EX-13 3 d35513dex13.htm EX-13 EX-13

EXHIBIT 13

 

Selected Financial Data Verizon Communications Inc. and Subsidiaries

 

     (dollars in millions, except per share amounts)  
      2015      2014      2013      2012      2011  

Results of Operations

              

Operating revenues

   $ 131,620       $ 127,079       $ 120,550       $ 115,846       $ 110,875   

Operating income

     33,060         19,599         31,968         13,160         12,880   

Net income attributable to Verizon

     17,879         9,625         11,497         875         2,404   

Per common share – basic

     4.38         2.42         4.01         .31         .85   

Per common share – diluted

     4.37         2.42         4.00         .31         .85   

Cash dividends declared per common share

     2.230         2.160         2.090         2.030         1.975   

Net income attributable to noncontrolling interests

     496         2,331         12,050         9,682         7,794   

Financial Position

              

Total assets

   $   244,640       $   232,616       $   273,654       $   222,911       $   228,194   

Debt maturing within one year

     6,489         2,735         3,933         4,369         4,849   

Long-term debt

     103,705         110,536         89,658         47,618         50,303   

Employee benefit obligations

     29,957         33,280         27,682         34,346         32,957   

Noncontrolling interests

     1,414         1,378         56,580         52,376         49,938   

Equity attributable to Verizon

     16,428         12,298         38,836         33,157         35,970   

 

 

Significant events affecting our historical earnings trends in 2013 through 2015 are described in “Other Items” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

 

 

2012 data includes severance, pension and benefit charges, early debt redemption costs and litigation settlement charges. 2011 data includes severance, pension and benefit charges and early debt redemption costs.

 

Stock Performance Graph

Comparison of Five-Year Total Return Among Verizon,

S&P 500 Telecommunications Services Index and S&P 500 Stock Index

 

LOGO

 

      At December 31,  
Data Points in Dollars    2010      2011      2012      2013      2014      2015  

Verizon

     100.0         118.3         133.9         158.5         157.7         163.2   

S&P 500 Telecom Services

     100.0         106.3         125.7         140.0         144.2         149.0   

S&P 500

     100.0         102.1         118.4         156.7         178.1         180.6   

 

The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period. It assumes $100 was invested on December 31, 2010 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 governmental agencies. With a presence around the world, we offer voice, data and video services and solutions on our wireless and wireline networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security and control. We have two reportable segments, Wireless and Wireline. Our wireless business, operating as Verizon Wireless, provides voice and data services and equipment sales across the United States (U.S.) using one of the most extensive and reliable wireless networks. Our wireline business provides consumer, business and government customers with communications products and enhanced services, including broadband data and video, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. We have a highly skilled, diverse and dedicated workforce of approximately 177,700 employees as of December 31, 2015.

To compete effectively in today’s dynamic marketplace, we are focused on transforming around the capabilities of our high-performing networks with a goal of future growth based on delivering what customers want and need in the new digital world. Our three tier strategy is to lead at the network connectivity level in the markets we serve, develop new business models through global platforms in video and Internet of Things (IoT) and create certain opportunities in applications and content for incremental monetization. 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 optic network that supports our businesses, 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. Our network leadership will continue to be the hallmark of our brand, and provide the fundamental strength at the connectivity, platform and solutions layers upon which we build our competitive advantage.

Strategic Transactions

Spectrum Auction

In January 2015, the Federal Communications Commission (FCC) completed an auction of 65 MHz of spectrum in the Advanced Wireless Services (AWS)-3 band. We participated in that auction and were the high bidder on 181 spectrum licenses, for which we paid cash of approximately $10.4 billion. The FCC granted us these spectrum licenses in April 2015.

Acquisition of AOL Inc.

On May 12, 2015, we entered into an Agreement and Plan of Merger (the Merger Agreement) with AOL Inc. (AOL) pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes. On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion. Holders of approximately 6.6 million shares exercised appraisal rights under Delaware law. If they had not exercised these rights, Verizon would have paid an additional $330 million for such shares at the closing.

AOL is a leader in the digital content and advertising platform space. Verizon has been investing in emerging technology that taps into the market shift to digital content and advertising. AOL’s business model aligns with this approach, and we believe that its combination of owned and operated content properties plus a digital advertising platform enhances our ability to further develop future revenue streams. See Note 2 to the consolidated financial statements for additional information.

Access Line Sale

On February 5, 2015, we announced that we have entered into a definitive agreement with Frontier Communications Corporation (Frontier) pursuant to which Verizon will sell its local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and high-speed Internet service and long distance voice accounts in these three states for approximately $10.5 billion (approximately $7.5 billion net of income taxes), subject to certain adjustments and including the assumption of $0.6 billion of indebtedness from Verizon by Frontier. The transaction, which includes the acquisition by Frontier of the equity interests of Verizon’s incumbent local exchange carriers (ILECs) in California, Florida and Texas, does not involve any assets or liabilities of Verizon Wireless. The assets and liabilities that will be sold are currently included in Verizon’s continuing operations and classified as assets held for sale and liabilities related to assets held for sale on our consolidated balance sheet as of December 31, 2015. The transaction is subject to the satisfaction of certain closing conditions including, among others, receipt of federal approvals from the FCC and the antitrust authorities and state regulatory approvals. All federal and state regulatory approvals have been obtained. We expect this transaction to close at the end of the first quarter of 2016.

Based on the number of voice connections and Fios Internet and video subscribers, respectively, as of December 31, 2015, the transaction will result in Frontier acquiring approximately 3.4 million voice connections, 1.6 million Fios Internet subscribers, 1.2 million Fios video subscribers and the related ILEC businesses from Verizon.


Tower Monetization Transaction

During March 2015, we completed a transaction with American Tower Corporation (American Tower) pursuant to which American Tower acquired the exclusive rights to lease and operate approximately 11,300 of our wireless towers for an upfront payment of $5.0 billion (the Tower Monetization Transaction). Under the terms of the leases, American Tower has exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, American Tower has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. As part of this transaction, we sold 162 towers for $0.1 billion. We have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates, with options to renew. We have accounted for the upfront payment as deferred rent and as a financing obligation.

Wireless Transaction

On February 21, 2014, we completed the acquisition of Vodafone Group Plc’s (Vodafone) indirect 45% interest in Cellco Partnership d/b/a Verizon Wireless for aggregate consideration of approximately $130 billion (the Wireless Transaction). The consideration paid was primarily comprised of cash of approximately $58.89 billion and Verizon common stock with a value of approximately $61.3 billion. With full control of Verizon Wireless enhancing our operational efficiency, we believe we are well-positioned to meet the challenges of an increasingly competitive industry. See Note 2 to the consolidated financial statements for additional information.

