EXHIBIT 13

Selected Financial Data Verizon Communications Inc. and Subsidiaries
 
(dollars in millions, except per share amounts)
 
 
2019

 
2018

 
2017

 
2016

 
2015

Results of Operations
 
 
 
 
 
 
 
 
 
Operating revenues
$
131,868

 
$
130,863

 
$
126,034

 
$
125,980

 
$
131,620

Operating income
30,378

 
22,278

 
27,425

 
29,249

 
30,615

Net income attributable to Verizon
19,265

 
15,528

 
30,101

 
13,127

 
17,879

Per common share – basic
4.66

 
3.76

 
7.37

 
3.22

 
4.38

Per common share – diluted
4.65

 
3.76

 
7.36

 
3.21

 
4.37

Cash dividends declared per common share
2.435

 
2.385

 
2.335

 
2.285

 
2.230

Net income attributable to noncontrolling interests
523

 
511

 
449

 
481

 
496

 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
Total assets
$
291,727

 
$
264,829

 
$
257,143

 
$
244,180

 
$
244,175

Debt maturing within one year
10,777

 
7,190

 
3,453

 
2,645

 
6,489

Long-term debt
100,712

 
105,873

 
113,642

 
105,433

 
103,240

Employee benefit obligations
17,952

 
18,599

 
22,112

 
26,166

 
29,957

Noncontrolling interests
1,440

 
1,565

 
1,591

 
1,508

 
1,414

Equity attributable to Verizon
61,395

 
53,145

 
43,096

 
22,524

 
16,428

Significant events affecting our historical earnings trends in 2018 through 2019 are described in "Special Items" in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section.
2017 data includes severance, pension and benefit charges, gain on spectrum license transactions, acquisition and integration related charges, product realignment charges, net gain on sale of divested businesses and early debt redemption costs. 2016 data includes severance, pension and benefit charges, gain on spectrum license transactions, net gain on sale of divested businesses and early debt redemption costs. 2015 data includes severance, pension and benefit credits and gain on spectrum license transactions.
On January 1, 2019, we adopted several Accounting Standards Updates (ASUs) that were issued by the Financial Accounting Standards Board (FASB) using the modified retrospective basis. On January 1, 2018, we adopted several ASUs that were issued by the FASB. These standards were adopted on different bases, including: (1) prospective; (2) full retrospective; and (3) modified retrospective. Based on the method of adoption, certain figures are not comparable, with full retrospective reflected in all periods. See Note 1 to the consolidated financial statements for additional information.
Stock Performance Graph
stockperformancegraph2019.jpg
 
2014

2015

2016

2017

2018

2019

Verizon
$
100.0

$
103.6

$
125.1

$
130.1

$
144.7

$
164.8

S&P 500
100.0

103.4

127.7

126.1

110.3

146.3

S&P 500 Telecom Services
100.0

101.4

113.5

138.3

132.2

173.8

The graph compares the cumulative total returns of Verizon, the S&P 500 Stock Index and the S&P 500 Telecommunications Services Index over a five-year period. It assumes $100 was invested on December 31, 2014 with dividends being reinvested.





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 government entities. With a presence around the world, we offer voice, data and video services and solutions on our networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security and control. We have a highly diverse workforce of approximately 135,000 employees as of December 31, 2019.

To compete effectively in today’s dynamic marketplace, we are focused on the capabilities of our high-performing networks to drive growth based on delivering what customers want and need in the new digital world. During 2019, we focused on leveraging our network leadership; retaining and growing our high-quality customer base while balancing profitability; enhancing ecosystems in growth businesses; and driving monetization of our networks and solutions. We are creating business value by earning customers', employees' and shareholders' trust, limiting our environmental impact and continuing our customer growth while creating social benefit through our products and services. Our strategy requires significant capital investments primarily to acquire wireless spectrum, put the spectrum into service, provide additional capacity for growth in our networks, invest in the fiber that supports our businesses, evolve and maintain our networks and develop and maintain significant advanced information technology systems and data system capabilities. We believe that steady and consistent investments in our networks and platforms will drive innovative products and services and fuel our growth.

We are consistently deploying new network architecture and technologies to extend our leadership in both fourth-generation (4G) and fifth-generation (5G) wireless networks. We expect that our next-generation multi-use platform, which we call the Intelligent Edge Network, will simplify operations by eliminating legacy network elements, improve 4G Long-Term Evolution (LTE) wireless coverage, speed the deployment of 5G wireless technology and create new opportunities in the business market. Our network leadership is the hallmark of our brand and the foundation for the connectivity, platform and solutions upon which we build our competitive advantage.

Highlights of Our 2019 Financial Results
(dollars in millions)
chart-operatingrevenue2019.jpgchart-operatingincome2019.jpgchart-netincome2019.jpgchart-cashflowsfromops2019.jpgchart-capex2019.jpg





Business Overview
In November 2018, we announced a strategic reorganization of our business. Under the new structure, effective April 1, 2019, there are two reportable segments that we operate and manage as strategic business units - Verizon Consumer Group (Consumer) and Verizon Business Group (Business).

Revenue by Segment
chart-revbysegment2019.jpgchart-revbysegment2018.jpg
infographiclegend.jpg
———
Note: Excludes eliminations.

Verizon Consumer Group
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States (U.S.) under the Verizon brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network under the Fios brand and over a traditional copper-based network to customers who are not served by Fios. Our Consumer segment's wireless and wireline products and services are available to our retail customers, as well as resellers that purchase wireless network access from us on a wholesale basis.

Customers can obtain our wireless services on a postpaid or prepaid basis. A retail postpaid connection represents an individual line of service for a wireless device for which a customer is generally billed one month in advance for a monthly access charge in return for access to and usage of network services. Our prepaid service is offered only to Consumer customers and enables individuals to obtain wireless services without credit verification by paying for all services in advance. The Consumer segment also offers several categories of wireless equipment to customers, including a variety of smartphones and other handsets, wireless-enabled Internet devices, such as tablets, laptop computers and netbooks, and other wireless-enabled connected devices, such as smart watches and other wearables.

In addition to the wireless services and equipment discussed above, Consumer sells residential fixed connectivity solutions, including Internet, video and voice services, and wireless network access to resellers on a wholesale basis. The Consumer segment's operating revenues for the year ended December 31, 2019 totaled $91.1 billion, an increase of $1.3 billion, or 1.4%, compared to the year ended December 31, 2018. As of December 31, 2019, Consumer had approximately 95 million wireless retail connections, 6 million broadband connections and 4 million Fios video connections.

Verizon Business Group
Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things (IoT) services and products, including solutions that support fleet tracking management, compliance management, field service management, asset tracking and other types of mobile resource management. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world. The Business segment's operating revenues for the year ended December 31, 2019 totaled $31.4 billion, a decrease of $91 million, or 0.3%, compared to the year ended December 31, 2018. As of December 31, 2019, Business had approximately 25 million wireless retail postpaid connections and 489 thousand broadband connections.

Corporate and Other
Corporate and other includes the results of our media business, Verizon Media, and other businesses, investments in unconsolidated businesses, insurance captives, unallocated corporate expenses, certain pension and other employee benefit related costs and interest and financing expenses. Corporate and other also includes the historical results of divested businesses and other adjustments and gains and losses that are not allocated in assessing segment performance due to their nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses from transactions that are not individually significant are included in segment results as these items are included in the chief operating decision maker’s assessment of segment performance.






Verizon Media includes diverse media and technology brands that serve both consumers and businesses. Verizon Media provides consumers with owned and operated and third-party search properties as well as mail, news, finance, sports and entertainment offerings, and provides other businesses and partners access to consumers through digital advertising, content delivery and video streaming platforms. Verizon Media's total operating revenues were $7.5 billion for the year ended December 31, 2019. This was a decrease of 3.0% from the year ended December 31, 2018.

Capital Expenditures and Investments
We continue to invest in our wireless networks, high-speed fiber and other advanced technologies to position ourselves at the center of growth trends for the future. During the year ended December 31, 2019, these investments included $17.9 billion for capital expenditures. See "Cash Flows Used in Investing Activities" and "Operating Environment and Trends" for additional information. We believe that our investments aimed at expanding our portfolio of products and services will provide our customers with an efficient, reliable infrastructure for competing in the information economy.

Global Network and Technology
We are focusing our capital spending on adding capacity and density to our 4G LTE network, while also building our next generation 5G network. We are densifying our network by utilizing small cell technology, in-building solutions and distributed antenna systems. Network densification enables us to add capacity to address increasing mobile video consumption and the growing demand for IoT products and services on our 4G LTE and 5G networks. Over the past several years, we have been leading the development of 5G wireless technology industry standards and the ecosystems for fixed and mobile 5G wireless services. We believe 5G technology will be able to provide users with eight capabilities, or currencies. The eight currencies are peak data rates, mobile data volumes, mobility, number of connected devices, energy efficiency of connected devices, service deployment, reduced latency and improved reliability. We expect that 5G technology will provide higher throughput and lower latency than the current 4G LTE technology and enable our networks to handle more traffic as the number of Internet-connected devices grows. During 2018, we commercially launched 5G Home on proprietary standards in four U.S. markets and on global standards in a fifth U.S. market in 2019. We also launched our 5G Ultra Wideband Network in 31 U.S. markets in 2019, as well as several 5G-compatible smartphones.

To compensate for the shrinking market for traditional copper-based products, we continue to build our wireline business around fiber-based networks supporting data, video and advanced business services - areas where demand for reliable high-speed connections is growing. We are evolving the architecture of our networks to a next-generation multi-use platform, providing improved efficiency and virtualization, increased automation and opportunities for edge computing services that will support both our fiber-based and radio access network technologies. We call this the Intelligent Edge Network. We expect that this new architecture will simplify operations by eliminating legacy network elements, improve our 4G LTE wireless coverage, speed the deployment of 5G wireless technology and create new opportunities in the business market.

Recent Developments
In 2019, the Federal Communications Commission (FCC) completed two millimeter wave spectrum license auctions. Verizon participated in these auctions and was the high bidder on 9 and 1,066 licenses, respectively, in the 24 Gigahertz (GHz) and 28 GHz bands. We submitted an application to the FCC and paid cash of approximately $521 million for the licenses. We received the licenses during the fourth quarter of 2019.

In December 2019, the FCC incentive auction for spectrum licenses in the upper 37 GHz, 39 GHz, and 47 GHz bands commenced. As an incumbent licensee, Verizon received vouchers related to our existing 39 GHz licenses. These vouchers can be converted into cash, the amount of which will not be known until the conclusion of the auction, or applied toward the purchase price of spectrum in the auction. At the conclusion of the auction, all existing licenses will be cancelled and new reconfigured licenses or cash will be distributed depending on the results of the auction. Due to the FCC's rules restricting communications regarding the auction, we will not disclose our financial plans for the auction during the quiet period for this auction unless legally required. In addition, as of this time, until the completion of the auction process, we cannot determine the resulting financial outcome, including a potential gain or loss. Such gain or loss, if any, may be material. 

Consolidated Results of Operations
In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In "Segment Results of Operations," we review the performance of our two reportable segments in more detail. A detailed discussion of 2017 items and year-over-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2018 filed with our most recent financial statements and included in the Company's Current Report on Form 8-K dated August 8, 2019.

Consolidated Revenues
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Consumer
$
91,056

 
$
89,762

 
$
1,294

 
1.4
 %
Business
31,443

 
31,534

 
(91
)
 
(0.3
)
Corporate and other
9,812

 
9,936

 
(124
)
 
(1.2
)
Eliminations
(443
)
 
(369
)
 
(74
)
 
20.1

Consolidated Revenues
$
131,868

 
$
130,863

 
$
1,005

 
0.8







Consolidated revenues increased $1.0 billion, or 0.8%, during 2019 compared to 2018, primarily due to an increase in revenues at our Consumer segment, partially offset by decreases in revenues at our Business segment and Corporate and other.

Revenues for our segments are discussed separately below under the heading "Segment Results of Operations."

