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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark one) | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2021
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the transition period from to | |
Commission file number: 1-8606
Verizon Communications Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 23-2259884 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1095 Avenue of the Americas | | 10036 |
New York, | New York | | |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (212) 395-1000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common Stock, par value $0.10 | | VZ | | New York Stock Exchange |
Common Stock, par value $0.10 | | VZ | | The NASDAQ Global Select Market |
1.625% Notes due 2024 | | VZ24B | | New York Stock Exchange |
4.073% Notes due 2024 | | VZ24C | | New York Stock Exchange |
0.875% Notes due 2025 | | VZ25 | | New York Stock Exchange |
3.250% Notes due 2026 | | VZ26 | | New York Stock Exchange |
1.375% Notes due 2026 | | VZ26B | | New York Stock Exchange |
0.875% Notes due 2027 | | VZ27E | | New York Stock Exchange |
1.375% Notes due 2028 | | VZ28 | | New York Stock Exchange |
1.125% Notes due 2028 | | VZ28A | | New York Stock Exchange |
2.350% Fixed Rate Notes due 2028 | | VZ28C | | New York Stock Exchange |
1.875% Notes due 2029 | | VZ29B | | New York Stock Exchange |
0.375% Notes due 2029 | | VZ29D | | New York Stock Exchange |
1.250% Notes due 2030 | | VZ30 | | New York Stock Exchange |
1.875% Notes due 2030 | | VZ30A | | New York Stock Exchange |
2.625% Notes due 2031 | | VZ31 | | New York Stock Exchange |
2.500% Notes due 2031 | | VZ31A | | New York Stock Exchange |
3.000% Fixed Rate Notes due 2031 | | VZ31D | | New York Stock Exchange |
0.875% Notes due 2032 | | VZ32 | | New York Stock Exchange |
0.750% Notes due 2032 | | VZ32A | | New York Stock Exchange |
1.300% Notes due 2033 | | VZ33B | | New York Stock Exchange |
4.750% Notes due 2034 | | VZ34 | | New York Stock Exchange |
3.125% Notes due 2035 | | VZ35 | | New York Stock Exchange |
1.125% Notes due 2035 | | VZ35A | | New York Stock Exchange |
3.375% Notes due 2036 | | VZ36A | | New York Stock Exchange |
2.875% Notes due 2038 | | VZ38B | | New York Stock Exchange |
1.875% Notes due 2038 | | VZ38C | | New York Stock Exchange |
1.500% Notes due 2039 | | VZ39C | | New York Stock Exchange |
3.500% Fixed Rate Notes due 2039 | | VZ39D | | New York Stock Exchange |
1.850% Notes due 2040 | | VZ40 | | New York Stock Exchange |
3.850% Fixed Rate Notes due 2041 | | VZ41C | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
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| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
At September 30, 2021, 4,140,163,896 shares of the registrant’s common stock were outstanding, after deducting 151,269,750 shares held in treasury.
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Item No. | | Page |
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Item 1. | | |
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| Three and nine months ended September 30, 2021 and 2020 | |
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| Three and nine months ended September 30, 2021 and 2020 | |
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| At September 30, 2021 and December 31, 2020 | |
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| Nine months ended September 30, 2021 and 2020 | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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Part I - Financial Information |
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Item 1. Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Income |
Verizon Communications Inc. and Subsidiaries |
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(dollars in millions, except per share amounts) (unaudited) | 2021 | | 2020 | | 2021 | | 2020 |
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Operating Revenues | | | | | | | |
Service revenues and other | $ | 27,565 | | | $ | 27,431 | | | $ | 83,709 | | | $ | 81,604 | |
Wireless equipment revenues | 5,350 | | | 4,112 | | | 15,837 | | | 11,996 | |
Total Operating Revenues | 32,915 | | | 31,543 | | | 99,546 | | | 93,600 | |
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Operating Expenses | | | | | | | |
Cost of services (exclusive of items shown below) | 7,855 | | | 7,955 | | | 24,199 | | | 23,348 | |
Cost of wireless equipment | 5,673 | | | 4,379 | | | 17,106 | | | 13,031 | |
