Notes to Condensed Consolidated Financial Statements
Verizon Communications Inc. and Subsidiaries
(Unaudited)
The accompanying
unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting
policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon or the Company) Annual Report on Form 10-K for the year ended December 31, 2015. These financial statements
reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not
necessarily indicative of results for the full year. We have reclassified certain prior year amounts to conform to the current year presentation.
Earnings Per Common Share
There were a total of approximately 6 million
and 5 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the three and six months ended June 30, 2016, respectively. There were a total of
approximately 6 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the three and six months ended June 30, 2015, respectively. There were
no outstanding options to purchase shares that would have been anti-dilutive for the three and six months ended June 30, 2016 and 2015, respectively.
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 combinations. 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 condensed 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 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 net asset value 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 did not have a significant impact on our condensed consolidated financial statements.
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 SEC paragraphs pursuant to an SEC Staff Announcement
that the SEC staff would not object to an entity deferring and presenting debt issuance costs associated 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 retrospectively to all periods presented. The adoption of these standard updates did not have a significant impact on our condensed consolidated financial statements.
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 condensed 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 Employers 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.
7
Recently Issued Accounting Standards
In June 2016, the standard update related to the measurement of credit losses on financial instruments was issued. This standard
update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. 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 condensed 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 exceptions. 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. We are currently evaluating the impact that this standard update will have on our condensed consolidated financial statements.
In May 2014, the accounting standard update related to the recognition of revenue from contracts with customers was issued. This standard
update clarifies the principles for recognizing revenue and develops a common revenue standard for generally accepted accounting principles in the United States (U.S. GAAP) and International Financial Reporting Standards. The standard update intends
to provide a more robust framework for addressing 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. Upon adoption of this standard update, we expect that the allocation and timing of revenue recognition will be impacted. In August 2015, an accounting standard update was issued that delays
the effective date of this standard until the first quarter of 2018. Companies are permitted to early adopt the standard in the first quarter of 2017.
There are two adoption methods available for implementation of the standard update related to the recognition of revenue from contracts with customers. Under one method, the guidance is applied
retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, the guidance is applied only to the most current period presented, recognizing the cumulative effect of the change
as an adjustment to the beginning balance of retained earnings, and also requires additional disclosures comparing the results to the previous guidance. We are currently evaluating these adoption methods and the impact that this standard update will
have on our condensed consolidated financial statements.
2.
|
Acquisitions and Divestitures
|
Wireless
Spectrum License Transactions
During the fourth quarter of 2015, we entered into a license exchange agreement with affiliates of AT&T Inc. to exchange certain Advanced Wireless Services (AWS) and Personal Communication Services
(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 condensed consolidated statement of income for the six months ended June 30, 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 is expected to be completed in the third quarter of 2016 and
we expect to record an immaterial gain.
During the three and six months ended June 30, 2016, we acquired various other
wireless licenses for cash consideration that was not significant.
Wireline
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. The transaction, which includes the acquisition by Frontier of the equity interests of Verizons 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.
8
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 six months ended June 30, 2016, these businesses generated revenues of approximately $1.3 billion and operating
income of $0.7 billion for Verizon. For the three and six months ended June 30, 2015, these businesses generated revenues of $1.3 billion and $2.7 billion, respectively, and operating income of $0.7 billion and $1.4 billion, respectively. 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 4). The assets and liabilities that were sold were included in Verizons continuing operations and classified as assets held for sale and liabilities related to assets held for sale on our condensed 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 condensed consolidated statements of income for the three and six months ended June 30, 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 by three of our defined benefit pension plans and one of our
other postretirement benefit plans.
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. AOLs 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. During the second quarter of 2016, we finalized our valuations for deferred taxes. These adjustments did not have a material impact on our condensed consolidated financial statements.
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.
9
The following table summarizes the consideration to AOLs shareholders 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 AOLs noncontrolling interests:
|
|
|
|
|
(dollars in millions)
|
|
As of June 23, 2015
|
|
Cash payment to AOLs equity holders
|
|
$
|
3,764
|
|
Estimated liabilities to be paid
(1)
|
|
|
377
|
|
|
|
|
|
|
Total consideration
|
|
$
|
4,141
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Goodwill
|
|
$
|
1,938
|
|
Intangible assets subject to amortization
|
|
|
2,504
|
|
Other
|
|
|
1,551
|
|
|
|
|
|
|
Total assets acquired
|
|
|
5,993
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Total liabilities assumed
|
|
|
1,851
|
|
|
|
Net assets acquired:
|
|
|
4,142
|
|
Noncontrolling interest
|
|
|
(1
|
)
|
|
|
|
|
|
Total consideration
|
|
$
|
4,141
|
|
|
|
|
|
|
(1)
|
During the six
months ended June 30, 2016, we made cash payments of $126 million in respect of acquisition-date estimated liabilities to be paid. As of June 30, 2016, the remaining balance of estimated liabilities to be paid was $251 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.
Acquisition of Yahoo! Inc.s Operating Business
On July 23,
2016, we 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 will acquire the stock of one or
more subsidiaries of Yahoo holding all of Yahoos 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 reorganization
agreement, Yahoo will transfer all of the assets and liabilities constituting Yahoos operating business to the subsidiaries to be acquired in the Transaction. The assets to be acquired will not include Yahoos 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 Yahoos 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-settleable 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 approximately $1.1 billion.
The Transaction is subject to customary regulatory approvals and closing conditions, including the approval of Yahoos stockholders, and is expected to close in the first quarter of 2017.
Other
On February 20,
2016, Verizon 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 outside of Verizons footprint for approximately $1.8 billion,
subject to adjustment. The transaction is subject to customary regulatory approvals and is expected to close in the first half of 2017. Separately, Verizon entered into an agreement to lease certain wireless spectrum from XO Holdings and has an
option, exercisable under certain circumstances, to buy XO Holdings entity that owns its wireless spectrum.
On June 21,
2016, Verizon announced an agreement to acquire a global, cloud-based mobile enterprise management software business. The acquisition is subject to customary regulatory approvals and is expected to close in the second half of 2016.
During the six months ended June 30, 2016, we acquired various other businesses and investments for cash consideration that was not
significant.
