null  null
2014 Annual report
Financial Highlights
as of December 31, 2014
Consolidated
Revenues
Cash Flows
from Operating
Activities
(billions)
Reported
Diluted Earnings
per Share
(billions)
$115.8
$120.6
$127.1
Dividends
Declared
per Share
(non-gaap)
$4.00
$38.8
$31.5
Adjusted
Diluted Earnings
per Share
$3.35
$2.03
$2.09
12
13
$2.16
$2.84
$30.6
$2.42
$2.24
$0.31
12
13
14
12
13
14
12
13
14
12
13
14
14
Corporate Highlights
•$13.4 billion in free cash flow (non-GAAP)
•48.5% wireless segment EBITDA service margin
•5.4% growth in operating revenues
•8.2% growth in wireless total operating revenues
•3.8% annual dividend increase •544,000 FiOS Internet subscriber net additions •108.2 million wireless retail connections
•387,000 FiOS Video subscriber net additions
•5.6 million wireless retail net additions*
•13.6% growth in FiOS revenues •35.6 million wireless retail postpaid accounts
•5.0% growth in wireline consumer retail revenues
•1.04% wireless retail postpaid churn
*Excludes acquisitions and adjustments
Note: Certain reclassifications have been made, where appropriate, to reflect comparable operating results.
See www.verizon.com/about/investors for reconciliations to U.S. generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report.
Forward-Looking Statements
In this report, we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include
the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,”
“hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The
following important factors, along with those discussed in our filings with the Securities and Exchange Commission (the “SEC”), could affect future results and could cause those results to differ materially
from those expressed in the forward-looking statements: adverse conditions in the U.S. and international economies; the effects of competition in the markets in which we operate; material changes
in technology or technology substitution; disruption of our key suppliers’ provisioning of products or services; changes in the regulatory environment in which we operate, including any increase in
restrictions on our ability to operate our networks; breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting
financial impact not covered by insurance; our high level of indebtedness; an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions
in the credit markets affecting the cost, including interest rates, and/or availability of further financing; material adverse changes in labor matters, including labor negotiations, and any resulting
financial and/or operational impact; significant increases in benefit plan costs or lower investment returns on plan assets; changes in tax laws or treaties, or in their interpretation; changes in accounting
assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; and the inability
to implement our business strategies.
In keeping with Verizon’s commitment to protect the environment, this report was printed on paper certified by the Forest Stewardship Council (FSC). By selecting FSC-certified paper, Verizon is helping to
make a difference by supporting responsible forest management practices.
Chairman’s Letter
Dear Shareowner,
A look at the communications marketplace in 2014 shows Verizon
sitting at the sweet spot of the trends driving growth in our industry.
Almost one in every three people on Earth has a mobile broadband
subscription—that’s 2.3 billion people, double the penetration rate of
just three years ago.
Almost 3 billion people—40 percent of the world’s
population—use the Internet. There are roughly 1.2 billion
connections in the rapidly growing Internet of Things—
about 20 percent more than in 2013—with that number
expected to grow almost fivefold by the end of the decade.
pricing plans. All of this suggests to investors that growth
will be more challenging going forward, and they’re trying
to figure out which companies have the strategic vision
and financial strength to invest, grow and profit over the
long term.
Despite these indicators that wireless and broadband are
more embedded in the lives of customers than ever before,
for investors 2014 seems to have posed more questions
than answers about the future of the communications
industry. As I read it, the conventional wisdom goes
something like this: New entrants are disrupting the
wireless and broadband space. Competition is putting
pressure on prices and margins. Customers are restless and
confused about the avalanche of competing claims and
All these statements are true, to one extent or another.
Yet in 2014 Verizon continued to do what we have done
throughout our history: show that we can compete
effectively in any environment. In a year full of competitive
challenges and industry disruption, we grew revenues, added
millions of customers, bolstered our network superiority,
executed a big strategic transaction, paid $7.8 billion in
dividends, and invested and innovated for the future. More
broadly, we demonstrated the resilience of our business
model, the strength of our culture and the profoundly
important role we play in the lives of our customers
and communities.
In the process, we showed that Verizon has what it takes to
succeed over the long haul in a rapidly changing industry.
Growing customer demand
The most fundamental reason for our confidence in the
future is that, for all its competitive intensity, our industry
is strong and growing, with customers using wireless and
broadband more—and in more ways—than ever before.
Verizon is well positioned to capitalize on these trends.
From a strategic perspective, our most notable
accomplishment of 2014 was completing the transaction
for full ownership of Verizon Wireless, which we believe to
be the best wireless asset in the world. Our performance in
2014 bears out our confidence in the U.S. wireless market.
We generated $87.6 billion in wireless revenues, an
increase of 8.2 percent over 2013, and added 5.5 million
retail connections. We ended the year with 108.2 million
retail connections, a year over year increase of 5.3 percent.
While higher-than-usual upgrades and new customer
activations in the fourth quarter impacted our margins, we
had a very profitable year, with wireless EBITDA service
margin of 48.5 percent for the full year.
Just as important as the number of customers is the quality
of those customers. We lead the industry in retail postpaid
connections, with a year-end total of 102.1 million, and are
Wireless
Highlights
Our wireline broadband business had a solid year as well,
driven by strong consumer demand for video and Internet
services. Total wireline revenues were $38.4 billion for
2014, down 0.5 percent from 2013. Consumer revenues
grew at a healthy 5 percent rate for the year, and wireline
EBITDA margin expanded to 23.2 percent, reflecting our
commitment to improving wireline’s profitability. The
centerpiece of our wireline business is FiOS, our 100
percent fiber network that has transformed consumer
wireline into a growth business. FiOS revenues for 2014
were $12.7 billion, up 13.6 percent compared with 2013,
and made up more than three-quarters of all our revenue
from the consumer retail business in 2014. Thanks to
FiOS, consumer revenues have grown more than 4 percent
in each of the last ten quarters.
We ended the year with 6.6 million FiOS Internet and 5.6
million FiOS Video customers, for a market penetration of
41 percent and 36 percent, respectively. We’re winning the
competitive battle by delivering new features and
functionality that leverage the superior FiOS architecture,
Wireless
Revenues
Wireless Retail
Connections
(billions)
(millions)
$75.9
12
2
focused on moving more of these loyal, high-value
customers to devices that take advantage of our 4G LTE
network leadership. Smartphones now account for 79
percent of our retail postpaid phone base, up from 70
percent at the end of 2013, and we ended the year with 7.2
million 4G LTE tablets. Average revenue per retail postpaid
account grew by 3.9 percent in 2014, as customers
consume more and more data and video services on their
mobile devices. All of this sets us up well for 2015.
$81.0
13
$87.6
14
98.2
12
102.8
13
Wireless Retail
Postpaid ARPA
108.2
14
$144.04
12
$153.93
13
$159.86
14
v e r i zo n co m m u n i c at i o n s i n c . 2 0 1 4 a n n ua l r e p o r t
with 59 percent of Internet subscribers on our high-speed
FiOS Quantum service. We continue to deliver innovative
new products on the FiOS platform, such as the FiOS
Quantum Gateway, a new router that boosts Wi-Fi speeds,
and a FiOS mobile video service that allows subscribers to
view FiOS content on their mobile devices.
This growth in the consumer segment helps offset the
declining revenues in Global Enterprise and Global
Wholesale, which continue to fight through global economic
challenges, price competition, and erosion in transport and
equipment sales. We continue to transform these segments
around enterprise-grade network, cloud, security, managed
services and other business solutions that help enterprise
customers adapt to the challenges of an all-digital world.
While overall revenues from Enterprise fell by 3.5 percent
in 2014, revenues from strategic services grew 2.3 percent
year over year.
Steady investment in networks
The foundation of our success in this broadband-centric
world is network excellence, which remains the heart and
soul of the Verizon brand. Our strong cash flows have
enabled us to invest more than $80 billion in infrastructure
over the past five years—a commitment to investment in
networks that lasted even through the recession. Through
our consistent strategic deployment of capital, we have
built an LTE network that reaches more than 500 markets;
expanded FiOS to nearly 20 million homes; deployed 100
gigabit capacity in our IP backbone network in the U.S. and
Wireline
Highlights
around the globe; and have begun testing commercial
deployment of 200 gigabit networks. In 2014, we enhanced
our wireless network by deploying additional spectrum
throughout the U.S., essentially doubling our capacity to
accommodate the rapid increase in wireless data and video
traffic. We also continue to move customers off legacy
copper networks onto the more powerful and efficient fiber
platform, which not only delivers more value to customers
but also improves the network’s reliability.
Not many companies have both the commitment and the
financial capacity to invest $16 billion to $17 billion in
infrastructure, year after year, but we know that’s what it
takes to deliver the kind of reliability, speed and ubiquity
our customers demand.
This network superiority gives us more than just bragging
rights—it gives us a competitive edge and a platform for
offering the growth products of the future. In December
2014, about 84 percent of our wireless data traffic was
being carried on our 4G LTE network, which transmits data
and video at broadband speeds. On the wireline side, we
have introduced high-speed FiOS Quantum Internet and
video products that differentiate our broadband services
around the unique advantages of our all-fiber network and
deliver features such as symmetrical speeds for uploads
and downloads that our cable competitors can’t match.
As we look to the future, we see customers interacting
seamlessly with all their digital content as they move from
their homes to their cars to their businesses. By constantly
FiOS Internet
Subscribers
FiOS Video
Subscribers
Wireline Consumer
Retail Revenues
(millions)
(millions)
(billions)
6.1
6.6
13
5.6
4.7
5.4
12
5.3
14
12
13
14
$14.1
12
$14.8
13
$15.6
14
3
evolving our wireless and fixed broadband networks, we
are in a great position to deliver this integrated experience
to our customers.
One thing that could have a negative impact on our future
network investments is the FCC’s stated intention to
reclassify broadband services under Title II of the 1934
Communications Act, which would impose rigid 20th
century rules on a dynamic 21st century industry. Such a
move could depress long-term capital investment in
infrastructure, discourage innovation in broadband Internet
and related services, and cost the economy thousands of
middle-class jobs. We urge the Congress to enact
legislation that will clarify the rules of the road and pave
the way for continued investment in high-quality open
networks that will secure America’s leadership in the global
digital economy.
Pathway to the future
We are also building a pathway to the future through our
investment in growth businesses and a stepped-up
innovation process. Over the past several years, we have
made targeted acquisitions in the fields of telematics,
digital video, cloud and cybersecurity that leverage our
network platforms and give us an expanding position in the
markets of the future. We’ve also created two Innovation
Centers to work with product, software and app developers
to embed our network capabilities in a new generation of
consumer and business solutions, and in 2014 we
sharpened our focus on accelerating product development
in such fast-growing markets as mobile video, digital media
content delivery, data analytics and the Internet of Things.
The growth prospects for digital media and entertainment
and the Internet of Things are substantial. Video
already makes up 55 percent of all mobile traffic, according
to the Cisco Visual Networking Index. That same report
says global mobile data traffic will increase by 10 times
by 2019, with three-quarters of that traffic being video.
Over that same period, the Internet of Things, which brings
connected solutions to the physical environment, is
projected to grow at a compound annual rate of 45 percent,
driven by the rapid growth of wearables and
machine-to-machine connections.
The Verizon Innovation Centers, located in the Boston and San Francisco areas, were created to help entrepreneurs and inventors connect their new
devices and software to the Verizon network. Advances in wireless technology are fueling a wave of innovation that’s connecting people, places and things
in meaningful new ways—changing the way we live, work and play. Verizon’s advanced technology platforms, including 4G LTE, are inspiring and enabling
businesses to bring new wireless-enabled services to market.
Visit innovation.verizon.com to learn more.
4
v e r i zo n co m m u n i c at i o n s i n c . 2 0 1 4 a n n ua l r e p o r t
As we saw in 2014, the new opportunities we’ve been
predicting for some time are becoming a reality. Through
Verizon Telematics, we are already one of the leaders in the
Internet of Things. We provide connectivity and telematics
to manufacturers such as Mercedes-Benz and Volkswagen
and help businesses manage large vehicle fleets more
efficiently. Revenues from this business and the Internet of
Things grew more than 45 percent year over year, to $585
million, and we continue to introduce a steady stream of
telematics services. For example, we announced a
consumer-oriented connected-car product called Verizon
Vehicle at the North American International Auto Show in
early 2015, which will launch commercially in the second
quarter. With an addressable market of 200 million vehicles
across the U.S., this product has the potential to reinvent
traditional roadside assistance services while enhancing
driver safety and convenience. Looking ahead, our
machine-to-machine platform gives us a launching pad for
growing our market position in such fields as the connected
home, e-commerce and retail, wearable computing and
energy, and utilities management.
We also have an expanding presence in the digital media
and entertainment space. Verizon Digital Media Services
helps more than 1,500 content companies deliver their
services in digital form to any screen or device, anywhere in
the world. We continually add features and functionality to
our FiOS TV service, and later this year we expect to launch
our own mobile-first video product, leveraging our 4G LTE
wireless network and large customer base to offer a
superior alternative to other over-the-top video services.
With these and other compelling new services in the
pipeline, we have a chance to disrupt other industries and
build businesses that can drive growth in the future, as
wireless and FiOS do today.
Financial strength
Among our leadership team we talk about the need to be an
“and” company that delivers both growth and profitability.
You can see the results of this balanced approach in our
financial performance in 2014. Operating revenues were
$127.1 billion, up 5.4 percent year over year. Adjusted
The Internet of Things is transforming people’s lives and changing the way businesses and institutions operate. Using secure network connectivity and
cloud infrastructure to interconnect machines and gather useful data, Verizon is enabling smart solutions like remote diagnostics, vehicle monitoring and
much more. To help our customers take advantage of IoT, Verizon’s first “Internet of Things Report” explains factors driving adoption and offers forwardthinking organizations recommendations on how to plan for IoT growth.
Visit verizonenterprise.com/products/m2m/ to learn more.
5
EBITDA margin at the corporate level was 34 percent, down
year over year mainly due to extraordinary wireless
volumes in the fourth quarter. Adjusted earnings per share
for the year were $3.35, up 18 percent over 2013, and we
returned $7.8 billion in dividends to shareowners, including
our 8th consecutive dividend increase. Cash flows from
operations totaled $30.6 billion.
These transactions will sharpen our strategic focus on our
core wireless and wireline markets and strengthen our
balance sheet. More important, however, is our rock-solid
conviction that the long-term game will be won by the
company with the best quality networks, the most robust
slate of video and data services, and the cash flows to
invest and participate in the growth markets of the future.
There is no question, however, that investor concerns about
the direction of our industry took their toll on our stock
price. Total shareowner return for 2014 declined by 0.6
percent year over year, our first negative return in several
years. We have taken steps early in 2015 to return
additional value to shareowners. In February, we
announced an agreement to sell our wireline properties in
California, Florida and Texas to Frontier Communications
and struck a deal with American Tower Corporation to lease
the rights to a majority of our company-owned wireless
towers. The value of these two deals is $15.5 billion. At the
same time, we announced that we are returning $5 billion
to shareholders through an accelerated share
repurchase program.
For these reasons, we remain confident in our
long-term financial position and ability to create value
for shareholders.
Culture as competitive advantage
In a challenging year, Verizon proved itself to be an
essential company in the lives of our customers and the
global digital economy. This is thanks in no small part
to our strong, high-performance culture and values based
on the Verizon Credo that give us ballast in this rapidly
transforming industry. We invested more than $380 million
in training, development and tuition assistance in 2014
to hone our employees’ skills and equip them to deliver
Verizon’s investment in on-site green energy lowers our CO2 emissions while reducing the strain on commercial power grids. In the past two years, we’ve
invested $137 million in solar and fuel-cell technologies for cleaner power for our networks and data centers. In addition, Verizon’s products and services are
helping our customers be more energy-efficient and reduce their environmental impact.
Visit verizon.com/about/responsibility/sustainability/ to learn more.
6
v e r i zo n co m m u n i c at i o n s i n c . 2 0 1 4 a n n ua l r e p o r t
great service to customers. In turn, they invest back into
our communities, with more than 300,000 hours of
volunteer service and more than $9.5 million in donations
to thousands of nonprofits around the world. In addition,
the Verizon Foundation made $66.5 million in contributions,
which includes $11 million in matching gifts.
We are constantly exploring new ways to use technology to
solve pressing social issues. Through our focus on
education, we harness young people’s fascination with
technology to give them real-world skills and encourage
greater participation in science, technology, engineering
and math disciplines. We are also focused on being good
stewards of the environment. We have invested $137
million in green energy, which will reduce our own carbon
footprint, and our products are helping our customers be
more energy-efficient and reduce their environmental
impact. All these initiatives are having a measurable
positive impact on society. You can read about our results
and learn more about all our Corporate Responsibility
initiatives at verizon.com/about/responsibility.
I’m proud of the recognition we’ve received from sources
such as J.D. Power, Diversity Inc. and Fortune magazine,
which named us its most admired communications company
again in 2014. But I am even more gratified by the efforts
of our dedicated employees, whose talents and community
spirit make customers’ lives better, help businesses be
more productive and transform society for the better.
2014 has been a noisy year. As you would expect, we
responded to the competitive challenge by raising our game
and delivering strong results for customers and
shareowners. 2015 promises to raise the bar even higher. I
am confident we will rise to the challenge again and—with
the guidance of our Board, the efforts of our leadership
team and the hard work of our more than 177,000
employees—remain one of the very few companies built for
long-term success in this dynamic industry.
Lowell McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
The Verizon Innovative App Challenge, part of Verizon’s long-standing commitment to improve education, gives middle and high school students the
opportunity to design and code real mobile apps. Winning teams work with engineers from MIT to build their apps and share them in the marketplace. Last
year, the Best in Nation team from Resaca Middle School in Los Fresnos, Texas, won for its Hello Navi app, which team members created to help a visually
impaired classmate navigate the school. The app also secured team members an invitation to the White House Science Fair.
Visit verizon.com/about/responsibility/education/ to learn more.
7
Corporate Responsibility Highlights
At Verizon, we’re using our technology to solve pressing social issues —
creating value for our shareowners, our employees and our communities.
Education
Kids have a natural interest in smartphones and
tablets, but not all kids have access to them. That’s
why our programs combine technology and hands-on
experiences to spark a passion for learning,
especially in those students who need it the most.
Giving Students Real-World Skills
Through our app development programs, we’re motivating thousands
of students to create mobile apps that give them real-world skills like
collaboration, negotiation and problem-solving. Results from student
surveys show a positive impact.
verizon Innovative App Challenge
91%
More likely
to pursue
a STEM
career
61%
88%
Through our 24 Verizon Innovative Learning Schools, we’re partnering
with teachers on how to effectively integrate mobile technology into
all aspects of the learning process. As a result, we’ve seen average
standardized math test scores rise by more than 4 percent for two years
at the schools that have been surveyed. And that’s not all.
More interested
in computer
science
35%
of students
showed increased
engagement
App Development Program
Considering
a career in
technology
Revolutionizing the Classroom
91%
Likely to study
computer science
in college
60%
56%
of teachers
individualized
instruction More
of students
showed more
tech proficiency
In 2014, we expanded the success of this program to eight more
schools, providing every student with a tablet and 24/7 Internet
access, helping to close the digital divide.
sustainability
We’re unrelenting in our efforts to create a greener
planet, from the way we run our network and business
operations, to the energy-saving solutions we offer our
customers.
Providing Products to Cut Emissions
Investing in Green Energy
That’s the equivalent of
$137 Million
toward
green energy
Verizon’s smart solutions enabled our
customers to better manage their buildings
and fleets, run power grids and telecommute
— reducing CO2 emissions by 13.12 to 17.04
million metric tons in 2014.
taking 3 MILLION
cars off the road
8
In the past two years, we've invested $137
million in solar and fuel-cell technologies
for cleaner power for our networks and data
centers.
We’ve installed 22 megawatts (MW) of fuel
cell and solar photovoltaic systems, with
2.4MW more on the way. That’s equivalent
to 2,700 homes’ electricity for a year —
eliminating 20,000 metric tons of CO2.
Cutting Carbon Intensity
All of our energy efficiency strategies
support our ultimate goal of cutting our
carbon intensity in half by 2020. That’s
the amount of carbon emissions emitted
compared to the amount of information
moving across our networks.
Baseline
09
18%
29%
31%
40%
Goal
50%
10
11
12
13
20
C02/terabyte reduction over the 2009 baseline
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Selected Financial Data
(dollars in millions, except per share amounts)
2014
2013
2012
2011
2010
Results of Operations
Operating revenues
Operating income
Net income attributable to Verizon
Per common share – basic
Per common share – diluted
Cash dividends declared per common share
Net income attributable to noncontrolling interests
$ 127,079
19,599
9,625
2.42
2.42
2.160
2,331
$ 120,550
31,968
11,497
4.01
4.00
2.090
12,050
$ 115,846
13,160
875
.31
.31
2.030
9,682
$ 110,875
12,880
2,404
.85
.85
1.975
7,794
$ 106,565
14,645
2,549
.90
.90
1.925
7,668
Financial Position
Total assets
Debt maturing within one year
Long-term debt
Employee benefit obligations
Noncontrolling interests
Equity attributable to Verizon
$ 232,708
2,735
110,536
33,280
1,378
12,298
$ 274,098
3,933
89,658
27,682
56,580
38,836
$ 225,222
4,369
47,618
34,346
52,376
33,157
$ 230,461
4,849
50,303
32,957
49,938
35,970
$ 220,005
7,542
45,252
28,164
48,343
38,569
• Significant events affecting our historical earnings trends in 2012 through 2014 are described in “Other Items” in the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section.
• 2011 data includes severance, pension and benefit charges and early debt redemption costs. 2010 data includes severance, pension and benefit charges, merger integration charges,
dispositions, Medicare Part D Subsidy charges and other items.
Stock Performance Graph
Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index
Verizon
S&P 500 Telecom Services
S&P 500
$220
$200
$180
Dollars
$160
$140
$120
$100
$80
$60
2009
2010
2011
2012
2013
2014
Data Points in Dollars
2009
2010
At December 31,
2011
2012
2013
2014
Verizon
S&P 500 Telecom Services
S&P 500
100.0
100.0
100.0
123.1
119.0
115.1
145.7
126.5
117.5
195.3
166.6
180.3
194.2
171.5
205.0
164.8
149.6
136.2
The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period. It assumes $100 was invested
on December 31, 2009 with dividends (including the value of the telephone access line spin-off that occurred in 2010) being reinvested.
9
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading
providers of communications, information and entertainment products
and services to consumers, businesses and governmental agencies. With
a presence around the world, we offer voice, data and video services
and solutions on our wireless and wireline networks that are designed
to meet customers’ demand for mobility, reliable network connectivity,
security and control. We have two reportable segments, Wireless and
Wireline. Our wireless business, operating as Verizon Wireless, provides
voice and data services and equipment sales across the United States
using one of the most extensive and reliable wireless networks. Our wireline business provides consumer, business and government customers
with communications products and enhanced services, including broadband data and video, corporate networking solutions, data center and
cloud services, security and managed network services and local and
long distance voice services, and also owns and operates one of the most
expansive end-to-end global Internet Protocol (IP) networks. We have a
highly skilled, diverse and dedicated workforce of approximately 177,300
employees as of December 31, 2014.
As advances in technology have changed the ways that our customers
interact in their personal and professional lives and that businesses
operate, we have continued to focus our efforts around higher margin
and growing areas of our business: wireless and wireline data and
Strategic services, including cloud computing services. Our strategy
requires significant capital investments primarily to acquire wireless
spectrum, put the spectrum into service, provide additional capacity for
growth in our wireless and wireline networks, invest in the fiber optic
network that supports our wireless and wireline businesses, maintain
our wireless and wireline networks and develop and maintain significant
advanced information technology systems and data system capabilities.
We believe that steady and consistent investments in networks and platforms will drive innovative products and services and fuel our growth.
Our wireless and wireline networks will continue to be the hallmark of
our brand, and provide the fundamental strength upon which we build
our competitive advantage.
Strategic Transactions
Wireless Transaction
On February 21, 2014, we set the stage for the next phase of our company’s growth when we completed the acquisition of Vodafone Group
Plc’s (Vodafone) indirect 45% interest in Cellco Partnership d/b/a Verizon
Wireless for aggregate consideration of approximately $130 billion (the
Wireless Transaction). The consideration paid was primarily comprised of
cash of approximately $58.89 billion and Verizon common stock with a
value of approximately $61.3 billion. With full control of Verizon Wireless
enhancing our operational efficiency, we believe we are well-positioned
to meet the challenges of an increasingly competitive industry. See Note
2 to the consolidated financial statements for additional information.
Spectrum Auction
On January 29, 2015, the Federal Communications Commission (FCC)
completed an auction of 65 MHz of spectrum, which it identified as the
Advanced Wireless Services (AWS)-3 band. Verizon participated in that
auction, and was the high bidder on 181 spectrum licenses, for which we
will pay approximately $10.4 billion. During the fourth quarter of 2014,
we made a deposit of $0.9 billion related to our participation in this auction. On February 13, 2015, we made a down payment of $1.2 billion for
these spectrum licenses. Verizon has submitted an application for these
licenses and must complete payment for them in the first quarter of 2015.
10
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Access Line Sale
On February 5, 2015, we announced that we have entered into a definitive agreement with Frontier Communications Corporation (Frontier)
pursuant to which Verizon will 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. The transaction, which includes the
acquisition by Frontier of the equity interests of Verizon’s incumbent local
exchange carriers (ILECs) in California, Florida and Texas, does not involve
any assets or liabilities of Verizon Wireless. The assets and liabilities that
will be sold are currently included in Verizon’s continuing operations. As
part of the transaction, Frontier will assume $0.6 billion of indebtedness
from Verizon. The transaction is subject to the satisfaction of certain
closing conditions including, among others, receipt of state and federal
telecommunications regulatory approvals, and we expect this transaction to close during the first half of 2016.
The transaction will result in Frontier acquiring approximately 1.5 million FiOS Internet subscribers, 1.2 million FiOS Video subscribers and the
related ILEC businesses from Verizon. This business generated revenues
of approximately $5.4 billion, excluding revenue with affiliates, for Verizon
in 2013, which is the most recent year for which audited stand-alone
financial statements are currently available.
Tower Monetization Transaction
On February 5, 2015, we announced an agreement with American Tower
Corporation (American Tower) pursuant to which American Tower will
have the exclusive rights to lease and operate over 11,300 of our wireless
towers for an upfront payment of $5.0 billion. Under the terms of the
leases, American Tower will have exclusive rights to lease and operate
the towers over an average term of approximately 28 years. As part of
this transaction, we will also sell 165 towers for $0.1 billion. We will sublease capacity on the towers from American Tower for a minimum of 10
years at current market rates, with options to renew. As the leases expire,
American Tower will have fixed-price purchase options to acquire these
towers based on their anticipated fair market values at the end of the
lease terms. We plan to account for the upfront payment primarily as
prepaid rent and a portion as a financing obligation. This transaction,
which is subject to customary closing conditions, is expected to close
during the first half of 2015.
Business Overview
Wireless
Demand for our fourth generation (4G) Long Term Evolution (LTE) smartphones and tablets continues to drive growth in our Wireless business.
During 2014, Wireless revenue increased $6.6 billion, or 8.2%, compared
to 2013 driven by service revenue growth of $3.6 billion, or 5.2%, which
does not include recurring equipment installment billings related to
Verizon Edge. Also contributing to the increase in Wireless revenue was
equipment revenue growth of $2.8 billion, or 35.1%, driven by higher
sales of equipment under both the traditional subsidy model and Verizon
Edge, a program that enables qualified customers to purchase their
devices on an installment payment plan. During 2014, retail postpaid
connections increased 5.5% compared to 2013, with smartphones representing 79% of our retail postpaid phone base at December 31, 2014
compared to 70% at December 31, 2013. Also, during 2014, postpaid
smartphone activations represented 92% of phones activated compared
to 86% in 2013.
We are focusing the capital spending in our Wireless business on adding
capacity and density to our 4G LTE network, which is available to over
98% of the U.S. population in more than 500 markets covering approximately 309 million people, including those in areas served by our LTE
in Rural America partners. Our 4G LTE network provides higher data
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
throughput performance for data services at a lower cost compared to
that provided via third-generation (3G) networks. Approximately 84% of
our total data traffic in December 2014 was carried on our 4G LTE network. In May 2014, we announced the deployment of AWS spectrum in
our 4G LTE network. This additional bandwidth, which we refer to and
brand as XLTE, provides additional network capacity and is currently available in more than 400 markets. Nearly all of the 4G LTE devices Verizon
Wireless currently sells can operate on XLTE.
By investing to expand our own capabilities, we are also providing the
communities we serve with an efficient, reliable infrastructure for competing in the information economy. We are committed to putting our
customers first and being a responsible member of our communities.
Guided by this commitment and by our core values of integrity, respect,
performance excellence and accountability, we believe we are wellpositioned to produce a long-term return for our shareowners, create
meaningful work for ourselves and provide lasting value for society.
In February 2014, we introduced our More Everything® plans which
replaced our Share Everything® plans. These plans feature domestic
unlimited voice minutes, unlimited domestic and international text,
video and picture messaging, cloud storage and a single data allowance
that can be shared among multiple devices connected to the Verizon
Wireless network. As of December 31, 2014, More Everything accounts
represented approximately 61% of our retail postpaid accounts compared to Share Everything plans representing approximately 46% of our
retail postpaid accounts as of December 31, 2013. Verizon Wireless also
offers shared data plans for business, with More Everything plans for
Small business and Nationwide Business Data Packages and Plans.
Trends
In the sections that follow, we provide information about the important
aspects of our operations and investments, both at the consolidated and
segment levels, and discuss our results of operations, financial position
and sources and uses of cash. In addition, we highlight key trends and
uncertainties to the extent practicable.
Wireline
In our Wireline business, revenues decreased 0.5% during 2014 compared to 2013, primarily due to declines in Global Enterprise Core and
Global Wholesale revenues resulting from lower voice services and data
networking revenues as well as the contraction of market rates due to
competition. To compensate for the shrinking market for traditional voice
service, we continue to build our Wireline segment around data, video
and advanced business services – areas where demand for reliable highspeed connections is growing. Wireline’s revenues during 2014 included
a 2.3% increase in Strategic services revenues, which represented 61%
of total Global Enterprise revenues, as compared to 57% of total Global
Enterprise revenues during 2013.
Wireline revenues during 2014 also included increases in Consumer retail
revenue driven by FiOS services. FiOS represented approximately 76%
of Consumer retail revenue during 2014, compared to approximately
71% during 2013. As the penetration of FiOS products increases, we
continue to seek ways to increase revenue and further realize operating
and capital efficiencies as well as maximize profitability. As more applications are developed for this high-speed service, we expect that FiOS
will become a hub for managing multiple home services that will eventually be part of the digital grid, including not just entertainment and
communications, but also machine-to-machine communications, such
as home monitoring, health monitoring, energy management and utilities management.
We continue to enrich the customer value proposition by creating new
and innovative services on our FiOS platform. During 2014, Verizon
announced the introduction of FiOS Quantum TV, which provides FiOS
video subscribers with new features, including the ability to record up
to 12 shows at once and control live TV from any room in their home.
This new service is now available everywhere that FiOS TV is offered. With
our FiOS Quantum broadband service and certain other data services,
our residential and small business customers can achieve symmetrical
upload and download speeds of up to 500 megabytes per second, which
we refer to as SpeedMatchsm.
Capital Expenditures and Investments
We are investing in wireless networks, high-speed fiber and cloud services to position ourselves at the center of growth trends for the future.
During 2014, these investments included capital expenditures of $17.2
billion and acquisitions of wireless licenses of $0.4 billion. See “Cash
Flows Used in Investing Activities” and Note 2 to the consolidated financial statements for additional information.
The industries that we operate in are highly competitive, which we expect
to continue particularly as traditional, non-traditional and emerging
service providers seek increased market share. We believe that our highquality customer base and superior networks differentiate us from our
competitors and enable us to provide enhanced communications experiences to our customers. We believe our focus on the fundamentals of
running a good business, including operating excellence and financial
discipline, gives us the ability to plan and manage through changing economic and competitive conditions. We will continue to invest for growth,
which we believe is the key to creating value for our shareowners.
Connection and Operating Trends
In our Wireless segment, we expect to continue to attract and maintain the loyalty of high-quality retail postpaid customers, capitalizing
on demand for data services and bringing our customers new ways of
using wireless services in their daily lives. We expect that future connection growth will continue as we introduce new 4G LTE devices, including
new smartphones and tablets. We believe these devices will attract and
retain higher value retail postpaid connections, contribute to continued
increases in the penetration of data services and help us remain competitive with other wireless carriers. However, as a result of the increasing
competition within our industry, we expect our churn to increase in 2015.
We expect future growth opportunities will be dependent on expanding
the penetration of our network services, offering innovative wireless
devices for both consumer and business customers and increasing
the number of ways that our customers can connect with our network
and services.