Selling, general and administrative expense | 6,521 | | | 7,339 | | | 21,246 | | | 23,080 | |
Depreciation and amortization expense | 3,961 | | | 4,192 | | | 12,155 | | | 12,523 | |
Total Operating Expenses | 24,010 | | | 23,865 | | | 74,706 | | | 71,982 | |
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Operating Income | 8,905 | | | 7,678 | | | 24,840 | | | 21,618 | |
Equity in earnings (losses) of unconsolidated businesses | 1 | | | (9) | | | 10 | | | (34) | |
Other income (expense), net | 269 | | | (774) | | | 1,172 | | | (703) | |
Interest expense | (801) | | | (1,044) | | | (2,746) | | | (3,167) | |
Income Before Provision For Income Taxes | 8,374 | | | 5,851 | | | 23,276 | | | 17,714 | |
Provision for income taxes | (1,820) | | | (1,347) | | | (5,395) | | | (4,084) | |
Net Income | $ | 6,554 | | | $ | 4,504 | | | $ | 17,881 | | | $ | 13,630 | |
| | | | | | | |
Net income attributable to noncontrolling interests | $ | 147 | | | $ | 147 | | | $ | 429 | | | $ | 417 | |
Net income attributable to Verizon | 6,407 | | | 4,357 | | | 17,452 | | | 13,213 | |
Net Income | $ | 6,554 | | | $ | 4,504 | | | $ | 17,881 | | | $ | 13,630 | |
| | | | | | | |
Basic Earnings Per Common Share | | | | | | | |
Net income attributable to Verizon | $ | 1.55 | | | $ | 1.05 | | | $ | 4.21 | | | $ | 3.19 | |
Weighted-average shares outstanding (in millions) | 4,142 | | | 4,140 | | | 4,141 | | | 4,139 | |
| | | | | | | |
Diluted Earnings Per Common Share | | | | | | | |
Net income attributable to Verizon | $ | 1.55 | | | $ | 1.05 | | | $ | 4.21 | | | $ | 3.19 | |
Weighted-average shares outstanding (in millions) | 4,144 | | | 4,142 | | | 4,143 | | | 4,141 | |
See Notes to Condensed Consolidated Financial Statements
| | |
Condensed Consolidated Statements of Comprehensive Income |
Verizon Communications Inc. and Subsidiaries |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | Nine Months Ended |
| September 30, | September 30, |
(dollars in millions) (unaudited) | 2021 | | 2020 | 2021 | | 2020 |
| | | | | | |
Net Income | $ | 6,554 | | | $ | 4,504 | | $ | 17,881 | | | $ | 13,630 | |
Other Comprehensive Income (Loss), Net of Tax (Expense) Benefit | | | | | | |
Foreign currency translation adjustments, net of tax of $(6), $10, $(13) and $10 | (146) | | | 124 | | (126) | | | 81 | |
Unrealized gain (loss) on cash flow hedges, net of tax of $61, $(176), $15 and $483 | (174) | | | 505 | | (42) | | | (1,391) | |
Unrealized gain (loss) on marketable securities, net of tax of $1, $(1), $2 and $(2) | — | | | 2 | | (5) | | | 7 | |
Defined benefit pension and postretirement plans, net of tax of $51, $55, $154 and $166 | (155) | | | (169) | | (465) | | | (507) | |
Other comprehensive income (loss) attributable to Verizon | (475) | | | 462 | | (638) | | | (1,810) | |
Total Comprehensive Income | $ | 6,079 | | | $ | 4,966 | | $ | 17,243 | | | $ | 11,820 | |
| | | | | | |
Comprehensive income attributable to noncontrolling interests | $ | 147 | | | $ | 147 | | $ | 429 | | | $ | 417 | |
Comprehensive income attributable to Verizon | 5,932 | | | 4,819 | | 16,814 | | | 11,403 | |
Total Comprehensive Income | $ | 6,079 | | | $ | 4,966 | | $ | 17,243 | | | $ | 11,820 | |
See Notes to Condensed Consolidated Financial Statements
| | |
Condensed Consolidated Balance Sheets |
Verizon Communications Inc. and Subsidiaries |
| | | | | | | | | | | |
| | | |
| At September 30, | | At December 31, |
(dollars in millions, except per share amounts) (unaudited) | 2021 | | 2020 |
| | | |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 9,936 | | | $ | 22,171 | |
Accounts receivable | 23,165 | | | 25,169 | |
Less Allowance for credit losses | 970 | | | 1,252 | |
| | | |
Accounts receivable, net | 22,195 | | | 23,917 | |
Inventories | 2,303 | | | 1,796 | |
Prepaid expenses and other | 5,843 | | | 6,710 | |
Total current assets | 40,277 | | | 54,594 | |
| | | |
Property, plant and equipment | 287,421 | | | 279,737 | |
Less Accumulated depreciation | 191,665 | | | 184,904 | |
Property, plant and equipment, net | 95,756 | | | 94,833 | |
| | | |
Investments in unconsolidated businesses | 1,100 | | | 589 | |
Wireless licenses | 145,767 | | | 96,097 | |
Deposits for wireless licenses | — | | | 2,772 | |
Goodwill | 24,887 | | | 24,773 | |
Other intangible assets, net | 7,022 | | | 9,413 | |
Operating lease right-of-use assets | 27,969 | | | 22,531 | |
Other assets | 10,679 | | | 10,879 | |
Total assets | $ | 353,457 | | | $ | 316,481 | |
| | | |
Liabilities and Equity | | | |
Current liabilities | | | |