10
3.
|
Wireless Licenses, Goodwill and Other Intangible Assets
|
Wireless Licenses
Changes in the carrying amount of Wireless licenses are as follows:
|
|
|
|
|
(dollars in millions)
|
|
|
|
Balance at January 1, 2016
|
|
$
|
86,575
|
|
Acquisitions (Note 2)
|
|
|
23
|
|
Capitalized interest on wireless licenses
|
|
|
259
|
|
Reclassifications, adjustments and other
|
|
|
124
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
86,981
|
|
|
|
|
|
|
Reclassifications, adjustments and other includes $0.4 billion received in exchanges of wireless licenses
in 2016 as well as $0.3 billion of wireless licenses that are classified as Assets held for sale on our condensed consolidated balance sheet at June 30, 2016 (see Note 2 for additional details).
At June 30, 2016, approximately $10.4 billion of wireless licenses were under development for commercial service for which we were
capitalizing interest costs.
The average remaining renewal period for our wireless licenses portfolio was 5.3 years as of June
30, 2016.
Goodwill
Changes
in the carrying amount of Goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Wireless
|
|
|
Wireline
|
|
|
Other
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
$
|
18,393
|
|
|
$
|
4,331
|
|
|
$
|
2,607
|
|
|
$
|
25,331
|
|
Acquisitions (Note 2)
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
82
|
|
Reclassifications, adjustments and other
|
|
|
|
|
|
|
(107
|
)
|
|
|
111
|
|
|
|
4
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
18,393
|
|
|
$
|
4,224
|
|
|
$
|
2,800
|
|
|
$
|
25,417
|
|
|
|
|
|
|
During the second quarter of 2016, we allocated $0.1 billion of Goodwill on a relative fair value basis
from Wireline to Corporate and other as a result of the reclassification of our vehicle original equipment manufacturer (OEM) and Networkfleet businesses (see Note 10 for additional details).
Other Intangible Assets
The following table displays the composition of Other intangible
assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016
|
|
|
At December 31, 2015
|
|
(dollars in millions)
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Customer lists (6 to 14 years)
|
|
$
|
4,141
|
|
|
$
|
(2,477
|
)
|
|
$
|
1,664
|
|
|
$
|
4,139
|
|
|
$
|
(2,365
|
)
|
|
$
|
1,774
|
|
Non-network internal-use software (3 to 8 years)
|
|
|
15,127
|
|
|
|
(10,198
|
)
|
|
|
4,929
|
|
|
|
14,542
|
|
|
|
(9,620
|
)
|
|
|
4,922
|
|
Other (5 to 25 years)
|
|
|
1,357
|
|
|
|
(551
|
)
|
|
|
806
|
|
|
|
1,346
|
|
|
|
(450
|
)
|
|
|
896
|
|
|
|
|
|
|
Total
|
|
$
|
20,625
|
|
|
$
|
(13,226
|
)
|
|
$
|
7,399
|
|
|
$
|
20,027
|
|
|
$
|
(12,435
|
)
|
|
$
|
7,592
|
|
|
|
|
|
|
The amortization expense for Other intangible assets was as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
2016
|
|
|
$ 401
|
|
|
|
$ 836
|
|
2015
|
|
|
428
|
|
|
|
809
|
|
The estimated future amortization expense for Other intangible assets is as follows:
|
|
|
|
|
Years
|
|
(dollars in millions)
|
|
Remainder of 2016
|
|
|
$ 788
|
|
2017
|
|
|
1,420
|
|
2018
|
|
|
1,252
|
|
2019
|
|
|
1,046
|
|
2020
|
|
|
839
|
|
11
Changes to debt during the six
months ended June 30, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Debt Maturing
within One Year
|
|
|
Long-term
Debt
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
$
|
6,489
|
|
|
$
|
103,240
|
|
|
$
|
109,729
|
|
Repayments of long-term borrowings and capital leases obligations
|
|
|
(3,844
|
)
|
|
|
(7,456
|
)
|
|
|
(11,300
|
)
|
Increase in short-term obligations, excluding current maturities
|
|
|
610
|
|
|
|
|
|
|
|
610
|
|
Reclassifications of long-term debt
|
|
|
3,396
|
|
|
|
(3,396
|
)
|
|
|
|
|
Other
|
|
|
152
|
|
|
|
534
|
|
|
|
686
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
6,803
|
|
|
$
|
92,922
|
|
|
$
|
99,725
|
|
|
|
|
|
|
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 commissions, 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)
|
|
Interest
Rate
|
|
|
Maturity
|
|
|
Principal
Amount
Outstanding
|
|
|
Purchase
Price
(1)
|
|
|
Principal
Amount
Purchased
|
|
Verizon Communications Inc.
|
|
|
2.50
|
%
|
|
|
2016
|
|
|
$
|
2,182
|
|
|
$
|
1,007.60
|
|
|
$
|
1,272
|
|
|
|
|
2.00
|
%
|
|
|
2016
|
|
|
|
1,250
|
|
|
|
1,007.20
|
|
|
|
731
|
|
|
|
|
6.35
|
%
|
|
|
2019
|
|
|
|
1,750
|
|
|
|
1,133.32
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 2 Any and All Offer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except for Purchase Price)
|
|
Interest
Rate
|
|
|
Maturity
|
|
|
Principal
Amount
Outstanding
|
|
|
Purchase
Price
(1)
|
|
|
Principal
Amount
Purchased
|
|
Verizon Delaware LLC
|
|
|
8.375
|
%
|
|
|
2019
|
|
|
$
|
15
|
|
|
$
|
1,182.11
|
|
|
$
|
15
|
|
|
|
|
8.625
|
%
|
|
|
2031
|
|
|
|
15
|
|
|
|
1,365.39
|
|
|
|
5
|
|
|
|
|
|
|
|
Verizon Maryland LLC
|
|
|
8.00
|
%
|
|
|
2029
|
|
|
|
50
|
|
|
|
1,301.32
|
|
|
|
22
|
|
|
|
|
8.30
|
%
|
|
|
2031
|
|
|
|
100
|
|
|
|
1,347.26
|
|
|
|
76
|
|
|
|
|
5.125
|
%
|
|
|
2033
|
|
|
|
350
|
|
|
|
1,012.50
|
|
|
|
171
|
|
|
|
|
|
|
|
Verizon New England Inc.