Corporate and other revenues decreased $124 million, or 1.2%, during 2019 compared to 2018, primarily due to a decrease of $232 million in revenues within Verizon Media.

Consolidated Operating Expenses
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Cost of services
$
31,772

 
$
32,185

 
$
(413
)
 
(1.3
)%
Cost of wireless equipment
22,954

 
23,323

 
(369
)
 
(1.6
)
Selling, general and administrative expense
29,896

 
31,083

 
(1,187
)
 
(3.8
)
Depreciation and amortization expense
16,682

 
17,403

 
(721
)
 
(4.1
)
Media goodwill impairment
186

 
4,591

 
(4,405
)
 
(95.9
)
Consolidated Operating Expenses
$
101,490

 
$
108,585

 
$
(7,095
)
 
(6.5
)

Operating expenses for our segments are discussed separately below under the heading "Segment Results of Operations."

Cost of Services
Cost of services includes the following costs directly attributable to a service: salaries and wages, benefits, materials and supplies, content costs, contracted services, network access and transport costs, customer provisioning costs, computer systems support, and costs to support our outsourcing contracts and technical facilities. Aggregate customer care costs, which include billing and service provisioning, are allocated between Cost of services and Selling, general and administrative expense.

Cost of services decreased $413 million, or 1.3%, during 2019 compared to 2018, primarily due to decreases in network access costs, a product realignment charge in 2018 (see "Special Items"), decreases in employee-related costs resulting from the Voluntary Separation Program and decreases in digital content costs. These decreases were partially offset by increases in rent expense as a result of adding capacity to the networks to support demand and the adoption of the new lease accounting standard in 2019, regulatory fees, and costs related to the device protection package offered to our wireless retail postpaid customers.

Cost of Wireless Equipment
Cost of wireless equipment decreased $369 million, or 1.6%, during 2019 compared to 2018, primarily as a result of declines in the number of wireless devices sold as a result of an elongation of the handset upgrade cycle, partially offset by a shift to higher priced devices in the mix of wireless devices sold.

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, call center and information technology costs, regulatory fees, professional service fees, and rent and utilities for administrative space. Also included is a portion of the aggregate customer care costs as discussed above in "Cost of Services."

Selling, general and administrative expense decreased $1.2 billion, or 3.8%, during 2019 compared to 2018, primarily due to decreases in employee-related costs primarily due to the Voluntary Separation Program, a decrease in severance, pension and benefits charges (see "Special Items"), the acquisition and integration related charges in 2018 primarily related to the acquisition of Yahoo's operating business (see "Special Items") and a net gain from dispositions of assets and businesses in 2019 (see "Special Items"), partially offset by increases in advertising expenses, sales commission and bad debt expense. The increase in sales commission expense during 2019 compared to 2018, was primarily due to a lower net deferral of commission costs as a result of the adoption of Topic 606 on January 1, 2018, using a modified retrospective approach.
 
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $721 million, or 4.1%, during 2019 compared to 2018, primarily due to the change in the mix of net depreciable assets.

Media Goodwill Impairment
The goodwill impairment charges recorded in 2019 and 2018 for Verizon Media were a result of the Company's annual impairment test performed in the fourth quarter (see "Critical Accounting Estimates").






Other Consolidated Results
Other Income (Expense), Net
Additional information relating to Other income (expense), net is as follows:
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Interest income
$
121

 
$
94

 
$
27

 
28.7
 %
Other components of net periodic benefit cost
627

 
3,068

 
(2,441
)
 
(79.6
)
Early debt extinguishment costs
(3,604
)
 
(725
)
 
(2,879
)
 
nm

Other, net
(44
)
 
(73
)
 
29

 
39.7

Total
$
(2,900
)
 
$
2,364

 
$
(5,264
)
 
nm


nm - not meaningful

The change in Other income (expense), net during the year ended December 31, 2019, compared to the similar period in 2018, was primarily driven by early debt redemption costs of $3.6 billion recorded during 2019, compared to $725 million recorded during 2018 (see "Special Items") as well as pension and benefit charges of $126 million recorded in 2019, compared with pension and benefit credits of $2.1 billion recorded in 2018 (see "Special Items").

Interest Expense
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Total interest costs on debt balances
$
5,386

 
$
5,573

 
$
(187
)
 
(3.4
)%
Less capitalized interest costs
656

 
740

 
(84
)
 
(11.4
)
Total
$
4,730

 
$
4,833

 
$
(103
)
 
(2.1
)
 
 
 
 
 
 
 
 
Average debt outstanding
$
112,901

 
$
115,858

 
 
 
 
Effective interest rate
4.8
%
 
4.8
%
 
 
 
 

Total interest costs on debt balances decreased during 2019 primarily due to lower average debt balances.

Provision for Income Taxes
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Provision for income taxes
$
2,945

 
$
3,584

 
$
(639
)
 
(17.8
)%
Effective income tax rate
13.0
%
 
18.3
%
 
 
 
 

The effective income tax rate is calculated by dividing the provision for income taxes by income before income taxes. The effective income tax rate for 2019 was 13.0% compared to 18.3% for 2018. The decrease in the effective income tax rate and the provision for income taxes was primarily due to the recognition of approximately $2.2 billion of a non-recurring tax benefit in connection with the disposition of preferred stock, representing a minority interest in a foreign affiliate in 2019 compared to the non-recurring deferred tax benefit of approximately $2.1 billion as a result of an internal reorganization of legal entities within the historical Wireless business, which was offset by a goodwill charge that is not deductible for tax purposes in 2018.

A reconciliation of the statutory federal income tax rate to the effective income tax rate for each period is included in Note 12 to the consolidated financial statements.

Consolidated Net Income, Consolidated EBITDA and Consolidated Adjusted EBITDA
Consolidated earnings before interest, taxes, depreciation and amortization expenses (Consolidated EBITDA) and Consolidated Adjusted EBITDA, which are presented below, are non-generally accepted accounting principles (GAAP) measures that we believe are useful to management, investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to Verizon’s competitors. Consolidated EBITDA is calculated by adding back interest, taxes, and depreciation and amortization expenses to net income.






Consolidated Adjusted EBITDA is calculated by excluding from Consolidated EBITDA the effect of the following non-operational items: equity in losses of unconsolidated businesses and other income and expense, net, as well as the effect of special items. We believe that this measure is useful to management, investors and other users of our financial information in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. We believe that Consolidated Adjusted EBITDA is widely used by investors to compare a company’s operating performance to its competitors by minimizing impacts caused by differences in capital structure, taxes and depreciation policies. Further, the exclusion of non-operational items and special items enables comparability to prior period performance and trend analysis. See "Special Items" for additional information.

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 non-GAAP 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. We believe that non-GAAP measures provide relevant and useful information, which is used by management, investors and other users of our financial information, as well as by our management in assessing both consolidated and segment performance. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be directly comparable to that of other companies.
 
(dollars in millions)
 
Years Ended December 31,
2019

 
2018

Consolidated Net Income
$
19,788

 
$
16,039

Add:
 
 
 
Provision for income taxes
2,945

 
3,584

Interest expense
4,730

 
4,833

Depreciation and amortization expense
16,682

 
17,403

Consolidated EBITDA
44,145

 
41,859

 
 
 
 
Add (Less):
 
 
 
Other (income) expense, net†
2,900

 
(2,364
)
Equity in losses of unconsolidated businesses‡
15

 
186

Severance charges
204

 
2,157

Acquisition and integration related charges§

 
531

Product realignment charges§

 
450

Impairment charges
186

 
4,591

Net gain from dispositions of assets and businesses
(261
)
 

Consolidated Adjusted EBITDA
$
47,189

 
$
47,410


† Includes Pension and benefits mark-to-market adjustments and early debt redemption costs, where applicable.
‡ Includes Product realignment charges and impairment charges, where applicable.
§ Excludes depreciation and amortization expense.

The changes in Consolidated Net 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.

Segment Results of Operations
We have two reportable segments that we operate and manage as strategic business units, Consumer and Business. 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.

To aid in the understanding of segment performance as it relates to segment operating income, we use the following operating statistics to evaluate the overall effectiveness of our segments:

Wireless retail connections are retail customer device postpaid and prepaid connections. Retail connections under an account may include those from smartphones and basic phones (collectively, phones) as well as tablets and other Internet devices, including wearables and retail IoT devices.

Wireless retail postpaid connections are retail postpaid customer device connections. Retail connections under an account may include those from phones, as well as tablets and other Internet devices, including wearables and retail IoT devices.

Fios Internet connections are the total number of connections to the Internet using Fios Internet services.

Fios video connections are the total number of connections to traditional linear video programming using Fios video services.

Broadband connections are the total number of connections to the Internet using Digital Subscriber Line (DSL) and Fios Internet services.






Voice connections are the total number of traditional switched access lines in service and Fios digital voice connections.

Wireless retail connections, net additions are the total number of additional retail customer device postpaid and prepaid connections, less the number of device disconnects within the current period.

Wireless retail postpaid connections, net additions are the total number of additional retail customer device postpaid connections, less the number of device disconnects within the current period.

Churn is the rate at which service to either retail or postpaid retail connections is terminated on a monthly basis.

Wireless retail postpaid ARPA is the calculated average service revenue per account (ARPA) from retail postpaid accounts, which does not include recurring device payment plan billings related to the Verizon device payment program, plan billings related to total mobile protection packages or regulatory fees.

Wireless retail postpaid accounts are retail customers that are directly served and managed under the Verizon brand and use its services. Accounts include unlimited plans, shared data 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.

Wireless 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.

Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income as a measure of operating performance. We believe this measure is useful to management, 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. Segment EBITDA margin is calculated by dividing Segment EBITDA by total segment operating revenues. You can find additional information about our segments in Note 13 to the consolidated financial statements.






Verizon Consumer Group
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States under the Verizon brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network under the Fios brand and over a traditional copper-based network to customers who are not served by Fios.

Operating Revenues and Selected Operating Statistics
 
 
 
 
(dollars in millions, except ARPA)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Service
$
65,383

 
$
64,223

 
$
1,160

 
1.8
 %
Wireless equipment
18,048

 
18,875

 
(827
)
 
(4.4
)
Other
7,625

 
6,664

 
961

 
14.4

Total Operating Revenues
$
91,056

 
$
89,762

 
$
1,294

 
1.4

 
 
 
 
 
 
 
 
Connections (‘000):(1)
 
 
 
 
 
 
 
Wireless retail connections
94,544

 
94,507

 
37

 

Wireless retail postpaid connections
90,481

 
89,861

 
620

 
0.7

Fios Internet connections
5,902

 
5,760

 
142

 
2.5

Fios video connections
4,152

 
4,377

 
(225
)
 
(5.1
)
Broadband connections
6,467

 
6,460

 
7

 
0.1

Voice connections
5,754

 
6,332

 
(578
)
 
(9.1
)
 
 
 
 
 
 
 
 
Net Additions in Period (‘000):(2)
 
 
 
 
 
 
 
Wireless retail
379

 
372

 
7

 
1.9

Wireless retail postpaid
970

 
1,129

 
(159
)
 
(14.1
)
Wireless retail postpaid phones
737

 
498

 
239

 
48.0

 
 
 
 
 
 
 
 
Churn Rate:
 
 
 
 
 
 
 
Wireless retail
1.28
%
 
1.25
%
 
 
 
 
Wireless retail postpaid
1.05
%
 
1.00
%
 
 
 
 
Wireless retail postpaid phones
0.79
%
 
0.76
%
 
 
 
 
 
 
 
 
 
 
 
 
Account Statistics:
 
 
 
 
 
 
 
Wireless retail postpaid ARPA
$
118.13

 
$
115.48

 
$
2.65

 
2.3

Wireless retail postpaid accounts (‘000)(1)
33,875

 
34,086

 
(211
)
 
(0.6
)
Wireless retail postpaid connections per account(1)
2.67

 
2.64

 
0.03

 
1.1


(1) 
As of end of period
(2) 
Excluding acquisitions and adjustments

Consumer's total operating revenues increased $1.3 billion, or 1.4%, during 2019 compared to 2018, primarily as a result of increases in Service and Other revenues, partially offset by a decrease in Wireless equipment revenue.

