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 for the year ended December 31, 2015 of Verizon Communications Inc. (Verizon or the Company) included in its Current Report on Form 8-K dated July 29, 2016. 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 7 million
and 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 nine months ended September 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 nine months ended September 30, 2015,
respectively. There were no outstanding options to purchase shares that would have been anti-dilutive for the three and nine months ended September 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 August 2016, the accounting standard update related to the classification 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. The amendments in this update are 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 condensed consolidated financial statements.
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 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, classification 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; however, early adoption is permitted. The adoption of this standard update is not expected to have a significant impact 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 also amends current guidance for the recognition of costs to obtain
and fulfill contracts with customers requiring that all incremental costs of obtaining and direct costs of fulfilling contracts with customers be deferred and recognized over the expected customer life. 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 as well as timing of recognition of certain contract costs will be impacted. In August 2015, an accounting
standard update was issued that delayed the effective date of this standard until the first quarter of 2018.
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.
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 updates reporting and disclosure requirements.
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. (AT&T) 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 nine months ended September 30, 2016.
8
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 administrative expense on our condensed consolidated statement of income for the nine months ended September 30, 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. This non-cash exchange is subject to customary closing conditions and is expected to be completed in the first half of 2017. Upon completion of this transaction, we expect to record a gain which will be determined upon the
closing of the transaction.
During the three and nine months ended September 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.
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 nine months ended September 30, 2016, these
businesses generated revenues of approximately $1.3 billion and operating income of $0.7 billion for Verizon. For the three and nine months ended September 30, 2015, these businesses generated revenues of $1.3 billion and $4.0 billion, respectively,
and operating income of $0.7 billion and $2.1 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 statement of income for nine months ended September 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.
XO Holdings
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 targeted to close by the end of the first quarter of 2017, subject to regulatory
approvals. Separately, Verizon entered into an agreement to lease certain wireless spectrum from XO Holdings and has an option, exercisable under certain circumstances, to buy the XO Holdings entity that owns its wireless spectrum.
9
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.
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 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 nine months ended September 30, 2016, we made cash payments of $179 million in respect of acquisition-date estimated liabilities to be
paid. As of September 30, 2016, the remaining balance of estimated liabilities to be paid was $198 million.
|
10
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.
On September 22, 2016, Yahoo announced that it had confirmed that a copy of certain information associated with at least 500
million user accounts was stolen from its network in late 2014. This could result in a material adverse effect under the terms of our agreement. We are continuing to evaluate the impacts of this event on the transaction.
Other
On July 29, 2016,
Verizon acquired Telogis, Inc., a global, cloud-based mobile enterprise management software business for $0.9 billion of cash consideration. Upon closing, we recorded $0.6 billion of goodwill that is included within Corporate and other.
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. Under the terms of the Transaction Agreement, we will acquire Fleetmatics pursuant to a scheme of arrangement under
the Irish Companies Act 2014 for $60.00 per ordinary share in cash, representing a value of approximately $2.4 billion. The acquisition is subject to customary regulatory approvals and closing conditions, including the approval of Fleetmatics
shareholders and the sanction of the scheme of arrangement by the Irish High Court. Approval from Fleetmatics shareholders has been obtained. We expect this transaction to close in the fourth quarter of 2016.
On September 12, 2016, Verizon announced an agreement to acquire a leading provider of Internet of Things (IoT) solutions for smart
communities for cash consideration that is not significant. The transaction was completed in October 2016.
During the nine
months ended September 30, 2016, we acquired various other businesses and investments for cash consideration that was not significant.
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)
|
|
|
26
|
|
Capitalized interest on wireless licenses
|
|
|
384
|
|
Reclassifications, adjustments and other
|
|
|
422
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
87,407
|
|
|
|
|
|
|
11
Reclassifications, adjustments and other includes the exchanges of wireless licenses in 2016
(see Note 2 for additional details).
