Building a
connected world
2016 Annual Report
...and a better future
for everyone
hum evolution
XO agreement announced
5G trials
Hearst joint venture
Boston build announcement
Awesomeness TV
Frontier sale
Wired Differently campaign
New prepaid plans
VZ Messages upgrade
Telogis
New labor agreements
New Verizon Plan & My Verizon app
One Fiber build
RootMetrics® clean sweep
LTE Advanced
Fleetmatics
Sensity
Qualcomm & ThingSpace initiative
Google Pixel
4G LTE drone test
hum evolution
XO agreement announced
5G trials
Hearst joint venture
Boston build announcement
Awesomeness TV
Frontier sale
Wired Differently campaign
New prepaid plans
VZ Messages upgrade
Telogis
New labor agreements
New Verizon Plan & My Verizon app
One Fiber build
RootMetrics® clean sweep
LTE Advanced
Fleetmatics
Sensity
Qualcomm & ThingSpace initiative
Google Pixel
4G LTE drone test
www.verizon.com/2016AnnualReport | 1
Financial and operational highlights
as of December 31, 2016
Dividends declared per share
2016
2015
2014
$2.285
$2.23
$2.16
$3.21 reported earnings per share
1.01% wireless retail postpaid churn
$3.87 adjusted earnings per share
(non-GAAP)
$126.0 billion in consolidated revenues
$89.2 billion in wireless revenues
92.5 million retail postpaid 4G LTE
connections
$22.7 billion in cash flow from operations
5.7 million Fios Internet subscribers
10th consecutive year of annual
dividend increases
114.2 million wireless retail connections
4.7 million Fios Video subscribers
4.6% growth in Fios revenues
Note: Certain reclassifications have been made, where appropriate, to reflect comparable operating results.
See our investor website (www.verizon.com/about/investors) for reconciliations to U.S. generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report.
Forward-looking statements
In this report, we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements
include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,”
“believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The following important factors, along with those discussed in our filings with the Securities and Exchange Commission (the “SEC”), could affect future results and
could cause those results to differ materially from those expressed in the forward-looking statements: adverse conditions in the U.S. and international economies; the effects of competition in the
markets in which we operate; material changes in technology or technology substitution; disruption of our key suppliers’ provisioning of products or services; changes in the regulatory environment
in which we operate, including any increase in restrictions on our ability to operate our networks; breaches of network or information technology security, natural disasters, terrorist attacks or acts
of war or significant litigation and any resulting financial impact not covered by insurance; our high level of indebtedness; an adverse change in the ratings afforded our debt securities by nationally
accredited ratings organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing; material adverse changes in labor
matters, including labor negotiations, and any resulting financial and/or operational impact; significant increases in benefit plan costs or lower investment returns on plan assets; changes in tax
laws or treaties, or in their interpretation; changes in accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their
application, which could result in an impact on earnings; the inability to implement our business strategies; and the inability to realize the expected benefits of strategic transactions.
2 | www.verizon.com/2016AnnualReport
Corporate responsibility highlights
Verizon’s technology delivers environmental and societal benefits to our customers. To learn more about our
initiatives, please review our Corporate Responsibility Supplement at www.verizon.com/about/responsibility.
Education
Through Verizon Innovative Learning, the education initiative of the Verizon Foundation,
we are providing free technology, access and an immersive, hands-on learning curriculum
to underserved communities across America.
Program results indicate:
Verizon Innovative
Learning reached more
than 200K students
in 2016.
Teachers are
more skilled at
using technology
in the classroom.
Students find
technology
makes STEM
more interesting.
Students are
more confident.
Sustainability
Verizon is working to minimize our environmental impact through energy efficiency and
waste reduction measures.
Carbon intensity
To build on our progress, we:
In 2009, we pledged to reduce our carbon
intensity— the carbon our business emits divided
by the terabytes of data we transport over our
networks— by 50 percent by 2020, even as we
grew our business. We achieved this goal in 2016.
Verizon carbon intensity 2009–2016
2009
baseline
2010
2011
2012
2013
2014
2015
2016
Goal
18%
29%
31%
40%
40%
48%
54%
• Established a new goal to double our current
green energy capacity by 2025 by adding
24MW of green energy.
• Reduced Verizon’s water consumption by
4 percent, toward our goal of a 7 percent
reduction from the 2014 baseline by 2020.
• Met our goal for 75 percent of assessed
suppliers to comply with our environmental
standards, and set a new goal for 75 percent
of assessed suppliers to be compliant with
comprehensive corporate responsibility
standards by 2020.
• Helped our customers eliminate 5.9 to
8.6 million metric tons of GHG emissions,
equivalent to removing 1.2 to 1.8 million cars
from the road for one year.
www.verizon.com/2016AnnualReport | 3
We are united in
our belief that
“better matters.”
Dear Shareholders,
Investing in superior networks
2016 at-a-glance
In one of the most dynamic business
environments in memory, Verizon
delivered solid results while continuing
to transform for the digital-first
marketplace. Our 2016 performance
reflects the attributes that have
become the hallmarks of Verizon:
leadership in wireless and fiber
networks; a growing base of loyal,
high-quality customers; innovation
in mobile and digital services;
and investment in new sources of
growth in the digital economy. We
remain well-positioned for long-
term profitable growth as we take
advantage of the opportunities
created by technology advances
and growing demand for connected
solutions.
The foundation of Verizon’s
performance— in 2016, as in every
year in our history— is our consistently
superior network. This fact was
confirmed by third-party studies such
as the most recent RootMetrics®
surveys, which ranked Verizon the
best wireless network in the U.S. in
all six of its categories: overall
performance, network reliability,
network speed, data performance, call
performance and text performance.
This was the seventh consecutive
time Verizon ranked #1 in the U.S.
We have sustained our quality edge
amid a period of extraordinary
growth in 4G LTE wireless network
usage, which was up 47 percent year
over year in 2016, driven by surging
demand for mobile video.
• Strong wireless demand in a
highly penetrated market with
increased competition
• Customer growth, satisfaction
and loyalty remained strong
• Progress in building new sources
of revenue by:
•
•
•
Investing in next-generation
fiber and wireless networks
Building new platforms in
digital commerce, video and
the Internet of Things
Developing applications and
content— on our own and with
partners— to drive traffic to
our superior networks
• Focus on fundamental
execution and delivering value
to shareholders
4 | www.verizon.com/2016AnnualReport
In keeping with our history of network
innovation, we are also reinventing
our network architecture around
a common fiber platform that will
support all of Verizon’s businesses.
This new “One Fiber” architecture
will improve our 4G LTE coverage,
speed the deployment of 5G,
and deliver high-speed broadband
to homes and businesses of all
sizes. We launched One Fiber in
Boston in 2016 and plan to invest
$300 million over six years to deploy
it throughout the city. Going forward,
we will have further opportunities for
expansion through recently acquired
XO Communications, which has
fiber assets in 45 of the 50 largest
markets across the U.S.
Through every generation of
technology, we have used network
innovation to create new opportunities
for growth and deliver superior
service to customers. We remain
dedicated to providing the foundation
for the connected life on which our
customers depend.
Delivering for customers
When J.D. Power asked customers
in 2016 to rate the quality of their
communications services, Verizon
ranked #1 in three out of four regions
for residential internet service, #1 in
six out of six regions surveyed for
wireless, and #1 overall among U.S.
large-business customers. These
ratings speak to both the excellence
of our networks and the dedication of
our employees to delivering superior
customer service.
These attributes also contribute to
Verizon’s having a high-quality, loyal
customer base. In wireless, we ended
the year with 114.2 million retail
connections, up 1.9 percent year over
year. In 2016 we added 1.3 million
postpaid smartphones and maintained
our industry-leading retail postpaid
phone churn of less than 0.9 percent
for the year, showing that customers
do indeed believe that “better matters.”
Customers responded strongly to
In wireless, we ended the
year with 114.2 million retail
connections, up 1.9% year
over year.
In order to respond to our customers’
needs, we continue to evolve our
network architecture to increase
efficiency and provide the highest
quality experience. Our superior
4G LTE Advanced wireless network
will be our mainstay for years to
come. We are constantly adding
to its capacity to handle increased
traffic, and preparing for the future
by deploying and recycling spectrum
while building small cells at a
significant reduction in cost.
We lead the industry in the
development of the next generation
of wireless networks, known as
5G, along with the ecosystem
of products this exciting new
technology will enable. With speeds
more than 1 gigabyte per second—
100 times faster than current
wireless technology— and latency
that is literally faster than the blink
of an eye, 5G will open new market
opportunities in fixed broadband
and the Internet of Things (IoT). 5G
technology will eventually impact
industry sectors across the global
economy and create an estimated
$12.3 trillion in market opportunity
by 2035.
To prepare for these growth
opportunities, we have created the
largest 5G proving ground in the
U.S. In 2016, we conducted successful
technical trials of 5G infrastructure
and will follow up in 2017 with pre-
commercial pilots in 11 markets
around the country in preparation for
introducing fixed wireless service.
We’re also working with partners
across the technology industry to
develop the ecosystem of devices
and network components to make
5G a reality. We believe these
initiatives— leveraged by our strong
spectrum and fiber assets— will give
us crucial first-mover advantage in
these new markets.
www.verizon.com/2016AnnualReport | 5
Network superiority: Our One Fiber build in Boston
We believe a better network matters. That’s why we work continually to
evolve next-generation networks.
Areas of growth: IoT and telematics
Verizon has become a major force in the Internet of Things marketplace,
and we’ve dramatically transformed our telematics capabilities.
innovations such as Safety Mode and
carryover data plans that give them
more control over their wireless usage.
In our wireline business, we ended
the year with 5.7 million Fios Internet
and 4.7 million Fios Video customers.
We’re growing by showing
customers that our all-fiber Fios
service is indeed “wired differently”
and delivering a steady stream of
innovations like 750 Mbps “Instant
Internet” and our popular Custom TV
packages. Fios revenue growth
remains strong, and we see more
opportunity to grow as we penetrate
big urban markets like Boston, New
York and Philadelphia.
Our Enterprise Solutions group
provides global clients with services
such as advanced connectivity,
collaboration and managed services.
Among our customer wins in 2016
were contracts with Target, Oracle,
AECOM, ICICI Bank, Nanyang
Technological University and several
U.S. federal government agencies.
We’re changing not only what we
deliver to customers, but also how
we deliver it, as we transform our
processes and customer interactions
around a digital model.
The most obvious driver of the trend
toward digital commerce is the
millennial customer: the Snapchat
generation that will account for
60 percent of U.S. purchasing power
by 2020. But digital disruption
is widespread and crosses all
demographics. Whether it’s ordering
a ride from Uber, shoes from Zappos
or groceries from Amazon, frictionless
online commerce is rapidly becoming
the norm in the digital economy. In
2016 Verizon made a big shift toward
this digital-first model by introducing
a new My Verizon app that enables
customers to purchase Verizon
services and manage their relationship
with us on their mobile device. After
its first six months, the new app was
already serving 14.5 million customers
and accounting for 13.4 percent of
our digital sales. We will continue to
simplify our products and processes
and improve all our touch points
with customers so that we earn their
loyalty every day.
With so much of daily life and
commerce dependent on our networks,
we take our responsibility to deliver
the promise of the digital world to
customers very seriously. With every
technological advance, the potential
for creating value— for shareholders
and for society— gets bigger and
more exciting. At the same time, we
have a responsibility for spreading
the opportunities afforded by the
digital world as widely as possible,
which is why we’ve made access
to technology and tech education
a focus of the Verizon Foundation.
Currently, careers in science,
technology, engineering and math
(STEM) are growing at twice the rate
of other jobs, yet millions of these
openings are going unfilled because
there are too few qualified workers
to fill the demand. In particular,
children in underserved communities
lack exposure to adult role models
in STEM jobs and, as a result, are
underrepresented in technical fields.
We’re tackling this issue through
an initiative called Verizon Innovative
Learning (VIL) that provides free
technology, access and immersive,
hands-on learning to students and
teachers, particularly in underserved
communities. Through VIL, we host
a nationwide contest that challenges
students to use technology to
solve real-world problems, provide
free summer technology camps
on university campuses, run free
technology workshops at select
Verizon Wireless stores and much
more. We’ve also launched a
campaign called #weneedmore
to call attention to the millions of
students in underserved communities
who lack advanced technology in
schools and exposure to careers
in science and technology. Our
goal is to get others involved in the
mission to expose young people to
the opportunities the digital world
offers and give every student an equal
chance at success. For more details,
visit verizon.com/about/responsibility
and www.weneedmore.com.
6 | www.verizon.com/2016AnnualReport
With every technological
advance, the potential for
creating value— for shareholders
and for society— gets bigger and
more exciting.
Building the growth platform
To drive future growth, we are
developing the platforms, content
and applications that will increase
usage on our network and monetize
our investment in world-class
infrastructure. For several years we
have been building our video assets
with the goal of creating new ways
to reach customers who access their
video content primarily on mobile
devices. According to a Cisco study,
mobile video is growing at a compound
annual rate of 62 percent and will
account for 75 percent of the traffic
on wireless networks by 2020.
The centerpiece of our strategy
in the evolving media marketplace
is AOL, which enjoyed sequential
revenue growth throughout 2016.
Average daily use of our mobile-
first content engine, go90, is up to
30 minutes per viewer as we add
more unique programming through
partnerships with Awesomeness TV,
Complex Media, professional sports
leagues and other content providers.
In 2016, we announced our intention
to acquire Yahoo. Together, AOL and
Yahoo will give us some 1.3 billion
users, and provide us with added
scale and content to make us a
strong competitive force in digital
advertising, which is projected to be
a $90 billion global market by 2020.
Addressing social challenges through “smart city” solutions
At Verizon, we’ve been building and advancing digital infrastructure and solutions for decades.
Building more connected communities for all is what we do best.
We also strengthened our position
in the IoT marketplace, particularly
in telematics, or connected
transportation solutions. IoT is a
fast-growing area for Verizon; in
the fourth quarter, organic revenue
growth from our IoT businesses
was 21 percent year over year, with
annualized revenues approaching
$1 billion. In fact, with the acquisitions
of Fleetmatics and Telogis in 2016,
Verizon is now the #1 telematics
company in the U.S., and we have
the assets and expertise to address
the global market for connected
fleet services, expected to grow to
$40 billion worldwide by 2020.
More broadly, we’re building the
platforms and products to seamlessly
connect people and vehicles to
the physical environment. Our
consumer telematics product, hum,
is gaining subscribers, and we will
add to its capabilities this year. Our
IoT platform, ThingSpace, supports
more than 13,000 developers
who are embedding mobility into
a wide range of products and
applications that will connect to
our 4G LTE wireless network. We
also acquired two companies in the
nascent “smart cities” marketplace,
giving us a robust suite of services
to offer to municipalities, campuses
and other communities to ease traffic
congestion, make neighborhoods
safer, manage energy use and
engage citizens. These kinds of
solutions will also leverage our One
Fiber investment in Boston and
eventually across the country.
www.verizon.com/2016AnnualReport | 7
Better matters
In a marketplace where some of our
competitors ask customers to
compromise on network quality,
we at Verizon are united in our belief
that “better matters” and confident
of the unique role we play in delivering
all the benefits of the digital world
to our customers. In a year marked
by many hurricanes, floods, fires and
other natural disasters, our employees
proved once again that the best
network is made up not only of glass
and cell towers, but also of the best
people who go the extra mile for our
customers.
I’m grateful to our leadership team for
their dedication and to our Board of
Directors for their strategic guidance.
All of us feel privileged to lead this
great company.
Over our history, we have used periods
of change in technology and industry
structure to grow our company
and move the industry forward. We’re
excited by that challenge in 2017
and beyond. We look forward to
developing our capabilities, building
our resources, and making our
networks stronger, faster and better
so that we continue to be the premier
company in delivering the promise
of the digital age.
Lowell McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
Serving the digital customer: Our go90 app
As technology changes, so do the needs of our customers. Our investments and assets position us
uniquely in the digital world and enable us to reach customers where they are.
The goal of our digital media, IoT and
smart cities initiatives is to create new
growth engines for Verizon by staying
ahead of the trends in a transforming
marketplace. Our focus now is to
integrate these businesses, gain
scale and build the global franchises
that will contribute meaningfully to
Verizon’s growth.
Focusing on the fundamentals
Achieving growth in a challenging
environment remains our top priority.
Total operating revenues for the year
were nearly $126 billion. Adjusting
for revenues attributable to AOL and
divested wireline properties, total
operating revenues (non-GAAP) were
down 2.4 percent for the year on a
comparable basis despite a solid
operating performance. Adjusted
earnings per share (non-GAAP) were
$3.87, down 3 percent year over
year. In wireless, revenues declined
by 2.7 percent year over year, as
we continued the transition to a
new pricing model and dealt with
the effects of a fluid competitive
environment. Total wireline revenues
decreased by 2.3 percent for the year,
but Fios revenue growth was strong,
at 4.6 percent year over year.
Throughout this rapidly changing
business environment, our commitment
to financial discipline is unwavering.
Total return to shareholders in 2016
was 20.7 percent, which includes our
10th consecutive dividend increase.
Our cash flows funded $17.1 billion
of capital investment to maintain our
network advantage and build new
businesses, and our strong balance
sheet gives us the financial flexibility
to grow the business. In 2016, we
improved our strategic position by
divesting three telephone properties,
continued to drive process efficiencies
and negotiated new labor contracts
that will yield $500 million in cash
savings as well as other benefits
over the life of the contracts. We
also negotiated the sale of our data
center assets, a transaction expected
to close in second-quarter 2017.
Total return to shareholders in 2016
was 20.7%, which includes our 10th
consecutive dividend increase.
8 | www.verizon.com/2016AnnualReport
Selected Financial Data
Results of Operations
Operating revenues
Operating income
Net income attributable to Verizon
Per common share — basic
Per common share — diluted
Cash dividends declared per common share
Net income attributable to noncontrolling interests
Financial Position
Total assets
Debt maturing within one year
Long-term debt
Employee benefit obligations
Noncontrolling interests
Equity attributable to Verizon
2016
2015
2014
2013
2012
(dollars in millions, except per share amounts)
$ 125,980
$ 131,620
$ 127,079
$ 120,550
$ 115,846
27,059
13,127
33,060
17,879
3.22
3.21
2.285
481
4.38
4.37
2.230
496
19,599
9,625
2.42
2.42
2.160
2,331
31,968
11,497
4.01
4.00
2.090
12,050
13,160
875
.31
.31
2.030
9,682
$ 244,180
$ 244,175
$ 232,109
$ 273,184
$ 222,720
2,645
105,433
26,166
1,508
6,489
103,240
29,957
1,414
2,735
110,029
33,280
1,378
22,524
16,428
12,298
3,933
89,188
27,682
56,580
38,836
4,369
47,428
34,346
52,376
33,157
• Significant events affecting our historical earnings trends in 2014 through 2016 are described in “Other Items” in the “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section.
• 2013 data includes severance, pension and benefit charges, gain on spectrum license transactions and wireless transaction costs. 2012 data includes severance, pension and benefit
charges, early debt redemption costs and litigation settlement charges.
Stock Performance Graph
Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index
s
r
a
l
l
o
D
$200
$180
$160
$140
$120
$100
$80
$60
Verizon
S&P 500 Telecom Services
S&P 500
2011
2012
2013
2014
2015
2016
Data Points in Dollars
Verizon
S&P 500 Telecom Services
S&P 500
2011
100.0
100.0
100.0
2012
113.2
118.3
116.0
2013
134.0
131.7
153.5
2014
133.3
135.6
174.5
2015
137.9
140.1
176.9
2016
166.5
173.0
198.0
At December 31,
The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period. It assumes $100 was
invested on December 31, 2011 with dividends being reinvested.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 9
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Verizon Communications Inc. (Verizon, or the Company) is a holding
company that, acting through its subsidiaries, is one of the world’s
leading providers of communications, information and entertainment
products and services to consumers, businesses and governmental
agencies. With a presence around the world, we offer voice, data and
video services and solutions on our wireless and wireline networks
that are designed to meet customers’ demand for mobility, reliable
network connectivity, security and control. We have two reportable
segments, Wireless and Wireline. Our wireless business, operating
as Verizon Wireless, provides voice and data services and equipment
sales across the United States (U.S.) using one of the most extensive
and reliable wireless networks. Our wireline business provides
consumer, business and government customers with communications
products and enhanced services, including broadband data and
video, corporate networking solutions, data center and cloud services,
security and managed network services and local and long distance
voice services, and also owns and operates one of the most expansive
end-to-end Global Internet Protocol (IP) networks. We have a highly
skilled, diverse and dedicated workforce of approximately 160,900
employees as of December 31, 2016.
To compete effectively in today’s dynamic marketplace, we are focused
on transforming around the capabilities of our high- performing networks
with a goal of future growth based on delivering what customers want
and need in the new digital world. Our three tier strategy is to lead at
the network connectivity level in the markets we serve, develop new
business models through global platforms in video and the Internet of
Things (IoT) and create certain opportunities in applications and content
for incremental monetization. Our strategy requires significant capital
investments primarily to acquire wireless spectrum, put the spectrum
into service, provide additional capacity for growth in our networks,
invest in the fiber-optic network that supports our businesses, maintain
our networks and develop and maintain significant advanced informa-
tion technology systems and data system capabilities. We believe that
steady and consistent investments in our networks and platforms will
drive innovative products and services and fuel our growth. In addition,
protecting the privacy of our customers’ information and the security
of our systems and networks will continue to be a priority at Verizon.
Our network leadership will continue to be the hallmark of our brand,
and provide the fundamental strength at the connectivity, platform and
solutions layers upon which we build our competitive advantage.
Strategic Transactions
Digital Media and Interactive Entertainment
We have been investing in technology that taps into the market shift
to digital content and advertising. During 2015, we entered into an
Agreement and Plan of Merger (the Merger Agreement) with AOL
Inc. (AOL) pursuant to which we completed a tender offer to acquire
all of the outstanding shares of common stock of AOL at a price of
$50.00 per share, net to the seller in cash, without interest and less
any applicable withholding taxes. The aggregate cash consideration
paid by Verizon at the closing of these transactions was approximately
$3.8 billion. AOL is a leader in the digital content and advertising
platform space. AOL’s business model aligns with this approach, and
we believe that its combination of owned and operated content prop-
erties plus a digital advertising platform enhances our ability to further
develop future revenue streams.
On July 23, 2016, Verizon entered into a stock purchase agreement
(the Purchase Agreement) with Yahoo! Inc. (Yahoo). Pursuant to the
Purchase Agreement, upon the terms and subject to the conditions
thereof, we agreed to acquire the stock of one or more subsidiaries
of Yahoo holding all of Yahoo's operating business, for approximately
$4.83 billion in cash, subject to certain adjustments (the Transaction).
On February 20, 2017, Verizon and Yahoo entered into an amendment
to the Purchase Agreement, pursuant to which the Transaction
purchase price will be reduced by $350 million to approximately
$4.48 billion in cash, subject to certain adjustments. Subject to certain
exceptions, the parties also agreed that certain user security and data
breaches incurred by Yahoo (and the losses arising therefrom) will
be disregarded (1) for purposes of specified conditions to Verizon’s
obligations to close the Transaction and (2) in determining whether a
“Business Material Adverse Effect” under the Purchase Agreement
has occurred.
Concurrently with the amendment of the Purchase Agreement, Yahoo
and Yahoo Holdings, Inc., a wholly owned subsidiary of Yahoo that
Verizon has agreed to purchase pursuant to the Transaction, also
entered into an amendment to a related reorganization agreement,
pursuant to which Yahoo (which has announced that it intends to
change its name to Altaba Inc. following the closing of the Transaction)
will retain 50% of certain post-closing liabilities arising out of govern-
mental or third party investigations, litigations or other claims related to
certain user security and data breaches incurred by Yahoo. In accor-
dance with the original Transaction agreements, Yahoo will continue
to retain 100% of any liabilities arising out of any shareholder lawsuits
(including derivative claims) and investigations and actions by the
Securities and Exchange Commission (SEC).
The Transaction remains subject to customary closing conditions,
including the approval of Yahoo's stockholders, and is expected to
close in the second quarter of 2017.
We believe that our acquisition of Yahoo's operating business will help
us become a scaled distributor in mobile media. Yahoo's operations
are expected to provide us with a valuable portfolio of online content,
mobile applications and viewers. Additionally, our acquisition of
Yahoo's operating business is expected to expand our analytics and
ad tech capabilities which we expect will enhance both our compet-
itive position in the mobile media marketplace and value proposition
to advertisers (see Note 2 to the consolidated financial statements for
additional details).
IoT and Telematics
We are also building our growth capabilities in the emerging IoT market
by developing business models to monetize usage on our network at
the connectivity and platform layers. On July 30, 2016, we entered into
a definitive agreement to acquire Fleetmatics Group PLC (Fleetmatics),
a leading global provider of fleet and mobile workforce management
solutions. Pursuant to the terms of the agreement, we acquired
Fleetmatics for $60.00 per ordinary share in cash. The aggregate
merger consideration was approximately $2.5 billion, including cash
acquired of $0.1 billion. We completed the acquisition on November 7,
2016. In July 2016, we also closed on the acquisition of Telogis, Inc.
(Telogis), a global cloud-based mobile enterprise management
software business, for $0.9 billion of cash consideration. For the year
ended December 31, 2016, we recognized IoT revenues, including
revenues from businesses acquired during 2016, of approximately
$1.0 billion, a 39% increase compared to the prior year period.
10
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Network Evolution
We are reinventing our network architecture around a common fiber
platform that will support both our wireless and wireline technologies.
We expect that this new “One Fiber” architecture will improve our 4G
LTE coverage, speed the deployment of fifth-generation (5G) tech-
nology, deliver high-speed Fios broadband to homes and businesses
and create new opportunities in the small and medium business
market. In April 2016, we announced our One Fiber strategy for the
city of Boston. We launched One Fiber for consumer and business
services to customers in Boston late in 2016. We expect to have
further opportunities for expansion with our acquisition of XO Holdings’
wireline business, which owns and operates one of the largest fiber-
based IP and Ethernet networks, for approximately $1.8 billion, subject
to adjustment. We completed this acquisition on February 1, 2017.
Data Center Sale
On December 6, 2016, we entered into a definitive agreement
with Equinix, Inc. (Equinix) pursuant to which Verizon will sell 24
customer- facing data center sites in the United States and Latin
America, for approximately $3.6 billion, subject to certain adjustments.
The sale does not affect Verizon’s data center services delivered from
27 sites in Europe, Asia- Pacific and Canada, or its managed hosting
and cloud offerings. The transaction is subject to customary regulatory
approvals and closing conditions, and is expected to close during the
first half of 2017.
Access Line Sale
On February 5, 2015, we entered into a definitive agreement with
Frontier Communications Corporation (Frontier) pursuant to which
Verizon agreed to sell its local exchange business and related landline
activities in California, Florida and Texas, including Fios Internet and
video customers, switched and special access lines and high-speed
Internet service and long distance voice accounts in these three states,
for approximately $10.5 billion (approximately $7.3 billion net of income
taxes), subject to certain adjustments and including the assumption
of $0.6 billion of indebtedness from Verizon by Frontier (Access Line
Sale). The transaction, which included the acquisition by Frontier of the
equity interests of Verizon’s incumbent local exchange carriers (ILECs)
in California, Florida and Texas, did not involve any assets or liabilities
of Verizon Wireless. The transaction closed on April 1, 2016.
The transaction resulted in Frontier acquiring approximately 3.3 million
voice connections, 1.6 million Fios Internet subscribers, 1.2 million
Fios video subscribers and the related ILEC businesses from Verizon.
Approximately 9,300 Verizon employees who served customers in
California, Florida and Texas continued employment with Frontier. The
operating results of these businesses, collectively, are excluded from
our Wireline segment for all periods presented to reflect comparable
segment operating results consistent with the information regularly
reviewed by our chief operating decision maker.
Business Overview
In the sections that follow, we provide information about the important
aspects of our operations and investments, both at the consolidated
and segment levels, and discuss our results of operations, financial
position and sources and uses of cash. We have two reportable
segments, Wireless and Wireline, which we operate and manage as
strategic business units and organize by products and services.
Wireless
Our Wireless segment, doing business as Verizon Wireless, provides
wireless communications services and products across one of the most
extensive wireless networks in the United States. We provide these
services and equipment sales to consumer, business and government
customers in the United States on a postpaid and prepaid basis. Postpaid
connections represent individual lines of service for which a customer is
billed in advance a monthly access charge in return for a monthly network
service allowance, and usage beyond the allowance is billed monthly
in arrears. Our prepaid service enables individuals to obtain wireless
services without credit verification by paying for all services in advance.
We offer various postpaid account service plans, including shared data
plans, single connection plans and other plans tailored to the needs
of our customers. Our shared data plans typically feature domestic
unlimited voice minutes, unlimited domestic and international text,
video and picture messaging, and a single data allowance that can
be shared among the wireless devices on a customer’s account.
These allowances will vary from time to time as part of promotional
offers or in response to market circumstances. On February 12, 2017,
we announced an introductory plan, our new Verizon Unlimited plan,
available to our consumer and small business customers, which offers
among other things, unlimited domestic voice, data and texting. Both
our shared data plans and the Verizon Unlimited plan include our HD
(High Definition) Voice, Video Calling and Mobile Hotspot services on
compatible devices.
Under the Verizon device payment program, our eligible wireless
customers purchase wireless devices under a device payment plan
agreement. Customers that activate service on devices purchased
under the device payment program, or on a compatible device that
they already own, pay lower service fees (unsubsidized service pricing)
as compared to those under fixed-term service plans.
We are focusing our wireless capital spending on adding capacity
and density to our fourth- generation (4G) Long-Term Evolution (LTE)
network, which is available to over 98% of the U.S. population in
more than 500 markets covering approximately 314 million people,
including those in areas served by our LTE in Rural America partners.
Approximately 96% of our total data traffic in December 2016 was
carried on our 4G LTE network. We are investing in the densification
of our network by utilizing small cell technology, in- building solutions
and distributed antenna systems. Densification enables us to add
capacity to manage mobile video consumption and demand for IoT,
as well as position us for future 5G technology. We are committed to
developing and deploying 5G wireless technology. We are working with
key partners to ensure the aggressive pace of innovation, standards
development and appropriate requirements for this next generation
of wireless technology. Based on the outcome of our ongoing pre-
commercial trials, we intend to be the first company to deploy a 5G fixed
wireless broadband network in the United States. We expect to launch a
fixed commercial wireless service supported by this network in 2018.
Wireline
Our Wireline segment provides voice, data and video communications
products and enhanced services, including broadband video and
data, corporate networking solutions, data center and cloud services,
security and managed network services and local and long distance
voice services. We provide these products and services to consumers
in the United States, as well as to carriers, businesses and government
customers both in the United States and around the world.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 11
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
In our Wireline business, to compensate for the shrinking market for tra-
ditional voice service, we continue to build our Wireline segment around
data, video and advanced business services — areas where demand for
reliable high-speed connections is growing. We expect our One Fiber
initiative in Wireline will allow us to densify our 4G LTE wireless network
as well as position us for future 5G technology. We also continue to
seek ways to increase revenue and further realize operating and capital
efficiencies as well as maximize profitability for our Fios services.
Corporate and Other
Corporate and other includes the results of our digital media, including
AOL, telematics and other businesses, investments in unconsolidated
businesses, unallocated corporate expenses, pension and other
employee benefit related costs and lease financing. Corporate and
other also includes the historical results of divested operations and
other adjustments and gains and losses that are not allocated in
assessing segment performance due to their non- operational nature.
Although such transactions are excluded from the business segment
results, they are included in reported consolidated earnings. Gains and
losses that are not individually significant are included in all segment
results as these items are included in the chief operating decision
maker’s assessment of segment performance.
On April 1, 2016, we completed the Access Line Sale. On July 1, 2014,
our Wireline segment sold a non- strategic business. See “Acquisitions
and Divestitures”. The results of operations for these divestitures are
included within Corporate and other for all periods presented to reflect
comparable segment operating results consistent with the information
regularly reviewed by our chief operating decision maker (See “Impact
of Divested Operations”).
In addition, Corporate and other includes the results of our telematics
businesses for all periods presented, which were reclassified from our
Wireline segment effective April 1, 2016. The impact of this reclassifi-
cation was not material to our consolidated financial statements or our
segment results of operations.
Capital Expenditures and Investments
We continue to invest in our wireless network, high-speed fiber and
other advanced technologies to position ourselves at the center of
growth trends for the future. During 2016, these investments included
$17.1 billion for capital expenditures. See “Cash Flows Used in Investing
Activities” and “Operating Environment and Trends” for additional informa-
tion. We believe that our investments aimed at expanding our portfolio
of products and services will provide our customers with an efficient,
reliable infrastructure for competing in the information economy.
Consolidated Results of Operations
In this section, we discuss our overall results of operations and highlight items of a non- operational nature that are not included in our segment
results. In “Segment Results of Operations,” we review the performance of our two reportable segments in more detail.
Consolidated Revenues
Years Ended December 31,
Wireless
Wireline
Corporate and other
Eliminations
Consolidated Revenues
2016
$ 89,186
31,345
6,943
(1,494)
$ 125,980
2015
$ 91,680
32,094
9,018
(1,172)
$ 131,620
2014
$ 87,646
32,793
7,731
(1,091)
$ 127,079
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$ (2,494)
(749)
(2,075)
(322)
$ (5,640)
(2.7)% $ 4,034
(699)
(2.3)
1,287
(23.0)
(81)
27.5
$ 4,541
(4.3)
4.6%
(2.1)
16.6
7.4
3.6
Corporate and other revenues decreased $2.1 billion, or 23.0%,
during 2016 as a result of the Access Line Sale that was completed
on April 1, 2016. The results of operations related to these divestitures
included within Corporate and other are discussed separately below
under the heading “Impact of Divested Operations”. During 2016, our
digital media business represented approximately 46% of revenues
in Corporate and other, comprised primarily of revenues from AOL,
which we aquired on June 23, 2015. Corporate and other also includes
revenues from new businesses acquired during 2016 of approximately
$0.1 billion.
2016 Compared to 2015
The decrease in consolidated revenues during 2016 was primarily due
to a decline in revenues at our segments, Wireless and Wireline, as well
as a decline in revenues within Corporate and other.
Wireless’ revenues decreased $2.5 billion, or 2.7%, during 2016
primarily as a result of a decline in service revenue driven by customer
migration to plans with unsubsidized service pricing, including our new
price plans launched during 2016. This decline was partially offset by
an increase in other revenue, primarily due to financing revenues from
the Verizon device payment program, and an increase in equipment
revenue due to an increase in device sales, primarily smartphones,
under the Verizon device payment program.
Wireline’s revenues decreased $0.7 billion, or 2.3%, during 2016
primarily as a result of declines in Global Enterprise and Global
Wholesale. Wireline’s revenues were also partially impacted by a
reduction in Fios marketing activities during the union work stoppage
that commenced on April 13, 2016 and ended on June 1, 2016.
Revenues for our segments are discussed separately below under the
heading “Segment Results of Operations”.
12
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
2015 Compared to 2014
The increase in consolidated revenues during 2015 was primarily due to
higher equipment revenues in our Wireless segment, higher revenues
as a result of the acquisition of AOL and higher Mass Markets revenues
driven by Fios services at our Wireline segment. Partially offsetting
these increases were lower service revenues at our Wireless segment
and lower Global Enterprise revenues at our Wireline segment.
Wireless’ revenues increased $4.0 billion, or 4.6%, during 2015
primarily as a result of growth in equipment revenue. Equipment
revenue increased as a result of an increase in device sales, primarily
smartphones, under the Verizon device payment program, partially
offset by a decline in device sales under traditional fixed-term service
plans. Service revenue decreased during 2015 primarily driven by
an increase in the activation of devices purchased under the Verizon
device payment program on plans with unsubsidized service pricing.
Wireline’s revenues decreased $0.7 billion, or 2.1%, during 2015
primarily as a result of declines in Global Enterprise, partially offset by
higher Mass Markets revenues driven by Fios services.
Revenues for our segments are discussed separately below under the
heading “Segment Results of Operations”.
Corporate and other revenues increased $1.3 billion, or 16.6%,
during 2015 primarily as a result of the acquisition of AOL, which was
completed on June 23, 2015. Corporate and other revenues include
the results of our local exchange business and related landline
activities in California, Florida and Texas that was sold on April 1,
2016. The results of operations related to these divestitures included
within Corporate and other are discussed separately below under the
heading “Impact of Divested Operations”.
Consolidated Operating Expenses
Years Ended December 31,
Cost of services
Wireless cost of equipment
Selling, general and administrative expense
Depreciation and amortization expense
Consolidated Operating Expenses
2016
$ 29,186
22,238
31,569
15,928
$ 98,921
2015
$ 29,438
23,119
29,986
16,017
$ 98,560
2014
$ 28,306
21,625
41,016
16,533
$ 107,480
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$
(252)
(881)
1,583
(89)
361
$
(0.9)% $ 1,132
1,494
(3.8)
(11,030)
5.3
(516)
(0.6)
$ (8,920)
0.4
4.0%
6.9
(26.9)
(3.1)
(8.3)
Consolidated operating expenses increased during 2016 primarily due to non- operational charges recorded in 2016 as compared to the
non- operational credits recorded in 2015 (see “Other Items”). Consolidated operating expenses decreased during 2015 primarily due to non-
operational credits recorded in 2015 as compared to non- operational charges recorded in 2014 (see “Other Items”).
Operating expenses for our segments are discussed separately below under the heading “Segment Results of Operations”.
2016 Compared to 2015
Cost of Services
Cost of services includes the following costs directly attributable to a
service: salaries and wages, benefits, materials and supplies, content
costs, contracted services, network access and transport costs,
customer provisioning costs, computer systems support, and costs to
support our outsourcing contracts and technical facilities. Aggregate
customer care costs, which include billing and service provisioning, are
allocated between Cost of services and Selling, general and adminis-
trative expense.
Cost of services decreased during 2016 primarily due to the comple-
tion of the Access Line Sale on April 1, 2016 (see “Impact of Divested
Operations”), as well as a decline in net pension and postretirement
benefit cost in our Wireline segment. Partially offsetting this decrease
is an increase in costs as a result of the acquisition of AOL on June 23,
2015, the launch of go90 in the third quarter of 2015, and $0.4 billion of
incremental costs incurred as a result of the union work stoppage that
commenced on April 13, 2016, and ended on June 1, 2016.
Wireless Cost of Equipment
Wireless cost of equipment decreased during 2016 primarily as a result
of a 4.6% decline in the number of smartphone units sold, partially
offset by an increase in the average cost per unit for smartphones.
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 com-
mission costs, customer billing, call center and information technology
costs, regulatory fees, professional service fees, and rent and utilities
for administrative space. Also included is a portion of the aggregate
customer care costs as discussed in “Cost of Services” above.
Selling, general and administrative expense increased during 2016
primarily due to severance, pension and benefit charges recorded in
2016 as compared to severance, pension and benefit credits recorded
in 2015 (see “Other Items”), an increase in costs as a result of the
acquisition of AOL on June 23, 2015, and the launch of go90 in the
third quarter of 2015. These increases were partially offset by a gain on
the Access Line Sale (see “Other Items”), a decline in costs as a result
of the completion of the Access Line Sale on April 1, 2016 (see “Impact
of Divested Operations”) as well as declines in sales commission
expense at our Wireless segment and declines in employee costs at
our Wireline segment.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2016
primarily due to a decrease in net depreciable assets at our Wireline
segment, partially offset by an increase in depreciable assets at our
Wireless segment.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 13
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
2015 Compared to 2014
Cost of Services
Cost of services increased during 2015 primarily due to an increase
in costs as a result of the acquisition of AOL, higher rent expense
as a result of an increase in wireless macro and small cell sites,
higher wireless network costs from an increase in fiber facilities
supporting network capacity expansion and densification, including
the deployment of small cell technology, a volume- driven increase
in costs related to the wireless device protection package offered
to our customers as well as a $0.4 billion increase in content costs
at our Wireline segment. Partially offsetting these increases were a
$0.4 billion decline in employee costs and a $0.3 billion decline in
access costs at our Wireline segment. Also offsetting the increase was
a decrease in Cost of services reflected in the results of operations
related to a non- strategic Wireline business that was divested on
July 1, 2014.