Service Revenue
Service revenue increased $1.2 billion, or 1.8%, during 2019 compared to 2018, primarily due to increases in wireless service and Fios revenues, partially offset by decreases in wireline voice and DSL services.

Wireless service revenue increased $1.3 billion, or 2.5%, during 2019 compared to 2018, due to increases in wireless access revenue, driven by customers shifting to higher access plans including unlimited plans and increases in the number of devices per account, the declining fixed-term subsidized plan base and growth from reseller accounts. Wireless retail postpaid ARPA increased 2.3%.

For the year ended December 31, 2019, Fios revenues totaled $10.4 billion and increased $92 million, or 0.9%, compared to 2018. This increase was due to a 2.5% increase in Fios Internet connections, reflecting increased demand in higher broadband speeds, partially offset by a 5.1% decrease in Fios video connections, reflecting the ongoing shift from traditional linear video to over-the-top (OTT) offerings.

Service revenue attributable to wireline voice and DSL broadband services declined during 2019, compared to 2018. The declines are primarily due to a decrease of 9.1% in voice connections resulting primarily from competition and technology substitution with wireless and competing Voice over Internet Protocol (VoIP) and cable telephony services.






Wireless Equipment Revenue
Wireless equipment revenue decreased $827 million, or 4.4%, during 2019 compared to 2018, as a result of declines in wireless device sales primarily due to an elongation of the handset upgrade cycle and increased promotions. These decreases were partially offset by a shift to higher priced units in the mix of wireless devices sold.

Other Revenue
Other revenue includes non-service revenues such as regulatory fees, cost recovery surcharges, revenues associated with our device protection package, leasing and interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent.

Other revenue increased $1.0 billion, or 14.4%, during 2019 compared to 2018, primarily due to pricing increases related to our wireless device protection plans, as well as regulatory fees.

Operating Expenses
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Cost of services
$
15,884

 
$
15,335

 
$
549

 
3.6
 %
Cost of wireless equipment
18,219

 
18,763

 
(544
)
 
(2.9
)
Selling, general and administrative expense
16,639

 
15,701

 
938

 
6.0

Depreciation and amortization expense
11,353

 
11,952

 
(599
)
 
(5.0
)
Total Operating Expenses
$
62,095

 
$
61,751

 
$
344

 
0.6


Cost of Services
Cost of services increased $549 million, or 3.6%, during 2019 compared to 2018, primarily due to increases in rent expense as a result of adding capacity to the networks to support demand as well as an increase due to the adoption of the new lease accounting standard in 2019, increases in costs related to the device protection package offered to our wireless retail postpaid customers, as well as regulatory fees. These increases were partially offset by decreases in employee-related costs primarily due to the Voluntary Separation Program, as well as decreases in access costs and roaming.

Cost of Wireless Equipment
Cost of wireless equipment decreased $544 million, or 2.9%, during 2019 compared to 2018, primarily as a result of declines in the number of wireless devices sold as a result of an elongation of the handset upgrade cycle. These decrease were partially offset by a shift to higher priced devices in the mix of wireless devices sold.

Selling, General and Administrative Expense
Selling, general and administrative expense increased $938 million, or 6.0%, during 2019 compared to 2018, primarily due to increases in sales commission and bad debt expense, and an increase in advertising costs. The increase in sales commission expense during 2019 compared to 2018 was primarily due to a lower net deferral of commission costs as a result of the adoption of Topic 606 on January 1, 2018 using a modified retrospective approach. These increases were partially offset by decreases in employee-related costs primarily due to the Voluntary Separation Program.

Depreciation and Amortization Expense
Depreciation and amortization expense decreased $599 million, or 5.0%, during 2019 compared to 2018, driven by the change in the mix of total Verizon depreciable assets and Consumer's usage of those assets.

Segment Operating Income and EBITDA
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Segment Operating Income
$
28,961

 
$
28,011

 
$
950

 
3.4
 %
Add Depreciation and amortization expense
11,353

 
11,952

 
(599
)
 
(5.0
)
Segment EBITDA
$
40,314

 
$
39,963

 
$
351

 
0.9

 
 
 
 
 
 
 
 
Segment operating income margin
31.8
%
 
31.2
%
 
 
 
 
Segment EBITDA margin
44.3
%
 
44.5
%
 
 
 
 






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.

Verizon Business Group
Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various IoT services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world. The Business segment is organized in four customer groups: Global Enterprise, Small and Medium Business, Public Sector and Other, and Wholesale.

Operating Revenues and Selected Operating Statistics
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Global Enterprise
$
10,818

 
$
11,201

 
$
(383
)
 
(3.4
)%
Small and Medium Business
11,464

 
10,752

 
712

 
6.6

Public Sector and Other
5,922

 
5,833

 
89

 
1.5

Wholesale
3,239

 
3,748

 
(509
)
 
(13.6
)
Total Operating Revenues(1)
$
31,443

 
$
31,534

 
$
(91
)
 
(0.3
)
 
 
 
 
 
 
 
 
Connections (‘000):(2)
 
 
 
 
 
 
 
Wireless retail postpaid connections
25,217

 
23,492

 
1,725

 
7.3

Fios Internet connections
326

 
307

 
19

 
6.2

Fios video connections
77

 
74

 
3

 
4.1

Broadband connections
489

 
501

 
(12
)
 
(2.4
)
Voice connections
4,959

 
5,400

 
(441
)
 
(8.2
)
 
 
 
 
 
 
 
 
Net Additions in Period ('000): (3)
 
 
 
 
 
 
 
Wireless retail postpaid
1,391

 
1,397

 
(6
)
 
(0.4
)
Wireless retail postpaid phones
698

 
625

 
73

 
11.7

 
 
 
 
 
 
 
 
Churn Rate:
 
 
 
 
 
 
 
Wireless retail postpaid
1.24
%
 
1.19
%
 
 
 
 
Wireless retail postpaid phones
0.99
%
 
0.98
%
 
 
 
 
(1) 
Service and other revenues included in our Business segment amounted to approximately $27.9 billion and $28.1 billion for the years ended December 31, 2019 and 2018, respectively. Wireless equipment revenues included in our Business segment amounted to approximately $3.5 billion and $3.4 billion for the years ended December 31, 2019 and 2018, respectively.
(2) 
As of end of period
(3) 
Includes certain adjustments

Business revenues decreased $91 million, or 0.3%, during 2019 compared to 2018, primarily due to decreases in Global Enterprise and Wholesale revenues, partially offset by increases in Small and Medium Business and Public Sector and Other revenues.

Global Enterprise
Global Enterprise offers services to large businesses, which are identified based on their size and volume of business with Verizon, as well as non-U.S. public sector customers.

Global Enterprise revenues decreased $383 million, or 3.4%, during 2019 compared to 2018, primarily due to declines in traditional data and voice communication services as a result of competitive price pressures. These revenue decreases were partially offset by increases in wireless service revenue.

Small and Medium Business
Small and Medium Business offers wireless services and equipment, tailored voice and networking products, Fios services, IP networking, advanced voice solutions, security and managed information technology services to our U.S.-based customers that do not meet the requirements to be categorized as Global Enterprise.

Small and Medium Business revenues increased $712 million, or 6.6%, during 2019 compared to 2018, primarily due to an increase in wireless postpaid service revenue of 11.7% as a result of increases in the amount of wireless retail postpaid connections. These increases were further driven by increased wireless equipment revenue resulting from a shift to higher priced units in the mix of wireless devices sold and increases in





the number of wireless devices sold, increased revenue related to our wireless device protection package, as well as increased revenue related to Fios services. These revenue increases were partially offset by revenue declines related to the loss of voice and DSL service connections.

Small and Medium Business Fios revenues totaled $915 million and increased $110 million, or 13.7%, during 2019 compared to 2018, reflecting the increase in total connections, as well as increased demand for higher broadband speeds.

Public Sector and Other
Public Sector and Other offers wireless products and services as well as wireline connectivity and managed solutions to U.S. federal, state and local governments and educational institutions. These services include the business services and connectivity similar to the products and services offered by Global Enterprise, in each case, with features and pricing designed to address the needs of governments and educational institutions.

Public Sector and Other revenues increased $89 million, or 1.5%, during 2019 compared to 2018, driven by increases in networking and wireless postpaid service revenue as a result of an increase in wireless retail postpaid connections.

Wholesale
Wholesale offers wireline communications services including data, voice, local dial tone and broadband services primarily to local, long distance, and wireless carriers that use our facilities to provide services to their customers.

Wholesale revenues decreased $509 million, or 13.6%, during 2019 compared to 2018, primarily due to declines in core data and traditional voice services resulting from the effect of technology substitution and continuing contraction of market rates due to competition.

Operating Expenses
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Cost of services
$
10,655

 
$
10,859

 
$
(204
)
 
(1.9
)%
Cost of wireless equipment
4,733

 
4,560

 
173

 
3.8

Selling, general and administrative expense
8,188

 
7,689

 
499

 
6.5

Depreciation and amortization expense
4,105

 
4,258

 
(153
)
 
(3.6
)
Total Operating Expenses
$
27,681

 
$
27,366

 
$
315

 
1.2

Cost of Services
Cost of services decreased $204 million, or 1.9%, during 2019 compared to 2018, primarily due to lower access costs resulting from a decline in voice connections, as well as lower employee-related costs associated with the lower headcount resulting from the Voluntary Separation Program, offset by an increase in regulatory fees.

Cost of Wireless Equipment
Cost of wireless equipment increased $173 million, or 3.8%, during 2019 compared to 2018, primarily driven by a shift to higher priced units in the mix of wireless devices sold and an increase in the number of wireless devices sold.

Selling, General and Administrative Expense
Selling, general and administrative expense increased $499 million, or 6.5%, during 2019 compared to 2018, due to increases in advertising expenses and sales commission expense, which were partially offset by decreases in employee-related costs resulting from the Voluntary Separation Program. The increase in sales commission expense was primarily due to a lower net deferral of commission costs in 2019 as compared to 2018 as a result of the adoption of Topic 606 on January 1, 2018 using a modified retrospective approach.

Depreciation and Amortization Expense
Depreciation and amortization expense decreased $153 million, or 3.6%, during 2019 compared to 2018, driven by the change in the mix of total Verizon depreciable assets and Business's usage of those assets.






Segment Operating Income and EBITDA
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2019

 
2018

 
2019 vs. 2018
Segment Operating Income
$
3,762

 
$
4,168

 
$
(406
)
 
(9.7
)%
Add Depreciation and amortization expense
4,105

 
4,258

 
(153
)
 
(3.6
)
Segment EBITDA
$
7,867

 
$
8,426

 
$
(559
)
 
(6.6
)
 
 
 
 
 
 
 
 
Segment operating income margin
12.0
%
 
13.2
%
 
 
 
 
Segment EBITDA margin
25.0
%
 
26.7
%
 
 
 
 
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.

Special Items
Special items included in Income Before (Provision) Benefit For Income Taxes were as follows:
 
(dollars in millions)
 
Years Ended December 31,
2019

 
2018

Severance, pension and benefits charges (credits)
 
 
 
Selling, general and administrative expense
$
204

 
$
2,157

Other income (expense), net
126

 
(2,107
)
Acquisition and integration related charges
 
 
 
Selling, general and administrative expense

 
531

Depreciation and amortization expense

 
22

Product realignment charges
 
 
 
Cost of services

 
303

Selling, general and administrative expense

 
147

Equity in losses of unconsolidated businesses


207

Depreciation and amortization expense

 
1

Impairment charges
 
 
 
Media goodwill impairment
186

 
4,591

Equity in losses of unconsolidated businesses
50

 

Early debt redemption costs
 
 
 
Other income (expense), net
3,604

 
725

Net gain from dispositions of assets and businesses
 
 
 
Selling, general and administrative expense
(261
)
 

Total
$
3,909

 
$
6,577


The Consolidated Adjusted EBITDA non-GAAP measure presented in the Consolidated Net Income, Consolidated EBITDA and Consolidated Adjusted EBITDA discussion (see "Consolidated Results of Operations") excludes all of the amounts included above, as described below.