Service and equipment pricing play an important role in the wireless
competitive landscape. As the demand for wireless services continues
to grow, wireless service providers are offering service plans that include
unlimited voice minutes and text messages and a specific amount of
data access in varying megabyte or gigabyte sizes or, in some cases,
unlimited data usage at competitive prices. Some wireless service providers also allow customers to rollover unused data allowances to the
next billing period and are also offering installment plans that decouple
service pricing from equipment pricing and blur the traditional boundary
between prepaid and postpaid plans. In 2015, we expect that customers
will continue to adopt these installment plans, which also offer discounts
on the cost of wireless service. Furthermore, some wireless providers
are offering new customers price plans that undercut pricing under the
customer’s service plan with its current wireless provider and provide a
credit to reimburse early termination fees paid to their former wireless
service provider, subject to certain limitations, in addition to promotions
targeted specifically to customers of Verizon Wireless. We seek to compete in this area by offering our customers services and equipment that
they will regard as the best available value for the price, as well as service
plans that meet their wireless service needs.
11
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
In our Wireline segment, we have experienced continuing access line
losses as customers have disconnected both primary and secondary
lines and switched to alternative technologies such as wireless, voice
over Internet protocol (VoIP) and cable for voice and data services. We
expect to continue to experience access line losses as customers continue to switch to alternate technologies. We also expect Consumer retail
revenues to increase, primarily driven by our FiOS services, as we seek to
increase our penetration rates within our FiOS service areas. Despite this challenging environment, we expect that we will be able
to grow key aspects of our Wireline segment by providing network reliability, offering product bundles that include broadband Internet access,
digital television and local and long distance voice services, offering more
robust IP products and service, and accelerating our cloud computing
and machine-to-machine strategies. We will also continue to focus on
cost efficiencies to attempt to offset adverse impacts from unfavorable
economic conditions and competitive pressures.
Operating Revenue
We expect to experience revenue growth in our Wireless segment in
2015, primarily as a result of continued growth in postpaid connections
driven by sales of smartphones and tablets, partially offset by declining
prices in response to increasing competitive pressure from other wireless carriers. We also expect the activation of devices on Verizon Edge
to contribute positively to our Wireless segment revenue and operating
income. In 2015, we expect the rate at which customers activate devices
on Verizon Edge to increase. As more customers adopt Verizon Edge,
we expect equipment and other revenue to be positively impacted,
while we expect retail postpaid average revenue per account (ARPA)
and service revenue, in each case when considered as a percentage of
total revenue, to continue to be negatively impacted. We expect that
our future service revenue growth will be substantially derived from an
increase in the usage of innovative mobile services in addition to our
pricing structure that will encourage customers to continue adding
data-enabled devices onto existing accounts. We expect that continued
emphasis on increasing smartphone penetration, including continuing
to migrate customers from basic phones to smartphones and from 3G
devices to 4G LTE devices, in addition to increasing our tablet penetration
will positively impact our revenue.
We expect FiOS broadband and video penetration to positively impact
our Mass Markets revenue and subscriber base. Although we have
recently experienced decelerating revenue growth within our Strategic
services business, we expect our Strategic services business to be positively impacted by additional enterprise revenues from application
services, such as our cloud, security and other solutions-based services
and from continued customer migration of their services to Private IP and
other strategic networking services. We believe the trend in these growth
areas as well as our offerings in telematics and video streaming will help
offset the continuing decline in revenues in our Wireline segment related
to retail voice connection losses as a result of technology substitution,
as well as the continued decline in our legacy wholesale and enterprise
markets. Upon the closing of the sale of our local exchange business and
related landline activities in California, Florida and Texas, we expect that
our Wireline segment EBITDA margin and operating income margin will
decline. Prior to closing this transaction, we expect to undertake initiatives to address our cost structure to mitigate this impact to our margins.
12
Operating Costs and Expenses
We anticipate our overall wireless operating costs will increase as a result
of the expected increase in the volume of smartphone sales, which will
result in higher equipment costs. In addition, we expect content costs
for our FiOS video service to continue to increase. However, we expect to
achieve certain cost efficiencies in 2015 and beyond as data traffic continues to migrate to our lower-cost 4G LTE network and as we continue
to streamline our business processes with a focus on improving productivity and increasing profitability.
Capital Expenditures
Our 2015 capital program includes capital to fund advanced networks
and services, including 4G LTE and FiOS, the continued expansion of
our core networks, including our IP and data center enhancements, and
support for our copper-based legacy voice networks and other expenditures to drive operating efficiencies. The level and the timing of the
Company’s capital expenditures within these broad categories can
vary significantly as a result of a variety of factors outside our control,
including, for example, material weather events. We are replacing copper
wire with fiber-optic cable which will not alter our capital program but
should result in lower maintenance costs in the future. Capital expenditures were $17.2 billion in 2014 and $16.6 billion in 2013. We believe
that we have significant discretion over the amount and timing of our
capital expenditures on a Company-wide basis as we are not subject to
any agreement that would require significant capital expenditures on a
designated schedule or upon the occurrence of designated events. We
expect capital expenditures in 2015, which will be primarily focused on
adding capacity to our 4G LTE network in order to stay ahead of our customers’ increasing data demands, to be in the range of approximately
$17.5 billion to $18.0 billion. We also expect our capital expenditures as a
percentage of revenue to decline in 2015 from 2014 levels.
Cash Flow from Operations
We create value for our shareowners by investing the cash flows generated by our business in opportunities and transactions that support
continued profitable growth, thereby increasing customer satisfaction
and usage of our products and services. In addition, we have used our
cash flows to maintain and grow our dividend payout to shareowners.
Verizon’s Board of Directors increased the Company’s quarterly dividend
by 3.8% during 2014, making this the eighth consecutive year in which
we have raised our dividend.
Our goal is to use our cash to create long-term value for our shareholders.
We will continue to look for investment opportunities that will help us
to grow the business. We expect to use our cash to reduce our debt
levels in order to return to our pre-Wireless Transaction credit metrics
by 2019, invest in the business, including spectrum licenses (see “Cash
Flows from Investing Activities”), pay dividends to our shareholders and,
when appropriate, buy back shares of our outstanding common stock
(see “Cash Flows from Financing Activities”).
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Consolidated Results of Operations
In this section, we discuss our overall results of operations and highlight items of a non-operational nature that are not included in our segment
results. We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products
and services. In “Segment Results of Operations,” we review the performance of our two reportable segments.
On February 21, 2014, we completed the acquisition of Vodafone’s indirect 45% interest in Verizon Wireless. As a result, our results reflect our 55%
ownership of Verizon Wireless through the closing of the Wireless Transaction and reflect our full ownership of Verizon Wireless from the closing of the
Wireless Transaction through December 31, 2014.
Corporate, eliminations and other includes unallocated corporate expenses such as certain pension and other employee benefit related costs,
intersegment eliminations recorded in consolidation, the results of other businesses, such as our investments in unconsolidated businesses, lease
financing as well as the historical results of divested operations, other adjustments and gains and losses that are not allocated in assessing segment
performance due to their non-operational nature. Although such transactions are excluded from the business segment results, they are included in
reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results as these items are included in
the chief operating decision maker’s assessment of segment performance. We believe that this presentation assists users of our financial statements
in better understanding our results of operations and trends from period to period. Effective January 1, 2014, we have also reclassified the results of
certain businesses, such as development stage businesses that support our strategic initiatives, from our Wireline segment to Corporate, eliminations
and other. The impact of this reclassification was not material to our consolidated financial statements or our segment results of operations.
On July 1, 2014, our Wireline segment sold a non-strategic business (see “Acquisitions and Divestitures”). Accordingly, the historical Wireline results for
these operations, which were not material to our consolidated financial statements or our segment results of operations, have been reclassified to
Corporate, eliminations and other to reflect comparable segment operating results. The results of operations related to this divestiture included within
Corporate, eliminations and other are as follows:
(dollars in millions)
2014
Years Ended December 31,
Impact of Divested Operations
Operating revenues
Cost of services and sales
Selling, general and administrative expense
$
2013
256
239
5
$
599
531
25
2012
$
835
756
23
Consolidated Revenues
(dollars in millions)
2014
Years Ended December 31,
Wireless
Service revenue
Equipment and other
Total
Wireline
Mass Markets
Global Enterprise
Global Wholesale
Other
Total
Corporate, eliminations and other
Consolidated Revenues
$
$
72,630
15,016
87,646
18,047
13,684
6,222
476
38,429
1,004
127,079
2013
$
$
69,033
11,990
81,023
17,383
14,182
6,594
465
38,624
903
120,550
2014 vs. 2013
2012
$
$
2014 Compared to 2013
The increase in consolidated revenues during 2014 compared to 2013
was primarily due to higher revenues at Wireless, as well as higher Mass
Markets revenues driven by FiOS services at our Wireline segment.
Partially offsetting these increases were lower Global Enterprise Core and
Global Wholesale revenues at our Wireline segment.
Wireless’ revenues increased $6.6 billion, or 8.2%, during 2014 compared
to 2013 primarily as a result of growth in service revenue and equipment revenue. The increase in service revenue, which does not include
recurring equipment installment billings related to Verizon Edge, during
2014 compared to 2013 was primarily driven by higher retail postpaid
service revenue, which increased largely as a result of an increase in
retail postpaid connections as well as the continued increase in penetration of 4G LTE smartphones and tablets through our More Everything
63,733
12,135
75,868
16,746
14,577
7,094
528
38,945
1,033
115,846
Increase/(Decrease)
2013 vs. 2012
$
$
3,597
3,026
6,623
5.2 %
25.2
8.2
664
(498)
(372)
11
(195)
101
6,529
3.8
(3.5)
(5.6)
2.4
(0.5)
11.2
5.4
$
$
5,300
(145)
5,155
637
(395)
(500)
(63)
(321)
(130)
4,704
8.3 %
(1.2)
6.8
3.8
(2.7)
(7.0)
(11.9)
(0.8)
(12.6)
4.1
plans. Equipment and other revenue increased during 2014 compared
to 2013 primarily due to an increase in equipment sales under both the
traditional subsidy model and Verizon Edge. Retail postpaid connection
net additions increased during 2014 compared to 2013 primarily due to
an increase in retail postpaid connection gross additions partially offset
by an increase in our retail postpaid connection churn rate. Retail
postpaid connections per account increased as of December 31, 2014
compared to December 31, 2013 primarily due to the increased penetration of tablets.
Wireline’s revenues decreased $0.2 billion, or 0.5%, during 2014 compared to 2013 primarily as a result of declines in Global Enterprise Core
and Global Wholesale, partially offset by higher Mass Markets revenues
driven by FiOS services and increased Strategic services revenues within
Global Enterprise.
13
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Mass Markets revenues increased $0.7 billion, or 3.8%, during 2014 compared to 2013 primarily due to the expansion of FiOS services (Voice,
Internet and Video), including our FiOS Quantum offerings, as well as
changes in our pricing strategies, partially offset by the continued decline
of local exchange revenues.
Global Enterprise revenues decreased $0.5 billion, or 3.5%, during 2014
compared to 2013 primarily due to lower voice services and data networking revenues, the contraction of market rates due to competition
and a decline in Core customer premise equipment revenues. This
decrease was partially offset by an increase in Strategic services revenues,
primarily due to growth in our application services, such as our cloud and
data center offerings and contact center solutions.
Global Wholesale revenues decreased $0.4 billion, or 5.6%, during 2014
compared to 2013 primarily due to a decline in data revenues driven by
the continuing demand for high-speed digital data services from fiber-tothe-cell customers upgrading their core data circuits to Ethernet facilities,
as well as a decline in traditional voice revenues. During 2014, we also
experienced a decline in domestic wholesale connections.
2013 Compared to 2012
The increase in consolidated revenues during 2013 compared to 2012
was primarily due to higher revenues at Wireless, as well as higher Mass
Markets revenues driven by FiOS services and increased Strategic services revenues within Global Enterprise at our Wireline segment. Partially
offsetting these increases were lower Global Enterprise Core and Global
Wholesale revenues at our Wireline segment.
Wireless’ revenues increased $5.2 billion, or 6.8%, during 2013 compared
to 2012 due to growth in service revenue. Service revenue increased
during 2013 compared to 2012 primarily driven by higher retail postpaid
service revenue, which increased largely as a result of an increase in retail
postpaid connections as well as the continued increase in penetration
of smartphones, tablets and other Internet devices through our Share
Everything plans. Retail postpaid connection net additions decreased
during 2013 compared to 2012 primarily due to an increase in our retail
postpaid connection churn rate, partially offset by an increase in retail
postpaid connection gross additions. Retail postpaid connections per
account increased as of December 31, 2013 compared to December
31, 2012 primarily due to the increased penetration of tablets and other
Internet devices.
Wireline’s revenues decreased $0.3 billion, or 0.8%, during 2013 compared to 2012 primarily driven by declines in Global Enterprise Core
and Global Wholesale, partially offset by higher Mass Markets revenues
driven by FiOS services and increased Strategic services revenues within
Global Enterprise.
Mass Markets revenues increased $0.6 billion, or 3.8%, during 2013 compared to 2012 due to the expansion of FiOS services (Voice, Internet and
Video) as well as changes in our pricing strategies, partially offset by the
continued decline of local exchange revenues.
Global Enterprise revenues decreased $0.4 billion, or 2.7%, during 2013
compared to 2012 primarily due to a decline in Core customer premise
equipment revenues and lower voice services and data networking revenues. This decrease was partially offset by growth in Strategic services
revenues, primarily due to an increase in advanced services, such as contact center solutions, IP communications, and our cloud and data center
offerings as well as revenue from a telematics services business that we
acquired in the third quarter of 2012.
Global Wholesale revenues decreased $0.5 billion, or 7.0%, during 2013
compared to 2012 primarily due to a decline in traditional voice revenues
as a result of decreased minutes of use (MOUs) and a decline in domestic
wholesale connections, partially offset by continuing demand for highspeed digital data services from fiber-to-the-cell customers upgrading
their core data circuits to Ethernet facilities as well as Ethernet migrations
from other core customers.
Other revenues decreased during 2013 compared to 2012 primarily due
to reduced volumes outside of our network footprint.
Consolidated Operating Expenses
(dollars in millions)
2014
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Consolidated Operating Expenses
$
$
49,931
41,016
16,533
107,480
2013
$
$
44,887
27,089
16,606
88,582
2014 vs. 2013
2012
$
$
46,275
39,951
16,460
102,686
Increase/(Decrease)
2013 vs. 2012
$
$
5,044
13,927
(73)
18,898
11.2 %
51.4
(0.4)
21.3
$
$
(1,388)
(12,862)
146
(14,104)
(3.0) %
(32.2)
0.9
(13.7)
Consolidated operating expenses increased during 2014 primarily due to non-operational charges recorded in 2014 as compared to non-operational
credits recorded in 2013 (see “Other Items”) as well as increased operating expenses at Wireless. Consolidated operating expenses decreased during
2013 primarily due to non-operational credits recorded in 2013 as compared to non-operational charges recorded in 2012 (see “Other Items”).
2014 Compared to 2013
Cost of Services and Sales
Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits, materials
and supplies, content costs, contracted services, network access and
transport costs, wireless equipment costs, customer provisioning costs,
computer systems support, costs to support our outsourcing contracts
and technical facilities and contributions to the Universal Service Fund.
Aggregate customer care costs, which include billing and service provisioning, are allocated between Cost of services and sales and Selling,
general and administrative expense.
14
Cost of services and sales increased during 2014 compared to 2013 primarily due to an increase in cost of equipment sales of $5.3 billion at our
Wireless segment as a result of an increase in the number of devices sold
as well as an increase in the cost per unit.
Selling, General and Administrative Expense
Selling, general and administrative expense includes: salaries and wages
and benefits not directly attributable to a service or product, bad debt
charges, taxes other than income taxes, advertising and sales commission costs, customer billing, call center and information technology costs,
regulatory fees, professional service fees, and rent and utilities for administrative space. Also included are a portion of the aggregate customer
care costs as discussed in “Cost of Services and Sales” above. Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Selling, general and administrative expense increased during 2014
compared to 2013 primarily due to non-operational charges, primarily
severance, pension and benefit charges, recorded in 2014 as compared
to non-operational credits, primarily severance, pension and benefit
credits, recorded in 2013 (see “Other Items”).
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2014 compared to 2013 primarily due to a decrease in net depreciable assets at our
Wireline segment, partially offset by an increase in depreciable assets at
our Wireless segment.
2013 Compared to 2012
Cost of Services and Sales
Cost of services and sales decreased during 2013 compared to 2012
primarily due to a decrease in cost of equipment sales, decreased data
roaming, a decline in cost of data services and a decrease in network
connection costs at our Wireless segment, as well as a decrease in costs
related to customer premise equipment, a decline in access costs and the
net effect of storm-related insurance recoveries at our Wireline segment.
Partially offsetting these decreases were higher content costs associated
with continued FiOS subscriber growth and programming license fee
increases at our Wireline segment, as well as increases in cost of network
services at our Wireless segment.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased during 2013 compared to 2012 primarily due to the non-operational credits recorded in
2013 and declines in employee costs at our Wireline segment as well as
the non-operational charges recorded in 2012 (see “Other Items”). This
decrease was partially offset by higher sales commission expense at our
Wireless segment.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during 2013 compared to 2012 primarily due to an increase in net depreciable assets at
our Wireless segment and an increase in amortization expense at our
Wireline segment. These increases were partially offset by a decline in net
depreciable assets at our Wireline segment.
Non-operational (Credits) Charges
Non-operational (credits) charges included in operating expenses (see
"Other Items") were as follows:
(dollars in millions)
2014
2013
Severance, Pension and Benefit
(Credits) Charges
Selling, general and administrative expense $ 7,507
$ (6,232)
Years Ended December 31,
Gain on Spectrum License Transactions
Selling, general and administrative expense
Litigation Settlements
Selling, general and administrative expense
Other Costs
Cost of services and sales
Selling, general and administrative expense
Total non-operating (credits) charges
included in operating expenses
(707)
2012
$
7,186
(278)
–
–
–
384
27
307
334
–
–
–
40
236
276
$ 7,134
$ (6,510)
$
Consolidated Operating Income and EBITDA
Consolidated earnings before interest, taxes, depreciation and amortization expenses (Consolidated EBITDA) and Consolidated Adjusted EBITDA,
which are presented below, are non-GAAP measures and do not purport
to be alternatives to operating income as a measure of operating performance. Management believes that these measures are useful to investors
and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation
and amortization expense related primarily to capital expenditures and
acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Consolidated EBITDA
is calculated by adding back interest, taxes, depreciation and amortization expense, equity in earnings of unconsolidated businesses and other
income and (expense), net to net income.
Consolidated Adjusted EBITDA is calculated by excluding the effect of
non-operational items and the impact of divested operations from the
calculation of Consolidated EBITDA. Management believes that this measure provides additional relevant and useful information to investors and
other users of our financial data in evaluating the effectiveness of our
operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. See “Other
Items” for additional details regarding these non-operational items.
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 to reflect actual return on plan assets and
updated actuarial assumptions. The adjustment has been recognized in
the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of
actuarial gains/losses. It is management’s intent to provide non-GAAP financial information to
enhance the understanding of Verizon’s GAAP financial information, and
it should be considered by the reader in addition to, but not instead of,
the financial statements prepared in accordance with GAAP. Each nonGAAP financial measure is presented along with the corresponding GAAP
measure so as not to imply that more emphasis should be placed on the
non-GAAP measure. The non-GAAP financial information presented may
be determined or calculated differently by other companies.
Years Ended December 31,
Consolidated Operating Income
Add Depreciation and amortization
expense
Consolidated EBITDA
Add (Less) Non-operating (credits) charges
included in operating expenses
Less Impact of divested operations
Consolidated Adjusted EBITDA
(dollars in millions)
2014
2013
2012
$ 19,599
$ 31,968
$ 13,160
16,533
36,132
16,606
48,574
16,460
29,620
(6,510)
(43)
$ 42,021
7,846
(56)
$ 37,410
7,134
(12)
$ 43,254
The changes in Consolidated Operating Income, Consolidated EBITDA
and Consolidated Adjusted EBITDA in the table above were primarily a
result of the factors described in connection with operating revenues
and operating expenses.
7,846
See “Other Items” for a description of these and other nonoperational items.
15
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Other Consolidated Results
Equity in Earnings of Unconsolidated Businesses
Equity in earnings of unconsolidated businesses increased $1.6 billion during 2014 compared to the similar period in 2013 primarily due to the gain
of $1.9 billion recorded on the sale of our interest in Vodafone Omnitel N.V. (Vodafone Omnitel) during the first quarter of 2014, which was part of the
consideration for the Wireless Transaction.
Equity in earnings of unconsolidated businesses decreased $0.2 billion, or 56.2%, in 2013 compared to 2012 primarily due to lower earnings from
operations at Vodafone Omnitel. The decrease during 2013 was partially offset by an immaterial gain recorded by Verizon Wireless upon obtaining
control of previously unconsolidated wireless partnerships, which were previously accounted for under the equity method and are now consolidated.
Other Income and (Expense), Net
Additional information relating to Other income and (expense), net is as follows:
2014
Years Ended December 31,
Interest income
Other, net
Total
$
108
(1,302)
$ (1,194)
2013
$
64
(230)
(166)
$
(dollars in millions)
2014 vs. 2013
2012
$
57
(1,073)
$ (1,016)
Increase/(Decrease)
2013 vs. 2012
$
44
(1,072)
$ (1,028)
68.8 %
nm
nm
$
$
7
843
850
12.3 %
(78.6)
(83.7)
nm - not meaningful
Other income and (expense), net changed unfavorably during 2014 compared to the similar period in 2013 primarily due to early debt redemption
costs of $1.4 billion incurred in 2014 (see “Other Items”).
Other income and (expense), net changed favorably during 2013 compared to 2012 primarily due to fees of $1.1 billion incurred in 2012 related
to the early redemption of debt, partially offset by $0.2 billion of fees
incurred during the fourth quarter of 2013 as a result of the termination
of a bridge credit agreement upon the effectiveness of a term loan agreement (see “Other Items”).
Interest Expense
Years Ended December 31,
(dollars in millions)
2014
2013
Total interest costs on debt balances
Less Capitalized interest costs
Total
$ 5,291
376
$ 4,915
$
Average debt outstanding
Effective interest rate
$ 108,461
4.9%
$ 65,959
5.2%
$
2012
3,421
754
2,667
Total interest costs on debt balances increased during 2014 compared
to 2013 primarily due to the issuance of fixed and floating rate notes
to finance the Wireless Transaction (see “Acquisitions and Divestitures”)
resulting in an increase in average debt and a corresponding increase
in interest expense, partially offset by a lower effective interest rate (see
“Consolidated Financial Condition”). Capitalized interest costs were lower
in 2014 primarily due to a decrease in wireless licenses that are currently
under development, which was due to the deployment of AWS licenses
for commercial service during 2014.
$
$
2,977
406
2,571
Increase/(Decrease)
2013 vs. 2012
2014 vs. 2013
$ 1,870
(378)
$ 2,248
54.7 %
(50.1)
84.3
$
$
Provision (Benefit) for income taxes
Effective income tax rate
14.9 %
85.7
3.7
$ 52,949
5.6%
Total interest costs on debt balances increased during 2013 compared to
2012 primarily due to the issuance of $49.0 billion of fixed and floating
rate notes to finance the Wireless Transaction (see “Acquisitions and
Divestitures”) resulting in an increase in average debt as well as an incremental increase in interest expense of $0.7 billion, partially offset by a
lower effective interest rate (see “Consolidated Financial Condition”).
Capitalized interest costs were higher in 2013 primarily due to increases
in wireless licenses that are currently under development.
Provision (Benefit) for Income Taxes Years Ended December 31,
444
348
96
(dollars in millions)
2014
$ 3,314
21.7 %
2013
$
5,730
19.6 %
2012
$
(660)
(6.7) %
Increase/(Decrease)
2013 vs. 2012
2014 vs. 2013
$ (2,416)
(42.2)%
$
6,390
nm
nm - not meaningful
The effective income tax rate is calculated by dividing the provision for
income taxes by income before the provision for income taxes. The effective income tax rate for 2014 was 21.7% compared to 19.6% for 2013. The
increase in the effective income tax rate was primarily due to additional
income taxes on the incremental income from the Wireless Transaction
completed on February 21, 2014 and was partially offset by the utiliza-
16
tion of certain tax credits in connection with the Omnitel Transaction in
2014 and the effective income tax rate impact of lower income before
income taxes due to severance, pension and benefit charges recorded
in 2014 compared to severance, pension and benefit credits recorded
in 2013. The decrease in the provision for income taxes was primarily
due to lower income before income taxes due to severance, pension and
benefit charges recorded in 2014 compared to severance, pension and
benefit credits recorded in 2013.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
The effective income tax rate for 2013 was 19.6% compared to (6.7)%
for 2012. The increase in the effective income tax rate and provision for
income taxes was primarily due to higher income before income taxes
as a result of severance, pension and benefit credits recorded during
2013 compared to lower income before income taxes as a result of severance, pension and benefit charges as well as early debt redemption costs
recorded during 2012.
Our effective income tax rate differed significantly from the statutory federal income tax rate for 2013 and 2012 due to the inclusion of income
attributable to Vodafone’s noncontrolling interest in the Verizon Wireless
partnership for the full year within our income before the provision for
income taxes. In 2013, we recorded a tax provision on income before the
provision for income taxes and when we included the income attributable
to Vodafone’s noncontrolling interest in the Verizon Wireless partnership
in our income before the provision for income taxes it resulted in our
effective income tax rate being 13.7 percentage points lower during
2013. In 2012, we recorded a tax benefit on income before the provision
for income taxes, which resulted in a negative effective income tax rate.
In this circumstance, including the income attributable to Vodafone’s
noncontrolling interest in the Verizon Wireless partnership in our income
before the provision for income taxes resulted in our negative effective
tax rate being 300.3 percentage points higher during 2012.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 13 to the consolidated financial statements.
Net Income Attributable to Noncontrolling Interests
Years Ended December 31,
Net income attributable to noncontrolling
interests
(dollars in millions)
2014
2013
$ 2,331
$ 12,050
The decrease in Net income attributable to noncontrolling interests
during 2014 compared to 2013 was primarily due to the completion of the
Wireless Transaction on February 21, 2014. As a result, our results reflect
our 55% ownership interest of Verizon Wireless through the closing of the
Wireless Transaction and reflect our full ownership of Verizon Wireless for
the remainder of the year. The noncontrolling interests that remained
after the completion of the Wireless Transaction primarily relate to wireless
partnership entities.
2012
$
9,682
Increase/(Decrease)
2013 vs. 2012
2014 vs. 2013
$ (9,719)
(80.7)%
$
2,368
24.5 %
The increase in Net income attributable to noncontrolling interests during
2013 compared to 2012 was due to higher earnings in our Verizon Wireless
segment, which had a 45% noncontrolling partnership interest attributable to Vodafone as of December 31, 2013.
Segment Results of Operations
We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products and
services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is consistent with the chief operating decision maker’s assessment of segment performance.
Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure and
does not purport to be an alternative to operating income as a measure of operating performance. Management believes that this measure is
useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as it excludes the
depreciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating
operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment operating income.
Wireless EBITDA margin is calculated by dividing Wireless EBITDA by total Wireless revenues. Wireless Segment EBITDA service margin, also presented
below, is calculated by dividing Wireless Segment EBITDA by Wireless service revenues. Wireless Segment EBITDA service margin utilizes service revenues rather than total revenues. Service revenues primarily exclude equipment revenues in order to reflect the impact of providing service to the
wireless customer base on an ongoing basis. Wireline EBITDA margin is calculated by dividing Wireline EBITDA by total Wireline revenues. You can find
additional information about our segments in Note 14 to the consolidated financial statements.
17
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Wireless
Our Wireless segment is primarily comprised of Cellco Partnership doing business as Verizon Wireless. Cellco Partnership was formed as a joint venture in April 2000 by the combination of the U.S. wireless operations and interests of Verizon and Vodafone. Prior to the completion of the Wireless
Transaction, Verizon owned a controlling 55% interest in Verizon Wireless and Vodafone owned the remaining 45%. On February 21, 2014, the Wireless
Transaction was completed and Verizon acquired 100% ownership of Verizon Wireless. Verizon Wireless provides wireless communications services
across one of the most extensive wireless networks in the United States.
We provide these services and equipment sales to consumer, business and government customers in the United States on a postpaid and prepaid
basis. Postpaid connections represent individual lines of service for which a customer is billed in advance a monthly access charge in return for a
monthly network service allowance, and usage beyond the allowance is billed monthly in arrears. Our prepaid service enables individuals to obtain
wireless services without a long-term contract or credit verification by paying for all services in advance.
All financial results included in the tables below reflect the consolidated results of Verizon Wireless.
Operating Revenues and Selected Operating Statistics
(dollars in millions, except ARPA)
2014
2013
2012
Retail service
Other service
Service revenue
$ 69,501
3,129
72,630
$ 66,334
2,699
69,033
$ 61,440
2,293
63,733
$ 3,167
430
3,597
4.8 %
15.9
5.2
Equipment
Other
Equipment and other
Total Operating Revenues
10,959
4,057
15,016
$ 87,646
8,111
3,879
11,990
$ 81,023
8,023
4,112
12,135
$ 75,868
2,848
178
3,026
$ 6,623
35.1
4.6
25.2
8.2
Connections ('000):(1)
Retail connections
Retail postpaid connections
108,211
102,079
102,799
96,752
98,230
92,530
5,412
5,327
5,568
5,482
4,472
4,118
5,917
5,024
1.33%
1.04%
1.27%
0.97%
1.19%
0.91%
$ 159.86
35,616
2.87
$ 153.93
35,083
2.76
$ 144.04
35,057
2.64
Years Ended December 31,
Net additions in period ('000):(2)
Retail connections
Retail postpaid connections
Churn Rate:
Retail connections
Retail postpaid connections
Account Statistics:
Retail postpaid ARPA
Retail postpaid accounts ('000)(1)
Retail postpaid connections per account(1)
Increase/(Decrease)
2013 vs. 2012
2014 vs. 2013
$
$
4,894
406
5,300
8.0 %
17.7
8.3
88
(233)
(145)
5,155
1.1
(5.7)
(1.2)
6.8
5.3
5.5
4,569
4,222
4.7
4.6
1,096
1,364
24.5
33.1
(1,445)
(906)
(24.4)
(18.0)
5.93
533
0.11
3.9
1.5
4.0
9.89
26
0.12
6.9
0.1
4.5
$
$
(1) As of end of period
(2) Excluding acquisitions and adjustments
2014 Compared to 2013
Wireless’ total operating revenues increased by $6.6 billion, or 8.2%,
during 2014 compared to 2013 primarily as a result of growth in service
revenue and equipment revenue.
Accounts and Connections
Retail (non-wholesale) postpaid accounts primarily represent retail customers under contract with Verizon Wireless that are directly served and
managed by Verizon Wireless and use its branded services. Accounts
include More Everything plans and corporate accounts, as well as legacy
single connection plans and family plans. A single account may include
monthly wireless services for a variety of connected devices. Retail connections represent our retail customer device connections. Churn is the
rate at which service to connections is terminated.
Retail connections under an account may include: smartphones, basic
phones, tablets, LTE Internet (Installed) and other connected devices.
18
Retail postpaid connection net additions increased during 2014 compared to 2013 primarily due to an increase in retail postpaid connection
gross additions partially offset by an increase in our retail postpaid connection churn rate. Higher retail postpaid connection gross additions
were driven by gross additions of tablets as well as 4G LTE smartphones. During 2014, our retail postpaid connection net additions
included approximately 4.2 million tablets as compared to 1.4 million
tablets in 2013.
Retail Postpaid Connections per Account
Retail postpaid connections per account is calculated by dividing the
total number of retail postpaid connections by the number of retail
postpaid accounts as of the end of the period. Retail postpaid connections per account increased 4.0% as of December 31, 2014 compared to
December 31, 2013 primarily due to the increased penetration of tablets.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Service Revenue
Service revenue, which does not include recurring equipment installment billings related to Verizon Edge, increased by $3.6 billion, or 5.2%,
during 2014 compared to 2013 primarily driven by higher retail postpaid
service revenue, which increased largely as a result of an increase in retail
postpaid connections as well as the continued increase in penetration
of 4G LTE smartphones and tablets through our More Everything plans.
The penetration of 4G LTE smartphones was driven by the activation of
smartphones by new customers as well as existing customers migrating
from basic phones and 3G smartphones to 4G LTE smartphones.
The increase in retail postpaid ARPA (the average revenue per account
from retail postpaid accounts), which does not include recurring equipment installment billings related to Verizon Edge, during 2014 compared
to 2013 was primarily driven by increases in smartphone penetration and
retail postpaid connections per account. As of December 31, 2014, we
experienced a 4.0% increase in retail postpaid connections per account
compared to 2013, with smartphones representing 79% of our retail
postpaid phone base as of December 31, 2014 compared to 70% as of
December 31, 2013. The increased penetration in retail postpaid connections per account is primarily due to increases in Internet data devices,
which represented 14.1% of our retail postpaid connection base as of
December 31, 2014 compared to 10.7% as of December 31, 2013, primarily due to tablet activations. Additionally, during 2014, postpaid
smartphone activations represented 92% of phones activated compared
to 86% during 2013.
Other service revenue increased during 2014 compared to 2013 due to
growth in wholesale connections.
Equipment and Other Revenue
Equipment and other revenue increased during 2014 compared to 2013
primarily due to an increase in equipment sales under both the traditional subsidy model and Verizon Edge.