Business Overview

Wireless

In our Wireless business, revenues grew 4.6% during 2015 driven by a 54.4% increase in equipment revenue as a result of an increase in device sales, primarily smartphones, under the Verizon device payment program (formerly known as Verizon Edge), partially offset by a decline in device sales under our traditional fixed-term service plans. Customers on our fixed-term service plans have historically paid higher fees for their wireless service in exchange for the ability to purchase their wireless devices at subsidized prices. Under the Verizon device payment program, our eligible wireless customers purchase phones or tablets at unsubsidized prices on an installment basis (a device installment plan). Customers that activate service on devices purchased under the device payment program or on a compatible device that they already own pay lower service fees (unsubsidized service pricing) as compared to those under our fixed-term service plans. The increase in activations of devices purchased under the Verizon device payment program has resulted in a relative shift of revenue from service revenue to equipment revenue and caused a change in the timing of the recognition of revenue. This shift in revenue was the result of recognizing a higher amount of equipment revenue at the time of sale of devices under the device payment program. For the year ended December 31, 2015, phone activations under the Verizon device payment program represented approximately 54% of retail postpaid phones activated compared to approximately 18% during 2014. During the fourth quarter of 2015, phone activations under the Verizon device payment program represented approximately 67% of retail postpaid phones activated. At December 31, 2015, approximately 29% of our retail postpaid phone connections participated in the Verizon device payment program compared to approximately 8% at December 31, 2014. At December 31, 2015, approximately 42% of our retail postpaid phone connections were on unsubsidized service pricing. At December 31, 2015, retail postpaid connections were 4.4% higher than at December 31, 2014, with smartphones representing 84% of our retail postpaid phone base at December 31, 2015 compared to 79% at December 31, 2014.

In August 2015, we launched a simplified shared data plan, the Verizon Plan, that offers customers various sizes of data packages that can be shared among up to 10 devices on a customer’s account. New customers who wish to participate in this new plan can do so by purchasing a device from Verizon either under our device payment program or at full retail, or by using their own compatible device. In addition, our current customers have the option of either moving to the Verizon Plan, subject to certain restrictions, or keeping their existing plan.

We are focusing our wireless capital spending on adding capacity and density to our fourth generation (4G) Long Term Evolution (LTE) network, which is available to over 98% of the U.S. population in more than 500 markets covering approximately 312 million people, including those in areas served by our LTE in Rural America partners. Approximately 91% of our total data traffic in December 2015 was carried on our 4G LTE network. We are investing in the densification of our network by utilizing small cell technology, in-building solutions and distributed antenna solutions. Densification enables us to add capacity to manage mobile video consumption and demand for IoT, as well as position us for future fifth-generation (5G) technology. In 2015, we announced our commitment to developing and deploying 5G wireless technology. We are working with key partners to ensure the aggressive pace of innovation, standards development and appropriate requirements for this next generation of wireless technology.

Wireline

In our Wireline business, revenues declined 1.8% during 2015 primarily due to revenue declines in Global Enterprise resulting from lower voice services and data networking revenues, as well as the negative impact of foreign exchange rates. To compensate for the shrinking market for traditional voice service, we continue to build our Wireline segment around data, video and advanced business services – areas where demand for reliable high-speed connections is growing. The decrease in revenues in our Wireline segment was partially offset by revenue increases in Consumer retail driven by Fios. During the year ended December 31, 2015, Fios represented approximately 79% of Consumer retail revenue compared to approximately 76% in 2014. As the penetration of Fios products increases, we continue to seek ways to increase revenue and further realize operating and capital efficiencies as well as maximize profitability. As more applications are developed for this high-speed service, we expect that Fios will become a hub for managing multiple home services that will eventually be part of the digital grid, including not just entertainment and communications, but also IoT technology used to support wireless communications in areas such as home monitoring, health monitoring, energy management and utilities management.


We continue to develop offerings on our Fios platform. During 2015, Verizon announced the introduction of Fios Custom TV, which offers customers the option of purchasing a package of channels that includes a base set of select national networks and local broadcast stations plus their choice of two sets of channels grouped into various content categories, such as news, sports and entertainment. Customers can add more sets of categorized channels to their Custom TV package for an additional monthly fee. As with all Fios TV packages, Custom TV customers also receive the Fios Local Package, which contains local versions of the Fox, CBS, NBCU, and ABC broadcast stations and other similar local content.

Capital Expenditures and Investments

We continue to invest in our wireless network, high-speed fiber and other advanced technologies to position ourselves at the center of growth trends for the future. During 2015, these investments included $17.8 billion for capital expenditures and $9.9 billion for acquisitions of wireless licenses. In addition, we acquired AOL to enhance our digital media and advertising capabilities. See “Cash Flows Used in Investing Activities” and Note 2 to the consolidated financial statements for additional information. We believe that our investments aimed at expanding our portfolio of products and services will provide our customers with an even more efficient, reliable infrastructure for competing in the information economy.

Trends

In the sections that follow, we provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and discuss our results of operations, financial position and sources and uses of cash. In addition, we highlight key trends and uncertainties to the extent practicable.

The industries that we operate in are highly competitive, which we expect to continue particularly as traditional, non-traditional and emerging service providers seek increased market share. We believe that our high-quality customer base and superior networks differentiate us from our competitors and enable us to provide enhanced communications experiences to our customers. We believe our focus on the fundamentals of running a good business, including operating excellence and financial discipline, gives us the ability to plan and manage through changing economic and competitive conditions. We will continue to invest for growth, which we believe is the key to creating value for our shareowners. We are investing in innovative technology, like wireless networks and high-speed fiber, as well as the platforms that will position us to capture incremental profitable growth in new areas, like mobile video and IoT, to position ourselves at the center of growth trends of the future.

Connection and Operating Trends

In our Wireless segment, we expect to continue to attract and maintain the loyalty of high-quality retail postpaid customers, capitalizing on demand for data services and bringing our customers new ways of using wireless services in their daily lives. We expect that future connection growth will be driven by smartphones, tablets and other connected devices. We believe these devices will attract and retain higher value retail postpaid connections, contribute to continued increases in the penetration of data services and help us remain competitive with other wireless carriers. We expect future growth opportunities will be dependent on expanding the penetration of our network services, offering innovative wireless devices for both consumer and business customers and increasing the number of ways that our customers can connect with our network and services, and we expect to manage churn by focusing on improving the customer experience through simplified pricing and better execution in our distribution channels.