The income and expenses related to special items included in our consolidated results of operations were as follows:
 
(dollars in millions)
 
Years Ended December 31,
2019

 
2018

Within Total Operating Expenses
$
129

 
$
7,752

Within Equity in losses of unconsolidated businesses
50

 
207

Within Other income (expense), net
3,730

 
(1,382
)
Total
$
3,909

 
$
6,577







Severance, Pension and Benefits Charges (Credits)
During 2019, in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur, we recorded net pre-tax pension and benefits charges of $126 million in our pension and postretirement benefit plans. The charges were recorded in Other income (expense), net in our consolidated statements of income and were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 4.4% at December 31, 2018 to a weighted-average of 3.3% at December 31, 2019 ($4.3 billion), partially offset by the difference between our estimated return on assets and our actual return on assets ($2.3 billion) and other assumption adjustments of $1.9 billion, of which $1.6 billion related to healthcare claims experience. During 2019, we also recorded net pre-tax severance charges of $204 million in Selling, general and administrative expense in our consolidated statements of income.

During 2018, we recorded net pre-tax pension and benefits credits of $2.1 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement credits of $2.3 billion, which were recorded in Other income (expense), net in our consolidated statements of income, were primarily driven by an increase in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 3.7% at December 31, 2017 to a weighted-average of 4.4% at December 31, 2018 ($2.6 billion), and mortality and other assumption adjustments of $1.7 billion, $1.6 billion of which related to healthcare claims and trend adjustments, offset by the difference between our estimated return on assets of 7.0% and our actual return on assets of (2.7)% ($1.9 billion). The credits were partially offset by $177 million due to the effects of participants retiring under the Voluntary Separation Program. During 2018, we also recorded net pre-tax severance charges of $2.2 billion in Selling, general and administrative expense, primarily driven by the Voluntary Separation Program for select U.S.-based management employees and other headcount reduction initiatives, which resulted in a severance charge of $1.8 billion ($1.4 billion after-tax), and $339 million in severance costs recorded under other existing separation plans.

Due to the presentation of the other components of net periodic benefit cost, we recognize a portion of the pension and benefits charges (credits) in Other income (expense), net in our consolidated statements of income.

See Note 11 to the consolidated financial statements for additional information related to severance, pension and benefits charges (credits).

Acquisition and Integration Related Charges
Acquisition and integration related charges of $553 million recorded during the year ended December 31, 2018 primarily related to the acquisition of Yahoo’s operating business in June 2017.

Product Realignment Charges
Product realignment charges of $658 million recorded during the year ended December 31, 2018 primarily related to the discontinuation of the go90 platform and associated content during the second quarter of 2018.

Impairment Charges
The impairment charges consist of write-downs of goodwill and other investments or assets. The goodwill impairment charges of $186 million and $4.6 billion recorded during the years ended December 31, 2019 and 2018, respectively, for Verizon Media were a result of the Company's annual impairment test performed in the fourth quarter (see "Critical Accounting Estimates"). In addition, we recorded an impairment charge of $50 million in Equity in losses of unconsolidated businesses related to a media joint venture investment.

Early Debt Redemption Costs
During 2019 and 2018, we recorded early debt redemptions costs of $3.6 billion and $725 million, respectively.
 
We recognize early debt redemptions costs in Other income (expense), net in our consolidated statements of income. See Note 7 to the consolidated financial statements for additional information related to our early debt redemptions.

Net Gain from Dispositions of Assets and Businesses
During 2019, we recorded a pre-tax net gain from dispositions of assets and businesses of $261 million in connection with the sale of various real estate properties and businesses.

Operating Environment and Trends
The telecommunications industry is highly competitive. We expect competition to remain intense as traditional and non-traditional participants seek increased market share. Our high-quality customer base and networks differentiate us from our competitors and give us the ability to plan and manage through changing economic and competitive conditions. We remain focused on executing on the fundamentals of the business: maintaining a high-quality customer base, delivering strong financial and operating results and strengthening our balance sheet. We will continue to invest for growth, which we believe is the key to creating value for our shareholders. We continue to lead in 4G LTE performance while building momentum for our 5G network. Our strategy lays the foundation for the future through investments in our Intelligent Edge Network that enable efficiencies throughout our core infrastructure and deliver flexibility to meet customer requirements.






The U.S. wireless market has achieved a high penetration of smartphones, which reduces the opportunity for new phone connection growth for the industry. We expect future revenue growth in the industry to be driven by expanding existing customer relationships, increasing the number of ways customers can connect with wireless networks and services and increasing the penetration of other connected devices including wearables, tablets and IoT devices. We expect 5G technology will provide a significant opportunity for growth in the industry in 2021 and beyond. With respect to our wireless connectivity products and services, we compete against other national wireless service providers, including AT&T Inc., Sprint Corporation and T-Mobile USA, Inc., as well as various regional wireless service providers. We also compete for retail activations with resellers that buy bulk wholesale service from wireless service providers, including Verizon, and resell it to their customers. Resellers may include cable companies. We face competition from other communications and technology companies seeking to increase their brand recognition and capture customer revenue with respect to the provision of wireless products and services, in addition to non-traditional offerings in mobile data. For example, Microsoft Corporation, Alphabet Inc., Apple Inc. and others are offering alternative means for making wireless voice calls that, in certain cases, can be used in lieu of the wireless provider’s voice service, as well as alternative means of accessing video content.

With respect to wireless services and equipment, pricing plays an important role in the wireless competitive landscape. We compete in this area by offering our customers services and devices that we believe they will regard as the best available value for the price. As the demand for wireless services continues to grow, wireless service providers are offering a range of service plans at competitive prices. These service offerings will vary from time to time based on customer needs, technology changes and market conditions and may be provided as standard plans or as part of limited time promotional offers.

We expect future service revenue growth opportunities to arise from increased access revenue as customers shift to higher access plans, as well as from increased connections per account. Future service revenue growth opportunities will be dependent on expanding the penetration of our services, increasing the number of ways that our customers can connect with our networks and services and the development of new ecosystems.We and other wireless service providers, as well as equipment manufacturers, offer device payment options, which provide customers with the ability to pay for their device over a period of time, and some providers offer device leasing arrangements.

Current and potential competitors in the wireline service market include cable companies, wireless service providers, domestic and foreign telecommunications providers, satellite television companies, Internet service providers, over-the-top providers and other companies that offer network services and managed enterprise solutions.

In addition, companies with a global presence are increasingly competing with us in our wireline services. A relatively small number of telecommunications and integrated service providers with global operations serve customers in the global enterprise market and, to a lesser extent, the global wholesale market. We compete with these providers for large contracts to provide integrated solutions to global enterprises. Many of these companies have strong market presence, brand recognition and existing customer relationships, all of which contribute to intensifying competition that may affect our future revenue growth.

Despite this challenging environment, we expect that we will be able to grow key aspects of our wireline services. We continue to provide network reliability and offer products, which include fiber-optic Internet access, several video services, and voice services. Further, we will continue to offer our business and government customers more robust IP products and services, and advance our IoT strategies by leveraging business models that monetize usage on our networks at the connectivity, platform and solution layers.

The online advertising market continues to evolve as online users are migrating from traditional desktop to mobile and multiple-device usage. Also, there is a continued shift towards programmatic advertising which presents opportunities to connect online advertisers with the appropriate online users in a rapid environment. Our Media business competes with other online search engines, advertising platforms, digital video services and social networks. We are experiencing pressure from search and desktop usage and believe the pressure in these sectors will continue. We are implementing initiatives to realize synergies across all of our media assets and build services around our core content pillars to diversify revenue and return to growth.

We will also continue to focus on cost efficiencies to ensure we have the maximum flexibility to adjust to changes in the competitive and economic environments and maximize returns to shareholders.

2020 Connection Trends
In our Consumer segment, we expect to continue to attract new customers and maintain high-quality retail postpaid customers, capitalizing on demand for data services and providing our customers new ways of using wireless services in their daily lives. We expect that future connection growth will be driven by smartphones, tablets and other connected devices such as wearables. We believe the combination of our wireless network performance and Mix & Match unlimited plans provides a superior customer experience, supporting increased penetration of data services and the continued attraction and retention of higher valued retail postpaid connections. We expect to manage churn by providing a consistent, reliable experience on our wireless service and focusing on improving the customer experience through simplified pricing and continued focus in our distribution channels. We expect to continue to grow our Fios Internet connections as we seek to increase our penetration rates within our Fios service areas, further supported by the demand for higher speed internet connections. In Fios video, the business continues to face ongoing pressure as observed throughout the linear television market. We expect to manage market pressure by offering customers a choice of video service, including options such as Mix & Match on Fios and other offerings. We have experienced continuing access line and DSL losses as customers have disconnected both primary and secondary lines and switched to alternative technologies such as wireless, VoIP and cable for voice and data services.

In our Business segment, we offer wireless products and services to business and government customers across the U.S. We continue to grow our retail connections while facing a competitive environment. We expect to maintain connection growth in part by adding capacity and density





to our 4G LTE network, in addition to leading the build-out of 5G technology. We expect this connection growth, combined with our industry-leading network assets, will provide additional opportunities to sell solutions, such as those around security, advanced communications and professional services. We expect to expand our existing services offered to business customers through our Intelligent Edge Network, our multi-use platform.

2020 Operating Revenue Trends
In our Consumer segment, we expect to see a continuation of the service revenue trends from 2019 as customers shift to higher access plans with additional services and increase the number of devices they connect with our networks and services. Equipment revenues are largely dependent on wireless device sales volumes, the mix of devices, promotions and upgrades, which are subject to device lifecycles, iconic device launches and competition within the wireless industry. We anticipate an increase in wireless device upgrades in the second half of the year as we expand the availability and reach of our 5G network.

In our Business segment, we expect overall revenue growth in 2020 as wireless services and our high-quality fiber-based products will offset secular declines from legacy technologies and pressure from competition. We expect wireless revenue to expand, driven by connection growth led by Small and Medium Business. We expect our Fios products, through increased penetration, will also contribute to revenue growth. Legacy traditional wireline services continue to face secular pressures.

Our Media Business, Verizon Media, is primarily made up of digital advertising products. We are experiencing revenue pressure from search and desktop usage, which started to improve throughout 2019 and believe the pressure in those sectors will continue. We are focused on returning to revenue growth by implementing initiatives to realize synergies across all of our media assets and building services around our core content pillars. We expect positive growth in mobile services and products.

2020 Operating Expense and Cash Flow from Operations Trends
We expect our consolidated operating income margin and adjusted consolidated EBITDA margin to remain strong as we continue to undertake initiatives to reduce our overall cost structure by improving productivity and gaining efficiencies in our operations throughout the business in 2020 and beyond. Business Excellence initiatives include the adoption of the zero-based budgeting methodology, driving capital efficiencies from the architecture of the networks, evolving our Information Technology strategy and the continuing benefit from the Voluntary Separation Program. We believe our additional investments in our Business segment in both product simplification and continued focus on process improvements and new work tools will drive cost savings and create incremental growth opportunities in areas such as 5G and One Fiber. The goal of the Business Excellence initiative is to take $10 billion of cumulative cash outflows out of the business over four years, beginning with 2018. As part of this initiative, we are focusing on both operating expenses and capital expenditures. Our Business Excellence initiatives produced cumulative cash savings of $5.7 billion through the end of 2019 from a mix of capital and operational expenditure activities. The program remains on track to achieve our goal. Expenses related to programs funded through the reinvestment of program savings are expected to apply offsetting pressures to our margins.

The implementation of Topic 606 resulted in the deferral of commission expense in both our Consumer and Business segments. In 2020, we expect a smaller year-over-year benefit from the adoption of the standard due to the deferral of commission costs as compared to 2018 and 2019. The reduction in benefit creates a year-over-year headwind to operating income.