Debt maturing within one year | $ | 7,623 | | | $ | 5,889 | |
Accounts payable and accrued liabilities | 20,153 | | | 20,658 | |
Current operating lease liabilities | 3,606 | | | 3,485 | |
Other current liabilities | 9,976 | | | 9,628 | |
Total current liabilities | 41,358 | | | 39,660 | |
| | | |
Long-term debt | 143,352 | | | 123,173 | |
Employee benefit obligations | 16,516 | | | 18,657 | |
Deferred income taxes | 38,481 | | | 35,711 | |
Non-current operating lease liabilities | 23,507 | | | 18,000 | |
Other liabilities | 11,754 | | | 12,008 | |
Total long-term liabilities | 233,610 | | | 207,549 | |
| | | |
Commitments and Contingencies (Note 12) | | | |
| | | |
Equity | | | |
Series preferred stock ($0.10 par value; 250,000,000 shares authorized; none issued) | — | | | — | |
Common stock ($0.10 par value; 6,250,000,000 shares authorized in each period; 4,291,433,646 shares issued in each period) | 429 | | | 429 | |
Additional paid in capital | 13,402 | | | 13,404 | |
Retained earnings | 70,062 | | | 60,464 | |
Accumulated other comprehensive loss | (709) | | | (71) | |
Common stock in treasury, at cost (151,269,750 and 153,304,088 shares outstanding) | (6,630) | | | (6,719) | |
Deferred compensation – employee stock ownership plans (ESOPs) and other | 490 | | | 335 | |
Noncontrolling interests | 1,445 | | | 1,430 | |
Total equity | 78,489 | | | 69,272 | |
Total liabilities and equity | $ | 353,457 | | | $ | 316,481 | |
See Notes to Condensed Consolidated Financial Statements
| | |
Condensed Consolidated Statements of Cash Flows |
Verizon Communications Inc. and Subsidiaries |
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
(dollars in millions) (unaudited) | 2021 | | 2020 |
| | | |
Cash Flows from Operating Activities | | | |
Net Income | $ | 17,881 | | | $ | 13,630 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization expense | 12,155 | | | 12,523 | |
Employee retirement benefits | (1,928) | | | 867 | |
Deferred income taxes | 2,970 | | | 530 | |
Provision for expected credit losses | 604 | | | 1,100 | |
Equity in losses of unconsolidated businesses, net of dividends received | 32 | | | 67 | |
| | | |
Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses | 603 | | | 1,345 | |
| | | |
Other, net | (1,155) | | | 2,410 | |
Net cash provided by operating activities | 31,162 | | | 32,472 | |
| | | |
Cash Flows from Investing Activities | | | |
Capital expenditures (including capitalized software) | (13,861) | | | (14,168) | |
Acquisitions of businesses, net of cash acquired | (459) | | | (507) | |
Acquisitions of wireless licenses | (47,027) | | | (3,757) | |
Proceeds from disposition of business | 4,122 | | | — | |
Other, net | 207 | | | (37) | |
Net cash used in investing activities | (57,018) | | | (18,469) | |
| | | |
Cash Flows from Financing Activities | | | |
Proceeds from long-term borrowings | 32,482 | | | 12,387 | |
Proceeds from asset-backed long-term borrowings | 2,695 | | | 4,439 | |
Repayments of long-term borrowings and finance lease obligations | (7,904) | | | (8,853) | |
Repayments of asset-backed long-term borrowings | (3,887) | | | (6,726) | |
Dividends paid | (7,797) | | | (7,636) | |
Other, net | (2,120) | | | (1,348) | |
Net cash provided by (used in) financing activities | 13,469 | | | (7,737) | |
| | | |
Increase (decrease) in cash, cash equivalents and restricted cash | (12,387) | | | 6,266 | |
Cash, cash equivalents and restricted cash, beginning of period | 23,498 | | | 3,917 | |
Cash, cash equivalents and restricted cash, end of period (Note 1) | $ | 11,111 | | | $ | 10,183 | |
See Notes to Condensed Consolidated Financial Statements
| | |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
Verizon Communications Inc. and Subsidiaries |
| | |
Note 1. Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.) and based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in Verizon Communications Inc.'s (Verizon or the Company) Annual Report on Form 10-K for the year ended December 31, 2020. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.
Certain amounts have been reclassified to conform to the current period’s presentation.
Earnings Per Common Share
There were a total of approximately 2 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the three and nine months ended September 30, 2021 and September 30, 2020.
Cash, Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates quoted market value and includes amounts held in money market funds.
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 condensed consolidated balance sheets.