2013 Compared to 2012
The increase in Wireless’ total operating revenues of $5.2 billion, or 6.8%,
during 2013 compared to 2012 was primarily the result of growth in
service revenue.
Accounts and Connections
Retail postpaid connection net additions decreased during 2013
compared to 2012 primarily due to an increase in our retail postpaid
connection churn rate, partially offset by an increase in retail postpaid
connection gross additions.
Retail Postpaid Connections per Account
Retail postpaid connections per account increased 4.5% as of December
31, 2013 compared to December 31, 2012 primarily due to the increased
penetration of tablets and other Internet devices.
Service Revenue
Service revenue increased $5.3 billion, or 8.3%, during 2013 compared
to 2012 primarily driven by higher retail postpaid service revenue, which
increased largely as a result of an increase in retail postpaid connections
as well as the continued increase in penetration of smartphones, tablets and other Internet devices through our Share Everything plans. The
penetration of smartphones was driven by the activation of smartphones
by new customers as well as existing customers migrating from basic
phones to smartphones.
The increase in retail postpaid ARPA during 2013 compared to 2012 was
primarily driven by increases in smartphone penetration and retail postpaid connections per account. As of December 31, 2013, we experienced
a 4.5% increase in retail postpaid connections per account compared to
2012, with smartphones representing 70% of our retail postpaid phone
base as of December 31, 2013 compared to 58% as of December 31, 2012.
The increased penetration in retail postpaid connections per account is
primarily due to increases in Internet data devices, which represented
10.7% of our retail postpaid connection base as of December 31, 2013
compared to 9.3% as of December 31, 2012, primarily due to activations
of tablets and other Internet devices. Additionally, during 2013, postpaid
smartphone activations represented 86% of phones activated compared
to 77% during 2012.
Other service revenue increased during 2013 compared to 2012 due to
growth in wholesale connections, partially offset by a decrease in revenue related to third party roaming.
Equipment and Other Revenue
Equipment and other revenue decreased during 2013 compared to 2012
as a decline in regulatory fees was partially offset by an increase in revenue related to upgrade fees.
19
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Operating Expenses
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
(dollars in millions)
2014
2013
2012
$ 28,825
23,602
8,459
$ 60,886
$ 23,648
23,176
8,202
$ 55,026
$ 24,490
21,650
7,960
$ 54,100
Increase/(Decrease)
2013 vs. 2012
2014 vs. 2013
$ 5,177
426
257
$ 5,860
21.9 %
1.8
3.1
10.6
$
$
(842)
1,526
242
926
(3.4) %
7.0
3.0
1.7
Cost of Services and Sales
Cost of services and sales increased during 2014 compared to 2013 primarily due to an increase in cost of equipment sales of $5.3 billion as a
result of an increase in the number of devices sold as well as an increase
in the cost per unit. The increase in the number of devices sold was
driven, in part, by the launch of new devices.
Selling, General and Administrative Expense
Selling, general and administrative expense increased during 2014
compared to 2013 primarily due to a $0.2 billion increase in advertising
expense and gains recorded in the first quarter of 2013 related to wireless license exchange agreements, partially offset by a decline in sales
commission expense, which was driven by the adoption of Verizon Edge.
Cost of services and sales decreased during 2013 compared to 2012 primarily due to a decrease in cost of equipment sales of $0.4 billion, which
was partially due to a decline in postpaid upgrades, decreased data
roaming, a decline in cost of data services and a decrease in network
connection costs due to the deployment of Ethernet backhaul facilities primarily targeted at sites upgrading to 4G LTE, partially offset by an
increase in cost of network services.
Selling, general and administrative expense increased during 2013 compared to 2012 primarily due to higher sales commission expense in our
indirect channel. Indirect sales commission expense increased $1.1 billion during 2013 compared to 2012 primarily as a result of increases in
indirect gross additions and upgrades, as well as the average commission
per unit, as the mix of units continues to shift toward smartphones and
more customers activate data services.
Depreciation and Amortization Expense
The increase in depreciation and amortization expense during 2014 compared to 2013, and 2013 compared to 2012, respectively, was primarily
driven by an increase in net depreciable assets.
Segment Operating Income and EBITDA
Years Ended December 31,
Segment Operating Income
Add Depreciation and amortization expense
Segment EBITDA
Segment operating income margin
Segment EBITDA margin
Segment EBITDA service margin
(dollars in millions)
2014
2013
2012
$ 26,760
8,459
$ 35,219
$ 25,997
8,202
$ 34,199
$ 21,768
7,960
$ 29,728
30.5%
40.2%
48.5%
32.1%
42.2%
49.5%
28.7%
39.2%
46.6%
The changes in the table above during the periods presented were primarily a result of the factors described in connection with operating
revenues and operating expenses.
Increase/(Decrease)
2013 vs. 2012
2014 vs. 2013
$
763
257
$ 1,020
2.9 %
3.1
3.0
$
4,229
242
4,471
19.4 %
3.0
15.0
Non-operational items excluded from Wireless’ Operating income
were as follows:
(dollars in millions)
2014
Years Ended December 31,
Gain on spectrum license transactions
Severance, pension and benefit (credits)
charges
Other costs
20
$
$
(707)
$
86
109
(512)
2013
$
(278)
$
(61)
–
(339)
2012
$
–
$
37
–
37
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Wireline
Our Wireline segment provides voice, data and video communications products and enhanced services, including broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services. We
provide these products and services to consumers in the United States, as well as to carriers, businesses and government customers both in the
United States and around the world.
On July 1, 2014, our Wireline segment sold a non-strategic business (see “Acquisitions and Divestitures”). Accordingly, the historical Wireline results for
these operations, which were not material to our consolidated financial statements or our segment results of operations, have been reclassified to
Corporate, eliminations and other to reflect comparable segment operating results.
Operating Revenues and Selected Operating Statistics
Years Ended December 31,
Consumer retail
Small business
Mass Markets
Strategic services
Core
Global Enterprise
Global Wholesale
Other
Total Operating Revenues
Connections ('000):(1)
Total voice connections
Total Broadband connections
FiOS Internet subscribers
FiOS Video subscribers
(dollars in millions)
Increase/(Decrease)
2013 vs. 2012
2014
2013
2012
2014 vs. 2013
$ 15,583
2,464
18,047
8,326
5,358
13,684
6,222
476
$ 38,429
$ 14,842
2,541
17,383
8,140
6,042
14,182
6,594
465
$ 38,624
$ 14,145
2,601
16,746
7,737
6,840
14,577
7,094
528
$ 38,945
19,795
21,085
22,503
(1,290)
(6.1)
(1,418)
(6.3)
9,205
6,616
5,649
9,015
6,072
5,262
8,795
5,424
4,726
190
544
387
2.1
9.0
7.4
220
648
536
2.5
11.9
11.3
$
$
741
(77)
664
186
(684)
(498)
(372)
11
(195)
5.0 %
(3.0)
3.8
2.3
(11.3)
(3.5)
(5.6)
2.4
(0.5)
$
$
697
(60)
637
403
(798)
(395)
(500)
(63)
(321)
4.9 %
(2.3)
3.8
5.2
(11.7)
(2.7)
(7.0)
(11.9)
(0.8)
(1) As of end of period
Wireline’s revenues decreased $0.2 billion, or 0.5%, during 2014 compared to 2013 primarily driven by declines in Global Enterprise Core and
Global Wholesale, partially offset by higher Consumer retail revenues
driven by FiOS services and increased Strategic services revenues within
Global Enterprise.
Mass Markets
Mass Markets operations provide broadband services (including highspeed Internet, FiOS Internet and FiOS Video services), local exchange
(basic service and end-user access) and long distance (including regional
toll) voice services to residential and small business subscribers.
2014 Compared to 2013
Mass Markets revenues increased $0.7 billion, or 3.8%, during 2014 compared to 2013 primarily due to the expansion of FiOS services (Voice,
Internet and Video), including our FiOS Quantum offerings, as well as
changes in our pricing strategies, partially offset by the continued decline
of local exchange revenues. FiOS represented approximately 76% of
Consumer retail revenue during 2014 compared to approximately 71%
during 2013.
During 2014, we grew our subscriber base by 0.5 million FiOS Internet
subscribers and by 0.4 million FiOS Video subscribers, while also
improving penetration rates within our FiOS service areas. As of
December 31, 2014, we achieved penetration rates of 41.1% and 35.8%
for FiOS Internet and FiOS Video, respectively, compared to penetration
rates of 39.5% and 35.0% for FiOS Internet and FiOS Video, respectively, at
December 31, 2013.
The increase in Mass Markets revenues was partially offset by the decline
of local exchange revenues primarily due to a 5.5% decline in Consumer
retail voice connections resulting primarily from competition and technology substitution with wireless, competing VoIP, and cable telephony
services. Total voice connections include traditional switched access
lines in service as well as FiOS digital voice connections. There was also
a decline in Small business retail voice connections, primarily reflecting
competition and a continuing shift to both IP and high-speed circuits.
2013 Compared to 2012
Mass Markets revenues increased $0.6 billion, or 3.8%, during 2013 compared to 2012 primarily due to the expansion of FiOS services (Voice,
Internet and Video) as well as changes in our pricing strategies, partially
offset by the continued decline of local exchange revenues.
During 2013, we grew our subscriber base by 0.6 million FiOS Internet
subscribers and by 0.5 million FiOS Video subscribers, while also consistently improving penetration rates within our FiOS service areas. As of
December 31, 2013, we achieved penetration rates of 39.5% and 35.0%
for FiOS Internet and FiOS Video, respectively, compared to penetration
rates of 37.3% and 33.3% for FiOS Internet and FiOS Video, respectively, at
December 31, 2012.
The increase in Mass Markets revenues, driven by FiOS services, was
partially offset by the decline of local exchange revenues primarily due
to a 5.2% decline in Consumer retail voice connections resulting primarily from competition and technology substitution with wireless,
VoIP, broadband and cable services. Total voice connections include
traditional switched access lines in service as well as FiOS digital voice
connections. There was also a decline in Small business retail voice
connections, primarily reflecting competition and a shift to both IP and
high-speed circuits.
21
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Global Enterprise
Global Enterprise offers Strategic services and other core communications services to medium and large business customers, multinational
corporations and state and federal government customers.
2014 Compared to 2013
Global Enterprise revenues decreased $0.5 billion, or 3.5%, during 2014
compared to 2013 primarily due to a $0.5 billion, or 11.9%, decline related
to lower voice services and data networking revenues, which consist of
traditional circuit-based services such as frame relay, private line and
legacy voice and data services. These core services declined compared to
2013 as customers continued to migrate to next generation IP services.
Also contributing to the decrease was the contraction of market rates
due to competition and a decline in Core customer premise equipment
revenues. This decrease was partially offset by an increase in Strategic
services revenues of $0.2 billion, or 2.3%, primarily due to growth in our
application services, such as our cloud and data center offerings and contact center solutions.
2013 Compared to 2012
Global Enterprise revenues decreased $0.4 billion, or 2.7%, during 2013
compared to 2012 primarily due to a $0.5 billion, or 27.1%, decline in Core
customer premise equipment revenues as well as lower voice services
and data networking revenues, which consist of traditional circuit-based
services such as frame relay, private line and legacy voice and data services. These core services declined in 2013 compared to 2012 as our
customer base continued to migrate to next generation IP services. The
decline in customer premise equipment revenues reflected our focus on
improving margins by continuing to de-emphasize sales of equipment
that are not part of an overall enterprise solutions bundle. This decrease
was partially offset by growth in Strategic services revenues, which
increased $0.4 billion, or 5.2%, during 2013 compared to 2012 primarily
due to growth in advanced services, such as contact center solutions,
IP communications and our cloud and data center offerings, as well as
revenue from a telematics services business that we acquired in the third
quarter of 2012.
22
Global Wholesale
Global Wholesale provides communications services including data,
voice and local dial tone and broadband services primarily to local, long
distance and other carriers that use our facilities to provide services to
their customers.
2014 Compared to 2013
Global Wholesale revenues decreased $0.4 billion, or 5.6%, during 2014
compared to 2013 primarily due to a decline in data revenues and traditional voice revenues. Data revenue declines were driven by the
continuing demand for high-speed digital data services from fiber-tothe-cell customers upgrading their core data circuits to Ethernet facilities.
As a result of the customer migrations, at December 31, 2014, the number
of core data circuits experienced a 14.2% decline compared to December
31, 2013. The traditional voice revenue declines are primarily due to a
decrease in MOUs and the effect of technology substitution. During
2014, we also experienced a 6.2% decline in domestic wholesale connections. Also contributing to the decline in voice revenues is the continuing
contraction of market rates due to competition.
2013 Compared to 2012
Global Wholesale revenues decreased $0.5 billion, or 7.0%, during 2013
compared to 2012 primarily due to a decline in traditional voice revenues
as a result of decreased MOUs and a 5.2% decline in domestic wholesale
connections. The traditional voice product reductions are primarily due
to competitors de-emphasizing their local market initiatives coupled with
the effect of technology substitution. Also contributing to the decline
in voice revenues is the continuing contraction of market rates due to
competition. Partially offsetting the overall decrease in wholesale revenue was a continuing demand for high-speed digital data services from
fiber-to-the-cell customers upgrading their core data circuits to Ethernet
facilities as well as Ethernet migrations from other core customers. As a
result of the customer upgrades, the number of core data circuits experienced an 11.3% decline compared to the similar period in 2012.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Operating Expenses
Years Ended December 31,
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
(dollars in millions)
2014
2013
2012
$ 21,332
8,180
7,882
$ 37,394
$ 21,396
8,571
8,327
$ 38,294
$ 21,657
8,860
8,424
$ 38,941
Cost of Services and Sales
Cost of services and sales decreased slightly during 2014 compared
to 2013, primarily due to a decrease in employee costs as a result of
reduced headcount and a decline in access costs driven by declines in
overall wholesale long distance volumes, which was partially offset by an
increase in content costs of $0.4 billion associated with continued FiOS
subscriber growth and programming license fee increases.
Cost of services and sales decreased during 2013 compared to 2012, primarily due to a decrease in costs related to customer premise equipment
which reflected our focus on improving margins by de-emphasizing sales
of equipment that are not part of an overall enterprise solutions bundle, a
decline in access costs resulting primarily from declines in overall wholesale long distance volumes and the net effect of storm-related insurance
recoveries. These decreases were partially offset by higher content costs
associated with continued FiOS subscriber growth and programming
license fee increases.
Increase/(Decrease)
2013 vs. 2012
2014 vs. 2013
$
$
(64)
(391)
(445)
(900)
(0.3)%
(4.6)
(5.3)
(2.4)
$
$
Segment Operating Income
Add Depreciation and amortization expense
Segment EBITDA
Segment operating income margin
Segment EBITDA margin
(1.2) %
(3.3)
(1.2)
(1.7)
Selling, General and Administrative Expense
Selling, general and administrative expense decreased during 2014 compared to 2013 primarily due to declines in employee costs as a result of
reduced headcount, decreased advertising expense and lower transaction and property taxes.
Selling, general and administrative expense decreased during 2013 compared to 2012 primarily due to declines in employee costs, primarily as
a result of reduced headcount, and declines in rent expenses, partially
offset by higher transaction and property tax expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 2014 compared to 2013, as well as 2013 compared to 2012, due to decreases in net
depreciable assets.
Segment Operating Income and EBITDA
Years Ended December 31,
(261)
(289)
(97)
(647)
(dollars in millions)
2014
$ 1,035
7,882
$ 8,917
2.7%
23.2%
2013
$
$
2014 vs. 2013
2012
330
8,327
8,657
$
$
0.9%
22.4%
4
8,424
8,428
Increase/(Decrease)
2013 vs. 2012
$
$
705
(445)
260
nm
(5.3)%
3.0
$
$
326
(97)
229
nm
(1.2) %
2.7
–
21.6%
nm - not meaningful
The changes in Wireline’s Operating income, Segment EBITDA and
Segment EBITDA margin during the periods presented were primarily
a result of the factors described in connection with operating revenues
and operating expenses.
Non-operational items excluded from Wireline’s Operating income were
as follows:
(dollars in millions)
2014
Years Ended December 31,
Severance, pension and benefit charges
Impact of divested operations
Other costs
$
$
189
(12)
137
314
2013
$
$
–
(43)
–
(43)
2012
$
$
–
(56)
56
–
23
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Other Items
Severance, Pension and Benefit (Credits) Charges
Early Debt Redemption and Other Costs
During 2014, we recorded net pre-tax severance, pension and benefits
charges of approximately $7.5 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The charges
were primarily driven by a decrease in our discount rate assumption used
to determine the current year liabilities from a weighted-average of 5.0%
at December 31, 2013 to a weighted-average of 4.2% at December 31,
2014 ($5.2 billion), a change in mortality assumptions primarily driven by
the use of updated actuarial tables (RP-2014 and MP-2014) issued by the
Society of Actuaries in October 2014 ($1.8 billion) and revisions to the
retirement assumptions for participants and other assumption adjustments, partially offset by the difference between our estimated return on
assets of 7.25% and our actual return on assets of 10.5% ($0.6 billion). As
part of this charge, we recorded severance costs of $0.5 billion under our
existing separation plans.
During March 2014, we recorded net debt redemption costs of $0.9 billion in connection with the early redemption of $1.25 billion aggregate
principal amount of Cellco Partnership and Verizon Wireless Capital LLC
8.50% Notes due 2018, and the purchase of the following notes pursuant
to the Tender Offer: $0.7 billion of the then outstanding $1.5 billion aggregate principal amount of Verizon 6.10% Notes due 2018, $0.8 billion of
the then outstanding $1.5 billion aggregate principal amount of Verizon
5.50% Notes due 2018, $0.6 billion of the then outstanding $1.3 billion
aggregate principal amount of Verizon 8.75% Notes due 2018, $0.7 billion of the then outstanding $1.25 billion aggregate principal amount of
Verizon 5.55% Notes due 2016, $0.4 billion of the then outstanding $0.75
billion aggregate principal amount of Verizon 5.50% Notes due 2017, $0.6
billion of the then outstanding $1.0 billion aggregate principal amount
of Cellco Partnership and Verizon Wireless Capital LLC 8.50% Notes due
2018, $0.2 billion of the then outstanding $0.3 billion aggregate principal
amount of Alltel Corporation 7.00% Debentures due 2016 and $0.3 billion
of the then outstanding $0.6 billion aggregate principal amount of GTE
Corporation 6.84% Debentures due 2018.
During 2013, we recorded net pre-tax severance, pension and benefits
credits of approximately $6.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The credits
were primarily driven by an increase in our discount rate assumption
used to determine the current year liabilities from a weighted-average of
4.2% at December 31, 2012 to a weighted-average of 5.0% at December
31, 2013 ($4.3 billion), lower than assumed retiree medical costs and
other assumption adjustments ($1.4 billion) and the difference between
our estimated return on assets of 7.5% at December 31, 2012 and our
actual return on assets of 8.6% at December 31, 2013 ($0.5 billion).
During 2012, we recorded net pre-tax severance, pension and benefits
charges of approximately $7.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The charges
were primarily driven by a decrease in our discount rate assumption used
to determine the current year liabilities from a weighted-average of 5% at
December 31, 2011 to a weighted-average of 4.2% at December 31, 2012
($5.3 billion) and revisions to the retirement assumptions for participants
and other assumption adjustments, partially offset by the difference
between our estimated return on assets of 7.5% and our actual return on
assets of 10% ($0.7 billion). As part of this charge, we also recorded $1.0
billion related to the annuitization of pension liabilities (see “Employee
Benefit Plan Funded Status and Contributions”) as well as severance
charges of $0.4 billion.
The Consolidated Adjusted EBITDA non-GAAP measure presented
in the Consolidated Operating Income and EBITDA discussion (see
“Consolidated Results of Operations”) excludes the severance, pension
and benefit (credits) charges presented above.
See Note 8 to the consolidated financial statements for additional information regarding the Tender Offer.
During the fourth quarter of 2014, we recorded net debt redemption
costs of $0.5 billion in connection with the early redemption of $0.5 billion aggregate principal amount of Verizon 4.90% Notes due 2015, $0.6
billion aggregate principal amount of Verizon 5.55% Notes due 2016, $1.3
billion aggregate principal amount of Verizon 3.00% Notes due 2016, $0.4
billion aggregate principal amount of Verizon 5.50% Notes due 2017, $0.7
billion aggregate principal amount of Verizon 8.75% Notes due 2018, $1.0
billion of the then outstanding $3.2 billion aggregate principal amount of
Verizon 2.50% Notes due 2016, $0.1 billion aggregate principal amount
Alltel Corporation 7.00% Debentures due 2016 and $0.4 billion aggregate
principal amount of Cellco Partnership and Verizon Wireless Capital LLC
8.50% Notes due 2018, as well as $0.3 billion of other costs.
During November 2012, we recorded debt redemption costs of $0.8 billion in connection with the purchase of $0.9 billion of the $1.25 billion of
8.95% Verizon Communications Notes due 2039 in a cash tender offer.
During December 2012, we recorded debt redemption costs of $0.3 billion in connection with the early redemption of $0.7 billion of the $2.0
billion of 8.75% Verizon Communications Notes due 2018, $1.0 billion of
4.625% Verizon Virginia LLC Debentures, Series A, due March 2013 and
$0.75 billion of 4.35% Verizon Communications Notes due February 2013,
as well as $0.3 billion of other costs.
We recognize early debt redemption costs in Other income and
(expense), net on our consolidated statements of income.
Gain on Spectrum License Transactions
During the second quarter of 2014, we completed license exchange
transactions with T-Mobile USA Inc. (T-Mobile USA) to exchange certain
AWS and Personal Communication Services (PCS) licenses. The exchange
included a number of swaps that we expect will result in more efficient use of the AWS and PCS bands. As a result of these exchanges, we
received $0.9 billion of AWS and PCS spectrum licenses at fair value and
we recorded an immaterial gain.
24
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
During the second quarter of 2014, we completed transactions pursuant to two additional agreements with T-Mobile USA with respect to
our remaining 700 MHz A block spectrum licenses. Under one agreement, we sold certain of these licenses to T-Mobile USA in exchange for
cash consideration of approximately $2.4 billion, and under the second
agreement we exchanged the remainder of our 700 MHz A block spectrum licenses as well as AWS and PCS spectrum licenses for AWS and
PCS spectrum licenses. As a result, we received $1.6 billion of AWS and
PCS spectrum licenses at fair value and we recorded a pre-tax gain
of approximately $0.7 billion in Selling, general and administrative
expense on our consolidated statement of income for the year ended
December 31, 2014.
During the third quarter of 2013, after receiving the required regulatory
approvals, Verizon Wireless sold 39 lower 700 MHz B block spectrum
licenses to AT&T in exchange for a payment of $1.9 billion and the
transfer by AT&T to Verizon Wireless of AWS (10 MHz) licenses in certain
markets in the western United States. Verizon Wireless also sold certain
lower 700 MHz B block spectrum licenses to an investment firm for a payment of $0.2 billion. As a result, we received $0.5 billion of AWS licenses
at fair value and we recorded a pre-tax gain of approximately $0.3 billion
in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2013.
The Consolidated Adjusted EBITDA non-GAAP measure presented
in the Consolidated Operating Income and EBITDA discussion (see
“Consolidated Results of Operations”) excludes the gains on the spectrum license transactions described above.
Wireless Transaction Costs
As a result of the third-party indebtedness incurred to finance the Wireless
Transaction, we incurred interest expense of $0.4 billion during 2014 (see
“Consolidated Financial Condition”). This amount represents the interest
expense incurred prior to the closing of the Wireless Transaction.
During 2013, as a result of the Wireless Transaction, we recorded costs of
$0.9 billion primarily for interest expense of $0.7 billion related to the issuance of the new notes, as well as $0.2 billion in fees primarily in connection
with the bridge credit agreement (see “Consolidated Financial Condition”).
Gain on Sale of Omnitel Interest
As a result of the sale of the Omnitel Interest on February 21, 2014, which
was part of the consideration for the Wireless Transaction, we recorded a
gain of $1.9 billion in Equity in earnings of unconsolidated businesses on
our consolidated statement of income during 2014.
Litigation Settlements
In the third quarter of 2012, we settled a number of patent litigation matters, including cases with ActiveVideo Networks Inc. (ActiveVideo) and TiVo
Inc. (TiVo). In connection with the settlements with ActiveVideo and TiVo,
we recorded a charge of $0.4 billion in the third quarter of 2012 and will
pay and recognize over the following six years an additional $0.2 billion.
The Consolidated Adjusted EBITDA non-GAAP measure presented in
the Consolidated Operating Income and EBITDA discussion (see
“Consolidated Results of Operations”) excludes the litigation settlement
costs presented above.
Consolidated Financial Condition
Years Ended December 31,
Cash Flows Provided By (Used In)
Operating activities
Investing activities
Financing activities
Increase (Decrease) In Cash and Cash
Equivalents
(dollars in millions)
2014
2013
2012
$ 30,631
(15,856)
(57,705)
$ 38,818
(14,833)
26,450
$ 31,486
(20,502)
(21,253)
$ (42,930)
$ 50,435
$ (10,269)
We use the net cash generated from our operations to fund network
expansion and modernization, service and repay external financing, pay
dividends, invest in new businesses and, when appropriate, buy back
shares of our outstanding common stock. Our sources of funds, primarily
from operations and, to the extent necessary, from external financing
arrangements, are sufficient to meet ongoing operating and investing
requirements. The cash portion of the purchase price for the Wireless
Transaction was primarily funded by the incurrence of third-party indebtedness (see “Acquisitions and Divestitures”). We expect that our capital
spending requirements will continue to be financed primarily through
internally generated funds. Debt or equity financing may be needed to
fund additional investments or development activities or to maintain
an appropriate capital structure to ensure our financial flexibility. Our
cash and cash equivalents are primarily held domestically in diversified
accounts and are invested to maintain principal and liquidity. Accordingly,
we do not have significant exposure to foreign currency fluctuations. See
“Market Risk” for additional information regarding our foreign currency
risk management strategies.
Our available external financing arrangements include credit available
under credit facilities and other bank lines of credit, vendor financing
arrangements, issuances of registered debt or equity securities and
privately-placed capital market securities. We may also issue short-term
debt through an active commercial paper program and have an $8.0 billion credit facility to support such commercial paper issuances.
Impact of Divested Operations
On July 1, 2014, we sold a non-strategic Wireline business, which provides
communications solutions to a variety of government agencies.
The Consolidated Adjusted EBITDA non-GAAP measure presented in the
Consolidated Operating Income and EBITDA discussion (see “Consolidated
Results of Operations”) excludes the historical financial results of the
divested operations described above.
25
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated from
operations, primarily from our Wireless segment. Net cash provided by
operating activities during 2014 decreased by $8.2 billion compared to
2013 primarily due to a $3.7 billion increase in income tax payments
due to the incremental pre-tax income attributable to Verizon included
in Verizon’s income since the closing of the Wireless Transaction. Also
contributing to the decrease was a $2.3 billion increase in interest
payments primarily due to the incremental debt needed to fund
the Wireless Transaction as well as a $1.5 billion increase in pension
contributions. The decrease in Cash flows provided by operating activities
was partially offset by an increase in earnings at our Wireless segment.
On February 21, 2014, we completed the Wireless Transaction which
provides full access to the cash flows of Verizon Wireless. Having full
access to all the cash flows from our wireless business gives us the ability
to continue to invest in our networks and spectrum, meet evolving
customer requirements for products and services and take advantage of
new growth opportunities across our lines of business.
Net cash provided by operating activities during 2013 increased by $7.3
billion compared to 2012 primarily due to higher consolidated earnings,
lower pension contributions and improved working capital levels. The
increase in net cash provided by operating activities in 2013 was partially
offset by net distributions of $0.3 billion received from Vodafone Omnitel
in 2012.
Cash Flows Used In Investing Activities
Capital expenditures increased at Wireless in 2013 compared to 2012
in order to substantially complete the build-out of our 4G LTE network.
Capital expenditures declined at Wireline as a result of decreased legacy
spending requirements and a decline in spending on our FiOS network.
Acquisitions
During 2014, 2013 and 2012, we invested $0.4 billion, $0.6 billion and
$4.3 billion, respectively, in acquisitions of wireless licenses. During
2014, 2013 and 2012, we also invested $0.2 billion, $0.5 billion and
$0.9 billion, respectively, in acquisitions of investments and businesses,
net of cash acquired.
On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Verizon participated in that
auction, and was the high bidder on 181 spectrum licenses, for which we
will pay approximately $10.4 billion. During the fourth quarter of 2014,
we made a deposit of $0.9 billion related to our participation in this auction. On February 13, 2015, we made a down payment of $1.2 billion for
these spectrum licenses. Verizon has submitted an application for these
licenses and must complete payment for them in the first quarter of
2015. During January 2015, we entered into a term loan agreement with
a major financial institution, pursuant to which we expect to borrow $6.5
billion to pay for the spectrum licenses. The proceeds from the Tower
Monetization Transaction, which we expect to receive in the first half of
2015, will be used to repay the majority of the term loan outstanding.
See Note 2 to the consolidated financial statements for additional information regarding the Tower Monetization Transaction and Note 8 to the
consolidated financial statements for additional information regarding
the term loan agreement.
Capital Expenditures
Capital expenditures continue to be a primary use of capital resources as
they facilitate the introduction of new products and services, enhance
responsiveness to competitive challenges and increase the operating
efficiency and productivity of our networks.
In February 2014, Verizon acquired a business dedicated to the development of IP television for cash consideration that was not significant.
Capital expenditures, including capitalized software, were as follows:
During 2012, we paid approximately $4.3 billion to acquire wireless
licenses primarily to meet future LTE capacity needs and enable LTE
expansion. Additionally, during 2012, we acquired HUGHES Telematics, a
provider of telematics services, for $0.6 billion. See Note 2 to the consolidated financial statements for additional information.
Years Ended December 31,
Wireless
Wireline
Other
Total as a percentage of revenue
(dollars in millions)
2014
$ 10,515
5,750
926
$ 17,191
13.5%
2013
$
9,425
6,229
950
$ 16,604
13.8%
2012
$
8,857
6,342
976
$ 16,175
14.0%
Capital expenditures increased at Wireless in 2014 compared to
2013 in order to increase the capacity of our 4G LTE network. Capital
expenditures declined at Wireline as a result of decreased legacy
spending requirements.
During the fourth quarter of 2013, Verizon acquired an industry leader
in content delivery networks for $0.4 billion. Additionally, we acquired
a technology company for cash consideration that was not significant.
Dispositions
During 2014, we received proceeds of $2.4 billion related to spectrum
license transactions and $0.1 billion related to the disposition of a nonstrategic Wireline business. See Note 2 to the consolidated financial
statements for additional information.
During 2013, we completed the sale of 700 MHz lower B block spectrum
licenses and as a result, we received proceeds of $2.1 billion.
During 2012, we received $0.4 billion related to the sale of some of our
700 MHz lower A and B block spectrum licenses. We acquired these
licenses as part of FCC Auction 73 in 2008.
Other, net
For the year ended December 31, 2014, Other, net included the deposit
of $0.9 billion related to our participation in the FCC auction of spectrum
in the AWS-3 band.
26
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Cash Flows Provided by (Used In) Financing Activities
We seek to maintain a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against
earnings and cash flow volatility resulting from changes in market conditions. During 2014, 2013 and 2012, net cash provided by (used in)
financing activities was $(57.7) billion, $26.5 billion and $(21.3) billion,
respectively.
2014
During 2014, our net cash used in financing activities of $57.7 billion was
primarily driven by:
• $58.9 billion used to partially fund the Wireless Transaction (see Note 2
to the consolidated financial statements);
• $17.7 billion used for repayments of long-term borrowings and capital
lease obligations; and
• $7.8 billion used for dividend payments. These uses of cash were partially offset by proceeds from long-term borrowings of $31.0 billion.
Proceeds from and Repayments of Long-Term Borrowings
As of December 31, 2014, our total debt increased to $113.3 billion as
compared to $93.6 billion at December 31, 2013 primarily as a result
of additional debt issued to finance the Wireless Transaction. Since
the substantial majority of our total debt portfolio consists of fixed rate
indebtedness, changes in interest rates do not have a material effect on
our interest payments. Throughout 2014, we accessed the capital markets to optimize the maturity schedule of our debt portfolio and take
advantage of lower interest rates, thereby reducing our effective interest
rate to 4.9% from 5.2% in 2013. See Note 8 to the consolidated financial
statements for additional details regarding our debt activity.
At December 31, 2014, approximately $9.6 billion or 8.5% of the aggregate principal amount of our total debt portfolio consisted of foreign
denominated debt, primarily the Euro and British Pound Sterling. We
have entered into cross currency swaps in order to fix our future interest
and principal payments in U.S. dollars and mitigate the impact of
foreign currency transaction gains or losses. See “Market Risk” for
additional information.
See “Other Items” for additional information related to the early debt
redemption costs incurred in 2014.
Dividends
The Verizon Board of Directors assesses the level of our dividend payments on a periodic basis taking into account such factors as long-term
growth opportunities, internal cash requirements and the expectations
of our shareowners. During the third quarter of 2014, the Board increased
our quarterly dividend payment 3.8% to $.55 per share from $.53 per
share in the same period of 2013. This is the eighth consecutive year that
Verizon’s Board of Directors has approved a quarterly dividend increase.