We create value for our shareholders 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 shareholders. Verizon’s Board of Directors increased the Company’s quarterly dividend by 2.1% during 2019, making this the thirteenth 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, strengthen our balance sheet, acquire spectrum licenses (see "Cash Flows from Investing Activities"), pay dividends to our shareholders and, when appropriate, buy back shares of our outstanding common stock (see "Cash Flows from Financing Activities").

Capital Expenditures
Our 2020 capital program includes capital to fund advanced networks and services, including expanding our core networks, adding capacity and density to our 4G LTE network in order to stay ahead of our customers’ increasing data demands and deploying our 5G network, transforming our structure to deploy the Intelligent Edge Network while reducing the cost to deliver services to our customers, and pursuing other opportunities to drive operating efficiencies. We expect that the new network architecture will simplify operations by eliminating legacy network elements, improve our 4G LTE coverage, speed the deployment of 5G technology, and create new enterprise opportunities in the business market. The level and the timing of the Company’s capital expenditures within these broad categories can vary significantly as a result of a variety of factors outside of our control, such as material weather events, equipment availability from vendors and permits from local governments. Capital expenditures for 2020 are expected to be in the range of $17.0 billion to $18.0 billion, including the continued investment in our 5G network. Capital expenditures were $17.9 billion in 2019 and $16.7 billion in 2018. We believe that we have significant discretion over the amount and timing of our capital expenditures on a Company-wide basis as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events.






Consolidated Financial Condition
 
(dollars in millions)
 
Years Ended December 31,
2019

 
2018

Cash flows provided by (used in)
 
 
 
Operating activities
$
35,746

 
$
34,339

Investing activities
(17,581
)
 
(17,934
)
Financing activities
(18,164
)
 
(15,377
)
Increase in cash, cash equivalents and restricted cash
$
1

 
$
1,028


We use the net cash generated from our operations to fund expansion and modernization of our networks, service and repay external financing, pay dividends, invest in new businesses and spectrum and, when appropriate, buy back shares of our outstanding common stock. Our sources of funds, primarily from operations and, to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that our capital spending 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 held both domestically and internationally, and are invested to maintain principal and provide liquidity. See "Market Risk" for additional information regarding our foreign currency risk management strategies.

Our available external financing arrangements include an active commercial paper program, credit available under credit facilities and other bank lines of credit, vendor financing arrangements, issuances of registered debt or equity securities, U.S. retail medium-term notes and other capital market securities that are privately-placed or offered overseas. In addition, we monetize our device payment plan agreement receivables through asset-backed debt transactions.

Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated from operations. Net cash provided by operating activities increased by $1.4 billion during 2019, compared to the similar period in 2018, primarily due to an increase in earnings and a decrease in discretionary contributions to qualified employee benefit plans, offset by changes in working capital, which includes an increase in cash income taxes as well as severance payments as a result of the Voluntary Separation Program. We made $300 million and $1.7 billion in discretionary employee benefits contributions to our defined benefit pension plan during 2019 and 2018, respectively. As a result of the discretionary pension contributions, we expect that there will be no required pension funding until 2026, which will continue to benefit future cash flows. These contributions also improved the funded status of our qualified pension plan.

Cash Flows Used In Investing Activities
Capital Expenditures
Capital expenditures continue to relate primarily to the use of capital resources to facilitate the introduction of new products and services, enhance responsiveness to competitive challenges, maintain our existing infrastructure 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,
2019

 
2018

Capital expenditures (including capitalized software)
$
17,939

 
$
16,658

Total as a percentage of revenue
13.6
%
 
12.7
%

Capital expenditures increased in 2019 primarily due to an increase in investments to support multi-use fiber assets, which support the densification of our 4G LTE network and our 5G technology deployment. Our investments are primarily related to network infrastructure to support the business.

Acquisitions
During 2019 and 2018, we invested $898 million and $1.4 billion, respectively, in acquisitions of wireless licenses. During 2019 and 2018, we also invested an insignificant amount and $230 million, respectively, in acquisitions of businesses, net of cash acquired.

In 2019, the FCC completed two millimeter wave spectrum license auctions. We paid approximately $521 million for spectrum licenses in connection with these auctions. See Note 3 to the consolidated financial statements for additional information.

In January 2018, Verizon acquired NextLink Wireless LLC (NextLink) from a wholly-owned subsidiary of XO Holdings for approximately $493 million, subject to certain adjustments, of which $320 million (an option exercise price to acquire NextLink) was prepaid in the first quarter of 2017. The option exercise price represented the fair value of the option. The remaining cash consideration was paid at the closing of the transaction. The spectrum acquired as part of the transaction is being used for our 5G technology deployment.






In February 2018, Verizon acquired Straight Path Communications Inc. (Straight Path), a holder of millimeter wave spectrum configured for 5G wireless services for total consideration reflecting an enterprise value of approximately $3.1 billion, which was primarily settled with Verizon shares but also included transaction costs payable in cash of approximately $736 million, consisting primarily of a fee paid to the FCC. The spectrum acquired as part of the transaction is being used for our 5G technology deployment.

During 2019 and 2018, we completed various other acquisitions for an insignificant amount of cash consideration.

See "Acquisitions and Divestitures" for information on our acquisitions.

Dispositions
During 2019, we received gross proceeds of approximately $1.0 billion for a sale-leaseback transaction for buildings and real estate. See Note 6 to the consolidated financial statements for additional information.

Cash Flows Used In Financing Activities
We seek to maintain a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. During 2019 and 2018, net cash used in financing activities was $18.2 billion and $15.4 billion, respectively.

2019
During 2019, our net cash used in financing activities of $18.2 billion was primarily driven by:

$23.9 billion used for repayments, redemptions and repurchases of long-term borrowings and finance lease obligations, which included $6.3 billion used for prepayments and repayments of asset-backed long-term borrowings;
$10.0 billion used for dividend payments; and
$1.8 billion used for net debt related costs.

These uses of cash were partially offset by proceeds from long-term borrowings of $18.7 billion, which included $8.6 billion of proceeds from our asset-backed debt transactions.

Proceeds from and Repayments, Redemptions, and Repurchases of Long-Term Borrowings
At December 31, 2019, our total debt decreased to $111.5 billion as compared to $113.1 billion at December 31, 2018. During both the years ended December 31, 2019 and 2018, our effective interest rate was 4.8%. The substantial majority of our total debt portfolio consists of fixed rate indebtedness, therefore, changes in interest rates do not have a material effect on our interest payments. See also "Market Risk" and Note 7 to the consolidated financial statements for additional information.

At December 31, 2019, approximately $23.5 billion, or 21.1%, of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps on substantially all of our foreign denominated debt in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See "Market Risk" for additional information.

Verizon may continue to repurchase debt securities issued by Verizon and its affiliates in the future through open market purchases, privately negotiated transactions, tender offers, exchange offers, or otherwise, upon such terms and at such prices as Verizon may from time to time determine for cash or other consideration.

Other, net
Other, net financing activities during 2019 includes early redemption costs, see "Special Items" for additional information, as well as cash paid on debt exchanges and derivative-related transactions. See Note 15 to the consolidated financial statements for additional information.

Dividends
The Verizon Board of Directors assesses the level of our dividend payments on a periodic basis taking into account such factors as long-term growth opportunities, internal cash requirements and the expectations of our shareholders. During the third quarter of 2019, the Board increased our quarterly dividend payment by 2.1% to $0.6150 from $0.6025 per share from the previous quarter. This is the thirteenth 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 2019, we paid $10.0 billion in dividends.

2018
During 2018, our net cash used in financing activities of $15.4 billion was primarily driven by:

$14.6 billion used for repayments, redemptions and repurchases of long-term borrowings and finance lease obligations, which included $3.6 billion used for prepayments of asset-backed long-term borrowings; and
$9.8 billion used for dividend payments.






These uses of cash were partially offset by proceeds from long-term borrowings of $10.8 billion, which included $4.8 billion of proceeds from our asset-backed debt transactions.

Proceeds from and Repayments, Redemptions, and Repurchases of Long-Term Borrowings
At December 31, 2018, our total debt was $113.1 billion, and during the year ended December 31, 2018, our effective interest rate was 4.8%. The substantial majority of our total debt portfolio consisted of fixed rate indebtedness, therefore, changes in interest rates did not have a material effect on our interest payments. See "Market Risk" and Note 7 to the consolidated financial statements for additional information.

At December 31, 2018, approximately $17.1 billion, or 15.1%, of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps on a majority of our foreign denominated debt in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See "Market Risk" for additional information.

Other, net
Other, net financing activities during 2018, included early debt redemption costs. See "Special Items" for additional information, as well as cash paid on debt exchanges and derivative-related transactions.

Dividends
During the third quarter of 2018, the Board increased our quarterly dividend payment by 2.1% to $0.6025 per share.

As in prior periods, dividend payments were a significant use of capital resources. During 2018, we paid $9.8 billion in dividends.

Asset-Backed Debt
As of December 31, 2019, the carrying value of our asset-backed debt was $12.4 billion. Our asset-backed debt includes Asset-Backed Notes (ABS Notes) issued to third-party investors (Investors) and loans (ABS Financing Facilities) received from banks and their conduit facilities (collectively, the Banks). Our consolidated asset-backed debt bankruptcy remote legal entities (each, an ABS Entity or collectively, the ABS Entities) issue the debt or are otherwise party to the transaction documentation in connection with our asset-backed debt transactions. Under the terms of our asset-backed debt, Cellco Partnership (Cellco) and certain other affiliates of Verizon (collectively, the Originators) transfer device payment plan agreement receivables to one of the ABS Entities, which in turn transfers such receivables to another ABS Entity that issues the debt. Verizon entities retain the equity interests in the ABS Entities, which represent the rights to all funds not needed to make required payments on the asset-backed debt and other related payments and expenses.

Our asset-backed debt is secured by the transferred device payment plan agreement receivables and future collections on such receivables. The device payment plan agreement receivables transferred to the ABS Entities and related assets, consisting primarily of restricted cash, will only be available for payment of asset-backed debt and expenses related thereto, payments to the Originators in respect of additional transfers of device payment plan agreement receivables, and other obligations arising from our asset-backed debt transactions, and will not be available to pay other obligations or claims of Verizon’s creditors until the associated asset-backed debt and other obligations are satisfied. The Investors or Banks, as applicable, which hold our asset-backed debt have legal recourse to the assets securing the debt, but do not have any recourse to Verizon with respect to the payment of principal and interest on the debt. Under a parent support agreement, Verizon has agreed to guarantee certain of the payment obligations of Cellco and the Originators to the ABS Entities.

Cash collections on the device payment plan agreement receivables collateralizing our asset-backed debt securities are required at certain specified times to be placed into segregated accounts. Deposits to the segregated accounts are considered restricted cash and are included in Prepaid expenses and other, and Other assets in our consolidated balance sheets.

Proceeds from our asset-backed debt transactions are reflected in Cash flows from financing activities in our consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are included in our consolidated balance sheets. See Note 7 to the consolidated financial statements for additional information.

In May 2018, we entered into an ABS financing facility with a number of financial institutions (2018 ABS Financing Facility). One loan agreement was entered into in connection with the 2018 ABS Financing Facility. In May 2019, the $540 million outstanding under the loan agreement was prepaid, and the loan agreement was terminated.

In September 2016, we entered into an ABS financing facility with a number of financial institutions (2016 ABS Financing Facility). Two loan agreements were entered into in connection with the 2016 ABS Financing Facility in September 2016 and May 2017. In April and May 2019, we paid off both the 2016 and 2017 loans for an aggregate of $671 million, and the loan agreements were terminated.

In May 2019, the 2016 ABS Financing Facility was amended and restated (2019 ABS Financing Facility). One loan agreement was entered into in connection with the 2019 ABS Financing Facility. Under the 2019 loan agreement, we have the right to prepay all or a portion of the advances at any time without penalty, but in certain cases, with breakage costs. During 2019, we received $4.8 billion of borrowings and prepaid $1.5 billion under the 2019 loan agreement.