Cash, cash equivalents and restricted cash are included in the following line items in the condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | |
| At September 30, | | At December 31, | | Decrease |
(dollars in millions) | 2021 | | 2020 | |
Cash and cash equivalents | $ | 9,936 | | | $ | 22,171 | | | $ | (12,235) | |
Restricted cash: | | | | | |
Prepaid expenses and other | 1,074 | | | 1,195 | | | (121) | |
Other assets | 101 | | | 132 | | | (31) | |
| | | | | |
| | | | | |
| | | | | |
Cash, cash equivalents and restricted cash | $ | 11,111 | | | $ | 23,498 | | | $ | (12,387) | |
| | |
Note 2. Revenues and Contract Costs |
We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of wireless equipment.
Revenue by Category
We have two reportable segments that we operate and manage as strategic business units - Consumer and Business. Revenue is disaggregated by products and services within Consumer and customer groups (Small and Medium Business, Global Enterprise, Public Sector and Other, and Wholesale) within Business. See Note 11 for additional information on revenue by segment.
Corporate and other primarily includes insurance captives as well as the historical results of the divested Verizon Media Group (Verizon Media). On September 1, 2021, we completed the sale of Verizon Media to an affiliate of Apollo Global Management Inc. Under our ownership, Verizon Media generated revenues from contracts with customers under Accounting Standards Updated (ASU) 2014-09, "Revenue from Contracts with Customers" (Topic 606) of approximately $1.4 billion and $5.3 billion during the three and nine months ended September 30, 2021, respectively. Under our ownership, Verizon Media generated revenues from contracts with customers under Topic 606 of approximately $1.7 billion and $4.7 billion during the three and nine months ended September 30, 2020, respectively. Refer to Note 3 for additional information on the sale of Verizon Media.
We also earn revenues that are not accounted for under Topic 606 from leasing arrangements (such as those for towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent. As allowed by the practical expedient within ASU 2016-02, "Leases" (Topic 842), we have elected to combine the lease and non-lease components for those arrangements of customer premise equipment where we are the lessor as components accounted for under Topic 606. During the three and nine months ended September 30, 2021, revenues from arrangements that were not accounted for under Topic 606 were approximately $803 million and $2.3 billion, respectively. During the three and nine months ended September 30, 2020, revenues from arrangements that were not accounted for under Topic 606 were approximately $715 million and $2.3 billion, respectively.
Remaining Performance Obligations
When allocating the total contract transaction price to identified performance obligations, a portion of the total transaction price may relate to service performance obligations which were not satisfied or are partially satisfied as of the end of the reporting period. Below we disclose information relating to these unsatisfied performance obligations. We apply the practical expedient available under Topic 606 that provides the option to exclude the expected revenues arising from unsatisfied performance obligations related to contracts that have an original expected duration of one year or less. This situation primarily arises with respect to certain month-to-month service contracts. At September 30, 2021, month-to-month service contracts represented approximately 93% of our wireless postpaid contracts and approximately 83% of our wireline Consumer and Small and Medium Business contracts, compared to September 30, 2020, for which month-to-month service contracts represented approximately 90% of our wireless postpaid contracts and 70% of our wireline Consumer and Small and Medium Business contracts.
Additionally, certain contracts provide customers the option to purchase additional services. The fees related to these additional services are recognized when the customer exercises the option (typically on a month-to-month basis).
Contracts for wireless services are generally either month-to-month and cancellable at any time (typically under a device payment plan) or contain terms ranging from greater than one month to up to two years (typically under a fixed-term plan). Additionally, customers may incur charges based on usage or additional optional services purchased in conjunction with entering into a contract that can be canceled at any time and therefore are not included in the transaction price. The transaction price allocated to service performance obligations, which are not satisfied or are partially satisfied as of the end of the reporting period, are generally related to contracts that are not accounted for as month-to-month contracts.
Our Consumer group customers also include traditional wholesale resellers that purchase and resell wireless service under their own brands to their respective customers. Reseller arrangements generally include a stated contract term, which typically extends longer than two years and, in some cases, include a periodic minimum revenue commitment over the contract term for which revenues will be recognized in future periods.
Consumer customer contracts for wireline services are generally month-to-month; however, they may have a service term of two years or shorter than twelve months. Certain contracts with Business customers for wireline services extend into future periods, contain fixed monthly fees and usage-based fees, and can include annual commitments in each year of the contract or commitments over the entire specified contract term; however, a significant number of contracts for wireline services with our Business customers have a contract term that is twelve months or less.
Additionally, there are certain contracts with Business customers for wireline and telematics services that have a contractual minimum fee over the total contract term. We cannot predict the time period when revenue will be recognized related to those contracts; thus, they are excluded from the time bands below. These contracts have varying terms spanning over approximately seven years ending in January 2029 and have aggregate contract minimum payments totaling $2.7 billion.