As in prior periods, dividend payments were a significant use of capital
resources. During 2014, we paid $7.8 billion in dividends compared
to $5.9 billion in 2013. The increase is primarily due to the issuance of
approximately 1.27 billion additional shares of common stock as a result
of the Wireless Transaction.
2013
During 2013, our net cash provided by financing activities of $26.5 billion was primarily driven by proceeds from long-term borrowings of $49.2
billion to fund the Wireless Transaction. This source of cash was partially
offset by:
• $8.2 billion used for repayments of long-term borrowings and capital
lease obligations;
• $5.9 billion used for dividend payments; and
• $3.2 billion used for a special distribution to a noncontrolling interest. Proceeds from and Repayments of Long-Term Borrowings
As of December 31, 2013, our total debt increased to $93.6 billion as
compared to $52.0 billion at December 31, 2012 primarily as a result
of additional debt issued to finance the Wireless Transaction. Since the
substantial majority of our total debt portfolio consists of fixed rate
indebtedness, changes in interest rates do not have a material effect on
our interest payments. See Note 8 to the consolidated financial statements for additional details regarding our debt activity.
Dividends
During the third quarter of 2013, the Board increased our quarterly dividend payment 2.9% to $.53 per share from $.515 per share in the same
period of 2012. As in prior periods, dividend payments were a significant
use of capital resources.
Special Distributions
In May 2013, the Board of Representatives of Verizon Wireless declared
a distribution to its owners, which was paid in the second quarter of
2013 in proportion to their partnership interests on the payment date,
in the aggregate amount of $7.0 billion. As a result, Vodafone received a
cash payment of $3.15 billion and the remainder of the distribution was
received by Verizon.
Other, net
The change in Other, net financing activities during 2013 compared
to 2012 was primarily driven by higher distributions to Vodafone,
which owned a 45% noncontrolling interest in Verizon Wireless as of
December 31, 2013.
2012
During 2012, our net cash used in financing activities of $21.3 billion was
primarily driven by:
• $8.3 billion used for a special distribution to a noncontrolling interest;
• $6.4 billion used for repayments of long-term borrowings and capital
lease obligations; and
• $5.2 billion used for dividend payments.
These uses of cash were partially offset by proceeds from long-term borrowings of $4.5 billion.
Proceeds from and Repayments of Long-Term Borrowings
As of December 31, 2012, our total debt decreased to $52.0 billion as
compared to $55.2 billion at December 31, 2011 primarily as a result of
the repayment of long-term borrowings. Since the substantial majority
of our total debt portfolio consists of fixed rate indebtedness, changes in
interest rates do not have a material effect on our interest payments.
See “Other Items” for additional information related to the early debt
redemption costs incurred in 2012.
Other, net
The change in Other, net financing activities during 2012 compared to
2011 was primarily driven by higher distributions to Vodafone, and higher
early debt redemption costs (see “Other Items”).
27
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Dividends
During the third quarter of 2012, the Board increased our quarterly dividend payment 3.0% to $.515 per share from $.50 per share in the same
period of 2011. As in prior periods, dividend payments were a significant
use of capital resources.
Special Distributions
In November 2012, the Board of Representatives of Verizon Wireless
declared a distribution to its owners, which was paid in the fourth quarter
of 2012 in proportion to their partnership interests on the payment date,
in the aggregate amount of $8.5 billion. As a result, Vodafone received a
cash payment of $3.8 billion and the remainder of the distribution was
received by Verizon.
In July 2011, the Board of Representatives of Verizon Wireless declared
a distribution to its owners, which was paid in the first quarter of 2012
in proportion to their partnership interests on the payment date, in
the aggregate amount of $10 billion. As a result, Vodafone received a
cash payment of $4.5 billion and the remainder of the distribution was
received by Verizon.
Credit Facilities
On July 31, 2014, we amended our $6.2 billion credit facility to increase
the availability to $8.0 billion and extend the maturity to July 31, 2018. At
the same time, we terminated our $2.0 billion 364-day revolving credit
agreement. As of December 31, 2014, the unused borrowing capacity
under this credit facility was approximately $7.9 billion. The credit facility
does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has
incurred a material adverse change. We use the credit facility for the issuance of letters of credit and for general corporate purposes.
Common Stock
Common stock has been used from time to time to satisfy some of the
funding requirements of employee and shareowner plans, including 18.2
million, 6.9 million and 24.6 million common shares issued from Treasury
stock during 2014, 2013 and 2012, respectively, which had aggregate
values of $0.7 billion, $0.3 billion and $1.0 billion, respectively.
As a result of the Wireless Transaction, in February 2014, Verizon issued
approximately 1.27 billion shares.
On March 7, 2014, the Verizon Board of Directors approved a share buyback program, which authorizes the repurchase of up to 100 million
shares of Verizon common stock terminating no later than the close of
business on February 28, 2017. The program permits Verizon to repurchase shares over time, with the amount and timing of repurchases
depending on market conditions and corporate needs. The Board also
determined that no additional shares were to be purchased under the
prior program. During 2013, we repurchased $0.2 billion of our common
stock under our previous share buyback program. There were no repurchases of common stock during 2014 or 2012.
28
In addition to the previously authorized three-year share buyback program, in February 2015, the Verizon Board of Directors authorized Verizon
to enter into an accelerated share repurchase (ASR) agreement to repurchase $5.0 billion of the Company’s common stock. The total number
of shares that Verizon will repurchase under the ASR agreement will
be based generally upon the volume-weighted average share price of
Verizon’s common stock during the term of the transaction. On February
10, 2015, in exchange for an up-front payment totaling $5.0 billion,
Verizon received an initial delivery of 86.2 million shares having a value of
approximately $4.25 billion. Final settlement of the transaction under the
ASR agreement, including delivery of the remaining shares, if any, that
Verizon is entitled to receive, is scheduled to occur in the second quarter
of 2015.
Credit Ratings
Verizon’s credit ratings did not change in 2014.
During the third quarter of 2013, Verizon’s credit ratings were downgraded by Moody’s Investors Service (Moody’s), Standard & Poor’s
Ratings Services (Standard & Poor’s) and Fitch Ratings (Fitch) as a result
of Verizon’s announcement of the agreement to acquire Vodafone’s 45%
noncontrolling interest in Verizon Wireless for approximately $130 billion including the incurrence of third-party indebtedness to fund the
cash portion of the purchase price for the Wireless Transaction. Moody’s
downgraded Verizon’s long-term debt ratings one notch from A3 to Baa1,
while Standard & Poor’s lowered its corporate credit rating and senior
unsecured debt rating one notch from A- to BBB+ and Fitch lowered its
long-term issuer default rating and senior unsecured debt rating one
notch from A to A-.
Securities ratings assigned by rating organizations are expressions of
opinion and are not recommendations to buy, sell or hold securities. A
securities rating is subject to revision or withdrawal at any time by the
assigning rating organization. Each rating should be evaluated independently of any other rating.
Covenants
Our credit agreements contain covenants that are typical for large, investment grade companies. These covenants include requirements to pay
interest and principal in a timely fashion, pay taxes, maintain insurance
with responsible and reputable insurance companies, preserve our
corporate existence, keep appropriate books and records of financial
transactions, maintain our properties, provide financial and other reports
to our lenders, limit pledging and disposition of assets and mergers and
consolidations, and other similar covenants. Additionally, our term loan
credit agreements require us to maintain a leverage ratio (as such term
is defined in those agreements) not in excess of 3.50:1.00 until our credit
ratings are equal to or higher than A3 and A-. See Note 8 to the consolidated financial statements for additional details related to our term loan
credit agreement.
We and our consolidated subsidiaries are in compliance with all
debt covenants.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Increase (Decrease) In Cash and Cash Equivalents
Our Cash and cash equivalents at December 31, 2014 totaled $10.6 billion, a $42.9 billion decrease compared to Cash and cash equivalents at
December 31, 2013 primarily as a result of the cash payment made to
Vodafone as part of the completion of the Wireless Transaction. Our Cash
and cash equivalents at December 31, 2013 totaled $53.5 billion, a $50.4
billion increase compared to Cash and cash equivalents at December 31,
2012 primarily as a result of the issuance of $49.0 billion aggregate principal amount of fixed and floating rate notes.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that management
believes is useful to investors and other users of Verizon’s financial information in evaluating cash available to pay debt and dividends. Free cash
flow is calculated by subtracting capital expenditures from net cash
provided by operating activities. The following table reconciles net cash
provided by operating activities to Free cash flow:
Years Ended December 31,
Net cash provided by operating activities
Less Capital expenditures (including
capitalized software)
Free cash flow
(dollars in millions)
2014
2013
2012
$ 30,631
$ 38,818
$ 31,486
17,191
$ 13,440
16,604
$ 22,214
16,175
$ 15,311
The changes in free cash flow during 2014, 2013 and 2012 were a result of
the factors described in connection with net cash provided by operating
activities and capital expenditures. On February 21, 2014, we completed
the Wireless Transaction which provides full access to the cash flows of
Verizon Wireless. The completion of the Wireless Transaction resulted in
an increase in income tax payments as well as an increase in interest payments, which reduced our net cash provided by operating activities (see
“Cash Flows Provided by Operating Activities”). Employer Contributions
We operate numerous qualified and nonqualified pension plans and
other postretirement benefit plans. These plans primarily relate to our
domestic business units. During 2014 and 2013, contributions to our
qualified pension plans were $1.5 billion and not material, respectively.
During 2012, we contributed $0.9 billion to our qualified pension plans,
excluding the pension annuitization discussed above. We also contributed $0.1 billion, $0.1 billion and $0.2 billion to our nonqualified pension
plans in 2014, 2013 and 2012, respectively.
In an effort to reduce the risk of our portfolio strategy and better align
assets with liabilities, we have adopted a liability driven pension strategy
that seeks to better match cash flows from investments with projected
benefit payments. We expect that the strategy will reduce the likelihood
that assets will decline at a time when liabilities increase (referred to as
liability hedging), with the goal to reduce the risk of underfunding to the
plan and its participants and beneficiaries, however, we also expect the
strategy to result in lower asset returns. Based on this strategy and the
funded status of the plans at December 31, 2014, we expect the minimum required qualified pension plan contribution in 2015 to be $0.7
billion. Nonqualified pension contributions are estimated to be approximately $0.1 billion in 2015.
Contributions to our other postretirement benefit plans generally relate
to payments for benefits on an as-incurred basis since the other postretirement benefit plans do not have funding requirements similar to
the pension plans. We contributed $0.7 billion, $1.4 billion and $1.5 billion to our other postretirement benefit plans in 2014, 2013 and 2012,
respectively. Contributions to our other postretirement benefit plans are
estimated to be approximately $0.8 billion in 2015.
Leasing Arrangements
See Note 7 to the consolidated financial statements for a discussion of
leasing arrangements.
Employee Benefit Plan Funded Status and Contributions
Pension Annuitization
On October 17, 2012, we, along with our subsidiary Verizon Investment
Management Corp., and Fiduciary Counselors Inc., as independent fiduciary of the Verizon Management Pension Plan (the Plan), entered into a
definitive purchase agreement with The Prudential Insurance Company
of America (Prudential) and Prudential Financial, Inc., pursuant to
which the Plan would purchase a single premium group annuity contract
from Prudential.
On December 10, 2012, upon issuance of the group annuity contract by
Prudential, Prudential irrevocably assumed the obligation to make future
annuity payments to approximately 41,000 Verizon management retirees
who began receiving pension payments from the Plan prior to January 1,
2010. The amount of each retiree’s annuity payment equals the amount
of such individual’s pension benefit. In addition, the group annuity contract is intended to replicate the same rights to future payments, such as
survivor benefits, that are currently offered by the Plan.
We contributed approximately $2.6 billion to the Plan between
September 1, 2012 and December 31, 2012 in connection with the transaction so that the Plan’s funding percentage would not decrease as a
result of the transaction.
29
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Off Balance Sheet Arrangements and Contractual Obligations
Contractual Obligations and Commercial Commitments
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2014. Additional detail about
these items is included in the notes to the consolidated financial statements.
(dollars in millions)
Contractual Obligations
Long-term debt(1)
Capital lease obligations(2)
Total long-term debt, including current maturities
Interest on long-term debt(1)
Operating leases(2)
Purchase obligations(3)
Other long-term liabilities(4)
Total contractual obligations
Total
$ 112,417
516
112,933
87,501
14,403
20,991
2,084
$ 237,912
Payments Due By Period
Less than
1 year
1-3 years
3-5 years
$
2,239
158
2,397
5,178
2,499
8,421
1,425
$ 19,920
$
9,807
218
10,025
10,081
4,205
8,503
659
$ 33,473
$ 12,524
93
12,617
9,504
3,029
2,544
$ 27,694
More than
5 years
$ 87,847
47
87,894
62,738
4,670
1,523
$ 156,825
(1)Items included in long-term debt with variable coupon rates are described in Note 8 to the consolidated financial statements.
(2)See Note 7 to the consolidated financial statements.
(3)The purchase obligations reflected above are primarily commitments to purchase programming and network services, equipment, software, handsets and peripherals, and marketing activities,
which will be used or sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject
of contractual obligations. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented in this table alone do not provide a reliable
indicator of our expected future cash outflows or changes in our expected cash position (see Note 17 to the consolidated financial statements).
(4)Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 12 to the consolidated financial statements).
We are not able to make a reliable estimate of when the unrecognized tax benefits balance of $1.8 billion and related interest and penalties will be settled with the respective taxing authorities
until issues or examinations are further developed (see Note 13 to the consolidated financial statements).
Guarantees
We guarantee the debentures and first mortgage bonds of our operating
telephone company subsidiaries as well as the debt obligations of GTE
Corporation that were issued and outstanding prior to July 1, 2003 (see
Note 8 to the consolidated financial statements).
In connection with the execution of agreements for the sale 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 financial
losses (see Note 17 to the consolidated financial statements).
As of December 31, 2014, letters of credit totaling approximately $0.1 billion, which were executed in the normal course of business and support
several financing arrangements and payment obligations to third parties,
were outstanding (see Note 17 to the consolidated financial statements).
30
Market Risk
We are exposed to various types of market risk in the normal course
of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in investment, equity and
commodity prices and changes in corporate tax rates. We employ
risk management strategies, which may include the use of a variety of
derivatives including cross currency swaps, foreign currency and prepaid
forwards and collars, interest rate swap agreements, commodity swap
and forward agreements and interest rate locks. We do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency and
other derivative transactions only to the extent necessary to achieve our
desired objectives in limiting our exposure to various market risks. Our
objectives include maintaining a mix of fixed and variable rate debt to
lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes
in market conditions. We do not hedge our market risk exposure in a
manner that would completely eliminate the effect of changes in interest
rates and foreign exchange rates on our earnings. At December 31, 2014,
we posted collateral of approximately $0.6 billion related to derivative
contracts under collateral exchange arrangements. While we may be
exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote. As such, we do not expect that our
results of operations or financial condition will be materially affected by
these risk management strategies.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Interest Rate Risk
Foreign Currency Translation
We are exposed to changes in interest rates, primarily on our short-term
debt and the portion of long-term debt that carries floating interest
rates. As of December 31, 2014, approximately 86% of the aggregate
principal amount of our total debt portfolio consisted of fixed rate
indebtedness, including the effect of interest rate swap agreements designated as hedges. The impact of a 100 basis point change in interest
rates affecting our floating rate debt would result in a change in annual
interest expense, including our interest rate swap agreements that are
designated as hedges, of approximately $0.2 billion. The interest rates on
substantially all of our existing long-term debt obligations are unaffected
by changes to our credit ratings.
The functional currency for our foreign operations is primarily the local
currency. The translation of income statement and balance sheet
amounts of our foreign operations into U.S. dollars is recorded as cumulative translation adjustments, which are included in Accumulated other
comprehensive income in our consolidated balance sheets. Gains and
losses on foreign currency transactions are recorded in the consolidated
statements of income in Other income and (expense), net. At December
31, 2014, our primary translation exposure was to the British Pound
Sterling and the Euro.
The table that follows summarizes the fair values of our long-term debt,
including current maturities, and interest rate swap derivatives as of
December 31, 2014 and 2013. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming
100-basis-point upward and downward shifts in the yield curve. Our
sensitivity analysis does not include the fair values of our commercial
paper and bank loans, if any, because they are not significantly affected
by changes in market interest rates.
Long-term debt and
related derivatives
At December 31, 2014
At December 31, 2013
(dollars in millions)
Fair Value
$ 126,139
103,103
Fair Value
assuming
+ 100 basis
point shift
$ 115,695
95,497
Fair Value
assuming
- 100 basis
point shift
$ 138,420
111,910
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. We record
the interest rate swaps at fair value on our consolidated balance sheets
as assets and liabilities.
During the second quarter of 2013, interest rate swaps with a notional
value of $1.25 billion matured and the impact to our consolidated financial statements was not material. During the third quarter of 2013, we
entered into interest rate swaps with a total notional value of $1.8 billion. At December 31, 2014 and 2013, the fair value of these interest
rate swaps was not material. At December 31, 2014, the total notional
amount of these interest rate swaps was $1.8 billion. The ineffective portion of these interest rate swaps was not material at December 31, 2014
and 2013.
Cross Currency Swaps
Verizon Wireless previously entered into cross currency swaps designated
as cash flow hedges to exchange approximately $1.6 billion of British
Pound Sterling and Euro-denominated debt into U.S. dollars and to fix
our future interest and principal payments in U.S. dollars, as well as to
mitigate the impact of foreign currency transaction gains or losses. In
June 2014, we settled $0.8 billion of these cross currency swaps and the
gains with respect to these swaps were not material.
During the first quarter of 2014, we entered into cross currency swaps
designated as cash flow hedges to exchange approximately $5.4 billion
of Euro and British Pound Sterling denominated debt into U.S. dollars.
During the second quarter of 2014, we entered into cross currency swaps
designated as cash flow hedges to exchange approximately $1.2 billion
of British Pound Sterling denominated debt into U.S. dollars. During
the fourth quarter of 2014, we entered into cross currency swaps designated as cash flow hedges to exchange approximately $3.0 billion of
Euro denominated debt into U.S. dollars and to fix our future interest and
principal payments in U.S. dollars. Each of these cross currency swaps
was entered into in order to mitigate the impact of foreign currency
transaction gains or losses.
A portion of the gains and losses recognized in Other comprehensive
income 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. The fair value of the outstanding swaps was $0.6
billion, which was primarily included within Other liabilities on our consolidated balance sheet, at December 31, 2014 and was not material at
December 31, 2013. During 2014 and 2013, a pre-tax loss of $0.1 billion
and an immaterial pre-tax gain, respectively, were recognized in Other
comprehensive income with respect to these swaps.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
the fourth quarter of 2013, we entered into forward interest rate swaps
with a notional value of $2.0 billion. In March 2014, we settled these
forward interest rate swaps and the pre-tax gain was not material. During
2014, we entered into forward interest rate swaps with a total notional
value of $4.8 billion. We designated these contracts as cash flow hedges.
During the fourth quarter of 2014, we settled $2.8 billion of forward
interest rate swaps and the pre-tax loss was not material. The fair value of
these contracts was $0.2 billion, which was included within Other liabilities on our consolidated balance sheet, at December 31, 2014 and was
not material at December 31, 2013.
31
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Critical Accounting Estimates and Recently issued Accounting Standards
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our
financial statements is as follows:
• Wireless licenses and Goodwill are a significant component of our consolidated assets. Both our wireless licenses and goodwill are treated as
indefinite-lived intangible assets and, therefore are not amortized, but
rather are tested for impairment annually in the fourth fiscal quarter,
unless there are events or changes in circumstances during an interim
period that indicate these assets may not be recoverable. We believe
our estimates and assumptions are reasonable and represent appropriate marketplace considerations as of the valuation date. We do not
believe that reasonably likely adverse changes in our assumptions and
estimates would result in an impairment charge as of our latest impairment testing date. However, if there is a substantial and sustained
adverse decline in our operating profitability, we may have impairment
charges in future years. Any such impairment charge could be material
to our results of operations and financial condition.
Wireless Licenses
The carrying value of our wireless licenses was approximately $75.3
billion as of December 31, 2014. We aggregate our wireless licenses
into one single unit of accounting, as we utilize our wireless licenses
on an integrated basis as part of our nationwide wireless network. Our
wireless licenses provide us with the exclusive right to utilize certain
radio frequency spectrum to provide wireless communication services.
There are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses.
In 2014 and 2013, we performed a qualitative impairment assessment
to determine whether it is more likely than not that the fair value of
our wireless licenses was less than the carrying amount. As part of
our assessment we considered several qualitative factors including
the business enterprise value of Wireless, macroeconomic conditions
(including changes in interest rates and discount rates), industry and
market considerations (including industry revenue and EBITDA margin
projections), the projected financial performance of Wireless, as well as
other factors. Based on our assessment in 2014 and 2013, we qualitatively concluded that it was more likely than not that the fair value of
our wireless licenses significantly exceeded their carrying value and
therefore, did not result in an impairment.
In 2012, our quantitative impairment test consisted of comparing the
estimated fair value of our wireless licenses to the aggregated carrying
amount as of the test date. If the estimated fair value of our wireless
licenses was less than the aggregated carrying amount of the wireless
licenses then an impairment charge would have been recognized. Our
annual quantitative impairment test for 2012 indicated that the fair
value significantly exceeded the carrying value and, therefore, did not
result in an impairment.
32
In 2012, using a quantitative assessment, we estimated the fair value of
our wireless licenses using a direct income based valuation approach.
This approach uses a discounted cash flow analysis to estimate what
a marketplace participant would be willing to pay to purchase the
aggregated wireless licenses as of the valuation date. As a result, we
were required to make significant estimates about future cash flows
specifically associated with our wireless licenses, an appropriate discount rate based on the risk associated with those estimated cash
flows and assumed terminal value and growth rates. We considered current and expected future economic conditions, current and
expected availability of wireless network technology and infrastructure
and related equipment and the costs thereof as well as other relevant
factors in estimating future cash flows. The discount rate represented
our estimate of the weighted-average cost of capital (WACC), or
expected return, that a marketplace participant would have required
as of the valuation date. We developed the discount rate based on
our consideration of the cost of debt and equity of a group of guideline companies as of the valuation date. Accordingly, our discount
rate incorporated our estimate of the expected return a marketplace
participant would have required as of the valuation date, including
the risk premium associated with the current and expected economic
conditions as of the valuation date. The terminal value growth rate
represented our estimate of the marketplace’s long-term growth rate.
Goodwill
At December 31, 2014, the balance of our goodwill was approximately
$24.6 billion, of which $18.4 billion was in our Wireless segment and
$6.2 billion was in our Wireline segment. Determining whether an
impairment has occurred requires the determination of fair value of
each respective reporting unit. Our operating segments, Wireless
and Wireline, are deemed to be our reporting units for purposes of
goodwill impairment testing. The fair value of Wireless significantly
exceeded its carrying value and the fair value of Wireline exceeded
its carrying value. Accordingly, our annual impairment tests for 2014,
2013 and 2012 did not result in an impairment.
The fair value of the reporting unit is calculated using a market
approach and a discounted cash flow method. The market approach
includes the use of comparative multiples to corroborate discounted
cash flow results. The discounted cash flow method is based on the
present value of two components—projected cash flows and a terminal value. The terminal value represents the expected normalized
future cash flows of the reporting unit beyond the cash flows from
the discrete projection period. The fair value of the reporting unit is
calculated based on the sum of the present value of the cash flows
from the discrete period and the present value of the terminal value.
The estimated cash flows are discounted using a rate that represents
our WACC.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
• We maintain benefit plans for most of our employees, including, for
certain employees, pension and other postretirement benefit plans.
At December 31, 2014, in the aggregate, pension plan benefit obligations exceeded the fair value of pension plan assets, which will result
in higher future pension plan expense. Other postretirement benefit
plans have larger benefit obligations than plan assets, resulting in
expense. Significant benefit plan assumptions, including the discount
rate used, the long-term rate of return on plan assets and health care
trend rates are periodically updated and impact the amount of benefit
plan income, expense, assets and obligations. A sensitivity analysis of
the impact of changes in these assumptions on the benefit obligations
and expense (income) recorded, as well as on the funded status due to
an increase or a decrease in the actual versus expected return on plan
assets as of December 31, 2014 and for the year then ended pertaining
to Verizon’s pension and postretirement benefit plans is provided in the
table below.
(dollars in millions)
Percentage
point
change
Increase
(decrease) at
December 31, 2014*
Pension plans discount rate
+0.50
-0.50
Rate of return on pension plan assets
+1.00
-1.00
(163)
163
Postretirement plans discount rate
+0.50
-0.50
(1,838)
2,081
+1.00
-1.00
(29)
29
+1.00
-1.00
3,760
(3,023)
Rate of return on postretirement plan
assets
Health care trend rates
$
in income tax expense. Actual tax payments may materially differ from
estimated liabilities as a result of changes in tax laws as well as unanticipated transactions impacting related income tax balances.
• Our Plant, property and equipment balance represents a significant
component of our consolidated assets. We record Plant, property and
equipment at cost. We depreciate Plant, property and equipment on
a straight-line basis over the estimated useful life of the assets. We
expect that a one-year increase in estimated useful lives of our Plant,
property and equipment would result in a decrease to our 2014 depreciation expense of $2.7 billion and that a one-year decrease would
result in an increase of approximately $5.2 billion in our 2014 depreciation expense.
Recently Issued Accounting Standards
See Note 1 to the consolidated financial statements for a discussion
of recently issued accounting standard updates not yet adopted as of
December 31, 2014.
(1,375)
1,526
* In determining its pension and other postretirement obligation, the Company used
a weighted-average discount rate of 4.2%. The rate was selected to approximate the
composite interest rates available on a selection of high-quality bonds available in the
market at December 31, 2014. The bonds selected had maturities that coincided with
the time periods during which benefits payments are expected to occur, were noncallable and available in sufficient quantities to ensure marketability (at least $0.3 billion
par outstanding).
• Our current and deferred income taxes, and associated valuation allowances, are impacted by events and transactions arising in the normal
course of business as well as in connection with the adoption of new
accounting standards, changes in tax laws and rates, acquisitions
and dispositions of businesses and non-recurring items. As a global
commercial enterprise, our income tax rate and the classification of
income taxes can be affected by many factors, including estimates of
the timing and realization of deferred income tax assets and the timing
and amount of income tax payments. We account for tax benefits
taken or expected to be taken in our tax returns in accordance with the
accounting standard relating to the uncertainty in income taxes, which
requires the use of a two-step approach for recognizing and measuring
tax benefits taken or expected to be taken in a tax return. We review
and adjust our liability for unrecognized tax benefits based on our best
judgment given the facts, circumstances, and information available at
each reporting date. To the extent that the final outcome of these tax
positions is different than the amounts recorded, such differences may
impact income tax expense and actual tax payments. We recognize
any interest and penalties accrued related to unrecognized tax benefits
33
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Acquisitions and Divestitures
Wireless
Wireless Transaction
On February 21, 2014, we completed the Wireless Transaction for aggregate consideration of approximately $130 billion. The consideration
paid was primarily comprised of cash of approximately $58.89 billion,
Verizon common stock with a value of approximately $61.3 billion and
other consideration.
Omnitel Transaction
On February 21, 2014, Verizon and Vodafone also consummated the
sale of the Omnitel Interest (the Omnitel Transaction) by a subsidiary
of Verizon to a subsidiary of Vodafone in connection with the Wireless
Transaction pursuant to a separate share purchase agreement. As a result,
during 2014, we recognized a pre-tax gain of $1.9 billion on the disposal
of the Omnitel interest.
See Note 2 to the consolidated financial statements for additional information regarding the Wireless Transaction.
Spectrum License Transactions
On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Verizon participated in that
auction, and was the high bidder on 181 spectrum licenses, for which we
will pay approximately $10.4 billion. During the fourth quarter of 2014,
we made a deposit of $0.9 billion related to our participation in this auction. On February 13, 2015, we made a down payment of $1.2 billion for
these spectrum licenses. Verizon has submitted an application for these
licenses and must complete payment for them in the first quarter of 2015.
From time to time, we enter into agreements to buy, sell or exchange
spectrum licenses. We believe these spectrum license transactions have
allowed us to continue to enhance the reliability of our network while
also resulting in a more efficient use of spectrum. See Note 2 to the
consolidated financial statements for additional details regarding our
spectrum license transactions.
Tower Monetization Transaction
On February 5, 2015, we announced an agreement with American Tower
pursuant to which American Tower will have the exclusive right to lease,
acquire or otherwise operate and manage many of our wireless towers
for an upfront payment of $5.1 billion, which also includes payment for
the sale of 165 towers. See Note 2 to the consolidated financial statements for additional information.
Wireline
During July 2014, Verizon sold a non-strategic Wireline business for cash
consideration that was not significant. Additionally, during July 2012, we
acquired HUGHES Telematics for approximately $12 per share in cash for
a total acquisition price of $0.6 billion. The acquisition has accelerated
our ability to bring more telematics offerings to market for existing and
new customers. See Note 2 to the consolidated financial statements for
additional information.
34
On February 5, 2015, we announced that we have entered into a
definitive agreement with Frontier pursuant to which Verizon will 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. See Note 2 to the consolidated financial statements for
additional information.
Other
During the fourth quarter of 2014, Redbox Instant by Verizon, a venture between Verizon and Redbox Automated Retail, LLC (Redbox), a
wholly-owned subsidiary of Outerwall Inc., ceased providing service to
its customers. In accordance with an agreement between the parties,
Redbox withdrew from the venture on October 20, 2014 and Verizon
wound down and dissolved the venture during the fourth quarter of
2014. As a result of the termination of the venture, we recorded a pre-tax
loss of $0.1 billion in the fourth quarter of 2014.
During February 2014, Verizon acquired a business dedicated to
the development of IP television for cash consideration that was
not significant.
During the fourth quarter of 2013, Verizon acquired an industry leader in
content delivery networks for $0.4 billion.
See Note 2 to the consolidated financial statements for additional
information.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations continued
Cautionary Statement Concerning
Forward-Looking Statements
In this report we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to
risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations.
Forward-looking statements also include those preceded or followed by
the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
The following important factors, along with those discussed elsewhere
in this report and in other filings with the Securities and Exchange
Commission (SEC), could affect future results and could cause
those results to differ materially from those expressed in the forwardlooking statements:
• adverse conditions in the U.S. and international economies;
• the effects of competition in the markets in which we operate;
• material changes in technology or technology substitution;
• disruption of our key suppliers’ provisioning of products or services;
• changes in the regulatory environment in which we operate, including
any increase in restrictions on our ability to operate our networks;
• breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any
resulting financial impact not covered by insurance;
• our high level of indebtedness;
• an adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations or adverse conditions in
the credit markets affecting the cost, including interest rates, and/or
availability of further financing;
• material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact;
• significant increases in benefit plan costs or lower investment returns
on plan assets;
• changes in tax laws or treaties, or in their interpretation;
• changes in accounting assumptions that regulatory agencies, including
the SEC, may require or that result from changes in the accounting
rules or their application, which could result in an impact on earnings;
and
• the inability to implement our business strategies.
35
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Report of Management on Internal Control Over
Report of Independent Registered Public Accounting
Financial Reporting
Firm on Internal Control Over Financial Reporting
We, the management of Verizon Communications Inc., are responsible
for establishing and maintaining adequate internal control over financial
reporting of the company. Management has evaluated internal control
over financial reporting of the company using the criteria for effective
internal control established in Internal Control–Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
Management has assessed the effectiveness of the company’s internal
control over financial reporting as of December 31, 2014. Based on this
assessment, we believe that the internal control over financial reporting
of the company is effective as of December 31, 2014. In connection with
this assessment, there were no material weaknesses in the company’s
internal control over financial reporting identified by management.
The company’s financial statements included in this Annual Report
have been audited by Ernst & Young LLP, independent registered public
accounting firm. Ernst & Young LLP has also provided an attestation
report on the company’s internal control over financial reporting.
Lowell C. McAdam
Chairman and Chief Executive Officer
Francis J. Shammo
Executive Vice President and Chief Financial Officer
Anthony T. Skiadas
Senior Vice President and Controller
36
We have audited Verizon Communications Inc. and subsidiaries’ (Verizon)
internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control–Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). Verizon’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Report of
Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Report of Independent Registered
Public Accounting Firm
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Verizon maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2014, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Verizon as of December 31, 2014 and 2013, and the
related consolidated statements of income, comprehensive income, cash
flows and changes in equity for each of the three years in the period
ended December 31, 2014 and our report dated February 23, 2015
expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 23, 2015
To The Board of Directors and Shareowners of Verizon
Communications Inc.:
We have audited the accompanying consolidated balance sheets of
Verizon Communications Inc. and subsidiaries (Verizon) as of December
31, 2014 and 2013, and the related consolidated statements of income,
comprehensive income, cash flows and changes in equity for each of
the three years in the period ended December 31, 2014. These financial
statements are the responsibility of Verizon’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Verizon
at December 31, 2014 and 2013, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2014, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Verizon’s internal
control over financial reporting as of December 31, 2014, based on criteria established in Internal Control–Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 23, 2015 expressed an
unqualified opinion thereon.