|
|
|
7.875
|
%
|
|
|
2029
|
|
|
|
349
|
|
|
|
1,261.63
|
|
|
|
176
|
|
|
|
|
|
|
|
Verizon New Jersey Inc.
|
|
|
8.00
|
%
|
|
|
2022
|
|
|
|
200
|
|
|
|
1,238.65
|
|
|
|
54
|
|
|
|
|
7.85
|
%
|
|
|
2029
|
|
|
|
149
|
|
|
|
1,311.32
|
|
|
|
63
|
|
|
|
|
|
|
|
Verizon New York Inc.
|
|
|
6.50
|
%
|
|
|
2028
|
|
|
|
100
|
|
|
|
1,151.71
|
|
|
|
28
|
|
|
|
|
7.375
|
%
|
|
|
2032
|
|
|
|
500
|
|
|
|
1,201.92
|
|
|
|
256
|
|
|
|
|
|
|
|
Verizon Pennsylvania LLC
|
|
|
6.00
|
%
|
|
|
2028
|
|
|
|
125
|
|
|
|
1,110.47
|
|
|
|
57
|
|
|
|
|
8.35
|
%
|
|
|
2030
|
|
|
|
175
|
|
|
|
1,324.10
|
|
|
|
127
|
|
|
|
|
8.75
|
%
|
|
|
2031
|
|
|
|
125
|
|
|
|
1,356.47
|
|
|
|
72
|
|
|
|
|
|
|
|
Verizon Virginia LLC
|
|
|
7.875
|
%
|
|
|
2022
|
|
|
|
100
|
|
|
|
1,227.79
|
|
|
|
43
|
|
|
|
|
8.375
|
%
|
|
|
2029
|
|
|
|
100
|
|
|
|
1,319.78
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Per $1,000
principal amount of notes tendered and not withdrawn prior to early expiration.
|
12
The table below lists the series of notes included in the Group 3 Offer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except for Purchase Price)
|
|
Interest
Rate
|
|
|
Maturity
|
|
|
Principal
Amount
Outstanding
|
|
|
Purchase
Price
(1)
|
|
|
Principal
Amount
Purchased
|
|
Verizon Communications Inc.
|
|
|
8.95
|
%
|
|
|
2039
|
|
|
$
|
353
|
|
|
$
|
1,506.50
|
|
|
$
|
63
|
|
|
|
|
7.75
|
%
|
|
|
2032
|
|
|
|
251
|
|
|
|
1,315.19
|
|
|
|
33
|
|
|
|
|
7.35
|
%
|
|
|
2039
|
|
|
|
480
|
|
|
|
1,293.50
|
|
|
|
68
|
|
|
|
|
7.75
|
%
|
|
|
2030
|
|
|
|
1,206
|
|
|
|
1,377.92
|
|
|
|
276
|
|
|
|
|
6.55
|
%
|
|
|
2043
|
|
|
|
6,585
|
|
|
|
1,291.74
|
|
|
|
2,340
|
|
|
|
|
6.40
|
%
|
|
|
2033
|
|
|
|
2,196
|
|
|
|
1,220.28
|
|
|
|
466
|
|
|
|
|
6.90
|
%
|
|
|
2038
|
|
|
|
477
|
|
|
|
1,243.29
|
|
|
|
92
|
|
|
|
|
6.25
|
%
|
|
|
2037
|
|
|
|
750
|
|
|
|
1,167.66
|
|
|
|
114
|
|
|
|
|
6.40
|
%
|
|
|
2038
|
|
|
|
866
|
|
|
|
1,176.52
|
|
|
|
116
|
|
|
|
|
5.85
|
%
|
|
|
2035
|
|
|
|
1,500
|
|
|
|
1,144.68
|
|
|
|
250
|
|
|
|
|
6.00
|
%
|
|
|
2041
|
|
|
|
1,000
|
|
|
|
1,164.56
|
|
|
|
|
|
|
|
|
5.15
|
%
|
|
|
2023
|
|
|
|
8,517
|
|
|
|
1,152.83
|
|
|
|
|
|
|
|
|
|
|
|
Alltel Corporation
|
|
|
7.875
|
%
|
|
|
2032
|
|
|
|
452
|
|
|
|
1,322.92
|
|
|
|
115
|
|
|
|
|
6.80
|
%
|
|
|
2029
|
|
|
|
235
|
|
|
|
1,252.93
|
|
|
|
47
|
|
|
|
|
|
|
|
GTE Corporation
|
|
|
6.94
|
%
|
|
|
2028
|
|
|
|
800
|
|
|
|
1,261.35
|
|
|
|
237
|
|
|
|
|
8.75
|
%
|
|
|
2021
|
|
|
|
300
|
|
|
|
1,307.34
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Per $1,000
principal amount of notes
|
April Early Debt Redemption
On April 8, 2016, we redeemed in whole the following series of outstanding 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 immaterial amount of accrued interest.
August Debt Issuance
On July 27, 2016, we entered into an agreement to sell $6.2 billion aggregate principal amount of fixed and floating rate notes, which
sale is expected to close on August 1, 2016. We expect to receive cash proceeds of approximately $6.1 billion, net of discounts and issuance costs and after reimbursement of certain expenses. The sale 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 will bear interest
at a rate equal to the three-month London Interbank Offered Rate (LIBOR) plus 0.370%, which rate will be reset quarterly. We intend to use the net proceeds from the sale of the notes for general corporate purposes, including to repay at maturity on
September 15, 2016, $2.25 billion aggregate principal amount of our floating rate notes, plus accrued interest on the notes.
Asset-Backed
Debt
In July 2016, we transferred $1.5 billion of device payment plan agreement receivables from Cellco
Partnership and certain other affiliates of Verizon (the Originators) to a consolidated asset-backed securitization bankruptcy remote legal entity (ABS Entity). The ABS Entity in turn issued $1.2 billion aggregate principal amount of senior and
junior asset-backed notes, of which $1.1 billion of notes were sold to third-party investors. The asset-backed notes are secured by the transferred device payment plan agreement receivables and future collections on the receivables. The third-party
investors in the asset-backed notes have legal recourse only to the assets securing the debt and do not have any recourse to Verizon with respect to the payment of principal and interest on the notes. The device payment plan agreement receivables
transferred to the ABS Entity will only be available for payment of the asset-backed notes and other obligations arising from the asset-backed securitization transaction and will not be available to pay other obligations or claims of Verizons
creditors until the associated asset-backed notes and other obligations are satisfied.
