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2015
Annual
Report

Table of contents

  • Page 1
    2015 Annual Report

  • Page 2
    ... truth: the digital world has made consumers a promise of a better, more connected life, and we're the ones delivering it. We help make businesses better partners for their customers. We help students explore worlds beyond their classrooms. 2015 Annual Report www.verizon.com/2015AnnualReport

  • Page 3
    1 We deliver the promise of the digital world.

  • Page 4
    ...) Dividends declared per share $3.99 $3.35 $2.84 $2.09 $2.16 $2.23 2013 2014 2015 2013 2014 2015 Corporate highlights $21.2 billion in free cash flow (non-GAAP) 3.6% growth in operating revenues 2.7% annual dividend increase 112.1 million wireless retail connections 4.0 million wireless...

  • Page 5
    ... customer greenhouse gas emissions equivalent to taking more than one million cars off the road. American Business Act on Climate Pledge Climate pledge We signed on to support clean energy, reduce waste and minimize our environmental footprint. www.verizon.com/2015AnnualReport 2015 Annual Report

  • Page 6
    ... our high-speed Fios Quantum service. This steady demand for mobile and consumer broadband fueled our revenue growth in 2015. Total operating revenues were $131.6 billion, an increase of 3.6 percent over 2014. Most important, as video, music and commerce all migrate to mobile and digital platforms...

  • Page 7
    ... traditional customers when it comes to managing their digital Wireless retail connections (in millions) 4G LTE devices (in millions) $81.0 $87.6 $91.7 102.8 108.2 112.1 67.4 84.4 42.7 2013 2014 2015 2013 2014 2015 2013 2014 2015 www.verizon.com/2015AnnualReport 2015 Annual Report

  • Page 8
    ... us online. We listened to customers' frustration with the 300-channel bundle of TV stations that bloat the traditional cable package and introduced a smaller bundle called Custom TV that now accounts for about one-third of Fios Video sales. We simplified complicated wireless price plans and data...

  • Page 9
    ... these platforms Fios Internet subscribers (in millions) Fios Video subscribers (in millions) Wireline consumer retail revenue (in billions) 6.1 6.6 7.0 5.3 5.6 5.8 $14.8 $15.6 $16.1 2013 2014 2015 2013 2014 2015 2013 2014 2015 www.verizon.com/2015AnnualReport 2015 Annual Report

  • Page 10
    ... the business forward. Our strong cash flows support consistent investment in networks and a record of dividend increases that now stands at nine consecutive years. Lowell McAdam Chairman and Chief Executive Officer Verizon Communications Inc. 2015 Annual Report www.verizon.com/2015AnnualReport

  • Page 11
    ... Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index $200 $180 $160 $140 $120 $100 $80 $60 Dollars Verizon S&P 500 Telecom Services S&P 500 2010 2011 2012 2013 2014 2015 At December 31, Data Points in Dollars 2010 2011 2012 2013 2014 2015...

  • Page 12
    ... 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...

  • Page 13
    ... to build our Wireline segment around data, video and advanced business services - areas where demand for reliable high-speed connections is growing. The decrease in revenues in our Wireline segment was partially offset by revenue increases in Consumer retail driven by Fios. During the year ended...

  • Page 14
    ... over unused data allowances to the next billing period. Furthermore, some wireless service providers offer price plans to new customers that undercut pricing under the customer's service plan with its current wireless provider. Some wireless providers also offer promotional pricing and incentives...

  • Page 15
    ... Our 2016 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...

  • Page 16
    14 Verizon Communications Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations continued Consolidated Revenues (dollars in millions) Years Ended December 31, 2015 2014 2013 2015 vs. 2014 Increase/(Decrease) 2014 vs. 2013 Wireless Service ...

  • Page 17
    ... voice revenues. During 2014, we also experienced a decline in domestic wholesale connections. Consolidated Operating Expenses (dollars in millions) Years Ended December 31, 2015 2014 2013 2015 vs. 2014 Increase/(Decrease) 2014 vs. 2013 Cost of services Wireless cost of equipment Selling, general...