Wireless Cost of Equipment
Wireless cost of equipment increased during 2015 primarily as a result
of an increase in the average cost per unit, driven by a shift to higher
priced units in the mix of devices sold, partially offset by a decline in
the number of units sold.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased during 2015
primarily due to non- operational credits, primarily severance, pension
and benefit credits, recorded in 2015 as compared to non- operational
charges, primarily severance, pension and benefit charges, recorded
in 2014 (see “Other Items”). Also contributing to this decrease was a
decline in sales commission expense at our Wireless segment, which
was driven by an increase in activations under the Verizon device
payment program. The decrease is partially offset by an increase in
bad debt expense at our Wireless segment. The increase in bad debt
expense was primarily driven by a volume increase in our installment
receivables, as the credit quality of our customers remained consistent
throughout the periods presented.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2015
primarily due to $0.9 billion of depreciation and amortization expense
not being recorded on our depreciable Wireline assets in California,
Florida and Texas which were classified as held for sale as of
February 5, 2015, partially offset by an increase in depreciable assets
at our Wireless segment.
We did not record depreciation and amortization expense on our
depreciable Wireline assets in California, Florida and Texas through
the closing of the Access Line Sale, which closed on April 1, 2016.
Non- operational Charges (Credits)
Non- operational charges (credits) included in operating expenses (see
“Other Items”) were as follows:
Years Ended December 31,
Severance, Pension and Benefit
Charges (Credits)
(dollars in millions)
2016
2015
2014
Selling, general and administrative expense $ 2,923
Gain on Access Line Sale
Selling, general and administrative expense
Gain on Spectrum License Transactions
Selling, general and administrative expense
Other Costs
Cost of services and sales
Selling, general and administrative expense
(1,007)
(142)
–
–
–
$ (2,256)
$ 7,507
–
–
(254)
(707)
–
–
–
27
307
334
Total non- operating charges (credits)
included in operating expenses
$ 1,774
$ (2,510)
$ 7,134
See “Other Items” for a description of these and other non-
operational items.
Impact of Divested Operations
On April 1, 2016, we completed the Access Line Sale. On July 1, 2014,
our Wireline segment sold a non- strategic business. See “Acquisitions
and Divestitures”. The results of operations related to these divestitures
are included within Corporate and other for all periods presented to
reflect comparable segment operating results consistent with the
information regularly reviewed by our chief operating decision maker.
The results of operations related to these divestitures included within
Corporate and other are as follows:
Years Ended December 31,
Impact of Divested Operations
Operating revenues
Cost of services
Selling, general and administrative
expense
Depreciation and amortization
expense
(dollars in millions)
2016
2015
2014
$ 1,280
482
$ 5,280
1,852
$ 5,625
2,004
137
522
574
–
88
1,026
14
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Other Consolidated Results
Equity in (Losses) Earnings of Unconsolidated Businesses
Equity in (losses) earnings of unconsolidated businesses changed unfavorably by $1.9 billion during 2015 primarily due to the gain of $1.9 billion
recorded on the sale of our interest in Vodafone Omnitel N.V. (the Omnitel Transaction, and such interest, the Omnitel Interest) during the first
quarter of 2014, which was part of the consideration for the acquisition of Vodafone Group Plc’s (Vodafone) indirect 45% interest in Cellco
Partnership d/b/a Verizon Wireless (the Wireless Transaction) completed on February 21, 2014.
Other Income and (Expense), Net
Additional information relating to Other income and (expense), net is as follows:
Years Ended December 31,
Interest income
Other, net
Total
nm — not meaningful
2016
59
(1,658)
(1,599)
$
$
$
$
2015
115
71
186
2014
108
(1,302)
(1,194)
$
$
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
(48.7)% $
$
(56)
(1,729)
$ (1,785)
nm
nm
7
1,373
$ 1,380
6.5%
nm
nm
The change in Other income and (expense), net during the year ended December 31, 2016, compared to the similar period in 2015 was primarily
driven by net early debt redemption costs of $1.8 billion recorded during the second quarter of 2016. Other income and (expense), net changed
favorably during 2015 primarily driven by net early debt redemption costs of $1.4 billion incurred in 2014 (see “Other Items”).
Interest Expense
Years Ended December 31,
Total interest costs on debt balances
Less capitalized interest costs
Total
2016
5,080
704
4,376
$
$
2015
5,504
584
4,920
$
$
2014
5,291
376
4,915
$
$
Average debt outstanding
Effective interest rate
$ 106,113
$ 112,838
$ 107,978
4.8%
4.9%
4.9%
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$
$
(424)
120
(544)
(7.7)% $
20.5
(11.1)
$
213
208
5
4.0%
55.3
0.1
Total interest costs on debt balances decreased during 2016 primarily due to lower average debt balances and a lower effective interest rate. Total
interest costs on debt balances increased during 2015 primarily due to a $4.9 billion increase in average debt (see “Consolidated Financial Condition”).
Capitalized interest costs were higher in 2016 and 2015 primarily due to an increase in wireless licenses that are currently under development,
which was a result of our winning bid in the FCC spectrum license auction during 2015. The FCC granted us those wireless licenses on April 8,
2015 (see Note 2 to the consolidated financial statements for additional details).
Provision for Income Taxes
Years Ended December 31,
Provision for income taxes
Effective income tax rate
nm — not meaningful
$
2016
7,378
35.2%
$
2015
9,865
34.9%
$
2014
3,314
21.7%
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$ (2,487)
(25.2)% $ 6,551
nm
The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. The
effective income tax rate for 2016 was 35.2% compared to 34.9% for 2015. The increase in the effective income tax rate was primarily due to the
impact of $527 million included in the provision for income taxes from goodwill not deductible for tax purposes in connection with the Access
Line Sale on April 1, 2016. This increase was partially offset by the impact that lower income before income taxes in the current period has on
each of the reconciling items specified in the table included in Note 11 to the consolidated financial statements. The decrease in the provision for
income taxes was primarily due to lower income before income taxes due to severance, pension and benefit charges recorded in 2016 compared
to severance, pension and benefit credits recorded in 2015.
The effective income tax rate for 2015 was 34.9% compared to 21.7% for 2014. The increase in the effective income tax rate and provision for income
taxes was primarily due to the impact of higher income before income taxes due to severance, pension and benefit credits recorded in 2015
compared to severance, pension and benefit charges recorded in 2014, as well as tax benefits associated with the utilization of certain tax credits
in 2014 in connection with the Omnitel Transaction. The 2014 effective income tax rate also included a benefit from the inclusion of income attrib-
utable to Vodafone’s noncontrolling interest in the Verizon Wireless partnership prior to the Wireless Transaction completed on February 21, 2014.
A reconciliation of the statutory federal income tax rate to the effective income tax rate for each period is included in Note 11 to the consolidated
financial statements.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 15
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Net Income Attributable to Noncontrolling Interests
Years Ended December 31,
Net income attributable to noncontrolling interests
2016
$ 481
2015
$ 496
2014
$ 2,331
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
2016 vs. 2015
$ (15)
(3.0)% $ (1,835)
(78.7)%
The decrease in Net income attributable to noncontrolling interests during 2015 was primarily due to the completion of the Wireless Transaction
on February 21, 2014. As a result, our results reflect our 55% ownership interest of Verizon Wireless through the closing of the Wireless
Transaction and reflect our full ownership of Verizon Wireless thereafter. The noncontrolling interests that remained after the completion of the
Wireless Transaction primarily relate to wireless partnership entities.
Consolidated Net Income, Operating Income
and EBITDA
Consolidated earnings before interest, taxes, depreciation and amor-
tization expenses (Consolidated EBITDA) and Consolidated Adjusted
EBITDA, which are presented below, are non-GAAP measures that
we believe are useful to management, 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 Verizon’s competitors. Consolidated EBITDA is calculated
by adding back interest, taxes, depreciation and amortization expense,
equity in (losses) 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. We believe this measure is
useful to management, investors and other users of our financial infor-
mation in evaluating the effectiveness of our operations and underlying
business trends in a manner that is consistent with management’s
evaluation of business performance. We believe Consolidated Adjusted
EBITDA is widely used by investors to compare a company’s operating
performance to its competitors by minimizing impacts caused by dif-
ferences in capital structure, taxes and depreciation policies. Further,
the exclusion of non- operational items and the impact of divested
operations enables comparability to prior period performance and trend
analysis. Consolidated Adjusted EBITDA is also used by rating agencies,
lenders and other parties to evaluate our creditworthiness. See “Other
Items” for additional details regarding these non- operational items.
Operating expenses include pension and other postretirement benefit
related credits and/or charges based on actuarial assumptions,
including projected discount rates and an estimated return on plan
assets. Such estimates are updated at least annually at the end of the
fiscal year to reflect actual return on plan assets and updated actuarial
assumptions or more frequently if significant events arise which require
an interim remeasurement. The adjustment has been recognized in the
income statement during the fourth quarter or upon a remeasurement
event pursuant to our accounting policy for the recognition of actuarial
gains/losses. We believe the exclusion of these actuarial gains or
losses enables management, investors and other users of our financial
information to assess our performance on a more comparable basis
and is consistent with management’s own evaluation of performance.
It is management’s intent to provide non-GAAP financial information
to enhance the understanding of Verizon’s GAAP financial informa-
tion, 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 corre-
sponding GAAP measure so as not to imply that more emphasis should
be placed on the non-GAAP measure. We believe that non-GAAP
measures provide relevant and useful information, which is used by
management, investors and other users of our financial information
as well as by our management in assessing both consolidated and
segment performance. The non-GAAP financial information presented
may be determined or calculated differently by other companies.
(dollars in millions)
Years Ended December 31,
Consolidated Net Income
Add (Less):
Provision for income taxes
Interest expense
Other (income) and expense, net
Equity in losses (earnings) of
unconsolidated businesses
2016
2014
$ 13,608 $ 18,375 $ 11,956
2015
7,378 9,865 3,314
4,376 4,920 4,915
1,194
1,599
(186)
86 (1,780)
27,059 33,060 19,599
Consolidated Operating Income
Add Depreciation and amortization expense 15,928 16,017 16,533
42,987 49,077 36,132
Consolidated EBITDA
Add (Less) Non- operating charges (credits)
98
included in operating expenses
Less Impact of divested operations
Consolidated Adjusted EBITDA
1,774 (2,510)
(661) (2,906)
7,134
(3,047)
$ 44,100 $ 43,661 $ 40,219
The changes in Consolidated Net Income, Consolidated Operating
Income, Consolidated EBITDA and Consolidated Adjusted EBITDA in
the table above were primarily a result of the factors described in con-
nection with operating revenues and operating expenses.
16
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Segment Results of Operations
We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products
and services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is
consistent with the chief operating decision maker’s assessment of segment performance.
Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure
and does not purport to be an alternative to operating income as a measure of operating performance. We believe this measure is useful to man-
agement, investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as it excludes the
depreciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evalu-
ating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense
to segment operating income. Segment EBITDA margin is calculated by dividing Segment EBITDA by total segment operating revenues.
You can find additional information about our segments in Note 12 to the consolidated financial statements.
Wireless
On February 21, 2014, we completed the acquisition of Vodafone’s indirect 45% interest in Cellco Partnership d/b/a Verizon Wireless. Prior to the
completion of the Wireless Transaction, Verizon owned a controlling 55% interest in Verizon Wireless and Vodafone owned the remaining 45%.
As a result of the completion of the Wireless Transaction, Verizon acquired 100% ownership of Verizon Wireless. All financial results included in
the tables below reflect the consolidated results of Verizon Wireless.
Operating Revenues and Selected Operating Statistics
(dollars in millions, except ARPA and I-ARPA)
Years Ended December 31,
Service
Equipment
Other
Total Operating Revenues
Connections (’000):(1)
Retail connections
Retail postpaid connections
Net additions in period (’000):(2)
Retail connections
Retail postpaid connections
Churn Rate:
Retail connections
Retail postpaid connections
Account Statistics:
Retail postpaid ARPA
Retail postpaid I-ARPA
Retail postpaid accounts (’000)(1)
Retail postpaid connections per account(1)
(1) As of end of period
(2) Excluding acquisitions and adjustments
2016
$ 66,580
17,515
5,091
$ 89,186
2015
$ 70,396
16,924
4,360
$ 91,680
2014
$ 72,630
10,959
4,057
$ 87,646
$
$
2016 vs. 2015
(3,816)
591
731
(2,494)
Increase/(Decrease)
2015 vs. 2014
(2,234)
5,965
303
$ 4,034
(3.1)%
54.4
7.5
4.6
(5.4)% $
3.5
16.8
(2.7)
114,243
108,796
112,108
106,528
108,211
102,079
2,135
2,268
1.9
2.1
3,897
4,449
3.6
4.4
2,155
2,288
3,956
4,507
5,568
5,482
(1,801)
(2,219)
(45.5)
(49.2)
(1,612)
(975)
(29.0)
(17.8)
1.26%
1.01%
1.24%
0.96%
1.33%
1.04%
$ 144.32
$ 167.70
35,410
3.07
$ 152.63
$ 163.63
35,736
2.98
$ 159.86
$ 162.17
35,616
2.87
$
$
(8.31)
4.07
(326)
0.09
(5.4)
2.5
(0.9)
3.0
$
$
(7.23)
1.46
120
0.11
(4.5)
0.9
0.3
3.8
2016 Compared to 2015
Wireless’ total operating revenues decreased by $2.5 billion, or 2.7%,
during 2016 compared to 2015 primarily as a result of a decline in service
revenue partially offset by increases in equipment and other revenues.
Accounts and Connections
Retail postpaid accounts primarily represent retail customers with
Verizon Wireless that are directly served and managed by Verizon
Wireless and use its branded services. Accounts include shared
data plans, such as our Verizon Plan and More Everything plans, and
corporate accounts, as well as legacy single connection plans and
family plans. A single account may include monthly wireless services
for a variety of connected devices.
Retail connections represent our retail customer device connections.
Churn is the rate at which service to connections is terminated. Retail
connections under an account may include those from smartphones
and basic phones (collectively, phones) as well as tablets and other
devices connected to the Internet, including retail IoT devices. The
U.S. wireless market has achieved a high penetration of smart phones
which reduced the opportunity for new phone connection growth
for the industry. Retail postpaid connection net additions decreased
during 2016 primarily due to a decrease in retail postpaid connec-
tion gross additions as well as a higher retail postpaid connection
churn rate.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 17
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Retail Postpaid Connections per Account
Retail postpaid connections per account is calculated by dividing the
total number of retail postpaid connections by the number of retail
postpaid accounts as of the end of the period. Retail postpaid connec-
tions per account increased 3.0% as of December 31, 2016 compared
to December 31, 2015 primarily due to increases in Internet devices,
which represented 18.3% of our retail postpaid connection base as of
December 31, 2016, compared to 16.8% as of December 31, 2015.
Other Revenue
Other revenue includes non- service revenues such as regulatory
fees, cost recovery surcharges, revenues associated with our device
protection package, sublease rentals and financing revenue. Other
revenue increased $0.7 billion, or 16.8%, during 2016 compared to
2015 primarily due to financing revenues from our device payment
program, cost recovery surcharges and a volume- driven increase in
revenues related to our device protection package.
Service Revenue
Service revenue, which does not include recurring device payment plan
billings related to the Verizon device payment program, decreased by
$3.8 billion, or 5.4%, during 2016 compared to 2015 primarily driven by
lower retail postpaid service revenue. Retail postpaid service revenue
was negatively impacted as a result of customer migration to plans with
unsubsidized service pricing, including our new price plans launched
during 2016 which feature safety mode and carryover data. Customer
migration to unsubsidized service pricing is driven in part by an increase
in the activation of devices purchased under the Verizon device payment
program. During the fourth quarter of 2016, phone activations under the
Verizon device payment program were 77% of retail postpaid phones
activated. At December 31, 2016, approximately 67% of our retail postpaid
phone connections were on unsubsidized service pricing compared
to approximately 42% at December 31, 2015. At December 31, 2016,
approximately 46% of our retail postpaid phone connections participated
in the Verizon device payment program compared to approximately 29%
at December 31, 2015. The decrease in service revenue was partially
offset by an increase in retail postpaid connections compared to the prior
year. Service revenue plus recurring device payment plan billings related
to the Verizon device payment program, which represents the total value
received from our wireless connections, increased 2.0% during 2016.
Retail postpaid ARPA (the average service revenue per account from
retail postpaid accounts), which does not include recurring device
payment plan billings related to the Verizon device payment program,
was negatively impacted during 2016 as a result of customer migration
to plans with unsubsidized service pricing, including our new price plans
launched during 2016 which feature safety mode and carryover data.
Retail postpaid I-ARPA (the average service revenue per account from
retail postpaid accounts plus recurring device payment plan billings),
which represents the monthly recurring value received on a per account
basis from our retail postpaid accounts, increased 2.5% during 2016.
Equipment Revenue
Equipment revenue increased $0.6 billion, or 3.5%, during 2016
compared to 2015 as a result of an increase in device sales, primarily
smartphones, under the Verizon device payment program, partially
offset by a decline in device sales under the traditional fixed-
term service plans, promotional activity and a decline in overall
sales volumes.
Under the Verizon device payment program, we recognize a higher
amount of equipment revenue at the time of sale of devices. For the year
ended December 31, 2016, phone activations under the Verizon device
payment program represented approximately 70% of retail postpaid
phones activated compared to approximately 54% during 2015.
2015 Compared to 2014
Wireless’ total operating revenues increased by $4.0 billion, or 4.6%,
during 2015 compared to 2014 primarily as a result of growth in
equipment revenue.
Accounts and Connections
Retail postpaid connection net additions decreased during 2015
compared to 2014 primarily due to a decrease in retail postpaid
connection gross additions, partially offset by lower retail postpaid
connection churn rate. The decrease in retail postpaid connection
gross additions during 2015 was driven by a decline in gross additions
of smartphones, tablets and other Internet devices.
Retail Postpaid Connections per Account
Retail postpaid connections per account increased as of December 31,
2015 compared to December 31, 2014. The increase in retail postpaid
connections per account is primarily due to increases in Internet
devices, which represented 16.8% of our retail postpaid connection base
as of December 31, 2015, compared to 14.1% as of December 31, 2014.
Service Revenue
Service revenue, which does not include recurring device payment
plan billings related to the Verizon device payment program, decreased
by $2.2 billion, or 3.1%, during 2015 compared to 2014 primarily driven
by lower retail postpaid service revenue. Retail postpaid service
revenue was negatively impacted as a result of an increase in the
activation of devices purchased under the Verizon device payment
program on plans with unsubsidized service pricing. During the fourth
quarter of 2015, phone activations under the Verizon device payment
program represented approximately 67% of retail postpaid phones
activated. The increase in these activations resulted in a relative shift
of revenue from service revenue to equipment revenue and caused
a change in the timing of the recognition of revenue. At December 31,
2015, approximately 29% of our retail postpaid phone connections
participated in the Verizon device payment program compared to
approximately 8% at December 31, 2014. At December 31, 2015,
approximately 42% of our retail postpaid phone connections were on
unsubsidized service pricing. The decrease in service revenue was
partially offset by the impact of an increase in retail postpaid connec-
tions as well as the continued increase in penetration of smartphones
and tablets through our shared data plans. Service revenue plus
recurring device payment plan billings related to the Verizon device
payment program increased 2.0% during 2015.
Retail postpaid ARPA, which does not include recurring device
payment plan billings related to the Verizon device payment program,
was negatively impacted during 2015 as a result of the increase in the
activation of devices purchased under the Verizon device payment
program on plans with unsubsidized service pricing. Partially offsetting
this impact during 2015 was an increase in our retail postpaid connec-
tions per account, as discussed above. Retail postpaid I-ARPA, which
represents the monthly recurring value received on a per account
basis from our retail postpaid accounts, increased 0.9% during 2015.
18
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Equipment Revenue
Equipment revenue increased by $6.0 billion, or 54.4%, during 2015
compared to 2014 as a result of an increase in device sales, primarily
smartphones, under the Verizon device payment program, partially
offset by a decline in device sales under traditional fixed-term service
plans. For the year ended December 31, 2015, phone activations under
the Verizon device payment program represented approximately 54%
of retail postpaid phones activated compared to approximately 18%
during 2014. The increase in these activations resulted in a relative shift
of revenue from service revenue to equipment revenue and caused a
change in the timing of the recognition of revenue. This shift in revenue
was the result of recognizing a higher amount of equipment revenue at
the time of sale of devices under the device payment program.
Other Revenue
Other revenue increased $0.3 billion, or 7.5%, during 2015 compared to
2014 primarily due to a volume- driven increase in revenues related to
our device protection package.
Operating Expenses
Years Ended December 31,
Cost of services
Cost of equipment
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
2016
$ 7,988
22,238
19,924
9,183
$ 59,333
2015
$ 7,803
23,119
21,805
8,980
$ 61,707
2014
$ 7,200
21,625
23,602
8,459
$ 60,886
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$
$
185
(881)
(1,881)
203
(2,374)
2.4% $
(3.8)
(8.6)
2.3
(3.8)
603
1,494
(1,797)
521
821
$
8.4%
6.9
(7.6)
6.2
1.3
Cost of Services
Cost of services increased $0.2 billion, or 2.4%, during 2016 compared
to 2015 primarily due to higher rent expense as a result of an increase
in macro and small cell sites supporting network capacity expansion
and densification, as well as a volume- driven increase in costs related
to the device protection package offered to our customers. Partially
offsetting these increases were decreases in network connection
costs and cost of roaming.
Cost of services increased $0.6 billion, or 8.4%, during 2015 compared
to 2014 primarily due to higher rent expense as a result of an increase
in macro and small cell sites as well as higher wireless network
costs from an increase in fiber facilities supporting network capacity
expansion and densification, including deployment of small cell tech-
nology, to meet growing customer demand for 4G LTE data services.
Also contributing to the increase in Cost of services during 2015 was
a volume- driven increase in costs related to the device protection
package offered to our customers.
Cost of Equipment
Cost of equipment decreased $0.9 billion, or 3.8%, during 2016
compared to 2015 primarily as a result of a 4.6% decline in the number
of smartphone units sold, partially offset by an increase in the average
cost per unit for smartphones.
Cost of equipment increased $1.5 billion, or 6.9%, during 2015
compared to 2014 primarily as a result of an increase in the average
cost per unit, driven by a shift to higher priced units in the mix of
devices sold, partially offset by a decline in the number of units sold.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $1.9 billion,
or 8.6%, during 2016 compared to 2015 primarily due to a $1.2 billion
decline in sales commission expense as well as declines in employee
related costs, non- income taxes, bad debt expense and advertising.
The decline in sales commission expense was driven by an overall
decline in activations as well as an increase in the proportion of
activations under the Verizon device payment program, which has a
lower commission per unit than activations under traditional fixed-term
service plans. The decline in employee related costs was a result of
reduced headcount.
Selling, general and administrative expense decreased $1.8 billion,
or 7.6%, during 2015 compared to 2014 primarily due to a $2.8 billion
decline in sales commission expense. The decline in sales commission
expense was driven by an increase in activations under the Verizon
device payment program, which has a lower commission per unit than
activations under traditional fixed-term service plans, partially offset
by an increase in bad debt expense. The increase in bad debt expense
was primarily driven by a volume increase in our device payment plan
receivables, as the credit quality of our customers remained consistent
throughout the periods presented.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during 2016 and
2015, respectively, primarily driven by an increase in net depre-
ciable assets.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 19
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Segment Operating Income and EBITDA
Years Ended December 31,
Segment Operating Income
Add Depreciation and amortization expense
Segment EBITDA
2016
$ 29,853
9,183
$ 39,036
2015
$ 29,973
8,980
$ 38,953
2014
$ 26,760
8,459
$ 35,219
Segment operating income margin
Segment EBITDA margin
33.5%
43.8%
32.7%
42.5%
30.5%
40.2%
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$
$
(120)
203
83
(0.4)% $ 3,213
521
2.3
$ 3,734
0.2
12.0%
6.2
10.6
The changes in the table above during the periods presented were primarily a result of the factors described in connection with operating
revenues and operating expenses.
Non- operational items excluded from our Wireless segment Operating income were as follows:
Years Ended December 31,
Gain on spectrum license transactions
Severance, pension and benefit charges
Other costs
2016
$ (142)
43
–
(99)
$
(dollars in millions)
2015
(254)
5
–
(249)
$
$
2014
$ (707)
86
109
$ (512)
Wireline
The operating results and statistics for all periods presented below exclude the results of Verizon’s local exchange business and related landline
activities in California, Florida and Texas, which were sold to Frontier on April 1, 2016, to reflect comparable segment operating results consistent
with the information regularly reviewed by our chief operating decision maker.
Operating Revenues and Selected Operating Statistics
Years Ended December 31,
Consumer retail
Small business
Mass Markets
Global Enterprise
Global Wholesale
Other
Total Operating Revenues
Connections (’000):(1)
Total voice connections
Total Broadband connections
Fios Internet subscribers
Fios video subscribers
(1) As of end of period
2016
$ 12,751
1,651
14,402
11,621
5,003
319
$ 31,345
2015
$ 12,696
1,744
14,440
12,050
5,263
341
$ 32,094
2014
$ 12,168
1,829
13,997
12,814
5,448
534
$ 32,793
$
$
2016 vs. 2015
55
(93)
(38)
(429)
(260)
(22)
(749)
0.4% $
(5.3)
(0.3)
(3.6)
(4.9)
(6.5)
(2.3)
$
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
528
(85)
443
(764)
(185)
(193)
(699)
4.3%
(4.6)
3.2
(6.0)
(3.4)
(36.1)
(2.1)
13,939
15,035
16,140
(1,096)
(7.3)
(1,105)
(6.8)
7,038
5,653
4,694
7,085
5,418
4,635
7,024
5,068
4,453
(47)
235
59
(0.7)
4.3
1.3
61
350
182
0.9
6.9
4.1
Wireline’s revenues decreased $0.7 billion, or 2.3%, during 2016 compared to 2015 primarily as a result of declines in Global Enterprise and
Global Wholesale. Wireline’s revenues were also partially impacted by a reduction in Fios marketing activities during the union work stoppage that
commenced on April 13, 2016 and ended on June 1, 2016. Fios revenues were $11.2 billion during the year ended December 31, 2016, compared to
$10.7 billion during the similar period in 2015.
20
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Mass Markets
Mass Markets operations provide broadband Internet and video
services (including high-speed Internet, Fios Internet and Fios video
services) and local exchange (basic service and end-user access) and
long distance (including regional toll) voice services to residential and
small business subscribers.
2016 Compared to 2015
Mass Markets revenues decreased 0.3%, during 2016 compared to
2015 as the continued decline of local exchange revenues was partially
offset by increases in Fios revenues due to subscriber growth for Fios
services (Internet, video and voice).
The decline of local exchange revenues was primarily due to a 7.5%
decline in Consumer retail voice connections resulting primarily from
competition and technology substitution with wireless and competing
voice over Internet Protocol (VoIP) and cable telephony services. Total
voice connections include traditional switched access lines in service
as well as Fios digital voice connections. There was also an 8.0%
decline in Small business retail voice connections, reflecting compe-
tition and a shift to both IP and high-speed circuits, primarily in areas
outside of our Fios footprint.
During 2016, we grew our subscriber base by 0.2 million Fios Internet
subscribers and 0.1 million Fios video subscribers, while also improving
penetration rates within our Fios service areas for Fios Internet. As of
December 31, 2016, we achieved a penetration rate of 40.4% for Fios
Internet compared to a penetration rate of 40.2% for Fios Internet
as of December 31, 2015. Our Fios connection growth for 2016 was
impacted by a reduction in Fios marketing activities during the union
work stoppage that commenced on April 13, 2016 and ended on
June 1, 2016. Consumer Fios revenues increased $0.4 billion, or 4.3%.
Fios represented approximately 82% of Consumer retail revenue
during 2016 compared to approximately 79% during 2015.
2015 Compared to 2014
Mass Markets revenues increased $0.4 billion, or 3.2%, during 2015
compared to 2014 primarily due to the expansion of Fios services
(voice, Internet and video), including our Fios Quantum offerings,
as well as changes in our pricing strategies, partially offset by the
continued decline of local exchange revenues.
During 2015, we grew our subscriber base by 0.4 million Fios Internet
subscribers and by 0.2 million Fios video subscribers, while also
improving the penetration rate within our Fios service areas for Fios
Internet. As of December 31, 2015, we achieved a penetration rate of
40.2% for Fios Internet compared to a penetration rate of 39.5% for
Fios Internet as of December 31, 2014. During 2015, Consumer Fios
revenue increased $0.9 billion, or 9.5%. Fios represented approx-
imately 79% of Consumer retail revenue during 2015 compared to
approximately 75% during 2014.
The decline of local exchange revenues was primarily due to a 6.2%
decline in Consumer retail voice connections resulting primarily from
competition and technology substitution with wireless, competing
VoIP and cable telephony services. Total voice connections include
traditional switched access lines in service as well as Fios digital voice
connections. There was also a 7.1% decline in Small business retail
voice connections, reflecting competition and a shift to both IP and
high-speed circuits, primarily in areas outside of our Fios footprint.
Global Enterprise
Global Enterprise offers advanced information and communication
technology services and other traditional communications services to
medium and large business customers, multinational corporations and
state and federal government customers.
2016 Compared to 2015
Global Enterprise revenues decreased $0.4 billion, or 3.6%, during
2016 compared to 2015 due to declines in traditional data and
advanced networking solutions, cloud and IT services and voice
communications services. Also contributing to the decrease was the
negative impact of foreign exchange rates. Our traditional data net-
working services, which consist of traditional circuit-based services
such as frame relay, private line and legacy data networking services,
our advanced networking solutions, which include Private IP, Public
Internet, Ethernet and optical network services, and our cloud and IT
services declined as a result of competitive price pressures.
2015 Compared to 2014
Global Enterprise revenues decreased $0.8 billion, or 6.0%, during
2015 compared to 2014 primarily due to a decline in core voice
services and data networking revenues, which consist of traditional
circuit-based services such as frame relay, private line and legacy
voice and data services. These core services declined as a result of
secular declines. Also contributing to the decrease were lower net-
working solutions revenues, a decline in customer premise equipment
revenues and the negative impact of foreign exchange rates.
Networking solutions, which include Private IP, Public Internet, Ethernet
and optical network services, declined as a result of competitive price
compression.
Global Wholesale
Global Wholesale provides communications services, including data,
voice and local dial tone and broadband services primarily to local,
long distance and other carriers that use our facilities to provide
services to their customers.
2016 Compared to 2015
Global Wholesale revenues decreased $0.3 billion, or 4.9%, during
2016 compared to 2015 primarily due to declines in data revenues
and traditional voice revenues driven by the effect of technology
substitution as well as continuing contraction of market rates due to
competition. As a result of technology substitution, the number of core
data circuits at December 31, 2016 decreased 16.3% compared to
December 31, 2015. The decline in traditional voice revenue is driven
by a 5.8% decline in domestic wholesale connections at December 31,
2016, compared to December 31, 2015.
2015 Compared to 2014
Global Wholesale revenues decreased $0.2 billion, or 3.4%, during
2015 compared to 2014 primarily due to declines in traditional voice
revenues and data revenues driven by the effect of technology
substitution as well as continuing contraction of market rates due to
competition. The decline in traditional voice revenue was also due
to a decrease in minutes of use. We experienced a 7.3% decline in
domestic wholesale connections between December 31, 2015 and
December 31, 2014. As a result of technology substitution, the number
of core data circuits at December 31, 2015 decreased 14.7% compared
to December 31, 2014.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 21
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Operating Expenses
Years Ended December 31,
Cost of services
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
2016
$ 18,619
6,585
6,101
$ 31,305
2015
$ 18,816
7,256
6,543
$ 32,615
2014
$ 19,413
7,394
6,817
$ 33,624
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$
$
(197)
(671)
(442)
(1,310)
(1.0)% $
(9.2)
(6.8)
(4.0)
$
(597)
(138)
(274)
(1,009)
(3.1)%
(1.9)
(4.0)
(3.0)
Cost of Services
Cost of services decreased $0.2 billion, or 1.0%, during 2016
compared to 2015 primarily due to a decline in net pension and post-
retirement benefit cost, a $0.3 billion decline in access costs driven
by declines in overall wholesale long distance volumes and rates and
employee costs as a result of reduced headcount. These decreases
were partially offset by $0.4 billion of incremental costs incurred as a
result of the union work stoppage that commenced on April 13, 2016
and ended on June 1, 2016 as well as a $0.2 billion increase in content
costs associated with continued programming license fee increases
and continued Fios subscriber growth.
Cost of services decreased during 2015 compared to 2014 primarily
due to a $0.4 billion decline in employee costs as a result of reduced
headcount as well as a $0.3 billion decline in access costs driven by
declines in overall wholesale long distance volumes. Partially offset-
ting these decreases was an increase in content costs of $0.4 billion
associated with continued Fios subscriber growth and programming
license fee increases.
Segment Operating Income (Loss) and EBITDA
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $0.7 billion,
or 9.2%, during 2016 compared to 2015 primarily due to declines in
employee costs as a result of reduced headcount, a decline in net
pension and postretirement benefit costs and decreases in non-
income taxes.
Selling, general and administrative expense decreased during 2015
compared to 2014 primarily due to declines in employee costs as a
result of reduced headcount and decreased administrative expenses,
partially offset by an increase in non- income taxes.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2016 and
2015 compared to the prior year periods primarily due to decreases in
net depreciable assets.
Years Ended December 31,
Segment Operating Income (Loss)
Add Depreciation and amortization expense
Segment EBITDA
2016
40
6,101
6,141
$
$
$
2015
(521)
6,543
$ 6,022
$
2014
(831)
6,817
$ 5,986
Segment operating income (loss) margin
Segment EBITDA margin
0.1%
19.6%
(1.6)%
18.8%
(2.5)%
18.3%
nm — not meaningful
2016 vs. 2015
(dollars in millions)
Increase/(Decrease)
2015 vs. 2014
$
$
561
(442)
119
nm
(6.8)%
2.0
$
$
310
(274)
36
(37.3)%
(4.0)
0.6
The changes in the table above were primarily a result of the factors described in connection with operating revenues and operating expenses.
Non- operational items excluded from Wireline’s Operating income (loss) were as follows:
(dollars in millions)
$
2015
15 $
2014
189
(2,021)
137
$ (2,803) $ (1,695)
(2,818)
–
Years Ended December 31,
Severance, pension and benefit charges
Impact of divested operations
Other costs
2016
$
–
(661)
–
$ (661)
22
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
were primarily driven by a decrease in our discount rate assumption
used to determine the current year liabilities from a weighted- average
of 5.0% at December 31, 2013 to a weighted- average of 4.2% at
December 31, 2014 ($5.2 billion), a change in mortality assumptions
primarily driven by the use of updated actuarial tables (RP-2014
and MP-2014) issued by the Society of Actuaries in October 2014
($1.8 billion) and revisions to the retirement assumptions for participants
and other assumption adjustments, partially offset by the difference
between our estimated return on assets of 7.25% and our actual return
on assets of 10.5% ($0.6 billion). As part of this charge, we recorded
severance costs of $0.5 billion under our existing separation plans.
The Consolidated Adjusted EBITDA non-GAAP measure presented
in the Consolidated Net Income, Operating Income and EBITDA
discussion (see “Consolidated Results of Operations”) excludes the
severance, pension and benefit charges (credits) presented above.
Early Debt Redemption and Other Costs
During 2016, we recorded net debt redemption costs of $1.8 billion in
connection with the early redemption of $2.2 billion aggregate principal
amount of Verizon Communications notes called and redeemed in
whole, as well as the early redemption pursuant to three concurrent,
but separate, tender offers of the following: $3.0 billion aggregate
principal amount of Verizon Communications notes included in the
Group 1 Any and All Offer; $1.2 billion aggregate principal amount of
debentures of our operating telephone company subsidiaries included
in the Group 2 Any and All Offer; $3.8 billion aggregate principal
amount of Verizon Communications notes, $0.2 billion aggregate
principal amount of Alltel Corporation debentures and $0.3 billion
aggregate principal amount of GTE Corporation debentures included
in the Group 3 Offer. See Note 6 to the consolidated financial state-
ments for additional details related to our early debt redemptions.
During 2014, we recorded net debt redemption costs of $1.4 billion
in connection with the early redemption of $4.5 billion aggregate
principal amount of Verizon Communications notes, $1.7 billion
aggregate principal amount of Cellco Partnership and Verizon Wireless
Capital LLC notes and $0.1 billion aggregate principal amount of Alltel
Corporation debentures as well as the purchase of the following
pursuant to a tender offer: $3.2 billion aggregate principal amount
of Verizon Communications notes, $0.6 billion aggregate principal
amount of Cellco Partnership and Verizon Wireless Capital LLC notes,
$0.3 billion aggregate principal amount of GTE Corporation deben-
tures and $0.2 billion aggregate principal amount of Alltel Corporation
debentures. We also recorded $0.3 billion of other costs.
We recognize early debt redemption costs in Other income and
(expense), net on our consolidated statements of income.
Other Items
Severance, Pension and Benefit Charges (Credits)
During 2016, we recorded net pre-tax severance, pension and benefit
charges of $2.9 billion in accordance with our accounting policy to
recognize actuarial gains and losses in the period in which they occur.
The pension and benefit remeasurement charges of $2.5 billion
were primarily driven by a decrease in our discount rate assumption
used to determine the current year liabilities of our pension and other
postretirement benefit plans from a weighted- average of 4.6% at
December 31, 2015 to a weighted- average of 4.2% at December 31,
2016 ($2.1 billion), updated health care trend cost assumptions
($0.9 billion), the difference between our estimated return on assets of
7.0% and our actual return on assets of 6.0% ($0.2 billion) and other
assumption adjustments ($0.3 billion). These charges were partially
offset by a change in mortality assumptions primarily driven by the
use of updated actuarial tables (MP-2016) issued by the Society of
Actuaries ($0.5 billion) and lower negotiated prescription drug pricing
($0.5 billion). As part of these charges, we also recorded severance
costs of $0.4 billion under our existing separation plans.
The net pre-tax severance, pension and benefit charges during 2016
were comprised of a net pre-tax pension remeasurement charge of
$0.2 billion measured as of March 31, 2016 related to settlements for
employees who received lump-sum distributions in one of our defined
benefit pension plans, a net pre-tax pension and benefit remeasure-
ment charge of $0.8 billion measured as of April 1, 2016 related to
curtailments in three of our defined benefit pension and one of our
other postretirement plans, a net pre-tax pension and benefit remea-
surement charge of $2.7 billion measured as of May 31, 2016 in two
defined benefit pension plans and three other postretirement benefit
plans as a result of our accounting for the contractual healthcare caps
and bargained for changes, a net pre-tax pension remeasurement
charge of $0.1 billion measured as of May 31, 2016 related to settle-
ments for employees who received lump-sum distributions in three of
our defined benefit pension plans, a net pre-tax pension remeasure-
ment charge of $0.6 billion measured as of August 31, 2016 related to
settlements for employees who received lump-sum distributions in
five of our defined benefit pension plans, and a net pre-tax pension
and benefit credit of $1.9 billion as a result of our fourth quarter remea-
surement of our pension and other postretirement assets and liabilities
based on updated actuarial assumptions.