13
Verizon entities will retain the equity interest in the ABS Entity, which
represents the rights to all funds not needed to make required payments on the asset-backed notes and other related payments. Proceeds from our asset-backed securitization transaction will be reflected in Cash flows from financing activities in our
condensed consolidated statement of cash flows. The asset-backed debt issued and the assets securing this debt will be included on our condensed consolidated balance sheets next quarter.
The senior asset-backed notes have an expected weighted average life of about 2.5 years and the junior asset-backed notes have an
expected weighted average life of about 3.2 years. Under the terms of the securitization transaction, there is a two year revolving period during which we may transfer additional receivables to the ABS Entity. Under a parent support agreement,
Verizon has agreed to guarantee certain of the payment obligations of Cellco Partnership and the Originators to the ABS Entity. Verizon does not guarantee any principal or interest on the asset-backed notes or any payments on the receivables.
Credit Facility
As of June 30, 2016, the unused borrowing capacity under our $8.0 billion credit facility was approximately $7.9 billion.
Additional Financing Activities (Non-Cash Transaction)
During the six
months ended June 30, 2016, we financed, primarily through vendor financing arrangements, the purchase of approximately $0.3 billion of long-lived assets, consisting primarily of network equipment. At June 30, 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 condensed consolidated statement
of cash flows.
Early Debt Redemptions
During the second quarter of 2016, we recorded a net pre-tax loss on early debt redemption of $1.8 billion 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 condensed consolidated statement of income.
Guarantees
We guarantee the debentures of our operating telephone company subsidiaries. As of June 30, 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 Frontier transaction, as of April 1, 2016, GTE Southwest Inc.,
Verizon California Inc. and Verizon Florida LLC are no longer wholly-owned subsidiaries of Verizon, and the guarantees of $0.6 billion aggregate principal amount of debentures and first mortgage bonds of those entities have terminated pursuant to
their terms.
We also guarantee the debt obligations of GTE Corporation that were issued and outstanding prior to July 1,
2003. As of June 30, 2016, $1.1 billion aggregate principal amount of these obligations were outstanding.
5.
|
Wireless Device Payment Plans
|
Under the Verizon device payment
program, our eligible wireless customers purchase wireless devices at unsubsidized prices 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. We have ongoing programs to sell certain device payment plan agreement receivables to financial
institutions. The outstanding portfolio of device payment plan agreement receivables derecognized from our condensed consolidated balance sheet, but which we continue to service, was $8.4 billion at June 30, 2016. As of June 30,
2016, the total portfolio of device payment plan agreement receivables, including derecognized device payment plan agreement receivables, that we are servicing was $13.5 billion.
14
Wireless Device Payment Plan Agreement Receivables
The following table displays device payment plan agreement receivables, net, that continue to be recognized in our condensed consolidated
balance sheets:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
At June 30,
2016
|
|
|
At December 31,
2015
|
|
Device payment plan agreement receivables, gross
|
|
$
|
5,124
|
|
|
$
|
3,720
|
|
Unamortized imputed interest
|
|
|
(212
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
Device payment plan agreement receivables, net of unamortized imputed interest
|
|
|
4,912
|
|
|
|
3,578
|
|
Allowance for credit losses
|
|
|
(578
|
)
|
|
|
(444
|
)
|
|
|
|
|
|
Device payment plan agreement receivables, net
|
|
$
|
4,334
|
|
|
$
|
3,134
|
|
|
|
|
|
|
|
|
|
Classified on our condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
2,591
|
|
|
$
|
1,979
|
|
Other assets
|
|
|
1,743
|
|
|
|
1,155
|
|
|
|
|
|
|
Device payment plan agreement receivables, net
|
|
$
|
4,334
|
|
|
$
|
3,134
|
|
|
|
|
|
|
At the time of the sale of the 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 condensed 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 applicants 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.
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 customers 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 bills due date.
15
The balance and aging of the device payment plan agreement receivables on a gross basis was as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
At June 30,
2016
|
|
|
At December 31,
2015
|
|
Unbilled
|
|
$
|
4,792
|
|
|
$
|
3,420
|
|
Billed:
|
|
|
|
|
|
|
|
|
Current
|
|
|
251
|
|
|
|
227
|
|
Past due
|
|
|
81
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
Device payment plan agreement receivables, gross
|
|
$
|
5,124
|
|
|
$
|
3,720
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for credit losses for the device payment plan agreement receivables was as follows:
|
|
|
|
|
(dollars in millions)
|
|
|
|
Balance at January 1, 2016
|
|
$
|
444
|
|
Bad debt expense
|
|
|
310
|
|
Write-offs
|
|
|
(210
|
)
|
Allowance related to receivables sold
|
|
|
28
|
|
Other
|
|
|
6
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
578
|
|
|
|
|
|
|
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 or for a device that is subject to an upgrade promotion, we may record a guarantee liability in accordance with our accounting policy. The gross guarantee liability related
to the upgrade program, which was immaterial at June 30, 2016 and approximately $0.2 billion at December 31, 2015, was included in Other current liabilities on our condensed consolidated balance sheets.
Sales of Wireless Device Payment Plan Agreement Receivables
Non-Revolving Sale of Wireless Device Payment Plan Agreement Receivables
During 2015, we established a program (Non-Revolving Program) pursuant to a Receivables Purchase Agreement, or RPA, to sell from time to
time, on an uncommitted basis, eligible device payment plan agreement receivables to a group of primarily relationship banks (Purchasers). Under the 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). The receivables
sold under the Non-Revolving Program are no longer considered assets of Verizon. We continue to bill and collect on the receivables in exchange for a monthly servicing fee, which is not material. Eligible receivables under the
Non-Revolving Program exclude device payment plan agreements where a new customer was required to provide a down payment.