At September 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 5.2 years as of September 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)
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
641
|
|
Reclassifications, adjustments and other
|
|
|
|
|
|
|
(113
|
)
|
|
|
111
|
|
|
|
(2
|
)
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
18,393
|
|
|
$
|
4,218
|
|
|
$
|
3,359
|
|
|
$
|
25,970
|
|
|
|
|
|
|
We recognized goodwill of $0.6 billion in Corporate and other as a result of an acquisition in the third
quarter of 2016 (see Note 2 for additional details). 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 September 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)
|
|
$
|
3,963
|
|
|
$
|
(2,355
|
)
|
|
$
|
1,608
|
|
|
$
|
4,139
|
|
|
$
|
(2,365
|
)
|
|
$
|
1,774
|
|
Non-network internal-use software (3 to 8 years)
|
|
|
15,530
|
|
|
|
(10,593
|
)
|
|
|
4,937
|
|
|
|
14,542
|
|
|
|
(9,620
|
)
|
|
|
4,922
|
|
Other (5 to 25 years)
|
|
|
1,688
|
|
|
|
(541
|
)
|
|
|
1,147
|
|
|
|
1,346
|
|
|
|
(450
|
)
|
|
|
896
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,181
|
|
|
$
|
(13,489)
|
|
|
$
|
7,692
|
|
|
$
|
20,027
|
|
|
$
|
(12,435)
|
|
|
$
|
7,592
|
|
|
|
|
|
|
|
|
|
|
The amortization expense for Other intangible assets was as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
|
$ 419
|
|
|
|
$ 1,255
|
|
2015
|
|
|
438
|
|
|
|
1,247
|
|
The estimated future amortization expense for Other intangible assets is as follows:
|
|
|
|
|
Years
|
|
(dollars in millions)
|
|
Remainder of 2016
|
|
|
$ 416
|
|
2017
|
|
|
1,505
|
|
2018
|
|
|
1,327
|
|
2019
|
|
|
1,121
|
|
2020
|
|
|
892
|
|
12
Changes to debt during the nine months ended September 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
|
|
Proceeds from borrowings
|
|
|
|
|
|
|
8,152
|
|
|
|
8,152
|
|
Proceeds from asset-backed borrowings
|
|
|
|
|
|
|
2,594
|
|
|
|
2,594
|
|
Repayments of borrowings and capital leases obligations
|
|
|
(6,110
|
)
|
|
|
(8,400
|
)
|
|
|
(14,510
|
)
|
Decrease in short-term obligations, excluding current maturities
|
|
|
(120
|
)
|
|
|
|
|
|
|
(120
|
)
|
Reclassifications of long-term debt
|
|
|
3,412
|
|
|
|
(3,412
|
)
|
|
|
|
|
Other
|
|
|
181
|
|
|
|
565
|
|
|
|
746
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
3,852
|
|
|
$
|
102,739
|
|
|
$
|
106,591
|
|
|
|
|
|
|
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.
13
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.
Debt Issuances
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 London
14
Interbank Offered Rate (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 immaterial loss. Proceeds not used for the redemption of these notes were used for general corporate purposes.
Asset-Backed Debt
As of September 30, 2016, the carrying value of our asset-backed debt was $2.6 billion. Our asset-backed debt
includes notes (the Asset-Backed Notes) issued to third-party investors (Investors) and loans (the 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 transfers 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
receivables. 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 Verizons
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 and 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 condensed 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 condensed 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 not reflected within Cash flows from financing activities in our condensed consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are
included on our condensed 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%. 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.
15
ABS Financing Facility
During the third quarter of 2016, we entered into a device payment plan agreement financing facility 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, and we have the option of requesting an additional $1.5 billion of committed funding. These loans have an
expected weighted average life of about 2.6 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 September 30, 2016, outstanding borrowings under the ABS Financing
Facility were $1.5 billion.
Variable Interest Entities
The ABS Entities meet the definition of a variable interest entity (VIE) for which we have determined that we have both the power to direct the activities of the entity that most significantly impact the
entitys 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 condensed consolidated balance sheets.
The assets and liabilities related to our asset-backed
debt arrangements included on our condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Account receivable, net
|
|
$
|
1,733
|
|
|
$
|
|
|
Prepaid expenses and other
|
|
|
71
|
|
|
|
|
|
Other assets
|
|
|
1,296
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,595
|
|
|
|
|
|
See Note 5 for more information on device payment plan agreement receivables used to secure asset-backed
debt.
Credit Facility
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 September 30, 2016, the unused
borrowing capacity under our $9.0 billion credit facility was approximately $8.9 billion.