Long-Term Credit Facilities
 
 
 
 
 
At December 31, 2019
 
(dollars in millions)
Maturities
 
Facility Capacity

 
Unused Capacity

 
Principal Amount Outstanding

Verizon revolving credit facility (1)
2022
 
$
9,500

 
$
9,390

 
N/A

Various export credit facilities (2)
2022-2027
 
5,500

 

 
4,471

Total
 
 
$
15,000

 
$
9,390

 
$
4,471

(1) The revolving 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. The revolving credit facility provides for the issuance of letters of credit.
(2) During 2019 and 2018, we drew down $1.5 billion and $3.0 billion from these facilities, respectively. We use these credit facilities to finance equipment-related purchases.

Common Stock
Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareholder plans. During the years ended December 31, 2019 and 2018, we issued 3.8 million and 3.5 million common shares from Treasury stock, respectively, which had an insignificant aggregate value.

In February 2020, the Verizon Board of Directors authorized a share buyback program to repurchase up to 100 million shares of the Company's common stock. The program will terminate when the aggregate number of shares purchased reaches 100 million, or a new share repurchase plan superseding the current plan is authorized, whichever is sooner. The program permits Verizon to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs. There were no repurchases of common stock during 2019 or 2018 under our previously authorized share buyback program.

Credit Ratings
Verizon’s credit ratings did not change in 2019 or 2018.

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.

We and our consolidated subsidiaries are in compliance with all of our restrictive covenants in our debt agreements.

Change In Cash, Cash Equivalents and Restricted Cash
Our Cash and cash equivalents at December 31, 2019 totaled $2.6 billion, a $151 million decrease compared to Cash and cash equivalents at December 31, 2018, primarily as a result of the factors discussed above.

Restricted cash at December 31, 2019 totaled $1.3 billion, a $152 million increase compared to restricted cash at December 31, 2018, primarily due to cash collections on the device payment plan agreement receivables that are required at certain specified times to be placed into segregated accounts.

Free Cash Flow
Free cash flow is a non-GAAP financial measure that reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. Free cash flow is calculated by subtracting capital expenditures from net cash provided by operating activities. We believe it is a more conservative measure of cash flow since purchases of fixed assets are necessary for ongoing operations. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on finance lease obligations or cash payments for business acquisitions or wireless licenses. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.






The following table reconciles net cash provided by operating activities to Free cash flow:
 
(dollars in millions)
 
Years Ended December 31,
2019

 
2018

Net cash provided by operating activities
$
35,746

 
$
34,339

Less Capital expenditures (including capitalized software)
17,939

 
16,658

Free cash flow
$
17,807

 
$
17,681


The increase in free cash flow during 2019 is a reflection of the increase in operating cash flows, partially offset by the increase in capital expenditures discussed above.

Employee Benefit Plans Funded Status and Contributions
Employer Contributions
We operate numerous qualified and nonqualified pension plans and other postretirement benefit plans. These plans primarily relate to our domestic business units. During 2019 and 2018, contributions to our qualified pension plans were $300 million and $1.0 billion, respectively. We made contributions of $71 million in 2019 to our nonqualified pension plans.

The Company’s overall investment strategy is to achieve a mix of assets that allows us to meet projected benefit payments while taking into consideration risk and return. 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. Nonqualified pension contributions are estimated to be approximately $70 million in 2020.

Contributions to our other postretirement benefit plans generally relate to payments for benefits on an as-incurred basis since these other postretirement benefit plans do not have funding requirements similar to the pension plans. We contributed $449 million to our other postretirement benefit plans in 2019 and $1.2 billion, including $679 million discretionary contributions, in 2018. Contributions to our other postretirement benefit plans are estimated to be approximately $700 million in 2020.

Leasing Arrangements
See Note 6 to the consolidated financial statements for a discussion of leasing arrangements.






Contractual Obligations
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2019. Additional detail about these items is included in the notes to the consolidated financial statements.
 
(dollars in millions)
 
 
Payments Due By Period
Contractual Obligations
Total

 
Less than
1 year

 
1 to 3 years

 
3 to 5 years

 
More than
5 years

Long-term debt(1)
$
110,865

 
$
10,470

 
$
16,431

 
$
9,803

 
$
74,161

Finance lease obligations(2)
1,213

 
366

 
479

 
244

 
124

Total long-term debt, including current maturities
112,078

 
10,836

 
16,910

 
10,047

 
74,285

Interest on long-term debt(1)
62,450

 
4,578

 
8,383

 
7,426

 
42,063

Operating leases(2)
25,968

 
4,099

 
7,127

 
5,485

 
9,257

Purchase obligations(3)
18,769

 
8,384

 
7,448

 
1,441

 
1,496

Other long-term liabilities(4)
4,135

 
694

 
1,692

 
1,749

 

Finance obligations(5)
1,539

 
281

 
579

 
603

 
76

Total contractual obligations
$
224,939

 
$
28,872

 
$
42,139

 
$
26,751

 
$
127,177


(1) 
Items included in long-term debt with variable coupon rates exclude unamortized debt issuance costs, and are described in Note 7 to the consolidated financial statements.
(2) 
See Note 6 to the consolidated financial statements for additional information.
(3) 
Items included in purchase obligations are primarily commitments to purchase content and network services, equipment, software and marketing services, which will be used or sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject of contractual obligations. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented in this table alone do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position. See Note 16 to the consolidated financial statements for additional information.
(4) 
Other long-term liabilities represent estimated postretirement benefit and qualified pension plan contributions. Estimated qualified pension plan contributions include expected minimum funding contributions, which commence in 2026 based on the plan's current funded status. Estimated postretirement benefit payments include expected future postretirement benefit payments. These estimated amounts: (1) are subject to change based on changes to assumptions and future plan performance, which could impact the timing or amounts of these payments; and (2) exclude expectations beyond 5 years due to uncertainty of the timing and amounts. See Note 11 to the consolidated financial statements for additional information.
(5) 
Represents future minimum payments under the sublease arrangement for our tower transaction. See Note 6 to the consolidated financial statements for additional information.

We are not able to make a reasonable estimate of when the unrecognized tax benefits balance of $2.9 billion and related interest and penalties will be settled with the respective taxing authorities until issues or examinations are further developed. See Note 12 to the consolidated financial statements for additional information.

Guarantees
We guarantee the debentures of our operating telephone company subsidiaries as well as the debt obligations of GTE LLC, as successor in interest to GTE Corporation, that were issued and outstanding prior to July 1, 2003. See Note 7 to the consolidated financial statements for additional information.

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 16 to the consolidated financial statements for additional information.

As of December 31, 2019, letters of credit totaling approximately $632 million, which were executed in the normal course of business and support several financing arrangements and payment obligations to third parties, were outstanding. See Note 16 to the consolidated financial statements for additional information.

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, forward starting interest rate swaps, interest rate swaps, interest rate caps and foreign exchange forwards. We do not hold derivatives for trading purposes.






It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in optimizing exposure to various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates and foreign exchange rates on our earnings.

Counterparties to our derivative contracts are major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex (CSA) agreements which provide rules for collateral exchange. Negotiations and executions of new ISDA master agreements and CSA agreements with our counterparties continued during 2018. The CSA agreements contain rating based thresholds such that we or our counterparties may be required to hold or post collateral based upon changes in outstanding positions as compared to established thresholds and changes in credit ratings. At December 31, 2019, we held an insignificant amount and at December 31, 2018, we posted approximately $0.1 billion of collateral related to derivative contracts under collateral exchange arrangements, which were recorded as Other current liabilities and Prepaid expenses and other, respectively, in our consolidated balance sheets. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect that any such nonperformance would result in a significant effect on our results of operations or financial condition due to our diversified pool of counterparties. See Note 9 to the consolidated financial statements for additional information regarding the derivative portfolio.

Interest Rate Risk
We are exposed to changes in interest rates, primarily on our short-term debt and the portion of long-term debt that carries floating interest rates. As of December 31, 2019, approximately 79% 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 $248 million. The interest rates on our existing long-term debt obligations are unaffected by changes to our credit ratings.

Certain of our floating rate debt and our interest rate derivative transactions utilize interest rates that are linked to the London Inter-Bank Offered Rate (LIBOR) as the benchmark rate. LIBOR is the subject of recent U.S. and international regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to become unavailable or to perform or be reported differently than in the past. The consequences of these developments cannot be entirely predicted but could include an increase in the cost of our floating rate debt or exposure under our interest rate derivative transactions. We do not anticipate a significant impact to our financial position given our current mix of variable and fixed-rate debt, taking into account the impact of our interest rate hedging.

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, 2019 and 2018. 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.
 
 
 
 
 
(dollars in millions)

Long-term debt and related derivatives
Fair Value

 
Fair Value assuming
+ 100 basis point shift

 
Fair Value assuming
 - 100 basis point shift

At December 31, 2019
$
128,633

 
$
119,288

 
$
139,980

At December 31, 2018
119,195

 
111,250

 
128,957


Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates that are currently based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against interest rate risk exposure of designated debt issuances. At December 31, 2019, the fair value of the asset and liability of these contracts were $568 million and $173 million, respectively. At December 31, 2018, the fair value of the asset and liability of these contracts were insignificant and $813 million, respectively. At December 31, 2019 and 2018, the total notional amount of the interest rate swaps was $17.0 billion and $19.8 billion, respectively.

Forward Starting Interest Rate Swaps
We have entered into forward starting interest rate swaps designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted transactions. At December 31, 2019 and 2018, the fair value of the liability of these contracts was $604 million and $60 million, respectively. At December 31, 2019 and 2018, the total notional amount of the forward starting interest rate swaps was $3.0 billion and $4.0 billion, respectively.

Interest Rate Caps
We also have interest rate caps which we use as an economic hedge but for which we have elected not to apply hedge accounting. We enter into interest rate caps to mitigate our interest exposure to interest rate increases on our ABS Financing Facility and ABS Notes. The fair value of the asset and liability of these contracts was insignificant at both December 31, 2019 and 2018. At December 31, 2019 and 2018, the total notional value of these contracts was $679 million and $2.2 billion, respectively.






Foreign Currency Translation
The functional currency for our foreign operations is primarily the local currency. The translation of income statement and balance sheet amounts of our foreign operations into U.S. dollars is recorded as cumulative translation adjustments, which are included in Accumulated other comprehensive income in our consolidated balance sheets. Gains and losses on foreign currency transactions are recorded in the consolidated statements of income in Other income (expense), net. At December 31, 2019, our primary translation exposure was to the British Pound Sterling, Euro, Australian Dollar and Japanese Yen.

Cross Currency Swaps
We have entered into cross currency swaps designated as cash flow hedges to exchange our British Pound Sterling, Euro, Swiss Franc and Australian Dollar-denominated cash flows into U.S. dollars and to fix our cash payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. The fair value of the asset of these contracts was $211 million and $220 million at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the fair value of the liability of these contracts was $912 million and $536 million, respectively. At December 31, 2019 and 2018, the total notional amount of the cross currency swaps was $23.1 billion and $16.6 billion, respectively.

Foreign Exchange Forwards
We also have foreign exchange forwards which we use as an economic hedge but for which we have elected not to apply hedge accounting. We enter into British Pound Sterling and Euro foreign exchange forwards to mitigate our foreign exchange rate risk related to non-functional currency denominated monetary assets and liabilities of international subsidiaries. At December 31, 2019, the fair value of the asset of these contracts was insignificant. At December 31, 2019 and 2018, the total notional amount of the foreign exchange forwards was $1.1 billion and $600 million, respectively.