Revolving Sale
of Wireless Device Payment Plan Agreement Receivables
During the fourth quarter of 2015 and first quarter of 2016, we
entered into separate tranches under our existing RPA with the Purchasers to sell eligible device payment plan agreement receivables on a revolving basis (Revolving Program), subject to a maximum funding limit, to the Purchasers. The revolving
period of both tranches ends in December 2016. Sales of eligible receivables by the Sellers, once initiated, generally occur and are settled on a monthly basis. The receivables sold under the Revolving Program are no longer considered
assets of Verizon. We continue to bill and collect on the receivables in exchange for a monthly servicing fee, which is not material. 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. Eligible receivables under the Revolving Program exclude device payment plan agreements where a new customer was required to provide a down
payment.
16
The sales of receivables under the Non-Revolving Program and Revolving Program did not have
a material impact on our condensed consolidated statements of income. The cash proceeds received from the Purchasers are recorded within Cash flows provided by operating activities on our condensed consolidated statements of cash flows.
The following table provides a summary of device payment plan agreement receivables sold under the Non-Revolving Program and the
Revolving Program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Non-Revolving Program
|
|
|
Revolving Program
|
|
Three Months Ended June 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Device payment plan agreement receivables sold, net
(1)
|
|
$
|
|
|
|
$
|
1,746
|
|
|
$
|
669
|
|
|
$
|
|
|
Cash proceeds received from new transfers
|
|
|
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
Cash proceeds received from reinvested collections
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
|
|
Deferred purchase price recorded
|
|
|
|
|
|
|
634
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Non-Revolving Program
|
|
|
Revolving Program
|
|
Six Months Ended June 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Device payment plan agreement receivables sold, net
(1)
|
|
$
|
|
|
|
$
|
3,671
|
|
|
$
|
3,286
|
|
|
$
|
|
|
Cash proceeds received from new transfers
|
|
|
|
|
|
|
2,441
|
|
|
|
1,978
|
|
|
|
|
|
Cash proceeds received from reinvested collections
|
|
|
|
|
|
|
|
|
|
|
885
|
|
|
|
|
|
Deferred purchase price recorded
|
|
|
|
|
|
|
1,329
|
|
|
|
423
|
|
|
|
|
|
(1)
Device payment plan agreement receivables net of allowances, imputed interest and the device trade-in right.
Variable Interest Entities
Under both the Non-Revolving Program and the Revolving Program, the Sellers sole business consists of the acquisition of the receivables from 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 variable interest entities 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 condensed consolidated financial statements.
Deferred Purchase Price
Under both the Non-Revolving Program and the Revolving Program, 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 connection 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. At June 30, 2016, our deferred purchase price receivable, which is held by the Sellers, was comprised of $1.5 billion included
within Prepaid expenses and other and $1.0 billion included within Other assets in our condensed consolidated balance sheet. At December 31, 2015, our deferred purchase price receivable was $2.2 billion, which was included within Other assets
in our condensed consolidated balance sheet.
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 $4.2 billion, net of fees. To date, cash proceeds received, net of remittances, were $5.9 billion. We have also collected an immaterial amount which was returned as deferred purchase price. During
the six months ended June 30, 2016, credit losses on receivables sold were an immaterial amount.
17
In addition, we have continuing involvement related to the sold receivables as we may be
responsible for absorbing additional credit losses pursuant to the agreements. The Companys maximum exposure to loss related to the involvement with the Sellers is limited to the amount of the deferred purchase price, which was $2.5 billion as
of June 30, 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 Companys expected loss.
6.
|
Fair Value Measurements
|
The following table presents the balances of assets
and liabilities measured at fair value on a recurring basis as of June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Level 1
(1)
|
|
|
Level 2
(2)
|
|
|
Level 3
(3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
170
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
170
|
|
Fixed income securities
|
|
|
|
|
|
|
625
|
|
|
|
|
|
|
|
625
|
|
Interest rate swaps
|
|
|
|
|
|
|
469
|
|
|
|
|
|
|
|
469
|
|
Net investment hedges
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
Total
|
|
$
|
170
|
|
|
$
|
1,110
|
|
|
$
|
|
|
|
$
|
1,280
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross currency swaps
|
|
|
|
|
|
|
1,822
|
|
|
|
|
|
|
|
1,822
|
|
Forward interest rate swaps
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2,057
|
|
|
$
|
|
|
|
$
|
2,057
|
|
|
|
|
|
|
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Level 1
(1)
|
|
|
Level 2
(2)
|
|
|
Level 3
(3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
265
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
265
|
|
Fixed income securities
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
928
|
|
|
|
|
|
|
|
928
|
|
Interest rate swaps
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
128
|
|
Net investment hedges
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
Cross currency swaps
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
Total
|
|
$
|
515
|
|
|
$
|
1,155
|
|
|
$
|
|
|
|
$
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
19
|
|
Cross currency swaps
|
|
|
|
|
|
|
1,638
|
|
|
|
|
|
|
|
1,638
|
|
Forward interest rate swaps
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
1,681
|
|
|
$
|
|
|
|
$
|
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
18
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 securities are classified as Level 1. For all other fixed income securities that do not have quoted prices
in active markets, we use alternative matrix pricing resulting in these debt securities being classified as Level 2.
Derivative contracts are valued using models based on readily observable market parameters for all substantial terms of our derivative
contracts and thus are classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.
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 the six months ended June 30, 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 measurement, 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 June 30, 2016
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
(dollars in millions)
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Short- and long-term debt, excluding capital leases
|
|
$
|
98,753
|
|
|
$
|
114,549
|
|
|
$
|
108,772
|
|
|
$
|
118,216
|
|
Derivative Instruments
We enter into derivative transactions to manage our exposure to fluctuations in foreign currency exchange rates, interest rates, and equity and commodity prices. 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, commodity swap and forward agreements and interest rate locks. We do not
hold derivatives for trading purposes. We posted collateral of approximately $0.2 billion and $0.1 billion related to derivative contracts under collateral exchange arrangements at June 30, 2016 and December 31, 2015, respectively, which was
recorded as Prepaid expenses and other on our condensed consolidated balance sheets. During 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 counterparties.
We measure all derivatives at fair value and recognize them as
either assets or liabilities on our condensed consolidated balance sheets. 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.