At September 30, 2021, the transaction price related to unsatisfied performance obligations that are expected to be recognized for the remainder of 2021, 2022 and thereafter was $4.7 billion, $14.5 billion and $6.3 billion, respectively. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations and changes in the timing and scope of contracts, arising from contract modifications.
Accounts Receivable and Contract Balances
The timing of revenue recognition may differ from the time of billing to our customers. Receivables presented in our condensed consolidated balance sheets represent an unconditional right to consideration. Contract balances represent amounts from an arrangement when either Verizon has performed, by transferring goods or services to the customer in advance of receiving all or partial consideration for such goods and services from the customer, or the customer has made payment to Verizon in advance of obtaining control of the goods and/or services promised to the customer in the contract.
Contract assets primarily relate to our rights to consideration for goods or services provided to customers but for which we do not have an unconditional right at the reporting date. Under a fixed-term plan, total contract revenue is allocated between wireless service and equipment revenues. In conjunction with these arrangements, a contract asset is created, which represents the difference between the amount of equipment revenue recognized upon sale and the amount of consideration received from the customer when the performance obligation related to the transfer of control of the equipment is satisfied. The contract asset is reclassified to accounts receivable as wireless services are provided and billed. We have the right to bill the customer as service is provided over time, which results in our right to the payment being unconditional. The contract asset balances are presented in our condensed consolidated balance sheets as Prepaid expenses and other and Other assets. We recognize the allowance for credit losses at inception and reassess quarterly based on management’s expectation of the asset’s collectability.
Contract liabilities arise when we bill our customers and receive consideration in advance of providing the goods or services promised in the contract. We typically bill service one month in advance, which is the primary component of the contract liability balance. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in our condensed consolidated balance sheets as Other current liabilities and Other liabilities.
The following table presents information about receivables from contracts with customers:
| | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, | | At January 1, | | At September 30, | | At January 1, |
(dollars in millions) | 2021 | | 2021 | | 2020 | | 2020 |
Receivables(1) | $ | 10,088 | | | $ | 12,029 | | | $ | 11,094 | | | $ | 12,078 | |
Device payment plan agreement receivables(2) | 11,178 | | | 10,358 | | | 9,559 | | | 11,741 | |
(1)Balances do not include receivables related to the following contracts: leasing arrangements (such as those for towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent.
(2)Included in device payment plan agreement receivables presented in Note 7. Balances do not include receivables derived from the sale of equipment on a device payment plan through an authorized agent.
The following table presents information about contract balances:
| | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, | | At January 1, | | At September 30, | | At January 1, |
(dollars in millions) | 2021 | | 2021 | | 2020 | | 2020 |
Contract asset | $ | 878 | | | $ | 937 | | | $ | 923 | | | $ | 1,150 | |
Contract liability (1) | 6,034 | | | 5,598 | | | 5,321 | | | 5,307 | |
(1) Revenue recognized related to contract liabilities existing at January 1, 2021 were $161 million and $4.2 billion for the three and nine months ended September 30, 2021, respectively. Revenue recognized related to contract liabilities existing at January 1, 2020 were $124 million and $4.2 billion, for the three and nine months ended September 30, 2020, respectively.
The balance of contract assets and contract liabilities recorded in our condensed consolidated balance sheets were as follows:
| | | | | | | | | | | |
| At September 30, | | At December 31, |
(dollars in millions) | 2021 | | 2020 |
Assets | | | |
Prepaid expenses and other | $ | 701 | | | $ | 733 | |
Other assets | 177 | | | 204 | |
Total | $ | 878 | | | $ | 937 | |
| | | |
Liabilities | | | |
Other current liabilities | $ | 5,159 | | | $ | 4,843 | |
Other liabilities | 875 | | | 755 | |
Total | $ | 6,034 | | | $ | 5,598 | |
Contract Costs
Topic 606 requires the recognition of an asset for incremental costs to obtain a customer contract, which are then amortized to expense over the respective periods of expected benefit. We recognize an asset for incremental commission expenses paid to internal and external sales personnel and agents in conjunction with obtaining customer contracts. We only defer these costs when we have determined the commissions are incremental costs that would not have been incurred absent the customer contract and are expected to be recoverable. Costs to obtain a contract are amortized and recorded ratably as commission expense over the period representing the transfer of goods or services to which the assets relate. Costs to obtain wireless contracts are amortized over both of our Consumer and Business customers' estimated device upgrade cycles, as such costs are typically incurred each time a customer upgrades. Costs to obtain wireline contracts are amortized as expense over the estimated customer relationship period for our Consumer customers. Incremental costs to obtain wireline contracts for our Business customers are insignificant. Costs to obtain contracts are recorded in Selling, general and administrative expense.
We also defer costs incurred to fulfill contracts that: (1) relate directly to the contract; (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract; and (3) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed as we satisfy our performance obligations and recorded in Cost of services. These costs principally relate to direct costs that enhance our wireline business resources, such as costs incurred to install circuits.