Service and equipment pricing play an important role in the wireless competitive landscape. As the demand for wireless services continues to grow, wireless service providers are offering service plans that include unlimited voice minutes and text messages and a specific amount of data access in varying megabyte or gigabyte sizes or, in some cases, unlimited data usage at competitive prices. Some wireless service providers also allow customers to roll over unused data allowances to the next billing period. Furthermore, some wireless service providers offer price plans to new customers that undercut pricing under the customer’s service plan with its current wireless provider. Some wireless providers also offer promotional pricing and incentives targeted specifically to customers of Verizon Wireless.

Many wireless service providers, as well as equipment manufacturers, offer device payment options that decouple service pricing from equipment pricing and blur the traditional boundary between prepaid and postpaid plans. These payment options include device installment plans, which provide customers with the ability to pay for their device over a period of time, and device leasing arrangements. Historically, wireless service providers offered customers wireless plans whereby, in exchange for the customer entering into a fixed-term service agreement, the wireless service providers significantly, and in some cases fully, subsidized the customer’s device purchase. Wireless providers recovered those subsidies through higher service fees as compared to those paid by customers on device installment plans. We and many other wireless providers have limited or discontinued the use of device subsidies. As a result of the increased penetration of device installment plans, we expect the number of customers on plans with unsubsidized service pricing to continue to grow in 2016. 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, while meeting their wireless service needs.

In our Wireline segment, we have experienced continuing access line losses as customers have disconnected both primary and secondary lines and switched to alternative technologies such as wireless, voice over Internet protocol (VoIP) and cable for voice and data services. We expect to continue to experience access line losses as customers continue to switch to alternate technologies. We also expect Consumer retail revenues to increase, primarily driven by our Fios services, as we seek to increase our penetration rates within our Fios service areas.


Despite this challenging environment, we expect that we will be able to grow key aspects of our Wireline segment by providing network reliability, offering product bundles that include broadband Internet access, digital television and local and long distance voice services, offering more robust IP products and services, and accelerating our cloud computing and IoT strategies. We will also continue to focus on cost efficiencies to attempt to offset adverse impacts from unfavorable economic conditions and competitive pressures.

Operating Revenue

We expect to experience revenue growth in our Wireless segment in 2016, primarily as a result of an increase in the sale of devices under the Verizon device payment program. The increase in activations of these devices with unsubsidized service pricing results in a relative shift of revenue from service revenue to equipment revenue and causes a change in the timing of the recognition of revenue. This shift in revenue is the result of recognizing a higher amount of equipment revenue at the time of sale of devices under the device payment program. As a result of the increased penetration of device installment plans, we expect the number of customers on plans with unsubsidized service pricing to continue to grow in 2016.

We expect Fios broadband and video penetration to positively impact our Mass Markets revenue and subscriber base. Although we have experienced revenue declines in our Global Enterprise business, we expect our Global Enterprise business to be positively impacted by additional revenues from application services, such as our cloud, security and other solutions-based services and from continued customer migration of their services to Private IP and other strategic networking services. We believe the trend in these growth areas as well as our offerings in telematics and video streaming will help offset the continuing decline in revenues in our Wireline segment related to retail voice connection losses and the continued decline in our legacy wholesale and enterprise markets.

We are focused on developing new products and services as well as commercial models in mobile video and the IoT to monetize usage on our networks and expand our revenue mix. Although we do not expect to realize material incremental revenues from these initiatives in 2016, we expect these initiatives will have a long-term positive impact on revenues.

Operating Costs and Expenses

We anticipate our overall wireless operating costs will increase as a result of the expected increase in the volume of smartphone sales, which will result in higher equipment costs. In addition, we expect content costs for our Fios video service to continue to increase. We also expect to incur costs related to the development of new products and services in mobile video and IoT. However, we expect to achieve certain cost efficiencies in 2016 and beyond as we continue to streamline our business processes with a focus on improving productivity and increasing profitability.

Upon the closing of the sale of our local exchange business and related landline activities in California, Florida and Texas, we expect that our Wireline segment EBITDA margin and operating income margin will decline. We expect to continue to undertake initiatives, including headcount and organizational realignment initiatives, to address our cost structure to mitigate this impact to our consolidated margins.

Cash Flow from Operations

We create value for our shareowners by investing the cash flows generated by our business in opportunities and transactions that support continued profitable growth, thereby increasing customer satisfaction and usage of our products and services. In addition, we have used our cash flows to maintain and grow our dividend payout to shareowners. Verizon’s Board of Directors increased the Company’s quarterly dividend by 2.7% during 2015, making this the ninth 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, 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”). We expect to use the proceeds from the Frontier transaction to reduce our debt levels. We also remain committed to returning to our pre Wireless Transaction credit-rating profile in the 2018 to 2019 timeframe.

Capital Expenditures

Our 2016 capital program includes capital to fund advanced networks and services, including 4G LTE and Fios, the continued expansion of our core networks, including our IP and data center enhancements, and support for our copper-based legacy voice networks and other expenditures to drive operating efficiencies. The level and the timing of the Company’s capital expenditures within these broad categories can vary significantly as a result of a variety of factors outside our control, including, for example, material weather events. We are replacing copper wire with fiber-optic cable which will not alter our capital program but should result in lower maintenance costs in the future. Capital expenditures were $17.8 billion in 2015 and $17.2 billion in 2014. We believe that we have significant discretion over the amount and timing of our capital expenditures on a Company-wide basis as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events. We expect capital expenditures in 2016, which will be primarily focused on adding capacity to our 4G LTE network in order to stay ahead of our customers’ increasing data demands, to be in the range of approximately $17.2 billion to $17.7 billion. This includes capital spending up to approximately $150 million for the properties to be sold to Frontier.


Consolidated Results of Operations

In this section, we discuss our overall results of operations and highlight items of a non-operational nature that are not included in our segment results. We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products and services. In “Segment Results of Operations,” we review the performance of our two reportable segments.

On February 21, 2014, we completed the acquisition of Vodafone’s indirect 45% interest in Verizon Wireless. As a result, for 2014 our results reflect our 55% ownership of Verizon Wireless through the closing of the Wireless Transaction and reflect our full ownership of Verizon Wireless from the closing of the Wireless Transaction through December 31, 2014.