During 2015, we recorded net pre-tax severance, pension and benefit
credits of approximately $2.3 billion primarily for our pension and post-
retirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The credits
were primarily driven by an increase in our discount rate assumption used
to determine the current year liabilities from a weighted- average of 4.2%
at December 31, 2014 to a weighted- average of 4.6% at December 31,
2015 ($2.5 billion), the execution of a new prescription drug contract
during 2015 ($1.0 billion) and a change in mortality assumptions
primarily driven by the use of updated actuarial tables (MP-2015) issued
by the Society of Actuaries ($0.9 billion), partially offset by the differ-
ence between our estimated return on assets of 7.25% at December 31,
2014 and our actual return on assets of 0.7% at December 31, 2015
($1.2 billion), severance costs recorded under our existing separation
plans ($0.6 billion) and other assumption adjustments ($0.3 billion).
During 2014, we recorded net pre-tax severance, pension and benefit
charges of approximately $7.5 billion primarily for our pension and post-
retirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The charges
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 23
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Gain on Access Line Sale
During the second quarter of 2016, we completed the Access Line
Sale. As a result of this transaction, we recorded a pre-tax gain
of approximately $1.0 billion in Selling, general and administrative
expense on our consolidated statement of income for the year ended
December 31, 2016. The pre-tax gain included a $0.5 billion pension
and postretirement benefit curtailment gain due to the elimination of
the accrual of pension and other postretirement benefits for some or
all future services of a significant number of employees covered in
three of our defined benefit pension plans and one of our other post-
retirement benefit plans.
The Consolidated Adjusted EBITDA non-GAAP measure presented in
the Consolidated Net Income, Operating Income and EBITDA discus-
sion (see “Consolidated Results of Operations”) excludes the gain on
the access line sale described above.
Gain on Spectrum License Transactions
During the first quarter of 2016, we completed a license exchange
transaction with affiliates of AT&T Inc. (AT&T) to exchange certain
Advanced Wireless Services (AWS) and Personal Communication
Services (PCS) spectrum licenses. As a result of this non-cash
exchange, we received $0.4 billion of AWS and PCS spectrum
licenses at fair value and we recorded a pre-tax gain of approximately
$0.1 billion in Selling, general and administrative expense on our con-
solidated statement of income for the year ended December 31, 2016.
During the fourth quarter of 2015, we completed a license exchange
transaction with an affiliate of T- Mobile USA Inc. (T- Mobile USA) to
exchange certain AWS and PCS licenses. As a result of this non-cash
exchange, we received $0.4 billion of AWS and PCS spectrum
licenses at fair value and we recorded a pre-tax gain of approximately
$0.3 billion in Selling, general and administrative expense on our con-
solidated statement of income for the year ended December 31, 2015.
During the second quarter of 2014, we completed license exchange
transactions with T- Mobile USA to exchange certain AWS and PCS
licenses. The exchange included a number of swaps that we expect
will result in more efficient use of the AWS and PCS bands. As a
result of these exchanges, we received $0.9 billion of AWS and PCS
spectrum licenses at fair value and we recorded an immaterial gain.
During the second quarter of 2014, we completed transactions
pursuant to two additional agreements with T- Mobile USA with
respect to our remaining 700 MHz A block spectrum licenses. Under
one agreement, we sold certain of these licenses to T- Mobile USA
in exchange for cash consideration of approximately $2.4 billion,
and under the second agreement we exchanged the remainder of
our 700 MHz A block spectrum licenses as well as AWS and PCS
spectrum licenses for AWS and PCS spectrum licenses. As a result,
we received $1.6 billion of AWS and PCS spectrum licenses at fair
value and we recorded a pre-tax gain of approximately $0.7 billion
in Selling, general and administrative expense on our consolidated
statement of income for the year ended December 31, 2014.
The Consolidated Adjusted EBITDA non-GAAP measure presented in
the Consolidated Net Income, Operating Income and EBITDA discus-
sion (see “Consolidated Results of Operations”) excludes the gains on
the spectrum license transactions described above.
Wireless Transaction Costs
As a result of the third-party indebtedness incurred to finance the
Wireless Transaction, we incurred interest expense of $0.4 billion
during 2014 (see “Consolidated Financial Condition”). This amount
represents the interest expense incurred prior to the closing of the
Wireless Transaction.
Gain on Sale of Omnitel Interest
As a result of the sale of the Omnitel Interest on February 21, 2014,
which was part of the consideration for the Wireless Transaction,
we recorded a gain of $1.9 billion in Equity in (losses) earnings of
unconsolidated businesses on our consolidated statement of income
during 2014.
Impact of Divested Operations
On April 1, 2016, we completed the Access Line Sale to Frontier.
On July 1, 2014, we sold a non- strategic Wireline business that provides
communications solutions to a variety of government agencies.
The Consolidated Adjusted EBITDA non-GAAP measure presented in
the Consolidated Net Income, Operating Income and EBITDA discus-
sion (see “Consolidated Results of Operations”) excludes the historical
financial results of the divested operations described above.
Operating Environment and Trends
The industries that we operate in are highly competitive, which we
expect to continue particularly as traditional, non- traditional and
emerging service providers seek increased market share. We believe
that our high- quality customer base and superior networks differ-
entiate us from our competitors and give us the ability to plan and
manage through changing economic and competitive conditions. We
remain focused on executing on the fundamentals of the business:
maintaining a high- quality customer base, delivering strong financial
and operating results and generating strong free cash flows. We will
continue to invest for growth, which we believe is the key to creating
value for our shareowners. We are investing in innovative technology,
such as 5G and high-speed fiber, as well as the platforms that will
position us to capture incremental profitable growth in new areas, like
mobile video and IoT, to position ourselves at the center of growth
trends of the future.
The U.S. wireless market has achieved a high penetration of smart-
phones which reduces the opportunity for new phone connection
growth for the industry. We expect future revenue growth in the
industry to be driven by monetization of usage through new ecosys-
tems, and penetration increases in other connected devices including
tablets and IoT devices. Current and potential competitors in the U.S.
wireless market include other national wireless service providers,
various regional wireless service providers, wireless resellers as
well as other communications and technology companies providing
wireless products and services.
24
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Service and equipment pricing continue to play an important role in the
wireless competitive landscape. We compete in this area by offering
our customers services and devices that we believe they will regard as
the best available value for the price. As the demand for wireless data
services continues to grow, we and other wireless service providers
are offering service plans at competitive prices that include a specific
amount of data access in varying megabyte or gigabyte sizes or,
in some cases, unlimited data usage subject to certain restrictions.
These allowances will vary from time to time as part of promotional
offers or in response to market circumstances. We and many other
wireless service providers allow customers to carry over unused data
allowances to the next billing period or provide access to specific data
content free of data charges to the customer. We expect future service
growth opportunities to arise following the migration of customers to
unsubsidized pricing and will be dependent on expanding the pen-
etration of our services and increasing the number of ways that our
customers can connect with our network and services.
Many wireless service providers, as well as equipment manufacturers,
offer device payment options that distinguish service pricing from
equipment pricing and blur the traditional boundary between prepaid
and postpaid plans. These payment options include device payment
plans, which provide customers with the ability to pay for their device
over a period of time, and device leasing arrangements. Historically,
wireless service providers offered customers wireless plans whereby,
in exchange for the customer entering into a fixed-term service
agreement, the wireless service providers significantly, and in some
cases fully, subsidized the customer’s device purchase. Wireless
providers recovered those subsidies through higher service fees as
compared to those paid by customers on device installment plans. We
and many other wireless providers have limited or discontinued this
form of device subsidy. As a result, we have experienced significant
growth in the percentage of activations on device payment plans and
the number of customers on plans with unsubsidized service pricing.
The increase in activations on device payment plans results in a
relative shift of revenue from service revenue to equipment revenue
and causes a change in the timing of the recognition of revenue.
This shift in revenue is the result of recognizing a higher amount of
equipment revenue at the time of sale of devices under the device
payment program, while recognizing a lower amount of monthly
service revenue with unsubsidized service pricing.
Current and potential competitors to our Wireline businesses include
cable companies, wireless service providers, other domestic and
foreign telecommunications providers, satellite television companies,
Internet service providers and other companies that offer network
services and managed enterprise solutions.
In addition, companies with a global presence increasingly compete
with our Wireline businesses. A relatively small number of telecom-
munications and integrated service providers with global operations
serve customers in the global enterprise and, to a lesser extent, the
global wholesale markets. We compete with these full or near-full
service providers for large contracts to provide integrated services
to global enterprises. Many of these companies have strong market
presence, brand recognition, and existing customer relationships, all of
which contribute to intensifying competition that may affect our future
revenue growth.
Despite this challenging environment, we expect that we will be able
to grow key aspects of our Wireline segment by providing network
reliability, offering product bundles that include broadband Internet
access, digital television and local and long distance voice services,
offering more robust IP products and services, and accelerating our
IoT strategies. We will also continue to focus on cost efficiencies to
attempt to offset adverse impacts from unfavorable economic condi-
tions and competitive pressures.
2017 Connection Trends
In our Wireless segment, we expect to continue to attract and maintain
the loyalty of high- quality retail postpaid customers, capitalizing on
demand for data services and bringing our customers new ways
of using wireless services in their daily lives. We expect that future
connection growth will be driven by smartphones, tablets and other
connected devices. We believe these devices will attract and retain
higher value retail postpaid connections, contribute to continued
increases in the penetration of data services and help us remain
competitive with other wireless carriers. We expect to manage churn
by providing a consistent, reliable experience on our wireless network
and focusing on improving the customer experience through simplified
pricing and better execution in our distribution channels.
In our Wireline segment, we have experienced continuing access line
losses as customers have disconnected both primary and secondary
lines and switched to alternative technologies such as wireless, VoIP
and cable for voice and data services. We expect to continue to expe-
rience access line losses as customers continue to switch to alternate
technologies. As we seek to increase our penetration rates within our
Fios service areas and expand our existing business through initiatives
such as One Fiber, we expect to continue to grow our Fios Internet and
video connections.
2017 Operating Revenue Trends
In our Wireless segment, we expect to continue to experience declines
in service revenue as a result of our customer base migration to unsub-
sidized service pricing, the introduction of new pricing structures in
2016 and early 2017 and the use of promotions. Equipment revenues
are largely dependent on wireless device sales volumes, the mix of
devices, promotions and upgrade cycles, which are subject to device
lifecycles, iconic device launches and competition within the wireless
industry.
We expect growth in our Fios broadband and video subscriber base
to positively impact our Consumer retail revenue. We also expect a
continuing decline in Consumer retail revenue related to retail voice
and legacy broadband connection losses. We expect a continued
decline in revenues for our legacy wholesale and enterprise markets.
However, we expect the acquisition of XO Holdings’ wireline business to
mitigate these declines. In Global Enterprise, we also expect additional
revenues from application services, such as our cloud, security and
other solutions-based services, and continued customer migration of
their services to Private IP and other strategic networking services to
partially mitigate these pressures.
We expect initiatives to develop platforms, content and applications
in the mobile video and IoT space will have a long-term positive
impact on revenues, drive usage on our network and monetize our
investments.
2017 Operating Cost and Expense Trends
We expect our consolidated operating income margin and adjusted
EBITDA margin to remain strong as we continue to undertake initia-
tives to reduce our overall cost structure by improving productivity and
gaining efficiency in our operations throughout the business in 2017
and beyond. Expenses related to new products and services, such as
mobile video, and expenses related to newly acquired businesses will
apply offsetting pressure to our margins.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 25
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Cash Flow from Operations
We create value for our shareowners by investing the cash flows
generated by our business in opportunities and transactions that
support continued profitable growth, thereby increasing customer
satisfaction and usage of our products and services. In addition, we
have used our cash flows to maintain and grow our dividend payout to
shareowners. Verizon’s Board of Directors increased the Company’s
quarterly dividend by 2.2% during 2016, making this the tenth consecu-
tive year in which we have raised our dividend.
During 2016, we changed the method in which we monetize device
payment plan receivables from sales of device payment plan receiv-
ables to asset- backed securitizations. While proceeds from sales of
device payment plan receivables were reflected in our cash flows
from operating activities in our consolidated statements of cash flows,
proceeds from asset- backed securitizations are reflected in cash flows
from financing activities. This change will result in lower cash flow
from operations, but will not reduce the cash we have available to run
the business.
Our goal is to use our cash to create long-term value for our share-
holders. We will continue to look for investment opportunities that will
help us to grow the business, acquire spectrum licenses (see “Cash
Flows from Investing Activities”), pay dividends to our shareholders
and, when appropriate, buy back shares of our outstanding common
stock (see “Cash Flows from Financing Activities”).
Capital Expenditures
Our 2017 capital program includes capital to fund advanced networks
and services, including adding capacity and density to our 4G LTE
network in order to stay ahead of our customers’ increasing data
demands and pre- position our network for 5G, building out fiber assets
for wireless backhaul and to deliver Fios services to customers as
part of our One Fiber initiative, expanding our core networks, sup-
porting our copper-based legacy voice networks and pursuing other
opportunities to drive operating efficiencies. The level and the timing
of the Company’s capital expenditures within these broad categories
can vary significantly as a result of a variety of factors outside of
our control, such as material weather events. Capital expenditures
were $17.1 billion in 2016 and $17.8 billion in 2015. We believe that we
have significant discretion over the amount and timing of our capital
expenditures on a Company-wide basis as we are not subject to any
agreement that would require significant capital expenditures on a
designated schedule or upon the occurrence of designated events.
Consolidated Financial Condition
Years Ended December 31,
Cash Flows Provided By (Used In)
Operating activities
Investing activities
Financing activities
Decrease In Cash and Cash
Equivalents
(dollars in millions)
2016
2015
2014
$ 22,715
(10,983)
(13,322)
$ 38,930
(30,043)
(15,015)
$ 30,631
(15,856)
(57,705)
$ (1,590)
$
(6,128)
$ (42,930)
We use the net cash generated from our operations to fund network
expansion and modernization, service and repay external financing,
pay dividends, invest in new businesses and, when appropriate, buy
back shares of our outstanding common stock. Our sources of funds,
primarily from operations and, to the extent necessary, from external
financing arrangements, are sufficient to meet ongoing operating and
investing requirements. We expect that our capital spending require-
ments will continue to be financed primarily through internally generated
funds. Debt or equity financing may be needed to fund additional invest-
ments or development activities or to maintain an appropriate capital
structure to ensure our financial flexibility. Our cash and cash equivalents
are primarily held domestically and are invested to maintain principal
and liquidity. Accordingly, we do not have significant exposure to foreign
currency fluctuations. See “Market Risk” for additional information
regarding our foreign currency risk management strategies.
Our available external financing arrangements include an active
commercial paper program, credit available under credit facilities and
other bank lines of credit, vendor financing arrangements, issuances
of registered debt or equity securities and privately- placed capital
market securities. In addition, our available arrangements to monetize
our device payment plan agreement receivables include asset- backed
securitizations and sales of selected receivables to relationship banks.
Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated from
operations, primarily from our Wireless segment. Net cash provided
by operating activities during 2016 decreased by $16.2 billion primarily
due to a change in the method in which we monetize device payment
plan receivables, as discussed below, as well as a decline in earnings,
an increase in income taxes paid primarily as a result of the Access
Line Sale, and $2.4 billion of cash proceeds received in 2015 as a result
of our transaction (Tower Monetization Transaction) with American
Tower Corporation (American Tower).
During 2016, we changed the method in which we monetize device
payment plan receivables from sales of device payment plan receiv-
ables, which were recorded within cash flows provided by operating
activities, to asset- backed securitization transactions, which are
recorded in cash flows from financing activities. During 2016, we
received cash proceeds related to sales of wireless device payment
plan agreement receivables of $2.0 billion and collected $1.1 billion
of deferred purchase price. During 2015, we received $7.2 billion of
cash proceeds related to new sales of wireless device payment plan
agreement receivables. See Note 7 to the consolidated financial state-
ments for more information. During 2016, we received proceeds from
asset- backed securitization transactions of $5.0 billion. See Note 6
to the consolidated financial statements and “Cash Flows Used in
Financing Activities” for more information.
26
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
investing activities on our consolidated statement of cash flows for the
year ended December 31, 2014. During the first quarter of 2015, we
submitted an application to the FCC and paid $9.5 billion to the FCC to
complete payment for these licenses. The cash payment of $9.5 billion
is classified within Acquisitions of wireless licenses on our consoli-
dated statement of cash flows for the year ended December 31, 2015.
On April 8, 2015, the FCC granted us these spectrum licenses.
On May 12, 2015, we entered into the Merger Agreement with AOL
pursuant to which we commenced a tender offer to acquire all of the
outstanding shares of common stock of AOL at a price of $50.00 per
share, net to the seller in cash, without interest and less any applicable
withholding taxes. On June 23, 2015, we completed the tender offer
and merger, and AOL became a wholly-owned subsidiary of Verizon.
The aggregate cash consideration paid by Verizon at the closing of
these transactions was approximately $3.8 billion, net of cash acquired
of $0.5 billion. Holders of approximately 6.6 million shares exercised
appraisal rights under Delaware law. If they had not exercised these
rights, Verizon would have paid an additional $330 million for such
shares at closing.
During 2016, 2015 and 2014, we acquired various other businesses and
investments for cash consideration that was not significant.
See “Acquisitions and Divestitures” for additional information on our
acquisitions.
Dispositions
During 2016, we received cash proceeds of $9.9 billion in connection
with the completion of the Access Line Sale on April 1, 2016.
During 2014, we received proceeds of $2.4 billion related to spectrum
license transactions and $0.1 billion related to the disposition of a non-
strategic Wireline business.
See “Acquisitions and Divestitures” for additional information on our
dispositions.
Other, net
On May 19, 2015, we consummated a sale- leaseback transaction
with a financial services firm for the buildings and real estate at our
Basking Ridge, New Jersey location. We received total gross proceeds
of $0.7 billion resulting in a deferred gain of $0.4 billion, which will
be amortized over the initial leaseback term of twenty years. The
leaseback of the buildings and real estate is accounted for as an
operating lease. The proceeds received as a result of this transaction
have been classified within Other, net investing activities for the year
ended December 31, 2015. Also in 2015, we received proceeds of
$0.2 billion related to a sale of real estate.
Net cash provided by operating activities during 2015 increased by
$8.3 billion primarily due to $5.9 billion of cash proceeds, net of remit-
tances, related to the sale of wireless device payment plan agreement
receivables as well as $2.4 billion of cash proceeds received as a result
of the Tower Monetization Transaction.
We completed the Tower Monetization Transaction in March 2015,
pursuant to which American Tower acquired the exclusive rights to lease
and operate approximately 11,300 of our wireless towers for an upfront
payment of $5.0 billion, of which $2.4 billion related to a portion of the
towers for which the right-of-use has passed to the tower operator. See
Note 2 to the consolidated financial statements for more information.
Cash Flows Used In Investing Activities
Capital Expenditures
Capital expenditures continue to relate primarily to the use of capital
resources to facilitate the introduction of new products and services,
enhance responsiveness to competitive challenges and increase the
operating efficiency and productivity of our networks.
Capital expenditures, including capitalized software, were as follows:
Years Ended December 31,
Wireless
Wireline
Other
(dollars in millions)
2016
$ 11,240
4,504
1,315
$ 17,059
2015
$ 11,725
5,049
1,001
$ 17,775
2014
$ 10,515
5,750
926
$ 17,191
Total as a percentage of revenue
13.5%
13.5%
13.5%
Capital expenditures decreased at Wireless in 2016 primarily due
to the timing of investments to increase the capacity of our 4G LTE
network. Capital expenditures increased at Wireless in 2015 in order
to increase the capacity of our 4G LTE network. Capital expendi-
tures declined at Wireline in 2016 as a result of capital expenditures
related to the local exchange business and related landline activities
in California, Florida and Texas that were sold to Frontier on April 1,
2016 and reduced capital spending during the work stoppage that
commenced April 13, 2016 and ended June 1, 2016. Capital expen-
ditures declined at Wireline in 2015 as a result of decreased legacy
spending requirements as well as decreased Fios spending require-
ments in 2015.
Acquisitions
During 2016, 2015 and 2014, we invested $0.5 billion, $9.9 billion
and $0.4 billion, respectively, in acquisitions of wireless licenses.
During 2016, 2015 and 2014, we also invested $3.8 billion, $3.5 billion
and $0.2 billion, respectively, in acquisitions of businesses, net of
cash acquired.
In July 2016, we acquired Telogis, a global cloud-based mobile enter-
prise management business, for $0.9 billion of cash consideration.
In November 2016, we acquired Fleetmatics, a leading global provider
of fleet and mobile workforce management solutions, for $60.00 per
ordinary share in cash. The aggregate merger consideration was
approximately $2.5 billion, including cash acquired of $0.1 billion.
On January 29, 2015, the FCC completed an auction of 65 MHz of
spectrum, which it identified as the AWS-3 band. Verizon participated
in that auction, and was the high bidder on 181 spectrum licenses,
for which we paid cash of approximately $10.4 billion. During the
fourth quarter of 2014, we made a deposit of $0.9 billion related to
our participation in this auction, which is classified within Other, net
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| 27
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Cash Flows Used In Financing Activities
We seek to maintain a mix of fixed and variable rate debt to lower
borrowing costs within reasonable risk parameters. During 2016,
2015 and 2014, net cash used in financing activities was $13.3 billion,
$15.0 billion and $57.7 billion, respectively.
2016
During 2016, our net cash used in financing activities of $13.3 billion
was primarily driven by:
2015
During 2015, our net cash used in financing activities of $15.0 billion
was primarily driven by:
• $9.3 billion used for repayments of long-term borrowings and capital
lease obligations, including the repayment of $6.5 billion of borrow-
ings under a term loan agreement;
• $8.5 billion used for dividend payments; and
• $5.0 billion payment for our accelerated share repurchase
• $19.2 billion used for repayments of long-term borrowings and
agreement.
capital lease obligations; and
• $9.3 billion used for dividend payments.
These uses of cash were partially offset by proceeds from long-term
borrowings of $18.0 billion, which included $5.0 billion of proceeds
from our asset- backed debt transactions.
Proceeds from and Repayments of Long-Term Borrowings
At December 31, 2016, our total debt decreased to $108.1 billion as
compared to $109.7 billion at December 31, 2015. Our effective interest
rate was 4.8% and 4.9% during the years ended December 31, 2016
and 2015, respectively. The substantial majority of our total debt
portfolio consists of fixed rate indebtedness, therefore, changes in
interest rates do not have a material effect on our interest payments.
See also “Market Risk” and Note 6 to the consolidated financial state-
ments for additional details.
At December 31, 2016, approximately $11.6 billion or 10.7% of the
aggregate principal amount of our total debt portfolio consisted
of foreign denominated debt, primarily the Euro and British Pound
Sterling. We have entered into cross currency swaps on a majority of
our foreign denominated debt in order to fix our future interest and
principal payments in U.S. dollars and mitigate the impact of foreign
currency transaction gains or losses. See “Market Risk” for additional
information.
Verizon may continue to acquire debt securities issued by Verizon and
its affiliates in the future through open market purchases, privately
negotiated transactions, tender offers, exchange offers, or otherwise,
upon such terms and at such prices as Verizon may from time to time
determine for cash or other consideration.
Other, net
Other, net financing activities during 2016, includes net early debt
redemption costs of $1.8 billion. See “Other Items” for additional infor-
mation related to the early debt redemption costs incurred during the
year ended December 31, 2016.
Dividends
The Verizon Board of Directors assesses the level of our dividend
payments on a periodic basis taking into account such factors as
long-term growth opportunities, internal cash requirements and the
expectations of our shareholders. During the third quarter of 2016,
the Board increased our quarterly dividend payment 2.2% to $0.5775
from $0.565 per share in the prior period. This is the tenth consecu-
tive year that Verizon’s Board of Directors has approved a quarterly
dividend increase.
As in prior periods, dividend payments were a significant use of capital
resources. During 2016, we paid $9.3 billion in dividends.
These uses of cash were partially offset by proceeds from long-term
borrowings of $6.7 billion, which included $6.5 billion of borrowings
under a term loan agreement which was used for general corporate
purposes, including the acquisition of spectrum licenses, as well
as $2.7 billion of cash proceeds received related to the Tower
Monetization Transaction attributable to the portion of the towers that
we continue to occupy and use for network operations.
Proceeds from and Repayments of Long-Term Borrowings
At December 31, 2015, our total debt decreased to $109.7 billion as
compared to $112.8 billion at December 31, 2014. The substantial
majority of our total debt portfolio consists of fixed rate indebtedness,
therefore, changes in interest rates do not have a material effect on our
interest payments. See Note 6 to the consolidated financial statements
for additional details regarding our debt activity.
At December 31, 2015, approximately $8.2 billion or 7.5% of the
aggregate principal amount of our total debt portfolio consisted
of foreign denominated debt, primarily the Euro and British Pound
Sterling. We have entered into cross currency swaps in order to fix our
future interest and principal payments in U.S. dollars and mitigate the
impact of foreign currency transaction gains or losses. See “Market
Risk” for additional information.
Other, net
Other, net financing activities during 2015 included $2.7 billion of cash
proceeds received related to the Tower Monetization Transaction,
which relates to the portion of the towers that we continue to occupy
and use for network operations partially offset by the settlement of
derivatives upon maturity for $0.4 billion.
Dividends
During the third quarter of 2015, the Board increased our quarterly
dividend payment 2.7% to $0.565 per share from $0.550 per share in
the same prior period.
As in prior periods, dividend payments were a significant use of capital
resources. During 2015, we paid $8.5 billion in dividends.
2014
During 2014, our net cash used in financing activities of $57.7 billion
was primarily driven by:
• $58.9 billion used to partially fund the Wireless Transaction (see
Note 2 to the consolidated financial statements);
• $17.7 billion used for repayments of long-term borrowings and
capital lease obligations; and
• $7.8 billion used for dividend payments.
These uses of cash were partially offset by proceeds from long-term
borrowings of $31.0 billion.
28
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Proceeds from and Repayments of Long-Term Borrowings
At December 31, 2014, our total debt increased to $112.8 billion as
compared to $93.1 billion at December 31, 2013 primarily as a result
of additional debt issued to finance the Wireless Transaction. Since
the substantial majority of our total debt portfolio consists of fixed rate
indebtedness, changes in interest rates do not have a material effect
on our interest payments. Throughout 2014, we accessed the capital
markets to optimize the maturity schedule of our debt portfolio and
take advantage of lower interest rates, thereby reducing our effective
interest rate to 4.9% from 5.2% in 2013. See Note 6 to the consolidated
financial statements for additional details regarding our debt activity.
At December 31, 2014, approximately $9.6 billion or 8.5% of the
aggregate principal amount of our total debt portfolio consisted
of foreign denominated debt, primarily the Euro and British Pound
Sterling. We have entered into cross currency swaps in order to fix our
future interest and principal payments in U.S. dollars and mitigate the
impact of foreign currency transaction gains or losses. See “Market
Risk” for additional information.
See “Other Items” for additional information related to the early debt
redemption costs incurred in 2014.
Dividends
During the third quarter of 2014, the Board increased our quarterly
dividend payment 3.8% to $0.550 per share from $0.530 per share in
the same period of 2013. As in prior periods, dividend payments were
a significant use of capital resources. During 2014, we paid $7.8 billion
in dividends.
Asset- Backed Debt
As of December 31, 2016, the carrying value of our asset- backed
debt was $5.0 billion. Our asset- backed debt includes notes (the
Asset- Backed Notes) issued to third-party investors (Investors) and
loans (ABS Financing Facility) received from banks and their conduit
facilities (collectively, the Banks). Our consolidated asset- backed
securitization bankruptcy remote legal entities (each, an ABS Entity or
collectively, the ABS Entities) issue the debt or are otherwise party to
the transaction documentation in connection with our asset- backed
debt transactions. Under the terms of our asset- backed debt, we
transfer device payment plan agreement receivables from Cellco
Partnership and certain other affiliates of Verizon (collectively, the
Originators) to one of the ABS Entities, which in turn transfer such
receivables to another ABS Entity that issues the debt. Verizon entities
retain the equity interests in the ABS Entities, which represent the
rights to all funds not needed to make required payments on the asset-
backed debt and other related payments and expenses.
Our asset- backed debt is secured by the transferred device payment
plan agreement receivables and future collections on such receiv-
ables. The device payment plan agreement receivables transferred to
the ABS Entities and related assets, consisting primarily of restricted
cash, will only be available for payment of asset- backed debt and
expenses related thereto, payments to the Originators in respect of
additional transfers of device payment plan agreement receivables,
and other obligations arising from our asset- backed debt transactions,
and will not be available to pay other obligations or claims of Verizon’s
creditors until the associated asset- backed debt and other obligations
are satisfied. The Investors or Banks, as applicable, which hold our
asset- backed debt have legal recourse to the assets securing the debt,
but do not have any recourse to Verizon with respect to the payment of
principal and interest on the debt. Under a parent support agreement,
Verizon has agreed to guarantee certain of the payment obligations of
Cellco Partnership and the Originators to the ABS Entities.
Cash collections on the device payment plan agreement receivables
are required at certain specified times to be placed into segregated
accounts. Deposits to the segregated accounts are considered
restricted cash and are included in Prepaid expenses and other and
Other assets on our consolidated balance sheets.
Proceeds from our asset- backed debt transactions, deposits to the
segregated accounts and payments to the Originators in respect of
additional transfers of device payment plan agreement receivables,
are reflected in Cash flows from financing activities in our consolidated
statements of cash flows. Repayments of our asset- backed debt and
related interest payments made from the segregated accounts are
non-cash activities and therefore are not reflected within Cash flows
from financing activities in our consolidated statements of cash flows.
The asset- backed debt issued and the assets securing this debt are
included on our consolidated balance sheets.
Although the ABS Financing Facility is fully drawn as of December 31,
2016, we have the right to prepay all or a portion thereof at any time. If
we choose to prepay, the amount prepaid shall be available for further
drawdowns until September 2018, except in certain circumstances.
Credit Facilities
On September 23, 2016, we amended our $8.0 billion credit facility
to increase the availability to $9.0 billion and extend the maturity to
September 23, 2020. As of December 31, 2016, the unused borrowing
capacity under our $9.0 billion credit facility was approximately
$8.9 billion. The credit facility does not require us to comply with
financial covenants or maintain specified credit ratings, and it permits
us to borrow even if our business has incurred a material adverse
change. We use the credit facility for the issuance of letters of credit
and for general corporate purposes.
In March 2016, we entered into an equipment credit facility insured
by Eksportkreditnamnden Stockholm, Sweden (EKN), the Swedish
export credit agency, with the ability to borrow up to $1 billion to
finance locally- sourced network equipment- related purchases. The
facility has borrowings available through June 2017, contingent upon
the amount of equipment- related purchases made by Verizon. As of
December 31, 2016 we had drawn $0.5 billion on the facility and the
unused borrowing capacity was $0.5 billion.
Common Stock
Common stock has been used from time to time to satisfy some of the
funding requirements of employee and shareholder plans, including
3.5 million, 22.6 million and 18.2 million common shares issued from
Treasury stock during 2016, 2015 and 2014, respectively, which had
aggregate values of an immaterial amount, $0.9 billion and $0.7 billion,
respectively.
In February 2015, the Verizon Board of Directors authorized Verizon to
enter into an accelerated share repurchase (ASR) agreement to repur-
chase $5.0 billion of the Company’s common stock. On February 10,
2015, in exchange for an upfront payment totaling $5.0 billion, Verizon
received an initial delivery of 86.2 million shares having a value of
approximately $4.25 billion. On June 5, 2015, Verizon received an addi-
tional 15.4 million shares as final settlement of the transaction under
the ASR agreement. In total, 101.6 million shares were delivered under
the ASR at an average repurchase price of $49.21.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 29
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
On March 7, 2014, the Verizon Board of Directors approved a share
buyback program, which authorizes the repurchase of up to 100 million
shares of Verizon common stock terminating no later than the close
of business on February 28, 2017. The program permits Verizon to
repurchase shares over time, with the amount and timing of repur-
chases depending on market conditions and corporate needs. The
Board also determined that no additional shares were to be purchased
under the prior program. There were no repurchases of common stock
during 2016 and 2014. During 2015, we repurchased $0.1 billion of our
common stock as part of our share buyback program.
As a result of the Wireless Transaction, in February 2014, Verizon
issued approximately 1.27 billion shares of common stock.
Credit Ratings
Verizon’s credit ratings did not change in 2016, 2015 or 2014.
Securities ratings assigned by rating organizations are expressions of
opinion and are not recommendations to buy, sell or hold securities. A
securities rating is subject to revision or withdrawal at any time by the
assigning rating organization. Each rating should be evaluated inde-
pendently of any other rating.
Covenants
Our credit agreements contain covenants that are typical for large,
investment grade companies. These covenants include requirements
to pay interest and principal in a timely fashion, pay taxes, maintain
insurance with responsible and reputable insurance companies,
preserve our corporate existence, keep appropriate books and records
of financial transactions, maintain our properties, provide financial and
other reports to our lenders, limit pledging and disposition of assets and
mergers and consolidations, and other similar covenants. Additionally,
our term loan credit agreements require us to maintain a leverage ratio
(as such term is defined in those agreements) not in excess of 3.50:1.00
until our credit ratings are equal to or higher than A3 and A-.
We and our consolidated subsidiaries are in compliance with all of our
financial and restrictive covenants.
2017 Term Loan Agreement
During January 2017, we entered into a term loan credit agreement with
a syndicate of major financial institutions, pursuant to which we can
borrow up to $5.5 billion for (i) the acquisition of Yahoo and (ii) general
corporate purposes. Borrowings under the term loan credit agreement
mature 18 months following the funding date, with a partial mandatory
prepayment required within six months following the funding date. The
term loan agreement contains certain negative covenants, including a
negative pledge covenant, a merger or similar transaction covenant and
an accounting changes covenant, affirmative covenants and events of
default that are customary for companies maintaining an investment
grade credit rating. In addition, the term loan credit agreement requires
us to maintain a leverage ratio (as defined in the term loan credit
agreement) not in excess of 3.50:1.00, until our credit ratings are equal
to or higher than A3 and A- at Moody’s Investor Service and S&P Global
Ratings, respectively. To date, we have not drawn on this term loan.
Change In Cash and Cash Equivalents
Our Cash and cash equivalents at December 31, 2016 totaled $2.9 billion,
a $1.6 billion decrease compared to Cash and cash equivalents at
December 31, 2015 primarily as a result of the factors discussed above.
Our Cash and cash equivalents at December 31, 2015 totaled $4.5 billion,
a $6.1 billion decrease compared to Cash and cash equivalents at
December 31, 2014 primarily as a result of the factors discussed above.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that reflects an addi-
tional way of viewing our liquidity that, when viewed with our GAAP
results, provides a more complete understanding of factors and trends
affecting our cash flows. We believe it is a more conservative measure
of cash flow since purchases of fixed assets are necessary for ongoing
operations. Free cash flow has limitations due to the fact that it does
not represent the residual cash flow available for discretionary expen-
ditures. For example, free cash flow does not incorporate payments
made on capital lease obligations or cash payments for business
acquisitions. Therefore, we believe it is important to view free cash flow
as a complement to our entire consolidated statements of cash flows.
Free cash flow is calculated by subtracting capital expenditures from
net cash provided by operating activities.
The following table reconciles net cash provided by operating activities
to Free cash flow:
Years Ended December 31,
Net cash provided by operating
(dollars in millions)
2016
2015
2014
activities
$ 22,715
$ 38,930
$ 30,631
Less Capital expenditures
(including capitalized software)
Free cash flow
17,059
$ 5,656
17,775
$ 21,155
17,191
$ 13,440
The changes in free cash flow during 2016, 2015 and 2014 were a
result of the factors described in connection with net cash provided by
operating activities and capital expenditures. The change in free cash
flow during 2016 was primarily due to a change in the method in which
we monetize device payment plan receivables, as discussed below, as
well as a decline in earnings, an increase in income taxes paid primarily
as a result of the Access Line Sale, and $2.4 billion of cash proceeds
received in 2015 related to the Tower Monetization Transaction with
American Tower.
During 2016, we changed the method in which we monetize device
payment plan receivables from sales of device payment plan receiv-
ables, which were recorded within cash flows provided by operating
activities, to asset- backed securitization transactions, which are
recorded in cash flows from financing activities. During 2016, we
received cash proceeds related to new sales of wireless device
payment plan agreement receivables of $2.0 billion and collected
$1.1 billion of deferred purchase price. During 2015, we received
$7.2 billion of cash proceeds related to new sales of wireless device
payment plan agreement receivables. See Note 7 to the consolidated
financial statements for more information. During 2016, we received
proceeds from asset- backed securitization transactions of $5.0 billion.
See Note 6 to the consolidated financial statements and “Cash Flows
Used in Financing Activities” for more information.
During 2015, we received $5.9 billion of cash proceeds, net of remit-
tances, related to the sale of wireless device payment plan receivables
as well as $2.4 billion of cash proceeds received related to the Tower
Monetization Transaction.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Employee Benefit Plan Funded Status and
Contributions
Employer Contributions
We operate numerous qualified and nonqualified pension plans and
other postretirement benefit plans. These plans primarily relate to
our domestic business units. During 2016, 2015 and 2014, contribu-
tions to our qualified pension plans were $0.8 billion, $0.7 billion and
$1.5 billion, respectively. We also contributed $0.1 billion to our non-
qualified pension plans each year in 2016, 2015 and 2014.
In an effort to reduce the risk of our portfolio strategy and better
align assets with liabilities, we have adopted a liability driven pension
strategy that seeks to better match cash flows from investments
with projected benefit payments. We expect that the strategy will
reduce the likelihood that assets will decline at a time when liabilities
increase (referred to as liability hedging), with the goal to reduce the
risk of underfunding to the plan and its participants and beneficia-
ries; however, we also expect the strategy to result in lower asset
returns. Based on this strategy and the funded status of the plans at
December 31, 2016, we expect the minimum required qualified pension
plan contribution in 2017 to be $0.6 billion. Nonqualified pension contri-
butions are estimated to be approximately $0.1 billion in 2017.
Contributions to our other postretirement benefit plans generally
relate to payments for benefits on an as- incurred basis since these
other postretirement benefit plans do not have funding requirements
similar to the pension plans. We contributed $1.1 billion, $0.9 billion and
$0.7 billion to our other postretirement benefit plans in 2016, 2015 and
2014, respectively. Contributions to our other postretirement benefit
plans are estimated to be approximately $0.8 billion in 2017.
Leasing Arrangements
See Note 5 to the consolidated financial statements for a discussion of leasing arrangements.
Off Balance Sheet Arrangements and Contractual Obligations
Contractual Obligations and Commercial Commitments
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2016. Additional detail
about these items is included in the notes to the consolidated financial statements.
Contractual Obligations
Long-term debt(1)
Capital lease obligations(2)
Total long-term debt, including current
maturities
Interest on long-term debt(1)
Operating leases(2)
Purchase obligations(3)
Other long-term liabilities(4)
Finance obligations(5)
Total contractual obligations
Payments Due By Period
Total
$ 107,429
950
108,379
81,026
17,875
16,799
2,536
2,360
$ 228,975
Less than
1 year
2,142
335
$
2,477
4,802
2,822
6,926
1,444
266
$ 18,737
1–3 years
$ 12,386
391
12,777
9,160
4,887
6,386
1,092
548
$ 34,850
3–5 years
$ 20,977
160
21,137
8,169
3,442
1,258
–
570
$ 34,576
(dollars in millions)
More than
5 years
$ 71,924
64
71,988
58,895
6,724
2,229
–
976
$ 140,812
(1) Items included in long-term debt with variable coupon rates are described in Note 6 to the consolidated financial statements.