Ernst & Young LLP
New York, New York
February 23, 2015
37
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Statements of Income
(dollars in millions, except per share amounts)
2014
2013
2012
$ 127,079
$ 120,550
$ 115,846
49,931
41,016
16,533
107,480
44,887
27,089
16,606
88,582
46,275
39,951
16,460
102,686
Operating Income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Income Before (Provision) Benefit For Income Taxes
(Provision) Benefit for income taxes
Net Income
19,599
1,780
(1,194)
(4,915)
15,270
(3,314)
$ 11,956
$
31,968
142
(166)
(2,667)
29,277
(5,730)
23,547
13,160
324
(1,016)
(2,571)
9,897
660
10,557
Net income attributable to noncontrolling interests
Net income attributable to Verizon
Net Income
$
2,331
9,625
$ 11,956
$
Basic Earnings Per Common Share
Net income attributable to Verizon
Weighted-average shares outstanding (in millions)
$
2.42
3,974
Diluted Earnings Per Common Share
Net income attributable to Verizon
Weighted-average shares outstanding (in millions)
$
2.42
3,981
Years Ended December 31,
Operating Revenues
Operating Expenses
Cost of services and sales (exclusive of items shown below)
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses
See Notes to Consolidated Financial Statements
38
$
12,050
11,497
23,547
$
$
4.01
2,866
$
.31
2,853
$
4.00
2,874
$
.31
2,862
$
$
9,682
875
10,557
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Statements of Comprehensive Income
(dollars in millions)
Years Ended December 31,
Net Income
Other Comprehensive Income, net of taxes
Foreign currency translation adjustments
Unrealized gain (loss) on cash flow hedges
Unrealized gain (loss) on marketable securities
Defined benefit pension and postretirement plans
Other comprehensive income (loss) attributable to Verizon
Other comprehensive income (loss) attributable to noncontrolling interests
Total Comprehensive Income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Verizon
Total Comprehensive Income
2014
$ 11,956
(1,199)
(197)
(5)
154
(1,247)
(23)
$ 10,686
2,308
8,378
$ 10,686
2013
$
$
$
23,547
60
25
16
22
123
(15)
23,655
12,035
11,620
23,655
2012
$
$
$
10,557
69
(68)
29
936
966
10
11,533
9,692
1,841
11,533
See Notes to Consolidated Financial Statements
39
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Balance Sheets
(dollars in millions, except per share amounts)
2014
At December 31,
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $739 and $645
Inventories
Prepaid expenses and other
Total current assets
$
Liabilities and Equity
Current liabilities
Debt maturing within one year
Accounts payable and accrued liabilities
Other
Total current liabilities
Long-term debt
Employee benefit obligations
Deferred income taxes
Other liabilities
Equity
Series preferred stock ($.10 par value; none issued)
Common stock ($.10 par value; 4,242,374,240 and 2,967,610,119 shares
issued in each period, respectively)
Contributed capital
Reinvested earnings
Accumulated other comprehensive income
Common stock in treasury, at cost
Deferred compensation – employee stock ownership plans and other
Noncontrolling interests
Total equity
Total liabilities and equity
See Notes to Consolidated Financial Statements
40
$
53,528
601
12,439
1,020
3,406
70,994
230,508
140,561
89,947
220,865
131,909
88,956
802
75,341
24,639
5,728
6,628
$ 232,708
$
3,432
75,747
24,634
5,800
4,535
274,098
$
$
Plant, property and equipment
Less accumulated depreciation
Investments in unconsolidated businesses
Wireless licenses
Goodwill
Other intangible assets, net
Other assets
Total assets
10,598
555
13,993
1,153
3,324
29,623
2013
2,735
16,680
8,649
28,064
3,933
16,453
6,664
27,050
110,536
33,280
41,578
5,574
89,658
27,682
28,639
5,653
–
–
424
11,155
2,447
1,111
(3,263)
424
1,378
13,676
$ 232,708
$
297
37,939
1,782
2,358
(3,961)
421
56,580
95,416
274,098
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Statements of Cash Flows
(dollars in millions)
Years Ended December 31,
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense
Employee retirement benefits
Deferred income taxes
Provision for uncollectible accounts
Equity in earnings of unconsolidated businesses, net of dividends received
Changes in current assets and liabilities, net of effects from
acquisition/disposition of businesses
Accounts receivable
Inventories
Other assets
Accounts payable and accrued liabilities
Other, net
Net cash provided by operating activities
2014
$ 11,956
2013
$
23,547
2012
$
10,557
16,533
8,130
(92)
1,095
(1,743)
16,606
(5,052)
5,785
993
(102)
16,460
8,198
(952)
972
77
(2,745)
(132)
(695)
1,412
(3,088)
30,631
(843)
56
(143)
925
(2,954)
38,818
(1,717)
(136)
306
1,144
(3,423)
31,486
Cash Flows from Investing Activities
Capital expenditures (including capitalized software)
Acquisitions of investments and businesses, net of cash acquired
Acquisitions of wireless licenses
Proceeds from dispositions of wireless licenses
Proceeds from dispositions of businesses
Other, net
Net cash used in investing activities
(17,191)
(182)
(354)
2,367
120
(616)
(15,856)
(16,604)
(494)
(580)
2,111
–
734
(14,833)
(16,175)
(913)
(4,298)
363
–
521
(20,502)
Cash Flows from Financing Activities
Proceeds from long-term borrowings
Repayments of long-term borrowings and capital lease obligations
Decrease in short-term obligations, excluding current maturities
Dividends paid
Proceeds from sale of common stock
Purchase of common stock for treasury
Special distribution to noncontrolling interest
Acquisition of noncontrolling interest
Other, net
Net cash provided by (used in) financing activities
30,967
(17,669)
(475)
(7,803)
34
–
–
(58,886)
(3,873)
(57,705)
49,166
(8,163)
(142)
(5,936)
85
(153)
(3,150)
–
(5,257)
26,450
4,489
(6,403)
(1,437)
(5,230)
315
–
(8,325)
–
(4,662)
(21,253)
(42,930)
53,528
$ 10,598
50,435
3,093
53,528
(10,269)
13,362
$
3,093
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
See Notes to Consolidated Financial Statements
41
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Consolidated Statements of Changes in Equity
(dollars in millions, except per share amounts, and shares in thousands)
Years Ended December 31,
Common Stock
Balance at beginning of year
Common shares issued (Note 2)
Balance at end of year
2014
Shares
2,967,610
1,274,764
4,242,374
Contributed Capital
Balance at beginning of year
Acquisition of noncontrolling interest (Note 2)
Other
Balance at end of year
$
Amount
2013
Shares
297
127
424
2,967,610
–
2,967,610
$
Amount
2012
Shares
297
–
297
2,967,610
–
2,967,610
Amount
$
297
–
297
37,939
(26,898)
114
11,155
37,990
–
(51)
37,939
37,919
–
71
37,990
Reinvested Earnings (Accumulated Deficit)
Balance at beginning of year
Net income attributable to Verizon
Dividends declared ($2.16, $2.09, $2.03) per share
Balance at end of year
1,782
9,625
(8,960)
2,447
(3,734)
11,497
(5,981)
1,782
1,179
875
(5,788)
(3,734)
Accumulated Other Comprehensive Income
Balance at beginning of year attributable to Verizon
Foreign currency translation adjustments
Unrealized gains (losses) on cash flow hedges
Unrealized gains (losses) on marketable securities
Defined benefit pension and postretirement plans
Other comprehensive income (loss)
Balance at end of year attributable to Verizon
2,358
(1,199)
(197)
(5)
154
(1,247)
1,111
2,235
60
25
16
22
123
2,358
1,269
69
(68)
29
936
966
2,235
Treasury Stock
Balance at beginning of year
Shares purchased
Employee plans (Note 16)
Shareowner plans (Note 16)
Other
Balance at end of year
Deferred Compensation-ESOPs and Other
Balance at beginning of year
Restricted stock equity grant
Amortization
Balance at end of year
Noncontrolling Interests
Balance at beginning of year
Acquisition of noncontrolling interest (Note 2)
Net income attributable to noncontrolling interests
Other comprehensive income (loss)
Total comprehensive income (loss)
Distributions and other
Balance at end of year
Total Equity
See Notes to Consolidated Financial Statements
42
(105,610)
–
14,132
4,105
(37)
(87,410)
(3,961)
–
541
157
–
(3,263)
(109,041)
(3,500)
6,835
96
–
(105,610)
(4,071)
(153)
260
3
–
(3,961)
(133,594)
–
11,434
13,119
–
(109,041)
(5,002)
–
433
498
–
(4,071)
421
166
(163)
424
440
152
(171)
421
308
196
(64)
440
56,580
(55,960)
2,331
(23)
2,308
(1,550)
1,378
52,376
–
12,050
(15)
12,035
(7,831)
56,580
49,938
–
9,682
10
9,692
(7,254)
52,376
$ 13,676
$
95,416
$
85,533
v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s
Notes to Consolidated Financial Statements
Note 1
Description of Business and Summary of Significant Accounting Policies
Description of Business
Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading
providers of communications, information and entertainment products
and services to consumers, businesses and governmental agencies
with a presence around the world. We have two reportable segments,
Wireless and Wireline. For further information concerning our business
segments, see Note 14.
The Wireless segment provides wireless communications products and
services across one of the most extensive and reliable wireless networks
in the United States (U.S.) and has the largest fourth-generation (4G)
Long-Term Evolution (LTE) technology and third-generation (3G) networks of any U.S. wireless service provider.
The Wireline segment provides voice, data and video communications
products and enhanced services, including broadband video and data,
corporate networking solutions, data center and cloud services, security
and managed network services and local and long distance voice services. We provide these products and services to consumers in the United
States, as well as to carriers, businesses and government customers both
in the United States and around the world.
Consolidation
The method of accounting applied to investments, whether consolidated, equity or cost, involves an evaluation of all significant terms of
the investments that explicitly grant or suggest evidence of control or
influence over the operations of the investee. The consolidated financial
statements include our controlled subsidiaries. For controlled subsidiaries
that are not wholly-owned, the noncontrolling interests are included in
Net income and Total equity. Investments in businesses which we do not
control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method.
Investments in which we do not have the ability to exercise significant
influence over operating and financial policies are accounted for under
the cost method. Equity and cost method investments are included
in Investments in unconsolidated businesses in our consolidated balance sheets. Certain of our cost method investments are classified as
available-for-sale securities and adjusted to fair value pursuant to the
accounting standard related to debt and equity securities. All significant
intercompany accounts and transactions have been eliminated.
Basis of Presentation
We have reclassified certain prior year amounts to conform to the current
year presentation.
Use of Estimates
We prepare our financial statements using U.S. generally accepted
accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful
accounts, the recoverability of plant, property and equipment, the
recoverability of intangible assets and other long-lived assets, unbilled
revenues, fair values of financial instruments, unrecognized tax benefits, valuation allowances on tax assets, accrued expenses, pension and
postretirement benefit assumptions, contingencies and allocation of purchase prices in connection with business combinations.
Revenue Recognition
Multiple Deliverable Arrangements
In both our Wireless and Wireline segments, we offer products and
services to our customers through bundled arrangements. These
arrangements involve multiple deliverables which may include products,
services, or a combination of products and services.
Wireless
Our Wireless segment earns revenue primarily by providing access to and
usage of its network. In general, access revenue is billed one month in
advance and recognized when earned. Usage revenue is generally billed
in arrears and recognized when service is rendered. Equipment sales
revenue associated with the sale of wireless handsets and accessories is
generally recognized when the products are delivered to and accepted
by the customer, as this is considered to be a separate earnings process
from providing wireless services. For agreements involving the resale of
third-party services in which we are considered the primary obligor in
the arrangements, we record the revenue gross at the time of the sale.
For equipment sales, we generally subsidize the cost of wireless devices
for plans under our traditional subsidy model. The amount of this subsidy is generally contingent on the arrangement and terms selected by
the customer. In multiple deliverable arrangements which involve the
sale of equipment and a service contract, the equipment revenue is recognized up to the amount collected when the wireless device is sold.
In addition to the traditional subsidy model for equipment sales, we offer
new and existing customers the option to participate in Verizon Edge, a
program that provides eligible wireless customers with the ability to pay
for handsets under an equipment installment plan. Under the Verizon
Edge program, customers have the right to upgrade their handset after
a minimum of 30 days, subject to certain conditions, including making a
stated portion of the required device payments, trading in their handset
in good working condition and signing a new contract with Verizon.
Upon upgrade, the outstanding balance of the equipment installment
plan is exchanged for the used handset. This trade-in right is accounted
for as a guarantee obligation.
Verizon Edge is a multiple-element arrangement typically consisting of
the trade-in right, handset and monthly wireless service. At the inception of the arrangement, the amount allocable to the delivered units
of accounting is limited to the amount that is not contingent upon the
delivery of the monthly wireless service (the noncontingent amount).
The full amount of the trade-in right’s fair value (not an allocated value)
will be recognized as the guarantee liability and the remaining allocable
consideration will be allocated to the handset. The value of the guarantee liability effectively results in a reduction to revenue recognized
for the sale of the handset. The guarantee liability is measured at fair
value upon initial recognition based on assumptions lacking observable pricing inputs including the probability and timing of the customer
upgrading to a new phone, the customer’s estimated remaining installment balance at the time of trade-in and the estimated fair value of the
phone at the time of trade-in and therefore is classified within Level 3 of
the fair value hierarchy. When the customer trades-in their used phone,
the handset received is recorded to inventory and measured as the difference between the remaining equipment installment plan balance at
the time of trade-in and the guarantee liability. As a result of changes in
the Verizon Edge program during 2014, and corresponding changes in
related assumptions, the guarantee liability associated with Verizon Edge
43
Notes to Consolidated Financial Statements continued
agreements under the current program is not material. The guarantee
liability may increase after initial recognition as a result of changes in
facts or assumptions and we will account for any increase in the guarantee liability with a corresponding decrease to revenue. The subsequent
derecognition of the guarantee liability occurs when the guarantor is
released from risk, which will occur at the earlier of the time the trade-in
right is exercised or expires.
Wireline
Our Wireline segment earns revenue based upon usage of its network
and facilities and contract fees. In general, fixed monthly fees for voice,
video, data and certain other services are billed one month in advance
and recognized when earned. Revenue from services that are not fixed
in amount and are based on usage is generally billed in arrears and recognized when service is rendered.
We sell each of the services offered in bundled arrangements (i.e., voice,
video and data), as well as separately; therefore each product or service
has a standalone selling price. For these arrangements, revenue is allocated to each deliverable using a relative selling price method. Under this
method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service.
These services include FiOS services, individually or in bundles, and High
Speed Internet. When we bundle equipment with maintenance and monitoring services,
we recognize equipment revenue when the equipment is installed in
accordance with contractual specifications and ready for the customer’s
use. The maintenance and monitoring services are recognized monthly
over the term of the contract as we provide the services.
Installation-related fees, along with the associated costs up to but not
exceeding these fees, are deferred and amortized over the estimated customer relationship period.
For each of our segments, we report taxes imposed by governmental
authorities on revenue-producing transactions between us and our customers on a net basis.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, principally to Cost of services and sales as these costs are incurred.
On January 28, 2014, at a special meeting of our shareholders, we received
shareholder approval to increase our authorized shares of common stock
by 2 billion shares to an aggregate of 6.25 billion authorized shares of
common stock. On February 4, 2014, this authorization became effective. On February 21, 2014, we issued approximately 1.27 billion shares
of common stock upon completing the acquisition of Vodafone Group
Plc’s indirect 45% interest in Cellco Partnership d/b/a Verizon Wireless.
See Note 2 for additional information.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents. Cash equivalents are stated
at cost, which approximates quoted market value and include amounts
held in money market funds.
Marketable Securities
We have investments in marketable securities, which are considered
“available-for-sale” under the provisions of the accounting standard for
certain debt and equity securities, and are included in the accompanying
consolidated balance sheets in Short-term investments, Investments
in unconsolidated businesses or Other assets. We continually evaluate
our investments in marketable securities for impairment due to declines
in market value considered to be other-than-temporary. That evaluation includes, in addition to persistent, declining stock prices, general
economic and company-specific evaluations. In the event of a determination that a decline in market value is other-than-temporary, a charge to
earnings is recorded for the loss, and a new cost basis in the investment
is established.
Inventories
Inventory consists of wireless and wireline equipment held for sale,
which is carried at the lower of cost (determined principally on either an
average cost or first-in, first-out basis) or market.
Plant and Depreciation
We record plant, property and equipment at cost. Plant, property and
equipment of wireline and wireless operations are generally depreciated
on a straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated
life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.
Advertising Costs
Costs for advertising products and services as well as other promotional
and sponsorship costs are charged to Selling, general and administrative
expense in the periods in which they are incurred (see Note 16).
When the depreciable assets of our wireline and wireless operations
are retired or otherwise disposed of, the related cost and accumulated
depreciation are deducted from the plant accounts, and any gains or
losses on disposition are recognized in income.
Earnings Per Common Share
Basic earnings per common share are based on the weighted-average
number of shares outstanding during the period. Where appropriate,
diluted earnings per common share include the dilutive effect of shares
issuable under our stock-based compensation plans.
We capitalize and depreciate network software purchased or developed
along with related plant assets. We also capitalize interest associated with
the acquisition or construction of network-related assets. Capitalized
interest is reported as a reduction in interest expense and depreciated as
part of the cost of the network-related assets.
There were a total of approximately 7 million, 8 million and 9 million outstanding dilutive securities, primarily consisting of restricted stock units,
included in the computation of diluted earnings per common share
for the years ended December 31, 2014, 2013 and 2012, respectively.
Outstanding options to purchase shares that were not included in the
computation of diluted earnings per common share, because to do so
would have been anti-dilutive for the period, were not significant for the
years ended December 31, 2014, 2013 and 2012, respectively.
In connection with our ongoing review of the estimated remaining
average useful lives of plant, property and equipment at our wireline
and wireless operations, we determined that changes were necessary
to the remaining estimated useful lives of certain assets as a result of
technology upgrades, enhancements, and planned retirements. These
changes resulted in an increase in depreciation expense of $0.6 billion
in 2014. While the timing and extent of current deployment plans are
subject to ongoing analysis and modification, we believe the current estimates of useful lives are reasonable.
44
Notes to Consolidated Financial Statements continued
Computer Software Costs
We capitalize the cost of internal-use network and non-network software
that has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal-use network and non-network software
are capitalized only to the extent that they allow the software to perform
a task it previously did not perform. Planning, software maintenance and
training costs are expensed in the period in which they are incurred. Also,
we capitalize interest associated with the development of internal-use
network and non-network software. Capitalized non-network internaluse software costs are amortized using the straight-line method over a
period of 3 to 7 years and are included in Other intangible assets, net
in our consolidated balance sheets. For a discussion of our impairment
policy for capitalized software costs, see “Goodwill and Other Intangible
Assets” below. Also, see Note 3 for additional detail of internal-use nonnetwork software reflected in our consolidated balance sheets.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets acquired. Impairment testing
for goodwill is performed annually in the fourth fiscal quarter or more
frequently if impairment indicators are present. The Company has the
option to perform a qualitative assessment to determine if the fair value
of the entity is less than its carrying value. However, the Company may
elect to perform an impairment test even if no indications of a potential impairment exist. The impairment test for goodwill uses a two-step
approach, which is performed at the reporting unit level. We have determined that in our case, the reporting units are our operating segments
since that is the lowest level at which discrete, reliable financial and cash
flow information is available. Step one compares the fair value of the
reporting unit (calculated using a market approach and/or a discounted
cash flow method) to its carrying value. If the carrying value exceeds
the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s
goodwill to its implied fair value (i.e., fair value of reporting unit less the
fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying
amount of goodwill, an impairment is recognized.
Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are wireless licenses that
provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication
services. While licenses are issued for only a fixed time, generally ten years,
such licenses are subject to renewal by the Federal Communications
Commission (FCC). License renewals have occurred routinely and at
nominal cost. Moreover, we have determined that there are currently
no legal, regulatory, contractual, competitive, economic or other factors
that limit the useful life of our wireless licenses. As a result, we treat the
wireless licenses as an indefinite-lived intangible asset. We reevaluate
the useful life determination for wireless licenses each year to determine
whether events and circumstances continue to support an indefinite
useful life.
We test our wireless licenses for potential impairment annually. In 2014
and 2013, we performed a qualitative assessment to determine whether
it is more likely than not that the fair value of our wireless licenses was
less than the carrying amount. As part of our assessment, we considered several qualitative factors including the business enterprise value
of Wireless, macroeconomic conditions (including changes in interest
rates and discount rates), industry and market considerations (including
industry revenue and EBITDA (Earnings before interest, taxes, depreciation
and amortization) margin projections), the projected financial performance of Wireless, as well as other factors. The most recent quantitative
assessment of our wireless licenses occurred in 2012. Our quantitative
assessment consisted of comparing the estimated fair value of our wireless licenses to the aggregated carrying amount as of the test date. Using
the quantitative assessment, we evaluated our licenses on an aggregate
basis using a direct value approach. The direct value approach estimates
fair value using a discounted cash flow analysis to estimate what a marketplace participant would be willing to pay to purchase the aggregated
wireless licenses as of the valuation date. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of
the licenses, an impairment is recognized.
Interest expense incurred while qualifying activities are performed to
ready wireless licenses for their intended use is capitalized as part of wireless licenses. The capitalization period ends when the development is
discontinued or substantially complete and the license is ready for its
intended use.
Intangible Assets Subject to Amortization and Long-Lived Assets
Our intangible assets that do not have indefinite lives (primarily customer
lists and non-network internal-use software) are amortized over their estimated useful lives. All of our intangible assets subject to amortization
and long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. If any indications were present, we would test
for recoverability by comparing the carrying amount of the asset group
to the net undiscounted cash flows expected to be generated from the
asset group. If those net undiscounted cash flows do not exceed the
carrying amount, we would perform the next step, which is to determine
the fair value of the asset and record an impairment, if any. We reevaluate the useful life determinations for these intangible assets each year to
determine whether events and circumstances warrant a revision in their
remaining useful lives.
For information related to the carrying amount of goodwill by segment,
wireless licenses and other intangible assets, as well as the major components and average useful lives of our other acquired intangible assets,
see Note 3.
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities is defined
as an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies
of measuring fair value for assets and liabilities, is as follows:
Level 1 –Quoted prices in active markets for identical assets or liabilities
Level 2 –Observable inputs other than quoted prices in active markets
for identical assets and liabilities
Level 3 –No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based
on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair
value measurements requires judgment, and may affect the valuation of
the assets and liabilities being measured and their placement within the
fair value hierarchy.
45
Notes to Consolidated Financial Statements continued
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates, tax
laws and regulations and tax planning strategies available to us in the
various jurisdictions in which we operate.
Deferred income taxes are provided for temporary differences in the
bases between financial statement and income tax assets and liabilities. Deferred income taxes are recalculated annually at tax rates then in
effect. We record valuation allowances to reduce our deferred tax assets
to the amount that is more likely than not to be realized.
We use a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return. The first step is recognition:
we determine whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by
the appropriate taxing authority that has full knowledge of all relevant
information. The second step is measurement: a tax position that meets
the more-likely-than-not recognition threshold is measured to determine
the amount of benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Differences
between tax positions taken in a tax return and amounts recognized in
the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of
an income tax refund receivable, a reduction in a deferred tax asset, or an
increase in a deferred tax liability.
The accounting standard relating to income taxes generated by leveraged lease transactions requires that changes in the projected timing of
income tax cash flows generated by a leveraged lease transaction be recognized as a gain or loss in the year in which the change occurs.
Significant management judgment is required in evaluating our tax positions and in determining our effective tax rate.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based
compensation awards made to employees and directors based on estimated fair values. See Note 11 for further details.
Foreign Currency Translation
The functional currency of our foreign operations is generally the local
currency. For these foreign entities, we translate income statement
amounts at average exchange rates for the period, and we translate
assets and liabilities at end-of-period exchange rates. We record these
translation adjustments in Accumulated other comprehensive income,
a separate component of Equity, in our consolidated balance sheets.
We report exchange gains and losses on intercompany foreign currency
transactions of a long-term nature in Accumulated other comprehensive
income. Other exchange gains and losses are reported in income.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits
earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting
from changes in plan benefits are generally amortized over the average
remaining service period of the employees expected to receive benefits.
Expected return on plan assets is determined by applying the return on
assets assumption to the actual fair value of plan assets. Actuarial gains
and losses are recognized in operating results in the year in which they
occur. These gains and losses are measured annually as of December
31 or upon a remeasurement event. Verizon management employees
no longer earn pension benefits or earn service towards the company
retiree medical subsidy (see Note 12).
We recognize a pension or a postretirement plan’s funded status as either
an asset or liability on the consolidated balance sheets. Also, we measure
any unrecognized prior service costs and credits that arise during the
period as a component of Accumulated other comprehensive income,
net of applicable income tax.
Derivative Instruments
We have entered into derivative transactions primarily to manage our
exposure to fluctuations in foreign currency exchange rates, interest rates,
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 and commodity swap agreements and interest rate locks. We do not
hold derivatives for trading purposes.
We measure all derivatives, including derivatives embedded in other
financial instruments, at fair value and recognize them as either assets
or liabilities on our consolidated balance sheets. Our derivative instruments are valued primarily using models based on readily observable
market parameters for all substantial terms of our derivative contracts
and thus are classified as Level 2. Changes in the fair values of derivative instruments not qualifying as hedges or any ineffective portion of
hedges are recognized in earnings in the current period. Changes in the
fair values of derivative instruments used effectively as fair value hedges
are recognized in earnings, along with changes in the fair value of the
hedged item. Changes in the fair value of the effective portions of cash
flow hedges are reported in Other comprehensive income (loss) and recognized in earnings when the hedged item is recognized in earnings.
Recently Adopted Accounting Standards
During the first quarter of 2014, we adopted the accounting standard
update relating to the presentation of an unrecognized tax benefit when
a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The standard update provides that a liability related to
an unrecognized tax benefit should be offset against same jurisdiction
deferred tax assets for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward if such settlement is required or expected in
the event the uncertain tax position is disallowed. The adoption of this
standard update did not have a significant impact on our consolidated
financial statements.
Recently Issued Accounting Standards
In April 2014, the accounting standard update related to the reporting
of discontinued operations and disclosures of disposals of components
of an entity was issued. This standard update changes the criteria for
reporting discontinued operations and enhances convergence of the
reporting requirements for discontinued operations. As a result of this
standard update, a disposal of a component of an entity or a group of
46
Notes to Consolidated Financial Statements continued
components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a
major effect on an entity’s operations and financial results. We will adopt
this standard update during the first quarter of 2015. We are currently
evaluating the impact that this standard update will have on our 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 U.S. GAAP and International Financial
Reporting Standards. The standard update intends to provide a more
robust framework for addressing revenue issues; improve comparability
of revenue recognition practices across entities, industries, jurisdictions,
and capital markets; and provide more useful information to users of
financial statements through improved disclosure requirements. Upon
adoption of this standard update, we expect that the allocation and
timing of revenue recognition will be impacted. We expect to adopt this
standard update during the first quarter of 2017.
There are two adoption methods available for implementation of the
standard update related to the recognition of revenue from contracts
with customers. Under one method, the guidance is applied retrospectively to contracts for each reporting period presented, subject to
allowable practical expedients. Under the other method, the guidance
is applied to contracts not completed as of the date of initial application, 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 consolidated financial statements.
In June 2014, 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
was issued. The standard update resolves the diverse accounting treatment for these share-based payments by requiring that a performance
target that affects vesting and that could be achieved after the requisite
service period be treated as a performance condition. The requisite service period ends when the employee can cease rendering service and
still be eligible to vest in the award if the performance target is achieved.
We will adopt this standard update during the first quarter of 2016. The
adoption of this standard update is not expected to have a significant
impact on our consolidated financial statements.
In January 2015, the accounting standard update related to the reporting
of extraordinary and unusual items was issued. This standard update
eliminates the concept of extraordinary items from U.S. GAAP as part of
an initiative to reduce complexity in accounting standards while maintaining or improving the usefulness of the information provided to the
users of the financial statements. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be
retained and expanded to include items that are both unusual in nature
and infrequent in occurrence. This standard update is effective as of the
first quarter of 2016; however, earlier adoption is permitted.
Note 2
Acquisitions and Divestitures
Wireless
Wireless Transaction
On September 2, 2013, Verizon entered into a stock purchase agreement
(the Stock Purchase Agreement) with Vodafone Group Plc (Vodafone) and
Vodafone 4 Limited (Seller), pursuant to which Verizon agreed to acquire
Vodafone’s indirect 45% interest in Cellco Partnership d/b/a Verizon
Wireless (the Partnership, and such interest, the Vodafone Interest) for
aggregate consideration of approximately $130 billion.
On February 21, 2014, pursuant to the terms and subject to the conditions
set forth in the Stock Purchase Agreement, Verizon acquired (the Wireless
Transaction) from Seller all of the issued and outstanding capital stock (the
Transferred Shares) of Vodafone Americas Finance 1 Inc., a subsidiary of
Seller (VF1 Inc.), which indirectly through certain subsidiaries (together
with VF1 Inc., the Purchased Entities) owned the Vodafone Interest. In
consideration for the Transferred Shares, upon completion of the Wireless
Transaction, Verizon (i) paid approximately $58.89 billion in cash, (ii) issued
approximately 1.27 billion shares of Verizon’s common stock, par value
$0.10 per share (the Stock Consideration), which was valued at approximately $61.3 billion at the closing of the Wireless Transaction, (iii) issued
senior unsecured Verizon notes in an aggregate principal amount of
$5.0 billion (the Verizon Notes), (iv) sold Verizon’s indirectly owned 23.1%
interest in Vodafone Omnitel N.V. (Omnitel, and such interest, the Omnitel
Interest), valued at $3.5 billion and (v) provided other consideration,
which included the assumption of preferred stock valued at approximately $1.7 billion. The total cash paid to Vodafone and the other costs
of the Wireless Transaction, including financing, legal and bank fees, were
financed through the incurrence of third-party indebtedness. See Note 8
for additional information.
In accordance with the accounting standard on consolidation, a change
in a parent’s ownership interest while the parent retains a controlling
financial interest in its subsidiary is accounted for as an equity transaction
and remeasurement of assets and liabilities of previously controlled and
consolidated subsidiaries is not permitted. As a result, we accounted for
the Wireless Transaction by adjusting the carrying amount of the noncontrolling interest to reflect the change in Verizon’s ownership interest in the
Partnership. Any difference between the fair value of the consideration
paid and the amount by which the noncontrolling interest is adjusted has
been recognized in equity attributable to Verizon.
Omnitel Transaction
On February 21, 2014, Verizon and Vodafone also consummated the sale
of the Omnitel Interest (the Omnitel Transaction) by a subsidiary of Verizon
to a subsidiary of Vodafone in connection with the Wireless Transaction
pursuant to a separate share purchase agreement. As a result, during
2014, we recognized a pre-tax gain of $1.9 billion on the disposal of the
Omnitel interest in Equity in earnings of unconsolidated businesses on
our consolidated statement of income.
Verizon Notes (Non-Cash Transaction)
The Verizon Notes were issued pursuant to Verizon’s existing indenture.
The Verizon Notes were issued in two separate series, with $2.5 billion
due February 21, 2022 (the eight-year Verizon Notes) and $2.5 billion due
February 21, 2025 (the eleven-year Verizon Notes). The Verizon Notes bear
interest at a floating rate, which will be reset quarterly, with interest payable
quarterly in arrears, beginning May 21, 2014. The eight-year Verizon notes
bear interest at a floating rate equal to three-month London Interbank
47
Notes to Consolidated Financial Statements continued
Offered Rate (LIBOR), plus 1.222%, and the eleven-year Verizon notes bear
interest at a floating rate equal to three-month LIBOR, plus 1.372%. The
indenture that governs the Verizon Notes contains certain negative covenants, including a negative pledge covenant and a merger or similar
transaction covenant, affirmative covenants and events of default that are
customary for companies maintaining an investment grade credit rating.
An event of default for either series of the Verizon Notes may result in
acceleration of the entire principal amount of all debt securities of that
series. Beginning two years after the closing of the Wireless Transaction,
Verizon may redeem all or any portion of the outstanding Verizon Notes
held by Vodafone or any of its affiliates for a redemption price of 100% of
the principal amount plus accrued and unpaid interest. The Verizon Notes
may only be transferred by Vodafone to third parties in specified amounts
during specified periods, commencing January 1, 2017. Any Verizon Notes
held by third parties will not be redeemable by Verizon prior to their
maturity dates. Verizon has agreed to file a registration statement with
respect to the Verizon Notes at least three months prior to the Verizon
Notes becoming transferable.
Other Consideration (Non-Cash Transaction)
Included in the other consideration provided to Vodafone is the indirect
assumption of long-term obligations with respect to 5.143% Class D and
Class E cumulative preferred stock (Preferred Stock) issued by one of the
Purchased Entities. Both the Class D shares (825,000 shares outstanding)
and Class E shares (825,000 shares outstanding) are mandatorily redeemable in April 2020 at $1,000 per share plus any accrued and unpaid
dividends. Dividends accrue at 5.143% per annum and will be treated as
interest expense. Both the Class D and Class E shares have been classified
as liability instruments and were recorded at fair value as determined at
the closing of the Wireless Transaction.