Corporate and other includes the operations of AOL and related businesses, unallocated corporate expenses, the results of other businesses, such as our investments in unconsolidated businesses, pension and other employee benefit related costs and lease financing. Effective January 1, 2014, we have also reclassified the results of certain businesses, such as development stage businesses that support our strategic initiatives, from our Wireline segment to Corporate and other. The impact of this reclassification was not material to our consolidated financial statements or our segment results of operations. Corporate and other also includes the historical results of divested operations and other adjustments and gains and losses that are not allocated in assessing segment performance due to their non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results as these items are included in the chief operating decision maker’s assessment of segment performance. We believe that this presentation assists users of our financial statements in better understanding our results of operations and trends from period to period.

On July 1, 2014, our Wireline segment sold a non-strategic business (see “Acquisitions and Divestitures”). Accordingly, the historical Wireline results for these operations, which were not material to our consolidated financial statements or our segment results of operations, have been reclassified to Corporate and other to reflect comparable segment operating results. The results of operations related to this divestiture included within Corporate and other are as follows:

 

     (dollars in millions)  
Years Ended December 31,    2015      2014      2013  

Impact of Divested Operations

        

Operating revenues

   $     —         $     256       $     599   

Cost of services

     —           239         531   

Selling, general and administrative expense

     —           5         25   

 

Consolidated Revenues

 

           (dollars in millions)  
                       Increase/(Decrease)  
Years Ended December 31,      2015        2014        2013        2015 vs. 2014        2014 vs. 2013   

Wireless

              

Service

   $ 70,396      $ 72,630      $ 69,033      $ (2,234 )      (3.1 )%    $ 3,597        5.2

Equipment

     16,924        10,959        8,111        5,965        54.4        2,848        35.1   

Other

     4,360        4,057        3,879        303        7.5        178        4.6   
  

 

 

   

 

 

     

 

 

   

Total

     91,680        87,646        81,023        4,034        4.6        6,623        8.2   

Wireline

              

Mass Markets

     18,473        18,047        17,383        426        2.4        664        3.8   

Global Enterprise

     12,943        13,649        14,156        (706 )      (5.2 )      (507     (3.6

Global Wholesale

     5,979        6,190        6,560        (211 )      (3.4 )      (370     (5.6

Other

     325        543        525        (218 )      (40.1 )      18        3.4   
  

 

 

   

 

 

     

 

 

   

Total

     37,720        38,429        38,624        (709 )      (1.8 )      (195     (0.5

Corporate and other

     3,444        2,144        2,113        1,300        60.6        31        1.5   

Eliminations

     (1,224 )      (1,140     (1,210     (84 )      7.4        70        (5.8
  

 

 

   

 

 

     

 

 

   

Consolidated Revenues

   $     131,620      $     127,079      $     120,550      $     4,541        3.6      $ 6,529        5.4   
  

 

 

   

 

 

     

 

 

   


2015 Compared to 2014

The increase in consolidated revenues during 2015 was primarily due to higher equipment revenues in our Wireless segment, higher revenues as a result of the acquisition of AOL and higher Mass Markets revenues driven by Fios services at our Wireline segment. Partially offsetting these increases were lower Service revenues at our Wireless segment and lower Global Enterprise revenues at our Wireline segment.

Wireless’ revenues increased $4.0 billion, or 4.6%, during 2015 primarily as a result of growth in equipment revenue. Equipment revenue increased by $6.0 billion, or 54.4% during 2015 as a result of an increase in device sales, primarily smartphones, under the Verizon device payment program, partially offset by a decline in device sales under traditional fixed-term service plans. Service revenue, which does not include recurring device installment billings related to the Verizon device payment program, decreased by $2.2 billion, or 3.1%, during 2015 primarily driven by an increase in the activation of devices purchased under the Verizon device payment program on plans with unsubsidized service pricing. The increase in these activations resulted in a relative shift of revenue from service revenue to equipment revenue and caused a change in the timing of the recognition of revenue. This shift in revenue was the result of recognizing a higher amount of equipment revenue at the time of sale of devices under the device payment program. During the year ended December 31, 2015, phone activations under the Verizon device payment program represented approximately 54% of retail postpaid phones activated compared to approximately 18% during 2014. During the fourth quarter of 2015, phone activations under the Verizon device payment program represented approximately 67% of retail postpaid phones activated. At December 31, 2015, approximately 29% of our retail postpaid phone connections participated in the Verizon device payment program compared to approximately 8% at December 31, 2014. At December 31, 2015, approximately 42% of our retail postpaid phone connections were on unsubsidized service pricing. Service revenue plus recurring device installment billings related to the Verizon device payment program increased 2.0% during 2015.

Retail postpaid connection net additions decreased during 2015 primarily due to a decrease in retail postpaid connection gross additions, partially offset by a lower retail postpaid connection churn rate. Retail postpaid connections per account increased as of December 31, 2015 compared to December 31, 2014, primarily due to increases in Internet devices.

Wireline’s revenues decreased $0.7 billion, or 1.8%, during 2015 primarily as a result of declines in Global Enterprise, partially offset by higher Mass Markets revenues driven by Fios services.

Mass Markets revenues increased $0.4 billion, or 2.4%, during 2015 primarily due to the expansion of Fios services (voice, internet and video), including our Fios Quantum offerings, as well as changes in our pricing strategies, partially offset by the continued decline of local exchange revenues.

Global Enterprise revenues decreased $0.7 billion, or 5.2%, during 2015 primarily due to lower voice services and data networking revenues, lower networking solutions revenues, a decline in customer premise equipment revenues and the negative impact of foreign exchange rates.

Corporate and other revenues increased $1.3 billion, or 60.6%, during 2015 primarily as a result of the acquisition of AOL, which was completed on June 23, 2015.

2014 Compared to 2013

The increase in consolidated revenues during 2014 was primarily due to higher revenues at Wireless, as well as higher Mass Markets revenues driven by Fios services at our Wireline segment. Partially offsetting these increases were lower Global Enterprise Core and Global Wholesale revenues at our Wireline segment.

Wireless’ revenues increased $6.6 billion, or 8.2%, during 2014 primarily as a result of growth in service revenue and equipment revenue. The increase in service revenue, which does not include recurring equipment installment billings related to the Verizon device payment program, during 2014 was primarily driven by higher retail postpaid service revenue, which increased largely as a result of an increase in retail postpaid connections as well as the continued increase in penetration of 4G LTE smartphones and tablets through our More Everything plans. Retail postpaid connection net additions increased during 2014 primarily due to an increase in retail postpaid connection gross additions partially offset by an increase in our retail postpaid connection churn rate. Retail postpaid connections per account increased as of December 31, 2015 compared to December 31, 2014 primarily due to the increased penetration of tablets. Equipment revenue increased during 2014 primarily due to an increase in device sales under both traditional fixed-term service plans and the Verizon device payment program.