  • Page 18
    ...) Years Ended December 31, 2015 2014 2013 Severance, Pension and Benefit (Credits) Charges Selling, general and administrative expense $ (2,256) Gain on Spectrum License Transactions Selling, general and administrative expense (254) Other Costs Cost of services and sales - Selling, general and...

  • Page 19
    ... in 2014 (see "Other Items"). Interest Expense (dollars in millions) Years Ended December 31, 2015 2014 2013 2015 vs. 2014 Increase/(Decrease) 2014 vs. 2013 Total interest costs on debt balances Less capitalized interest costs Total Average debt outstanding Effective interest rate $ $ 5,504...

  • Page 20
    18 Verizon Communications Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations continued Provision for Income Taxes (dollars in millions) Years Ended December 31, 2015 2014 2013 2015 vs. 2014 Increase/(Decrease) 2014 vs. 2013 Provision for ...

  • Page 21
    ... 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 Years Ended December 31, 2015 2014 2013 2015 vs. 2014 (dollars in millions, except ARPA) Increase...

  • Page 22
    ... shared data plans. Service revenue plus recurring device installment billings related to the Verizon device payment program increased 2.0% during 2015. Retail postpaid ARPA (the average revenue per account from retail postpaid accounts), which does not include recurring device installment billings...

  • Page 23
    ... traditional fixed-term service plans and the Verizon device payment program. Operating Expenses (dollars in millions) Years Ended December 31, 2015 2014 2013 2015 vs. 2014 Increase/(Decrease) 2014 vs. 2013 Cost of services Cost of equipment Selling, general and administrative expense Depreciation...

  • Page 24
    ...) Years Ended December 31, 2015 2014 2013 2015 vs. 2014 Increase/(Decrease) 2014 vs. 2013 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...

  • Page 25
    ... provide broadband Internet and video services (including high-speed 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. 2015 Compared to 2014...

  • Page 26
    ... Communications Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations continued Operating Expenses (dollars in millions) Years Ended December 31, 2015 2014 2013 2015 vs. 2014 Increase/(Decrease) 2014 vs. 2013 Cost of services Selling, general...

  • Page 27
    ... of this non-cash exchange, we received $0.4 billion of AWS and PCS spectrum licenses at fair value and we recorded a pre-tax gain of approximately $0.3 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2015. During the...

  • Page 28
    ...bank lines of credit, vendor financing arrangements, issuances of registered debt or equity securities and privately- placed capital market securities. In addition, in 2015, we established an active program to sell selected device installment plan receivables under the Verizon device payment program...

  • Page 29
    ... of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of our networks. Capital expenditures, including capitalized software, were as follows: (dollars in millions) Years Ended December 31, 2015 2014 2013 Wireless...

  • Page 30
    ... negotiated transactions, tender offers, exchange offers, or otherwise, upon such terms and at such prices as Verizon may from time to time determine for cash or other consideration. Other, net Other, net financing activities during 2015, include $2.7 billion of cash proceeds received related to the...

  • Page 31
    ... in free cash flow during 2015, 2014 and 2013 were a result of the factors described in connection with net cash provided by operating activities and capital expenditures. During 2015, we received $5.9 billion of cash proceeds, net of remittances, related to the sale of wireless device installment...

  • Page 32
    ...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...

  • Page 33
    ...summarizes the fair values of our long-term debt, including current maturities, and interest rate swap derivatives as of December 31, 2015 and 2014. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point upward and downward...

  • Page 34
    ... 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...

  • Page 35
    ... date. These individual spot rates align with the timing of each future cash outflow for benefit payments and therefore provide a more precise estimate of interest cost. This change in accounting estimate does not affect the measurement of our total benefit obligations at year end or our annual...

  • Page 36
    ... 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...

  • Page 37
    ...properties plus a digital advertising platform enhances our ability to further develop future revenue streams. See Note 2 to the consolidated financial statements for additional information. Other On September 3, 2015, AOL announced an agreement to acquire an advertising technology business for cash...

  • Page 38
    ... audited Verizon Communications Inc. and subsidiaries' (Verizon) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework...

  • Page 39
    ... respects, the consolidated financial position of Verizon at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. We also...

  • Page 40
    38 Verizon Communications Inc. and Subsidiaries Consolidated Statements of Income (dollars in millions, except per share amounts) Years Ended December 31, Operating Revenues Service revenues and other Wireless equipment revenues Total Operating Revenues Operating Expenses Cost of services (...