Additional Financing Activities (Non-Cash
Transaction)
During the nine months ended September 30, 2016, we financed, primarily through vendor financing
arrangements, the purchase of approximately $0.4 billion of long-lived assets, consisting primarily of network equipment. At September 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 statements 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 statements of income.
Guarantees
We guarantee the debentures of our operating telephone company subsidiaries. As of September 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.
16
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 September 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 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 agreement receivables, net, that
continue to be recognized in our condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
At September 30,
2016
|
|
|
At December 31,
2015
|
|
Device payment plan agreement receivables, gross
|
|
$
|
7,735
|
|
|
$
|
3,720
|
|
Unamortized imputed interest
|
|
|
(332
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
Device payment plan agreement receivables, net of unamortized imputed interest
|
|
|
7,403
|
|
|
|
3,578
|
|
Allowance for credit losses
|
|
|
(601
|
)
|
|
|
(444
|
)
|
|
|
|
|
|
Device payment plan agreement receivables, net
|
|
$
|
6,802
|
|
|
$
|
3,134
|
|
|
|
|
|
|
|
|
|
Classified on our condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
4,000
|
|
|
$
|
1,979
|
|
Other assets
|
|
|
2,802
|
|
|
|
1,155
|
|
|
|
|
|
|
Device payment plan agreement receivables, net
|
|
$
|
6,802
|
|
|
$
|
3,134
|
|
|
|
|
|
|
Included in our device payment plan agreement receivables, net at September 30, 2016 are net device
payment plan agreement receivables of $3.0 billion that have been transferred to ABS Entities and continue to be reported in our condensed consolidated financial statements.
At the time of the 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 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.
17
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.
The balance and aging of the device payment plan agreement receivables on a gross basis was as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
At September 30,
2016
|
|
|
At December 31,
2015
|
|
Unbilled
|
|
$
|
7,261
|
|
|
$
|
3,420
|
|
Billed:
|
|
|
|
|
|
|
|
|
Current
|
|
|
375
|
|
|
|
227
|
|
Past due
|
|
|
99
|
|
|
|
73
|
|
|
|
|
|
|
Device payment plan agreement receivables, gross
|
|
$
|
7,735
|
|
|
$
|
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
|
|
|
437
|
|
Write-offs
|
|
|
(347
|
)
|
Allowance related to receivables sold
|
|
|
59
|
|
Other
|
|
|
8
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
601
|
|
|
|
|
|
|
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 $0.1 billion at September 30, 2016 and approximately $0.2 billion at December 31, 2015, is included in Other current liabilities on our condensed consolidated balance sheets.
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 receivables
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 condensed consolidated balance sheet, but which we continue to service, was $6.4 billion at September 30, 2016. As of September 30, 2016, the total portfolio of device payment
plan agreement receivables, including derecognized device payment plan agreement receivables, that we are servicing was $14.1 billion.
18
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 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.
There were no sales of device payment plan agreement receivables during the three months ended September 30,
2016. During the nine months ended September 30, 2016, we sold $3.3 billion of receivables, net of allowances and imputed interest. 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 the three and nine months ended September 30,
2015, we sold $2.4 billion and $6.1 billion, respectively, of receivables, net of allowances and imputed interest, and received cash proceeds from new transfers of $2.0 billion and $4.5 billion, respectively. Additionally, during the three and
nine months ended September 30, 2015, we recorded a deferred purchase price of $0.4 billion and $1.7 billion, respectively.
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 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. To date, we have collected $0.5 billion which was returned as deferred purchase price and recorded within Cash flows provided by
operating activities on our condensed consolidated statements of cash flows. At September 30, 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 $1.0 billion included within Other assets in our condensed consolidated balance sheets. At December 31, 2015, our deferred purchase price receivable was $2.2 billion, which was included within Other assets in our condensed consolidated
balance sheets.
Variable Interest Entities
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 condensed consolidated 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 $5.7 billion, net of fees. To date, cash proceeds received, net of remittances, were $4.4 billion. During the nine months ended September 30, 2016, credit losses on receivables sold were $0.1 billion.
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 $2.2 billion as of September 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.