Wireline’s revenues decreased $0.2 billion, or 0.5%, during 2014 primarily as a result of declines in Global Enterprise Core and Global Wholesale, partially offset by higher Mass Markets revenues driven by Fios services and increased Strategic services revenues within Global Enterprise.

Mass Markets revenues increased $0.7 billion, or 3.8%, during 2014 primarily due to the expansion of Fios services (voice, internet and video), including our Fios Quantum offerings, as well as changes in our pricing strategies, partially offset by the continued decline of local exchange revenues.

Global Enterprise revenues decreased $0.5 billion, or 3.6%, during 2014 primarily due to lower voice services and data networking revenues, the contraction of market rates due to competition and a decline in Core customer premise equipment revenues. This decrease was partially offset by an increase in Strategic services revenues, primarily due to growth in our application services, such as our cloud and data center offerings and contact center solutions.


Global Wholesale revenues decreased $0.4 billion, or 5.6%, during 2014 primarily due to a decline in data revenues driven by the continuing demand for high-speed digital data services from fiber-to-the-cell customers upgrading their core data circuits to Ethernet facilities, as well as a decline in traditional voice revenues. During 2014, we also experienced a decline in domestic wholesale connections.

 

Consolidated Operating Expenses

 

              (dollars in millions)   
              Increase/(Decrease)   
Years Ended December 31,    2015      2014      2013      2015 vs. 2014     2014 vs. 2013  

Cost of services

   $ 29,438       $ 28,306       $ 28,534       $       1,132        4.0   $ (228     (0.8 )% 

Wireless cost of equipment

     23,119         21,625         16,353         1,494        6.9        5,272        32.2   

Selling, general and administrative expense

     29,986         41,016         27,089         (11,030     (26.9     13,927        51.4   

Depreciation and amortization expense

     16,017         16,533         16,606         (516     (3.1     (73     (0.4
  

 

 

    

 

 

     

 

 

   

Consolidated Operating Expenses

   $     98,560       $     107,480       $     88,582       $ (8,920     (8.3   $     18,898        21.3   
  

 

 

    

 

 

     

 

 

   

Consolidated operating expenses decreased during 2015 primarily due to non-operational credits recorded in 2015 as compared to non-operational charges recorded in 2014 (see “Other Items”). Consolidated operating expenses increased during 2014 primarily due to non-operational charges recorded in 2014 as compared to non-operational credits recorded in 2013 (see “Other Items”) as well as increased operating expenses at Wireless.

2015 Compared to 2014

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 increased during 2015 primarily due to an increase in costs as a result of the acquisition of AOL, higher rent expense as a result of an increase in wireless macro and small cell sites, higher wireless network costs from an increase in fiber facilities supporting network capacity expansion and densification, including the deployment of small cell technology, a volume-driven increase in costs related to the wireless device protection package offered to our customers as well as a $0.5 billion increase in content costs at our Wireline segment. Partially offsetting these increases were a $0.3 billion decline in employee costs and a $0.3 billion decline in access costs at our Wireline segment. Also offsetting the increase was a decrease in Cost of services reflected in the results of operations related to a non-strategic Wireline business that was divested on July 1, 2014.

Wireless Cost of Equipment

Wireless cost of equipment increased during 2015 primarily as a result of an increase in the average cost per unit, driven by a shift to higher priced units in the mix of devices sold, partially offset by a decline in the number of units 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, customer billing, 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 in “Cost of Services” above.

Selling, general and administrative expense decreased during 2015 primarily due to non-operational credits, primarily severance, pension and benefit credits, recorded in 2015 as compared to non-operational charges, primarily severance, pension and benefit charges, recorded in 2014 (see “Other Items”). Also contributing to this decrease was a decline in sales commission expense at our Wireless segment, which was driven by an increase in activations under the Verizon device payment program. The decrease is partially offset by an increase in bad debt expense at our Wireless segment. The increase in bad debt expense was primarily driven by a volume increase in our installment receivables, as the credit quality of our customers remained consistent throughout the periods presented.


Depreciation and Amortization Expense

Depreciation and amortization expense decreased during 2015 primarily due to $0.9 billion of depreciation and amortization expense not being recorded on our depreciable Wireline assets in California, Florida and Texas which were classified as held for sale as of February 5, 2015, partially offset by an increase in depreciable assets at our Wireless segment.

We will not record depreciation and amortization expense on our depreciable Wireline assets in California, Florida and Texas through the closing of the transaction with Frontier, which is expected to occur at the end of the first quarter of 2016.

2014 Compared to 2013

Wireless Cost of Equipment

Wireless cost of equipment increased during 2014 primarily due to an increase in cost of equipment sales at our Wireless segment as a result of an increase in the number of devices sold as well as an increase in the cost per unit.

Selling, General and Administrative Expense

Selling, general and administrative expense increased during 2014 primarily due to non-operational charges, primarily severance, pension and benefit charges, recorded in 2014 as compared to non-operational credits, primarily severance, pension and benefit credits, recorded in 2013 (see “Other Items”).

Depreciation and Amortization Expense

Depreciation and amortization expense decreased during 2014 primarily due to a decrease in net depreciable assets at our Wireline segment, partially offset by an increase in depreciable assets at our Wireless segment.

Non-operational (Credits) Charges

Non-operational (credits) charges included in operating expenses (see “Other Items”) were as follows:

 

     (dollars in millions)  
Years Ended December 31,      2015        2014        2013   

Severance, Pension and Benefit (Credits) Charges

      

Selling, general and administrative expense

   $ (2,256   $ 7,507      $ (6,232

Gain on Spectrum License Transactions

      

Selling, general and administrative expense

     (254     (707     (278

Other Costs

      

Cost of services and sales

     —          27        —     

Selling, general and administrative expense

     —          307        —     
  

 

 

 
             —          334                —     
  

 

 

 

Total non-operating (credits) charges included in operating expenses

   $ (2,510   $     7,134      $ (6,510
  

 

 

 

See “Other Items” for a description of these and other non-operational items.