(2) See Note 5 to the consolidated financial statements.
(3) The purchase obligations reflected above are primarily commitments to purchase programming and network services, equipment, software and marketing services, which will be
used or sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject of
contractual obligations. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented in this table alone do not provide a reliable
indicator of our expected future cash outflows or changes in our expected cash position (see Note 15 to the consolidated financial statements).
(4) Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 10 to the consolidated financial statements).
(5) Represents future minimum payments under the sublease arrangement for our tower transaction (see Note 5 to the consolidated financial statements).
We are not able to make a reliable estimate of when the unrecognized tax benefits balance of $1.9 billion and related interest and penalties will
be settled with the respective taxing authorities until issues or examinations are further developed (see Note 11 to the consolidated financial
statements).
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| 31
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Guarantees
We guarantee the debentures of our operating telephone company
subsidiaries as well as the debt obligations of GTE LLC, as successor
in interest to GTE Corporation, that were issued and outstanding prior
to July 1, 2003 (see Note 6 to the consolidated financial statements).
As a result of the closing of the Access Line Sale on April 1, 2016,
GTE Southwest Inc., Verizon California Inc. and Verizon Florida LLC
are no longer wholly-owned subsidiaries of Verizon, and the guar-
antees of $0.6 billion aggregate principal amount of debentures and
first mortgage bonds of those entities have terminated pursuant to
their terms.
In connection with the execution of agreements for the sale of busi-
nesses and investments, Verizon ordinarily provides representations
and warranties to the purchasers pertaining to a variety of nonfinancial
matters, such as ownership of the securities being sold, as well as
financial losses (see Note 15 to the consolidated financial statements).
As of December 31, 2016, letters of credit totaling approximately
$0.4 billion, which were executed in the normal course of business
and support several financing arrangements and payment obligations
to third parties, were outstanding (see Note 15 to the consolidated
financial statements).
Market Risk
We are exposed to various types of market risk in the normal course
of business, including the impact of interest rate changes, foreign
currency exchange rate fluctuations, changes in investment, equity
and commodity prices and changes in corporate tax rates. We employ
risk management strategies, which may include the use of a variety
of derivatives including cross currency swaps, foreign currency and
prepaid forwards and collars, interest rate swap agreements, and
interest rate caps. We do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency and
other derivative transactions only to the extent necessary to achieve
our desired objectives in optimizing exposure to various market risks.
Our objectives include maintaining a mix of fixed and variable rate
debt to lower borrowing costs within reasonable risk parameters
and to protect against earnings and cash flow volatility resulting
from changes in market conditions. We do not hedge our market risk
exposure in a manner that would completely eliminate the effect of
changes in interest rates and foreign exchange rates on our earnings.
At December 31, 2016 and 2015, we posted collateral of approximately
$0.2 billion and $0.1 billion, respectively, related to derivative contracts
under collateral exchange arrangements. During 2015, we paid an
immaterial amount of cash to enter into amendments to certain col-
lateral exchange arrangements. These amendments suspend cash
collateral posting for a specified period of time by both counterparties.
We are in the process of negotiating extensions to amendments
expiring during 2017. While we may be exposed to credit losses due
to the nonperformance of our counterparties, we consider the risk
remote. As such, we do not expect that our results of operations or
financial condition will be materially affected by these risk manage-
ment strategies.
Interest Rate Risk
We are exposed to changes in interest rates, primarily on our short-
term debt and the portion of long-term debt that carries floating
interest rates. As of December 31, 2016, approximately 78% of the
aggregate principal amount of our total debt portfolio consisted of
fixed rate indebtedness, including the effect of interest rate swap
agreements designated as hedges. The impact of a 100 basis point
change in interest rates affecting our floating rate debt would result
in a change in annual interest expense, including our interest rate
swap agreements that are designated as hedges, of approximately
$0.3 billion. The interest rates on substantially all of our existing
long-term debt obligations are unaffected by changes to our
credit ratings.
The table that follows summarizes the fair values of our long-term
debt, including current maturities, and interest rate swap derivatives as
of December 31, 2016 and 2015. The table also provides a sensitivity
analysis of the estimated fair values of these financial instruments
assuming 100-basis-point upward and downward shifts in the yield
curve. Our sensitivity analysis does not include the fair values of our
commercial paper and bank loans, if any, because they are not signifi-
cantly affected by changes in market interest rates.
Long-term debt and
related derivatives
At December 31, 2016
At December 31, 2015
Fair Value
$ 117,580
117,943
Fair Value
assuming
+ 100 basis
point shift
$ 109,029
108,992
(dollars in millions)
Fair Value
assuming
– 100 basis
point shift
$ 128,007
128,641
Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix of fixed
and variable rate debt. We principally receive fixed rates and pay
variable rates based on the London Interbank Offered Rate, resulting
in a net increase or decrease to Interest expense. These swaps are
designated as fair value hedges and hedge against interest rate risk
exposure of designated debt issuances. At December 31, 2016 and
2015, the fair value of these contracts was $0.2 billion and $0.1 billion,
respectively, which was primarily included within Other liabilities and
Other assets, respectively, on our consolidated balance sheets. At
December 31, 2016 and 2015, the total notional amount of the interest
rate swaps was $13.1 billion and $7.6 billion, respectively.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, we
have entered into forward interest rate swaps. We designated these
contracts as cash flow hedges. The fair value of these contracts, which
was included within Other liabilities on our consolidated balance sheet,
was not material at December 31, 2015. At December 31, 2015, these
swaps had a notional value of $0.8 billion. During 2016, we settled all
outstanding forward interest rate swaps.
Interest Rate Caps
We also have interest rate caps which we use as an economic hedge
but for which we have elected not to apply hedge accounting. During
2016, we entered into interest rate caps to mitigate our interest
exposure to interest rate increases on our ABS Financing Facility. The
fair value of these contracts was not material at December 31, 2016.
At December 31, 2016, the total notional value of these contracts was
$2.5 billion.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Foreign Currency Translation
The functional currency for our foreign operations is primarily the local
currency. The translation of income statement and balance sheet
amounts of our foreign operations into U.S. dollars is recorded as
cumulative translation adjustments, which are included in Accumulated
other comprehensive income in our consolidated balance sheets.
Gains and losses on foreign currency transactions are recorded in the
consolidated statements of income in Other income and (expense),
net. At December 31, 2016, our primary translation exposure was to the
British Pound Sterling, Euro, Australian Dollar and Japanese Yen.
Cross Currency Swaps
We enter into cross currency swaps to exchange British Pound
Sterling and Euro- denominated debt into U.S. dollars and to fix our
future interest and principal payments in U.S. dollars, as well as to
mitigate the effect of foreign currency transaction gains or losses.
These swaps are designated as cash flow hedges. The fair value of the
outstanding swaps, which was primarily included within Other liabilities
on our consolidated balance sheets, was $1.8 billion and $1.6 billion
at December 31, 2016 and 2015, respectively. At December 31, 2016
and 2015, the total notional amount of the cross currency swaps was
$12.9 billion and $9.7 billion, respectively.
Net Investment Hedges
We have designated certain foreign currency instruments as net
investment hedges to mitigate foreign exchange exposure related to
non-U.S. dollar net investments in certain foreign subsidiaries against
changes in foreign exchange rates. The fair value of these contracts
was not material at December 31, 2015. At December 31, 2015, the
total notional value of these contracts was $0.9 billion. During 2016, we
settled these net investment hedges and designated $0.8 billion total
notional value of Euro- denominated debt as a net investment hedge.
Critical Accounting Estimates and
Recently Issued Accounting Standards
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
financial statements is as follows:
• Wireless licenses and Goodwill are a significant component of
our consolidated assets. Both our wireless licenses and goodwill
are treated as indefinite-lived intangible assets and, therefore are
not amortized, but rather are tested for impairment annually in the
fourth fiscal quarter, unless there are events requiring an earlier
assessment or changes in circumstances during an interim period
that indicate these assets may not be recoverable. We believe our
estimates and assumptions are reasonable and represent appro-
priate marketplace considerations as of the valuation date. Although
we use consistent methodologies in developing the assumptions
and estimates underlying the fair value calculations used in our
impairment tests, these estimates and assumptions are uncertain
by nature, may change over time and can vary from actual results. It
is possible that in the future there may be changes in our estimates
and assumptions, including the timing and amount of future cash
flows, margins, growth rates, market participant assumptions, com-
parable benchmark companies and related multiples and discount
rates, which could result in different fair value estimates. Significant
and adverse changes to any one or more of the above noted
estimates and assumptions could result in a goodwill impairment for
one or more of our reporting units.
Wireless Licenses
The carrying value of our wireless licenses was approximately
$86.7 billion as of December 31, 2016. We aggregate our wireless
licenses into one single unit of accounting, as we utilize our wireless
licenses on an integrated basis as part of our nationwide wireless
network. Our wireless licenses provide us with the exclusive right
to utilize certain radio frequency spectrum to provide wireless
communication services. There are currently no legal, regulatory,
contractual, competitive, economic or other factors that limit the
useful life of our wireless licenses.
In 2016 and 2014, we performed a qualitative impairment assess-
ment to determine whether it is more likely than not that the fair
value of our wireless licenses was less than the carrying amount. As
part of our assessment we considered several qualitative factors
including the business enterprise value of Wireless, macroeconomic
conditions (including changes in interest rates and discount rates),
industry and market considerations (including industry revenue and
EBITDA margin projections), the projected financial performance
of Wireless, as well as other factors. Based on our assessments in
2016 and 2014, we qualitatively concluded that it was more likely
than not that the fair value of our wireless licenses significantly
exceeded their carrying value and, therefore, did not result in an
impairment.
In 2015, our quantitative impairment test consisted of comparing the
estimated fair value of our aggregate wireless licenses to the aggre-
gated carrying amount as of the test date. If the estimated fair value
of our aggregated wireless licenses is less than the aggregated
carrying amount of the wireless licenses then an impairment charge
would have been recognized. Our quantitative impairment test for
2015 indicated that the fair value significantly exceeded the carrying
value and, therefore, did not result in an impairment.
In 2015, using a quantitative assessment, we estimated the fair
value of our wireless licenses using the Greenfield approach.
The Greenfield approach is an income based valuation approach
that values the wireless licenses by calculating the cash flow
generating potential of a hypothetical start-up company that goes
into business with no assets except the wireless licenses to be
valued. A discounted cash flow analysis is used to estimate what
a marketplace participant would be willing to pay to purchase
the aggregated wireless licenses as of the valuation date. As a
result, we were required to make significant estimates about future
cash flows specifically associated with our wireless licenses, an
appropriate discount rate based on the risk associated with those
estimated cash flows and assumed terminal value and growth rates.
We considered current and expected future economic conditions,
current and expected availability of wireless network technology
and infrastructure and related equipment and the costs thereof as
well as other relevant factors in estimating future cash flows. The
discount rate represented our estimate of the weighted- average
cost of capital (WACC), or expected return, that a marketplace par-
ticipant would have required as of the valuation date. We developed
the discount rate based on our consideration of the cost of debt
and equity of a group of guideline companies as of the valuation
date. Accordingly, our discount rate incorporated our estimate of
the expected return a marketplace participant would have required
as of the valuation date, including the risk premium associated with
the current and expected economic conditions as of the valuation
date. The terminal value growth rate represented our estimate of the
marketplace’s long-term growth rate.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 33
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Goodwill
At December 31, 2016, the balance of our goodwill was approx-
imately $27.2 billion, of which $18.4 billion was in our Wireless
reporting unit, $3.8 billion was in our Wireline reporting unit,
$2.7 billion was in our digital media reporting unit and $2.3 billion
was in our other reporting units. To determine if goodwill is
potentially impaired, we have the option to perform a qualitative
assessment to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value. If we elect
to bypass the qualitative assessment or if indications of a potential
impairment exist, the determination of whether an impairment has
occurred requires the determination of fair value of each respective
reporting unit.
In 2016, we performed a qualitative assessment for our Wireless
reporting unit to determine whether it is more likely than not that the
fair value of the reporting unit was less than the carrying amount. As
part of our assessment we considered several qualitative factors,
including the business enterprise value of Wireless from the last
quantitative test and the excess of fair value over carrying value
from this test, macroeconomic conditions (including changes in
interest rates and discount rates), industry and market consider-
ations (including industry revenue and EBITDA margin projections),
the projected financial performance of Wireless, as well as other
factors. Based on our assessments in 2016, we qualitatively
concluded that it was more likely than not that the fair value of the
Wireless reporting unit significantly exceeded its carrying value and,
therefore, did not result in an impairment.
We performed a quantitative impairment assessment for our
Wireless reporting unit in 2015 and 2014 and for our Wireline and
other reporting units in 2016, 2015 and 2014. For each year, our
quantitative impairment tests indicated that the fair value of each
of our reporting units exceeded their carrying value and therefore,
did not result in an impairment. In the event of a 10% decline in the
fair value of any of our reporting units, the fair value of each of our
reporting units would have still exceeded their book value. However,
the excess of fair value over carrying value for both our Wireline
and digital media reporting units continues to decline such that it is
reasonably possible that small changes to our valuation inputs, such
as a decline in actual or projected operating results or an increase in
discount rates, could trigger a goodwill impairment loss in the future.
Under our quantitative assessment, the fair value of the reporting
unit is calculated using a market approach and a discounted cash
flow method. The market approach includes the use of compar-
ative multiples to corroborate discounted cash flow results. The
discounted cash flow method is based on the present value of
two components — projected cash flows and a terminal value. The
terminal value represents the expected normalized future cash
flows of the reporting unit beyond the cash flows from the discrete
projection period. The fair value of the reporting unit is calculated
based on the sum of the present value of the cash flows from the
discrete period and the present value of the terminal value. The
discount rate represented our estimate of the WACC, or expected
return, that a marketplace participant would have required as of the
valuation date.
• We maintain benefit plans for most of our employees, including, for
certain employees, pension and other postretirement benefit plans.
At December 31, 2016, in the aggregate, pension plan benefit obliga-
tions exceeded the fair value of pension plan assets, which will result
in higher future pension plan expense. Other postretirement benefit
plans have larger benefit obligations than plan assets, resulting
in expense. Significant benefit plan assumptions, including the
discount rate used, the long-term rate of return on plan assets, the
determination of the substantive plan and health care trend rates are
periodically updated and impact the amount of benefit plan income,
expense, assets and obligations. Changes to one or more of these
assumptions could significantly impact our accounting for pension
and other postretirement benefits. A sensitivity analysis of the
impact of changes in these assumptions on the benefit obligations
and expense (income) recorded, as well as on the funded status due
to an increase or a decrease in the actual versus expected return on
plan assets as of December 31, 2016 and for the year then ended
pertaining to Verizon’s pension and postretirement benefit plans, is
provided in the table below.
(dollars in millions)
Pension plans discount rate
Rate of return on pension plan assets
Postretirement plans discount rate
Rate of return on postretirement plan assets
Health care trend rates
Percentage
point
change
$
Increase
(decrease) at
December 31,
2016*
(1,114)
1,241
(149)
149
(1,006)
1,113
(14)
14
609
(616)
+0.50
–0.50
+1.00
–1.00
+0.50
–0.50
+1.00
–1.00
+1.00
–1.00
* In determining its pension and other postretirement obligation, the Company used a
weighted- average discount rate of 4.2%. The rate was selected to approximate the
composite interest rates available on a selection of high- quality bonds available in the
market at December 31, 2016. The bonds selected had maturities that coincided with
the time periods during which benefits payments are expected to occur, were non-
callable and available in sufficient quantities to ensure marketability (at least $0.3 billion
par outstanding).
The annual measurement date for both our pension and other
postretirement benefits is December 31. Effective January 1, 2016,
we adopted the full yield curve approach to estimate the interest
cost component of net periodic benefit cost for pension and
other postretirement benefits. We accounted for this change as
a change in accounting estimate and, accordingly, accounted for
it prospectively beginning in the first quarter of 2016. Prior to this
change, we estimated the interest cost component utilizing a single
weighted- average discount rate derived from the yield curve used to
measure the benefit obligation at the beginning of the period.
34
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
of specific customer accounts and includes consideration of the
credit worthiness and financial condition of those customers. We
record an allowance to reduce the receivables to the amount that is
reasonably believed to be collectible. We also record an allowance
for all other receivables based on multiple factors, including histor-
ical experience with bad debts, the general economic environment
and the aging of such receivables. If there is a deterioration of our
customers’ financial condition or if future actual default rates on
receivables in general differ from those currently anticipated, we
may have to adjust our allowance for doubtful accounts, which
would affect earnings in the period the adjustments are made.
Recently Issued Accounting Standards
See Note 1 to the consolidated financial statements for a discussion
of recently issued accounting standard updates not yet adopted as of
December 31, 2016.
Acquisitions and Divestitures
Wireless
Wireless Transaction
On February 21, 2014, we completed the Wireless Transaction for
aggregate consideration of approximately $130 billion. The con-
sideration paid was primarily comprised of cash of approximately
$58.89 billion, Verizon common stock with a value of approximately
$61.3 billion and other consideration.
Omnitel Transaction
On February 21, 2014, Verizon and Vodafone also consummated the
sale of the Omnitel Interest by a subsidiary of Verizon to a subsidiary
of Vodafone in connection with the Wireless Transaction pursuant
to a separate share purchase agreement. As a result, during 2014,
we recognized a pre-tax gain of $1.9 billion on the disposal of the
Omnitel interest.
See Note 2 to the consolidated financial statements for additional
information regarding the Wireless Transaction.
Spectrum License Transactions
In January 2015, the FCC completed an auction of 65 MHz of
spectrum in the AWS-3 band. We participated in the auction and were
the high bidder on 181 spectrum licenses, for which we paid cash
of approximately $10.4 billion. The FCC granted us these spectrum
licenses in April 2015.
During the fourth quarter of 2016, we entered into a license exchange
agreement with affiliates of AT&T to exchange certain AWS and
PCS spectrum licenses. As a result of this agreement, $0.9 billion of
Wireless licenses are classified as held for sale on our consolidated
balance sheet as of December 31, 2016. This non-cash exchange was
completed in February 2017. We expect to record a gain on this trans-
action in the first quarter of 2017.
The full yield curve approach refines our estimate of interest cost
by applying the individual spot rates from a yield curve composed
of the rates of return on several hundred high- quality fixed income
corporate bonds available at the measurement date. These indi-
vidual spot rates align with the timing of each future cash outflow for
benefit payments and therefore provide a more precise estimate of
interest cost.
This change in accounting estimate does not affect the measure-
ment of our total benefit obligations at year end or our annual net
periodic benefit cost as the change in the interest cost is offset
in the actuarial gain or loss recorded at year end. Accordingly,
this change in accounting estimate has no impact on our annual
consolidated GAAP results. For the year ended December 31,
2016, this change resulted in our reduction of the interest cost
component of net periodic benefit cost of approximately $0.4 billion.
For the year ended December 31, 2016, the impact of this change
on our non-GAAP measures was an increase to Consolidated
Adjusted EBITDA by approximately $0.4 billion. Our non-GAAP
measure for Segment EBITDA is unaffected because the interest
cost component of net periodic benefit cost is not included in our
segment results. For additional discussion of Non-GAAP measures
and non- operational items see “Consolidated Results of Operations”.
• Our current and deferred income taxes and associated valuation
allowances are impacted by events and transactions arising in
the normal course of business as well as in connection with the
adoption of new accounting standards, changes in tax laws and
rates, acquisitions and dispositions of businesses and non- recurring
items. As a global commercial enterprise, our income tax rate and
the classification of income taxes can be affected by many factors,
including estimates of the timing and realization of deferred income
tax assets and the timing and amount of income tax payments. We
account for tax benefits taken or expected to be taken in our tax
returns in accordance with the accounting standard relating to the
uncertainty in income taxes, which requires the use of a two-step
approach for recognizing and measuring tax benefits taken or
expected to be taken in a tax return. We review and adjust our
liability for unrecognized tax benefits based on our best judgment
given the facts, circumstances and information available at each
reporting date. To the extent that the final outcome of these tax
positions is different than the amounts recorded, such differences
may impact income tax expense and actual tax payments. We
recognize any interest and penalties accrued related to unrecog-
nized tax benefits in income tax expense. Actual tax payments may
materially differ from estimated liabilities as a result of changes in
tax laws as well as unanticipated transactions impacting related
income tax balances.
• Our Plant, property and equipment balance represents a signif-
icant component of our consolidated assets. We record Plant,
property and equipment at cost. We depreciate Plant, property and
equipment on a straight-line basis over the estimated useful life of
the assets. We expect that a one-year increase in estimated useful
lives of our Plant, property and equipment would result in a decrease
to our 2016 depreciation expense of $2.8 billion and that a one-year
decrease would result in an increase of approximately $5.7 billion in
our 2016 depreciation expense.
• We maintain allowances for uncollectible accounts receivable,
including our device payment plan receivables, for estimated losses
resulting from the failure or inability of our customers to make
required payments. Our allowance for uncollectible accounts receiv-
able is based on management’s assessment of the collectability
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 35
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
From time to time, we enter into agreements to buy, sell or exchange
spectrum licenses. We believe these spectrum license transactions
have allowed us to continue to enhance the reliability of our network
while also resulting in a more efficient use of spectrum. See Note 2 to
the consolidated financial statements for additional details regarding
our spectrum license transactions.
Tower Monetization Transaction
During March 2015, we completed a transaction with American Tower
pursuant to which American Tower acquired the exclusive right to
lease, acquire or otherwise operate and manage many of our wireless
towers for an upfront payment of $5.1 billion, which also included
payment for the sale of 162 towers. See Note 2 to the consolidated
financial statements for additional information.
Wireline
Access Line Sale
On February 5, 2015, we entered into a definitive agreement with
Frontier pursuant to which Verizon agreed to sell its local exchange
business and related landline activities in California, Florida and Texas,
including Fios Internet and video customers, switched and special
access lines and high-speed Internet service and long distance voice
accounts in these three states, for approximately $10.5 billion (approx-
imately $7.3 billion net of income taxes), subject to certain adjustments
and including the assumption of $0.6 billion of indebtedness from
Verizon by Frontier. The transaction, which included the acquisition by
Frontier of the equity interests of Verizon’s ILECs in California, Florida
and Texas, did not involve any assets or liabilities of Verizon Wireless.
The transaction closed on April 1, 2016. See Note 2 to the consolidated
financial statements for additional information.
Other
During July 2014, we sold a non- strategic Wireline business for cash
consideration that was not significant. See Note 2 to the consolidated
financial statements for additional information.
On February 20, 2016, we entered into a purchase agreement to
acquire XO Holdings’ wireline business, which owns and operates one
of the largest fiber-based IP and Ethernet networks, for approximately
$1.8 billion, subject to adjustment. We completed the acquisition on
February 1, 2017. Separately, we entered into an agreement to lease
certain wireless spectrum from a wholly-owned subsidiary of XO
Holdings that holds its wireless spectrum. Verizon has an option, exer-
cisable under certain circumstances, to buy that subsidiary.
On December 6, 2016, we entered into a definitive agreement with
Equinix pursuant to which Verizon will sell 24 customer- facing data
center sites in the United States and Latin America, for approximately
$3.6 billion, subject to certain adjustments. The sale does not affect
Verizon’s data center services delivered from 27 sites in Europe, Asia-
Pacific and Canada, or its managed hosting and cloud offerings. The
transaction is subject to customary regulatory approvals and closing
conditions, and is expected to close during the first half of 2017.
Other
Acquisition of Yahoo! Inc.’s Operating Business
On July 23, 2016, Verizon entered into a stock purchase agreement
(the Purchase Agreement) with Yahoo. Pursuant to the Purchase
Agreement, upon the terms and subject to the conditions thereof,
we agreed to acquire the stock of one or more subsidiaries of
Yahoo holding all of Yahoo’s operating business for approximately
$4.83 billion in cash, subject to certain adjustments (the Transaction).
Prior to the closing of the Transaction, pursuant to a related reorga-
nization agreement, Yahoo will transfer all of the assets and liabilities
constituting Yahoo’s operating business to the subsidiaries to be
acquired in the Transaction. The assets to be acquired will not include
Yahoo’s cash, its ownership interests in Alibaba, Yahoo! Japan and
certain other investments, certain undeveloped land recently divested
by Yahoo or certain non-core intellectual property. We will receive for
our benefit and that of our current and certain future affiliates a non-ex-
clusive, worldwide, perpetual, royalty-free license to all of Yahoo’s
intellectual property that is not being conveyed with the business.
On February 20, 2017, Verizon and Yahoo entered into an amendment
to the Purchase Agreement, pursuant to which the Transaction
purchase price will be reduced by $350 million to approximately
$4.48 billion in cash, subject to certain adjustments. Subject to certain
exceptions, the parties also agreed that certain user security and data
breaches incurred by Yahoo (and the losses arising therefrom) will
be disregarded (1) for purposes of specified conditions to Verizon’s
obligations to close the Transaction and (2) in determining whether a
“Business Material Adverse Effect” under the Purchase Agreement
has occurred.
Concurrently with the amendment of the Purchase Agreement, Yahoo
and Yahoo Holdings, Inc., a wholly owned subsidiary of Yahoo that
Verizon has agreed to purchase pursuant to the Transaction, also
entered into an amendment to the related reorganization agreement,
pursuant to which Yahoo (which has announced that it intends to
change its name to Altaba Inc. following the closing of the Transaction)
will retain 50% of certain post-closing liabilities arising out of govern-
mental or third party investigations, litigations or other claims related to
certain user security and data breaches incurred by Yahoo. In accor-
dance with the original Transaction agreements, Yahoo will continue
to retain 100% of any liabilities arising out of any shareholder lawsuits
(including derivative claims) and investigations and actions by the SEC.
The Transaction remains subject to customary closing conditions,
including the approval of Yahoo's stockholders, and is expected to
close in the second quarter of 2017.
36
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Acquisition of AOL Inc.
On May 12, 2015, we entered into the Merger Agreement with AOL
pursuant to which we commenced a tender offer to acquire all of the
outstanding shares of common stock of AOL at a price of $50.00 per
share, net to the seller in cash, without interest and less any applicable
withholding taxes. On June 23, 2015, we completed the tender offer
and merger, and AOL became a wholly-owned subsidiary of Verizon.
The aggregate cash consideration paid by Verizon at the closing
of these transactions was approximately $3.8 billion. Holders of
approximately 6.6 million shares exercised their appraisal rights under
Delaware law. If they had not exercised these rights, Verizon would
have paid an additional $330 million for such shares at the closing.
AOL is a leader in the digital content and advertising platform space.
Verizon has been investing in emerging technology that taps into the
market shift to digital content and advertising. AOL’s business model
aligns with this approach, and we believe that its combination of owned
and operated content properties plus a digital advertising platform
enhances our ability to further develop future revenue streams.
See Note 2 to the consolidated financial statements for additional
information.
Other
On July 29, 2016, we acquired Telogis, a global cloud-based mobile
enterprise management software business, for $0.9 billion of cash
consideration.
On July 30, 2016, we entered into an agreement (the Transaction
Agreement) to acquire Fleetmatics. Fleetmatics is a leading global
provider of fleet and mobile workforce management solutions.
Pursuant to the terms of the Transaction Agreement, we acquired
Fleetmatics for $60.00 per ordinary share in cash. The aggregate
merger consideration was approximately $2.5 billion, including
cash acquired of $0.1 billion. We completed the acquisition on
November 7, 2016.
During the fourth quarter of 2014, Redbox Instant by Verizon, a venture
between Verizon and Redbox Automated Retail, LLC (Redbox), a
wholly-owned subsidiary of Outerwall Inc., ceased providing service to
its customers. In accordance with an agreement between the parties,
Redbox withdrew from the venture on October 20, 2014 and Verizon
wound down and dissolved the venture during the fourth quarter
of 2014. As a result of the termination of the venture, we recorded a
pre-tax loss of $0.1 billion in the fourth quarter of 2014.
From time to time, we enter into strategic agreements to acquire
various other businesses and investments. See Note 2 to the consoli-
dated financial statements for additional information.
Cautionary Statement Concerning
Forward- Looking Statements
In this report we have made forward- looking statements. These state-
ments are based on our estimates and assumptions and are subject
to risks and uncertainties. Forward- looking statements include the
information concerning our possible or assumed future results of oper-
ations. Forward- looking statements also include those preceded or
followed by the words “anticipates,” “believes,” “estimates,” “hopes” or
similar expressions. For those statements, we claim the protection of
the safe harbor for forward- looking statements contained in the Private
Securities Litigation Reform Act of 1995.
The following important factors, along with those discussed elsewhere
in this report and in other filings with the SEC, could affect future
results and could cause those results to differ materially from those
expressed in the forward- looking statements:
• adverse conditions in the U.S. and international economies;
•
the effects of competition in the markets in which we operate;
• material changes in technology or technology substitution;
• disruption of our key suppliers’ provisioning of products or services;
• changes in the regulatory environment in which we operate,
including any increase in restrictions on our ability to operate
our networks;
• breaches of network or information technology security, natural
disasters, terrorist attacks or acts of war or significant litigation and
any resulting financial impact not covered by insurance;
• our high level of indebtedness;
• an adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations or adverse conditions in
the credit markets affecting the cost, including interest rates, and/or
availability of further financing;
• material adverse changes in labor matters, including labor negotia-
tions, and any resulting financial and/or operational impact;
• significant increases in benefit plan costs or lower investment
returns on plan assets;
• changes in tax laws or treaties, or in their interpretation;
• changes in accounting assumptions that regulatory agencies,
including the SEC, may require or that result from changes in the
accounting rules or their application, which could result in an impact
on earnings;
•
•
the inability to implement our business strategies; and
the inability to realize the expected benefits of strategic transactions.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 37
Report of Management on Internal
Control Over Financial Reporting
We, the management of Verizon Communications Inc., are respon-
sible for establishing and maintaining adequate internal control over
financial reporting of the company. Management has evaluated internal
control over financial reporting of the company using the criteria for
effective internal control established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in 2013.
Management has assessed the effectiveness of the company’s
internal control over financial reporting as of December 31, 2016.
Based on this assessment, we believe that the internal control over
financial reporting of the company is effective as of December 31,
2016. In connection with this assessment, there were no material
weaknesses in the company’s internal control over financial reporting
identified by management.
The company’s financial statements included in this Annual Report
have been audited by Ernst & Young LLP, independent registered
public accounting firm. Ernst & Young LLP has also provided an attes-
tation report on the company’s internal control over financial reporting.
Lowell C. McAdam
Chairman and Chief Executive Officer
Matthew D. Ellis
Executive Vice President and Chief Financial Officer
Anthony T. Skiadas
Senior Vice President and Controller
Report of Independent Registered
Public Accounting Firm on Internal
Control Over Financial Reporting
To The Board of Directors and Shareowners of
Verizon Communications Inc.:
We have audited Verizon Communications Inc. and subsidiaries’
(Verizon) internal control over financial reporting as of December 31,
2016, based on criteria established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 framework) (the COSO criteria).
Verizon’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in
the accompanying Report of Management on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reason-
able assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evalu-
ating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the main-
tenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
38
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or proce-
dures may deteriorate.
In our opinion, Verizon maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2016, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consoli-
dated balance sheets of Verizon as of December 31, 2016 and 2015,
and the related consolidated statements of income, comprehensive
income, cash flows and changes in equity for each of the three
years in the period ended December 31, 2016 and our report dated
February 21, 2017 expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 21, 2017
Report of Independent Registered Public
Accounting Firm
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
We have audited the accompanying consolidated balance sheets
of Verizon Communications Inc. and subsidiaries (Verizon) as of
December 31, 2016 and 2015, and the related consolidated statements
of income, comprehensive income, cash flows and changes in equity
for each of the three years in the period ended December 31, 2016.
These financial statements are the responsibility of Verizon’s man-
agement. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain rea-
sonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as eval-
uating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Verizon
at December 31, 2016 and 2015, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2016, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Verizon’s
internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control–Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated February 21, 2017
expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 21, 2017
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 39
Consolidated Statements of Income
Years Ended December 31,
Operating Revenues
Service revenues and other
Wireless equipment revenues
Total Operating Revenues
Operating Expenses
Cost of services (exclusive of items shown below)
Wireless cost of equipment
Selling, general and administrative expense, net
Depreciation and amortization expense
Total Operating Expenses
Operating Income
Equity in (losses) earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Income Before Provision For Income Taxes
Provision for income taxes
Net Income
Net income attributable to noncontrolling interests
Net income attributable to Verizon
Net Income
Basic Earnings Per Common Share
Net income attributable to Verizon
Weighted- average shares outstanding (in millions)
Diluted Earnings Per Common Share
Net income attributable to Verizon
Weighted- average shares outstanding (in millions)
See Notes to Consolidated Financial Statements
(dollars in millions, except per share amounts)
2016
2015
2014
$ 108,468
17,512
125,980
$ 114,696
16,924
131,620
$ 116,122
10,957
127,079
29,186
22,238
31,569
15,928
98,921
27,059
(98)
(1,599)
(4,376)
20,986
(7,378)
13,608
481
13,127
13,608
3.22
4,080
$
$
$
$
29,438
23,119
29,986
16,017
98,560
33,060
(86)
186
(4,920)
28,240
(9,865)
18,375
496
17,879
18,375
4.38
4,085
$
$
$
$
28,306
21,625
41,016
16,533
107,480
19,599
1,780
(1,194)
(4,915)
15,270
(3,314)
11,956
2,331
9,625
11,956
2.42
3,974
$
$
$
$
$
3.21
4,086
$
4.37
4,093
$
2.42
3,981
40
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Consolidated Statements of Comprehensive Income
Years Ended December 31,
Net Income
Other Comprehensive Income, net of taxes
Foreign currency translation adjustments
Unrealized gains (losses) on cash flow hedges
Unrealized losses on marketable securities
Defined benefit pension and postretirement plans
Other comprehensive income (loss) attributable to Verizon
Other comprehensive loss attributable to noncontrolling interests
Total Comprehensive Income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Verizon
Total Comprehensive Income
See Notes to Consolidated Financial Statements
2016
13,608
$
2015
18,375
$
(159)
198
(55)
2,139
2,123
–
15,731
481
15,250
15,731
$
$
(208)
(194)
(11)
(148)
(561)
–
17,814
496
17,318
17,814
$
$
(dollars in millions)
2014
11,956
$
(1,199)
(197)
(5)
154
(1,247)
(23)
10,686
2,308
8,378
10,686
$
$
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 41
Consolidated Balance Sheets
At December 31,
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $845 and $882
Inventories
Assets held for sale
Prepaid expenses and other
Total current assets
Plant, property and equipment
Less accumulated depreciation
Plant, property and equipment, net
Investments in unconsolidated businesses
Wireless licenses
Goodwill
Other intangible assets, net
Non- current assets held for sale
Other assets
Total assets
Liabilities and Equity
Current liabilities
Debt maturing within one year
Accounts payable and accrued liabilities
Liabilities related to assets held for sale
Other
Total current liabilities
Long-term debt
Employee benefit obligations
Deferred income taxes
Non- current liabilities related to assets held for sale
Other liabilities
Equity
Series preferred stock ($.10 par value; none issued)
Common stock ($.10 par value; 4,242,374,240 shares issued in each period)
Contributed capital
Reinvested earnings
Accumulated other comprehensive income
Common stock in treasury, at cost
Deferred compensation — employee stock ownership plans and other
Noncontrolling interests
Total equity
Total liabilities and equity
See Notes to Consolidated Financial Statements
(dollars in millions, except per share amounts)
2016
2015
$
2,880
–
17,513
1,202
882
3,918
26,395
232,215
147,464
84,751
1,110
86,673
27,205
8,897
613
8,536
$ 244,180
$
4,470
350
13,457
1,252
792
2,034
22,355
220,163
136,622
83,541
796
86,575
25,331
7,592
10,267
7,718
$ 244,175
$
2,645
19,593
24
8,078
30,340
$
6,489
19,362
463
8,738
35,052
105,433
26,166
45,964
6
12,239
103,240
29,957
45,484
959
11,641
–
424
11,182
15,059
2,673
(7,263)
449
1,508
24,032
$ 244,180
–
424
11,196
11,246
550
(7,416)
428
1,414
17,842
$ 244,175
42
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Consolidated Statements of Cash Flows
Years Ended December 31,
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Employee retirement benefits
Deferred income taxes
Provision for uncollectible accounts
Equity in losses (earnings) of unconsolidated businesses, net of dividends received
Changes in current assets and liabilities, net of effects from acquisition/disposition
of businesses
Accounts receivable
Inventories
Other assets
Accounts payable and accrued liabilities
Other, net
Net cash provided by operating activities
Cash Flows from Investing Activities
Capital expenditures (including capitalized software)
Acquisitions of businesses, net of cash acquired
Acquisitions of wireless licenses
Proceeds from dispositions of wireless licenses
Proceeds from dispositions of businesses
Other, net
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from long-term borrowings
Proceeds from asset- backed long-term borrowings
Repayments of long-term borrowings and capital lease obligations
Decrease in short-term obligations, excluding current maturities
Dividends paid
Proceeds from sale of common stock
Purchase of common stock for treasury
Acquisition of noncontrolling interest
Other, net
Net cash used in financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See Notes to Consolidated Financial Statements
2016
2015
2014
(dollars in millions)
$
13,608
$
18,375
$
11,956
15,928
2,705
(1,063)
1,420
138
(5,067)
61
449
(1,079)
(4,385)
22,715
(17,059)
(3,765)
(534)
–
9,882
493
(10,983)
12,964
4,986
(19,159)
(149)
(9,262)
3
–
–
(2,705)
(13,322)
(1,590)
4,470
2,880
$
16,017
(1,747)
3,516
1,610
127
(945)
(99)
942
2,545
(1,411)
38,930
(17,775)
(3,545)
(9,942)
–
48
1,171
(30,043)
6,667
–
(9,340)
(344)
(8,538)
40
(5,134)
–
1,634
(15,015)
(6,128)
10,598
4,470
$
16,533
8,130
(92)
1,095
(1,743)
(2,745)
(132)
(695)
1,412
(3,088)
30,631
(17,191)
(182)
(354)
2,367
120
(616)
(15,856)
30,967
–
(17,669)
(475)
(7,803)
34
–
(58,886)
(3,873)
(57,705)
(42,930)
53,528
10,598
$
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 43
Consolidated Statements of Changes in Equity
Years Ended December 31,
2016
2015
2014
Shares
Amount
Shares
Amount
Shares
Amount
(dollars in millions, except per share amounts, and shares in thousands)
Common Stock
Balance at beginning of year
Common shares issued (Note 2)
Balance at end of year
Contributed Capital
Balance at beginning of year
Acquisition of noncontrolling interest (Note 2)
Other
Balance at end of year
Reinvested Earnings
Balance at beginning of year
Net income attributable to Verizon
Dividends declared ($2.285, $2.23, $2.16) per share
Balance at end of year
Accumulated Other Comprehensive Income
Balance at beginning of year attributable to Verizon
Foreign currency translation adjustments
Unrealized gains (losses) on cash flow hedges
Unrealized losses on marketable securities
Defined benefit pension and postretirement plans
Other comprehensive income (loss)
Balance at end of year attributable to Verizon
Treasury Stock
Balance at beginning of year
Shares purchased
Employee plans (Note 14)
Shareowner plans (Note 14)
Other
Balance at end of year
Deferred Compensation-ESOPs and Other
Balance at beginning of year
Restricted stock equity grant
Amortization
Balance at end of year
Noncontrolling Interests
Balance at beginning of year
Acquisition of noncontrolling interest (Note 2)
Net income attributable to noncontrolling interests
Other comprehensive loss
Total comprehensive income
Distributions and other
Balance at end of year
Total Equity
See Notes to Consolidated Financial Statements
4,242,374
–
4,242,374
$
424
–
424
4,242,374
–
4,242,374
$
424
–
424
2,967,610
1,274,764
4,242,374
$
297
127
424
11,196
–
(14)
11,182
11,246
13,127
(9,314)
15,059
550
(159)
198
(55)
2,139
2,123
2,673
(7,416)
–
150
3
–
(7,263)
428
223
(202)
449
1,414
–
481
–
481
(387)
1,508
$ 24,032
11,155
–
41
11,196
2,447
17,879
(9,080)
11,246
1,111
(208)
(194)
(11)
(148)
(561)
550
(3,263)
(5,134)
740
241
–
(7,416)
424
208
(204)
428
1,378
–
496
–
496
(460)
1,414
$ 17,842
(87,410)
(104,402)
17,072
5,541
–
(169,199)
37,939
(26,898)
114
11,155
1,782
9,625
(8,960)
2,447
2,358
(1,199)
(197)
(5)
154
(1,247)
1,111
(3,961)
–
541
157
–
(3,263)
421
166
(163)
424
56,580
(55,960)
2,331
(23)
2,308
(1,550)
1,378
$ 13,676
(105,610)
–
14,132
4,105
(37)
(87,410)
(169,199)
–
3,439
70
–
(165,690)
44
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements
Note 1
Description of Business and Summary of Significant Accounting Policies
Description of Business
Verizon Communications Inc. (Verizon or the Company) is a holding
company that, acting through its subsidiaries, is one of the world’s
leading providers of communications, information and entertainment
products and services to consumers, businesses and governmental
agencies with a presence around the world. We have two reportable
segments, Wireless and Wireline. For further information concerning
our business segments, see Note 12.