19
6.
|
Fair Value Measurements
|
The following table presents the
balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Level 1
(1)
|
|
|
Level 2
(2)
|
|
|
Level 3
(3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
126
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
126
|
|
Fixed income securities
|
|
|
15
|
|
|
|
605
|
|
|
|
|
|
|
|
620
|
|
Interest rate swaps
|
|
|
|
|
|
|
420
|
|
|
|
|
|
|
|
420
|
|
Net investment hedge
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Interest rate cap
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
Total
|
|
$
|
141
|
|
|
$
|
1,034
|
|
|
$
|
|
|
|
$
|
1,175
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
2
|
|
Net investment hedge
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Cross currency swaps
|
|
|
|
|
|
|
1,536
|
|
|
|
|
|
|
|
1,536
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
1,539
|
|
|
$
|
|
|
|
$
|
1,539
|
|
|
|
|
|
|
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
|
20
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 nine months ended September 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 September 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
|
|
$
|
105,628
|
|
|
$
|
122,520
|
|
|
$
|
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, interest rate locks and interest rate
caps. 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 September 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 LIBOR, 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. During the third quarter of 2016, we entered into interest rate swaps with a total notional value of $1.1 billion. During the third quarter of
2016, we settled $0.9 billion notional amount of interest rate swaps. The ineffective portion of these interest rate swaps was not material for the three and nine months ended September 30, 2016 and 2015, respectively.
21
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 third quarter of 2016, we settled $2.0 billion notional amount of these forward interest rate swaps. During the three and nine months ended September
30, 2016, pre-tax losses of an immaterial amount and $0.2 billion, respectively, were recognized in Other comprehensive income (loss). During the three and nine months ended September 30, 2015, pre-tax gains of $0.2 billion, respectively, were
recognized in Other comprehensive income (loss).
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 second quarter of 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 nine months ended September 30, 2016, pre-tax gains of $0.3 billion and $0.1 billion, respectively, were recognized in Other comprehensive income
(loss). During the three and nine months ended September 30, 2015, pre-tax losses of $0.2 billion and $0.9 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.
Interest Rate Caps
We
enter into interest rate caps to mitigate our interest exposure on our ABS Financing Facility against changes in interest rates. We have not applied hedge accounting to these interest rate caps. During the third quarter of 2016, we entered
into interest rate caps with a notional value of $1.5 billion.
The following table sets forth the notional amounts of our
outstanding derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016
|
|
|
At December 31, 2015
|
|
(dollars in millions)
|
|
Notional Amount
|
|
|
Notional Amount
|
|
Interest rate swaps
|
|
$
|
7,850
|
|
|
$
|
7,620
|
|
Forward interest rate swaps
|
|
|
|
|
|
|
750
|
|
Cross currency swaps
|
|
|
9,606
|
|
|
|
9,675
|
|
Net investment hedge
|
|
|
864
|
|
|
|
864
|
|
Interest rate caps
|
|
|
1,540
|
|
|
|
|
|
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.
22
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.
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
|
|
|
4,044
|
|
|
|
6,124
|
|
Payments
|
|
|
(4,736
|
)
|
|
|
(4,702
|
)
|
Cancelled/Forfeited
|
|
|
(94
|
)
|
|
|
(131
|
)
|
Adjustments
|
|
|
|
|
|
|
170
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
13,117
|
|
|
|
18,664
|
|
|
|
|
|
|
As of September 30, 2016, unrecognized compensation expense related to the unvested portion of
Verizons RSUs and PSUs was approximately $0.4 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 $51.90 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 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 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 September 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
82
|
|
|
$
|
93
|
|
|
$
|
40
|
|
|
$
|
81
|
|
Amortization of prior service cost (credit)
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
(235
|
)
|
|
|
(72
|
)
|
Expected return on plan assets
|
|
|
(257
|
)
|
|
|
(317
|
)
|
|
|
(13
|
)
|
|
|
(25
|
)
|
Interest cost
|
|
|
162
|
|
|
|
242
|
|
|
|
162
|
|
|
|
280
|
|
Remeasurement loss, net
|
|
|
555
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) cost
|
|
$
|
552
|
|
|
$
|
359
|
|
|
$
|
(46
|
)
|
|
$
|
264
|
|
Termination benefits
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
556
|
|
|
$
|
359
|
|
|
$
|
(46
|
)
|
|
$
|
264
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Pension
|
|
|
Health Care and Life
|
|
Nine Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
238
|
|
|
$
|
280
|
|
|
$
|
153
|
|
|
$
|
243
|
|
Amortization of prior service cost (credit)
|
|
|
12
|
|
|
|
(3
|
)
|
|
|
(421
|
)
|
|
|
(215
|
)
|
Expected return on plan assets
|
|
|
(785
|
)
|
|
|
(952
|
)
|
|
|
(41
|
)
|
|
|
(76
|
)
|
Interest cost
|
|
|
518
|
|
|
|
727
|
|
|
|
583
|
|
|
|
838
|
|
Remeasurement loss, net
|
|
|
1,977
|
|
|
|
342
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) cost
|
|
$
|
1,960
|
|
|
$
|
394
|
|
|
$
|
2,567
|
|
|
$
|
790
|
|
Termination benefits
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,964
|
|
|
$
|
394
|
|
|
$
|
2,567
|
|
|
$
|
790
|
|
|
|
|
|
|
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 nine months ended September 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 $0.3 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 statements 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) during the nine months ended September 30, 2016. 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 an increase to pre-tax income of approximately $0.4 billion for the seven months ended December 31, 2016, of which $0.2 billion has been reclassified to net periodic cost during the three and nine months ended September 30,
2016.