Consolidated Operating Income and EBITDA

Consolidated earnings before interest, taxes, depreciation and amortization expenses (Consolidated EBITDA) and Consolidated Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. Management believes that these measures are useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Consolidated EBITDA is calculated by adding back interest, taxes, depreciation and amortization expense, equity in (losses) earnings of unconsolidated businesses and other income and (expense), net to net income.


Consolidated Adjusted EBITDA is calculated by excluding the effect of non-operational items and the impact of divested operations from the calculation of Consolidated EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. See “Other Items” for additional details regarding these non-operational items.

Operating expenses include pension and benefit related credits and/or charges based on actuarial assumptions, including projected discount rates and an estimated return on plan assets. These estimates are updated in the fourth quarter to reflect actual return on plan assets and updated actuarial assumptions. The adjustment has been recognized in the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains/losses.

It is management’s intent to provide non-GAAP financial information to enhance the understanding of Verizon’s GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each 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. The non-GAAP financial information presented may be determined or calculated differently by other companies.

 

     (dollars in millions)  
Years Ended December 31,    2015     2014     2013  

Consolidated Operating Income

   $ 33,060      $ 19,599      $ 31,968   

Add Depreciation and amortization expense

     16,017        16,533        16,606   
  

 

 

 

Consolidated EBITDA

     49,077        36,132        48,574   

Add (Less) Non-operating (credits) charges included in operating expenses

     (2,510     7,134        (6,510

Less Impact of divested operations

     —          (12     (43
  

 

 

 

Consolidated Adjusted EBITDA

   $     46,567      $     43,254      $     42,021   
  

 

 

 

The changes in Consolidated Operating Income, Consolidated EBITDA and Consolidated Adjusted EBITDA in the table above were primarily a result of the factors described in connection with operating revenues and operating expenses.

 

Other Consolidated Results

Equity in Earnings of Unconsolidated Businesses

Equity in earnings of unconsolidated businesses decreased $1.9 billion during 2015 and increased $1.6 billion during 2014 primarily due to the gain of $1.9 billion recorded on the sale of our interest in Vodafone Omnitel N.V. (the Omnitel Transaction, and such interest, the Omnitel Interest) during the first quarter of 2014, which was part of the consideration for the Wireless Transaction completed on February 21, 2014.

Other Income and (Expense), Net

Additional information relating to Other income and (expense), net is as follows:

 

      (dollars in millions)  
      Increase/(Decrease)  
Years Ended December 31,    2015      2014     2013     2015 vs. 2014     2014 vs. 2013  

Interest income

   $     115       $       108      $       64      $ 7         6.5   $         44        68.8

Other, net

     71         (1,302     (230     1,373         nm        (1,072     nm   
  

 

 

   

 

 

      

 

 

   

Total

   $     186       $ (1,194   $ (166   $     1,380         nm      $ (1,028     nm   
  

 

 

   

 

 

      

 

 

   

nm – not meaningful

Other income and (expense), net changed favorably during 2015 and changed unfavorably during 2014 primarily driven by net early debt redemption costs of $1.4 billion incurred in 2014 (see “Other Items”).


Interest Expense

 

                       (dollars in millions)  
                       Increase/(Decrease)  
Years Ended December 31,    2015     2014     2013     2015 vs. 2014     2014 vs. 2013  

Total interest costs on debt balances

   $ 5,504      $ 5,291      $ 3,421      $ 213         4.0   $ 1,870        54.7

Less capitalized interest costs

     584        376        754        208         55.3        (378     (50.1
  

 

 

   

 

 

      

 

 

   

Total

   $ 4,920      $ 4,915      $ 2,667      $ 5         0.1      $     2,248        84.3   
  

 

 

   

 

 

      

 

 

   

Average debt outstanding

   $     113,325      $     108,461      $     65,959            

Effective interest rate

     4.9     4.9     5.2         

Total interest costs on debt balances increased during 2015 primarily due to a $4.9 billion increase in average debt (see “Consolidated Financial Condition”). Capitalized interest costs were higher in 2015 primarily due to an increase in wireless licenses that are currently under development, which was a result of our winning bid in the FCC spectrum license auction during 2015. The FCC granted us those wireless licenses on April 8, 2015 (see Note 2 for additional information).

Total interest costs on debt balances increased during 2014 primarily due to the issuance of fixed and floating rate notes to finance the Wireless Transaction (see “Acquisitions and Divestitures”) resulting in an increase in average debt and a corresponding increase in interest expense, partially offset by a lower effective interest rate (see “Consolidated Financial Condition”). Capitalized interest costs were lower in 2014 primarily due to a decrease in wireless licenses that are currently under development, which was due to the deployment of AWS licenses for commercial service during 2014.

Provision for Income Taxes

 

                       (dollars in millions)  
                       Increase/(Decrease)  
Years Ended December 31,    2015     2014     2013     2015 vs. 2014      2014 vs. 2013  

Provision for income taxes

   $     9,865      $     3,314      $     5,730      $     6,551         nm       $     (2,416)         (42.2 )% 

Effective income tax rate

     34.9     21.7     19.6           

 

nm

– not meaningful

The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. The effective income tax rate for 2015 was 34.9% compared to 21.7% for 2014. The increase in the effective income tax rate and provision for income taxes was primarily due to the impact of higher income before income taxes due to severance, pension and benefit credits recorded in 2015 compared to severance, pension and benefit charges recorded in 2014, as well as tax benefits associated with the utilization of certain tax credits in 2014 in connection with the Omnitel Transaction. The 2014 effective income tax rate also included a benefit from the inclusion of income attributable to Vodafone’s noncontrolling interest in the Verizon Wireless partnership prior to the Wireless Transaction completed on February 21, 2014.

The effective income tax rate for 2014 was 21.7% compared to 19.6% for 2013. The increase in the effective income tax rate was primarily due to additional income taxes on the incremental income from the Wireless Transaction completed on February 21, 2014 and was partially offset by the utilization of certain tax credits in connection with the Omnitel Transaction in 2014 and the effective income tax rate impact of lower income before income taxes due to severance, pension and benefit charges recorded in 2014 compared to severance, pension and benefit credits recorded in 2013. The decrease in the provision for income taxes was primarily due to lower income before income taxes due to severance, pension and benefit charges recorded in 2014 compared to severance, pension and benefit credits recorded in 2013.

Our effective income tax rate differed significantly from the statutory federal income tax rate for 2013 due to the inclusion of income attributable to Vodafone’s noncontrolling interest in the Verizon Wireless partnership for the full year within our income before the provision for income taxes. In 2013, we recorded a tax provision on income before the provision for income taxes and when we included the income attributable to Vodafone’s noncontrolling interest in the Verizon Wireless partnership in our income before the provision for income taxes it resulted in our effective income tax rate being 13.7 percentage points lower during 2013.