Interest Rate Swaps
We
enter into domestic 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 changes in the fair value of our debt portfolio. The ineffective portion of these interest rate swaps was not material for the three and six months ended June 30,
2016 and 2015, 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. During the first quarter of 2016, we
entered into forward interest rate swaps with a total notional value of $1.3 billion. During the three and six months ended June 30, 2016, pre-tax losses of $0.1 billion and $0.2 billion, respectively, were recognized in Other comprehensive income
(loss). During the three and six months ended June 30, 2015, pre-tax gains of $0.1 billion and an immaterial amount, respectively, were recognized in Other comprehensive income (loss).
19
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. During the three and six months ended June 30, 2016, we settled $0.1 billion of these cross currency swaps upon redemption
of the related debt. 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 the three and six months ended June 30, 2016, pre-tax losses of $0.4 billion and $0.2 billion, respectively, were recognized in Other comprehensive income (loss). During the three and six months ended June 30, 2015, a
pre-tax gain of $0.2 billion and a pre-tax loss of $0.7 billion, respectively, were recognized in Other comprehensive income (loss).
Net
Investment Hedges
We enter into foreign currency forward contracts that are designated 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 following table sets forth the notional amounts of our outstanding derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
(dollars in millions)
|
|
Notional Amount
|
|
|
Notional Amount
|
|
Interest rate swaps
|
|
$
|
7,620
|
|
|
$
|
7,620
|
|
Forward interest rate swaps
|
|
|
2,000
|
|
|
|
750
|
|
Cross currency swaps
|
|
|
9,606
|
|
|
|
9,675
|
|
Net investment hedge
|
|
|
864
|
|
|
|
864
|
|
7.
|
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, performance 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 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 proportion as the PSU award. The granted and cancelled
activity for the PSU award includes adjustments for the performance goals achieved.
20
The following table summarizes the Restricted Stock Unit and Performance Stock Unit activity:
|
|
|
|
|
|
|
|
|
(shares in thousands)
|
|
Restricted
Stock Units
|
|
|
Performance
Stock Units
|
|
Outstanding, January 1, 2016
|
|
|
13,903
|
|
|
|
17,203
|
|
Granted
|
|
|
3,797
|
|
|
|
5,659
|
|
Payments
|
|
|
(4,560
|
)
|
|
|
(4,213
|
)
|
Cancelled/Forfeited
|
|
|
(67
|
)
|
|
|
(95
|
)
|
Adjustments
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
Outstanding, June 30, 2016
|
|
|
13,073
|
|
|
|
18,724
|
|
|
|
|
|
|
As of June 30, 2016, unrecognized compensation expense related to the unvested portion of Verizons
RSUs and PSUs was approximately $0.5 billion and is expected to be recognized over approximately two years.
The RSUs granted
in 2016 have a weighted-average grant date fair value of $51.82 per unit.
We maintain
non-contributory defined benefit pension plans for many of our employees. In addition, we maintain postretirement health care and life insurance plans for our 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 and an estimated return on plan assets. These estimates are updated in the fourth quarter or upon a remeasurement event to reflect actual return on plan assets and updated
actuarial assumptions. The adjustment will be recognized in our consolidated statement of income during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains and losses.
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)
|
|
Pension
|
|
|
Health Care and Life
|
|
Three Months Ended June 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
76
|
|
|
$
|
93
|
|
|
$
|
52
|
|
|
$
|
81
|
|
Amortization of prior service cost (credit)
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
(113
|
)
|
|
|
(71
|
)
|
Expected return on plan assets
|
|
|
(257
|
)
|
|
|
(318
|
)
|
|
|
(13
|
)
|
|
|
(26
|
)
|
Interest cost
|
|
|
170
|
|
|
|
242
|
|
|
|
197
|
|
|
|
279
|
|
Remeasurement loss, net
|
|
|
1,257
|
|
|
|
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,249
|
|
|
$
|
14
|
|
|
$
|
2,416
|
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Pension
|
|
|
Health Care and Life
|
|
Six Months Ended June 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
156
|
|
|
$
|
187
|
|
|
$
|
113
|
|
|
$
|
162
|
|
Amortization of prior service cost (credit)
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
(186
|
)
|
|
|
(143
|
)
|
Expected return on plan assets
|
|
|
(528
|
)
|
|
|
(635
|
)
|
|
|
(28
|
)
|
|
|
(51
|
)
|
Interest cost
|
|
|
356
|
|
|
|
485
|
|
|
|
421
|
|
|
|
558
|
|
Remeasurement loss, net
|
|
|
1,422
|
|
|
|
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,408
|
|
|
$
|
35
|
|
|
$
|
2,613
|
|
|
$
|
526
|
|
|
|
|
|
|
21
Changes in Accounting for Benefit Plans
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 will account for it prospectively.
For the three and six months ended June 30, 2016, the impact of this change
was a reduction of the interest cost component of net periodic benefit cost and an increase to operating income of approximately $0.1 billion and $0.2 billion, respectively. The use of the full yield curve approach does not impact how we measure our
total benefit obligations at December 31 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 our
consolidated statement of income. Accordingly, this change in estimate will not impact our income from continuing operations, net income or earnings per share as measured on an annual basis.
2016 Collective Bargaining Negotiations
In the collective bargaining
agreements ratified in June 2016, Verizons 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 substantive postretirement benefit plans provide that Verizons 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 agreements. The impact is 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 the average remaining service period of the respective plans
participants 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 will result in a decrease to net periodic benefit cost and
increase to pre-tax income of approximately $0.4 billion for the seven months ended December 31, 2016.
Pension and Benefit Charges
(Credits)
During the three and six months ended June 30, 2016, we recorded a net pre-tax curtailment gain of $0.5 billion
due to the elimination of the accrual of 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 (see Note 2 for additional
details).
During the three months ended June 30, 2016, we recorded net pre-tax pension and benefit remeasurement charges of
approximately $3.6 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. These charges were comprised of a net pre-tax pension and benefit remeasurement charge of $0.8
billion measured as of April 1, 2016 related to curtailments in three of our defined benefit pension plans and one of our other postretirement benefit plans, a net pre-tax pension and benefit remeasurement 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, and a net pre-tax pension and benefit remeasurement charge of
$0.1 billion measured as of May 31, 2016 related to settlements for employees who received lump-sum distributions in three of Verizons defined benefit pension plans. The pension and benefit remeasurement charges 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 ($2.7 billion) and updated healthcare cost trend rate assumptions ($0.9 billion). Our weighted-average
discount rate assumption decreased from 4.60% at December 31, 2015 to 3.99% at May 31, 2016.