The Wireless segment provides wireless communications services
and products across one of the most extensive wireless networks in
the United States (U.S.). We provide these services and equipment
sales to consumer, business and government customers in the United
States on a postpaid and prepaid basis.
The Wireline segment provides voice, data and video communications
products and enhanced services, including broadband video and
data, corporate networking solutions, data center and cloud services,
security and managed network services and local and long distance
voice services. We provide these products and services to consumers
in the United States, as well as to carriers, businesses and government
customers both in the United States and around the world.
Consolidation
The method of accounting applied to investments, whether consoli-
dated, equity or cost, involves an evaluation of all significant terms of
the investments that explicitly grant or suggest evidence of control
or influence over the operations of the investee. The consolidated
financial statements include our controlled subsidiaries, as well as
variable interest entities (VIE) where we are deemed to be the primary
beneficiary. For controlled subsidiaries that are not wholly-owned, the
noncontrolling interests are included in Net income and Total equity.
Investments in businesses which we do not control, but have the ability
to exercise significant influence over operating and financial policies,
are accounted for using the equity method. Investments in which we
do not have the ability to exercise significant influence over operating
and financial policies are accounted for under the cost method. Equity
and cost method investments are included in Investments in unconsol-
idated businesses in our consolidated balance sheets. All significant
intercompany accounts and transactions have been eliminated.
Basis of Presentation
We have reclassified certain prior year amounts to conform to the
current year presentation.
Use of Estimates
We prepare our financial statements using U.S. generally accepted
accounting principles (GAAP), which requires management to make
estimates and assumptions that affect reported amounts and disclo-
sures. Actual results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful
accounts, the recoverability of plant, property and equipment, the
recoverability of intangible assets and other long-lived assets, fair
values of financial instruments, unrecognized tax benefits, valuation
allowances on tax assets, accrued expenses, pension and postre-
tirement benefit obligations, contingencies and the identification and
valuation of assets acquired and liabilities assumed in connection with
business combinations.
Revenue Recognition
Multiple Deliverable Arrangements
We offer products and services to our wireless and wireline customers
through bundled arrangements. These arrangements involve multiple
deliverables which may include products, services, or a combination of
products and services.
Wireless
Our Wireless segment earns revenue primarily by providing access to
and usage of its network as well as the sale of equipment. In general,
access revenue is billed one month in advance and recognized when
earned. Usage revenue is generally billed in arrears and recognized
when service is rendered. Equipment sales revenue associated with
the sale of wireless devices and accessories is generally recognized
when the products are delivered to and accepted by the customer, as
this is considered to be a separate earnings process from providing
wireless services. For agreements involving the resale of third-party
services in which we are considered the primary obligor in the
arrangements, we record the revenue gross at the time of the sale.
Under the Verizon device payment program, our eligible wireless
customers purchase wireless devices under a device payment plan
agreement. On select devices, certain marketing promotions have
been revocably offered to customers to upgrade to a new device
after paying down a certain specified portion of the required device
payment plan agreement amount as well as trading in their device in
good working order. When a customer enters into a device payment
plan agreement with the right to upgrade to a new device, we account
for this trade-in right as a guarantee obligation. The full amount of
the trade-in right’s fair value (not an allocated value) is recognized
as a guarantee liability and the remaining allocable consideration
is allocated to the device. The value of the guarantee liability effec-
tively results in a reduction to the revenue recognized for the sale of
the device.
We may offer our customers certain promotions where a customer
can trade-in his or her owned device in connection with the purchase
of a new device. Under these types of promotions, the customer will
receive trade-in credits that are applied to the customer’s monthly bill.
As a result, we recognize a trade-in obligation measured at fair value
using weighted- average selling prices obtained in recent resales of
devices eligible for trade-in.
In multiple element arrangements that bundle devices and monthly
wireless service, revenue is allocated to each unit of accounting using
a relative selling price method. At the inception of the arrangement, the
amount allocable to the delivered units of accounting is limited to the
amount that is not contingent upon the delivery of the monthly wireless
service (the noncontingent amount). We effectively recognize revenue
on the delivered device at the lesser of the amount allocated based
on the relative selling price of the device or the noncontingent amount
owed when the device is sold.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 45
Earnings Per Common Share
Basic earnings per common share are based on the weighted- average
number of shares outstanding during the period. Where appropriate,
diluted earnings per common share include the dilutive effect of shares
issuable under our stock-based compensation plans.
There were a total of approximately 6 million, 8 million and 7 million
outstanding dilutive securities, primarily consisting of restricted stock
units, included in the computation of diluted earnings per common
share for the years ended December 31, 2016, 2015 and 2014, respec-
tively. For the years ended December 31, 2016 and 2015, respectively,
there were no outstanding options to purchase shares that would have
been anti- dilutive. Outstanding options to purchase shares that were
not included in the computation of diluted earnings per common share,
because to do so would have been anti- dilutive for the period, were not
significant for the year ended December 31, 2014.
On January 28, 2014, at a special meeting of our shareholders, we
received shareholder approval to increase our authorized shares of
common stock by 2 billion shares to an aggregate of 6.25 billion autho-
rized shares of common stock. On February 4, 2014, this authorization
became effective. On February 21, 2014, we issued approximately
1.27 billion shares of common stock upon completing the acquisition
of Vodafone Group Plc’s (Vodafone) indirect 45% interest in Cellco
Partnership d/b/a Verizon Wireless. See Note 2 for additional information.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days
or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates quoted market value and include
amounts held in money market funds.
Marketable Securities
We have investments in marketable securities, which are considered
“ available-for-sale” under the provisions of the accounting standard
for certain debt and equity securities and are included in the accom-
panying consolidated balance sheets in Short-term investments or
Other assets. We continually evaluate our investments in marketable
securities for impairment due to declines in market value considered to
be other-than- temporary. That evaluation includes, in addition to per-
sistent, declining stock prices, general economic and company- specific
evaluations. In the event of a determination that a decline in market
value is other-than- temporary, a charge to earnings is recorded for the
loss and a new cost basis in the investment is established.
Notes to Consolidated Financial Statements continued
Wireline
Our Wireline segment earns revenue based upon usage of its network
and facilities and contract fees. In general, fixed monthly fees for voice,
video, data and certain other services are billed one month in advance
and recognized when earned. Revenue from services that are not fixed
in amount and are based on usage is generally billed in arrears and
recognized when service is rendered.
We sell each of the services offered in bundled arrangements (i.e.,
voice, video and data), as well as separately; therefore each product
or service has a standalone selling price. For these arrangements,
revenue is allocated to each deliverable using a relative selling price
method. Under this method, arrangement consideration is allocated
to each separate deliverable based on our standalone selling price for
each product or service. These services include Fios services, individ-
ually or in bundles, and high-speed Internet.
When we bundle equipment with maintenance and monitoring
services, we recognize equipment revenue when the equipment is
installed in accordance with contractual specifications and ready
for the customer’s use. The maintenance and monitoring services
are recognized monthly over the term of the contract as we provide
the services.
Installation- related fees, along with the associated costs up to but not
exceeding these fees, are deferred and amortized over the estimated
customer relationship period.
Other
Advertising revenues are generated through display advertising and
search advertising. Display advertising revenue is generated by the
display of graphical advertisements and other performance-based
advertising. Search advertising revenue is generated when a consumer
clicks on a text-based advertisement on their screen. Agreements for
advertising typically take the forms of impression-based contracts,
time-based contracts or performance-based contracts. Advertising
revenues derived from impression-based contracts, in which we
provide impressions in exchange for a fixed fee, are generally recog-
nized as the impressions are delivered. Advertising revenues derived
from time-based contracts, in which we provide promotions over a
specified time period for a fixed fee, are recognized on a straight-line
basis over the term of the contract, provided that we meet and will
continue to meet our obligations under the contract. Advertising
revenues derived from contracts where we are compensated based
on certain performance criteria are recognized as we complete the
contractually specified performance.
We report taxes imposed by governmental authorities on revenue-
producing transactions between us and our customers, which we pass
through to our customers, on a net basis.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, princi-
pally to Cost of services as these costs are incurred.
Advertising Costs
Costs for advertising products and services as well as other pro-
motional and sponsorship costs are charged to Selling, general and
administrative expense in the periods in which they are incurred
(see Note 14).
46
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
Allowance for Doubtful Accounts
Accounts receivable are recorded in the consolidated financial
statements at cost net of an allowance for credit losses, with the
exception of device payment plan agreement receivables which are
initially recorded at fair value. We maintain allowances for uncollectible
accounts receivable, including our device payment plan agreement
receivables, for estimated losses resulting from the failure or inability
of our customers to make required payments. Our allowance for
uncollectible accounts receivable is based on management’s assess-
ment of the collectability of specific customer accounts and includes
consideration of the credit worthiness and financial condition of
those customers. We record an allowance to reduce the receivables
to the amount that is reasonably believed to be collectible. We also
record an allowance for all other receivables based on multiple factors
including historical experience with bad debts, the general economic
environment and the aging of such receivables. Similar to traditional
service revenue accounting treatment, we record device payment plan
agreement bad debt expense based on an estimate of the percentage
of equipment revenue that will not be collected. This estimate is based
on a number of factors including historical write-off experience, credit
quality of the customer base and other factors such as macroeco-
nomic conditions. Due to the device payment plan agreement being
incorporated in the standard Verizon Wireless bill, the collection and
risk strategies continue to follow historical practices. We monitor
the aging of our accounts with device payment plan agreement
receivables and write-off account balances if collection efforts are
unsuccessful and future collection is unlikely.
Inventories
Inventory consists of wireless and wireline equipment held for sale,
which is carried at the lower of cost (determined principally on either
an average cost or first-in, first-out basis) or market.
Plant and Depreciation
We record plant, property and equipment at cost. Plant, property and
equipment are generally depreciated on a straight-line basis.
Leasehold improvements are amortized over the shorter of the
estimated life of the improvement or the remaining term of the related
lease, calculated from the time the asset was placed in service.
When depreciable assets are retired or otherwise disposed of, the
related cost and accumulated depreciation are deducted from the
plant accounts and any gains or losses on disposition are recognized
in income.
We capitalize and depreciate network software purchased
or developed along with related plant assets. We also capi-
talize interest associated with the acquisition or construction of
network- related assets. Capitalized interest is reported as a reduction
in interest expense and depreciated as part of the cost of the
network- related assets.
In connection with our ongoing review of the estimated useful lives
of plant, property and equipment during 2016, we determined that
the average useful lives of certain leasehold improvements would
be increased from 5 to 7 years. This change resulted in a decrease
to depreciation expense of $0.2 billion in 2016. We determined that
changes were also necessary to the remaining estimated useful lives
of certain assets as a result of technology upgrades, enhancements,
and planned retirements. These changes resulted in an increase in
depreciation expense of $0.3 billion, $0.4 billion and $0.6 billion in
2016, 2015 and 2014, respectively. While the timing and extent of
current deployment plans are subject to ongoing analysis and modifi-
cation, we believe the current estimates of useful lives are reasonable.
Computer Software Costs
We capitalize the cost of internal-use network and non- network
software that has a useful life in excess of one year. Subsequent
additions, modifications or upgrades to internal-use network and
non- network software are capitalized only to the extent that they allow
the software to perform a task it previously did not perform. Planning,
software maintenance and training costs are expensed in the period
in which they are incurred. Also, we capitalize interest associated with
the development of internal-use network and non- network software.
Capitalized non- network internal-use software costs are amortized
using the straight-line method over a period of 3 to 8 years and are
included in Other intangible assets, net in our consolidated balance
sheets. For a discussion of our impairment policy for capitalized
software costs, see “Goodwill and Other Intangible Assets” below.
Also, see Note 3 for additional detail of internal-use non- network
software reflected in our consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets acquired. Impairment testing
for goodwill is performed annually in the fourth fiscal quarter or
more frequently if impairment indicators are present. To determine if
goodwill is potentially impaired, we have the option to perform a qual-
itative assessment. However, we may elect to bypass the qualitative
assessment and perform an impairment test even if no indications of
a potential impairment exist. The impairment test for goodwill uses a
two-step approach, which is performed at the reporting unit level. Step
one, performed to identify potential impairment, compares the fair
value of the reporting unit (calculated using a market approach and/
or a discounted cash flow method) to its carrying value. If the carrying
value exceeds the fair value, there is a potential impairment and step
two must be performed to measure the amount of the impairment
charge. Step two compares the carrying value of the reporting unit’s
goodwill to its implied fair value (i.e., fair value of reporting unit less
the fair value of the unit’s assets and liabilities, including identifiable
intangible assets). If the implied fair value of goodwill is less than the
carrying amount of goodwill, an impairment charge is recognized.
Our assessments in 2016, 2015 and 2014 indicated that the fair value
of each of our reporting units exceeded their carrying value and
therefore, did not result in an impairment.
Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are wireless licenses that
provide our wireless operations with the exclusive right to utilize des-
ignated radio frequency spectrum to provide wireless communication
services. While licenses are issued for only a fixed time, generally
ten years, such licenses are subject to renewal by the Federal
Communications Commission (FCC). License renewals have occurred
routinely and at nominal cost. Moreover, we have determined that there
are currently no legal, regulatory, contractual, competitive, economic
or other factors that limit the useful life of our wireless licenses. As a
result, we treat the wireless licenses as an indefinite-lived intangible
asset. We re- evaluate the useful life determination for wireless licenses
each year to determine whether events and circumstances continue
to support an indefinite useful life. We aggregate our wireless licenses
into one single unit of accounting, as we utilize our wireless licenses on
an integrated basis as part of our nationwide wireless network.
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| 47
Notes to Consolidated Financial Statements continued
We test our wireless licenses for potential impairment annually or more
frequently if impairment indicators are present. We have the option
to first perform a qualitative assessment to determine whether it is
necessary to perform a quantitative impairment test. However, we may
elect to bypass the qualitative assessment in any period and proceed
directly to performing the quantitative impairment test. In 2016 and
2014, we performed a qualitative assessment to determine whether it is
more likely than not that the fair value of our wireless licenses was less
than the carrying amount. As part of our assessment, we considered
several qualitative factors including the business enterprise value of our
Wireless segment, macroeconomic conditions (including changes in
interest rates and discount rates), industry and market considerations
(including industry revenue and EBITDA (Earnings before interest,
taxes, depreciation and amortization) margin projections), the projected
financial performance of our Wireless segment, as well as other factors.
The most recent quantitative assessments of our wireless licenses
occurred in 2015. Our quantitative assessment consisted of comparing
the estimated fair value of our aggregate wireless licenses to the
aggregated carrying amount as of the test date. Using a quantitative
assessment, we estimated the fair value of our aggregate wireless
licenses using the Greenfield approach. The Greenfield approach is
an income based valuation approach that values the wireless licenses
by calculating the cash flow generating potential of a hypothetical
start-up company that goes into business with no assets except the
wireless licenses to be valued. A discounted cash flow analysis is used
to estimate what a marketplace participant would be willing to pay to
purchase the aggregated wireless licenses as of the valuation date.
If the estimated fair value of the aggregated wireless licenses is less
than the aggregated carrying amount of the wireless licenses then an
impairment charge is recognized. Our assessments in 2016, 2015 and
2014 indicated that the fair value of our wireless licenses exceeded the
carrying value and, therefore, did not result in an impairment.
Interest expense incurred while qualifying activities are performed to
ready wireless licenses for their intended use is capitalized as part of
wireless licenses. The capitalization period ends when the develop-
ment is discontinued or substantially complete and the license is ready
for its intended use.
Intangible Assets Subject to Amortization and Long-Lived Assets
Our intangible assets that do not have indefinite lives (primarily
customer lists and non- network internal-use software) are amortized
over their estimated useful lives. All of our intangible assets subject
to amortization and long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If any indica-
tions were present, we would test for recoverability by comparing the
carrying amount of the asset group to the net undiscounted cash flows
expected to be generated from the asset group. If those net undis-
counted cash flows do not exceed the carrying amount, we would
perform the next step, which is to determine the fair value of the asset
and record an impairment, if any. We re- evaluate the useful life deter-
minations for these intangible assets each year to determine whether
events and circumstances warrant a revision to their remaining
useful lives.
For information related to the carrying amount of goodwill, wireless
licenses and other intangible assets, as well as the major components
and average useful lives of our other acquired intangible assets,
see Note 3.
Fair Value Measurements
Fair value of financial and non- financial assets and liabilities is defined
as an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants. The three-tier hierarchy for inputs used
in measuring fair value, which prioritizes the inputs used in the method-
ologies of measuring fair value for assets and liabilities, is as follows:
Level 1 — Quoted prices in active markets for identical assets or
liabilities
Level 2 — Observable inputs other than quoted prices in active
markets for identical assets and liabilities
Level 3 — No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurements. Our assessment of the significance of a particular
input to the fair value measurements requires judgment, and may
affect the valuation of the assets and liabilities being measured and
their categorization within the fair value hierarchy.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates,
tax laws and regulations and tax planning strategies available to us in
the various jurisdictions in which we operate.
Deferred income taxes are provided for temporary differences in the
basis between financial statement and income tax assets and liabili-
ties. Deferred income taxes are recalculated annually at tax rates then
in effect. We record valuation allowances to reduce our deferred tax
assets to the amount that is more likely than not to be realized.
We use a two-step approach for recognizing and measuring tax
benefits taken or expected to be taken in a tax return. The first step
is recognition: we determine whether it is more likely than not that a
tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical
merits of the position. In evaluating whether a tax position has met
the more- likely-than-not recognition threshold, we presume that the
position will be examined by the appropriate taxing authority that has
full knowledge of all relevant information. The second step is measure-
ment: a tax position that meets the more- likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize
in the financial statements. The tax position is measured at the largest
amount of benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. Differences between tax positions taken in
a tax return and amounts recognized in the financial statements will
generally result in one or more of the following: an increase in a liability
for income taxes payable, a reduction of an income tax refund receiv-
able, a reduction in a deferred tax asset or an increase in a deferred
tax liability.
Significant management judgment is required in evaluating our tax
positions and in determining our effective tax rate.
48
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Notes to Consolidated Financial Statements continued
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based
compensation awards made to employees and directors based on
estimated fair values. See Note 9 for further details.
Foreign Currency Translation
The functional currency of our foreign operations is generally the local
currency. For these foreign entities, we translate income statement
amounts at average exchange rates for the period, and we translate
assets and liabilities at end-of- period exchange rates. We record
these translation adjustments in Accumulated other comprehensive
income, a separate component of Equity, in our consolidated balance
sheets. We report exchange gains and losses on intercompany
foreign currency transactions of a long-term nature in Accumulated
other comprehensive income. Other exchange gains and losses are
reported in income.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits
earned during the year as well as interest on projected benefit
obligations are accrued currently. Prior service costs and credits
resulting from changes in plan benefits are generally amortized over
the average remaining service period of the employees expected to
receive benefits. Expected return on plan assets is determined by
applying the return on assets assumption to the actual fair value of plan
assets. Actuarial gains and losses are recognized in operating results
in the year in which they occur. These gains and losses are measured
annually as of December 31 or upon a remeasurement event. Verizon
management employees no longer earn pension benefits or earn
service towards the company retiree medical subsidy (see Note 10).
We recognize a pension or a postretirement plan’s funded status as
either an asset or liability on the consolidated balance sheets. Also, we
measure any unrecognized prior service costs and credits that arise
during the period as a component of Accumulated other comprehen-
sive income, net of applicable income tax.
Derivative Instruments
We enter into derivative transactions primarily to manage our exposure
to fluctuations in foreign currency exchange rates and interest rates.
We employ risk management strategies, which may include the use
of a variety of derivatives including cross currency swaps, foreign
currency and prepaid forwards and collars, interest rate swap agree-
ments and interest rate caps. We do not hold derivatives for trading
purposes. See Note 8.
We measure all derivatives at fair value and recognize them as
either assets or liabilities on our consolidated balance sheets. Our
derivative instruments are valued primarily using models based on
readily observable market parameters for all substantial terms of our
derivative contracts and thus are classified as Level 2. Changes in
the fair values of derivative instruments not qualifying as hedges or
any ineffective portion of hedges are recognized in earnings in the
current period. Changes in the fair values of derivative instruments
used effectively as fair value hedges are recognized in earnings, along
with changes in the fair value of the hedged item. Changes in the fair
value of the effective portions of cash flow hedges are reported in
Other comprehensive income (loss) and recognized in earnings when
the hedged item is recognized in earnings. Changes in the fair value of
the effective portion of net investment hedges of certain of our foreign
operations are reported in Other comprehensive income (loss) as part
of the cumulative translation adjustment and partially offset the impact
of foreign currency changes on the value of our net investment.
Variable Interest Entities
VIEs are entities which lack sufficient equity to permit the entity to
finance its activities without additional subordinated financial support
from other parties, have equity investors which do not have the ability
to make significant decisions relating to the entity’s operations through
voting rights, do not have the obligation to absorb the expected losses,
or do not have the right to receive the residual returns of the entity. We
consolidate the assets and liabilities of VIEs when we are deemed to
be the primary beneficiary. The primary beneficiary is the party which
has the power to make the decisions that most significantly affect the
economic performance of the VIE and has the obligation to absorb
losses or the right to receive benefits that could potentially be signifi-
cant to the VIE.
Recently Adopted Accounting Standards
During the first quarter of 2016, we adopted the accounting
standard update related to the simplification of the accounting
for measurement- period adjustments in business combina-
tions. This standard update requires an acquirer to recognize
measurement- period adjustments in the reporting period in which the
adjustments are determined and to record the effects on earnings
of any changes resulting from the change in provisional amounts,
calculated as if the accounting had been completed at the acquisition
date. The prospective adoption of this standard update did not have a
significant impact on our consolidated financial statements.
During the first quarter of 2016, we adopted the accounting standard
update related to disclosures for investments in certain entities that
calculate net asset value (NAV) per share. This standard update
removes the requirement to categorize within the fair value hierarchy
all investments for which fair value is measured using the NAV per
share practical expedient. The standard update limits the required
disclosures to investments for which the entity has elected to measure
the fair value using the practical expedient. The retrospective adoption
of this standard update impacted our presentation of pension and
other postretirement benefit plan assets in the notes to the con-
solidated financial statements but did not have an impact on the
measurement of the assets.
During the first quarter of 2016, we adopted the accounting standard
update related to the simplification of the presentation of debt issuance
costs. This standard update requires that debt issuance costs related
to a recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability. During
the first quarter of 2016, we also adopted the accounting standard
update related to the presentation and subsequent measurement of
debt issuance costs associated with line-of- credit arrangements. This
standard adds Securities and Exchange Commision (SEC) paragraphs
pursuant to an SEC Staff Announcement that the SEC staff would not
object to an entity deferring and presenting debt issuance costs asso-
ciated with a line-of- credit arrangement as an asset and subsequently
amortizing the costs ratably over the term of the arrangement. We
applied the amendments in these accounting standard updates ret-
rospectively to all periods presented. The adoption of these standard
updates did not have a significant impact on our consolidated financial
statements.
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| 49
Notes to Consolidated Financial Statements continued
During the first quarter of 2016, we adopted the accounting standard
update related to the accounting for share-based payments when
the terms of an award provide that a performance target could be
achieved after the requisite service period. The standard requires that
a performance target that affects vesting and that could be achieved
after the requisite service period be treated as a performance
condition. The prospective adoption of this standard update did not
have an impact on our consolidated financial statements.
During the second quarter of 2016, we prospectively changed our
method for determining the date at which we remeasure plan assets
and obligations as a result of a significant event during an interim
period in accordance with Accounting Standards Update (ASU)
2015-04, Compensation — Retirement Benefits (Topic 715): Practical
Expedient for the Measurement Date of an Employer’s Defined Benefit
Obligation and Plan Assets. As a practical expedient, we elected to
remeasure defined benefit plan assets and obligations using the
month-end that is closest to the date of the significant event. While
this standard update may impact the amounts recognized in an interim
period as the result of a remeasurement, the adoption of this standard
update did not impact our annual consolidated financial statements
as the employee benefit obligations are measured annually as of
December 31.
Recently Issued Accounting Standards
In January 2017, the accounting standard update related to the sim-
plification of the accounting for goodwill impairment was issued. The
amendments in this update eliminate the requirement to perform step
two of the goodwill impairment test, which requires a hypothetical
purchase price allocation when an impairment is determined to have
occurred. A goodwill impairment will now be the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the
carrying amount of goodwill. This standard update is effective as of
the first quarter of 2020; however, early adoption is permitted for any
interim or annual impairment tests performed after January 1, 2017.
Verizon expects to early adopt this standard as of January 1, 2017. The
prospective adoption of this standard update is not expected to have a
significant impact on our consolidated financial statements.
In November 2016, the accounting standard update related to the clas-
sification and presentation of changes in restricted cash was issued.
The amendments in this update require that cash and cash equivalent
balances in a statement of cash flows include those amounts deemed
to be restricted cash and restricted cash equivalents. This standard
update is effective as of the first quarter of 2018; however, early
adoption is permitted. We are currently evaluating the impact that this
standard update will have on our consolidated financial statements.
In August 2016, the accounting standard update related to the classi-
fication of certain cash receipts and cash payments was issued. This
standard update addresses eight specific cash flow issues with the
objective of reducing the existing diversity in practice for these issues.
Among the updates, this standard update requires cash receipts from
payments on a transferor’s beneficial interests in securitized trade
receivables to be classified as cash inflows from investing activities.
This standard update is effective as of the first quarter of 2018;
however, early adoption is permitted. We are currently evaluating the
impact that this standard update will have on our consolidated financial
statements. We expect the amendment relating to beneficial interests
in securitization transactions will have an impact on our presentation
of collections of the deferred purchase price from sales of wireless
device payment plan agreement receivables in our consolidated
statements of cash flows. Upon adoption of this standard update in the
first quarter of 2018, we expect to retrospectively reclassify approxi-
mately $1.1 billion of collections of deferred purchase price related to
collections from customers for the year ended December 31, 2016
from Cash flows from operating activities to Cash flows from investing
activities in our consolidated statements of cash flows.
In June 2016, the standard update related to the measurement of credit
losses on financial instruments was issued. This standard update
requires that certain financial assets be measured at amortized cost
reflecting an allowance for estimated credit losses expected to occur
over the life of the assets. The estimate of credit losses must be based
on all relevant information including historical information, current
conditions and reasonable and supportable forecasts that affect the
collectability of the amounts. This standard update is effective as of
the first quarter of 2020; however early adoption is permitted. We are
currently evaluating the impact that this standard update will have on
our consolidated financial statements.
In March 2016, the accounting standard update related to employee
share-based payment accounting was issued. This standard update
intends to simplify several aspects of the accounting for share-based
payment transactions, including the income tax consequences, classi-
fication of awards as either equity or liabilities, and classification on the
statement of cash flows. This standard update is effective as of the first
quarter of 2017. The retrospective adoption of this standard update
is not expected to have a significant impact on our consolidated
financial statements.
In February 2016, the accounting standard update related to leases
was issued. This standard update intends to increase transparency
and improve comparability by requiring entities to recognize assets
and liabilities on the balance sheet for all leases, with certain excep-
tions. In addition, through improved disclosure requirements, the
standard update will enable users of financial statements to further
understand the amount, timing, and uncertainty of cash flows arising
from leases. This standard update is effective as of the first quarter of
2019; however, early adoption is permitted. Verizon’s current operating
lease portfolio is primarily comprised of network, real estate, and
equipment leases. Upon adoption of this standard, we expect our
balance sheet to include a right of use asset and liability related to
substantially all operating lease arrangements. We have established a
cross- functional coordinated implementation team to implement the
standard update related to leases. We are in the process of assessing
the impact to our systems, processes and internal controls to meet the
standard update’s reporting and disclosure requirements.
In May 2014, the accounting standard update related to the recognition
of revenue from contracts with customers was issued. This standard
update along with related subsequently issued updates clarifies the
principles for recognizing revenue and develops a common revenue
standard for U.S. GAAP. The standard update also amends current
guidance for the recognition of costs to obtain and fulfill contracts with
customers such that incremental costs of obtaining and direct costs of
fulfilling contracts with customers will be deferred and amortized con-
sistent with the transfer of the related good or service. The standard
update intends to provide a more robust framework for addressing
50
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Notes to Consolidated Financial Statements continued
revenue issues; improve comparability of revenue recognition
practices across entities, industries, jurisdictions, and capital markets;
and provide more useful information to users of financial statements
through improved disclosure requirements. The two permitted
transition methods under the new standard are the full retrospective
method, in which case the standard would be applied to each prior
reporting period presented and the cumulative effect of applying the
standard would be recognized at the earliest period shown, or the
modified retrospective method, in which case the standard is applied
only to the most current period presented and the cumulative effect of
applying the standard would be recognized at the date of initial appli-
cation. In August 2015, an accounting standard update was issued that
delayed the effective date of this standard until the first quarter of 2018,
at which time we plan to adopt the standard.
We are in process of evaluating the impact of the standard update. The
ultimate impact on revenue resulting from the application of the new
standard will be subject to assessments that are dependent on many
variables, including, but not limited to, the terms of our contractual
arrangements and our mix of business. Upon adoption, we expect
that the allocation of revenue between equipment and service for our
wireless fixed-term service plans will result in more revenue allocated
to equipment and recognized earlier as compared with current GAAP.
We expect the timing of recognition of our sales commission expenses
will also be impacted, as a substantial portion of these costs (which
are currently expensed) will be capitalized and amortized as described
above. In 2016, total sales commission expenses were approximately
$4.2 billion. In 2017, we expect total sales commission expenses
to decline as our wireless customers continue to migrate from our
fixed-term service plans to device payment plans which have lower
commission structures. We continue to evaluate the available transi-
tion methods. Our considerations include, but are not limited to, the
comparability of our financial statements and the comparability within
our industry from application of the new standard to our contractual
arrangements. We plan to select a transition method by the second
half of 2017.
We have established a cross- functional coordinated implementation
team to implement the standard update related to the recognition of
revenue from contracts with customers. We have identified and are in
the process of implementing changes to our systems, processes and
internal controls to meet the standard update’s reporting and disclo-
sure requirements.
Note 2
Acquisitions and Divestitures
Wireless
Wireless Transaction
On September 2, 2013, Verizon entered into a stock purchase
agreement (the Stock Purchase Agreement) with Vodafone and
Vodafone 4 Limited (Seller), pursuant to which Verizon agreed to
acquire Vodafone’s indirect 45% interest in Cellco Partnership d/b/a
Verizon Wireless (the Partnership, and such interest, the Vodafone
Interest) for aggregate consideration of approximately $130 billion.
On February 21, 2014, pursuant to the terms and subject to the con-
ditions set forth in the Stock Purchase Agreement, Verizon acquired
(the Wireless Transaction) from Seller all of the issued and outstanding
capital stock (the Transferred Shares) of Vodafone Americas Finance 1
Inc., a subsidiary of Seller (VF1 Inc.), which indirectly through certain
subsidiaries (together with VF1 Inc., the Purchased Entities) owned
the Vodafone Interest. In consideration for the Transferred Shares,
upon completion of the Wireless Transaction, Verizon (i) paid approx-
imately $58.89 billion in cash, (ii) issued approximately 1.27 billion
shares of Verizon’s common stock, par value $0.10 per share,
which was valued at approximately $61.3 billion at the closing of the
Wireless Transaction, (iii) issued senior unsecured Verizon notes in an
aggregate principal amount of $5.0 billion (the Verizon Notes), (iv) sold
Verizon’s indirectly owned 23.1% interest in Vodafone Omnitel N.V.
(Omnitel, and such interest, the Omnitel Interest), valued at $3.5 billion
and (v) provided other consideration, which included the assumption of
preferred stock valued at approximately $1.7 billion. The total cash paid
to Vodafone and the other costs of the Wireless Transaction, including
financing, legal and bank fees, were financed through the incurrence of
third-party indebtedness.
In accordance with the accounting standard on consolidation, a
change in a parent’s ownership interest while the parent retains a con-
trolling financial interest in its subsidiary is accounted for as an equity
transaction and remeasurement of assets and liabilities of previously
controlled and consolidated subsidiaries is not permitted. As a result,
we accounted for the Wireless Transaction by adjusting the carrying
amount of the noncontrolling interest to reflect the change in Verizon’s
ownership interest in the Partnership. Any difference between the fair
value of the consideration paid and the amount by which the noncon-
trolling interest is adjusted has been recognized in equity attributable
to Verizon.
Omnitel Transaction
On February 21, 2014, Verizon and Vodafone also consummated the
sale of the Omnitel Interest (the Omnitel Transaction) by a subsidiary
of Verizon to a subsidiary of Vodafone in connection with the Wireless
Transaction pursuant to a separate share purchase agreement. As a
result, during 2014, we recognized a pre-tax gain of $1.9 billion on the
disposal of the Omnitel interest in Equity in (losses) earnings of uncon-
solidated businesses on our consolidated statement of income.
Verizon Notes (Non-Cash Transaction)
The Verizon Notes were issued pursuant to Verizon’s existing
indenture. The Verizon Notes were issued in two separate series, with
$2.5 billion due February 21, 2022 (the eight-year Verizon Notes) and
$2.5 billion due February 21, 2025 (the eleven-year Verizon Notes).
The Verizon Notes bear interest at a floating rate, which will be reset
quarterly, with interest payable quarterly in arrears, beginning May 21,
2014. The eight-year Verizon notes bear interest at a floating rate equal
to the three-month London Interbank Offered Rate (LIBOR), plus
1.222%, and the eleven-year Verizon notes bear interest at a floating
rate equal to the three-month LIBOR, plus 1.372%. On December 7,
2016, we redeemed the eight-year Verizon Notes (see Note 6 for addi-
tional details).
Other Consideration (Non-Cash Transaction)
Included in the other consideration provided to Vodafone is the
indirect assumption of long-term obligations with respect to 5.143%
Class D and Class E cumulative preferred stock issued by one of
the Purchased Entities. Both the Class D shares (825,000 shares
outstanding) and Class E shares (825,000 shares outstanding) are
mandatorily redeemable in April 2020 at $1,000 per share plus any
accrued and unpaid dividends. Dividends accrue at 5.143% per annum
and will be treated as interest expense. Both the Class D and Class E
shares have been classified as liability instruments and were recorded
at fair value as determined at the closing of the Wireless Transaction.
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| 51
Notes to Consolidated Financial Statements continued
Deferred Tax Liabilities
Certain deferred taxes directly attributable to the Wireless Transaction
have been calculated based on an analysis of taxes attributable to
the difference between the tax basis of the investment in the noncon-
trolling interest that is assumed compared to Verizon’s book basis.
As a result, Verizon recorded a deferred tax liability of approximately
$13.5 billion.
Spectrum License Transactions
Since 2014, we have entered into several strategic spectrum transac-
tions including:
• During the second quarter of 2014, we completed license exchange
transactions with T- Mobile USA, Inc. (T- Mobile USA) to exchange
certain Advanced Wireless Services (AWS) and Personal
Communication Services (PCS) licenses. The exchange included
a number of swaps that we expect will result in more efficient use
of the AWS and PCS bands. As a result of these exchanges, we
received $0.9 billion of AWS and PCS spectrum licenses at fair
value and we recorded an immaterial gain.
• During the second quarter of 2014, we completed transactions
pursuant to two additional agreements with T- Mobile USA with
respect to our remaining 700 MHz A block spectrum licenses.
Under one agreement, we sold certain of these licenses to
T- Mobile USA in exchange for cash consideration of approximately
$2.4 billion, and under the second agreement we exchanged the
remainder of our 700 MHz A block spectrum licenses as well as
AWS and PCS spectrum licenses for AWS and PCS spectrum
licenses. As a result, we received $1.6 billion of AWS and PCS
spectrum licenses at fair value and we recorded a pre-tax gain of
approximately $0.7 billion in Selling, general and administrative
expense on our consolidated statement of income for the year
ended December 31, 2014.
• During the third quarter of 2014, we entered into a license exchange
agreement with affiliates of AT&T Inc. (AT&T) to exchange certain
AWS and PCS spectrum licenses. This non-cash exchange was
completed in January 2015 at which time we recorded an immate-
rial gain.
• On January 29, 2015, the FCC completed an auction of 65 MHz
of spectrum, which it identified as the AWS-3 band. Verizon par-
ticipated in that auction and was the high bidder on 181 spectrum
licenses, for which we paid cash of approximately $10.4 billion.
During the fourth quarter of 2014, we made a deposit of $0.9 billion
related to our participation in this auction which is classified within
Other, net investing activities on our consolidated statement of cash
flows for the year ended December 31, 2014. During the first quarter
of 2015, we submitted an application to the FCC and paid $9.5 billion
to the FCC to complete payment for these licenses. The cash
payment of $9.5 billion is classified within Acquisitions of wireless
licenses on our consolidated statement of cash flows for the year
ended December 31, 2015. On April 8, 2015, the FCC granted us
these spectrum licenses.
• During the fourth quarter of 2015, we completed a license exchange
transaction with an affiliate of T- Mobile USA to exchange certain
AWS and PCS spectrum licenses. As a result we received
$0.4 billion of AWS and PCS spectrum licenses at fair value and
recorded a pre-tax gain of approximately $0.3 billion in Selling,
general and administrative expense on our consolidated statement
of income for the year ended December 31, 2015.
• During the fourth quarter of 2015, we entered into a license
exchange agreement with affiliates of AT&T to exchange certain
AWS and PCS spectrum licenses. This non-cash exchange was
completed in March 2016. As a result, we received $0.4 billion
of AWS and PCS spectrum licenses at fair value and recorded a
pre-tax gain of $0.1 billion in Selling, general and administrative
expense on our consolidated statement of income for the year
ended December 31, 2016.
• During the first quarter of 2016, we entered into a license exchange
agreement with affiliates of Sprint Corporation, which provides for
the exchange of certain AWS and PCS spectrum licenses. This
non-cash exchange was completed in September 2016. As a result,
we received $0.3 billion of AWS and PCS spectrum licenses at fair
value and recorded an immaterial gain in Selling, general and admin-
istrative expense on our consolidated statement of income for the
year ended December 31, 2016.