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.


Net Income Attributable to Noncontrolling Interests

 

                          (dollars in millions)  
                          Increase/(Decrease)  
Years Ended December 31,    2015      2014      2013      2015 vs. 2014     2014 vs. 2013  

Net income attributable to noncontrolling interests

   $   496       $   2,331       $   12,050       $   (1,835)         (78.7 )%    $   (9,719)         (80.7 )% 

The decrease in Net income attributable to noncontrolling interests during 2015 and 2014 was primarily due to the completion of the Wireless Transaction on February 21, 2014. As a result, our results reflect our 55% ownership interest of Verizon Wireless through the closing of the Wireless Transaction and reflect our full ownership of Verizon Wireless for the remainder of the year. The noncontrolling interests that remained after the completion of the Wireless Transaction primarily relate to wireless partnership entities.


Segment Results of Operations

We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is consistent with the chief operating decision maker’s assessment of segment performance.

Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income as a measure of operating performance. Management believes that this measure is useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment operating income.

Wireless Segment EBITDA margin is calculated by dividing Wireless Segment EBITDA by total Wireless revenues. Wireless Segment EBITDA service margin, also presented below, is calculated by dividing Wireless Segment EBITDA by Wireless service revenues. Wireless Segment EBITDA service margin utilizes service revenues rather than total revenues. Service revenues primarily exclude equipment revenues in order to reflect the impact of providing service to the wireless customer base on an ongoing basis. Wireline Segment EBITDA margin is calculated by dividing Wireline Segment EBITDA by total Wireline revenues. You can find additional information about our segments in Note 13 to the consolidated financial statements.


Wireless

Our Wireless segment, doing business as Verizon Wireless, provides wireless communications services across one of the most extensive wireless networks in the United States. Verizon Wireless was formed as a joint venture in April 2000 by the combination of the U.S. wireless operations and interests of Verizon and Vodafone. Prior to the completion of the Wireless Transaction, Verizon owned a controlling 55% interest in Verizon Wireless and Vodafone owned the remaining 45%. On February 21, 2014, the Wireless Transaction was completed and Verizon acquired 100% ownership of Verizon Wireless.

We provide these services and equipment sales to consumer, business and government customers in the United States on a postpaid and prepaid basis. Postpaid connections represent individual lines of service for which a customer is billed in advance a monthly access charge in return for a monthly network service allowance, and usage beyond the allowance is billed monthly in arrears. Our prepaid service enables individuals to obtain wireless services without credit verification by paying for all services in advance.

All financial results included in the tables below reflect the consolidated results of Verizon Wireless.

Operating Revenues and Selected Operating Statistics

 

                       (dollars in millions, except ARPA)  
           Increase/(Decrease)  

Years Ended December 31,

     2015        2014        2013        2015 vs. 2014        2014 vs. 2013   

Service

   $ 70,396      $ 72,630      $ 69,033      $ (2,234     (3.1 )%    $ 3,597         5.2

Equipment

     16,924        10,959        8,111        5,965        54.4        2,848         35.1   

Other

     4,360        4,057        3,879        303        7.5        178         4.6   
  

 

 

   

 

 

     

 

 

    

Total Operating Revenues

   $ 91,680      $ 87,646      $ 81,023      $     4,034        4.6      $ 6,623         8.2   
  

 

 

   

 

 

     

 

 

    

Connections (‘000):(1)

               

Retail connections

     112,108        108,211        102,799        3,897        3.6        5,412         5.3   

Retail postpaid connections

     106,528        102,079        96,752        4,449        4.4        5,327         5.5   

Net additions in period (‘000):(2)

               

Retail connections

     3,956        5,568        4,472        (1,612     (29.0     1,096         24.5   

Retail postpaid connections

     4,507        5,482        4,118        (975     (17.8     1,364         33.1   

Churn Rate:

               

Retail connections

     1.24     1.33     1.27         

Retail postpaid connections

     0.96     1.04     0.97         

Account Statistics:

               

Retail postpaid ARPA

   $ 152.63      $ 159.86      $ 153.93      $ (7.23     (4.5   $ 5.93         3.9   

Retail postpaid accounts (‘000)(1)

     35,736        35,616        35,083        120        0.3        533         1.5   

Retail postpaid connections per account(1)

     2.98        2.87        2.76        0.11        3.8        0.11         4.0   

 

(1) 

As of end of period

(2)

Excluding acquisitions and adjustments

2015 Compared to 2014

Wireless’ total operating revenues increased by $4.0 billion, or 4.6%, during 2015 primarily as a result of growth in equipment revenue.

Accounts and Connections

Retail (non-wholesale) postpaid accounts primarily represent retail customers with Verizon Wireless that are directly served and managed by Verizon Wireless and use its branded services. Accounts include shared data plans, such as our new Verizon Plan and More Everything plans, and corporate accounts, as well as legacy single connection plans and family plans. A single account may include monthly wireless services for a variety of connected devices. Retail connections represent our retail customer device connections. Churn is the rate at which service to connections is terminated.


Retail connections under an account may include: smartphones and basic phones (collectively, phones) as well as tablets, LTE Internet (Installed) and other connected devices. Retail postpaid connection net additions decreased during 2015 primarily due to a decrease in retail postpaid connection gross additions, partially offset by lower retail postpaid connection churn rate. The decrease in retail postpaid connection gross additions during 2015 was driven by a decline in gross additions of smartphones, tablets and other Internet devices.

Retail Postpaid Connections per Account

Retail postpaid connections per account is calculated by dividing the total number of retail postpaid connections by the number of retail postpaid accounts as of the end of the period. Retail postpaid connections per account increased as of December 31, 2015 compared to December 31, 2014. The increase in retail postpaid connections per account is primarily due to increases in Internet devices, which represented 16.8% of our retail postpaid connection base as of December 31, 2015, compared to 14.1% as of December 31, 2014.