Severance, Pension and Benefit Charges (Credits)
During the nine months ended September 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 September 30, 2016, we recorded net pre-tax severance, pension and benefit charges of approximately $0.8 billion primarily for our pension plans in accordance with our
accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension remeasurement charges of $0.6 billion primarily related to settlements
24
for employees who received lump-sum distributions in five of our defined benefit pension plans. The charges were primarily driven by a decrease in our discount rate assumption of $0.8
billion used to determine the current year liabilities of our pension plans, partially offset by the difference between our expected return on assets of 7.0% and our annualized actual return on assets of 11.0% at August 31, 2016 ($0.2
billion). Our weighted average discount rate assumption was 3.61% at August 31, 2016. As part of this charge, we recorded severance costs of $0.2 billion under our existing separation plans.
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 three months ended March 31, 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.
During the three and nine months ended September 30, 2015, we recorded net pre-tax pension remeasurement charges of approximately $0.3
billion, in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension remeasurement charges relate to settlements for employees who received lump-sum distributions in four of
Verizons seven defined benefit pension plans. The pension remeasurement charges from the impacted plans were primarily driven by a $0.7 billion loss resulting from the difference between our expected return on assets assumption of 7.25%
at December 31, 2014 and our annualized actual return on assets of 1.96% at September 30, 2015, as well as other losses of $0.1 billion. These losses were partially offset by a gain of $0.5 billion resulting from an increase in our discount
rate assumption used to determine the current year liabilities of our pension plans. Our weighted-average discount rate assumption increased from 4.2% at December 31, 2014 to 4.5% at September 30, 2015.
Severance Payments
During the three and nine months ended September 30, 2016, we paid severance benefits of $0.1 billion and $0.4 billion, respectively. At
September 30, 2016, we had a remaining severance liability of $0.6 billion, a portion of which includes future contractual payments to employees separated as of September 30, 2016.
Employer Contributions
During the three and nine months ended September
30, 2016, we contributed $0.2 billion and $0.9 billion, respectively, to our other postretirement benefit plans. During the three and nine months ended September 30, 2016, we contributed $0.5 billion and $0.8 billion, respectively, to our
qualified pension plans, which included $0.2 billion of discretionary contributions. The contributions to our nonqualified pension plans were $0.1 billion during the three and nine months ended September 30, 2016. There have been no material
changes with respect to the qualified and nonqualified pension contributions in 2016 as previously disclosed in Managements Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31,
2015 included in our Current Report on Form 8-K dated July 29, 2016.
25
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
|
|
|
8,632
|
|
|
|
376
|
|
|
|
9,008
|
|
Other comprehensive income
|
|
|
2,208
|
|
|
|
|
|
|
|
2,208
|
|
|
|
|
|
|
Comprehensive income
|
|
|
10,840
|
|
|
|
376
|
|
|
|
11,216
|
|
|
|
|
|
|
|
|
|
|
Contributed capital
|
|
|
(17
|
)
|
|
|
|
|
|
|
(17
|
)
|
Dividends declared
|
|
|
(6,960
|
)
|
|
|
|
|
|
|
(6,960
|
)
|
Common stock in treasury
|
|
|
152
|
|
|
|
|
|
|
|
152
|
|
Distributions and other
|
|
|
17
|
|
|
|
(267
|
)
|
|
|
(250
|
)
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
20,460
|
|
|
$
|
1,523
|
|
|
$
|
21,983
|
|
|
|
|
|
|
Common Stock
Verizon did not repurchase any shares of Verizon common stock through its previously authorized share buyback program during the nine months ended September 30, 2016. At September 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 3.5 million common shares issued from Treasury stock during the nine months ended September 30, 2016.