• During the fourth quarter of 2016, we entered into a license
exchange agreement with affiliates of AT&T to exchange certain
AWS and PCS spectrum licenses. As a result of this agreement,
$0.9 billion of Wireless licenses are classified as held for sale on our
consolidated balance sheet as of December 31, 2016. This non-cash
exchange was completed in February 2017. We expect to record a
gain on this transaction in the first quarter of 2017.
Tower Monetization Transaction
During March 2015, we completed a transaction with American Tower
Corporation (American Tower) pursuant to which American Tower
acquired the exclusive rights to lease and operate approximately
11,300 of our wireless towers for an upfront payment of $5.0 billion.
Under the terms of the leases, American Tower has exclusive rights to
lease and operate the towers over an average term of approximately
28 years. As the leases expire, American Tower has fixed-price
purchase options to acquire these towers based on their anticipated
fair market values at the end of the lease terms. As part of this trans-
action, we also sold 162 towers for $0.1 billion. We have subleased
capacity on the towers from American Tower for a minimum of 10
years at current market rates, with options to renew. The upfront
payment, including the towers sold, which is primarily included within
Other liabilities on our consolidated balance sheet, is accounted for as
deferred rent and as a financing obligation. The $2.4 billion accounted
for as deferred rent, which is presented within Other, net cash flows
provided by operating activities, relates to the portion of the towers
for which the right-of-use has passed to the tower operator. The
$2.7 billion accounted for as a financing obligation, which is presented
within Other, net cash flows used in financing activities, relates to the
portion of the towers that we continue to occupy and use for network
operations. See Note 5 for additional information.
Other
During 2016, 2015, and 2014, we acquired various other wireless
licenses and markets for cash consideration that was not significant.
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The acquisition of XO Holdings’ wireline business will be accounted for
as a business combination. While we have commenced the appraisals
necessary to identify the tangible and intangible assets acquired and
liabilities assumed and the amount of goodwill to be recognized as of
the acquisition date, the initial identification of the assets acquired and
liabilities assumed is not yet available.
Data Center Sale
On December 6, 2016, we entered into a definitive agreement
with Equinix, Inc. (Equinix) pursuant to which Verizon will sell 24
customer- facing data center sites in the United States and Latin
America, for approximately $3.6 billion, subject to certain adjustments.
The sale does not affect Verizon’s data center services delivered from
27 sites in Europe, Asia- Pacific and Canada, or its managed hosting
and cloud offerings.
We plan to account for a portion of the transaction, consisting of the
data center buildings, land and related assets, as a sale of real estate.
The real estate assets to be sold of $0.7 billion are currently included in
Verizon’s continuing operations and classified as held and used within
Plant, property and equipment, net on our consolidated balance sheet
at December 31, 2016. The non-real estate assets and liabilities that will
be sold are currently included in Verizon’s continuing operations and
classified as assets held for sale and liabilities related to assets held for
sale on our consolidated balance sheet as of December 31, 2016. At
December 31, 2016, assets to be sold classified as Non- current assets
held for sale of $0.6 billion were principally comprised of goodwill,
plant, property and equipment and other intangible assets. The
transaction is subject to customary regulatory approvals and closing
conditions, and is expected to close during the first half of 2017.
Other
On July 1, 2014, we sold a non- strategic Wireline business that provides
communications solutions to a variety of government agencies for net
cash proceeds of $0.1 billion and recorded an immaterial gain.
During the fourth quarter of 2015, we completed a sale of real estate
for which we received total gross proceeds of $0.2 billion and recog-
nized an immaterial deferred gain. The proceeds received as a result
of this transaction have been classified within Cash flows used in
investing activities on our consolidated statement of cash flows for the
year ended December 31, 2015.
Notes to Consolidated Financial Statements continued
Wireline
Access Line Sale
On February 5, 2015, we entered into a definitive agreement with
Frontier Communications Corporation (Frontier) pursuant to which
Verizon sold its local exchange business and related landline activities
in California, Florida and Texas, including Fios Internet and video
customers, switched and special access lines and high-speed Internet
service and long distance voice accounts in these three states, for
approximately $10.5 billion (approximately $7.3 billion net of income
taxes), subject to certain adjustments and including the assumption
of $0.6 billion of indebtedness from Verizon by Frontier (Access Line
Sale). The transaction, which included the acquisition by Frontier of the
equity interests of Verizon’s incumbent local exchange carriers (ILECs)
in California, Florida and Texas, did not involve any assets or liabilities
of Verizon Wireless. The transaction closed on April 1, 2016.
The transaction resulted in Frontier acquiring approximately 3.3 million
voice connections, 1.6 million Fios Internet subscribers, 1.2 million
Fios video subscribers and the related ILEC businesses from Verizon.
For the years ended December 31, 2016, 2015 and 2014, these busi-
nesses generated revenues of approximately $1.3 billion, $5.3 billion
and $5.4 billion, respectively, and operating income of $0.7 billion,
$2.8 billion and $2.0 billion, respectively, for Verizon. The operating
results of these businesses are excluded from our Wireline segment
for all periods presented to reflect comparable segment operating
results consistent with the information regularly reviewed by our chief
operating decision maker.
During April 2016, Verizon used the net cash proceeds received of
$9.9 billion to reduce its consolidated indebtedness (see Note 6). The
assets and liabilities that were sold were included in Verizon’s con-
tinuing operations and classified as assets held for sale and liabilities
related to assets held for sale on our consolidated balance sheets
through the completion of the transaction on April 1, 2016. As a result
of the closing of the transaction, we derecognized plant, property, and
equipment of $9.0 billion, goodwill of $1.3 billion, $0.7 billion of defined
benefit pension and other postretirement benefit plan obligations and
$0.6 billion of indebtedness assumed by Frontier.
We recorded a pre-tax gain of approximately $1.0 billion in Selling,
general and administrative expense on our consolidated statement
of income for the year ended December 31, 2016. The pre-tax gain
included a $0.5 billion pension and postretirement benefit curtailment
gain due to the elimination of the accrual of pension and other postre-
tirement benefits for some or all future services of a significant number
of employees covered by three of our defined benefit pension plans
and one of our other postretirement benefit plans.
XO Holdings
On February 20, 2016, we entered into a purchase agreement to
acquire XO Holdings’ wireline business, which owns and operates one
of the largest fiber-based Internet Protocol (IP) and Ethernet networks,
for approximately $1.8 billion, subject to adjustment. We completed
the acquisition on February 1, 2017. Separately, we entered into an
agreement to lease certain wireless spectrum from a wholly-owned
subsidiary of XO Holdings that holds its wireless spectrum. Verizon
has an option, exercisable under certain circumstances, to buy that
subsidiary.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 53
Notes to Consolidated Financial Statements continued
Other
Acquisition of AOL Inc.
On May 12, 2015, we entered into an Agreement and Plan of Merger
(the Merger Agreement) with AOL Inc. (AOL) pursuant to which we
commenced a tender offer to acquire all of the outstanding shares of
common stock of AOL at a price of $50.00 per share, net to the seller
in cash, without interest and less any applicable withholding taxes.
On June 23, 2015, we completed the tender offer and merger, and
AOL became a wholly-owned subsidiary of Verizon. The aggregate
cash consideration paid by Verizon at the closing of these transactions
was approximately $3.8 billion. Holders of approximately 6.6 million
shares exercised appraisal rights under Delaware law. If they had
not exercised these rights, Verizon would have paid an additional
$330 million for such shares at the closing.
AOL is a leader in the digital content and advertising platform space.
Verizon has been investing in emerging technology that taps into the
market shift to digital content and advertising. AOL’s business model
aligns with this approach, and we believe that its combination of owned
and operated content properties plus a digital advertising platform
enhances our ability to further develop future revenue streams.
The acquisition of AOL has been accounted for as a business
combination. The identification of the assets acquired and liabilities
assumed are finalized. The fair values of the assets acquired and
liabilities assumed were determined using the income, cost and
market approaches. The fair value measurements were primarily
based on significant inputs that are not observable in the market
and thus represent a Level 3 measurement as defined in Accounting
Standards Codification (ASC) 820, other than long-term debt assumed
in the acquisition. The income approach was primarily used to value
the intangible assets, consisting primarily of acquired technology
and customer relationships. The income approach indicates value
for an asset based on the present value of cash flow projected to
be generated by the asset. Projected cash flow is discounted at a
required rate of return that reflects the relative risk of achieving the
cash flow and the time value of money. The cost approach, which
estimates value by determining the current cost of replacing an asset
with another of equivalent economic utility, was used, as appropriate,
for plant, property and equipment. The cost to replace a given asset
reflects the estimated reproduction or replacement cost for the
property, less an allowance for loss in value due to depreciation.
The following table summarizes the consideration to AOL’s share-
holders and the identification of the assets acquired, including cash
acquired of $0.5 billion, and liabilities assumed as of the close of the
acquisition, as well as the fair value at the acquisition date of AOL’s
noncontrolling interests:
(dollars in millions)
Cash payment to AOL’s equity holders
Estimated liabilities to be paid(1)
Total consideration
Assets acquired:
Goodwill
Intangible assets subject to amortization
Other
Total assets acquired
Liabilities assumed:
Total liabilities assumed
Net assets acquired:
Noncontrolling interest
Total consideration
As of June 23, 2015
$ 3,764
377
$ 4,141
$ 1,938
2,504
1,551
5,993
1,851
4,142
(1)
$ 4,141
(1) During the year ended December 31, 2016, we made cash payments of $179 million in
respect of acquisition-date estimated liabilities to be paid. As of December 31, 2016, the
remaining balance of estimated liabilities to be paid was $198 million.
Goodwill is calculated as the difference between the acquisition date
fair value of the consideration transferred and the fair value of the
net assets acquired. The goodwill recorded as a result of the AOL
transaction represents future economic benefits we expect to achieve
as a result of combining the operations of AOL and Verizon as well as
assets acquired that could not be individually identified and separately
recognized. The goodwill related to this acquisition is included within
Corporate and other (see Note 3 for additional details).
Acquisition of Yahoo! Inc.’s Operating Business
On July 23, 2016, Verizon entered into a stock purchase agreement
(the Purchase Agreement) with Yahoo! Inc. (Yahoo). Pursuant to the
Purchase Agreement, upon the terms and subject to the conditions
thereof, we agreed to acquire the stock of one or more subsidiaries
of Yahoo holding all of Yahoo’s operating business for approximately
$4.83 billion in cash, subject to certain adjustments (the Transaction).
Prior to the closing of the Transaction, pursuant to a related reorga-
nization agreement, Yahoo will transfer all of the assets and liabilities
constituting Yahoo’s operating business to the subsidiaries to be
acquired in the Transaction. The assets to be acquired will not include
Yahoo’s cash, its ownership interests in Alibaba, Yahoo! Japan
and certain other investments, certain undeveloped land recently
divested by Yahoo or certain non-core intellectual property. We
will receive for our benefit and that of our current and certain future
affiliates a non-exclusive, worldwide, perpetual, royalty-free license
to all of Yahoo’s intellectual property that is not being conveyed with
the business.
Yahoo employees who transfer to Verizon will have any unvested
Yahoo restricted stock units that they hold converted into cash-settle-
able Verizon restricted stock units, which will have the same vesting
schedule as their Yahoo restricted stock units. The value of those
outstanding restricted stock units on the date of signing was approxi-
mately $1.1 billion.
54
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
On February 20, 2017, Verizon and Yahoo entered into an amendment
to the Purchase Agreement, pursuant to which the Transaction
purchase price will be reduced by $350 million to approximately
$4.48 billion in cash, subject to certain adjustments. Subject to certain
exceptions, the parties also agreed that certain user security and data
breaches incurred by Yahoo (and the losses arising therefrom) will
be disregarded (1) for purposes of specified conditions to Verizon’s
obligations to close the Transaction and (2) in determining whether a
“Business Material Adverse Effect” under the Purchase Agreement
has occurred.
Concurrently with the amendment of the Purchase Agreement, Yahoo
and Yahoo Holdings, Inc., a wholly owned subsidiary of Yahoo that
Verizon has agreed to purchase pursuant to the Transaction, also
entered into an amendment to the related reorganization agreement,
pursuant to which Yahoo (which has announced that it intends to
change its name to Altaba Inc. following the closing of the Transaction)
will retain 50% of certain post-closing liabilities arising out of govern-
mental or third party investigations, litigations or other claims related to
certain user security and data breaches incurred by Yahoo. In accor-
dance with the original Transaction Agreements, Yahoo will continue
to retain 100% of any liabilities arising out of any shareholder lawsuits
(including derivative claims) and investigations and actions by the SEC.
The Transaction remains subject to customary closing conditions,
including the approval of Yahoo's stockholders, and is expected to
close in the second quarter of 2017.
Fleetmatics Group PLC
On July 30, 2016, we entered into an agreement (the Transaction
Agreement) to acquire Fleetmatics Group PLC, a public limited
company incorporated in Ireland (Fleetmatics). Fleetmatics is a
leading global provider of fleet and mobile workforce management
solutions. Pursuant to the terms of the Transaction Agreement, we
acquired Fleetmatics for $60.00 per ordinary share in cash. The
aggregate merger consideration was approximately $2.5 billion,
including cash acquired of $0.1 billion. We completed the acquisition on
November 7, 2016. As a result of the transaction, Fleetmatics became a
wholly-owned subsidiary of Verizon.
The consolidated financial statements include the results of
Fleetmatics’ operations from the date the acquisition closed. Had this
acquisition been completed on January 1, 2016 or 2015, the results of
the acquired operations of Fleetmatics would not have had a signif-
icant impact on the consolidated net income attributable to Verizon.
Upon closing, we recorded approximately $1.4 billion of goodwill and
$1.1 billion of other intangibles.
The acquisition of Fleetmatics was accounted for as a business
combination. The consideration was allocated to the assets acquired
and liabilities assumed based on their fair values as of the close of the
acquisition.
Goodwill is calculated as the difference between the acquisition date
fair value of the consideration transferred and the fair value of the net
assets acquired. The goodwill recorded as a result of the Fleetmatics
transaction represents future economic benefits we expect to achieve
as a result of the acquisition. The goodwill related to this acquisition is
included within Corporate and other (see Note 3 for additional details).
Other
On July 29, 2016, we acquired Telogis, Inc., a global cloud-based
mobile enterprise management software business, for $0.9 billion of
cash consideration. Upon closing, we recorded $0.5 billion of goodwill
that is included within Corporate and other.
On September 12, 2016, we announced an agreement to acquire
a leading provider of IoT solutions for smart communities for cash
consideration that is not significant. The transaction was completed in
October 2016.
On September 3, 2015, AOL announced an agreement to acquire an
advertising technology business for cash consideration that was not
significant. The transaction was completed in October 2015.
On October 7, 2014, Redbox Instant by Verizon, a venture between
Verizon and Redbox Automated Retail, LLC (Redbox), a wholly-owned
subsidiary of Outerwall Inc., ceased providing service to its customers.
In accordance with an agreement between the parties, Redbox
withdrew from the venture on October 20, 2014 and Verizon wound
down and dissolved the venture during the fourth quarter of 2014. As a
result of the termination of the venture, we recorded a pre-tax loss of
$0.1 billion in the fourth quarter of 2014.
During February 2014, we acquired a business dedicated to the devel-
opment of IP television for cash consideration that was not significant.
Real Estate Transaction
On May 19, 2015, we consummated a sale- leaseback transaction
with a financial services firm for the buildings and real estate at our
Basking Ridge, New Jersey location. We received total gross proceeds
of $0.7 billion resulting in a deferred gain of $0.4 billion, which will
be amortized over the initial leaseback term of twenty years. The
leaseback of the buildings and real estate is accounted for as an
operating lease. The proceeds received as a result of this transaction
have been classified within Cash flows used in investing activities
on our consolidated statement of cash flows for the year ended
December 31, 2015.
Note 3
Wireless Licenses, Goodwill and Other
Intangible Assets
Wireless Licenses
Changes in the carrying amount of Wireless licenses are as follows:
Balance at January 1, 2015
Acquisitions (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2015
Acquisitions (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2016
(dollars in millions)
$ 75,341
10,474
389
371
$ 86,575
28
506
(436)
$ 86,673
Reclassifications, adjustments and other includes the exchanges
of wireless licenses in 2016 and 2015 as well as $0.9 billion and
$0.3 billion of Wireless licenses that are classified as Assets held for
sale on our consolidated balance sheets at December 31, 2016 and
2015, respectively. See Note 2 for additional details.
At December 31, 2016 and 2015, approximately $10.0 billion and
$10.4 billion, respectively, of wireless licenses were under development
for commercial service for which we were capitalizing interest costs.
The average remaining renewal period of our wireless license
portfolio was 5.1 years as of December 31, 2016. See Note 1 for addi-
tional details.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 55
Notes to Consolidated Financial Statements continued
Goodwill
Changes in the carrying amount of Goodwill are as follows:
Balance at January 1, 2015
Acquisitions (Note 2)
Reclassifications, adjustments and other
Balance at December 31, 2015
Acquisitions (Note 2)
Reclassifications, adjustments and other
Balance at December 31, 2016
Wireless
$ 18,390
3
–
$ 18,393
–
–
$ 18,393
Wireline
6,249
–
(1,918)
4,331
–
(547)
3,784
$
$
$
Other
–
2,035
572
2,607
2,310
111
5,028
$
$
$
(dollars in millions)
Total
$ 24,639
2,038
(1,346)
$ 25,331
2,310
(436)
$ 27,205
During the second quarter of 2016, we allocated $0.1 billion of Goodwill on a relative fair value basis from Wireline to Other as a result of the
reclassification of our telematics businesses (see Note 12 for additional details). During the fourth quarter of 2016, we allocated $0.4 billion of
Goodwill on a relative fair value basis from Wireline to Non- current assets held for sale on our consolidated balance sheet as of December 31,
2016 as a result of our agreement to sell 24 data center sites (see Note 2 for additional details). As a result of acquisitions completed during 2016,
we recognized preliminary Goodwill of $2.3 billion, which is included within Other (see Note 2 for additional details).
As a result of the acquisition of AOL in the second quarter of 2015, we recognized Goodwill of $1.9 billion, which is included within Other (see
Note 2 for additional details). We also allocated $0.6 billion of goodwill on a relative fair value basis from Wireline to Other as a result of an
internal reorganization. This increase was partially offset by a decrease in Goodwill in Wireline primarily due to the reclassification of $1.3 billion
of Goodwill to Non- current assets held for sale on our consolidated balance sheet at December 31, 2015 as a result of the Access Line Sale (see
Note 2 for additional details). The amount of Goodwill reclassified was based on a relative fair value basis.
Other Intangible Assets
The following table displays the composition of Other intangible assets, net:
At December 31,
Customer lists (6 to 14 years)
Non- network internal-use software (3 to 8 years)
Other (5 to 25 years)
Total
$
Gross
Amount
2,884
16,135
1,854
$ 20,873
$
Accumulated
Amortization
(480)
(10,913)
(583)
$ (11,976)
2016
$
Net Amount
2,404
5,222
1,271
8,897
$
$
Gross Amount
4,139
14,542
1,346
$ 20,027
$
Accumulated
Amortization
(2,365)
(9,620)
(450)
$ (12,435)
(dollars in millions)
2015
Net Amount
1,774
$
4,922
896
7,592
$
The amortization expense for Other intangible assets was as follows:
Years
2016
2015
2014
(dollars in millions)
$ 1,701
1,694
1,567
Estimated annual amortization expense for Other intangible assets is
as follows:
Years
2017
2018
2019
2020
2021
(dollars in millions)
$ 1,749
1,564
1,358
1,121
938
Note 4
Plant, Property and Equipment
The following table displays the details of Plant, property and
equipment, which is stated at cost:
(dollars in millions)
At December 31,
Land
Buildings and equipment
Central office and other network
Lives (years)
–
7 – 45
$
2016
667 $
2015
709
25,587
27,117
equipment
Cable, poles and conduit
Leasehold improvements
Work in progress
Furniture, vehicles and other
Less accumulated depreciation
Plant, property and equipment, net
3 – 50
7 – 50
5 – 20
–
3 – 20
136,737
45,639
7,627
5,710
8,718
232,215
147,464
129,201
44,290
7,104
4,907
8,365
220,163
136,622
$ 84,751 $ 83,541
56
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
Note 5
Leasing Arrangements
As Lessee
We lease certain facilities and equipment for use in our operations
under both capital and operating leases. Total rent expense under
operating leases amounted to $3.6 billion in 2016, $3.2 billion in 2015
and $2.7 billion in 2014.
Amortization of capital leases is included in Depreciation and amortiza-
tion expense in the consolidated statements of income. Capital lease
amounts included in Plant, property and equipment are as follows:
At December 31,
Capital leases
Less accumulated amortization
Total
(dollars in millions)
2016
$ 1,277
(524)
753
$
2015
$ 1,046
(318)
728
$
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2016, are as follows:
(dollars in millions)
Tower Monetization Transaction
During March 2015, we completed a transaction with American Tower
pursuant to which American Tower acquired the exclusive rights to
lease and operate approximately 11,300 of our wireless towers for an
upfront payment of $5.0 billion. We have subleased capacity on the
towers from American Tower for a minimum of 10 years at current
market rates, with options to renew. Under this agreement, total rent
payments amounted to $0.3 billion and $0.2 billion for the years
ended December 31, 2016 and 2015, respectively. We expect to make
minimum future lease payments of approximately $2.4 billion. We
continue to include the towers in Plant, property and equipment, net
in our consolidated balance sheets and depreciate them accordingly.
At December 31, 2016 and 2015, $0.5 billion of towers related to this
transaction were included in Plant, property and equipment, net. See
Note 2 for additional information.
Operating
Leases
$ 2,822
2,583
2,304
1,927
1,515
6,724
$ 17,875
Capital
Leases
366
272
149
111
62
79
1,039
89
950
335
615
$
$
Years
2017
2018
2019
2020
2021
Thereafter
Total minimum rental commitments
Less interest and executory costs
Present value of minimum lease payments
Less current installments
Long-term obligation at December 31, 2016
Note 6
Debt
Changes to debt during 2016 are as follows:
Balance at January 1, 2016
Proceeds from long-term borrowings
Proceeds from asset- backed long-term borrowings
Repayments of long-term borrowings and capital leases obligations
Decrease in short-term obligations, excluding current maturities
Reclassifications of long-term debt
Other
Balance at December 31, 2016
Debt maturing within one year is as follows:
At December 31,
Long-term debt maturing within one year
Short-term notes payable
Commercial paper and other
Total debt maturing within one year
$
Debt Maturing
within One Year
6,489
120
–
(8,125)
(149)
4,088
222
2,645
$
Long-term
Debt
$ 103,240
12,844
4,986
(11,034)
–
(4,088)
(515)
$ 105,433
2016
2,477
168
–
2,645
$
$
(dollars in millions)
Total
$ 109,729
12,964
4,986
(19,159)
(149)
–
(293)
$ 108,078
(dollars in millions)
2015
6,325
158
6
6,489
$
$
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 57
Notes to Consolidated Financial Statements continued
Credit facilities
On September 23, 2016, we amended our $8.0 billion credit facility to increase the availability to $9.0 billion and extend the maturity to
September 23, 2020. As of December 31, 2016, the unused borrowing capacity under our $9.0 billion credit facility was approximately
$8.9 billion. The credit facility does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to
borrow even if our business has incurred a material adverse change. We use the credit facility for the issuance of letters of credit and for general
corporate purposes.
In March 2016, we entered into an equipment credit facility insured by Eksportkreditnamnden Stockholm, Sweden (EKN), the Swedish export
credit agency, with the ability to borrow up to $1 billion to finance locally- sourced network equipment- related purchases. The facility has borrow-
ings available through June 2017, contingent upon the amount of equipment- related purchases made by Verizon. As of December 31, 2016 we
had drawn $0.5 billion on the facility and the unused borrowing capacity was $0.5 billion.
Long-Term Debt
Outstanding long-term debt obligations are as follows:
At December 31,
Verizon Communications — notes payable and other
Interest Rates %
0.50 – 3.85
4.11 – 5.50
5.85 – 6.90
7.35 – 8.95
Floating
Maturities
2017 – 2042
2018 – 2055
2018 – 2054
2018 – 2039
2017 – 2025
Verizon Wireless — Alltel assumed notes
6.80 – 7.88
2029 – 2032
Telephone subsidiaries — debentures
5.13 – 6.50
7.38 – 7.88
8.00 – 8.75
2028 – 2033
2022 – 2032
2022 – 2031
Other subsidiaries — notes payable, debentures and other
6.84 – 8.75
2018 – 2028
Verizon Wireless and other subsidiaries — asset- backed debt
1.42 – 2.36
Floating
2021
2021
Capital lease obligations (average rate of 3.5% and 3.4% in 2016 and
2015, respectively)
Unamortized discount, net of premium
Unamortized debt issuance costs
Total long-term debt, including current maturities
Less long-term debt maturing within one year
Total long-term debt
$
2016
28,491
53,909
11,295
1,860
9,750
525
319
561
328
1,102
2,485
2,520
(dollars in millions)
$
2015
26,281
51,156
16,420
2,300
14,100
686
575
1,099
780
1,500
–
–
950
(5,716)
(469)
107,910
2,477
$ 105,433
957
(5,824)
(465)
109,565
6,325
$ 103,240
2016
April Tender Offers
On March 4, 2016, we announced the commencement of three concurrent, but separate, tender offers (the April Tender Offers) to purchase
for cash (1) any and all of the series of notes listed below in the Group 1 Any and All Offer, (2) any and all of the series of notes listed below in the
Group 2 Any and All Offer and (3) up to $5.5 billion aggregate purchase price, excluding accrued and unpaid interest and any fees or commis-
sions, of the series of notes listed below in the Group 3 Offer.
The April Tender Offers for each series of notes were conditioned upon the closing of the sale of our local exchange business and related
landline activities in California, Florida and Texas to Frontier and the receipt of at least $9.5 billion of the purchase price cash at closing (the Sale
Condition). The Sale Condition was satisfied and the April Tender Offers were settled on April 4, 2016, resulting in the notes listed below being
repurchased and cancelled for $10.2 billion, inclusive of accrued interest of $0.1 billion.
The table below lists the series of notes included in the Group 1 Any and All Offer:
(dollars in millions, except for Purchase Price)
Verizon Communications Inc.
Interest Rate
2.50%
2.00%
6.35%
Maturity
2016
2016
2019
Principal Amount
Outstanding
$ 2,182
1,250
1,750
Purchase Price(1)
$ 1,007.60
1,007.20
1,133.32
Principal Amount
Purchased
$ 1,272
731
970
$ 2,973
(1) Per $1,000 principal amount of notes tendered and not withdrawn prior to early expiration
58
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
The table below lists the series of notes included in the Group 2 Any and All Offer:
(dollars in millions, except for Purchase Price)
Verizon Delaware LLC
Interest Rate
8.375%
8.625%
Maturity
2019
2031
Principal Amount
Outstanding
15
15
$
Purchase Price(1)
$ 1,182.11
1,365.39
Principal Amount
Purchased
15
5
$
Verizon Maryland LLC
Verizon New England Inc.
Verizon New Jersey Inc.
Verizon New York Inc.
Verizon Pennsylvania LLC
Verizon Virginia LLC
8.00%
8.30%
5.125%
7.875%
8.00%
7.85%
6.50%
7.375%
6.00%
8.35%
8.75%
7.875%
8.375%
2029
2031
2033
2029
2022
2029
2028
2032
2028
2030
2031
2022
2029
50
100
350
349
200
149
100
500
125
175
125
100
100
1,301.32
1,347.26
1,012.50
1,261.63
1,238.65
1,311.32
1,151.71
1,201.92
1,110.47
1,324.10
1,356.47
1,227.79
1,319.78
22
76
171
176
54
63
28
256
57
127
72
43
81
$ 1,246
(1) Per $1,000 principal amount of notes tendered and not withdrawn prior to early expiration
The table below lists the series of notes included in the Group 3 Offer:
(dollars in millions, except for Purchase Price)
Verizon Communications Inc.
Alltel Corporation
GTE Corporation
(1) Per $1,000 principal amount of notes
Interest Rate
8.95%
7.75%
7.35%
7.75%
6.55%
6.40%
6.90%
6.25%
6.40%
5.85%
6.00%
5.15%
7.875%
6.80%
6.94%
8.75%
Maturity
2039
2032
2039
2030
2043
2033
2038
2037
2038
2035
2041
2023
2032
2029
2028
2021
$
Principal Amount
Outstanding
353
251
480
1,206
6,585
2,196
477
750
866
1,500
1,000
8,517
452
235
800
300
Purchase Price(1)
$ 1,506.50
1,315.19
1,293.50
1,377.92
1,291.74
1,220.28
1,243.29
1,167.66
1,176.52
1,144.68
1,164.56
1,152.83
1,322.92
1,252.93
1,261.35
1,307.34
$
Principal Amount
Purchased
63
33
68
276
2,340
466
92
114
116
250
–
–
115
47
237
93
$ 4,310
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 59
Notes to Consolidated Financial Statements continued
April Early Debt Redemption
On April 8, 2016, we redeemed in whole the following series of out-
standing notes which were called for redemption on April 5, 2016
(collectively, April Early Debt Redemption): $0.9 billion aggregate
principal amount of Verizon Communications 2.50% Notes due 2016
at 100.8% of the principal amount of such notes, $0.5 billion aggregate
principal amount of Verizon Communications 2.00% Notes due 2016
at 100.8% of the principal amount of such notes, and $0.8 billion
aggregate principal amount of Verizon Communications 6.35% Notes
due 2019 at 113.5% of the principal amount of such notes. These notes
were repurchased and cancelled for $2.3 billion, inclusive of an imma-
terial amount of accrued interest.
Debt Issuances and Redemptions
During August 2016, we issued $6.2 billion aggregate principal amount
of fixed and floating rate notes. The issuance of these Notes resulted
in cash proceeds of approximately $6.1 billion, net of discounts
and issuance costs and after reimbursement of certain expenses.
The issuance consisted of the following series of notes: $0.4 billion
aggregate principal amount of Verizon Communications Floating Rate
Notes due 2019, $1.0 billion aggregate principal amount of Verizon
Communications 1.375% Notes due 2019, $1.0 billion aggregate
principal amount of Verizon Communications 1.750% Notes due 2021,
$2.3 billion aggregate principal amount of Verizon Communications
2.625% Notes due 2026, and $1.5 billion aggregate principal amount
of Verizon Communications 4.125% Notes due 2046. The floating
rate notes bear interest at a rate equal to the three-month LIBOR plus
0.370%, which rate will be reset quarterly. The net proceeds were
used for general corporate purposes, including to repay at maturity
on September 15, 2016, $2.3 billion aggregate principal amount of our
floating rate notes, plus accrued interest on the notes.
During September 2016, we issued $2.1 billion aggregate principal
amount of 4.20% Notes due 2046. The issuance of these Notes
resulted in cash proceeds of approximately $2.0 billion, net of
discounts and issuance costs and after reimbursement of certain
expenses. The net proceeds were used to redeem in whole $0.9 billion
aggregate principal amount of Verizon Communications 4.80% Notes
due 2044 at 100% of the principal amount of such notes, plus any
accrued and unpaid interest to the date of redemption, for an imma-
terial loss. Proceeds not used for the redemption of these notes were
used for general corporate purposes.
During October 2016, we issued the following series of notes:
€1.0 billion aggregate principal amount of Verizon Communications
0.500% Notes due 2022, €1.0 billion aggregate principal amount
of Verizon Communications 0.875% Notes due 2025, €1.25 billion
aggregate principal amount of Verizon Communications 1.375% Notes
due 2028, and £0.45 billion aggregate principal amount of Verizon
Communications 3.125% Notes due 2035. The issuance of these
notes resulted in cash proceeds of approximately $4.1 billion, net of
discounts and issuance costs and after reimbursement of certain
expenses. The net proceeds from the sale of the notes were used for
general corporate purposes, including the financing of our acquisition
of Fleetmatics and the repayment of outstanding indebtedness.
During December 2016, we redeemed in whole $2.0 billion aggregate
principal amount of Verizon Communications 1.35% Notes due 2017 at
100.321% of the principal amount of such notes, plus any accrued and
unpaid interest to the date of redemption, for an immaterial loss. Also
in December 2016, we repurchased $2.5 billion aggregate principal
amount of the eight-year Verizon Notes at 100% of the aggregate
principal amount of such notes plus accrued and unpaid interest to the
date of redemption.
During February 2017, we issued $1.5 billion aggregate principal
amount of 4.95% Notes due 2047. The issuance of these Notes
resulted in cash proceeds of approximately $1.5 billion, net of discounts
and issuance costs and after reimbursement of certain expenses. The
net proceeds were used for general corporate purposes.
2017 Term Loan Agreement
During January 2017, we entered into a term loan credit agreement
with a syndicate of major financial institutions, pursuant to which
we can borrow up to $5.5 billion for (i) the acquisition of Yahoo and
(ii) general corporate purposes. Borrowings under the term loan
credit agreement mature 18 months following the funding date, with
a partial mandatory prepayment required within six months following
the funding date. The term loan agreement contains certain negative
covenants, including a negative pledge covenant, a merger or similar
transaction covenant and an accounting changes covenant, affirmative
covenants and events of default that are customary for companies
maintaining an investment grade credit rating. In addition, the term loan
credit agreement requires us to maintain a leverage ratio (as defined
in the term loan credit agreement) not in excess of 3.50:1.00, until our
credit ratings are equal to or higher than A3 and A- at Moody’s Investor
Service and S&P Global Ratings, respectively. To date, we have not
drawn on this term loan.
January 2017 Exchange Offers and Cash Offers
On January 25, 2017, we commenced eighteen separate private offers
to exchange (the January 2017 Exchange Offers) specified series
of outstanding Notes issued by Verizon Communications (the Old
Notes) for new Notes to be issued by Verizon Communications. In
connection with the January 2017 Exchange Offers, which expired on
January 31, 2017 and settled on February 3, 2017, we issued $3.2 billion
aggregate principal amount of Verizon Communications 2.946%
Notes due 2022, $1.7 billion aggregate principal amount of Verizon
Communications 4.812% Notes due 2039 and $4.1 billion aggregate
principal amount of Verizon Communications 5.012% Notes due 2049
(collectively, the New Notes) plus applicable cash of $0.6 billion (not
including accrued and unpaid interest on the Old Notes) in exchange
for $8.3 billion aggregate principal amount of tendered Old Notes.
We concurrently commenced eighteen separate offers to purchase
for cash (the January 2017 Cash Offers) the Old Notes. In connection
with the January 2017 Cash Offers, which expired on January 31,
2017 and settled on February 3, 2017, we repurchased $0.5 billion
aggregate principal amount of Old Notes for $0.5 billion, exclusive of
accrued interest.
2015
February Exchange Offers
On February 11, 2015, we announced the commencement of seven
separate private offers to exchange (the February Exchange Offers)
specified series of outstanding notes and debentures issued by
Verizon and GTE Corporation (collectively, the Old Notes) for new
Notes to be issued by Verizon (the New Notes) and, in the case of the
6.94% debentures due 2028 of GTE Corporation, cash. The February
Exchange Offers have been accounted for as a modification of debt.
On March 13, 2015, Verizon issued $2.9 billion aggregate principal
amount of 4.272% Notes due 2036 (the 2036 New Notes), $5.0 billion
aggregate principal amount of 4.522% Notes due 2048 (the 2048
New Notes) and $5.5 billion aggregate principal amount of 4.672%
Notes due 2055 (the 2055 New Notes) in satisfaction of the exchange
offer consideration on tendered Old Notes (not including accrued and
unpaid interest on the Old Notes). The following tables list the series of
Old Notes included in the February Exchange Offers and the principal
amount of each such series accepted by Verizon for exchange.
60
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
The table below lists the series of Old Notes included in the February Exchange Offers for the 2036 New Notes:
(dollars in millions)
Verizon Communications Inc.
Interest Rate
5.15%
Maturity
2023
Principal Amount
Outstanding
$ 11,000
The table below lists the series of Old Notes included in the February Exchange Offers for the 2048 New Notes:
(dollars in millions)
Verizon Communications Inc.
GTE Corporation
Interest Rate
6.90%
6.40%
6.40%
6.25%
6.94%
Maturity
2038
2038
2033
2037
2028
Principal Amount
Outstanding
$ 1,250
1,750
4,355
750
800
The table below lists the series of Old Notes included in the February Exchange Offers for the 2055 New Notes:
(dollars in millions)
Verizon Communications Inc.
Interest Rate
6.55%
Maturity
2043
Principal Amount
Outstanding
$ 10,670
Principal Amount
Accepted For
Exchange
$ 2,483
Principal Amount
Accepted For
Exchange
773
$
884
2,159
–
–
$ 3,816
Principal Amount
Accepted For
Exchange
$ 4,084
Term Loan Agreement
During the first quarter of 2015, we entered into a term loan agreement
with a major financial institution, pursuant to which we borrowed
$6.5 billion for general corporate purposes, including the acquisition of
spectrum licenses. Borrowings under the term loan agreement were
to mature in March 2016, with a $4.0 billion mandatory prepayment
required in June 2015. The term loan agreement contained certain
negative covenants, including a negative pledge covenant, a merger
or similar transaction covenant and an accounting changes covenant,
affirmative covenants and events of default that are customary for
companies maintaining an investment grade credit rating. In addition,
the term loan agreement required us to maintain a leverage ratio
(as defined in the term loan agreement) not in excess of 3.50:1.00,
until our credit ratings were equal to or higher than A3 and A- at
Moody’s Investors Service and Standard & Poor’s Ratings Services,
respectively.
During March 2015, we prepaid approximately $5.0 billion of the term
loan agreement, which satisfied the mandatory prepayment. During the
third and fourth quarters of 2015, respectively, we made repayments of
approximately $1.0 billion and $0.5 billion. As of December 31, 2015, no
amounts remained outstanding under the term loan agreement.
Other
During June 2015, as part of the Merger Agreement with AOL, we
assumed approximately $0.6 billion of debt and capital lease obliga-
tions. During 2015, approximately $0.4 billion of the assumed debt and
capital lease obligations were repaid.
During October 2015, we executed a $0.2 billion, 1.5% loan due
2018. Also, during March 2015, $0.5 billion of floating rate Verizon
Communications Notes matured and were repaid. During November
2015, $1.0 billion of 0.7% Verizon Communications Notes matured and
were repaid.
During December 2015, we repaid $0.6 billion upon maturity for
€0.5 billion aggregate principal amount of Cellco Partnership and
Verizon Wireless Capital LLC 8.750% Notes due 2015, and the related
cross currency swap was settled.
Asset- Backed Debt
As of December 31, 2016, the carrying value of our asset- backed
debt was $5.0 billion. Our asset- backed debt includes notes (the
Asset- Backed Notes) issued to third-party investors (Investors) and
loans (ABS Financing Facility) received from banks and their conduit
facilities (collectively, the Banks). Our consolidated asset- backed
securitization bankruptcy remote legal entities (each, an ABS Entity or
collectively, the ABS Entities) issue the debt or are otherwise party to
the transaction documentation in connection with our asset- backed
debt transactions. Under the terms of our asset- backed debt, we
transfer device payment plan agreement receivables from Cellco
Partnership and certain other affiliates of Verizon (collectively, the
Originators) to one of the ABS Entities, which in turn transfer such
receivables to another ABS Entity that issues the debt. Verizon entities
retain the equity interests in the ABS Entities, which represent the
rights to all funds not needed to make required payments on the asset-
backed debt and other related payments and expenses.