  • Page 41
    ... Statements of Comprehensive Income (dollars in millions) Years Ended December 31, Net Income Other Comprehensive Income, net of taxes Foreign currency translation adjustments Unrealized gains (losses) on cash flow hedges Unrealized gains (losses) on marketable securities Defined benefit...

  • Page 42
    ... Other Total current liabilities Long-term debt Employee benefit obligations Deferred income taxes Non-current liabilities related to assets held for sale Other liabilities Equity Series preferred stock ($.10 par value; none issued) Common stock ($.10 par value; 4,242,374,240 shares issued in each...

  • Page 43
    ... to net cash provided by operating activities: Depreciation and amortization expense Employee retirement benefits Deferred income taxes Provision for uncollectible accounts Equity in losses (earnings) of unconsolidated businesses, net of dividends received Changes in current assets and liabilities...

  • Page 44
    ...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 Treasury Stock Balance at beginning of year Shares purchased Employee plans (Note 15...

  • Page 45
    ... device payment program (formerly known as Verizon Edge), our eligible wireless customers purchase phones or tablets at unsubsidized prices on an installment basis (a device installment plan). Certain devices are subject to promotions that allow customers to upgrade to a new device after paying down...

  • Page 46
    ...-based compensation plans. There were a total of approximately 8 million, 7 million and 8 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, 2015, 2014 and 2013...

  • Page 47
    ... in 2015 and 2014, respectively. 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. Computer Software Costs We capitalize the cost of internal-use network and non- network software...

  • Page 48
    ... 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...

  • Page 49
    ... on our consolidated financial statements. In June 2014, an accounting standard update was issued related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The standard update requires that...

  • Page 50
    ... 21, 2014. The eight-year Verizon notes bear interest at a floating rate equal to three-month London Interbank 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...

  • Page 51
    ...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...

  • Page 52
    ... 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...

  • Page 53
    ... year ended December 31, 2015. Other On September 3, 2015, AOL announced an agreement to acquire an advertising technology business for cash consideration that was not significant. The transaction was completed in October 2015. On October 7, 2014, Redbox Instant by Verizon, a venture between Verizon...

  • Page 54
    ... balance sheet at December 31, 2015 as a result of our agreement to sell our local exchange business and related landline activities in California, Florida and Texas to Frontier (see Note 2 for additional details). The amount of Goodwill reclassified was based on a relative fair value basis.

  • Page 55
    ...reflected in the table below. Summarized financial information for our equity investees in 2013 is as follows: Income Statement (dollars in millions) Years Ended December 31, 2013 Land Buildings and equipment Central office and other network equipment Cable, poles and conduit Leasehold improvements...

  • Page 56
    ... December 31, Leveraged Leases Direct Finance Leases 2015 Leveraged Leases Direct Finance Leases 2014 Total Total Minimum lease payments receivable Estimated residual value Unearned income Total Allowance for doubtful accounts Finance lease receivables, net Prepaid expenses and other Other assets...

  • Page 57
    ... and equipment, net. See Note 2 for additional information. 2016 2017 2018 2019 2020 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, 2015 $ $ 302 278 187 97 45 159...

  • Page 58
    ... facility for the issuance of letters of credit and for general corporate purposes. Long-Term Debt Outstanding long-term debt obligations are as follows: (dollars in millions) At December 31, Interest Rates % Maturities 2015 2014 Verizon Communications - notes payable and other 0.30 - 3.85 4.15...

  • Page 59
    ... by Verizon and GTE Corporation (collectively, the Old Notes) for new Notes to be issued by Verizon (the New Notes) and, in the case of the 6.94% debentures due 2028 of GTE Corporation, cash. The February Exchange Offers have been accounted for as a modification of debt. On March 13, 2015, Verizon...

  • Page 60
    ...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...

  • Page 61
    ... 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...

  • Page 62
    60 Verizon Communications Inc. and Subsidiaries Notes to Consolidated Financial Statements continued The table below lists the series of Old Notes included in the July Exchange Offers for the 2054 New Notes: Interest Rate Principal Amount Outstanding Principal Amount Accepted For Exchange (dollars...