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)
|
|
|
(23
|
)
|
|
|
(91
|
)
|
|
|
8
|
|
|
|
2,902
|
|
|
|
2,796
|
|
Amounts reclassified to net income
|
|
|
|
|
|
|
33
|
|
|
|
(43
|
)
|
|
|
(578
|
)
|
|
|
(588
|
)
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(23
|
)
|
|
|
(58
|
)
|
|
|
(35
|
)
|
|
|
2,324
|
|
|
|
2,208
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
(577
|
)
|
|
$
|
(336
|
)
|
|
$
|
66
|
|
|
$
|
3,605
|
|
|
$
|
2,758
|
|
|
|
|
|
|
The amounts presented above in net other comprehensive income (loss) are net of taxes which are not
significant except as noted below. For the nine months ended September 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 statements of income. For the nine months ended September 30, 2016, the amounts reclassified to net income related to unrealized loss on marketable securities in the table above
are included in Other income and (expense), net on our condensed consolidated statements of income. For the nine months ended September 30, 2016, the amounts reclassified to net income related to unrealized loss on cash flow hedges in the table
above are included in Other income and (expense), net and Interest expense on our condensed consolidated statements of income.
26
Defined Benefit Pension and Postretirement Plans
The change in defined benefit and postretirement plans for the nine months ended September 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 nine months ended September 30, 2016 include 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 vehicle OEM and Networkfleet businesses and 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.
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.
|
27
The following table provides operating financial information for our two reportable
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
External Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
16,647
|
|
|
$
|
17,580
|
|
|
$
|
50,108
|
|
|
$
|
53,146
|
|
Equipment
|
|
|
4,124
|
|
|
|
4,292
|
|
|
|
11,782
|
|
|
|
11,526
|
|
Other
|
|
|
1,249
|
|
|
|
1,108
|
|
|
|
3,661
|
|
|
|
3,196
|
|
|
|
|
|
|
Total Wireless
|
|
|
22,020
|
|
|
|
22,980
|
|
|
|
65,551
|
|
|
|
67,868
|
|
|
|
|
|
|
Wireline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer retail
|
|
|
3,174
|
|
|
|
3,168
|
|
|
|
9,519
|
|
|
|
9,470
|
|
Small business
|
|
|
411
|
|
|
|
434
|
|
|
|
1,241
|
|
|
|
1,320
|
|
|
|
|
|
|
Mass Markets
|
|
|
3,585
|
|
|
|
3,602
|
|
|
|
10,760
|
|
|
|
10,790
|
|
Global Enterprise
|
|
|
2,886
|
|
|
|
2,987
|
|
|
|
8,748
|
|
|
|
9,040
|
|
Global Wholesale
|
|
|
1,009
|
|
|
|
1,046
|
|
|
|
3,071
|
|
|
|
3,209
|
|
Other
|
|
|
78
|
|
|
|
87
|
|
|
|
248
|
|
|
|
256
|
|
|
|
|
|
|
Total Wireline
|
|
|
7,558
|
|
|
|
7,722
|
|
|
|
22,827
|
|
|
|
23,295
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
29,578
|
|
|
$
|
30,702
|
|
|
$
|
88,378
|
|
|
$
|
91,163
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
81
|
|
|
$
|
25
|
|
|
$
|
258
|
|
|
$
|
78
|
|
Wireline
|
|
|
229
|
|
|
|
245
|
|
|
|
706
|
|
|
|
735
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
310
|
|
|
$
|
270
|
|
|
$
|
964
|
|
|
$
|
813
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
22,101
|
|
|
$
|
23,005
|
|
|
$
|
65,809
|
|
|
$
|
67,946
|
|
Wireline
|
|
|
7,787
|
|
|
|
7,967
|
|
|
|
23,533
|