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
Wireless licenses and Goodwill are a significant component of our consolidated assets. Both our wireless licenses and goodwill are treated as indefinite-lived intangible assets and, therefore are not amortized, but rather are tested for impairment annually in the fourth fiscal quarter, unless there are events requiring an earlier assessment or changes in circumstances during an interim period providing impairment indicators are present. We believe our estimates and assumptions are reasonable and represent appropriate marketplace considerations as of the valuation date. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates and assumptions are uncertain by nature, may change over time and can vary from actual results. It is possible that in the future there may be changes in our estimates and assumptions, including the timing and amount of future cash flows, margins, growth rates, market participant assumptions, comparable benchmark companies and related multiples and discount rates, which could result in different fair value estimates. Significant and adverse changes to any one or more of the above-noted estimates and assumptions could result in a goodwill impairment for one or more of our reporting units.

Wireless Licenses
The carrying value of our wireless licenses was approximately $95.1 billion as of December 31, 2019. 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 2019, 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 historical business enterprise value of our wireless business, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA margin projections), the recent and projected financial performance of our wireless business as a whole, as well as other factors.

In 2018, our quantitative impairment test consisted of comparing the estimated fair value of our aggregate wireless licenses to the aggregated carrying amount as of the test date.

Our impairment test in 2019 indicated that it is more likely than not that the fair value of our wireless licenses remained above their carrying value and, therefore, did not result in an impairment. Our impairment test in 2018 indicated that the fair value of our wireless licenses significantly exceeded their carrying value and, therefore, did not result in an impairment.

Under our quantitative assessment, we estimated the fair value of our wireless licenses using the Greenfield approach. The Greenfield approach is an income-based valuation approach that values the wireless licenses by calculating the cash flow generating potential of a hypothetical start-up company that goes into business with no assets except the wireless licenses to be valued. A discounted cash flow analysis is used to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. As a result, we





were required to make significant estimates about future cash flows specifically associated with our wireless licenses, an appropriate discount rate based on the risk associated with those estimated cash flows and assumed terminal value and growth rates. We considered current and expected future economic conditions, current and expected availability of wireless network technology and infrastructure and related equipment and the costs thereof as well as other relevant factors in estimating future cash flows. The discount rate represented our estimate of the weighted-average cost of capital (WACC), or expected return, that a marketplace 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
In November 2018, we announced a strategic reorganization of our business. The Company began reporting externally under the new structure as of April 1, 2019 which resulted in certain changes to our operating segments and reporting units. Upon the date of reorganization, the goodwill of our historical Wireless reporting unit, historical Wireline reporting unit and historical Verizon Connect reporting unit were reallocated to our new Consumer and Business reporting units using a relative fair value approach. At December 31, 2019, the balance of our goodwill was approximately $24.4 billion, of which $17.1 billion was in our Consumer reporting unit and $7.3 billion was in our Business reporting unit. To determine if goodwill is potentially impaired, we have the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we elect not to conduct the qualitative assessment or if indications of a potential impairment exist, the determination of whether an impairment has occurred requires the determination of the fair value of each the reporting unit being assessed.

Under the qualitative assessment, we consider several qualitative factors, including the business enterprise value of the reporting unit from the last quantitative test and the excess of fair value over carrying value from this test, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA margin projections), the recent and projected financial performance of the reporting unit, as well as other factors.

Under our quantitative assessment, the fair value of the reporting unit is calculated using a market approach and a discounted cash flow method. The market approach includes the use of 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 discount rate represented our estimate of the WACC, or expected return, that a marketplace participant would have required as of the valuation date. The application of our goodwill impairment test required key assumptions underlying our valuation model. The discounted cash flow analysis factored in assumptions on discount rates and terminal growth rates to reflect risk profiles of key strategic revenue and cost initiatives, as well as revenue and EBITDA growth relative to history and market trends and expectations. The market multiples approach incorporated significant judgment involved in the selection comparable public company multiples and benchmarks. The selection of companies was influenced by differences in growth and profitability, and volatility in market prices of peer companies. These valuation inputs are inherently uncertain, and an adverse change in one or a combination of these inputs could trigger a goodwill impairment loss in the future.

A projected sustained decline in a reporting unit's revenues and earnings could have a significant negative impact on its fair value and may result in impairment charges. Such a decline could be driven by, among other things: (1) further anticipated decreases in service pricing, sales volumes and long-term growth rate as a result of competitive pressures or other factors; or (2) the inability to achieve or delays in achieving the goals in strategic initiatives. Also, adverse changes to macroeconomic factors, such as increases to long-term interest rates, would also negatively impact the fair value of the reporting unit.

We performed impairment assessments of the impacted reporting units, specifically our historical Wireless, historical Wireline and historical Connect reporting units on March 31, 2019, immediately before our strategic reorganization became effective. Our impairment assessments indicated that the fair value for each of our historical Wireless, historical Wireline and historical Connect reporting units exceeded their respective carrying values, and therefore did not result in a goodwill impairment. We then performed quantitative assessments of our Consumer and Business reporting units on April 1, 2019, immediately following our strategic reorganization. Our impairment assessments indicated that the fair value for each of our Consumer and Business reporting units exceeded their respective carrying values and therefore, did not result in a goodwill impairment. Our Media reporting unit was not impacted by the strategic reorganization and there was no indicator of impairment as of the reorganization date.

We performed qualitative impairment assessments for our Consumer and Business reporting units during the fourth quarter of 2019. Our qualitative assessments indicated that it was more likely than not that the fair values for our Consumer and Business reporting units exceeded their respective carrying values and, therefore, did not result in an impairment. We performed quantitative impairment assessments for our Media reporting unit in 2019 and 2018. For details on our Media reporting unit, refer to the discussion below.

Our Media business, Verizon Media, experienced increased competitive and market pressures throughout 2018 that resulted in lower than expected revenues and earnings. These pressures were expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business. Our Media business also achieved lower than expected benefits from the integration of the Yahoo Inc. and AOL Inc. (AOL) businesses.






As of August 2018, Hans Vestberg became Chief Executive Officer of Verizon, and as of October 2018, K. Guru Gowrappan was appointed Chief Executive Officer of our Media business. In connection with Verizon’s annual budget process during the fourth quarter of 2019 and 2018, the leadership at both Verizon Media and Verizon completed a comprehensive five-year strategic planning review of Verizon Media's business prospects resulting in unfavorable adjustments to Verizon Media's financial projections. These revised projections were used as a key input into Verizon Media's annual goodwill impairment tests performed in the fourth quarter of 2019 and 2018.

During the fourth quarter of 2019 and 2018, consistent with our accounting policy, we applied a combination of a market approach and a discounted cash flow method reflecting current assumptions and inputs, including our revised projections, discount rate and expected growth rates, which resulted in the determination that the fair value of the Media reporting unit was less than its carrying amount. As a result, we recorded a non-cash goodwill impairment charge of approximately $186 million ($176 million after-tax) in the fourth quarter of 2019 and a charge of $4.6 billion ($4.5 billion after-tax) in the fourth quarter of 2018 in our consolidated statements of income. The goodwill balance of the Media reporting unit has been fully written off as a result of these impairment charges.

We performed a quantitative impairment assessment for all of the other reporting units in 2018. Our impairment tests indicated that the fair value for each of our historical Wireless, historical Wireline and historical Connect reporting units exceeded their respective carrying value and, therefore, did not result in an impairment.

Pension and Other Postretirement Benefit Plans
We maintain benefit plans for most of our employees, including, for certain employees, pension and other postretirement benefit plans. At December 31, 2019, in the aggregate, pension plan benefit obligations exceeded the fair value of pension plan assets, which will result in future pension plan expense. Other postretirement benefit plans have larger benefit obligations than plan assets, resulting in expense. Significant benefit plan assumptions, including the discount rate used, the long-term rate of return on plan assets, the determination of the substantive plan and health care trend rates are periodically updated and impact the amount of benefit plan income, expense, assets and obligations. Changes to one or more of these assumptions could significantly impact our accounting for pension and other postretirement benefits. A sensitivity analysis of the impact of changes in these assumptions on the benefit obligations and expense (income) recorded, as well as on the funded status due to an increase or a decrease in the actual versus expected return on plan assets as of December 31, 2019 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, 2019*

Pension plans discount rate
+0.50
$
(1,137
)
 
-0.50
1,266

Rate of return on pension plan assets
+1.00
(167
)
 
-1.00
167

Postretirement plans discount rate
+0.50
(858
)
 
-0.50
948

Rate of return on postretirement plan assets
+1.00
(9
)
 
-1.00
9

Health care trend rates
+1.00
626

 
-1.00
(696
)

* In determining its pension and other postretirement obligation, the Company used a weighted-average discount rate of 3.3%. 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, 2019. The bonds selected had maturities that coincided with the time periods during which benefits payments are expected to occur, were non-callable and available in sufficient quantities to ensure marketability (at least $300 million par outstanding).

The annual measurement date for both our pension and other postretirement benefits is December 31. We use the full yield curve approach to estimate the interest cost component of net periodic benefit cost for pension and other postretirement benefits. The full yield curve approach refines our estimate of interest cost by applying the individual spot rates from a yield curve composed of the rates of return on several hundred high-quality fixed income corporate bonds available at the measurement date. These 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.

Income Taxes
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 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. See Note 12 to the consolidated financial statements for additional information.

Property, Plant and Equipment
Our Property, plant and equipment balance represents a significant component of our consolidated assets. We record Property, plant and equipment at cost. We depreciate Property, plant 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 Property, plant and equipment would result in a decrease to our 2019 depreciation expense of $2.7 billion and that a one year decrease would result in an increase of approximately $4.7 billion in our 2019 depreciation expense.

Accounts Receivable
We maintain allowances for uncollectible accounts receivable, including our direct-channel device payment plan agreement receivables, for estimated losses resulting from the failure or inability of our customers to make required payments. Indirect-channel device payment loans are considered financial instruments and are initially recorded at fair value net of imputed interest, and credit losses are recorded as incurred. However, loan balances are assessed quarterly for impairment and an allowance is recorded if the loan is considered impaired. Our allowance for uncollectible accounts receivable is based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. We record an allowance to reduce the receivables to the amount that is reasonably believed to be collectible. We also record an allowance for all other receivables based on multiple factors including historical experience with bad debts, the general economic environment and the aging of such receivables. Similar to traditional service revenue, we record direct device payment plan agreement bad debt expense based on an estimate of the percentage of equipment revenue that will not be collected. This estimate is based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. If there is a deterioration of our customers’ financial condition or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which would affect earnings in the period the adjustments are made.

Recently Issued Accounting Standards
See Note 1 to the consolidated financial statements for a discussion of recently issued accounting standard updates not yet adopted as of December 31, 2019.

Acquisitions and Divestitures
Acquisition of AOL Inc.
In May 2015, we entered into an Agreement and Plan of Merger with AOL Inc. pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes.

On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion. Holders of approximately 6.6 million shares exercised appraisal rights under Delaware law. In September 2018, we obtained court approval to settle this matter for total cash consideration of $219 million, of which an insignificant amount relates to interest, resulting in an insignificant gain. We paid the cash consideration in October 2018.

XO Holdings
In February 2016, we entered into a purchase agreement to acquire XO Holdings' wireline business (XO), which owned and operated one of the largest fiber-based IP and Ethernet networks in the U.S. Concurrently, we entered into a separate agreement to utilize certain wireless spectrum from a wholly-owned subsidiary of XO Holdings, NextLink, that held XO's millimeter-wave wireless spectrum. The agreement included an option, subject to certain conditions, to acquire NextLink. In February 2017, we completed our acquisition of XO for total cash consideration of approximately $1.5 billion, of which $100 million was paid in 2015, and we prepaid $320 million in connection with the NextLink option which represented the fair value of the option.

In April 2017, we exercised our option to buy NextLink for approximately $493 million, subject to certain adjustments, of which $320 million was prepaid in the first quarter of 2017. The transaction closed in January 2018. The acquisition of NextLink was accounted for as an asset acquisition, as substantially all of the value related to the acquired spectrum. Upon closing, we recorded approximately $657 million of wireless licenses, $110 million of a deferred tax liability and $58 million of other liabilities. See Note 3 to the consolidated financial statements for additional information.