  • Page 63
    ... installment plan). Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under our fixed-term service plans, and their installment charge is included in their standard wireless monthly bill. As of December 31, 2015 and 2014...

  • Page 64
    ... our consolidated financial statements. Deferred Purchase Price Under both the RPA and the Revolving Program, the deferred purchase price was initially recorded at fair value, based on the remaining installment amounts expected to be collected, adjusted, as applicable, for the time value of money...

  • Page 65
    ... and future cash flows discounted at current rates, which are Level 2 measurements. The fair value of our short-term and long-term debt, excluding capital leases, was as follows: (dollars in millions) At December 31, Carrying Amount 2015 Fair Value Carrying Amount 2014 Fair Value Short- and long...

  • Page 66
    ... and $0.4 billion for 2015, 2014 and 2013, 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...

  • Page 67
    Verizon Communications Inc. and Subsidiaries 65 Notes to Consolidated Financial Statements continued Obligations and Funded Status (dollars in millions) At December 31, 2015 Pension 2014 2015 Health Care and Life 2014 Change in Benefit Obligations Beginning of year Service cost Interest cost Plan ...

  • Page 68
    ...the benefit (income) cost related to our pension and postretirement health care and life insurance plans: (dollars in millions) Years Ended December 31, 2015 2014 Pension 2013 2015 Health Care and Life 2014 2013 Service cost Amortization of prior service cost (credit) Expected return on plan assets...

  • Page 69
    ... investment area in the trust's long-term asset allocation policy. The assumed health care cost trend rates follow: At December 31, Health Care and Life 2015 2014 2013 management approaches are used depending on perceived market efficiencies and various other factors. Due to our diversification and...

  • Page 70
    68 Verizon Communications Inc. and Subsidiaries Notes to Consolidated Financial Statements continued Health Care and Life Plans The fair values for the other postretirement benefit plans by asset category at December 31, 2015 are as follows: (dollars in millions) Asset Category Total Level 1 Level ...

  • Page 71
    ... benefits: (dollars in millions) Year Beginning of Year Charged to Expense Payments Other End of Year During 2013, we recorded net pre-tax severance, pension and benefit credits of approximately $6.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy...

  • Page 72
    ..., pension and benefit credits recorded in 2013. The amounts of cash taxes paid are as follows: (dollars in millions) Years Ended December 31, 2015 2014 2013 During 2015, the valuation allowance increased approximately $1.6 billion primarily as a result of the acquisition of AOL. The balance...

  • Page 73
    ...are provided to consumer, business and government customers across the United States. Wireline's voice, data and video communications products and enhanced services include broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services...

  • Page 74
    72 Verizon Communications Inc. and Subsidiaries Notes to Consolidated Financial Statements continued (dollars in millions) 2014 Wireless Wireline Total Segments External Operating Revenues Service revenue Equipment Other Consumer retail Small business Mass Markets Strategic services Core Global ...

  • Page 75
    ... taxes is as follows: (dollars in millions) Years Ended December 31, 2015 2014 2013 We generally account for intersegment sales of products and services and asset transfers at arm's length prices. No single customer accounted for more than 10% of our total operating revenues during the years ended...

  • Page 76
    ...that follow provide additional financial information related to our consolidated financial statements: Income Statement Information (dollars in millions) Years Ended December 31, 2015 2014 2013 Depreciation expense Interest costs on debt balances Capitalized interest costs Advertising expense $ 14...

  • Page 77
    ... based on number of subscribers at December 31, 2015, and applicable rates stipulated in the contracts in effect at that time. We also purchase products and services as needed with no firm commitment. Note 17 Quarterly Financial Information (Unaudited) (dollars in millions, except per share...

  • Page 78
    ... and Planning 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 2015 Annual Report www.verizon.com/2015AnnualReport

  • Page 79
    ....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, 2015: 602,700 Verizon (ticker symbol: VZ) is listed on the New York Stock Exchange...

  • Page 80
    Verizon Communications Inc. 1095 Avenue of the Americas New York, New York 10036 212 395-1000 verizon.com/about © 2016. Verizon. All Rights Reserved. 002CSN622B 3.EPCP90276283RD