|
|
|
24,030
|
|
|
|
|
|
|
Total reportable segments
|
|
$
|
29,888
|
|
|
$
|
30,972
|
|
|
$
|
89,342
|
|
|
$
|
91,976
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
7,647
|
|
|
$
|
7,668
|
|
|
$
|
23,544
|
|
|
$
|
23,174
|
|
Wireline
|
|
|
156
|
|
|
|
(109
|
)
|
|
|
(374
|
)
|
|
|
(528
|
)
|
|
|
|
|
|
Total reportable segments
|
|
$
|
7,803
|
|
|
$
|
7,559
|
|
|
$
|
23,170
|
|
|
$
|
22,646
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
At September 30,
2016
|
|
|
At December 31,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
204,409
|
|
|
$
|
185,405
|
|
Wireline
|
|
|
63,586
|
|
|
|
78,305
|
|
|
|
|
|
|
Total reportable segments
|
|
|
267,995
|
|
|
|
263,710
|
|
Corporate and other
|
|
|
208,837
|
|
|
|
205,476
|
|
Eliminations
|
|
|
(237,334
|
)
|
|
|
(225,011
|
)
|
|
|
|
|
|
Total consolidated reported
|
|
$
|
239,498
|
|
|
$
|
244,175
|
|
|
|
|
|
|
A reconciliation of the reportable segment operating revenues to consolidated operating revenues is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total reportable segment operating revenues
|
|
$
|
29,888
|
|
|
$
|
30,972
|
|
|
$
|
89,342
|
|
|
$
|
91,976
|
|
Corporate and other
|
|
|
1,403
|
|
|
|
1,170
|
|
|
|
4,078
|
|
|
|
2,259
|
|
Eliminations
|
|
|
(354
|
)
|
|
|
(291
|
)
|
|
|
(1,060
|
)
|
|
|
(845
|
)
|
Impact of divested operations
|
|
|
|
|
|
|
1,307
|
|
|
|
1,280
|
|
|
|
3,976
|
|
|
|
|
|
|
Total consolidated operating revenues
|
|
$
|
30,937
|
|
|
$
|
33,158
|
|
|
$
|
93,640
|
|
|
$
|
97,366
|
|
|
|
|
|
|
Fios revenues are included within our Wireline segment and amounted to approximately $2.8 billion and
$8.3 billion, respectively, for the three and nine months ended September 30, 2016. Fios revenues amounted to approximately $2.7 billion and $8.0 billion, respectively, for the three and nine months ended September 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(dollars in millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total reportable segment operating income
|
|
$
|
7,803
|
|
|
$
|
7,559
|
|
|
$
|
23,170
|
|
|
$
|
22,646
|
|
Corporate and other
|
|
|
(466
|
)
|
|
|
(399
|
)
|
|
|
(1,432
|
)
|
|
|
(1,097
|
)
|
Severance, pension and benefit charges (Note 8)
|
|
|
(797
|
)
|
|
|
(342
|
)
|
|
|
(4,512
|
)
|
|
|
(342
|
)
|
Gain on access line sale (Note 2)
|
|
|
|
|
|
|
|
|
|
|
1,007
|
|
|
|
|
|
Gain on spectrum license transaction (Note 2)
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
Impact of divested operations
|
|
|
|
|
|
|
717
|
|
|
|
661
|
|
|
|
2,109
|
|
|
|
|
|
|
Total consolidated operating income
|
|
|
6,540
|
|
|
|
7,535
|
|
|
|
19,036
|
|
|
|
23,316
|
|
|
|
|
|
|
Equity in losses of unconsolidated businesses
|
|
|
(23
|
)
|
|
|
(18
|
)
|
|
|
(63
|
)
|
|
|
(70
|
)
|
Other income and (expense), net
|
|
|
97
|
|
|
|
51
|
|
|
|
(1,697
|
)
|
|
|
158
|
|
Interest expense
|
|
|
(1,038
|
)
|
|
|
(1,202
|
)
|
|
|
(3,239
|
)
|
|
|
(3,742
|
)
|
|
|
|
|
|
Income Before Provision For Income Taxes
|
|
$
|
5,576
|
|
|
$
|
6,366
|
|
|
$
|
14,037
|
|
|
$
|
19,662
|
|
|
|
|
|
|
No single customer accounted for more than 10% of our total operating revenues during the three and nine
months ended September 30, 2016 and 2015.
29
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 40 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.
30