Deferred Tax Liabilities
Certain deferred taxes directly attributable to the Wireless Transaction
have been calculated based on an analysis of taxes attributable to the
difference between the tax basis of the investment in the noncontrolling interest that is assumed compared to Verizon’s book basis. As a result,
Verizon recorded a deferred tax liability of approximately $13.5 billion.
Spectrum License Transactions
Since 2012, we have entered into several strategic spectrum
transactions including:
• During the third quarter of 2012, after receiving the required regulatory approvals, Verizon Wireless completed the following previously
announced transactions in which we acquired wireless spectrum that
will be used to deploy additional 4G LTE capacity:
o Verizon
Wireless acquired Advanced Wireless Services (AWS) spectrum in separate transactions with SpectrumCo and Cox TMI
Wireless, LLC for which it paid an aggregate of $3.9 billion. Verizon
Wireless has also recorded a liability of $0.4 billion related to a
three-year service obligation to SpectrumCo’s members
pursuant to commercial agreements executed concurrently with
the SpectrumCo transaction.
oVerizon
Wireless completed license purchase and exchange
transactions with Leap Wireless, Savary Island Wireless, which is
majority owned by Leap Wireless, and a subsidiary of T-Mobile
USA, Inc. (T-Mobile USA). As a result of these transactions, Verizon
Wireless received an aggregate $2.6 billion of AWS and Personal
Communication Services (PCS) licenses at fair value and net cash
proceeds of $0.2 billion, transferred certain AWS licenses to T-Mobile
USA and a 700 megahertz (MHz) lower A block license to Leap
Wireless, and recorded an immaterial gain.
48
• During the first quarter of 2013, we completed license exchange transactions with T-Mobile License LLC and Cricket License Company, LLC,
a subsidiary of Leap Wireless, to exchange certain AWS licenses. These
non-cash exchanges included a number of intra-market swaps that we
expect will enable Verizon Wireless to make more efficient use of the
AWS band. As a result of these exchanges, we received an aggregate
$0.5 billion of AWS licenses at fair value and recorded an immaterial gain.
• During the third quarter of 2013, after receiving the required regulatory
approvals, Verizon Wireless sold 39 lower 700 MHz B block spectrum
licenses to AT&T Inc. (AT&T) in exchange for a payment of $1.9 billion
and the transfer by AT&T to Verizon Wireless of AWS (10 MHz) licenses in
certain markets in the western United States. Verizon Wireless also sold
certain lower 700 MHz B block spectrum licenses to an investment firm
for a payment of $0.2 billion. As a result, we received $0.5 billion of AWS
licenses at fair value and we recorded a pre-tax gain of approximately
$0.3 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2013.
• During the second quarter of 2014, we completed license exchange
transactions with T-Mobile USA to exchange certain AWS and PCS
licenses. The exchange included a number of swaps that we expect
will result in more efficient use of the AWS and PCS bands. As a result
of these exchanges, we received $0.9 billion of AWS and PCS spectrum
licenses at fair value and we recorded an immaterial gain.
• During the second quarter of 2014, we completed transactions pursuant
to two additional agreements with T-Mobile USA with respect to our
remaining 700 MHz A block spectrum licenses. Under one agreement,
we sold certain of these licenses to T-Mobile USA in exchange for cash
consideration of approximately $2.4 billion, and under the second
agreement we exchanged the remainder of our 700 MHz A block
spectrum licenses as well as AWS and PCS spectrum licenses for AWS
and PCS spectrum licenses. As a result, we received $1.6 billion of AWS
and PCS spectrum licenses at fair value and we recorded a pre-tax gain
of approximately $0.7 billion in Selling, general and administrative
expense on our consolidated statement of income for the year ended
December 31, 2014.
• During the third quarter of 2014, we entered into a license exchange
agreement with affiliates of AT&T Inc. to exchange certain AWS and PCS
spectrum licenses. This non-cash exchange was completed in January
2015 at which time we recorded an immaterial gain.
• On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Verizon participated in that
auction, and was the high bidder on 181 spectrum licenses, for which
we will pay approximately $10.4 billion. During the fourth quarter of
2014, we made a deposit of $0.9 billion related to our participation in
this auction. On February 13, 2015, we made a down payment of $1.2
billion for these spectrum licenses. Verizon has submitted an application for these licenses and must complete payment for them in the first
quarter of 2015.
Notes to Consolidated Financial Statements continued
Tower Monetization Transaction
On February 5, 2015, we announced an agreement with American Tower
Corporation (American Tower) pursuant to which American Tower will
have the exclusive rights to lease and operate over 11,300 of our wireless
towers for an upfront payment of $5.0 billion. Under the terms of the
leases, American Tower will have exclusive rights to lease and operate
the towers over an average term of approximately 28 years. As part of
this transaction, we will also sell 165 towers for $0.1 billion. We will sublease capacity on the towers from American Tower for a minimum of 10
years at current market rates, with options to renew. As the leases expire,
American Tower will have fixed-price purchase options to acquire these
towers based on their anticipated fair market values at the end of the
lease terms. We plan to account for the upfront payment primarily as prepaid rent and a portion as a financing obligation. This transaction, which
is subject to customary closing conditions, is expected to close during
the first half of 2015.
Other
During 2014 and 2013, we acquired various other wireless licenses and
markets for cash consideration that was not significant. Additionally,
during 2013, we obtained control of previously unconsolidated wireless partnerships, which were previously accounted for under the
equity method and are now consolidated, which resulted in an immaterial gain. In 2013, we recorded $0.2 billion of goodwill as a result of
these transactions.
During 2012, we acquired various other wireless licenses and markets for
cash consideration that was not significant and recorded $0.2 billion of
goodwill as a result of these transactions.
Wireline
Access Line Sale
On February 5, 2015, we announced that we have entered into a definitive agreement with Frontier Communications Corporation (Frontier)
pursuant to which Verizon will 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. The transaction, which includes the
acquisition by Frontier of the equity interests of Verizon’s incumbent local
exchange carriers (ILECs) in California, Florida and Texas, does not involve
any assets or liabilities of Verizon Wireless. The assets and liabilities that
will be sold are currently included in Verizon’s continuing operations. As
part of the transaction, Frontier will assume $0.6 billion of indebtedness
from Verizon. The transaction is subject to the satisfaction of certain
closing conditions including, among others, receipt of state and federal
telecommunications regulatory approvals, and we expect this transaction to close during the first half of 2016.
HUGHES Telematics, Inc.
During July 2012, we acquired HUGHES Telematics, Inc. (HUGHES
Telematics) for approximately $12 per share in cash for a total acquisition
price of $0.6 billion. As a result of the transaction, HUGHES Telematics
became a wholly-owned subsidiary of Verizon. The consolidated financial
statements include the results of HUGHES Telematics’ operations from the
date the acquisition closed. Upon closing, we recorded approximately
$0.6 billion of goodwill, $0.1 billion of other intangibles, and assumed the
debt obligations of HUGHES Telematics, which were approximately $0.1
billion as of the date of acquisition, and which were repaid by Verizon.
Had this acquisition been completed on January 1, 2012, the results of
the acquired operations of HUGHES Telematics would not have had a significant impact on the consolidated net income attributable to Verizon.
The acquisition has accelerated our ability to bring more telematics offerings to market for existing and new customers.
The acquisition of HUGHES Telematics was accounted for as a business
combination under the acquisition method. The cost of the acquisition
was allocated to the assets and liabilities acquired based on their fair
values as of the close of the acquisition, with the excess amount being
recorded as goodwill.
Other
On July 1, 2014, we sold a non-strategic Wireline business, which provides
communications solutions to a variety of government agencies for net
cash proceeds of $0.1 billion and recorded an immaterial gain.
Other
On October 7, 2014, Redbox Instant by Verizon, a venture between
Verizon and Redbox Automated Retail, LLC (Redbox), a wholly-owned
subsidiary of Outerwall Inc., ceased providing service to its customers. In
accordance with an agreement between the parties, Redbox withdrew
from the venture on October 20, 2014 and Verizon wound down and dissolved the venture during the fourth quarter of 2014. As a result of the
termination of the venture, we recorded a pre-tax loss of $0.1 billion in
the fourth quarter of 2014.
During February 2014, Verizon acquired a business dedicated to the
development of Internet Protocol (IP) television for cash consideration
that was not significant.
During the fourth quarter of 2013, Verizon acquired an industry leader
in content delivery networks for $0.4 billion. Upon closing, we recorded
$0.3 billion of goodwill. Additionally, we acquired a technology company
for cash consideration that was not significant. The consolidated financial
statements include the results of the operations of each of these acquisitions from the date each acquisition closed.
The transaction will result in Frontier acquiring approximately 1.5 million FiOS Internet subscribers, 1.2 million FiOS Video subscribers and the
related ILEC businesses from Verizon. This business generated revenues
of approximately $5.4 billion, excluding revenue with affiliates, for Verizon
in 2013, which is the most recent year for which audited stand-alone
financial statements are currently available.
49
Notes to Consolidated Financial Statements continued
Note 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, 2013
Acquisitions (Note 2)
Dispositions (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2013
Acquisitions (Note 2)
Dispositions (Note 2)
Capitalized interest on wireless licenses
Reclassifications, adjustments and other
Balance at December 31, 2014
$
77,744
579
(2,361)
566
(781)
75,747
444
(1,978)
167
961
75,341
$
$
Reclassifications, adjustments and other includes the exchanges of wireless licenses in 2014 and 2013 as well as $0.3 and $0.9 billion of Wireless
licenses that are classified as held for sale and included in Prepaid expenses and other on our consolidated balance sheets at December 31, 2014 and
2013, respectively. See Note 2 for additional details.
At December 31, 2014 and 2013, approximately $0.4 billion and $7.7 billion, respectively, of wireless licenses were under development for
commercial service for which we were capitalizing interest costs. The decline is primarily due to the deployment of AWS licenses for commercial
service during 2014.
The average remaining renewal period of our wireless license portfolio was 4.7 years as of December 31, 2014. See Note 1 for additional details.
Goodwill
Changes in the carrying amount of Goodwill are as follows:
(dollars in millions)
Wireless
Balance at January 1, 2013
Acquisitions (Note 2)
Balance at December 31, 2013
Acquisitions (Note 2)
Dispositions (Note 2)
Reclassifications, adjustments and other
Balance at December 31, 2014
$
$
$
18,172
204
18,376
15
–
(1)
18,390
Wireline
$
$
$
5,967
291
6,258
40
(38)
(11)
6,249
Total
$
24,139
495
24,634
55
(38)
(12)
24,639
$
$
The increase in Goodwill at Wireless at December 31, 2013 was primarily due to obtaining control of previously unconsolidated wireless partnerships,
which were previously accounted for under the equity method and are now consolidated. This resulted in an immaterial gain recorded during the year
ended December 31, 2013. The increase in Goodwill at Wireline at December 31, 2013 was primarily due to the acquisition of a provider of content
delivery networks.
Other Intangible Assets
The following table displays the composition of Other intangible assets, net:
Gross
Amount
At December 31,
Customer lists (5 to 13 years)
Non-network internal-use software (3 to 7 years)
Other (2 to 25 years)
Total
$
$
3,618
13,194
670
17,482
Accumulated
Amortization
$
(2,924)
(8,462)
(368)
$ (11,754)
The amortization expense for Other intangible assets was as follows:
Years
2014
2013
2012
50
(dollars in millions)
2014
Net
Amount
(dollars in millions)
$ 1,567
1,587
1,540
$
$
694
4,732
302
5,728
Gross
Amount
$
$
3,639
11,770
691
16,100
2013
Net
Amount
Accumulated
Amortization
$
$
(2,660)
(7,317)
(323)
(10,300)
$
979
4,453
368
5,800
$
Estimated annual amortization expense for Other intangible assets is as
follows:
Years
2015
2016
2017
2018
2019
(dollars in millions)
$
1,428
1,193
1,008
843
613
Notes to Consolidated Financial Statements continued
Note 4
Summarized Financial Information
Summarized financial information for our equity investees is as follows:
Plant, Propert y and Equipment
The following table displays the details of Plant, property and equipment,
which is stated at cost:
(dollars in millions)
At December 31,
Land
Buildings and equipment
Central office and other network
equipment
Cable, poles and conduit
Leasehold improvements
Work in progress
Furniture, vehicles and other
Less accumulated depreciation
Total
Lives (years)
2014
–
15 – 45
$
763
25,209
3 – 15
11 – 50
5 – 20
–
3 – 20
129,619
54,797
6,374
4,580
9,166
230,508
140,561
$ 89,947
2013
$
819
23,857
121,594
55,240
5,877
4,176
9,302
220,865
131,909
88,956
$
Note 5
Investments in Unconsolidated Businesses
Our investments in unconsolidated businesses are comprised of
the following:
At December 31,
Equity Investees
Vodafone Omnitel(1)
Other
Total equity investees
Cost Investees
Total investments in
unconsolidated businesses
Balance Sheet
2014
2013
Current assets
Noncurrent assets
Total assets
$
Current liabilities
Noncurrent liabilities
Equity
Total liabilities and equity
$
3,983
7,748
$ 11,731
4,692
5
7,034
$ 11,731
Income Statement
(dollars in millions)
Years Ended December 31,
Net revenue
Operating income
Net income
$
2013
2012
8,984
1,632
925
$ 10,825
2,823
1,679
The financial information for our equity method investees in 2014,
including Vodafone Omnitel through the closing of the Wireless
Transaction in February 2014, was not significant and therefore is not
reflected in the tables above.
(dollars in millions)
Ownership
(dollars in millions)
At December 31,
Note 6
2013
Noncontrolling Interests
–
Various
$
Various
–
677
677
$
802
Noncontrolling interests in equity of subsidiaries were as follows:
(dollars in millions)
2014
2013
–
1,378
$ 1,378
$ 55,465
1,115
$ 56,580
At December 31,
125
$
2,511
818
3,329
103
$
3,432
(1)Prior to the completion of the Wireless Transaction on February 21, 2014, Verizon held a
23.1% ownership interest in Vodafone Omnitel.
Dividends and repatriations of foreign earnings received from these
investees were not significant in 2014 and 2013 and $0.4 billion in 2012.
See Note 13 regarding undistributed earnings of our foreign subsidiaries.
Equity Method Investments
Vodafone Omnitel
Vodafone Omnitel N.V. (Vodafone Omnitel) is one of the largest wireless
communications companies in Italy. As part of the consideration of the
Wireless Transaction, a subsidiary of Verizon sold its entire ownership
interest in Vodafone Omnitel to a subsidiary of Vodafone on February 21,
2014. See Note 2 for additional information. At December 31, 2013, our
investment in Vodafone Omnitel included goodwill of $1.1 billion.
Other Equity Investees
The remaining investments include wireless partnerships in the U.S., limited partnership investments in entities that invest in affordable housing
projects and other smaller domestic and international investments.
Verizon Wireless
Wireless partnerships and other
$
Wireless Joint Venture
Our Wireless segment is primarily comprised of Cellco Partnership doing
business as Verizon Wireless (Verizon Wireless). Cellco Partnership was
formed as a joint venture in April 2000 by the combination of the U.S.
wireless operations and interests of Verizon and Vodafone. On February
21, 2014, Verizon completed the Wireless Transaction and acquired 100%
ownership of Verizon Wireless. See Note 2 for additional information.
Special Distributions
In May 2013, the Board of Representatives of Verizon Wireless declared
a distribution to its owners, which was paid in the second quarter of
2013 in proportion to their partnership interests on the payment date,
in the aggregate amount of $7.0 billion. As a result, Vodafone received a
cash payment of $3.15 billion and the remainder of the distribution was
received by Verizon.
In November 2012, the Board of Representatives of Verizon Wireless
declared a distribution to its owners, which was paid in the fourth quarter
of 2012 in proportion to their partnership interests on the payment date,
in the aggregate amount of $8.5 billion. As a result, Vodafone received
a cash payment of $3.8 billion and the remainder of the distribution was
received by Verizon.
In July 2011, the Board of Representatives of Verizon Wireless declared
a distribution to its owners, which was paid in the first quarter of 2012
in proportion to their partnership interests on the payment date, in
the aggregate amount of $10 billion. As a result, Vodafone received a
cash payment of $4.5 billion and the remainder of the distribution was
received by Verizon.
51
Notes to Consolidated Financial Statements continued
Note 7
Leasing Arrangements
As Lessor
We are the lessor in leveraged and direct financing lease agreements for commercial aircraft and power generating facilities, which comprise the majority
of our leasing portfolio along with telecommunications equipment, commercial real estate property and other equipment. These leases have remaining
terms of up to 36 years as of December 31, 2014. In addition, we lease space on certain of our cell towers to other wireless carriers. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party nonrecourse debt relating to leveraged lease transactions. Since
we have no general liability for this debt, which is secured by a senior security interest in the leased equipment and rentals, the related principal and
interest have been offset against the minimum lease payments receivable in accordance with U.S. GAAP. All recourse debt is reflected in our consolidated
balance sheets.
At each reporting period, we monitor the credit quality of the various lessees in our portfolios. Regarding the leveraged lease portfolio, external credit
reports are used where available and where not available we use internally developed indicators. These indicators or internal credit risk grades factor historic loss experience, the value of the underlying collateral, delinquency trends, and industry and general economic conditions. The credit quality of our
lessees varies from AAA to CCC+. For each reporting period, the leveraged leases within the portfolio are reviewed for indicators of impairment where it
is probable the rent due according to the contractual terms of the lease will not be collected. All significant accounts, individually or in the aggregate, are
current and none are classified as impaired.
Finance lease receivables, which are included in Prepaid expenses and other and Other assets in our consolidated balance sheets, are comprised of
the following:
(dollars in millions)
2014
At December 31,
Leveraged
Leases
Direct Finance
Leases
$ 1,095
600
(535)
$ 1,160
Minimum lease payments receivable
Estimated residual value
Unearned income
Total
Allowance for doubtful accounts
Finance lease receivables, net
Prepaid expenses and other
Other assets
$
$
Accumulated deferred taxes arising from leveraged leases, which are
included in Deferred income taxes, amounted to $0.9 billion at December
31, 2014 and $1.0 billion at December 31, 2013.
The future minimum lease payments to be received from noncancelable
capital leases (direct financing and leveraged leases), net of nonrecourse
loan payments related to leveraged leases and allowances for doubtful
accounts, along with expected receipts relating to operating leases for
the periods shown at December 31, 2014, are as follows:
(dollars in millions)
Capital
Leases
Years
2015
2016
2017
2018
2019
Thereafter
Total
52
$
$
46
115
39
57
44
802
1,103
Operating
Leases
$
$
196
168
76
51
19
20
530
8
2
(2)
8
Total
$ 1,103
602
(537)
$ 1,168
(78)
$ 1,090
$
4
1,086
$ 1,090
2013
Leveraged
Leases
$
$
1,069
780
(589)
1,260
Direct Finance
Leases
$
$
16
5
(4)
17
Total
$
$
$
$
$
1,085
785
(593)
1,277
(90)
1,187
5
1,182
1,187
Notes to Consolidated Financial Statements continued
As Lessee
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense under operating
leases amounted to $2.7 billion in 2014, $2.6 billion in 2013 and $2.5 billion in 2012, respectively.
The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2014, are as follows:
On February 5, 2015, we announced an agreement with American
Tower pursuant to which American Tower will have the exclusive rights
to lease and operate over 11,300 of our wireless towers for an upfront
payment of $5.0 billion. We will sublease capacity on the towers from
American Tower for a minimum of 10 years at current market rates, with
options to renew. Under this agreement, we expect to make minimum
future lease payments of approximately $2.8 billion. See Note 2 for
additional information.
2015
2016
2017
2018
2019
Thereafter
Total minimum rental commitments
Less interest and executory costs
Present value of minimum lease payments
Less current installments
Long-term obligation at December 31, 2014
Amortization of capital leases is included in Depreciation and amortization expense in the consolidated statements of income. Capital lease
amounts included in Plant, property and equipment are as follows:
(dollars in millions)
Capital
Leases
Years
$
$
Operating
Leases
181
137
113
68
39
60
598
82
516
158
358
$
2,499
2,245
1,960
1,660
1,369
4,670
$ 14,403
(dollars in millions)
2014
At December 31,
Capital leases
Less accumulated amortization
Total
$
$
319
171
148
2013
$
$
353
188
165
Note 8
Debt
Changes to debt during 2014 are as follows:
(dollars in millions)
Debt Maturing
within One Year
Balance at January 1, 2014
Proceeds from long-term borrowings
Verizon Notes
Preferred Stock (Mandatorily Redeemable)
Repayments of long-term borrowings and capital leases obligations
Decrease in short-term obligations, excluding current maturities
Reclassifications of long-term debt
Other
Balance at December 31, 2014
$
$
3,933
–
–
–
(4,022)
(475)
2,739
560
2,735
Long-term
Debt
$
89,658
30,967
5,000
1,650
(13,647)
–
(2,739)
(353)
$ 110,536
Debt maturing within one year is as follows:
$
93,591
30,967
5,000
1,650
(17,669)
(475)
–
207
$ 113,271
(dollars in millions)
2014
At December 31,
Long-term debt maturing within one year
Short-term notes payable
Commercial paper and other
Total debt maturing within one year
Total
$
$
2,397
319
19
2,735
2013
$
$
3,486
–
447
3,933
The weighted-average interest rate for our commercial paper outstanding was 0.4% and 0.2% at December 31, 2014 and 2013, respectively.
Credit Facilities
On July 31, 2014, we amended our $6.2 billion credit facility to increase the availability to $8.0 billion and extend the maturity to July 31, 2018. At the
same time, we terminated our $2.0 billion 364-day revolving credit agreement. As of December 31, 2014, the unused borrowing capacity under this
credit facility was approximately $7.9 billion. The credit facility does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has incurred a material adverse change. We use the credit facility for the issuance of letters of
credit and for general corporate purposes.
53
Notes to Consolidated Financial Statements continued
Long-Term Debt
Outstanding long-term debt obligations are as follows:
(dollars in millions)
Interest Rates %
At December 31,
Maturities
0.30 – 3.85
4.15 – 5.50
5.85 – 6.90
7.35 – 8.95
Floating
2015
2018
2018
2018
2015
Verizon Wireless - notes payable and other
8.75 – 8.88
2015 – 2018
676
3,931
Verizon Wireless - Alltel assumed notes
6.80 – 7.88
2029 – 2032
686
1,300
Telephone subsidiaries - debentures
5.13 – 6.86
7.38 – 7.88
8.00 – 8.75
2027 – 2033
2022 – 2032
2019 – 2031
1,075
1,099
880
1,075
1,099
880
Other subsidiaries - debentures and other
6.84 – 8.75
2018 – 2028
1,432
1,700
2014
During February 2014, we issued €1.75 billion aggregate principal amount
of 2.375% Notes due 2022, €1.25 billion aggregate principal amount of
3.25% Notes due 2026 and £0.85 billion aggregate principal amount of
4.75% Notes due 2034. The issuance of these Notes resulted in cash proceeds of approximately $5.4 billion, net of discounts and issuance costs.
The net proceeds were used, in part, to finance the Wireless Transaction.
Net proceeds not used to finance the Wireless Transaction were used for
general corporate purposes. Also, during February 2014, we issued $0.5
billion aggregate principal amount of 5.90% Notes due 2054 resulting in
cash proceeds of approximately $0.5 billion, net of discounts and issuance costs. The net proceeds were used for general corporate purposes.
During March 2014, we issued $4.5 billion aggregate principal amount of
fixed and floating rate notes resulting in cash proceeds of approximately
$4.5 billion, net of discounts and issuance costs. The issuances consisted
of the following: $0.5 billion aggregate principal amount Floating Rate
Notes due 2019 that bear interest at a rate equal to three-month LIBOR
plus 0.77% which rate will be reset quarterly, $0.5 billion aggregate principal amount of 2.55% Notes due 2019, $1.0 billion aggregate principal
amount of 3.45% Notes due 2021, $1.25 billion aggregate principal
amount of 4.15% Notes due 2024 and $1.25 billion aggregate principal
amount of 5.05% Notes due 2034. During March 2014, the net proceeds
were used to purchase notes in the Tender Offer described below.
Also, during March 2014, $1.0 billion of LIBOR plus 0.61% Verizon
Communications Notes and $1.5 billion of 1.95% Verizon Communications
Notes matured and were repaid.
During September 2014, we issued $0.9 billion aggregate principal
amount of 4.8% Notes due 2044. The issuance of these Notes resulted
in cash proceeds of approximately $0.9 billion, net of discounts and issuance costs. The net proceeds were used for general corporate purposes.
Also, during September 2014, we redeemed $0.8 billion aggregate principal amount of Verizon 1.25% Notes due November 2014 and recorded
an immaterial amount of early debt redemption costs.
During October 2014, we issued $6.5 billion aggregate principal amount
of fixed rate notes. The issuance of these notes resulted in cash proceeds
of approximately $6.4 billion, net of discounts and issuance costs and
after reimbursement of certain expenses. The issuance consisted of the
54
2042
2054
2054
2039
2025
$
27,617
40,701
24,341
2,264
14,600
2013
Verizon Communications - notes payable and other
Capital lease obligations (average rate of 4.0% and 8.1% in 2014 and 2013, respectively)
Unamortized discount, net of premium
Total long-term debt, including current maturities
Less long-term debt maturing within one year
Total long-term debt
–
–
–
–
–
2014
516
(2,954)
112,933
2,397
$ 110,536
$
$
20,416
20,226
31,965
5,023
5,500
293
(264)
93,144
3,486
89,658
following: $1.5 billion aggregate principal amount of 3.00% Notes due
2021, $2.5 billion aggregate principal amount of 3.50% Notes due 2024,
and $2.5 billion aggregate principal amount of 4.40% Notes due 2034.
The net proceeds from the issuance was used to redeem (i) in whole the
following series of outstanding notes which were called for early redemption in November 2014 (collectively, November Early Debt Redemption):
$0.5 billion aggregate principal amount of Verizon Communications
4.90% Notes due 2015 at 103.7% of the principal amount of such notes,
$0.6 billion aggregate principal amount of Verizon Communications
5.55% Notes due 2016 at 106.3% of the principal amount of such notes,
$1.3 billion aggregate principal amount of Verizon Communications
3.00% Notes due 2016 at 103.4% of the principal amount of such notes,
$0.4 billion aggregate principal amount of Verizon Communications
5.50% Notes due 2017 at 110.5% of the principal amount of such notes,
$0.7 billion aggregate principal amount of Verizon Communications
8.75% Notes due 2018 at 125.2% of the principal amount of such notes,
$0.1 billion aggregate principal amount of Alltel Corporation 7.00%
Debentures due 2016 at 108.7% of the principal amount of such notes
and $0.4 billion aggregate principal amount of Cellco Partnership and
Verizon Wireless Capital LLC 8.50% Notes due 2018 at 124.5% of the
principal amount of such notes; and (ii) $1.0 billion aggregate principal
amount of Verizon Communications 2.50% Notes due 2016 at 103.0% of
the principal amount of such notes. Proceeds not used for the redemption of these notes will be used for general corporate purposes. Any
accrued and unpaid interest was paid to the date of redemption (see
“Early Debt Redemption and Other Costs”).
During December 2014, we issued €1.4 billion aggregate principal
amount of 1.625% Notes due 2024 and €1.0 billion aggregate principal
amount of 2.625% Notes due 2031. The issuance of these Notes resulted
in cash proceeds of approximately $3.0 billion, net of discounts and
issuance costs and after reimbursement of certain expenses. The net proceeds were used for general corporate purposes.
Verizon Notes (Non-Cash Transaction)
During February 2014, in connection with the Wireless Transaction, we
issued $5.0 billion aggregate principal amount of floating rate notes. The
Verizon Notes were issued in two separate series, with $2.5 billion due
February 21, 2022 and $2.5 billion due February 21, 2025. The Verizon
Notes bear interest at a floating rate, which will be reset quarterly, with
Notes to Consolidated Financial Statements continued
interest payable quarterly in arrears, beginning May 21, 2014 (see Note
2). The eight-year Verizon notes bear interest at a floating rate equal to
three-month LIBOR, plus 1.222%, and the eleven-year Verizon notes bear
interest at a floating rate equal to three-month LIBOR, plus 1.372%.
Preferred Stock (Non-Cash Transaction)
As a result of the Wireless Transaction, we assumed long-term obligations with respect to 5.143% Class D and Class E cumulative Preferred
Stock issued by one of the Purchased Entities. Both the Class D shares
(825,000 shares outstanding) and Class E shares (825,000 shares outstanding) are mandatorily redeemable in April 2020 at $1,000 per share
plus any accrued and unpaid dividends. Dividends accrue at 5.143% per
annum and will be treated as interest expense. Both the Class D and Class
E shares have been classified as liability instruments and were recorded at
fair value as determined at the closing of the Wireless Transaction.
Term Loan Agreements
During February 2014, we drew $6.6 billion pursuant to a term loan
agreement, which was entered into during October 2013, with a group
of major financial institutions to finance, in part, the Wireless Transaction.
$3.3 billion of the loans under the term loan agreement had a maturity of
three years (the 3-Year Loans) and $3.3 billion of the loans under the term
loan agreement had a maturity of five years (the 5-Year Loans). The 5-Year
Loans provide for the partial amortization of principal during the last two
years that they are outstanding. Loans under the term loan agreement
bear interest at floating rates. The term loan agreement contains certain
negative covenants, including a negative pledge covenant, a merger
or similar transaction covenant and an accounting changes covenant,
affirmative covenants and events of default that are customary for companies maintaining an investment grade credit rating. In addition, the
term loan agreement requires us to maintain a leverage ratio (as defined
in the term loan agreement) not in excess of 3.50:1.00, until our credit ratings are equal to or higher than A3 and A- at Moody’s Investors Service
and Standard & Poor’s Ratings Services, respectively.
During June 2014, we issued $3.3 billion aggregate principal amount of
fixed and floating rate notes resulting in cash proceeds of approximately
$3.3 billion, net of discounts and issuance costs. The issuances consisted
of the following: $1.3 billion aggregate principal amount of Floating
Rate Notes due 2017 that will bear interest at a rate equal to threemonth LIBOR plus 0.40% which will be reset quarterly and $2.0 billion
aggregate principal amount of 1.35% Notes due 2017. We used the net
proceeds from the offering of these notes to repay the 3-Year Loans on
June 12, 2014.
During July 2014, we amended the term loan agreement, settled the outstanding $3.3 billion of 5-Year Loans and borrowed $3.3 billion of new
loans. The new loans mature in July 2019, bear interest at a lower interest
rate and require lower amortization payments in 2017 and 2018. In connection with the transaction, which primarily settled on a net basis, we
recorded approximately $0.5 billion of proceeds from long-term borrowings and of repayments of long-term borrowings, respectively.
During January 2015, we entered into a term loan agreement with a
major financial institution, pursuant to which we can borrow up to $6.5
billion for general corporate purposes, including the acquisition of spectrum licenses. Borrowings under the term loan agreement mature in
March 2016, with a partial mandatory prepayment required in June 2015.
The term loan agreement contains certain negative covenants, including
a negative pledge covenant, a merger or similar transaction covenant
and an accounting changes covenant, affirmative covenants and events
of default that are customary for companies maintaining an investment
grade credit rating. In addition, the term loan agreement requires us to
maintain a leverage ratio (as defined in the term loan agreement) not
in excess of 3.50:1.00, until our credit ratings are equal to or higher than
A3 and A- at Moody’s Investors Service and Standard & Poor’s Ratings
Services, respectively.
Tender Offer
On March 10, 2014, we announced the commencement of a tender offer (the Tender Offer) to purchase for cash any and all of the series of notes
listed in the following table:
Interest
Rate
Maturity
Verizon Communications
6.10%
5.50%
8.75%
5.55%
5.50%
2018
2018
2018
2016
2017
Cellco Partnership and Verizon Wireless Capital LLC
8.50%
2018
1,000
1,279.63
619
Alltel Corporation
7.00%
2016
300
1,125.26
157
GTE Corporation
6.84%
2018
600
1,196.85
(dollars in millions, except for Purchase Price)
Principal Amount
Outstanding
$
1,500
1,500
1,300
1,250
750
Purchase
Price (1)
$
1,170.07
1,146.91
1,288.35
1,093.62
1,133.22
Principal Amount
Purchased
$
$
748
763
564
652
353
266
4,122
(1)Per $1,000 principal amount of notes
The Tender Offer for each series of notes was subject to a financing condition, which was either satisfied or waived with respect to all series. The
Tender Offer expired on March 17, 2014 and settled on March 19, 2014.
In addition to the purchase price, any accrued and unpaid interest on the
purchased notes was paid to the date of purchase. During March 2014,
we recorded early debt redemption costs in connection with the Tender
Offer (see “Early Debt Redemption and Other Costs”).
May Exchange Offer
On May 29, 2014, we announced the commencement of a private
exchange offer (the May Exchange Offer) to exchange up to all Cellco
Partnership and Verizon Wireless Capital LLC’s £0.6 billion outstanding
aggregate principal amount of 8.875% Notes due 2018 (the 2018 Old
Notes) for Verizon’s new sterling-denominated Notes due 2024 (the New
Notes) and an amount of cash. This exchange offer has been accounted
for as a modification of debt. In connection with the May Exchange Offer,
which expired on June 25, 2014, we issued £0.7 billion aggregate principal of New Notes and made a cash payment of £22 million in exchange
for £0.6 billion aggregate principal amount of tendered 2018 Old Notes.