Straight Path
In May 2017, we entered into a purchase agreement to acquire Straight Path, a holder of millimeter wave spectrum configured for 5G wireless services, for total consideration reflecting an enterprise value of approximately $3.1 billion. Under the terms of the purchase agreement, we agreed to pay: (1) Straight Path shareholders $184.00 per share, payable in Verizon shares; and (2) certain transaction costs payable in cash of approximately $736 million, consisting primarily of a fee to be paid to the FCC. The transaction closed in February 2018 at which time we issued





approximately 49 million shares of Verizon common stock, valued at approximately $2.4 billion, and paid the associated cash consideration. See Note 3 to the consolidated financial statements for additional information.

Spectrum License Transactions
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 wireless network while also resulting in a more efficient use of spectrum. See Note 3 to the consolidated financial statements for additional information regarding our spectrum license transactions.

Other
From time to time, we enter into strategic agreements to acquire various other businesses and investments. See Note 3 to the consolidated financial statements for additional information.

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," "expects," "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. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following important factors, along with those discussed elsewhere in this report and in other filings with the SEC, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:

cyber attacks impacting our networks or systems and any resulting financial or reputational impact;

natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial or reputational impact;

disruption of our key suppliers’ or vendors' provisioning of products or services;

material adverse changes in labor matters and any resulting financial or operational impact;

the effects of competition in the markets in which we operate;

failure to take advantage of developments in technology and address changes in consumer demand;

performance issues or delays in the deployment of our 5G network resulting in significant costs or a reduction in the anticipated benefits of the enhancement to our networks;

the inability to implement our business strategy;

adverse conditions in the U.S. and international economies;

changes in the regulatory environment in which we operate, including any increase in restrictions on our ability to operate our networks;

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;

significant increases in benefit plan costs or lower investment returns on plan assets;

changes in tax laws or treaties, or in their interpretation; and

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.





Report of Management 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.

Management has assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2019. Based on this assessment, we believe that the internal control over financial reporting of the company is effective as of December 31, 2019. 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. 
/s/
Hans E. Vestberg
 
Hans E. Vestberg
 
Chairman and Chief Executive Officer
 
 
/s/
Matthew D. Ellis
 
Matthew D. Ellis
 
Executive Vice President and Chief Financial Officer
 
 
/s/
Anthony T. Skiadas
 
Anthony T. Skiadas
 
Senior Vice President and Controller





Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Verizon Communications Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Verizon Communications Inc. and subsidiaries’ (Verizon) internal control over financial reporting as of December 31, 2019, 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). In our opinion, Verizon maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Verizon as of December 31, 2019 and 2018, 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, 2019, and the related notes and our report dated February 21, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

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 Verizon's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Verizon in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.
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.



/s/
Ernst & Young LLP
 
Ernst & Young LLP
 
New York, New York
 
 
 
February 21, 2020





Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Verizon Communications Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Verizon Communications Inc. and subsidiaries (Verizon) as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Verizon at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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) (PCAOB), Verizon’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2019, Verizon changed its method of accounting for leases due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related amendments, using the modified retrospective method.

ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2018 Verizon changed its method for recognizing revenue as a result of the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12 using the modified retrospective method.

Basis for Opinion

These financial statements are the responsibility of Verizon’s management. Our responsibility is to express an opinion on Verizon’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Verizon in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

















 
Impairment Evaluation for Wireline Goodwill
Description of the Matter
At March 31, 2019, the Company’s goodwill related to its historical Wireline reporting unit was $3.9 billion and represented 1.4% of total assets. As discussed in Notes 1 and 4 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at the reporting unit level at least annually, or more frequently if impairment indicators are present. The impairment test compares the fair value of the reporting unit (calculated using a combination of a market approach and a discounted cash flow method) to its carrying amount. Effective April 1, 2019, the Company transitioned to its new segment reporting structure, which resulted in certain changes to its operating segments and reporting units. On March 31, 2019 the Company performed an impairment assessment of the impacted reporting units, including the Wireline reporting unit, immediately before the segment reorganization became effective.

Auditing management’s goodwill impairment test was complex and highly judgmental due to the inherent subjectivity of developing an estimate of the fair value of the reporting unit, which is based on assumptions about future conditions, transactions, or events whose outcome is uncertain and will therefore be subject to change over time. In particular, the fair value estimate was sensitive to significant assumptions such as the weighted average cost of capital, revenue growth rate and operating margin, which are affected by expected future market or economic conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. For example, we tested controls over the Company’s development of prospective financial information and management’s review of other key assumptions.

To test the estimated fair value of the Company’s Wireline reporting unit prior to segment reorganization, our audit procedures included, among others, assessing the suitability and application of the valuation methodologies selected and evaluating the significant assumptions discussed above and underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends, changes in the Company’s business model, customer base or product mix and other relevant factors. We performed sensitivity analyses of significant assumptions to determine what changes in assumptions are particularly sensitive when assessing the likelihood of impairment, or when calculating the amount of an impairment. In addition, we involved a valuation specialist to assist in the evaluation of the assumptions and other relevant information that are most significant to the fair value estimate. We also assessed the historical accuracy of management’s forecasts of financial results used in developing prior fair value estimates to assist in evaluating the reliability of the current forecasts.
 
 
 
Valuation of Employee Benefit Obligations
Description of the Matter

The Company sponsors several pension plans and other post-employment benefit plans. At December 31, 2019, the Company’s aggregate defined benefit pension obligation was $21.2 billion and exceeded the fair value of pension plan assets of $19.4 billion, resulting in an unfunded defined benefit pension obligation of $1.8 billion. Also, at December 31, 2019, the other postretirement benefits obligation was approximately $15.7 billion. As explained in Note 11 of the consolidated financial statements, the Company updates the estimates used to measure employee benefit obligations and plan assets in the fourth quarter and upon a remeasurement event to reflect the actual return on plan assets and updated actuarial assumptions.

Auditing the employee benefit obligations was complex due to the highly judgmental nature of the actuarial assumptions (e.g., discount rate, health care cost trends, per capita claims cost trends and mortality rates) used in the measurement process. These assumptions had a significant effect on the projected benefit obligation.
How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the employee benefits obligation valuation process. For example, we tested controls over management’s review of the employee benefit obligation calculations, the significant actuarial assumptions and the data inputs provided to the actuary.

To test the employee benefit obligations, our audit procedures included, among others, evaluating the methodologies used, the significant actuarial assumptions discussed above and the underlying data used by the Company. We compared the actuarial assumptions used by management to historical trends, current economic factors and evaluated the change in the employee benefit obligations from prior year due to the change in service cost, interest cost, actuarial gains and losses, benefit payments, contributions and other activities. In addition, we involved an actuarial specialist to assist in evaluating management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the employee benefit obligations. As part of this assessment, we compared the projected cash flows to prior year projections and compared the current year benefits paid to the prior year projected cash flows. To evaluate the health care cost trends, per capita claims cost trends and the mortality rates, we involved an actuarial specialist to assist in evaluating the assumptions and assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments were applied. We also tested the completeness and accuracy of the underlying data, including the participant data provided to management’s actuarial specialists.
 
 
 
Income Taxes - Benefit from the disposition of stock of a foreign affiliate
Description of the Matter

As described in Note 12 to the consolidated financial statements, during the fourth quarter of 2019 the Company sold a minority interest in a foreign affiliate to unrelated parties resulting in the recognition of a tax benefit of approximately $2.2 billion.

Auditing the recognition and measurement of this income tax benefit required significant auditor judgment because the determination of whether the tax positions’ technical merits are more likely than not to be sustained in an audit by a taxing authority is based on the application and interpretation of the relevant tax laws to the facts of the specific transaction.





How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s income tax processes. For example, we tested controls over management’s review of the income tax technical merits of the transaction and the related recognition and measurement of the income tax benefit.

To test the income tax benefit related to this transaction, our audit procedures included, among others, assessing the suitability and application of tax laws and legal rulings and evaluating the related conclusions. In addition, we involved our tax professionals to assist in the review and evaluation of management’s third-party tax opinions and memoranda and other relevant agreements. We tested the completeness and accuracy of the data and calculations used to determine the amount of the income tax benefit recognized.

/s/
Ernst & Young LLP
 
Ernst & Young LLP
 
We have served as Verizon's auditor since 2000.
 
New York, New York
 
 
 
February 21, 2020





Consolidated Statements of Income Verizon Communications Inc. and Subsidiaries
 
 
(dollars in millions, except per share amounts)
 
Years Ended December 31,
2019

 
2018

 
2017

 
 
 
 
 
 
Operating Revenues
 
 
 
 
 
Service revenues and other
$
110,305

 
$
108,605

 
$
107,145

Wireless equipment revenues
21,563

 
22,258

 
18,889

Total Operating Revenues
131,868


130,863


126,034

 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
Cost of services (exclusive of items shown below)
31,772

 
32,185

 
30,916

Cost of wireless equipment
22,954

 
23,323

 
22,147

Selling, general and administrative expense (including net gain/(loss) on sale of divested businesses of $(94), $0 and $1,774, respectively)
29,896

 
31,083

 
28,592

Depreciation and amortization expense
16,682

 
17,403

 
16,954

Media goodwill impairment
186

 
4,591

 

Total Operating Expenses
101,490

 
108,585

 
98,609

 
 
 
 
 
 
Operating Income
30,378

 
22,278

 
27,425

Equity in losses of unconsolidated businesses
(15
)
 
(186
)
 
(77
)
Other income (expense), net
(2,900
)
 
2,364

 
(2,021
)
Interest expense
(4,730
)
 
(4,833
)
 
(4,733
)
Income Before (Provision) Benefit For Income Taxes
22,733

 
19,623

 
20,594

(Provision) benefit for income taxes
(2,945
)
 
(3,584
)
 
9,956

Net Income
$
19,788

 
$
16,039

 
$
30,550

 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
523

 
$
511

 
$
449

Net income attributable to Verizon
19,265

 
15,528

 
30,101

Net Income
$
19,788

 
$
16,039

 
$
30,550

 
 
 
 
 
 
Basic Earnings Per Common Share
 
 
 
 
 
Net income attributable to Verizon
$
4.66

 
$
3.76

 
$
7.37

Weighted-average shares outstanding (in millions)
4,138

 
4,128

 
4,084

 
 
 
 
 
 
Diluted Earnings Per Common Share
 
 
 
 
 
Net income attributable to Verizon
$
4.65

 
$
3.76

 
$
7.36

Weighted-average shares outstanding (in millions)
4,140

 
4,132

 
4,089

See Notes to Consolidated Financial Statements





Consolidated Statements of Comprehensive Income Verizon Communications Inc. and Subsidiaries
 
(dollars in millions)
 
Years Ended December 31,
2019

 
2018

 
2017

 
 
 
 
 
 
Net Income
$
19,788

 
$
16,039

 
$
30,550

Other Comprehensive Loss, Net of Tax (Expense) Benefit
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $(21), $(11) and $30
16

 
(117
)
 
245

Unrealized gain (loss) on cash flow hedges, net of tax of $265, $(19) and $20
(736
)
 
55

 
(31
)
Unrealized gain (loss) on marketable securities, net of tax of $(2), $0 and $10
7

 
1

 
(14
)
Defined benefit pension and postretirement plans, net of tax of $219, $284 and $144
(659
)
 
(858
)
 
(214
)
Other comprehensive loss attributable to Verizon
(1,372
)

(919
)
 
(14
)
Total Comprehensive Income
$
18,416

 
$
15,120

 
$
30,536

 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
$
523

 
$
511

 
$
449

Comprehensive income attributable to Verizon
17,893

 
14,609

 
30,087

Total Comprehensive Income
$
18,416

 
$
15,120

 
$
30,536

See Notes to Consolidated Financial Statements





Consolidated Balance Sheets Verizon Communications Inc. and Subsidiaries
(dollars in millions, except per share amounts)
 
At December 31,
2019

 
2018

 
 
 
 
Assets
 
 
 
Current assets