We determine the amortization periods for our costs incurred to obtain or fulfill a customer contract at a portfolio level due to the similarities within these customer contract portfolios.
Other costs, such as general costs or costs related to past performance obligations, are expensed as incurred.
Collectively, costs to obtain a contract and costs to fulfill a contract are referred to as deferred contract costs, and amortized over a two-to six-year period. Deferred contract costs are classified as current or non-current within Prepaid expenses and other and Other assets, respectively.
The balances of deferred contract costs included in our condensed consolidated balance sheets were as follows:
| | | | | | | | | | | |
| At September 30, | | At December 31, |
(dollars in millions) | 2021 | | 2020 |
Assets | | | |
Prepaid expenses and other | $ | 2,366 | | | $ | 2,472 | |
Other assets | 2,151 | | | 2,070 | |
Total | $ | 4,517 | | | $ | 4,542 | |
For the three and nine months ended September 30, 2021, we recognized expense of $751 million and $2.3 billion, respectively, associated with the amortization of deferred contract costs, primarily within Selling, general and administrative expense in our condensed consolidated statements of income. For the three and nine months ended September 30, 2020, we recognized expense of $763 million and $2.3 billion, respectively, associated with the amortization of deferred contract costs, primarily within Selling, general and administrative expense in our condensed consolidated statements of income.
We assess our deferred contract costs for impairment on a quarterly basis. We recognize an impairment charge to the extent the carrying amount of a deferred cost exceeds the remaining amount of consideration we expect to receive in exchange for the goods and services related to the cost, less the expected costs related directly to providing those goods and services that have not yet been recognized as expenses. There have been no impairment charges recognized for the three and nine months ended September 30, 2021 or September 30, 2020.
| | |
Note 3. Acquisitions and Divestitures |
Spectrum License Transactions
In March 2020, the Federal Communications Commission's (FCC) incentive auction, Auction 103, for spectrum licenses in the upper 37 Gigahertz (GHz), 39 GHz, and 47 GHz bands concluded. Verizon participated in this incentive auction and was the high bidder on 4,940 licenses, which primarily consisted of 37 GHz and, to a lesser extent, 39 GHz spectrum. As an incumbent licensee, our 39 GHz licenses provided us with incentive payments that were applied towards the purchase price of spectrum in the auction. The value of the licenses won by Verizon amounted to $3.4 billion, of which $1.8 billion was settled with the relinquished 39 GHz licenses. The remaining balance was settled in cash of $1.6 billion, of which $101 million was paid in December 2019. In connection with the incentive auction, a pre-tax net loss of $1.2 billion ($914 million after-tax) was recorded in Selling, general and administrative expense in the condensed consolidated statement of income during the nine months ended September 30, 2020 because the exchange of the previously held licenses for new licenses had commercial substance. See Note 4 for additional information. The new reconfigured licenses were received in the second quarter 2020 and are included in Wireless licenses in our condensed consolidated balance sheet.
In September 2020, the FCC completed Auction 105 for Priority Access Licenses. Verizon participated in the auction and was the high bidder on 557 licenses in the 3.5 GHz band valued at approximately $1.9 billion. Verizon made payments for these licenses in 2020 and received them from the FCC in March 2021. The purchase cost for these licenses and related capitalized interest, to the extent qualifying activities have occurred, are included in Wireless licenses in our condensed consolidated balance sheet.
In February 2021, the FCC concluded Auction 107 for C-Band wireless spectrum. Verizon was the winning bidder on 3,511 licenses, consisting of contiguous C-Band spectrum bands ranging between 140 and 200 megahertz of C-Band spectrum in all 406 markets available in the auction. Verizon paid $45.5 billion for the licenses it won, of which $44.6 billion was paid in the first quarter of 2021. In accordance with the rules applicable to the auction, Verizon is required to make additional payments to acquire the licenses. The payments are for our allocable share of clearing costs incurred by, and incentive payments due to, the incumbent license holders associated with the auction, which are estimated to be $7.7 billion. In September 2021, we made a payment of $1.3 billion for certain obligations related to projected clearing costs associated with the auction. We expect to make payments related to accelerated clearing incentives later in 2021 for the initial 46 markets. We expect to continue to make payments related to clearing cost and incentive payment obligations through 2024. These payments are dependent on the incumbent license holders accelerated clearing of the spectrum for Verizon’s use and, therefore, the final timing and amounts could differ based on the incumbent holders’ execution of their clearing process. In accordance with the FCC order, the clearing must be completed by December 2025.