The New Notes bear interest at a rate of 4.073% per annum.
55
Notes to Consolidated Financial Statements continued
Concurrent with the issuance of the New Notes, we entered into cross
currency swaps to fix our future interest and principal payments in U.S.
dollars (see Note 10).
July Exchange Offers
On July 23, 2014, we announced the commencement of eleven separate private offers to exchange (the July Exchange Offers) specified series
of outstanding Notes issued by Verizon and Alltel Corporation (collectively, the Old Notes) for new Notes to be issued by Verizon. The July
Exchange Offers have been accounted for as a modification of debt.
On August 21, 2014, Verizon issued $3.3 billion aggregate principal
amount of 2.625% Notes due 2020 (the 2020 New Notes), $4.5 billion
aggregate principal amount of 4.862% Notes due 2046 (the 2046 New
Notes) and $5.5 billion aggregate principal amount of 5.012% Notes due
2054 (the 2054 New Notes) in satisfaction of the exchange offer consideration on tendered Old Notes (not including accrued and unpaid interest
on the Old Notes). The following tables list the series of Old Notes
included in the July Exchange Offers and the principal amount of each
such series accepted by Verizon for exchange.
The table below lists the series of Old Notes included in the July Exchange Offers for the 2020 New Notes:
(dollars in millions)
Verizon Communications
Interest
Rate
Maturity
3.65%
2.50%
2018
2016
Principal Amount
Outstanding
$
4,750
4,250
Principal Amount
Accepted For
Exchange
$
$
2,052
1,068
3,120
The table below lists the series of Old Notes included in the July Exchange Offers for the 2046 New Notes:
(dollars in millions)
Verizon Communications
Alltel Corporation
Interest
Rate
Maturity
6.40%
7.75%
7.35%
7.75%
2033
2030
2039
2032
7.875%
6.80%
2032
2029
Principal Amount
Outstanding
$
6,000
2,000
1,000
400
Principal Amount
Accepted For
Exchange
$
700
300
$
1,645
794
520
149
248
65
3,421
The table below lists the series of Old Notes included in the July Exchange Offers for the 2054 New Notes:
(dollars in millions)
Verizon Communications
Interest
Rate
Maturity
6.55%
6.40%
6.90%
2043
2038
2038
Principal Amount
Outstanding
$
15,000
1,750
1,250
Principal Amount
Accepted For
Exchange
$
$
2013
During March 2013, we issued $0.5 billion aggregate principal amount of
floating rate Notes due 2015 in a private placement resulting in cash proceeds of approximately $0.5 billion, net of discounts and issuance costs.
The proceeds were used for the repayment of commercial paper.
During April 2013, $1.25 billion of 5.25% Verizon Communications Notes
matured and were repaid. In addition, during June 2013, $0.5 billion of
4.375% Verizon Communications Notes matured and were repaid.
During September 2013, in connection with the Wireless Transaction,
we issued $49.0 billion aggregate principal amount of fixed and floating
rate notes resulting in cash proceeds of approximately $48.7 billion,
net of discounts and issuance costs. The issuances consisted of the following: $2.25 billion aggregate principal amount of floating rate Notes
due 2016 that bear interest at a rate equal to three-month LIBOR plus
1.53% which rate will be reset quarterly, $1.75 billion aggregate principal amount of floating rate Notes due 2018 that bear interest at a rate
equal to three-month LIBOR plus 1.75% which rate will be reset quarterly, $4.25 billion aggregate principal amount of 2.50% Notes due 2016,
$4.75 billion aggregate principal amount of 3.65% Notes due 2018, $4.0
56
4,330
–
–
4,330
billion aggregate principal amount of 4.50% Notes due 2020, $11.0 billion aggregate principal amount of 5.15% Notes due 2023, $6.0 billion
aggregate principal amount of 6.40% Notes due 2033 and $15.0 billion
aggregate principal amount of 6.55% Notes due 2043 (collectively, the
new notes). The proceeds of the new notes were used to finance, in part,
the Wireless Transaction and to pay related fees and expenses. As a result
of the issuance of the new notes, we incurred interest expense related to
the Wireless Transaction of $0.7 billion during 2013.
Bridge Credit Agreement
During September 2013, we entered into a $61.0 billion bridge credit
agreement with a group of major financial institutions. The credit
agreement provided us with the ability to borrow up to $61.0 billion to
finance, in part, the Wireless Transaction and to pay related transaction
costs. Following the September 2013 issuance of notes, borrowing availability under the bridge credit agreement was reduced to $12.0 billion.
Following the effectiveness of the term loan agreement in October 2013,
the bridge credit agreement was terminated in accordance with its terms
and as such, the related fees of $0.2 billion were recognized in Other
income and (expense), net during the fourth quarter of 2013.
Notes to Consolidated Financial Statements continued
Verizon Wireless – Notes Payable and Other
Verizon Wireless Capital LLC, a wholly-owned subsidiary of Verizon
Wireless, is a limited liability company formed under the laws of Delaware
on December 7, 2001 as a special purpose finance subsidiary to facilitate
the offering of debt securities of Verizon Wireless by acting as co-issuer.
Other than the financing activities as a co-issuer of Verizon Wireless
indebtedness, Verizon Wireless Capital LLC has no material assets, operations or revenues. Verizon Wireless is jointly and severally liable with
Verizon Wireless Capital LLC for co-issued notes.
2014
In addition to the retirements of debt securities in connection with the
Tender Offer, the May Exchange Offer, the July Exchange Offers and the
November Early Debt Redemption, as noted above, during March 2014,
Verizon Wireless redeemed $1.25 billion aggregate principal amount of
the Cellco Partnership and Verizon Wireless Capital LLC 8.50% Notes due
2018 at 127.135% of the principal amount of such notes, plus accrued
and unpaid interest (see “Early Debt Redemption and Other Costs”).
2013
During November 2013, $1.25 billion of 7.375% Verizon Wireless Notes
and $0.2 billion of 6.50% Verizon Wireless Notes matured and were
repaid. Also during November 2013, Verizon Wireless redeemed $3.5 billion of 5.55% Notes, due February 1, 2014 at a redemption price of 101%
of the principal amount of the notes. Any accrued and unpaid interest
was paid to the date of redemption.
Telephone and Other Subsidiary Debt
2014
During 2014, a series of notes held by GTE Corporation were included in
the Tender Offer described above.
2013
During May 2013, $0.1 billion of 7.0% Verizon New York Inc. Debentures
matured and were repaid. During June 2013, $0.1 billion of 7.0% Verizon
New York Inc. Debentures matured and were repaid. In addition, during
June 2013, we redeemed $0.25 billion of 7.15% Verizon Maryland LLC
Debentures, due May 2023 at a redemption price of 100% of the principal amount of the debentures. During October 2013, $0.3 billion of
4.75% Verizon New England Inc. Debentures matured and were repaid.
During November 2013, we redeemed $0.3 billion of 6.70% Verizon New
York Inc. Debentures, due November 2023 at a redemption price of 100%
of the principal amount of the debentures. During December 2013,
we redeemed $0.2 billion of 7.0% Verizon New York Inc. Debentures,
due December 2033 at a redemption price of 100% of the principal
amount of the debentures and $20 million of 7.0% Verizon Delaware LLC
Debentures, due December 2023 at a redemption price of 100% of the
principal amount of the debentures. Any accrued and unpaid interest
was paid to the date of redemption.
Early Debt Redemption and Other Costs
During March 2014, we recorded net debt redemption costs of $0.9 billion in connection with the early redemption of $1.25 billion aggregate
principal amount of Cellco Partnership and Verizon Wireless Capital LLC
8.50% Notes due 2018, and the purchase of the following notes pursuant
to the Tender Offer: $0.7 billion of the then outstanding $1.5 billion aggregate principal amount of Verizon 6.10% Notes due 2018, $0.8 billion of
the then outstanding $1.5 billion aggregate principal amount of Verizon
5.50% Notes due 2018, $0.6 billion of the then outstanding $1.3 billion
aggregate principal amount of Verizon 8.75% Notes due 2018, $0.7 billion of the then outstanding $1.25 billion aggregate principal amount of
Verizon 5.55% Notes due 2016, $0.4 billion of the then outstanding $0.75
billion aggregate principal amount of Verizon 5.50% Notes due 2017, $0.6
billion of the then outstanding $1.0 billion aggregate principal amount
of Cellco Partnership and Verizon Wireless Capital LLC 8.50% Notes due
2018, $0.2 billion of the then outstanding $0.3 billion aggregate principal
amount of Alltel Corporation 7.00% Debentures due 2016 and $0.3 billion
of the then outstanding $0.6 billion aggregate principal amount of GTE
Corporation 6.84% Debentures due 2018.
During the fourth quarter of 2014, we recorded net debt redemption
costs of $0.5 billion in connection with the early redemption of $0.5 billion aggregate principal amount of Verizon 4.90% Notes due 2015, $0.6
billion aggregate principal amount of Verizon 5.55% Notes due 2016, $1.3
billion aggregate principal amount of Verizon 3.00% Notes due 2016, $0.4
billion aggregate principal amount of Verizon 5.50% Notes due 2017, $0.7
billion aggregate principal amount of Verizon 8.75% Notes due 2018, $1.0
billion of the then outstanding $3.2 billion aggregate principal amount of
Verizon 2.50% Notes due 2016, $0.1 billion aggregate principal amount
Alltel Corporation 7.00% Debentures due 2016 and $0.4 billion aggregate
principal amount of Cellco Partnership and Verizon Wireless Capital LLC
8.50% Notes due 2018, as well as $0.3 billion of other costs.
We recognize early debt redemption costs in Other income and
(expense), net on our consolidated statements of income.
Additional Financing Activities (Non-Cash Transaction)
During 2014 and 2013, we financed, primarily through vendor financing
arrangements, the purchase of approximately $0.7 billion and $0.1 billion,
respectively, of long-lived assets, consisting primarily of network equipment. At December 31, 2014, $0.7 billion of these financing arrangements
remained outstanding. These purchases are non-cash financing activities
and therefore not reflected within Capital expenditures on our consolidated statements of cash flows.
Guarantees
We guarantee the debentures and first mortgage bonds of our operating
telephone company subsidiaries. As of December 31, 2014, $3.1 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.
We also guarantee the debt obligations of GTE Corporation that were
issued and outstanding prior to July 1, 2003. As of December 31, 2014,
$1.4 billion aggregate principal amount of these obligations remain
outstanding.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our
debt covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2014 are
as follows:
Years
2015
2016
2017
2018
2019
Thereafter
(dollars in millions)
$
2,397
6,114
3,911
6,529
6,088
87,894
57
Notes to Consolidated Financial Statements continued
Note 9
Wireless Equipment Installment Plans
We offer new and existing customers the option to participate in Verizon
Edge, a program that provides eligible wireless customers with the ability
to pay for their handset over a period of time (an equipment installment
plan) and the right to upgrade their handset after a minimum of 30 days,
subject to certain conditions, including making a stated portion of the
required device payments, trading in their handset in good working
condition and signing a new contract with Verizon. The gross guarantee
liability related to this program, which was approximately $0.7 billion
at December 31, 2014 and was not material at December 31, 2013,
was primarily included in Other current liabilities on our consolidated
balance sheets.
At the time of sale, we impute risk adjusted interest on the receivables
associated with Verizon Edge. We record the imputed interest as a
reduction to the related accounts receivable. Interest income, which is
included within Other income and (expense), net on our consolidated
statements of income, is recognized over the financed installment term.
We assess the collectability of our Verizon Edge receivables based upon
a variety of factors, including the credit quality of the customer base,
payment trends and other qualitative factors. The current portion of our
receivables related to Verizon Edge included in Accounts receivable was
$2.3 billion at December 31, 2014 and was not material at December 31,
2013. The long-term portion of the equipment installment plan receivables included in Other assets was $1.2 billion at December 31, 2014 and
was not material at December 31, 2013.
The credit profiles of our customers with a Verizon Edge plan are similar
to those of our customers with a traditional subsidized plan. Customers
with a credit profile which carries a higher risk are required to make a
down payment for equipment financed through Verizon Edge.
Note 10
Fair Value Measurements and Financial Instruments
Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2014:
Assets:
Short-term investments:
Equity securities
Fixed income securities
Other assets:
Fixed income securities
Interest rate swaps
Cross currency swaps
Total
Liabilities:
Other current liabilities:
Cross currency swaps
and other
Other liabilities:
Forward interest rate swaps
Cross currency swaps
Total
(dollars in millions)
Level 1(1)
Level 2(2)
Level 3(3)
$
295
–
$
$
$
250
–
–
545
893
72
6
$ 1,231
$
–
$
74
$
–
–
–
$
216
528
818
–
260
Total
–
–
$
295
260
$
–
–
–
–
1,143
72
6
$ 1,776
$
–
$
74
$
–
–
–
$
216
528
818
(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
58
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 2014.
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 longterm debt, excluding capital leases, was as follows:
(dollars in millions)
At December 31,
Carrying
Amount
Short- and long-term debt,
excluding capital leases
$ 112,755
2014
Fair
Value
$ 126,549
Carrying
Amount
2013
Fair
Value
$ 93,298
$ 103,527
Derivative Instruments
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. We record
the interest rate swaps at fair value on our consolidated balance sheets as
assets and liabilities.
During the second quarter of 2013, interest rate swaps with a notional
value of $1.25 billion matured and the impact to our consolidated financial statements was not material. During the third quarter of 2013, we
entered into interest rate swaps with a total notional value of $1.8 billion.
At December 31, 2014 and 2013, the fair value of these interest rate swaps
was not material. At December 31, 2014, the total notional amount of
these interest rate swaps was $1.8 billion. The ineffective portion of these
interest rate swaps was not material at December 31, 2014 and 2013.
Notes to Consolidated Financial Statements continued
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
the fourth quarter of 2013, we entered into forward interest rate swaps
with a notional value of $2.0 billion. In March 2014, we settled these forward interest rate swaps and the pre-tax gain was not material. During
2014, we entered into forward interest rate swaps with a total notional
value of $4.8 billion. We designated these contracts as cash flow hedges.
During the fourth quarter of 2014, we settled $2.8 billion of forward
interest rate swaps and the pre-tax loss was not material. The fair value of
these contracts was $0.2 billion, which was included within Other liabilities on our consolidated balance sheet, at December 31, 2014 and was
not material at December 31, 2013.
Cross Currency Swaps
Verizon Wireless previously entered into cross currency swaps designated
as cash flow hedges to exchange approximately $1.6 billion of British
Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our
future interest and principal payments in U.S. dollars, as well as to mitigate
the impact of foreign currency transaction gains or losses. In June 2014,
we settled $0.8 billion of these cross currency swaps and the gains with
respect to these swaps were not material.
During the first quarter of 2014, we entered into cross currency swaps
designated as cash flow hedges to exchange approximately $5.4 billion
of Euro and British Pound Sterling denominated debt into U.S. dollars.
During the second quarter of 2014, we entered into cross currency swaps
designated as cash flow hedges to exchange approximately $1.2 billion of British Pound Sterling denominated debt into U.S. dollars. During
the fourth quarter of 2014, we entered into cross currency swaps designated as cash flow hedges to exchange approximately $3.0 billion of
Euro denominated debt into U.S. dollars and to fix our future interest and
principal payments in U.S. dollars. Each of these cross currency swaps was
entered into in order to mitigate the impact of foreign currency transaction gains or losses.
A portion of the gains and losses recognized in Other comprehensive
income 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. The fair value of the outstanding swaps was $0.6 billion,
which was primarily included within Other liabilities on our consolidated
balance sheet, at December 31, 2014 and was not material at December
31, 2013. During 2014 and 2013, a pre-tax loss of $0.1 billion and an
immaterial pre-tax gain, respectively, were recognized in Other comprehensive income with respect to these swaps.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term
investments, trade receivables, certain notes receivable, including lease
receivables, and derivative contracts. Our policy is to deposit our temporary cash investments with major financial institutions. Counterparties to
our derivative contracts are also major financial institutions with whom
we have negotiated derivatives agreements (ISDA master agreement)
and credit support annex agreements which provide rules for collateral
exchange. We generally apply collateralized arrangements with our counterparties for uncleared derivatives to mitigate credit risk. At December
31, 2014, we posted collateral of approximately $0.6 billion related to
derivative contracts under collateral exchange arrangements, which were
recorded as Prepaid expenses and other in our consolidated balance
sheet. At December 31, 2013, we held an immaterial amount of collateral
related to derivative contracts under collateral exchange arrangements,
which were recorded as Accounts payable and accrued liabilities in our
consolidated balance sheet. We may enter into swaps on an uncollateralized basis in certain circumstances. While we may be exposed to credit
losses due to the nonperformance of our counterparties, we consider the
risk remote and do not expect the settlement of these transactions to
have a material effect on our results of operations or financial condition.
Nonrecurring Fair Value Measurements
The Company measures certain assets and liabilities at fair value on a
nonrecurring basis. During the fourth quarter of 2014, certain long-lived
assets met the criteria to be classified as held for sale. At that time, the
fair value of these long-lived assets was measured, resulting in expected
disposal losses of $0.1 billion. The fair value of these assets held for sale
was measured with the assistance of third-party appraisals and other estimates of fair value, which used market approach techniques as part of
the analysis. The fair value measurement was categorized as Level 3, as
significant unobservable inputs were used in the valuation. The expected
disposal losses, which represented the difference between the fair value
less cost to sell and the carrying amount of the assets held for sale, were
included in Selling, general and administrative expenses.
59
Notes to Consolidated Financial Statements continued
Note 11
Stock-Based Compensation
Verizon Communications Long-Term Incentive Plan
The Verizon Communications Inc. Long-Term Incentive Plan (the Plan)
permits the granting of stock options, stock appreciation rights, restricted
stock, restricted stock units, performance shares, performance stock units
and other awards. The maximum number of shares available for awards
from the Plan is 119.6 million shares.
Restricted Stock Units
The Plan provides for grants of Restricted Stock Units (RSUs) that generally vest at the end of the third year after the grant. The RSUs are classified
as equity awards because the RSUs will be paid in Verizon common stock
upon vesting. The RSU equity awards are measured using the grant date
fair value of Verizon common stock and are not remeasured at the end
of each reporting period. Dividend equivalent units are also paid to participants at the time the RSU award is paid, and in the same proportion
as the RSU award.
Performance Stock Units
The Plan also provides for grants of Performance Stock Units (PSUs) that
generally vest at the end of the third year after the grant. As defined by
the Plan, the Human Resources Committee of the Board of Directors
determines the number of PSUs a participant earns based on the extent
to which the corresponding performance goals have been achieved
over the three-year performance cycle. The PSUs are classified as liability
awards because the PSU awards are paid in cash upon vesting. The PSU
award liability is measured at its fair value at the end of each reporting
period and, therefore, will fluctuate based on the price of Verizon
common stock as well as performance relative to the targets. Dividend
equivalent units are also paid to participants at the time that the PSU
award is determined and paid, and in the same proportion as the PSU
award. The granted and cancelled activity for the PSU award includes
adjustments for the performance goals achieved.
The following table summarizes Verizon’s Restricted Stock Unit and
Performance Stock Unit activity:
(shares in thousands)
Outstanding January 1, 2012
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2012
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2013
Granted
Payments
Cancelled/Forfeited
Outstanding December 31, 2014
60
Restricted
Stock Units
19,836
6,350
(7,369)
(148)
18,669
4,950
(7,246)
(180)
16,193
5,278
(6,202)
(262)
15,007
Performance
Stock Units
27,614
20,537
(8,499)
(189)
39,463
7,470
(22,703)
(506)
23,724
7,359
(9,153)
(1,964)
19,966
As of December 31, 2014, unrecognized compensation expense
related to the unvested portion of Verizon’s RSUs and PSUs was approximately $0.4 billion and is expected to be recognized over approximately
two years.
The RSUs granted in 2014 and 2013 have weighted-average grant date
fair values of $47.23 and $47.96 per unit, respectively. During 2014, 2013
and 2012, we paid $0.6 billion, $1.1 billion and $0.6 billion, respectively, to
settle RSUs and PSUs classified as liability awards.
Verizon Wireless’ Long-Term Incentive Plan
The Verizon Wireless Long-Term Incentive Plan (the Wireless Plan) provided compensation opportunities to eligible employees of Verizon
Wireless (the Partnership). Under the Wireless Plan, Value Appreciation
Rights (VARs) were granted to eligible employees. We have not granted
new VARs since 2004. As of December 31, 2014, there are no VARs that
remain outstanding.
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related
to RSUs, PSUs, and VARs described above included in Net income attributable to Verizon was $0.3 billion, $0.4 billion and $0.7 billion for 2014,
2013 and 2012, respectively.
Stock Options
The Plan provides for grants of stock options to participants at an option
price per share of no less than 100% of the fair market value of Verizon
common stock on the date of grant. Each grant has a 10-year life, vesting
equally over a three-year period, starting at the date of the grant. We
have not granted new stock options since 2004. As of December 31,
2014, there are no stock options that remain outstanding.
Notes to Consolidated Financial Statements continued
Note 12
Employee Benefits
We maintain non-contributory defined benefit pension plans for many
of our employees. In addition, we maintain postretirement health care
and life insurance plans for our retirees and their dependents, which
are both contributory and non-contributory, and include a limit on our
share of the cost for certain recent and future retirees. In accordance
with our accounting policy for pension and other postretirement benefits, operating expenses include pension and benefit related credits
and/or charges based on actuarial assumptions, including projected
discount rates and an estimated return on plan assets. These estimates
are updated in the fourth quarter to reflect actual return on plan assets
and updated actuarial assumptions. The adjustment is recognized in the
income statement during the fourth quarter or upon a remeasurement
event pursuant to our accounting policy for the recognition of actuarial
gains and losses.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for many of our employees
are subject to collective bargaining agreements. Modifications in benefits have been bargained from time to time, and we may also periodically
amend the benefits in the management plans. The following tables
summarize benefit costs, as well as the benefit obligations, plan assets,
funded status and rate assumptions associated with pension and postretirement health care and life insurance benefit plans.
Obligations and Funded Status
At December 31,
Change in Benefit
Obligations
Beginning of year
Service cost
Interest cost
Plan amendments
Actuarial (gain) loss, net
Benefits paid
Curtailment and termination
benefits
Settlements paid
End of year
2014
(dollars in millions)
Pension
2013
Health Care and Life
2014
2013
At December 31,
339
(137)
(6,123)
$ (5,921)
$
–
(528)
(24,134)
$ (24,662)
$
Amounts recognized in
Accumulated Other
Comprehensive Income
(Pre-tax)
Prior Service Benefit (Cost) $
Total
$
$
$
$ (2,280)
$ (2,280)
$ (2,120)
$ (2,120)
$ 23,042
258
1,107
(412)
4,645
(1,543)
$ 26,844
318
1,095
(119)
(3,576)
(1,520)
11
(407)
$ 25,320
4
(889)
$ 23,032
–
–
$ 27,097
–
–
$ 23,042
Change in Plan Assets
Beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Settlements paid
End of year
$ 17,111
1,778
1,632
(1,566)
(407)
$ 18,548
$ 18,282
1,388
107
(1,777)
(889)
$ 17,111
$ 3,053
193
732
(1,543)
–
$ 2,435
$
Funded Status
End of year
$ (6,772)
$ (5,921)
$ (24,662)
$ (19,989)
(56)
(56)
$
25
25
–
(710)
(19,279)
$ (19,989)
Beginning in 2013, as a result of federal health care reform, Verizon no
longer files for the Retiree Drug Subsidy (RDS) and instead contracts with
a Medicare Part D plan on a group basis to provide prescription drug
benefits to Medicare eligible retirees.
The accumulated benefit obligation for all defined benefit
pension plans was $25.3 billion and $22.9 billion at December 31, 2014
and 2013, respectively.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows:
At December 31,
$ 26,773
395
1,002
(149)
(2,327)
(1,777)
2014
Health Care and Life
2014
2013
Amounts recognized on the
balance sheet
Noncurrent assets
$
337
Current liabilities
(122)
Noncurrent liabilities
(6,987)
Total
$ (6,772)
$ 23,032
327
1,035
(89)
2,977
(1,566)
(dollars in millions)
Pension
2013
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
(dollars in millions)
2014
2013
$ 24,919
24,851
17,810
$ 22,610
22,492
16,350
2,657
556
1,360
(1,520)
–
$ 3,053
61
Notes to Consolidated Financial Statements continued
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)
2014
Years Ended December 31,
Service cost
Amortization of prior service cost (credit)
Expected return on plan assets
Interest cost
Remeasurement (gain) loss, net
Net periodic benefit (income) cost
Curtailment and termination benefits
Total
$
327
(8)
(1,181)
1,035
2,380
2,553
11
$ 2,564
2013
$
395
6
(1,245)
1,002
(2,470)
(2,312)
4
$ (2,308)
Pension
2012
Health Care and Life
2013
2012
2014
$
258
(253)
(161)
1,107
4,615
5,566
–
$ 5,566
$
358
(1)
(1,795)
1,449
5,542
5,553
–
$ 5,553
$
318
(247)
(143)
1,095
(3,989)
(2,966)
–
$ (2,966)
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:
2014
At December 31,
Prior service cost
Reversal of amortization items
Prior service cost
Total recognized in other comprehensive (income) loss (pre-tax)
Pension
2013
$
$
359
(89)
(171)
1,284
1,262
2,645
–
2,645
(dollars in millions)
Health Care and Life
2014
2013
$
(89)
$
(149)
$
(413)
$
(119)
$
8
(81)
$
(6)
(155)
$
253
(160)
$
247
128
The estimated prior service cost for the defined benefit pension plans
that will be amortized from Accumulated other comprehensive income
(loss) into net periodic benefit (income) cost over the next fiscal year is
not significant. The estimated prior service cost for the defined benefit
postretirement plans that will be amortized from Accumulated other
comprehensive income into net periodic benefit (income) cost over the
next fiscal year is $0.3 billion.
Assumptions
The weighted-average assumptions used in determining benefit obligations follow:
At December 31,
2014
Discount Rate
Rate of compensation increases
4.20 %
3.00
Pension
2013
5.00 %
3.00
2014
Health Care and Life
2013
4.20 %
N/A
5.00 %
N/A
The weighted-average assumptions used in determining net periodic cost follow:
At December 31,
Discount Rate
Expected return on plan assets
Rate of compensation increases
2014
5.00 %
7.25
3.00
2013
4.20 %
7.50
3.00
In order to project the long-term target investment return for the total
portfolio, estimates are prepared for the total return of each major asset
class over the subsequent 10-year period. Those estimates are based on
a combination of factors including the current market interest rates and
valuation levels, consensus earnings expectations and historical longterm risk premiums. To determine the aggregate return for the pension
trust, the projected return of each individual asset class is then weighted
according to the allocation to that investment area in the trust’s longterm asset allocation policy.
62
Pension
2012
5.00 %
7.50
3.00
2014
5.00 %
5.50
N/A
2013
Health Care and Life
2012
4.20 %
5.60
N/A
5.00 %
7.00
N/A
Notes to Consolidated Financial Statements continued
The assumed health care cost trend rates follow:
At December 31,
Healthcare cost trend rate assumed for
next year
Rate to which cost trend rate gradually
declines
Year the rate reaches the level it is
assumed to remain thereafter
2014
Health Care and Life
2013
2012
Pension Plans
The fair values for the pension plans by asset category at December 31,
2014 are as follows:
(dollars in millions)
Asset Category
6.50 %
6.50 %
7.00 %
4.75
4.75
5.00
2022
2020
2016
A one-percentage point change in the assumed health care cost trend
rate would have the following effects:
(dollars in millions)
One-Percentage Point
Increase
Decrease
Effect on 2014 service and interest cost
Effect on postretirement benefit obligation as of
December 31, 2014
$
$
193
3,760
(155)
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Real estate
Other
Private equity
Hedge funds
Total
Total
Level 1
Level 2
$ 1,983
4,339
$ 1,814
2,952
1,257
2,882
582
3
1,792
830
264
39
–
–
427
2,506
524
3
–
–
112
19
–
1,792
3,748
1,962
$ 18,548
–
–
$ 5,899
204
1,164
$ 6,274
3,544
798
$ 6,375
$
169
1,277
Level 3
$
–
110
(3,023)
Plan Assets
The company’s overall investment strategy is to achieve a mix of assets
which allows us to meet projected benefit payments while taking into
consideration risk and return. While target allocation percentages will
vary over time, the current target allocation for plan assets is designed so
that 70% of the assets have the objective of achieving a return in excess
of the growth in liabilities (comprised of public equities, private equities,
real estate, hedge funds and emerging debt) and 30% of the assets are
invested as liability hedging assets (where cash flows from investments
better match projected benefit payments, typically longer duration fixed
income). This allocation will shift as funded status improves to a higher
allocation of liability hedging assets. Target policies will be revisited
periodically to ensure they are in line with fund objectives. Both active
and passive management approaches are used depending on perceived
market efficiencies and various other factors. Due to our diversification
and risk control processes, there are no significant concentrations of risk,
in terms of sector, industry, geography or company names.
The fair values for the pension plans by asset category at December 31,
2013 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Real estate
Other
Private equity
Hedge funds
Total
Total
$
968
4,200
Level 1
$
881
3,300
Level 2
$
87
900
Level 3
$
–
–
1,097
2,953
364
3
1,784
691
212
51
–
–
406
2,579
313
3
–
–
162
–
–
1,784
3,942
1,800
$ 17,111
–
–
5,135
–
604
4,892
3,942
1,196
7,084
$
$
$
Pension and healthcare and life plans assets do not include significant
amounts of Verizon common stock.
63
Notes to Consolidated Financial Statements continued
The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant unobservable inputs:
(dollars in millions)
Equity
Securities
Balance at January 1, 2013
Actual gain on plan assets
Purchases and sales
Transfers in (out)
Balance at December 31, 2013
Actual gain (loss) on plan assets
Purchases and sales
Transfers in (out)
Balance at December 31, 2014
$
Corporate
Bonds
–
–
–
–
–
(1)
106
5
110
$
$
$
$
$
196
12
(13)
(33)
162
5
(50)
(5)
112
Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset category at December 31, 2014 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Total
Total
$
208
1,434
105
461
111
116
$ 2,435
Level 1
$
6
1,172
98
119
14
–
$ 1,409
Level 2
$
$
202
262
7
296
97
116
980
Level 3
$
$
–
–
–
46
–
–
46
The fair values for the other postretirement benefit plans by asset category at December 31, 2013 are as follows:
(dollars in millions)
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
U.S. Treasuries and agencies
Corporate bonds
International bonds
Other
Total
Total
$
$
237
2,178
121
252
104
161
3,053
Level 1
$
$
12
1,324
94
45
18
40
1,533
Level 2
$
$
225
854
27
207
86
121
1,520
Level 3
$
$
–
–
–
–
–
–
–
The following is a reconciliation of the beginning and ending balance of
the other postretirement benefit plans assets that are measured at fair
value using significant unobservable inputs:
Corporate
Bonds
Balance at December 31, 2013
Actual gain on plan assets
Purchases and sales
Balance at December 31, 2014
$
$
–
1
45
46
Total
$
$
–
1
45
46
The following are general descriptions of asset categories, as well as the
valuation methodologies and inputs used to determine the fair value of
each major category of assets.
Cash and cash equivalents include short-term investment funds, primarily
in diversified portfolios of investment grade money market instruments
and are valued using quoted market prices or other valuation methods,
and thus are classified within Level 1 or Level 2.
64
International
Bonds
$
$
$
–
–
–
–
–
–
8
11
19
Real
Estate
$
2,018
81
(315)
–
$ 1,784
42
(34)
–
$ 1,792
Private
Equity
$
5,039
674
(1,732)
(39)
$ 3,942
73
(471)
–
$ 3,544
Hedge
Funds
$
$
$
558
84
(124)
678
1,196
33
144
(575)
798
Total
$
7,811
851
(2,184)
606
$ 7,084
152
(297)
(564)
$ 6,375
Equity securities are investments in common stock of domestic and
international corporations in a variety of industry sectors, and are valued
primarily using quoted market prices or other valuation methods, and
thus are classified within Level 1 or Level 2.
Fixed income securities include U.S. Treasuries and agencies, debt obligations of foreign governments and domestic and foreign corporations.
Fixed income also includes investments in collateralized mortgage obligations, mortgage backed securities and interest rate swaps. The fair
value of fixed income securities is based on observable prices for identical or comparable assets, adjusted using benchmark curves, sector
grouping, matrix pricing, broker/dealer quotes and issuer spreads, and
thus is classified within Level 1 or Level 2.
Real estate investments include those in limited partnerships that invest
in various commercial and residential real estate projects both domestically and internationally. The fair values of real estate assets are typically
determined by using income and/or cost approaches or a comparable
sales approach, taking into consideration discount and capitalization
rates, financial conditions, local market conditions and the status of the
capital markets, and thus are classified within Level 3.
Private equity investments include those in limited partnerships that
invest in operating companies that are not publicly traded on a stock
exchange. Investment strategies in private equity include leveraged buyouts, venture capital, distressed investments and investments in natural
resources. These investments are valued using inputs such as trading
multiples of comparable public securities, merger and acquisition activity
and pricing data from the most recent equity financing taking into consideration illiquidity, and thus are classified within Level 3.