Our asset- backed debt is secured by the transferred device payment
plan agreement receivables and future collections on such receiv-
ables. The device payment plan agreement receivables transferred to
the ABS Entities and related assets, consisting primarily of restricted
cash, will only be available for payment of asset- backed debt and
expenses related thereto, payments to the Originators in respect of
additional transfers of device payment plan agreement receivables,
and other obligations arising from our asset- backed debt transactions,
and will not be available to pay other obligations or claims of Verizon’s
creditors until the associated asset- backed debt and other obligations
are satisfied. The Investors or Banks, as applicable, which hold our
asset- backed debt have legal recourse to the assets securing the debt,
but do not have any recourse to Verizon with respect to the payment of
principal and interest on the debt. Under a parent support agreement,
Verizon has agreed to guarantee certain of the payment obligations of
Cellco Partnership and the Originators to the ABS Entities.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 61
Notes to Consolidated Financial Statements continued
Cash collections on the device payment plan agreement receivables
are required at certain specified times to be placed into segregated
accounts. Deposits to the segregated accounts are considered
restricted cash and are included in Prepaid expenses and other and
Other assets on our consolidated balance sheets.
Proceeds from our asset- backed debt transactions, deposits to the
segregated accounts and payments to the Originators in respect of
additional transfers of device payment plan agreement receivables,
are reflected in Cash flows from financing activities in our consolidated
statements of cash flows. Repayments of our asset- backed debt and
related interest payments made from the segregated accounts are
non-cash activities and therefore are not reflected within Cash flows
from financing activities in our consolidated statements of cash flows.
The asset- backed debt issued and the assets securing this debt are
included on our consolidated balance sheets.
Asset- Backed Notes
In July 2016, we issued $1.2 billion aggregate principal amount of
senior and junior asset- backed notes through an ABS Entity, of which
$1.1 billion of notes were sold to Investors. The senior asset- backed
notes have an expected weighted- average life of about 2.5 years and
bear interest at 1.42% per annum. The junior asset- backed notes have
an expected weighted- average life of about 3.2 years and bear interest
at a weighted- average rate of 1.53%.
In November 2016, we issued $1.4 billion aggregate principal amount
of senior and junior asset- backed notes through an ABS Entity. The
senior asset- backed notes have an expected weighted- average life
of about 2.6 years and bear interest at 1.68% per annum. The junior
asset- backed notes have an expected weighted- average life of about
3.3 years and bear interest at a weighted- average rate of 2.26%.
Under the terms of the asset- backed notes, there is a two-year
revolving period during which we may transfer additional receivables
to the ABS Entity.
ABS Financing Facility
During September 2016, we entered into a device payment plan
agreement financing facility through an ABS Entity with a number of
financial institutions. Under the terms of the ABS Financing Facility,
such counterparties made advances under asset- backed loans
backed by device payment plan agreement receivables for proceeds
of $1.5 billion. We had the option of requesting an additional $1.5 billion
of committed funding. During December 2016, we received additional
funding of $1.0 billion under this option. These loans have an expected
weighted- average life of about 2.4 years and bear interest at floating
rates. There is a two-year revolving period, which may be extended,
during which we may transfer additional receivables to the ABS
Entity. Subject to certain conditions, we may also remove receivables
from the ABS Entity. We may prepay the outstanding amounts of the
loans without penalty, but in certain cases, with breakage costs. As of
December 31, 2016, outstanding borrowings under the ABS Financing
Facility were $2.5 billion.
Although the ABS Financing Facility is fully drawn as of December 31,
2016, we have the right to prepay all or a portion thereof at any time. If
we choose to prepay, the amount prepaid shall be available for further
drawdowns until September 2018, except in certain circumstances.
Variable Interest Entities (VIEs)
The ABS Entities meet the definition of a VIE for which we have
determined we are the primary beneficiary as we have both the power
to direct the activities of the entity that most significantly impact the
entity’s performance and the obligation to absorb losses or the right
to receive benefits of the entity. Therefore, the assets, liabilities and
activities of the ABS Entities are consolidated in our financial results
and are included in amounts presented on the face of our consolidated
balance sheets.
The assets and liabilities related to our asset- backed debt arrange-
ments included on our consolidated balance sheets were as follows:
At December 31,
Assets
Account receivable, net
Prepaid expenses and other
Other Assets
Liabilities
Accounts payable and accrued liabilities
Long-term debt
(dollars in millions)
2016
2015
$
$ 3,383
236
2,383
4
4,988
–
–
–
–
–
See Note 7 for more information on device payment plan agreement
receivables used to secure asset- backed debt.
Early Debt Redemption and Other Costs
During 2016, we recorded net pre-tax losses on early debt redemption
of $1.8 billion primarily in connection with the April Tender Offers and
the April Early Debt Redemption.
We recognize early debt redemption costs in Other income and
(expense), net on our consolidated statements of income and within
our Net cash used in financing activities on our consolidated state-
ments of cash flows.
Additional Financing Activities (Non-Cash Transaction)
During the years ended December 31, 2016 and 2015, we financed,
primarily through vendor financing arrangements, the purchase of
approximately $0.5 billion and $0.7 billion, respectively, of long-lived
assets consisting primarily of network equipment. At December 31,
2016, $1.1 billion relating to vendor financing arrangements, including
those entered into in prior years, remained outstanding. These
purchases are non-cash financing activities and therefore not reflected
within Capital expenditures on our consolidated statements of
cash flows.
Guarantees
We guarantee the debentures of our operating telephone company
subsidiaries. As of December 31, 2016, $1.2 billion aggregate principal
amount of these obligations remained outstanding. Each guarantee
will remain in place for the life of the obligation unless terminated
pursuant to its terms, including the operating telephone company no
longer being a wholly-owned subsidiary of Verizon.
As a result of the closing of the Access Line Sale on April 1, 2016,
GTE Southwest Inc., Verizon California Inc. and Verizon Florida LLC
are no longer wholly-owned subsidiaries of Verizon, and the guar-
antees of $0.6 billion aggregate principal amount of debentures and
first mortgage bonds of those entities have terminated pursuant to
their terms.
62
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
We also guarantee the debt obligations of GTE LLC as successor in
interest to GTE Corporation that were issued and outstanding prior to
July 1, 2003. As of December 31, 2016, $1.1 billion aggregate principal
amount of these obligations remain outstanding.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our
financial and restrictive covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding, excluding unamortized debt
issuance costs, at December 31, 2016 are as follows:
Years
2017
2018
2019
2020
2021
Thereafter
(dollars in millions)
$ 2,477
7,729
5,548
9.040
12.097
71,988
Note 7
Wireless Device Payment Plans
Under the Verizon device payment program, our eligible wireless
customers purchase wireless devices under a device payment plan
agreement. Customers that activate service on devices purchased
under the device payment program pay lower service fees as
compared to those under our fixed-term service plans, and their
device payment plan charge is included on their standard wireless
monthly bill.
Wireless Device Payment Plan Agreement Receivables
The following table displays device payment plan receivables, net, that
continue to be recognized in our consolidated balance sheets:
At December 31,
Device payment plan agreement receivables,
gross
Unamortized imputed interest
Device payment plan agreement receivables,
net of unamortized imputed interest
Allowance for credit losses
Device payment plan agreement
receivables, net
Classified on our consolidated balance
sheets:
Accounts receivable, net
Other assets
Device payment plan agreement
receivables, net
(dollars in millions)
2016
2015
$ 11,797
(511)
$ 3,720
(142)
11,286
(688)
3,578
(444)
$ 10,598
$ 3,134
$ 6,140
4,458
$ 1,979
1,155
$ 10,598
$ 3,134
Included in our device payment plan agreement receivables, net at
December 31, 2016 are net device payment plan agreement receiv-
ables of $5.7 billion that have been transferred to ABS Entities and
continue to be reported in our consolidated financial statements.
We may offer our customers certain promotions where a customer
can trade-in his or her owned device in connection with the purchase
of a new device. Under these types of promotions, the customer will
receive trade-in credits that are applied to the customer’s monthly bill.
As a result, we recognize a trade-in obligation measured at fair value
using weighted- average selling prices obtained in recent resales of
devices eligible for trade-in. Device payment plan agreement receiv-
ables, net does not reflect this trade-in obligation. At December 31,
2016, the amount of trade-in obligations was not significant.
At the time of sale of a device, we impute risk adjusted interest on the
device payment plan agreement receivables. We record the imputed
interest as a reduction to the related accounts receivable. Interest
income, which is included within Service revenues and other on our
consolidated statements of income, is recognized over the financed
device payment term.
When originating device payment plan agreements, we use internal
and external data sources to create a credit risk score to measure
the credit quality of a customer and to determine eligibility for the
device payment program. If a customer is either new to Verizon
Wireless or has less than 210 days of customer tenure with Verizon
Wireless (a new customer), the credit decision process relies more
heavily on external data sources. If the customer has 210 days or
more of customer tenure with Verizon Wireless (an existing customer),
the credit decision process relies on internal data sources. Verizon
Wireless’ experience has been that the payment attributes of longer
tenured customers are highly predictive when considering their ability
to pay in the future. External data sources include obtaining a credit
report from a national consumer credit reporting agency, if available.
Verizon Wireless uses its internal data and/or credit data obtained
from the credit reporting agencies to create a custom credit risk score.
The custom credit risk score is generated automatically (except with
respect to a small number of applications where the information needs
manual intervention) from the applicant’s credit data using Verizon
Wireless’ proprietary custom credit models, which are empirically
derived, demonstrably and statistically sound. The credit risk score
measures the likelihood that the potential customer will become
severely delinquent and be disconnected for non- payment. For a small
portion of new customer applications, a traditional credit report is not
available from one of the national credit reporting agencies because
the potential customer does not have sufficient credit history. In those
instances, alternate credit data is used for the risk assessment.
Based on the custom credit risk score, we assign each customer
to a credit class, each of which has a specified required down
payment percentage and specified credit limits. Device payment plan
agreement receivables originated from customers assigned to credit
classes requiring no down payment represent the lowest risk. Device
payment plan agreement receivables originated from customers
assigned to credit classes requiring a down payment represent a
higher risk.
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| 63
Notes to Consolidated Financial Statements continued
Subsequent to origination, Verizon Wireless monitors delinquency and
write-off experience as key credit quality indicators for its portfolio of
device payment plan agreements and fixed-term service plans. The
extent of our collection efforts with respect to a particular customer
are based on the results of proprietary custom empirically derived
internal behavioral scoring models which analyze the customer’s
past performance to predict the likelihood of the customer falling
further delinquent. These customer scoring models assess a number
of variables, including origination characteristics, customer account
history and payment patterns. Based on the score derived from these
models, accounts are grouped by risk category to determine the
collection strategy to be applied to such accounts. We continuously
monitor collection performance results and the credit quality of our
device payment plan agreement receivables based on a variety of
metrics, including aging. Verizon Wireless considers an account to be
delinquent and in default status if there are unpaid charges remaining
on the account on the day after the bill’s due date.
The balance and aging of the device payment plan agreement receiv-
ables on a gross basis was as follows:
At December 31,
Unbilled
Billed:
Current
Past due
Device payment plan agreement
receivables, gross
(dollars in millions)
2016
$ 11,089
2015
$ 3,420
557
151
227
73
$ 11,797
$ 3,720
Activity in the allowance for credit losses for the device payment plan
agreement receivables was as follows:
Balance at January 1, 2016
Bad debt expense
Write-offs
Allowance related to receivables sold
Other
Balance at December 31, 2016
(dollars in millions)
$
$
444
692
(479)
28
3
688
Customers that entered into device payment plan agreements prior to
May 31, 2015 have the right to upgrade their device, subject to certain
conditions, including making a stated portion of the required device
payment plan agreement payments and trading in their device in good
working order. Generally, customers entering into device payment plan
agreements on or after June 1, 2015 are required to repay all amounts
due under their device payment plan agreements before being eligible
to upgrade their device. However, on select devices, certain marketing
promotions have been revocably offered to customers to upgrade
to a new device after paying down a certain specified portion of the
required device payment plan agreement amount as well as trading
in their device in good working order. When a customer enters into
a device payment plan agreement with the right to upgrade to a
new device, we record a guarantee liability in accordance with our
accounting policy.
Sales of Wireless Device Payment Plan Agreement
Receivables
During 2015 and 2016, we established programs pursuant to a
Receivables Purchase Agreement, or RPA, to sell from time to time, on
an uncommitted basis, eligible device payment plan agreement receiv-
ables to a group of primarily relationship banks (Purchasers) on both
a revolving (Revolving Program) and non- revolving (Non- Revolving
Program) basis. The receivables sold under the RPA are no longer
considered assets of Verizon. The outstanding portfolio of device
payment plan agreement receivables derecognized from our consoli-
dated balance sheet, but which we continue to service, was $4.3 billion
at December 31, 2016. As of December 31, 2016, the total portfolio of
device payment plan agreement receivables, including derecognized
device payment plan agreement receivables, that we are servicing was
$16.1 billion.
Under the Non- Revolving Program, we transfer the eligible receivables
to wholly-owned subsidiaries that are bankruptcy remote special
purpose entities (Sellers). The Sellers then sell the receivables to the
Purchasers for upfront cash proceeds and additional consideration
upon settlement of the receivables (the deferred purchase price).
Under the Revolving Program, we sell eligible device payment plan
agreement receivables on a revolving basis, subject to a maximum
funding limit, to the Purchasers. Sales of eligible receivables by the
Sellers, once initiated, generally occur and are settled on a monthly
basis. Customer payments made towards receivables sold under the
Revolving Program will be available to purchase additional eligible
device payment plan agreement receivables originated during the
revolving period. We elected to end the revolving period in July 2016.
We continue to bill and collect on the receivables in exchange for
a monthly servicing fee, which is not material. Eligible receivables
under the RPA excluded device payment plan agreements where a
new customer was required to provide a down payment. The sales
of receivables under the RPA did not have a material impact on our
consolidated statements of income. The cash proceeds received from
the Purchasers are recorded within Cash flows provided by operating
activities on our consolidated statements of cash flows.
During 2016, we sold $3.3 billion of receivables, net of allowance
and imputed interest, under the Revolving Program. We received
cash proceeds from new transfers of $2.0 billion and cash proceeds
from reinvested collections of $0.9 billion, and recorded a deferred
purchase price of $0.4 billion.
During 2015, we sold $6.1 billion of receivables, net of allowances and
imputed interest, under the Non- Revolving Program. In connection with
this sale, we received cash proceeds from new transfers of $4.5 billion
and recorded a deferred purchase price of $1.7 billion. During 2015,
we also sold $3.3 billion of receivables, net of allowances and imputed
interest, under the Revolving Program. In connection with this sale,
we received cash proceeds from new transfers of $2.7 billion and
recorded a deferred purchase price of $0.6 billion.
64
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
Deferred Purchase Price
Under the RPA, the deferred purchase price was initially recorded at
fair value, based on the remaining device payment amounts expected
to be collected, adjusted, as applicable, for the time value of money
and by the timing and estimated value of the device trade-in in con-
nection with upgrades. The estimated value of the device trade-in
considers prices expected to be offered to us by independent third
parties. This estimate contemplates changes in value after the launch
of a device. The fair value measurements are considered to be Level
3 measurements within the fair value hierarchy. The collection of the
deferred purchase price is contingent on collections from customers.
To date, we have collected $1.1 billion which was returned as deferred
purchase price and recorded within Cash flows provided by operating
activities on our consolidated statements of cash flows. Collections
which were returned as deferred purchase price and recorded within
Cash flows provided by investing activities on our consolidated
statements of cash flows were immaterial. At December 31, 2016,
our deferred purchase price receivable, which is held by the Sellers,
was comprised of $1.2 billion included within Prepaid expenses and
other and $0.4 billion included within Other assets in our consolidated
balance sheet. At December 31, 2015, our deferred purchase price
receivable was $2.2 billion, which was included within Other assets in
our consolidated balance sheet.
Variable Interest Entities (VIEs)
Under the RPA, the Sellers’ sole business consists of the acquisition
of the receivables from Cellco Partnership and certain other affiliates
of Verizon and the resale of the receivables to the Purchasers. The
assets of the Sellers are not available to be used to satisfy obligations
of any Verizon entities other than the Sellers. We determined that the
Sellers are VIEs as they lack sufficient equity to finance their activities.
Given that we have the power to direct the activities of the Sellers that
most significantly impact the Sellers’ economic performance, we are
deemed to be the primary beneficiary of the Sellers. As a result, we
consolidate the assets and liabilities of the Sellers into our consoli-
dated financial statements.
Continuing Involvement
Verizon has continuing involvement with the sold receivables as
it services the receivables. We continue to service the customer
and their related receivables on behalf of the Purchasers, including
facilitating customer payment collection, in exchange for a monthly
servicing fee. While servicing the receivables, the same policies and
procedures are applied to the sold receivables that apply to owned
receivables, and we continue to maintain normal relationships with our
customers. The credit quality of the customers we continue to service
is consistent throughout the periods presented. To date, we have
collected and remitted approximately $7.1 billion, net of fees. To date,
cash proceeds received, net of remittances, were $3.0 billion. During
2016, credit losses on receivables sold were $0.2 billion.
In addition, we have continuing involvement related to the sold receiv-
ables as we may be responsible for absorbing additional credit losses
pursuant to the agreements. The Company’s maximum exposure to
loss related to the involvement with the Sellers is limited to the amount
of the outstanding deferred purchase price, which was $1.6 billion as
of December 31, 2016. The maximum exposure to loss represents
an estimated loss that would be incurred under severe, hypothetical
circumstances whereby the Company would not receive the portion of
the proceeds withheld by the Purchasers. As we believe the probability
of these circumstances occurring is remote, the maximum exposure to
loss is not an indication of the Company’s expected loss.
Note 8
Fair Value Measurements and Financial
Instruments
Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities
measured at fair value on a recurring basis as of December 31, 2016:
Level 1(1)
Level 2(2)
Level 3(3)
Total
(dollars in millions)
Assets:
Other assets:
$
Equity securities
Fixed income securities
Interest rate swaps
Cross currency swaps
Interest rate cap
Total
Liabilities:
Other liabilities:
Interest rate swaps
Cross currency swaps
Total
$
$
$
123
10
–
–
–
133
$
$
–
566
71
45
10
692
$
$
–
–
–
$
236
1,803
$ 2,039
$
$
–
–
–
–
–
–
–
–
–
$
$
123
576
71
45
10
825
$
236
1,803
$ 2,039
The following table presents the balances of assets and liabilities
measured at fair value on a recurring basis as of December 31, 2015:
Level 1(1)
Level 2(2)
Level 3(3)
Total
(dollars in millions)
Assets:
Short-term investments:
Equity securities
Fixed income securities
$
Other current assets:
$
265
–
Fixed income securities
250
$
–
85
–
Other assets:
Fixed income securities
Interest rate swaps
Net investment hedges
Cross currency swaps
Total
Liabilities:
Other liabilities:
Interest rate swaps
Cross currency swaps
Forward interest
rate swaps
Total
$
$
$
–
–
–
–
515
928
128
13
1
$ 1,155
$
–
–
–
–
$
19
1,638
$
24
$ 1,681
$
–
–
–
–
–
–
–
–
–
–
–
–
$
265
85
250
928
128
13
1
$ 1,670
$
19
1,638
24
$ 1,681
(1) quoted prices in active markets for identical assets or liabilities
(2) observable inputs other than quoted prices in active markets for identical assets and
liabilities
(3) no observable pricing inputs in the market
Equity securities consist of investments in common stock of domestic
and international corporations measured using quoted prices in
active markets.
Fixed income securities consist primarily of investments in municipal
bonds as well as U.S. Treasury securities. We use quoted prices in
active markets for our U.S. Treasury securities, therefore these secu-
rities are classified as Level 1. For all other fixed income securities that
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| 65
Notes to Consolidated Financial Statements continued
do not have quoted prices in active markets, we use alternative matrix
pricing resulting in these debt securities being classified as Level 2.
pricing for fair value measurements of our derivative instruments. Our
derivative instruments are recorded on a gross basis.
Derivative contracts are valued using models based on readily observ-
able market parameters for all substantial terms of our derivative
contracts and thus are classified within Level 2. We use mid- market
We recognize transfers between levels of the fair value hierarchy as of
the end of the reporting period. There were no transfers within the fair
value hierarchy during 2016.
Fair Value of Short-term and Long-term Debt
The fair value of our debt is determined using various methods, including quoted prices for identical terms and maturities, which is a Level 1 mea-
surement, as well as quoted prices for similar terms and maturities in inactive markets and future cash flows discounted at current rates, which
are Level 2 measurements. The fair value of our short-term and long-term debt, excluding capital leases, was as follows:
At December 31,
Short- and long-term debt, excluding capital leases
Derivative Instruments
Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix of fixed
and variable rate debt. We principally receive fixed rates and pay
variable rates based on LIBOR, resulting in a net increase or decrease
to Interest expense. These swaps are designated as fair value hedges
and hedge against interest rate risk exposure of designated debt
issuances. We record the interest rate swaps at fair value on our
consolidated balance sheets as assets and liabilities. Changes in the
fair value of the interest rate swaps are recorded to Interest expense,
which are offset by changes in the fair value of the hedged debt due to
changes in interest rates.
During 2015, we entered into interest rate swaps with a total notional
value of $5.8 billion. During 2016, we entered into interest rate swaps
with a total notional value of $6.3 billion and settled $0.9 billion notional
amount of interest rate swaps. The ineffective portion of these interest
rate swaps was not material at December 31, 2016 and 2015.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, we
have entered into forward interest rate swaps. We designated these
contracts as cash flow hedges. During 2015, we settled $2.0 billion
notional amount of forward interest rate swaps for a pre-tax loss that
was not material, and entered into forward interest rate swaps with a
total notional value of $0.8 billion. During 2016, we entered into forward
interest rate swaps with a total notional value of $1.3 billion and settled
$2.0 billion notional amount of these forward interest rate swaps.
During 2016, a pre-tax loss of $0.2 billion was recognized in Other
comprehensive income (loss). During 2015, a pre-tax loss of $0.1 billion
was recognized in Other comprehensive income (loss).
Cross Currency Swaps
We have entered into cross currency swaps designated as cash
flow hedges to exchange our British Pound Sterling and Euro-
denominated debt into U.S. dollars and to fix our future interest and
principal payments in U.S. dollars, as well as to mitigate the impact
of foreign currency transaction gains or losses. During 2015, we
settled $0.6 billion of cross currency swaps on maturity. During 2016,
we entered into cross currency swaps with a total notional value of
$3.3 billion and settled $0.1 billion notional amount of cross currency
swaps upon redemption of the related debt.
Carrying
Amount
$ 107,128
2016
Fair
Value
$ 117,584
Carrying
Amount
$ 108,772
(dollars in millions)
2015
Fair
Value
$ 118,216
A portion of the gains and losses recognized in Other comprehensive
income (loss) was reclassified to Other income and (expense), net to
offset the related pre-tax foreign currency transaction gain or loss on
the underlying debt obligations. During 2016 and 2015, pre-tax losses
of $0.1 billion and $1.2 billion, respectively, were recognized in Other
comprehensive income (loss) with respect to these swaps.
Net Investment Hedges
We have designated certain foreign currency instruments as net
investment hedges to mitigate foreign exchange exposure related
to non-U.S. dollar net investments in certain foreign subsidiaries
against changes in foreign exchange rates. During 2015, we entered
into foreign currency forward contracts with a total notional value of
$0.9 billion and designated them as net investment hedges. During
2016, we de- designated and settled these hedges. We simultaneously
designated $0.8 billion total notional value of Euro- denominated debt
as a net investment hedge.
Undesignated Derivatives
We also have the following derivative which we use as an economic
hedge but for which we have elected not to apply hedge accounting.
Interest Rate Caps
We enter into interest rate caps to mitigate our interest exposure to
interest rate increases on our ABS Financing Facility. During 2016, we
entered into such interest rate caps with a notional value of $2.5 billion
and recognized an immaterial reduction in Interest expense.
The following table sets forth the notional amounts of our outstanding
derivative instruments:
(dollars in millions)
Interest rate swaps
Forward interest rate swaps
Cross currency swaps
Net investment hedge
Interest rate caps
At December 31, 2016
Notional Amount
$ 13,099
–
12,890
–
2,540
At December 31, 2015
Notional Amount
$ 7,620
750
9,675
864
–
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk
consist primarily of temporary cash investments, short-term and
long-term investments, trade receivables, including device payment
plan agreement receivables, certain notes receivable, including
lease receivables, and derivative contracts. Our policy is to deposit
66
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
our temporary cash investments with major financial institutions.
Counterparties to our derivative contracts are also major financial
institutions with whom we have negotiated derivatives agreements
(ISDA master agreement) and credit support annex agreements which
provide rules for collateral exchange. We generally apply collateralized
arrangements with our counterparties for uncleared derivatives to
mitigate credit risk. At December 31, 2016 and 2015, we posted collat-
eral of approximately $0.2 billion and $0.1 billion, respectively, related
to derivative contracts under collateral exchange arrangements, which
were recorded as Prepaid expenses and other in our consolidated
balance sheets. During the first and second quarters of 2015, we paid
an immaterial amount of cash to enter into amendments to certain
collateral exchange arrangements. These amendments suspend cash
collateral posting for a specified period of time by both counterpar-
ties. We are in the process of negotiating extensions to amendments
expiring during 2017. We may enter into swaps on an uncollateral-
ized basis in certain circumstances. While we may be exposed to
credit losses due to the nonperformance of our counterparties, we
consider the risk remote and do not expect the settlement of these
transactions to have a material effect on our results of operations or
financial condition.
Note 9
Stock-Based Compensation
Verizon Communications Long-Term Incentive Plan
The Verizon Communications Inc. Long-Term Incentive Plan (the
Plan) permits the granting of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares, perfor-
mance stock units and other awards. The maximum number of shares
available for awards from the Plan is 119.6 million shares.
Restricted Stock Units
The Plan provides for grants of Restricted Stock Units (RSUs) that
generally vest at the end of the third year after the grant. The RSUs
are generally classified as equity awards because the RSUs will be
paid in Verizon common stock upon vesting. The RSU equity awards
are measured using the grant date fair value of Verizon common stock
and are not remeasured at the end of each reporting period. Dividend
equivalent units are also paid to participants at the time the RSU award
is paid, and in the same proportion as the RSU award.
Performance Stock Units
The Plan also provides for grants of Performance Stock Units (PSUs)
that generally vest at the end of the third year after the grant. As
defined by the Plan, the Human Resources Committee of the Board of
Directors determines the number of PSUs a participant earns based
on the extent to which the corresponding performance goals have
been achieved over the three-year performance cycle. The PSUs are
classified as liability awards because the PSU awards are paid in cash
upon vesting. The PSU award liability is measured at its fair value at the
end of each reporting period and, therefore, will fluctuate based on the
price of Verizon common stock as well as performance relative to the
targets. Dividend equivalent units are also paid to participants at the
time that the PSU award is determined and paid, and in the same pro-
portion as the PSU award. The granted and cancelled activity for the
PSU award includes adjustments for the performance goals achieved.
The following table summarizes Verizon’s Restricted Stock Unit and
Performance Stock Unit activity:
(shares in thousands)
Outstanding January 1, 2014
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2014
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2015
Granted
Payments
Cancelled/Forfeited
Adjustments
Outstanding December 31, 2016
Restricted
Stock Units
16,193
5,278
(6,202)
(262)
15,007
4,958
(5,911)
(151)
13,903
4,409
(4,890)
(114)
–
13,308
Performance
Stock Units
23,724
7,359
(9,153)
(1,964)
19,966
7,044
(6,732)
(3,075)
17,203
6,391
(4,702)
(1,143)
170
17,919
As of December 31, 2016, unrecognized compensation expense
related to the unvested portion of Verizon’s RSUs and PSUs was
approximately $0.3 billion and is expected to be recognized over
approximately two years.
The RSUs granted in 2016 and 2015 have weighted- average grant
date fair values of $51.86 and $48.15 per unit, respectively. During
2016, 2015 and 2014, we paid $0.4 billion, $0.4 billion and $0.6 billion,
respectively, to settle RSUs and PSUs classified as liability awards.
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation
related to RSUs and PSUs described above included in Net income
attributable to Verizon was $0.4 billion, $0.3 billion and $0.3 billion for
2016, 2015 and 2014, respectively.
Note 10
Employee Benefits
We maintain non- contributory defined benefit pension plans for certain
employees. In addition, we maintain postretirement health care and
life insurance plans for certain retirees and their dependents, which
are both contributory and non- contributory, and include a limit on our
share of the cost for certain recent and future retirees. In accordance
with our accounting policy for pension and other postretirement
benefits, operating expenses include pension and benefit related
credits and/or charges based on actuarial assumptions, including
projected discount rates, an estimated return on plan assets, and
health care trend rates. These estimates are updated in the fourth
quarter to reflect actual return on plan assets and updated actuarial
assumptions. The adjustment is recognized in the income statement
during the fourth quarter or upon a remeasurement event pursuant to
our accounting policy for the recognition of actuarial gains and losses.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for certain employees are
subject to collective bargaining agreements. Modifications in benefits
have been bargained from time to time, and we may also periodically
amend the benefits in the management plans. The following tables
summarize benefit costs, as well as the benefit obligations, plan assets,
funded status and rate assumptions associated with pension and post-
retirement health care and life insurance benefit plans.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 67
Notes to Consolidated Financial Statements continued
Obligations and Funded Status
At December 31,
Change in Benefit Obligations
Beginning of year
Service cost
Interest cost
Plan amendments
Actuarial (gain) loss, net
Benefits paid
Curtailment and termination benefits
Settlements paid
Divestiture (Note 2)
End of year
Change in Plan Assets
Beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Settlements paid
Divestiture (Note 2)
End of year
Funded Status
End of year
2016
$ 22,016
322
677
428
1,017
(938)
4
(1,270)
(1,144)
$ 21,112
$ 16,124
882
837
(938)
(1,270)
(972)
$ 14,663
Pension
2015
$ 25,320
374
969
–
(1,361)
(971)
–
(2,315)
–
$ 22,016
$ 18,548
118
744
(971)
(2,315)
–
$ 16,124
(dollars in millions)
Health Care and Life
2015
2016
$ 24,223
193
746
(5,142)
1,289
(1,349)
–
–
(310)
$ 19,650
$
$
1,760
35
917
(1,349)
–
–
1,363
$ 27,097
324
1,117
(45)
(2,733)
(1,370)
–
–
(167)
$ 24,223
$
$
2,435
28
667
(1,370)
–
–
1,760
$
(6,449)
$
(5,892)
$ (18,287)
$ (22,463)
As a result of the Access Line Sale which closed on April 1, 2016, we derecognized $0.7 billion of defined benefit pension and other postre-
tirement benefit plan obligations, including $0.2 billion that had been reclassified to Non- current liabilities related to assets held for sale in our
consolidated balance sheet as of December 31, 2015. See Note 2 for additional details.
At December 31,
Amounts recognized on the balance sheet
Noncurrent assets
Current liabilities
Noncurrent liabilities
Total
Amounts recognized in Accumulated Other
Comprehensive Income (Pre-tax)
Prior Service Cost (Benefit)
Total
2016
2
(88)
(6,363)
(6,449)
443
443
$
$
$
$
$
$
$
$
Pension
2015
349
(93)
(6,148)
(5,892)
(dollars in millions)
Health Care and Life
2015
2016
$
–
(639)
(17,648)
$ (18,287)
$
–
(695)
(21,768)
$ (22,463)
(51)
(51)
$
$
(6,072)
(6,072)
$
$
(2,038)
(2,038)
The accumulated benefit obligation for all defined benefit pension plans was $21.1 billion and $22.0 billion at December 31, 2016 and 2015,
respectively.
2016 Collective Bargaining Negotiations
In the collective bargaining agreements ratified in June 2016, Verizon’s
annual postretirement benefit obligation for retiree healthcare remains
capped at the levels established by the previous contracts ratified in
2012. Effective January 2016, prior to reaching these new collective
bargaining agreements, certain retirees began to pay for the costs
of retiree healthcare in accordance with the provisions relating to
caps in the previous contracts. In reaching new collective bargaining
agreements in 2016, there is a mutual understanding that the sub-
stantive postretirement benefit plans provide that Verizon’s annual
postretirement benefit obligation for retiree healthcare is capped
and, accordingly, we began accounting for the contractual healthcare
caps in June 2016. We also adopted changes to our defined benefit
pension plans and other postretirement benefit plans to reflect the
agreed upon terms and conditions of the collective bargaining agree-
ments. The impact was a reduction in our postretirement benefit
plan obligations of approximately $5.1 billion and an increase in our
defined benefit pension plan obligations of approximately $0.4 billion,
which have been recorded as a net increase to Accumulated other
comprehensive income of $2.9 billion (net of taxes of $1.8 billion). The
amount recorded in Accumulated other comprehensive income will
be reclassified to net periodic benefit cost on a straight-line basis over
68
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
the average remaining service period of the respective plans’ partic-
ipants which, on a weighted- average basis, is 12.2 years for defined
benefit pension plans and 7.8 years for other postretirement benefit
plans. The above-noted reclassification resulted in a decrease to net
periodic benefit cost and increase to pre-tax income of approximately
$0.4 billion during 2016.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows:
At December 31,
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2016
$ 21,048
20,990
14,596
(dollars in millions)
2015
$ 21,694
21,636
15,452
Net Periodic Cost
The following table summarizes the benefit (income) cost related to our pension and postretirement health care and life insurance plans:
(dollars in millions)
Years Ended December 31,
Service cost
Amortization of prior service cost (credit)
Expected return on plan assets
Interest cost
Remeasurement (gain) loss, net
Net periodic benefit (income) cost
Curtailment and termination benefits
Total
$
2016
322
21
(1,045)
677
1,198
1,173
4
$ 1,177
2015
374
(5)
(1,270)
969
(209)
(141)
–
(141)
$
$
$
Pension
2014
327
(8)
(1,181)
1,035
2,380
2,553
11
$ 2,564
$
2016
193
(657)
(54)
746
1,300
1,528
–
$ 1,528
$
$
Health Care and Life
2014
258
(253)
(161)
1,107
4,615
5,566
–
$ 5,566
2015
324
(287)
(101)
1,117
(2,659)
(1,606)
–
(1,606)
$
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:
(dollars in millions)
At December 31,
Prior service cost (benefit)
Reversal of amortization items
Prior service cost (benefit)
Amounts reclassified to net income
Total recognized in other comprehensive (income) loss (pre-tax)
2016
428
(21)
87
494
$
$
Pension
2015
–
$
5
–
5
$
Health Care and Life
2015
(45)
$
2016
$ (5,142)
657
451
$ (4,034)
287
–
242
$
Amounts reclassified to net income for the year ended December 31, 2016 includes the reclassification to Selling, general and administrative
expense of a pre-tax pension and postretirement benefit curtailment gain of $0.5 billion ($0.3 billion net of taxes) due to the transfer of employees
to Frontier, which caused the elimination of a significant amount of future service in three of our defined benefit pension plans and one of our
other postretirement benefit plans requiring us to recognize a portion of the prior service credits. See Note 2 for additional detail.
The estimated prior service cost for the defined benefit pension plans that will be amortized from Accumulated other comprehensive income into
net periodic benefit (income) cost over the next fiscal year is not significant. The estimated prior service cost for the defined benefit postretire-
ment plans that will be amortized from Accumulated other comprehensive income into net periodic benefit (income) cost over the next fiscal year
is ($0.9) billion.
Assumptions
The weighted- average assumptions used in determining benefit obligations follow:
At December 31,
Discount Rate
Rate of compensation increases
2016
4.30%
3.00
Pension
2015
4.60%
3.00
Health Care and Life
2015
4.60%
N/A
2016
4.20%
N/A
The weighted- average assumptions used in determining net periodic cost follow:
At December 31,
Discount rate in effect for determining service cost
Discount rate in effect for determining interest cost
Expected return on plan assets
Rate of compensation increases
2016
4.50%
3.20
7.00
3.00
2015
4.20%
4.20
7.25
3.00
Pension
2014
5.00%
5.00
7.25
3.00
2016
4.50%
3.40
3.80
N/A
Health Care and Life
2014
5.00%
5.00
5.50
N/A
2015
4.20%
4.20
4.80
N/A
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| 69
Notes to Consolidated Financial Statements continued
Effective January 1, 2016, we changed the method we use to estimate
the interest component of net periodic benefit cost for pension and
other postretirement benefits. Historically, we estimated the interest
cost component utilizing a single weighted- average discount rate
derived from the yield curve used to measure the benefit obligation
at the beginning of the period. We have elected to utilize a full yield
curve approach in the estimation of interest cost by applying the
specific spot rates along the yield curve used in the determination of
the benefit obligation to the relevant projected cash flows. We have
made this change to provide a more precise measurement of interest
cost by improving the correlation between projected benefit cash
flows to the corresponding spot yield curve rates. We have accounted
for this change as a change in accounting estimate and accordingly
accounted for it prospectively.
For the year ended December 31, 2016, the impact of this change on
our consolidated GAAP results was a reduction of the interest cost
component of net periodic benefit cost by approximately $0.4 billion.
The use of the full yield curve approach does not impact how we
measure our total benefit obligations at year end or our annual net
periodic benefit cost as any change in the interest cost component is
completely offset by the actuarial gain or loss measured at year end
which is immediately recognized in the income statement. Accordingly,
this change in estimate did not impact our income from continuing
operations, net income or earnings per share as measured on an
annual basis.
In determining our pension and other postretirement benefit obliga-
tions, we used a weighted- average discount rate of 4.2%. The rate was
selected to approximate the composite interest rates available on a
selection of high- quality bonds available in the market at December 31,
2016. The bonds selected had maturities that coincided with the time
periods during which benefits payments are expected to occur, were
non- callable and available in sufficient quantities to ensure market-
ability (at least $0.3 billion par outstanding).
In order to project the long-term target investment return for the total
portfolio, estimates are prepared for the total return of each major
asset class over the subsequent 10-year period. Those estimates are
based on a combination of factors including the current market interest
rates and valuation levels, consensus earnings expectations and his-
torical long-term risk premiums. To determine the aggregate return for
the pension trust, the projected return of each individual asset class is
then weighted according to the allocation to that investment area in the
trust’s long-term asset allocation policy.
The assumed health care cost trend rates follow:
At December 31,
Healthcare cost trend rate assumed
for next year
Rate to which cost trend rate gradually
Health Care and Life
2014
2015
2016
6.50%
6.00%
6.50%
declines
4.50
4.50
4.75
Year the rate reaches the level it is
assumed to remain thereafter
2025
2024
2022
A one- percentage point change in the assumed health care cost trend
rate would have the following effects:
Plan Assets
The company’s overall investment strategy is to achieve a mix of
assets which allows us to meet projected benefit payments while
taking into consideration risk and return. While target allocation
percentages will vary over time, the current target allocation for plan
assets is designed so that 65% of the assets have the objective of
achieving a return in excess of the growth in liabilities (comprised of
public equities, private equities, real estate, hedge funds and emerging
debt) and 35% of the assets are invested as liability hedging assets
(where cash flows from investments better match projected benefit
payments, typically longer duration fixed income). This allocation
will shift as funded status improves to a higher allocation of liability
hedging assets. Target policies will be revisited periodically to
ensure they are in line with fund objectives. Both active and passive
management approaches are used depending on perceived market
efficiencies and various other factors. Due to our diversification and
risk control processes, there are no significant concentrations of risk,
in terms of sector, industry, geography or company names.
Pension and healthcare and life plans assets do not include significant
amounts of Verizon common stock.