The carrying value of the wireless spectrum won in Auction 107 will consist of all payments required to participate and purchase licenses in the auction, including Verizon’s allocable share of clearing costs incurred by, and incentive payments due to, the incumbent license holders associated with the auction that we are obligated to pay in order to acquire the licenses. Carrying value will also include capitalized interest to the extent qualifying activities have occurred. The licenses were received from the FCC in July 2021 and are included within Wireless licenses in our condensed consolidated balance sheet as of September 30, 2021. The average remaining renewal period for these acquired licenses was 15 years.
Refer to Note 6 for further details on significant debt transactions.
During the three and nine months ended September 30, 2021, we entered into and completed various other wireless license acquisitions for cash consideration of an insignificant amount and approximately $95 million, respectively. We recognized a pre-tax loss in connection with the sale of certain wireless licenses during the nine months ended September 30, 2021 of $223 million ($167 million after-tax).
Blue Jeans Network, Inc.
In April 2020, we entered into a definitive purchase agreement to acquire Blue Jeans Network, Inc. (BlueJeans), an enterprise-grade video conferencing and event platform, whose services are sold to Business customers globally. The transaction closed in May 2020. The aggregate cash consideration paid by Verizon at the closing of the transaction was approximately $397 million, net of cash acquired.
TracFone Wireless, Inc.
In September 2020, we entered into a purchase agreement (Tracfone Purchase Agreement) with América Móvil to acquire TracFone Wireless, Inc. (Tracfone), a provider of prepaid and value mobile services in the U.S. Under the terms of the Tracfone Purchase Agreement, we will acquire all of the stock of Tracfone for approximately $3.1 billion in cash and $3.1 billion in Verizon common stock, subject to customary adjustments, at closing. The number of shares issued will be based on an average trading price determined as of the closing date and is subject to a minimum number of shares issuable of 47,124,445 and a maximum number of shares issuable of 57,596,544. The Tracfone Purchase Agreement also includes up to an additional $650 million in future cash consideration related to the achievement of certain performance measures and other commercial arrangements. The transaction is subject to regulatory approvals and closing conditions and is expected to close in the fourth quarter of 2021.
Bluegrass Cellular
In October 2020, we entered into a definitive agreement to acquire certain assets of Bluegrass Cellular (Bluegrass), a rural wireless operator serving central Kentucky. Bluegrass provides wireless service to 210,000 customers in 34 counties in rural service areas 3, 4, and 5 in Central Kentucky. The transaction closed in March 2021. The aggregate cash consideration paid by Verizon at the closing of the transaction was approximately $412 million, net of cash acquired, which is subject to customary closing adjustments.
The financial results of Bluegrass are included in the consolidated results of Verizon from the date of acquisition. For the three and nine months ended September 30, 2021, revenue related to Bluegrass was insignificant and approximately $88 million, respectively.
The acquisition of Bluegrass was accounted for as a business combination. We are currently assessing the identification and measurement of the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition. Preliminarily, we recorded approximately $141 million of plant, property and equipment, $135 million of intangible assets and $92 million of goodwill. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired. The goodwill represents future economic benefits that we expect to achieve as a result of the acquisition. The goodwill related to this acquisition is included within Consumer.
Verizon Media
On May 2, 2021, Verizon entered into a definitive agreement with an affiliate of Apollo Global Management Inc. (the Apollo Affiliate) pursuant to which we agreed to sell Verizon Media in return for consideration of $4.3 billion in cash, subject to customary adjustments, $750 million in non-convertible preferred limited partnership units of the Apollo Affiliate, and 10% of the fully-diluted common limited partnership units of the Apollo Affiliate.
On September 1, 2021, we completed the sale of Verizon Media. As of the close of the transaction, cash proceeds, the fair value of the non-convertible preferred limited partnership units of the Apollo Affiliate, and the fair value of 10% of the fully-diluted common limited partnership units of the Apollo Affiliate were $4.3 billion, $496 million, and $124 million, respectively. We recorded a pre-tax gain on sale of approximately $1.1 billion (after-tax $1.1 billion) in Selling general and administrative expense in our condensed consolidated statement of income for the three and nine months ended September 30, 2021. In addition, we incurred $346 million of various costs associated with this disposition which are primarily recorded in Selling general and administrative expense in our condensed consolidated statement of income for the three and nine months ended September 30, 2021.
Upon the closing of the transaction, Verizon’s preferred limited partnership interest in the Apollo Affiliate and 10% common interest in the Apollo Affiliate were recognized at their initial fair value of $496 million and $124 million, respectively. The fair values were both estimated using a combination of the market approach and the income approach. The valuations are both considered Level 3 fair value measurements due to the use of significant judgment and unobservable inputs, which include the amount and timing of future cash flows, and a discount rate reflecting risks inherent in the future cash flows and market prices. Verizon’s preferred limited partnership interest is accounted for at cost, and is subject to impairment and other changes resulting from observable price changes in orderly transactions for identical or similar investments of the issuer. On September 28, 2021, the Apollo Affiliate redeemed $100 million of Verizon’s preferred limited partnership interest reducing the carrying value of our preferred interest at September 30, 2021 to $396 million. The redemption is reflected within Net cash used in investing activities in our condensed consolidated statement of cash flows for the nine months ended September 30, 2021. Verizon’s 10% common interest in the Apollo Affiliate is accounted for as an equity method investment. The post-sale results of Verizon’s common ownership interest in the Apollo Affiliate are recorded through the equity method of accounting, within our Corporate and other segment.