During the six months ended June
30, 2016, we also recorded a net pre-tax pension and benefit remeasurement charge of $0.2 billion related to settlements for employees who received lump-sum distributions in one of Verizons defined benefit pension plans.
22
Severance Payments
During the three and six months ended June 30, 2016, we paid severance benefits of $0.1 billion and $0.4 billion, respectively. At June 30, 2016, we had a remaining severance liability of $0.4
billion, a portion of which includes future contractual payments to employees separated as of June 30, 2016.
Employer Contributions
During the three and six months ended June 30, 2016, we contributed $0.3 billion and $0.6 billion, respectively, to our
other postretirement benefit plans and $0.2 billion and $0.3 billion, respectively, to our qualified pension plans. The contributions to our nonqualified pension plans were not material during the three and six months ended June 30, 2016. There have
been no material changes with respect to the qualified and nonqualified pension contributions in 2016 as previously disclosed in Part II. Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the year ended December 31, 2015.
9.
|
Equity and Accumulated Other Comprehensive Income
|
Equity
Changes in the components of Total equity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Attributable
to Verizon
|
|
|
Noncontrolling
Interests
|
|
|
Total
Equity
|
|
Balance at January 1, 2016
|
|
$
|
16,428
|
|
|
$
|
1,414
|
|
|
$
|
17,842
|
|
|
|
|
|
Net income
|
|
|
5,012
|
|
|
|
249
|
|
|
|
5,261
|
|
Other comprehensive income
|
|
|
2,297
|
|
|
|
|
|
|
|
2,297
|
|
|
|
|
|
|
Comprehensive income
|
|
|
7,309
|
|
|
|
249
|
|
|
|
7,558
|
|
|
|
|
|
|
|
|
|
|
Contributed capital
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Dividends declared
|
|
|
(4,606
|
)
|
|
|
|
|
|
|
(4,606
|
)
|
Common stock in treasury
|
|
|
137
|
|
|
|
|
|
|
|
137
|
|
Distributions and other
|
|
|
(20
|
)
|
|
|
(163
|
)
|
|
|
(183
|
)
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
19,244
|
|
|
$
|
1,500
|
|
|
$
|
20,744
|
|
|
|
|
|
|
Common Stock
Verizon did not repurchase any shares of Verizon common stock through its previously authorized share buyback program during the six months ended June 30, 2016. At June 30, 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.
Common stock has
been used from time to time to satisfy some of the funding requirements of employee and shareowner plans, including 3.1 million common shares issued from Treasury stock during the six months ended June 30, 2016.
23
Accumulated Other Comprehensive Income
The changes in the balances of Accumulated other comprehensive income by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Foreign currency
translation
adjustments
|
|
|
Unrealized
loss on cash
flow hedges
|
|
|
Unrealized
loss on
marketable
securities
|
|
|
Defined benefit
pension and
postretirement
plans
|
|
|
Total
|
|
Balance at January 1, 2016
|
|
$
|
(554
|
)
|
|
$
|
(278
|
)
|
|
$
|
101
|
|
|
$
|
1,281
|
|
|
$
|
550
|
|
Other comprehensive income (loss)
|
|
|
55
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
2,902
|
|
|
|
2,704
|
|
Amounts reclassified to net income
|
|
|
|
|
|
|
48
|
|
|
|
(16
|
)
|
|
|
(439
|
)
|
|
|
(407
|
)
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
55
|
|
|
|
(205
|
)
|
|
|
(16
|
)
|
|
|
2,463
|
|
|
|
2,297
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
(499
|
)
|
|
$
|
(483
|
)
|
|
$
|
85
|
|
|
$
|
3,744
|
|
|
$
|
2,847
|
|
|
|
|
|
|
The amounts presented above in net other comprehensive income (loss) are net of taxes which are not
significant except as noted below. For the six months ended June 30, 2016, 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 condensed consolidated statement of income. For the six months ended June 30, 2016, all other amounts reclassified to net income in the table above are included in Other income and (expense), net on our
condensed consolidated statement of income.
Defined Benefit Pension and Postretirement Plans
The change in defined benefit and postretirement plans for the six months ended June 30, 2016 of $4.7 billion ($2.9 billion net of taxes)
was due to the change in prior service credit as a result of our accounting for contractual healthcare caps and bargained for changes (see Note 8 for additional detail).
Reclassification adjustments on defined benefit pension and postretirement plans for the six months ended June 30, 2016 reflect 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).
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 reportable segments based on segment operating income, consistent with the chief operating decision makers assessment of segment performance.
Corporate and other includes the operations of AOL and related businesses, unallocated corporate expenses, the results of other
insignificant businesses, such as our investments in unconsolidated businesses accounted for on an equity method basis, 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 makers assessment of segment performance.
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.
On April 1, 2016, we completed the sale of our local exchange business and related landline activities in California, Florida and Texas
to Frontier (see Note 2). Accordingly, the corresponding Wireline results for these operations have been reclassified to Corporate and other for all comparative periods presented consistent with the information regularly reviewed by our chief
operating decision maker.
24
In addition, Corporate and other includes the results of our vehicle OEM and Networkfleet
businesses for all periods presented, which were reclassified from our Wireline segment effective April 1, 2016. The impact of this reclassification was not material to our condensed consolidated financial statements or our segment results of
operations.
We have adjusted prior period consolidated and segment information, where applicable, to conform to current
period presentation.