Pension Plans
The fair values for the pension plans by asset category at
December 31, 2016 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Real estate
Other
Private equity
Hedge funds
Total investments at fair value
Total
Level 1
Level 2
$ 1,228 $ 1,219 $
1,883 1,883
Level 3
–
–
9 $
–
1,251
2,375
713
655
880
371
152 2,126
679
–
20
–
–
97
14
655
624
526
624
–
4
–
9,255 4,154 3,707 1,394
–
522
Investments measured at NAV 5,408
Total
$ 14,663 $ 4,154 $ 3,707 $ 1,394
The fair values for the pension plans by asset category at
December 31, 2015 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Real estate
Other
Private equity
Hedge funds
Total investments at fair value
Total
Level 1
Level 2
$ 1,387 $ 1,375 $
2,237 2,234
Level 3
–
3
12 $
–
1,265
2,350
710
2
873
884
381
192 2,030
657
2
–
33
–
–
–
128
20
–
873
609
194
609
–
–
–
9,627 4,718 3,276 1,633
–
194
One- Percentage Point
Effect on 2016 service and interest cost
Effect on postretirement benefit obligation as of
Increase
$ 100
Decrease
(81)
$
Total
December 31, 2016
609
(616)
$ 16,124 $ 4,718 $ 3,276 $ 1,633
(dollars in millions)
Investments measured at NAV 6,497
70
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant
unobservable inputs:
Balance at January 1, 2015
Actual gain (loss) on plan assets
Purchases and sales
Transfers in (out)
Balance at December 31, 2015
Actual gain (loss) on plan assets
Purchases and sales
Balance at December 31, 2016
$
Equity
Securities
1
–
–
2
3
(1)
(2)
–
$
$
$
Corporate
Bonds
100
6
18
4
128
(9)
(22)
97
$
$
$
International
Bonds
18
(2)
5
(1)
20
(2)
(4)
14
$
$
Real
Estate
692
93
(24)
112
873
169
(387)
655
$
$
$
Private
Equity
624
45
(60)
–
609
12
3
624
$
$
$
Hedge
Funds
–
–
–
–
–
–
4
4
$
$
$
(dollars in millions)
Total
$ 1,435
142
(61)
117
$ 1,633
169
(408)
$ 1,394
Commingled funds not traded on national exchanges are priced by
the funds’ custodian or administrator at NAV. Commingled funds held
by third-party custodians appointed by the fund managers provide the
fund managers with a NAV. The fund managers have the responsibility
for providing this information to the custodian of the respective plan.
The investment manager of the entity values venture capital, corporate
finance, and natural resource limited partnership investments. Real
estate investments are valued at amounts based upon appraisal
reports prepared by either independent real estate appraisers or the
investment manager using discounted cash flows or market compa-
rable data. Loans secured by mortgages are carried at the lesser of
the unpaid balance or appraised value of the underlying properties.
The values assigned to these investments are based upon available
and current market information and do not necessarily represent
amounts which might ultimately be realized. Because of the inherent
uncertainty of valuation, estimated fair values might differ significantly
from the values that would have been used had a ready market for the
securities existed. These differences could be material.
Forward currency contracts, futures, and options are valued by the
trustee at the exchange rates and market prices prevailing on the last
business day of the year. Both exchange rates and market prices are
readily available from published sources. These securities are classi-
fied by the asset class of the underlying holdings.
Hedge funds are valued by the custodian at NAV based on statements
received from the investment manager. These funds are valued in
accordance with the terms of their corresponding offering or private
placement memoranda.
Commingled funds, hedge funds, venture capital, corporate finance,
natural resource and real estate limited partnership investments for
which fair value is measured using the NAV per share as a practical
expedient are not leveled within the fair value hierarchy and are
included as a reconciling item to total investments.
Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset
category at December 31, 2016 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
Total
$ 131 $
463
Level 1
Level 2
1 $ 130 $
463
–
Level 3
–
–
U.S. Treasuries and agencies
Corporate bonds
International bonds
Total investments at fair value
Investments measured at NAV
23
170
60
847
516
22
145
30
661
1
25
30
186
Total
$ 1,363 $ 661 $ 186 $
–
–
–
–
–
The fair values for the other postretirement benefit plans by asset
category at December 31, 2015 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
Total
$ 162 $
768
Level 1
Level 2
– $ 162 $
752
16
Level 3
–
–
U.S. Treasuries and agencies
Corporate bonds
International bonds
Total investments at fair value
Investments measured at NAV
21
208
79
1,238
522
19
133
19
923
2
75
60
315
Total
$ 1,760 $ 923 $ 315 $
–
–
–
–
–
The following are general descriptions of asset categories, as well
as the valuation methodologies and inputs used to determine the fair
value of each major category of assets.
Cash and cash equivalents include short-term investment funds,
primarily in diversified portfolios of investment grade money market
instruments and are valued using quoted market prices or other
valuation methods.
Investments in securities traded on national and foreign securities
exchanges are valued by the trustee at the last reported sale prices on
the last business day of the year or, if no sales were reported on that
date, at the last reported bid prices. Government obligations, corporate
bonds, international bonds and asset- backed securities are valued
using matrix prices with input from independent third-party valuation
sources. Over-the- counter securities are valued at the bid prices or the
average of the bid and ask prices on the last business day of the year
from published sources or, if not available, from other sources consid-
ered reliable such as multiple broker quotes.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 71
Notes to Consolidated Financial Statements continued
Employer Contributions
In 2016, we contributed $0.8 billion to our qualified pension plans
which included $0.2 billion of discretionary contributions, $0.1 billion
to our nonqualified pension plans and $1.1 billion to our other post-
retirement benefit plans. We anticipate a minimum contribution of
$0.6 billion to our qualified pension plans in 2017. Nonqualified pension
plans contributions are estimated to be $0.1 billion and contributions to
our other postretirement benefit plans are estimated to be $0.8 billion
in 2017.
Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid as follows:
Year
2017
2018
2019
2020
2021
2022–2026
Pension Benefits
$ 2,356
1,790
1,722
1,204
1,189
5,777
(dollars in millions)
Health Care and Life
$ 1,259
1,284
1,290
1,302
1,327
6,616
Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOP).
We match a certain percentage of eligible employee contributions to
the savings plans with shares of our common stock from this ESOP.
At December 31, 2016, the number of allocated shares of common
stock in this ESOP was 55 million. There were no unallocated shares
of common stock in this ESOP at December 31, 2016. All leveraged
ESOP shares are included in earnings per share computations.
Total savings plan costs were $0.7 billion in 2016, $0.9 billion in 2015
and $0.9 billion in 2014.
Severance Benefits
The following table provides an analysis of our actuarially determined
severance liability recorded in accordance with the accounting
standard regarding employers’ accounting for postemploy-
ment benefits:
Beginning
of Year
$ 757
875
800
Charged to
Expense
$ 531
551
417
(dollars in millions)
Payments
$ (406)
(619)
(583)
$
Other
(7)
(7)
22
End
of Year
$ 875
800
656
Year
2014
2015
2016
Severance, Pension and Benefit Charges (Credits)
During 2016, we recorded net pre-tax severance, pension and benefit
charges of $2.9 billion in accordance with our accounting policy to
recognize actuarial gains and losses in the period in which they occur.
The pension and benefit remeasurement charges of $2.5 billion
were primarily driven by a decrease in our discount rate assumption
used to determine the current year liabilities of our pension and other
postretirement benefit plans from a weighted- average of 4.6% at
December 31, 2015 to a weighted- average of 4.2% at December 31,
2016 ($2.1 billion), updated health care trend cost assumptions
($0.9 billion), the difference between our estimated return on assets of
7.0% and our actual return on assets of 6.0% ($0.2 billion) and other
assumption adjustments ($0.3 billion). These charges were partially
offset by a change in mortality assumptions primarily driven by the
use of updated actuarial tables (MP-2016) issued by the Society of
Actuaries ($0.5 billion) and lower negotiated prescription drug pricing
($0.5 billion). As part of these charges, we also recorded severance
costs of $0.4 billion under our existing separation plans.
The net pre-tax severance, pension and benefit charges during 2016
were comprised of a net pre-tax pension remeasurement charge of
$0.2 billion measured as of March 31, 2016 related to settlements for
employees who received lump-sum distributions in one of our defined
benefit pension plans, a net pre-tax pension and benefit remeasure-
ment charge of $0.8 billion measured as of April 1, 2016 related to
curtailments in three of our defined benefit pension and one of our
other postretirement plans, a net pre-tax pension and benefit remea-
surement charge of $2.7 billion measured as of May 31, 2016 in two
defined benefit pension plans and three other postretirement benefit
plans as a result of our accounting for the contractual healthcare caps
and bargained for changes, a net pre-tax pension remeasurement
charge of $0.1 billion measured as of May 31, 2016 related to settle-
ments for employees who received lump-sum distributions in three of
our defined benefit pension plans, a net pre-tax pension remeasure-
ment charge of $0.6 billion measured as of August 31, 2016 related to
settlements for employees who received lump-sum distributions in
five of our defined benefit pension plans, and a net pre-tax pension
and benefit credit of $1.9 billion as a result of our fourth quarter remea-
surement of our pension and other postretirement assets and liabilities
based on updated actuarial assumptions.
During 2015, we recorded net pre-tax severance, pension and benefit
credits of approximately $2.3 billion primarily for our pension and post-
retirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The credits
were primarily driven by an increase in our discount rate assumption
used to determine the current year liabilities from a weighted- average
of 4.2% at December 31, 2014 to a weighted- average of 4.6% at
December 31, 2015 ($2.5 billion), the execution of a new prescription
drug contract during 2015 ($1.0 billion) and a change in mortality
assumptions primarily driven by the use of updated actuarial tables
(MP-2015) issued by the Society of Actuaries ($0.9 billion), partially
offset by the difference between our estimated return on assets of
7.25% at December 31, 2014 and our actual return on assets of 0.7% at
December 31, 2015 ($1.2 billion), severance costs recorded under our
existing separation plans ($0.6 billion) and other assumption adjust-
ments ($0.3 billion).
During 2014, we recorded net pre-tax severance, pension and benefit
charges of approximately $7.5 billion primarily for our pension and
postretirement plans in accordance with our accounting policy
to recognize actuarial gains and losses in the year in which they
occur. The charges were primarily driven by a decrease in our
discount rate assumption used to determine the current year lia-
bilities from a weighted- average of 5.0% at December 31, 2013 to
a weighted- average of 4.2% at December 31, 2014 ($5.2 billion), a
change in mortality assumptions primarily driven by the use of updated
actuarial tables (RP-2014 and MP-2014) issued by the Society of
Actuaries in October 2014 ($1.8 billion) and revisions to the retirement
assumptions for participants and other assumption adjustments,
partially offset by the difference between our estimated return on
assets of 7.25% and our actual return on assets of 10.5% ($0.6 billion).
As part of this charge, we recorded severance costs of $0.5 billion
under our existing separation plans.
72
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
Note 11
Taxes
The components of income before provision for income taxes are
as follows:
Years Ended December 31,
Domestic
Foreign
Total
(dollars in millions)
2016
$ 20,047
939
$ 20,986
2015
$ 27,639
601
$ 28,240
2014
$ 12,992
2,278
$ 15,270
The components of the provision for income taxes are as follows:
The amounts of cash taxes paid are as follows:
Years Ended December 31,
Income taxes, net of amounts
refunded
Employment taxes
Property and other taxes
Total
(dollars in millions)
2016
2015
2014
$ 9,577
1,196
1,796
$ 12,569
$ 5,293
1,284
1,868
$ 8,445
$ 4,093
1,290
1,797
$ 7,180
The increase in cash taxes paid during 2016 compared to 2015 was
due to a $3.2 billion increase in income taxes paid primarily as a result
of the Access Line Sale.
(dollars in millions)
2016
2015
2014
Deferred taxes arise because of differences in the book and tax bases
of certain assets and liabilities. Significant components of deferred tax
assets and liabilities are as follows:
Years Ended December 31,
Current
Federal
Foreign
State and Local
Total
Deferred
Federal
Foreign
State and Local
Total
Total income tax provision
$ 7,451
148
842
8,441
$ 5,476
70
803
6,349
$ 2,657
81
668
3,406
(933)
(2)
(128)
(1,063)
$ 7,378
3,377
9
130
3,516
$ 9,865
(51)
(9)
(32)
(92)
$ 3,314
The following table shows the principal reasons for the difference
between the effective income tax rate and the statutory federal income
tax rate:
Years Ended December 31,
Statutory federal income tax rate
State and local income tax rate,
net of federal tax benefits
Affordable housing credit
Employee benefits including
ESOP dividend
Disposition of Omnitel Interest
Noncontrolling interests
Non- deductible goodwill
Other, net
Effective income tax rate
2016
35.0 %
2015
35.0 %
2014
35.0 %
2.2
(0.7)
2.1
(0.5)
(0.5)
–
(0.6)
2.2
(2.4)
35.2 %
(0.4)
–
(0.5)
–
(0.8)
34.9 %
2.7
(1.0)
(0.7)
(5.9)
(5.0)
–
(3.4)
21.7 %
The effective income tax rate for 2016 was 35.2% compared to
34.9% for 2015. The increase in the effective income tax rate was
primarily due to the impact of $527 million included in the provision for
income taxes from goodwill not deductible for tax purposes in con-
nection with the Access Line Sale on April 1, 2016. This increase was
partially offset by the impact that lower income before income taxes
in the current period has on each of the reconciling items specified in
the table above. The decrease in the provision for income taxes was
primarily due to lower income before income taxes due to severance,
pension and benefit charges recorded in 2016 compared to severance,
pension and benefit credits recorded in 2015.
The effective income tax rate for 2015 was 34.9% compared to
21.7% for 2014. The increase in the effective income tax rate and
provision for income taxes was primarily due to the impact of higher
income before income taxes due to severance, pension and benefit
credits recorded in 2015 compared to severance, pension and benefit
charges recorded in 2014, as well as tax benefits associated with
the utilization of certain tax credits in connection with the Omnitel
Transaction in 2014.
At December 31,
Employee benefits
Tax loss and credit carry forwards
Other — assets
Valuation allowances
Deferred tax assets
Spectrum and other intangible amortization
Depreciation
Other — liabilities
Deferred tax liabilities
Net deferred tax liability
(dollars in millions)
2016
$ 10,453
3,318
2,632
16,403
(2,473)
13,930
2015
$ 12,220
4,099
2,504
18,823
(3,414)
15,409
31,404
22,848
5,642
59,894
$ 45,964
29,945
24,725
6,125
60,795
$ 45,386
At December 31, 2016, undistributed earnings of our foreign sub-
sidiaries indefinitely invested outside the United States amounted
to approximately $2.3 billion. The majority of Verizon’s cash flow is
generated from domestic operations and we are not dependent on
foreign cash or earnings to meet our funding requirements, nor do we
intend to repatriate these undistributed foreign earnings to fund U.S.
operations. Furthermore, a portion of these undistributed earnings
represent amounts that legally must be kept in reserve in accordance
with certain foreign jurisdictional requirements and are unavailable
for distribution or repatriation. As a result, we have not provided U.S.
deferred taxes on these undistributed earnings because we intend that
they will remain indefinitely reinvested outside of the United States and
therefore unavailable for use in funding U.S. operations. Determination
of the amount of unrecognized deferred taxes related to these undis-
tributed earnings is not practicable.
At December 31, 2016, we had net after-tax loss and credit carry
forwards for income tax purposes of approximately $3.3 billion that
primarily relate to state and foreign tax losses. Of these net after-tax
loss and credit carry forwards, approximately $1.9 billion will expire
between 2017 and 2036 and approximately $1.4 billion may be carried
forward indefinitely.
During 2016, the valuation allowance decreased approximately
$0.9 billion. The balance of the valuation allowance at December 31,
2016 is primarily related to state and foreign tax losses and the 2016
activity is primarily the result of the utilization and expiration of certain
tax attributes.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 73
Notes to Consolidated Financial Statements continued
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of unrecognized
tax benefits is as follows:
Note 12
Segment Information
Balance at January 1,
Additions based on tax positions
related to the current year
Additions for tax positions of prior
years
Reductions for tax positions of
prior years
Settlements
Lapses of statutes of limitations
Balance at December 31,
(dollars in millions)
2016
$ 1,635
2015
$ 1,823
2014
$ 2,130
338
188
194
330
80
627
(153)
(18)
(88)
$ 1,902
(412)
(79)
(221)
$ 1,635
(278)
(239)
(497)
$ 1,823
Included in the total unrecognized tax benefits at December 31, 2016,
2015 and 2014 is $1.5 billion, $1.2 billion and $1.3 billion, respectively,
that if recognized, would favorably affect the effective income tax rate.
We recognized the following net after-tax (expenses) benefits related
to interest and penalties in the provision for income taxes:
Years Ended December 31,
2016
2015
2014
$
(dollars in millions)
(25)
43
92
The after-tax accruals for the payment of interest and penalties in the
consolidated balance sheets are as follows:
At December 31,
2016
2015
(dollars in millions)
$ 142
125
Verizon and/or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state, local and foreign jurisdictions. As a
large taxpayer, we are under audit by the Internal Revenue Service
(IRS) and multiple state and foreign jurisdictions for various open tax
years. The IRS is currently examining the Company’s U.S. income
tax returns for tax years 2013–2014, Cellco Partnership’s U.S. income
tax return for tax year 2013, and AOL’s U.S. income tax returns for tax
years 2011–2012. Tax controversies are ongoing for tax years as early
as 2006. The amount of the liability for unrecognized tax benefits will
change in the next twelve months due to the expiration of the statute
of limitations in various jurisdictions and it is reasonably possible that
various current tax examinations will conclude or require reevaluations
of the Company’s tax positions during this period. An estimate of the
range of the possible change cannot be made until these tax matters
are further developed or resolved.
Reportable Segments
We have two reportable segments, Wireless and Wireline, which
we operate and manage as strategic business units and organize
by products and services. We measure and evaluate our report-
able segments based on segment operating income, consistent
with the chief operating decision maker’s assessment of segment
performance.
Our segments and their principal activities consist of the following:
Segment
Wireless
Wireline
Description
Wireless’ communications products and services
include wireless voice and data services and equipment
sales, which are provided to consumer, business and
government customers across the United States.
Wireline’s voice, data and video communications
products and enhanced services include broadband
video and data, corporate networking solutions, data
center and cloud services, security and managed network
services and local and long distance voice services. We
provide these products and services to consumers in
the United States, as well as to carriers, businesses and
government customers both in the United States and
around the world.
Corporate and other includes the results of our digital media, including
AOL, telematics and other businesses, investments in unconsolidated
businesses, unallocated corporate expenses, pension and other
employee benefit related costs and lease financing. Corporate and
other also includes the historical results of divested operations and
other adjustments and gains and losses that are not allocated in
assessing segment performance due to their non- operational nature.
Although such transactions are excluded from the business segment
results, they are included in reported consolidated earnings. Gains and
losses that are not individually significant are included in all segment
results as these items are included in the chief operating decision
maker’s assessment of segment performance.
On April 1, 2016, we completed the Access Line Sale. On July 1, 2014,
our Wireline segment sold a non- strategic business. See Note 2.
The results of operations for these divestitures are included within
Corporate and other for all periods presented to reflect comparable
segment operating results consistent with the information regularly
reviewed by our chief operating decision maker.
In addition, Corporate and other includes the results of our telematics
businesses for all periods presented, which were reclassified from our
Wireline segment effective April 1, 2016. The impact of this reclassifi-
cation was not material to our consolidated financial statements or our
segment results of operations.
The reconciliation of segment operating revenues and expenses to
consolidated operating revenues and expenses below also includes
those items of a non- operational nature. We exclude from segment
results the effects of certain items that management does not consider
in assessing segment performance, primarily because of their non-
operational nature.
We have adjusted prior period consolidated and segment information,
where applicable, to conform to current year presentation.
74
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
The following table provides operating financial information for our two reportable segments:
2016
External Operating Revenues
Service
Equipment
Other
Consumer retail
Small business
Mass Markets
Global Enterprise
Global Wholesale
Other
Intersegment revenues
Total operating revenues
Cost of services
Wireless cost of equipment
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
Assets
Plant, property and equipment, net
Capital expenditures
2015
External Operating Revenues
Service
Equipment
Other
Consumer retail
Small business
Mass Markets
Global Enterprise
Global Wholesale
Other
Intersegment revenues
Total operating revenues
Cost of services
Wireless cost of equipment
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income (loss)
Assets
Plant, property and equipment, net
Capital expenditures
Wireless
Wireline
(dollars in millions)
Total Reportable
Segments
$
$
66,362
17,511
4,915
–
–
–
–
–
–
398
89,186
7,988
22,238
19,924
9,183
59,333
29,853
$ 211,345
42,898
11,240
$
$
$
–
–
–
12,751
1,651
14,402
11,620
4,052
320
951
31,345
18,619
–
6,585
6,101
31,305
40
66,679
40,205
4,504
$
66,362
17,511
4,915
12,751
1,651
14,402
11,620
4,052
320
1,349
120,531
26,607
22,238
26,509
15,284
90,638
29,893
$
$ 278,024
83,103
15,744
Wireless
Wireline
(dollars in millions)
Total Reportable
Segments
$
$
70,305
16,924
4,294
–
–
–
–
–
–
157
91,680
7,803
23,119
21,805
8,980
61,707
29,973
$ 185,405
40,911
11,725
$
$
$
–
–
–
12,696
1,744
14,440
12,048
4,301
338
967
32,094
18,816
–
7,256
6,543
32,615
(521)
78,305
41,044
5,049
$
70,305
16,924
4,294
12,696
1,744
14,440
12,048
4,301
338
1,124
123,774
26,619
23,119
29,061
15,523
94,322
29,452
$
$ 263,710
81,955
16,774
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 75
Notes to Consolidated Financial Statements continued
2014
External Operating Revenues
Service
Equipment
Other
Consumer retail
Small business
Mass Markets
Global Enterprise
Global Wholesale
Other
Intersegment revenues
Total operating revenues
Cost of services
Wireless cost of equipment
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income (loss)
Assets
Plant, property and equipment, net
Capital expenditures
Wireless
Wireline
(dollars in millions)
Total Reportable
Segments
$
$
72,555
10,957
4,021
–
–
–
–
–
–
113
87,646
7,200
21,625
23,602
8,459
60,886
26,760
$ 160,333
38,276
10,515
$
$
$
–
–
–
12,168
1,829
13,997
12,802
4,520
527
947
32,793
19,413
–
7,394
6,817
33,624
(831)
76,629
50,318
5,750
$
72,555
10,957
4,021
12,168
1,829
13,997
12,802
4,520
527
1,060
120,439
26,613
21,625
30,996
15,276
94,510
25,929
$
$ 236,962
88,594
16,265
Reconciliation to Consolidated Financial Information
A reconciliation of the reportable segment operating revenues to consolidated operating revenues is as follows:
Years Ended December 31,
Operating Revenues
Total reportable segments
Corporate and other
Reconciling items:
Impact of divested operations (Note 2)
Eliminations
Consolidated operating revenues
2016
2015
$ 120,531
5,663
1,280
(1,494)
$ 125,980
$ 123,774
3,738
5,280
(1,172)
$ 131,620
(dollars in millions)
2014
$ 120,439
2,106
5,625
(1,091)
$ 127,079
Fios revenues are included within our Wireline segment and amounted to approximately $11.2 billion, $10.7 billion, and $9.8 billion for the years
ended December 31, 2016, 2015, and 2014, respectively.
A reconciliation of the total of the reportable segments’ operating income to consolidated Income before provision for income taxes is as follows:
Years Ended December 31,
Operating Income
Total reportable segments
Corporate and other
Reconciling items:
Severance, pension and benefit credits (charges) (Note 10)
Gain on access line sale (Note 2)
Gain on spectrum license transactions (Note 2)
Impact of divested operations (Note 2)
Other costs
Consolidated operating income
Equity in (losses) earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Income Before Provision for Income Taxes
2016
2015
(dollars in millions)
2014
$ 29,893
(1,721)
(2,923)
1,007
142
661
–
27,059
(98)
(1,599)
(4,376)
$ 20,986
$ 29,452
(1,720)
2,256
–
254
2,818
–
33,060
(86)
186
(4,920)
$ 28,240
$ 25,929
(1,217)
(7,507)
–
707
2,021
(334)
19,599
1,780
(1,194)
(4,915)
$ 15,270
76
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
A reconciliation of the total of the reportable segments’ assets to consolidated assets is as follows:
At December 31,
Assets
Total reportable segments
Corporate and other
Eliminations
Total consolidated
2016
$ 278,024
213,787
(247,631)
$ 244,180
(dollars in millions)
2015
$ 263,710
205,476
(225,011)
$ 244,175
No single customer accounted for more than 10% of our total operating revenues during the years ended December 31, 2016, 2015 and 2014.
International operating revenues and long-lived assets are not significant.
Note 13
Comprehensive Income
Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income.
Significant changes in the components of Other comprehensive income, net of provision for income taxes are described below.
Accumulated Other Comprehensive Income
The changes in the balances of Accumulated other comprehensive income by component are as follows:
(dollars in millions)
Balance at January 1, 2014
Other comprehensive income (loss)
Amounts reclassified to net income
Net other comprehensive income (loss)
Balance at December 31, 2014
Other comprehensive loss
Amounts reclassified to net income
Net other comprehensive loss
Balance at December 31, 2015
Other comprehensive income (loss)
Amounts reclassified to net income
Net other comprehensive income (loss)
Balance at December 31, 2016
$
Foreign currency
translation
adjustments
853
(288)
(911)
(1,199)
(346)
(208)
–
(208)
(554)
(159)
–
(159)
(713)
$
$
Unrealized
gain (loss)
on cash flow
hedges
113
(89)
(108)
(197)
(84)
(1,063)
869
(194)
(278)
(225)
423
198
(80)
$
Unrealized
gain (loss) on
marketable
securities
117
$
14
(19)
(5)
112
(5)
(6)
(11)
101
(13)
(42)
(55)
46
$
Defined benefit
pension and
postretirement
plans
$ 1,275
–
154
154
1,429
–
(148)
(148)
1,281
2,881
(742)
2,139
$ 3,420
Total
$ 2,358
(363)
(884)
(1,247)
1,111
(1,276)
715
(561)
550
2,484
(361)
2,123
$ 2,673
The amounts presented above in net other comprehensive income (loss) are net of taxes. The amounts reclassified to net income related to foreign
currency translation adjustments in the table above are included in Equity in (losses) earnings of unconsolidated businesses (see Note 2 for additional
information). The amounts reclassified to net income related to defined benefit pension and postretirement plans in the table above are included in
Cost of services and Selling, general and administrative expense on our consolidated statements of income (see Note 10 for additional information).
The amounts reclassified to net income related to unrealized gain (loss) on marketable securities in the table above are included in Other income and
(expense), net on our consolidated statements of income. The amounts reclassified to net income related to unrealized gain (loss) on cash flow hedges
in the table above are included in Other income and (expense), net and Interest expense on our consolidated statements of income (see Note 8 for
additional information).
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 77
Notes to Consolidated Financial Statements continued
Note 14
Additional Financial Information
The tables that follow provide additional financial information related to
our consolidated financial statements:
Income Statement Information
Years Ended December 31,
Depreciation expense
Interest costs on debt balances
Capitalized interest costs
Advertising expense
2016
$ 14,227
5,080
(704)
2,744
2015
$ 14,323
5,504
(584)
2,749
2014
$ 14,966
5,291
(376)
2,526
(dollars in millions)
Balance Sheet Information
At December 31,
Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Accrued vacation, salaries and wages
Interest payable
Taxes payable
Other Current Liabilities
Advance billings and customer deposits
Dividends payable
Other
(dollars in millions)
2016
2015
$ 7,084
5,717
3,813
1,463
1,516
$ 19,593
$ 5,700
5,659
4,420
1,529
2,054
$ 19,362
$ 2,914
2,375
2,789
$ 8,078
$ 2,969
2,323
3,446
$ 8,738
Cash Flow Information
Years Ended December 31,
Cash Paid
Interest, net of amounts capitalized
Other, net Cash Flows from
Operating Activities
Changes in device
payment plan agreement
receivables-non- current
Proceeds from Tower Monetization
Transaction
Other, net
(dollars in millions)
2016
2015
2014
$ 4,085
$ 4,491
$ 4,429
$
(3,303)
$
(23)
$
(1,010)
–
(1,082)
(4,385)
2,346
(3,734)
(1,411)
$
$
–
(2,078)
(3,088)
$
During the year ended December 31, 2016, Verizon did not repurchase
any shares of Verizon’s common stock under our authorized share
buyback program. During the year ended December 31, 2015, Verizon
repurchased approximately 2.8 million shares of the Company’s
common stock under our authorized share buyback program for
approximately $0.1 billion. At December 31, 2016, the maximum
number of shares that could be purchased by or on behalf of Verizon
under our share buyback program was 97.2 million.
In addition to the previously authorized three-year share buyback
program, in 2015, the Verizon Board of Directors authorized Verizon
to enter into an accelerated share repurchase (ASR) agreement
to repurchase $5.0 billion of the Company’s common stock. On
February 10, 2015, in exchange for an up-front payment totaling
$5.0 billion, Verizon received an initial delivery of 86.2 million shares
having a value of approximately $4.25 billion. On June 5, 2015,
Verizon received an additional 15.4 million shares as final settlement
of the transaction under the ASR agreement. In total, 101.6 million
shares were delivered under the ASR at an average repurchase price
of $49.21.
Common stock has been used from time to time to satisfy some of
the funding requirements of employee and shareowner plans. During
the year ended December 31, 2016, we issued 3.5 million common
shares from Treasury stock, which had an immaterial aggregate value.
During the year ended December 31, 2015, we issued 22.6 million
common shares from Treasury stock, which had an aggregate value of
$0.9 billion.
Note 15
Commitments and Contingencies
In the ordinary course of business, Verizon is involved in various com-
mercial litigation and regulatory proceedings at the state and federal
level. Where it is determined, in consultation with counsel based on
litigation and settlement risks, that a loss is probable and estimable
in a given matter, the Company establishes an accrual. In none of
the currently pending matters is the amount of accrual material. An
estimate of the reasonably possible loss or range of loss in excess
of the amounts already accrued cannot be made at this time due to
various factors typical in contested proceedings, including (1) uncertain
damage theories and demands; (2) a less than complete factual
record; (3) uncertainty concerning legal theories and their resolution by
courts or regulators; and (4) the unpredictable nature of the opposing
party and its demands. We continuously monitor these proceedings
as they develop and adjust any accrual or disclosure as needed. We
do not expect that the ultimate resolution of any pending regulatory or
legal matter in future periods, including the Hicksville matter described
below, will have a material effect on our financial condition, but it
could have a material effect on our results of operations for a given
reporting period.
Reserves have been established to cover environmental matters
relating to discontinued businesses and past telecommunications
activities. These reserves include funds to address contamination
at the site of a former Sylvania facility in Hicksville NY, which had
processed nuclear fuel rods in the 1950s and 1960s. In September
2005, the Army Corps of Engineers (ACE) accepted the site into its
Formerly Utilized Sites Remedial Action Program. As a result, the ACE
has taken primary responsibility for addressing the contamination at
the site. An adjustment to the reserves may be made after a cost allo-
cation is conducted with respect to the past and future expenses of all
of the parties. Adjustments to the environmental reserve may also be
made based upon the actual conditions found at other sites requiring
remediation.
78
| Verizon Communications Inc. and Subsidiaries www.verizon.com/2016AnnualReport
Notes to Consolidated Financial Statements continued
Verizon is currently involved in approximately 35 federal district court
actions alleging that Verizon is infringing various patents. Most of these
cases are brought by non- practicing entities and effectively seek only
monetary damages; a small number are brought by companies that
have sold products and could seek injunctive relief as well. These
cases have progressed to various stages and a small number may go
to trial in the coming 12 months if they are not otherwise resolved.
In connection with the execution of agreements for the sales of busi-
nesses and investments, Verizon ordinarily provides representations
and warranties to the purchasers pertaining to a variety of nonfinancial
matters, such as ownership of the securities being sold, as well as
indemnity from certain financial losses. From time to time, counterpar-
ties may make claims under these provisions, and Verizon will seek to
defend against those claims and resolve them in the ordinary course
of business.
Subsequent to the sale of Verizon Information Services Canada in
2004, we continue to provide a guarantee to publish directories, which
was issued when the directory business was purchased in 2001 and
had a 30-year term (before extensions). The preexisting guarantee
continues, without modification, despite the subsequent sale of
Verizon Information Services Canada and the spin-off of our domestic
print and Internet yellow pages directories business. The possible
financial impact of the guarantee, which is not expected to be adverse,
cannot be reasonably estimated as a variety of the potential outcomes
Note 16
Quarterly Financial Information (Unaudited)
available under the guarantee result in costs and revenues or benefits
that may offset each other. We do not believe performance under the
guarantee is likely.
As of December 31, 2016, letters of credit totaling approximately
$0.4 billion, which were executed in the normal course of business and
support several financing arrangements and payment obligations to
third parties, were outstanding.
We have several commitments primarily to purchase programming and
network services, equipment, software and marketing services, which
will be used or sold in the ordinary course of business, from a variety
of suppliers totaling $16.8 billion. Of this total amount, $6.9 billion is
attributable to 2017, $6.4 billion is attributable to 2018 through 2019,
$1.3 billion is attributable to 2020 through 2021 and $2.2 billion is
attributable to years thereafter. These amounts do not represent our
entire anticipated purchases in the future, but represent only those
items that are the subject of contractual obligations. Our commitments
are generally determined based on the noncancelable quantities
or termination amounts. Purchases against our commitments
totaled approximately $8.1 billion for 2016, $10.2 billion for 2015, and
$21.0 billion for 2014. Since the commitments to purchase program-
ming services from television networks and broadcast stations have
no minimum volume requirement, we estimated our obligation based
on number of subscribers at December 31, 2016, and applicable rates
stipulated in the contracts in effect at that time. We also purchase
products and services as needed with no firm commitment.
Quarter Ended
2016
March 31
June 30
September 30
December 31
2015
March 31
June 30
September 30
December 31
Operating
Revenues
$ 32,171
30,532
30,937
32,340
$ 31,984
32,224
33,158
34,254
Operating
Income
$ 7,942
4,554
6,540
8,023
$ 7,960
7,821
7,535
9,744
Net Income attributable to Verizon(1)
(dollars in millions, except per share amounts)
Amount
$ 4,310
702
3,620
4,495
$ 4,219
4,231
4,038
5,391
Per Share —
Basic
Per Share —
Diluted
$
$
1.06
.17
.89
1.10
1.03
1.04
.99
1.32
$
$
1.06
.17
.89
1.10
1.02
1.04
.99
1.32
Net Income
$ 4,430
831
3,747
4,600
$ 4,338
4,353
4,171
5,513
•
•
•
•
•
•
Results of operations for the first quarter of 2016 include after-tax charges attributable to Verizon of $0.1 billion related to a pension remeasurement, as well as after-tax credits attribut-
able to Verizon of $0.1 billion related to a gain on spectrum license transactions.
Results of operations for the second quarter of 2016 include after-tax charges attributable to Verizon of $2.2 billion related to pension and benefit remeasurements and after-tax charges
attributable to Verizon of $1.1 billion related to early debt redemption costs, as well as after-tax credits attributable to Verizon of $0.1 billion related to a gain on the Access Line Sale.
Results of operations for the third quarter of 2016 include after-tax charges attributable to Verizon of $0.5 billion related to a pension remeasurement and severance costs.
Results of operations for the fourth quarter of 2016 include after-tax credits attributable to Verizon of $1.0 billion related to severance, pension and benefit credits.
Results of operations for the third quarter of 2015 include after-tax charges attributable to Verizon of $0.2 billion related to a pension remeasurement.
Results of operations for the fourth quarter of 2015 include after-tax credits attributable to Verizon of $1.6 billion related to severance, pension and benefit credits, as well as after-tax
credits attributable to Verizon of $0.2 billion related to a gain on spectrum license transactions.
(1) Net income attributable to Verizon per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount.
www.verizon.com/2016AnnualReport Verizon Communications Inc. and Subsidiaries
| 79
Corporate officers and
executive leadership
Lowell C. McAdam
Chairman and Chief Executive Officer
Matthew D. Ellis
Executive Vice President and Chief Financial Officer
Caroline Armour
Senior Vice President of Internal Auditing
Roy H. Chestnutt
Executive Vice President— Strategy, Development
and Planning
James J. Gerace
Senior Vice President and Chief Communications Officer
Roger Gurnani
Executive Vice President and Chief Information and
Technology Architect
William L. Horton, Jr.
Senior Vice President, Deputy General Counsel and
Corporate Secretary
Scott Krohn
Senior Vice President and Treasurer
Marc C. Reed
Executive Vice President and Chief Administrative Officer
Diego Scotti
Executive Vice President and Chief Marketing Officer
Craig L. Silliman
Executive Vice President of Public Policy and General
Counsel
Anthony T. Skiadas
Senior Vice President and Controller
John G. Stratton
Executive Vice President and President of Operations
Marni M. Walden
Executive Vice President and President of Product
Innovation and New Businesses
Board of Directors
Shellye L. Archambeau
Chief Executive Officer
MetricStream, Inc.
Mark T. Bertolini
Chairman and Chief Executive Officer
Aetna Inc.
Richard L. Carrión
Chairman and Chief Executive Officer
Popular, Inc.
Melanie L. Healey
Former Group President
The Procter & Gamble Company
M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc
Karl- Ludwig Kley
Former Chairman of the Executive Board and
Chief Executive Officer
Merck KGaA
Lowell C. McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
Clarence Otis, Jr.
Former Chairman and Chief Executive Officer
Darden Restaurants, Inc.
Rodney E. Slater
Partner
Squire Patton Boggs LLP
Kathryn A. Tesija
Former Executive Vice President and
Chief Merchandising and Supply Chain Officer
Target Corporation
Gregory D. Wasson
Former President and Chief Executive Officer
Walgreens Boots Alliance, Inc.
Gregory G. Weaver
Former Chairman and Chief Executive Officer
Deloitte & Touche LLP
80
| www.verizon.com/2016AnnualReport
Investor information
Stock transfer agent
Questions or requests for assistance
regarding changes to or transfers
of your registered stock ownership
should be directed to our Transfer
Agent, Computershare Trust
Company, N.A. at:
Verizon Communications Inc.
c/o Computershare
P.O. Box 43078
Providence, RI 02940-3078
Phone: 800 631-2355 or
781 575-3994
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following services:
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Click on “Create Log In” to register.
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transfer service to registered
shareowners wishing to deposit
dividends directly into savings or
checking accounts on dividend
payment dates.
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share ownership plan: Verizon offers
a direct stock purchase and share
ownership plan. The plan allows
current and new investors to purchase
common stock and to reinvest their
dividends toward the purchase
of additional shares. For more
information, go to www.verizon.com/
about/investors/shareowner-services.
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Stock market information
Shareowners of record as of
December 31, 2016: 690,741
Verizon (ticker symbol: VZ) is listed
on the New York Stock Exchange and
the Nasdaq Global Select Market.
Dividend information
At its September 2016 meeting, the
Board of Directors increased our
quarterly dividend 2.2 percent. On an
annual basis, this increased Verizon’s
dividend to $2.31 per share. Dividends
have been paid since 1984.
Form 10-K
To receive a printed copy of the
2016 Annual Report on Form 10-K,
which is filed with the Securities
and Exchange Commission, please
contact Investor Relations:
Verizon Communications Inc.
Investor Relations
One Verizon Way
Basking Ridge, NJ 07920
Phone: 212 395-1525
Corporate governance
Verizon’s Bylaws, Code of Conduct,
Corporate Governance Guidelines
and the charters of the committees
of its Board of Directors can be
found on the corporate governance
section of our website at
www.verizon.com/ about/investors/
corporate-governance.
If you would like to receive a printed
copy of any of these documents,
please contact the Assistant
Corporate Secretary:
Verizon Communications Inc.
Assistant Corporate Secretary
1095 Avenue of the Americas
New York, NY 10036
www.verizon.com/2016AnnualReport
| 81
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1095 Avenue of the Americas
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212 395-1000
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