The following table summarizes the assets and liabilities which were disposed as a result of the closing of the transaction:
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| September 1, | | |
(dollars in millions) | 2021 | | |
Assets: | | | |
Cash, cash equivalents and restricted cash | $ | 168 | | | |
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Accounts receivable | 1,597 | | | |
Prepaid expenses and other | 134 | | | |
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Property, plant and equipment, net | 1,235 | | | |
Other intangible assets, net | 2,579 | | | |
Other assets | 221 | | | |
Total assets | $ | 5,934 | | | |
Liabilities: | | | |
Accounts payable and accrued liabilities | $ | 1,411 | | | |
Other current liabilities | 315 | | | |
Other liabilities | 310 | | | |
Total liabilities | $ | 2,036 | | | |
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The operating results of Verizon Media are included within our Corporate and other segment for all periods presented through the date of the sale. Refer to Note 2 for further details on revenues generated by Verizon Media under Topic 606.
In connection with the closing of the transaction, we entered into Transition Services Agreements with the Apollo Affiliate, under which Verizon will continue to provide and receive specified administrative and technical services to support operations for up to 12 months and 18 months, respectively.
Other
During the three and nine months ended September 30, 2021, we completed other acquisitions for cash consideration of an insignificant amount and $51 million, respectively.
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Note 4. Wireless Licenses, Goodwill, and Other Intangible Assets |
Wireless Licenses
The carrying amounts of our Wireless licenses, as well as wireless spectrum for which licenses had not yet been received, are as follows:
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| At September 30, | At December 31, |
(dollars in millions) | 2021 | 2020 |
Wireless licenses | $ | 145,767 | | $ | 96,097 | |
Deposits for wireless licenses | — | | 2,772 | |
At September 30, 2021 and 2020, approximately $54.8 billion and $6.9 billion, respectively, of wireless licenses were under development for commercial service for which we were capitalizing interest costs. We recorded approximately $1.1 billion and $171 million of capitalized interest on wireless licenses for the nine months ended September 30, 2021 and 2020, respectively.
In July 2021, we received the wireless licenses won in connection with the FCC's auction for C-Band wireless spectrum, Auction 107. As a result, these wireless licenses, including capitalized interest, were reclassified from Deposits for wireless licenses to Wireless licenses in our condensed consolidated balance sheet. Refer to Note 3 for additional information regarding spectrum license transactions.
In the first quarter of 2020, we reclassified substantially all of our 39 GHz wireless licenses, including capitalized interest, with a carrying value of $2.8 billion to assets held for sale in connection with the FCC's incentive auction, Auction 103. As a result, these wireless licenses were adjusted down to their fair value of $1.6 billion resulting in a pre-tax loss of $1.2 billion ($914 million after-tax) in 2020. The new reconfigured licenses were received in the second quarter 2020 and had a value of $3.4 billion.
During the nine months ended September 30, 2021, we renewed various wireless licenses in accordance with FCC regulations. The average renewal period for these licenses was 10 years.
Goodwill
Changes in the carrying amount of Goodwill are as follows:
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(dollars in millions) | Consumer | | Business | | Other | | Total |
Balance at January 1, 2021 (1) | $ | 17,222 | | | $ | 7,535 | | | $ | 16 | | | $ | 24,773 | |
Acquisitions (2) | 92 | | | — | | | 37 | | | 129 | |
Reclassifications, adjustments and other | 3 | | | (17) | | | (1) | | | (15) | |
Balance at September 30, 2021 (1) | $ | 17,317 | | | $ | 7,518 | | | $ | 52 | | | $ | 24,887 | |
(1) Goodwill is net of accumulated impairment charges of $4.8 billion, related to our historical Media reporting unit, which included Verizon Media. On September 1, 2021, we completed the sale of Verizon Media. See Note 3 for additional information.
(2) The change in goodwill due to acquisitions is related to Bluegrass and other insignificant transactions. See Note 3 for additional information.
Other Intangible Assets
The following table displays the composition of Other intangible assets, net as well as the respective amortization period:
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| At September 30, 2021 | | At December 31, 2020 |
(dollars in millions) | Gross (1) Amount | | Accumulated Amortization | | Net Amount | | Gross Amount | | Accumulated Amortization | | Net Amount |
Customer lists (8 to 13 years) | $ | 1,933 | | | $ | (1,033) | | | $ | |