Hedge fund investments include those seeking to maximize absolute
returns using a broad range of strategies to enhance returns and provide
additional diversification. The fair values of hedge funds are estimated
using net asset value per share (NAV) of the investments. Verizon has
the ability to redeem these investments at NAV within the near term and
thus are classified within Level 2. Investments that cannot be redeemed
in the near term are classified within Level 3.
Employer Contributions
In 2014, we contributed $1.5 billion to our qualified pension plans, $0.1
billion to our nonqualified pension plans and $0.7 billion to our other
postretirement benefit plans. We anticipate a minimum contribution of
$0.7 billion to our qualified pension plans in 2015. Nonqualified pension
plans contributions are estimated to be $0.1 billion and contributions to
our other postretirement benefit plans are estimated to be $0.8 billion
in 2015.
Notes to Consolidated Financial Statements continued
Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid as follows:
Year
2015
2016
2017
2018
2019
2020-2024
(dollars in millions)
Pension Benefits
$
2,855
2,024
1,937
1,427
1,396
6,890
Health Care and Life
$
1,481
1,456
1,452
1,436
1,398
6,996
Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOP).
We match a certain percentage of eligible employee contributions to
the savings plans with shares of our common stock from this ESOP. At
December 31, 2014, the number of allocated shares of common stock in
this ESOP was 61 million. There were no unallocated shares of common
stock in this ESOP at December 31, 2014. All leveraged ESOP shares are
included in earnings per share computations.
Total savings plan costs were $0.9 billion in 2014, $1.0 billion in 2013 and
$0.7 billion in 2012.
Pension Annuitization
On October 17, 2012, we, along with our subsidiary Verizon Investment
Management Corp., and Fiduciary Counselors Inc., as independent fiduciary of the Verizon Management Pension Plan (the Plan), entered into a
definitive purchase agreement with The Prudential Insurance Company
of America (Prudential) and Prudential Financial, Inc., pursuant to
which the Plan would purchase a single premium group annuity contract
from Prudential.
On December 10, 2012, upon issuance of the group annuity contract by
Prudential, Prudential irrevocably assumed the obligation to make future
annuity payments to approximately 41,000 Verizon management retirees
who began receiving pension payments from the Plan prior to January 1,
2010. The amount of each retiree’s annuity payment equals the amount
of such individual’s pension benefit. In addition, the group annuity contract is intended to replicate the same rights to future payments, such as
survivor benefits, that are currently offered by the Plan.
We contributed approximately $2.6 billion to the Plan between
September 1, 2012 and December 31, 2012 in connection with the transaction so that the Plan’s funding percentage would not decrease as a
result of the transaction.
Severance Benefits
The following table provides an analysis of our actuarially determined
severance liability recorded in accordance with the accounting standard
regarding employers’ accounting for postemployment benefits:
Year
2012
2013
2014
(dollars in millions)
Beginning
of Year
$
1,113
1,010
757
Charged
to Expense
$
396
134
531
Payments
$
(531)
(381)
(406)
Other
$
32
(6)
(7)
End of Year
$
1,010
757
875
Severance, Pension and Benefit (Credits) Charges
During 2014, we recorded net pre-tax severance, pension and benefits
charges of approximately $7.5 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The charges
were primarily driven by a decrease in our discount rate assumption used
to determine the current year liabilities from a weighted-average of 5.0%
at December 31, 2013 to a weighted-average of 4.2% at December 31,
2014 ($5.2 billion), a change in mortality assumptions primarily driven by
the use of updated actuarial tables (RP-2014 and MP-2014) issued by the
Society of Actuaries in October 2014 ($1.8 billion) and revisions to the
retirement assumptions for participants and other assumption adjustments, partially offset by the difference between our estimated return on
assets of 7.25% and our actual return on assets of 10.5% ($0.6 billion). As
part of this charge, we recorded severance costs of $0.5 billion under our
existing separation plans.
During 2013, we recorded net pre-tax severance, pension and benefits
credits of approximately $6.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The credits
were primarily driven by an increase in our discount rate assumption
used to determine the current year liabilities from a weighted-average of
4.2% at December 31, 2012 to a weighted-average of 5.0% at December
31, 2013 ($4.3 billion), lower than assumed retiree medical costs and
other assumption adjustments ($1.4 billion) and the difference between
our estimated return on assets of 7.5% at December 31, 2012 and our
actual return on assets of 8.6% at December 31, 2013 ($0.5 billion).
During 2012, we recorded net pre-tax severance, pension and benefits
charges of approximately $7.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize
actuarial gains and losses in the year in which they occur. The charges
were primarily driven by a decrease in our discount rate assumption used
to determine the current year liabilities from a weighted-average of 5% at
December 31, 2011 to a weighted-average of 4.2% at December 31, 2012
($5.3 billion) and revisions to the retirement assumptions for participants
and other assumption adjustments, partially offset by the difference
between our estimated return on assets of 7.5% and our actual return
on assets of 10% ($0.7 billion). As part of this charge, we also recorded
$1.0 billion related to the annuitization of pension liabilities, as described
above, as well as severance charges of $0.4 billion.
65
Notes to Consolidated Financial Statements continued
Note 13
Taxes
The components of income before (provision) benefit for income taxes
are as follows:
Years Ended December 31,
Domestic
Foreign
Total
(dollars in millions)
2014
2013
$ 12,992
2,278
$ 15,270
$ 28,833
444
$ 29,277
2012
$
$
9,316
581
9,897
The components of the provision (benefit) for income taxes are as follows:
Years Ended December 31,
Current
Federal
Foreign
State and Local
Total
Deferred
Federal
Foreign
State and Local
Total
Total income tax provision (benefit)
(dollars in millions)
2014
$ 2,657
81
668
3,406
(51)
(9)
(32)
(92)
$ 3,314
2013
$
$
(197)
(59)
201
(55)
5,060
8
717
5,785
5,730
2012
$
$
223
(45)
114
292
(559)
10
(403)
(952)
(660)
The following table shows the principal reasons for the difference
between the effective income tax rate and the statutory federal income
tax rate:
Years Ended December 31,
2014
Statutory federal income tax rate
State and local income tax rate, net of
federal tax benefits
Affordable housing credit
Employee benefits including ESOP
dividend
Disposition of Omnitel Interest
Noncontrolling interests
Other, net
Effective income tax rate
35.0 %
35.0 %
35.0 %
2.7
(1.0)
2.1
(0.6)
(1.9)
(1.9)
(0.4)
(14.3)
(2.2)
19.6 %
(1.1)
(33.7)
(3.1)
(6.7) %
(0.7)
(5.9)
(5.0)
(3.4)
21.7 %
2013
2012
The effective income tax rate for 2014 was 21.7% compared to 19.6% for
2013. The increase in the effective income tax rate was primarily due to
additional income taxes on the incremental income from the Wireless
Transaction completed on February 21, 2014 and was partially offset
by the utilization of certain tax credits in connection with the Omnitel
Transaction in 2014 and the effective income tax rate impact of lower
income before income taxes due to severance, pension and benefit
charges recorded in 2014 compared to severance, pension and benefit credits recorded in 2013. The decrease in the provision for income
taxes was primarily due to lower income before income taxes due to
severance, pension and benefit charges recorded in 2014 compared to
severance, pension and benefit credits recorded in 2013.
The effective income tax rate for 2013 was 19.6% compared to (6.7)%
for 2012. The increase in the effective income tax rate and provision for
income taxes was primarily due to higher income before income taxes
as a result of severance, pension and benefit credits recorded during
2013 compared to lower income before income taxes as a result of severance, pension and benefit charges as well as early debt redemption costs
recorded during 2012.
The amounts of cash taxes paid are as follows:
Years Ended December 31,
Income taxes, net of amounts refunded
Employment taxes
Property and other taxes
Total
66
(dollars in millions)
2014
$ 4,093
1,290
1,797
$ 7,180
2013
$
$
422
1,282
2,082
3,786
2012
$
$
351
1,308
1,727
3,386
Notes to Consolidated Financial Statements continued
Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. The presentation of significant components
of deferred tax assets and liabilities is updated to reflect the Wireless
Transaction. Significant components of deferred tax assets and liabilities
are as follows:
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of unrecognized
tax benefits is as follows:
Balance at January 1,
Additions based on tax positions related to
the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapses of statutes of limitations
Balance at December 31,
At December 31,
(dollars in millions)
2014
2013
Valuation allowances
Deferred tax assets
$ 13,350
2,255
2,247
17,852
(1,841)
16,011
$ 10,413
2,912
1,783
15,108
(1,685)
13,423
Spectrum and other intangible amortization
Depreciation
Other – liabilities
Deferred tax liabilities
Net deferred tax liability
28,283
23,423
5,754
57,460
$ 41,449
18,280
18,913
4,315
41,508
$ 28,085
Employee benefits
Tax loss and credit carry forwards
Other – assets
At December 31, 2014, undistributed earnings of our foreign subsidiaries indefinitely invested outside the United States amounted to
approximately $1.3 billion. The majority of Verizon's cash flow is generated from domestic operations and we are not dependent on foreign
cash or earnings to meet our funding requirements, nor do we intend
to repatriate these undistributed foreign earnings to fund U.S. operations. Furthermore, a portion of these undistributed earnings represent
amounts that legally must be kept in reserve in accordance with certain
foreign jurisdictional requirements and are unavailable for distribution or
repatriation. As a result, we have not provided U.S. deferred taxes on
these undistributed earnings because we intend that they will remain
indefinitely reinvested outside of the United States and therefore unavailable for use in funding U.S. operations. Determination of the amount of
unrecognized deferred taxes related to these undistributed earnings is
not practicable.
At December 31, 2014, we had net after-tax loss and credit carry forwards
for income tax purposes of approximately $2.3 billion. Of these net aftertax loss and credit carry forwards, approximately $1.8 billion will expire
between 2015 and 2034 and approximately $0.5 billion may be carried
forward indefinitely.
During 2014, the valuation allowance increased approximately $0.2 billion. The balance of the valuation allowance at December 31, 2014 and
the 2014 activity is primarily related to state and foreign tax losses.
(dollars in millions)
2014
$ 2,130
80
627
(278)
(239)
(497)
$ 1,823
2013
$
2,943
$
116
250
(801)
(210)
(168)
2,130
2012
$
3,078
$
131
92
(415)
100
(43)
2,943
Included in the total unrecognized tax benefits at December 31, 2014,
2013 and 2012 is $1.3 billion, $1.4 billion and $2.1 billion, respectively,
that if recognized, would favorably affect the effective income tax rate.
We recognized the following net after-tax benefits related to interest and
penalties in the provision for income taxes:
Years Ended December 31,
2014
2013
2012
(dollars in millions)
$
92
33
82
The after-tax accruals for the payment of interest and penalties in the
consolidated balance sheets are as follows:
At December 31,
2014
2013
(dollars in millions)
$
169
274
The decrease in unrecognized tax benefits was primarily due to the resolution of issues with the Internal Revenue Service (IRS) involving tax years
2007 through 2009, and was partially offset by an increase in unrecognized tax benefits related to the Wireless Transaction. The uncertain tax
benefits related to the Wireless Transaction concern pre-acquisition tax
controversies and are the subject of an indemnity from Vodafone for
which a corresponding indemnity asset has been established.
Verizon and/or its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various state, local and foreign jurisdictions. As a large
taxpayer, we are under audit by the IRS and multiple state and foreign
jurisdictions for various open tax years. The IRS is currently examining
the Company’s U.S. income tax returns for tax years 2010-2012 and Cellco
Partnership’s U.S. income tax returns for tax years 2012-2013. Significant
tax controversies are ongoing in Massachusetts for tax years as early
as 2001. The amount of the liability for unrecognized tax benefits will
change in the next twelve months due to the expiration of the statute
of limitations in various jurisdictions and it is reasonably possible that
various current tax examinations will conclude or require reevaluations
of the Company’s tax positions during this period. An estimate of the
range of the possible change cannot be made until these tax matters are
further developed or resolved.
67
Notes to Consolidated Financial Statements continued
Note 14
Segment Information
Reportable Segments
We have two reportable segments, 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 maker’s assessment
of segment performance.
Corporate, eliminations and other includes unallocated corporate
expenses, intersegment eliminations recorded in consolidation, the
results of other businesses, such as our investments in unconsolidated
businesses, pension and other employee benefit related costs, lease
financing, as well as the historical results of divested operations, other
adjustments and gains and losses that are not allocated in assessing segment performance due to their non-operational nature. Although such
transactions are excluded from the business segment results, they are
included in reported consolidated earnings. Gains and losses that are
not individually significant are included in all segment results as these
items are included in the chief operating decision maker’s assessment of
segment performance. Effective January 1, 2014, we have also reclassified
the results of certain businesses, such as development stage businesses
that support our strategic initiatives, from our Wireline segment to
Corporate, eliminations and other. The impact of this reclassification was
not material to our consolidated financial statements or our segment
results of operations.
On July 1, 2014, our Wireline segment sold a non-strategic business (see
Note 2). Accordingly, the historical Wireline results for these operations
have been reclassified to Corporate, eliminations and other to reflect
comparable segment operating results.
The reconciliation of segment operating revenues and expenses to consolidated operating revenues and expenses below also includes those
items of a non-operational nature. We exclude from segment results the
effects of certain items that management does not consider in assessing
segment performance, primarily because of their non-operational nature.
We have adjusted prior period consolidated and segment information,
where applicable, to conform to current year presentation.
Our 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
Wireline’s voice, data and video communications products and
enhanced services include broadband video and data, corporate networking solutions, data center and cloud services,
security and managed network services and local and long
distance voice services. We provide these products and services to consumers in the United States, as well as to carriers,
businesses and government customers both in the United
States and around the world.
The following table provides operating financial information for our two reportable segments:
2014
External Operating Revenues
Retail service
Other service
Service revenue
(dollars in millions)
Wireless
$
69,451
3,104
72,555
Wireline
$
–
–
–
Total Segments
$
69,451
3,104
72,555
10,957
4,021
–
–
10,957
4,021
Consumer retail
Small business
Mass Markets
–
–
–
15,583
2,464
18,047
15,583
2,464
18,047
Strategic services
Core
Global Enterprise
–
–
–
8,318
5,355
13,673
8,318
5,355
13,673
Global Wholesale
Other
Intersegment revenues
Total operating revenues
–
–
113
87,646
5,240
462
1,007
38,429
5,240
462
1,120
126,075
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
$
28,825
23,602
8,459
60,886
26,760
21,332
8,180
7,882
37,394
1,035
$
50,157
31,782
16,341
98,280
27,795
Assets
Plant, property and equipment, net
Capital expenditures
$ 160,385
38,276
10,515
76,673
50,318
5,750
$ 237,058
88,594
16,265
Equipment
Other
68
$
$
Notes to Consolidated Financial Statements continued
(dollars in millions)
2013
External Operating Revenues
Retail service
Other service
Service revenue
Wireless
$
Equipment
Other
66,282
2,691
68,973
Wireline
$
–
–
–
Total Segments
$
66,282
2,691
68,973
8,096
3,851
–
–
8,096
3,851
Consumer retail
Small business
Mass Markets
–
–
–
14,842
2,537
17,379
14,842
2,537
17,379
Strategic services
Core
Global Enterprise
–
–
–
8,129
6,028
14,157
8,129
6,028
14,157
Global Wholesale
Other
Intersegment revenues
Total operating revenues
–
–
103
81,023
5,583
442
1,063
38,624
5,583
442
1,166
119,647
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
23,648
23,176
8,202
55,026
25,997
21,396
8,571
8,327
38,294
330
45,044
31,747
16,529
93,320
26,327
Assets
Plant, property and equipment, net
Capital expenditures
$
$
146,429
35,932
9,425
$
$
84,573
51,885
6,229
$
$
231,002
87,817
15,654
69
Notes to Consolidated Financial Statements continued
(dollars in millions)
2012
External Operating Revenues
Retail service
Other service
Service revenue
Wireless
$
Equipment
Other
61,383
2,290
63,673
Wireline
$
–
–
–
Total Segments
$
61,383
2,290
63,673
8,010
4,096
–
–
8,010
4,096
Consumer retail
Small business
Mass Markets
–
–
–
14,145
2,589
16,734
14,145
2,589
16,734
Strategic services
Core
Global Enterprise
–
–
–
7,737
6,833
14,570
7,737
6,833
14,570
Global Wholesale
Other
Intersegment revenues
Total operating revenues
–
–
89
75,868
6,031
498
1,112
38,945
6,031
498
1,201
114,813
Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total operating expenses
Operating income
24,490
21,650
7,960
54,100
21,768
21,657
8,860
8,424
38,941
4
46,147
30,510
16,384
93,041
21,772
Assets
Plant, property and equipment, net
Capital expenditures
70
$
$
142,485
34,545
8,857
$
$
84,815
52,911
6,342
$
$
227,300
87,456
15,199
Notes to Consolidated Financial Statements continued
Reconciliation to Consolidated Financial Information
A reconciliation of the segment operating revenues to consolidated operating revenues is as follows:
(dollars in millions)
2014
Years Ended December 31,
Operating Revenues
Total reportable segments
Reconciling items:
Impact of divested operations (Note 2)
Corporate, eliminations and other
Consolidated operating revenues
$ 126,075
256
748
$ 127,079
2013
$
119,647
$
599
304
120,550
2012
$
114,813
$
835
198
115,846
A reconciliation of the total of the reportable segments' operating income to consolidated Income before (provision) benefit for income taxes
is as follows:
(dollars in millions)
2014
Years Ended December 31,
Operating Income
Total segment operating income
Severance, pension and benefit credits (charges) (Note 12)
Gain on spectrum license transactions (Note 2)
Litigation settlements (Note 17)
Impact of divested operations (Note 2)
Other costs
Corporate, eliminations and other
Consolidated operating income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Income Before (Provision) Benefit for Income Taxes
$
$
27,795
(7,507)
707
–
12
(334)
(1,074)
19,599
1,780
(1,194)
(4,915)
15,270
2013
$
$
26,327
6,232
278
–
43
–
(912)
31,968
142
(166)
(2,667)
29,277
2012
$
$
21,772
(7,186)
–
(384)
56
(276)
(822)
13,160
324
(1,016)
(2,571)
9,897
A reconciliation of the total of the reportable segments' assets to consolidated assets is as follows:
(dollars in millions)
At December 31,
Assets
Total reportable segments
Corporate, eliminations and other
Total consolidated
2014
$ 237,058
(4,350)
$ 232,708
2013
$
$
231,002
43,096
274,098
Corporate, eliminations and other at December 31, 2013 is primarily comprised of cash and cash equivalents which were used to complete the
Wireless Transaction on February 21, 2014.
We generally account for intersegment sales of products and services and asset transfers at current market prices. No single customer accounted for
more than 10% of our total operating revenues during the years ended December 31, 2014, 2013 and 2012. International operating revenues and
long-lived assets are not significant.
71
Notes to Consolidated Financial Statements continued
Note 15
Comprehensive Income
Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income.
Significant changes in the components of Other comprehensive income, net of provision for income taxes are described below.
Accumulated Other Comprehensive Income
The changes in the balances of Accumulated other comprehensive income by component are as follows:
(dollars in millions)
Balance at January 1, 2014
Other comprehensive income (loss)
Amounts reclassified to net income
Net other comprehensive income (loss)
Balance at December 31, 2014
Foreign currency
translation
adjustments
$
853
(288)
(911)
(1,199)
$ (346)
Unrealized
loss on cash
flow hedges
$
$
The amounts presented above in net other comprehensive income (loss)
are net of taxes and noncontrolling interests, which are not significant.
For the year ended December 31, 2014, the amounts reclassified to net
income related to foreign currency translation adjustments are included
in Equity in earnings of unconsolidated businesses on our consolidated
statement of income and are a result of the completion of the Omnitel
transaction. See Note 2 for additional details. For the year ended
December 31, 2014, 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 sales and Selling, general and administrative expense on our consolidated statement of income. For the year
ended December 31, 2014, all other amounts reclassified to net income
in the table above are included in Other income and (expense), net on
our consolidated statement of income.
Foreign Currency Translation Adjustments
The change in Foreign currency translation adjustments during 2014
was primarily a result of the completion of the Omnitel transaction. The
change in Foreign currency translation adjustments during 2013 and
2012 was primarily related to our investment in Vodafone Omnitel N.V.
which was driven by the movements of the U.S. dollar against the Euro.
Net Unrealized Gains (Losses) on Cash Flow Hedges
During 2014, 2013 and 2012, Unrealized gains (losses) on cash flow
hedges included in Other comprehensive income (loss) attributable to
noncontrolling interests, primarily reflect activity related to cross currency
swaps (see Note 10). Reclassification adjustments for gains (losses) realized in net income were not significant.
72
113
(89)
(108)
(197)
(84)
Unrealized
loss on
marketable
securities
$
$
117
14
(19)
(5)
112
Defined benefit
pension and
postretirement
plans
$
1,275
–
154
154
$ 1,429
Total
$
2,358
(363)
(884)
(1,247)
$ 1,111
Net Unrealized Gains (Losses) on Marketable Securities
During 2014, 2013 and 2012, reclassification adjustments on marketable
securities for gains (losses) realized in net income were not significant.
Defined Benefit Pension and Postretirement Plans
The change in Defined benefit pension and postretirement plans at
December 31, 2014 and 2013, respectively, was not significant.
Notes to Consolidated Financial Statements continued
Note 16
Additional Financial Information
The tables that follow provide additional financial information related to our consolidated financial statements:
Income Statement Information
(dollars in millions)
2014
Years Ended December 31,
Depreciation expense
Interest costs on debt balances
Capitalized interest costs
Advertising expense
$
14,966
5,291
(376)
2,526
2013
$
15,019
3,421
(754)
2,438
Balance Sheet Information
$
14,920
2,977
(406)
2,381
(dollars in millions)
2014
At December 31,
Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Accrued vacation, salaries and wages
Interest payable
Taxes payable
$
$
Other Current Liabilities
Advance billings and customer deposits
Dividends payable
Other
$
$
2013
5,598
4,016
4,131
1,478
1,457
16,680
$
3,125
2,307
3,217
8,649
$
Cash Flow Information
$
$
4,954
3,954
4,790
1,199
1,556
16,453
2,829
1,539
2,296
6,664
(dollars in millions)
2014
Years Ended December 31,
Cash Paid
Interest, net of amounts capitalized
2012
$
4,429
2013
$
2,122
2012
$
1,971
Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareowner plans, including 18.2 million common shares issued from Treasury stock during the year ended December 31, 2014, which had an aggregate value of $0.7 billion.
In addition to the previously authorized three-year share buyback program, in February 2015, the Verizon Board of Directors authorized Verizon to
enter into an accelerated share repurchase (ASR) agreement to repurchase $5.0 billion of the Company’s common stock. The total number of shares
that Verizon will repurchase under the ASR agreement will be based generally upon the volume-weighted average share price of Verizon’s common
stock during the term of the transaction. On February 10, 2015, in exchange for an up-front payment totaling $5.0 billion, Verizon received an initial
delivery of 86.2 million shares having a value of approximately $4.25 billion. Final settlement of the transaction under the ASR agreement, including
delivery of the remaining shares, if any, that Verizon is entitled to receive, is scheduled to occur in the second quarter of 2015.
73
Notes to Consolidated Financial Statements continued
Note 17
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 70 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 the third quarter
of 2012, we settled a number of patent litigation matters, including cases
with ActiveVideo Networks Inc. (ActiveVideo) and TiVo Inc. (TiVo). In connection with the settlements with ActiveVideo and TiVo, we recorded a
charge of $0.4 billion in the third quarter of 2012 and will pay and recognize over the following six years an additional $0.2 billion.
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.
74
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.
As of December 31, 2014, letters of credit totaling approximately $0.1 billion, which were executed in the normal course of business and support
several financing arrangements and payment obligations to third parties,
were outstanding.
We have several commitments primarily to purchase programming and
network services, equipment, software, handsets and peripherals, and
marketing activities, which will be used or sold in the ordinary course
of business, from a variety of suppliers totaling $21.0 billion. Of this total
amount, $8.4 billion is attributable to 2015, $8.5 billion is attributable to
2016 through 2017, $2.5 billion is attributable to 2018 through 2019 and
$1.6 billion is attributable to years thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only
those items that are the subject of contractual obligations. Our commitments are generally determined based on the noncancelable quantities
or termination amounts. Purchases against our commitments for 2014
totaled approximately $21.0 billion. Since the commitments to purchase
programming services from television networks and broadcast stations
have no minimum volume requirement, we estimated our obligation
based on number of subscribers at December 31, 2014, and applicable
rates stipulated in the contracts in effect at that time. We also purchase
products and services as needed with no firm commitment.
Notes to Consolidated Financial Statements continued
Note 18
Quarterly Financial Information (Unaudited)
(dollars in millions, except per share amounts)
Net Income (Loss) attributable to Verizon(1)
Per SharePer ShareAmount
Basic
Diluted
Quarter Ended
Operating
Revenues
Operating
Income (Loss)
2014
March 31
June 30
September 30
December 31
$ 30,818
31,483
31,586
33,192
$ 7,160
7,685
6,890
(2,136)
$ 3,947
4,214
3,695
(2,231)
$
1.15
1.02
.89
(.54)
$
1.15
1.01
.89
(.54)
$ 5,986
4,324
3,794
(2,148)
2013
March 31
June 30
September 30
December 31
$ 29,420
29,786
30,279
31,065
$
$
$
.68
.78
.78
1.77
$
.68
.78
.78
1.76
$
6,222
6,555
7,128
12,063
1,952
2,246
2,232
5,067
Net Income
(Loss)
4,855
5,198
5,578
7,916
• Results of operations for the first quarter of 2014 include after-tax-credits attributable to Verizon of $1.9 billion related to the sale of its entire ownership interest in Vodafone Omnitel, as well as
after-tax costs attributable to Verizon of $0.6 billion related to early debt redemptions and $0.3 billion related to the Wireless Transaction.
• Results of operations for the second quarter of 2014 include after-tax credits attributable to Verizon of $0.4 billion related to a gain on spectrum license transactions.
• Results of operations for the fourth quarter of 2014 include after-tax charges attributable to Verizon of $4.7 billion related to severance, pension and benefit charges, as well as after-tax costs
attributable to Verizon of $0.5 billion related to early debt redemption and other costs.
• Results of operations for the second quarter of 2013 include after-tax credits attributable to Verizon of $0.1 billion related to a pension remeasurement.
• Results of operations for the third quarter of 2013 include immaterial after-tax credits attributable to Verizon related to a gain on a spectrum license transaction, as well as immaterial after-tax
costs attributable to Verizon related to the Wireless Transaction.
• Results of operations for the fourth quarter of 2013 include after-tax credits attributable to Verizon of $3.7 billion related to severance, pension and benefit credits, as well as after-tax costs
attributable to Verizon of $0.5 billion related to the Wireless Transaction.
(1)Net income (loss) attributable to Verizon per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount.
75
Board of
Directors *
Shellye L. Archambeau
Chief Executive Officer
MetricStream, Inc.
Mark T. Bertolini
Chairman and Chief Executive Officer
Aetna Inc.
Richard L. Carrión
Chairman and Chief Executive Officer
Popular, Inc.
and Chairman and Chief Executive Officer
Banco Popular de Puerto Rico
Melanie L. Healey
Group President and Advisor to the Chairman and
Chief Executive Officer
The Procter & Gamble Company
M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc
Lowell C. McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
Donald T. Nicolaisen
Former Chief Accountant
United States Securities and Exchange Commission
Clarence Otis, Jr.
Former Chairman and Chief Executive Officer
Darden Restaurants, Inc.
Corporate Officers and
Executive Leadership
Lowell C. McAdam
Chairman and Chief Executive Officer
Francis J. Shammo
Executive Vice President and
Chief Financial Officer
Roy H. Chestnutt
Executive Vice President –
Strategy, Development and Planning
Matthew D. Ellis
Senior Vice President and Treasurer
James J. Gerace
Chief Communications Officer
Roger Gurnani
Executive Vice President and
Chief Information and Technology Architect
William L. Horton, Jr.
Senior Vice President, Deputy General Counsel and
Corporate Secretary
Daniel S. Mead
Executive Vice President and
President of Strategic Initiatives
Marc C. Reed
Executive Vice President and
Chief Administrative Officer
Shane A. Sanders
Senior Vice President – Internal Auditing
Rodney E. Slater
Partner
Squire Patton Boggs LLP
Diego Scotti
Executive Vice President and
Chief Marketing Officer
Kathryn A. Tesija
Executive Vice President and Chief Merchandising
and Supply Chain Officer
Target Corporation
Craig L. Silliman
Executive Vice President – Public Policy and
General Counsel
Gregory D. Wasson
Former President and Chief Executive Officer
Walgreens Boots Alliance, Inc.
Anthony T. Skiadas
Senior Vice President and Controller
John G. Stratton
Executive Vice President and
President of Operations
Marni M. Walden
Executive Vice President and President of
Product Innovation and New Businesses
* Directors standing for election at the May 2015
Annual Meeting
76
v e r i zo n co m m u n i c at i o n s i n c . 2 0 1 4 a n n ua l r e p o r t
Investor Information
Stock Transfer Agent
Questions or requests for assistance regarding changes to or transfers
of your registered stock ownership should be directed to our Transfer
Agent, Computershare Trust Company, N.A. at:
Verizon Communications Inc.
c/o Computershare
P.O. Box 43078
Providence, RI 02940-3078
Phone: 800 631-2355
781 575-3994 — outside the U.S.
Website: www.computershare.com/verizon
Email: [email protected]
Persons using a telecommunications device for the deaf (TDD) may call:
800 952-9245
Shareowner Services
Please contact our Transfer Agent regarding information on the
following services:
Online Account Access — Registered shareowners can view account
information online at: www.computershare.com/verizon
Click on “Create Login” to register. For existing users, click on “Login.”
Direct Dividend Deposit Service — Verizon offers an electronic funds
transfer service to registered shareowners wishing to deposit dividends
directly into savings or checking accounts on dividend payment dates.
Direct Invest Stock Purchase and Ownership Plan — Verizon offers
a direct stock purchase and share ownership plan. The plan allows
current and new investors to purchase common stock and to reinvest
the dividends toward the purchase of additional shares. For more
information, go to www.verizon.com/about/stock-transfer-agent
Electronic Delivery — By receiving links to proxy, annual report and
shareowner materials online, you can help Verizon reduce the amount
of materials we print and mail. As a thank you for choosing electronic
delivery, Verizon will plant a tree on your behalf. It’s fast and easy, and
you can change your electronic delivery options at any time. Sign up
at www.eTree.com/verizon. If your shares are held by a broker, bank
or other nominee, you may elect to receive an electronic copy of the
annual report and proxy materials online at www.proxyvote.com, or you
can contact your broker.
Corporate Sponsored Nominee
If you hold shares of Verizon stock in the form of CDIs through the
Verizon Corporate Sponsored Nominee (applicable only to shareholders
in the UK, Ireland and other permitted jurisdictions in Europe), questions
or requests for assistance should be directed to Computershare
Company Nominee Limited at:
Verizon Communications Inc.
c/o Computershare
The Pavilions
Bridgwater Road
Bristol
BS99 6ZZ
Phone: +44 (0)870 707 1739 (UK & Overseas)
+00 353 1 696 8421 (Ireland)
Website: www.investorcentre.co.uk
Investor Services
Investor Website — Get company information and news on our
investor website — www.verizon.com/about/investors
Email Alerts — Get the latest investor information delivered directly to
you. Subscribe to Email alerts at our investor website.
Stock Market Information
Shareowners of record at December 31, 2014: 664,218
Verizon (ticker symbol: VZ) is listed on the New York Stock Exchange
(NYSE) and the NASDAQ Global Select Market (NASDAQ). Verizon
also maintains a standard listing on the London Stock Exchange.
Dividend Information
At its September 2014 meeting, the Board of Directors increased
our quarterly dividend 3.8 percent. On an annual basis, this increased
Verizon’s dividend to $2.20 per share. Dividends have been paid
since 1984.
Form 10-K
To receive a printed copy of the 2014 Annual Report on Form 10-K,
which is filed with the Securities and Exchange Commission, please
contact Investor Relations:
Verizon Communications Inc.
Investor Relations
One Verizon Way
Basking Ridge, NJ 07920
Phone: 212 395-1525
Corporate Governance Statement
Verizon is subject to the corporate governance standards of the
NYSE and NASDAQ, which are available on their respective websites.
In addition, Verizon has adopted its own corporate governance
framework. Information relating to Verizon's corporate governance
framework, including Verizon's Code of Conduct, Corporate Governance
Guidelines and the charters of the Committees of its Board of Directors,
can be found on Verizon's website at: www.verizon.com/investor/
corporategovernance. Verizon believes it is in compliance with the
applicable corporate governance requirements in the United States,
including under Delaware law, the corporate governance standards of
the NYSE and NASDAQ, and U.S. federal securities laws.
If you would like to receive a printed copy of Verizon’s Corporate
Governance Guidelines, please contact the Assistant Corporate
Secretary:
Verizon Communications Inc.
Assistant Corporate Secretary
1095 Avenue of the Americas
New York, NY 10036
Printed with
inks containing
soy and/or
vegetable oils
Verizon Communications Inc.
1095 Avenue of the Americas
New York, New York 10036
212 395-1000
verizon.com
© 2015. Verizon. All Rights Reserved.
002CSN49B3
3.EPCP74448125.101
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