Our reportable segments and their principal activities consist of the following:
|
|
|
Segment
|
|
Description
|
Wireless
|
|
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
|
|
Wirelines 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.
|
25
The following table provides operating financial information for our two reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
External Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
16,692
|
|
|
$
|
17,670
|
|
|
$
|
33,461
|
|
|
$
|
35,566
|
|
Equipment
|
|
|
3,704
|
|
|
|
3,861
|
|
|
|
7,658
|
|
|
|
7,234
|
|
Other
|
|
|
1,216
|
|
|
|
1,055
|
|
|
|
2,412
|
|
|
|
2,088
|
|
|
|
|
|
|
Total Wireless
|
|
|
21,612
|
|
|
|
22,586
|
|
|
|
43,531
|
|
|
|
44,888
|
|
|
|
|
|
|
Wireline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer retail
|
|
|
3,165
|
|
|
|
3,174
|
|
|
|
6,345
|
|
|
|
6,302
|
|
Small business
|
|
|
408
|
|
|
|
441
|
|
|
|
830
|
|
|
|
886
|
|
|
|
|
|
|
Mass Markets
|
|
|
3,573
|
|
|
|
3,615
|
|
|
|
7,175
|
|
|
|
7,188
|
|
Global Enterprise
|
|
|
2,906
|
|
|
|
3,006
|
|
|
|
5,862
|
|
|
|
6,053
|
|
Global Wholesale
|
|
|
1,018
|
|
|
|
1,064
|
|
|
|
2,062
|
|
|
|
2,163
|
|
Other
|
|
|
87
|
|
|
|
81
|
|
|
|
170
|
|
|
|
169
|
|
|
|
|
|
|
Total Wireline
|
|
|
7,584
|
|
|
|
7,766
|
|
|
|
15,269
|
|
|
|
15,573
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
29,196
|
|
|
$
|
30,352
|
|
|
$
|
58,800
|
|
|
$
|
60,461
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
92
|
|
|
$
|
27
|
|
|
$
|
177
|
|
|
$
|
53
|
|
Wireline
|
|
|
239
|
|
|
|
247
|
|
|
|
477
|
|
|
|
490
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
331
|
|
|
$
|
274
|
|
|
$
|
654
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
21,704
|
|
|
$
|
22,613
|
|
|
$
|
43,708
|
|
|
$
|
44,941
|
|
Wireline
|
|
|
7,823
|
|
|
|
8,013
|
|
|
|
15,746
|
|
|
|
16,063
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
29,527
|
|
|
$
|
30,626
|
|
|
$
|
59,454
|
|
|
$
|
61,004
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
8,017
|
|
|
$
|
7,696
|
|
|
$
|
15,897
|
|
|
$
|
15,506
|
|
Wireline
|
|
|
(463
|
)
|
|
|
(199
|
)
|
|
|
(530
|
)
|
|
|
(419
|
)
|
|
|
|
|
|
Total reportable segments
|
|
$
|
7,554
|
|
|
$
|
7,497
|
|
|
$
|
15,367
|
|
|
$
|
15,087
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
At June 30,
2016
|
|
|
At December 31,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
195,871
|
|
|
$
|
185,405
|
|
Wireline
|
|
|
61,555
|
|
|
|
78,305
|
|
|
|
|
|
|
Total reportable segments
|
|
|
257,426
|
|
|
|
263,710
|
|
Corporate and other
|
|
|
203,512
|
|
|
|
205,476
|
|
Eliminations
|
|
|
(229,068
|
)
|
|
|
(225,011
|
)
|
|
|
|
|
|
Total consolidated reported
|
|
$
|
231,870
|
|
|
$
|
244,175
|
|
|
|
|
|
|
A reconciliation of the reportable segment operating revenues to consolidated operating revenues is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total reportable segment operating revenues
|
|
$
|
29,527
|
|
|
$
|
30,626
|
|
|
$
|
59,454
|
|
|
$
|
61,004
|
|
Corporate and other
|
|
|
1,366
|
|
|
|
553
|
|
|
|
2,675
|
|
|
|
1,089
|
|
Eliminations
|
|
|
(361
|
)
|
|
|
(282
|
)
|
|
|
(706
|
)
|
|
|
(554
|
)
|
Impact of divested operations
|
|
|
|
|
|
|
1,327
|
|
|
|
1,280
|
|
|
|
2,669
|
|
|
|
|
|
|
Total consolidated operating revenues
|
|
$
|
30,532
|
|
|
$
|
32,224
|
|
|
$
|
62,703
|
|
|
$
|
64,208
|
|
|
|
|
|
|
Fios revenues are included within our Wireline segment and amounted to approximately $2.8 billion and
$5.5 billion, respectively, for the three and six months ended June 30, 2016. Fios revenues amounted to approximately $2.7 billion and $5.3 billion, respectively, for the three and six months ended June 30, 2015.
A reconciliation of the total of the reportable segments operating income to consolidated income before provision for income taxes
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total reportable segment operating income
|
|
$
|
7,554
|
|
|
$
|
7,497
|
|
|
$
|
15,367
|
|
|
$
|
15,087
|
|
Corporate and other
|
|
|
(457
|
)
|
|
|
(417
|
)
|
|
|
(966
|
)
|
|
|
(698
|
)
|
Pension and benefit charges (Note 8)
|
|
|
(3,550
|
)
|
|
|
|
|
|
|
(3,715
|
)
|
|
|
|
|
Gain on access line sale (Note 2)
|
|
|
1,007
|
|
|
|
|
|
|
|
1,007
|
|
|
|
|
|
Gain on spectrum license transaction (Note 2)
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
Impact of divested operations
|
|
|
|
|
|
|
741
|
|
|
|
661
|
|
|
|
1,392
|
|
|
|
|
|
|
Total consolidated operating income
|
|
|
4,554
|
|
|
|
7,821
|
|
|
|
12,496
|
|
|
|
15,781
|
|
|
|
|
|
|
Equity in losses of unconsolidated businesses
|
|
|
(20
|
)
|
|
|
(18
|
)
|
|
|
(40
|
)
|
|
|
(52
|
)
|
Other income and (expense), net
|
|
|
(1,826
|
)
|
|
|
32
|
|
|
|
(1,794
|
)
|
|
|
107
|
|
Interest expense
|
|
|
(1,013
|
)
|
|
|
(1,208
|
)
|
|
|
(2,201
|
)
|
|
|
(2,540
|
)
|
|
|
|
|
|
Income Before Provision For Income Taxes
|
|
$
|
1,695
|
|
|
$
|
6,627
|
|
|
$
|
8,461
|
|
|
$
|
13,296
|
|
|
|
|
|
|
No single customer accounted for more than 10% of our total operating revenues during the three and six
months ended June 30, 2016 and 2015.
27
11.
|
Commitments and Contingencies
|
In the ordinary
course of business, Verizon is involved in various commercial 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 allocation 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.
Verizon is currently involved in approximately 50 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 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 businesses 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, counterparties 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 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.
28