Service Revenue

Service revenue, which does not include recurring device installment billings related to the Verizon device payment program, decreased by $2.2 billion, or 3.1%, during 2015 primarily driven by lower retail postpaid service revenue. Retail postpaid service revenue was negatively impacted as a result of an increase in the activation of devices purchased under the Verizon device payment program on plans with unsubsidized service pricing. The increase in these activations resulted in a relative shift of revenue from service revenue to equipment revenue and caused a change in the timing of the recognition of revenue. At December 31, 2015, approximately 29% of our retail postpaid phone connections participated in the Verizon device payment program compared to approximately 8% at December 31, 2014. At December 31, 2015, approximately 42% of our retail postpaid phone connections were on unsubsidized service pricing. The decrease in service revenue was partially offset by the impact of an increase in retail postpaid connections as well as the continued increase in penetration of smartphones and tablets through our shared data plans. Service revenue plus recurring device installment billings related to the Verizon device payment program increased 2.0% during 2015.

Retail postpaid ARPA (the average revenue per account from retail postpaid accounts), which does not include recurring device installment billings related to the Verizon device payment program, was negatively impacted during 2015 as a result of the increase in the activation of devices purchased under the Verizon device payment program on plans with unsubsidized service pricing. Partially offsetting this impact during 2015 was an increase in our retail postpaid connections per account, as discussed above.

Equipment Revenue

Equipment revenue increased by $6.0 billion, or 54.4%, during 2015 as a result of an increase in device sales, primarily smartphones, under the Verizon device payment program, partially offset by a decline in device sales under traditional fixed-term service plans. For the year ended December 31, 2015, phone activations under the Verizon device payment program represented approximately 54% of retail postpaid phones activated compared to approximately 18% during 2014. During the fourth quarter of 2015, phone activations under the Verizon device payment program represented approximately 67% of retail postpaid phones activated. The increase in these activations resulted in a relative shift of revenue from service revenue to equipment revenue and caused a change in the timing of the recognition of revenue. This shift in revenue was the result of recognizing a higher amount of equipment revenue at the time of sale of devices under the device payment program.

Other Revenue

Other revenue includes non-service revenues such as regulatory fees, cost recovery surcharges, revenues associated with our device protection package, sublease rentals and financing revenue. Other revenue increased $0.3 billion, or 7.5%, during 2015 primarily due to a volume-driven increase in revenues related to our device protection package.

2014 Compared to 2013

Wireless’ total operating revenues increased by $6.6 billion, or 8.2%, during 2014 primarily as a result of growth in service revenue and equipment revenue.

Accounts and Connections

Retail postpaid connection net additions increased during 2014 primarily due to an increase in retail postpaid connection gross additions partially offset by an increase in our retail postpaid connection churn rate. Higher retail postpaid connection gross additions were driven by gross additions of tablets as well as 4G LTE smartphones. During 2014, our retail postpaid connection net additions included approximately 4.2 million tablets as compared to 1.4 million tablets in 2013.

Retail Postpaid Connections per Account

Retail postpaid connections per account increased 4.0% as of December 31, 2014 compared to December 31, 2013 primarily due to the increased penetration of tablets.


Service Revenue

Service revenue, which does not include recurring device installment billings related to the Verizon device payment program, increased by $3.6 billion, or 5.2%, during 2014 primarily driven by higher retail postpaid service revenue, which increased largely as a result of an increase in retail postpaid connections as well as the continued increase in penetration of 4G LTE smartphones and tablets through our More Everything plans. The penetration of 4G LTE smartphones was driven by the activation of smartphones by new customers as well as existing customers migrating from basic phones and 3G smartphones to 4G LTE smartphones.

The increase in retail postpaid ARPA, which does not include recurring device installment billings related to the Verizon device payment program, during 2014 was primarily driven by increases in smartphone penetration and retail postpaid connections per account. As of December 31, 2014, we experienced a 4.0% increase in retail postpaid connections per account compared to 2013, with smartphones representing 79% of our retail postpaid phone base as of December 31, 2014 compared to 70% as of December 31, 2013. The increased penetration in retail postpaid connections per account is primarily due to increases in Internet data devices, which represented 14.1% of our retail postpaid connection base as of December 31, 2014 compared to 10.7% as of December 31, 2013, primarily due to tablet activations. Additionally, during 2014, postpaid smartphone activations represented 92% of phones activated compared to 86% during 2013.

Other service revenue increased during 2014 due to growth in wholesale connections.

Equipment Revenue

Equipment revenue increased during 2014 primarily due to an increase in device sales under both traditional fixed-term service plans and the Verizon device payment program.

Operating Expenses

 

            (dollars in millions)  
            Increase/(Decrease)  
Years Ended December 31,    2015      2014      2013      2015 vs. 2014     2014 vs. 2013  

Cost of services

   $ 7,803       $ 7,200       $ 7,295       $ 603        8.4   $ (95     (1.3 )% 

Cost of equipment

     23,119         21,625         16,353             1,494        6.9            5,272        32.2   

Selling, general and administrative expense

     21,805         23,602         23,176         (1,797     (7.6     426        1.8   

Depreciation and amortization expense

     8,980         8,459         8,202         521        6.2        257        3.1   
  

 

 

    

 

 

     

 

 

   

Total Operating Expenses

   $     61,707       $     60,886       $     55,026       $ 821        1.3      $ 5,860        10.6   
  

 

 

    

 

 

     

 

 

   

Cost of Services

Cost of services increased $0.6 billion, or 8.4%, during 2015 primarily due to higher rent expense as a result of an increase in macro and small cell sites as well as higher wireless network costs from an increase in fiber facilities supporting network capacity expansion and densification, including the deployment of small cell technology, to meet growing customer demand for 4G LTE data services. Also contributing to the increase in Cost of services during 2015 was a volume-driven increase in costs related to the device protection package offered to our customers.

Cost of Equipment

Cost of equipment increased $1.5 billion, or 6.9%, during 2015 primarily as a result of an increase in the average cost per unit, driven by a shift to higher priced units in the mix of devices sold, partially offset by a decline in the number of units sold.

Cost of equipment increased during 2014 primarily due to an increase in cost of equipment sales of $5.3 billion as a result of an increase in the number of devices sold as well as an increase in the cost per unit. The increase in the number of devices sold was driven, in part, by the launch of new devices.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased during 2015 primarily due to a $2.8 billion decline in sales commission expense. The decline in sales commission expense was driven by an increase in activations under the Verizon device payment program, which has a lower commission per unit than activations under traditional fixed-term service plans, partially offset by an increase in bad debt expense. The increase in bad debt expense was primarily driven by a volume increase in our device installment receivables, as the credit quality of our customers remained consistent throughout the periods presented.


Selling, general and administrative expense increased during 2014 primarily due to a $0.2 billion increase in advertising expense and gains recorded in the first quarter of 2013 related to wireless license exchange agreements, partially offset by a decline in sales commission expense, which was driven by the adoption of the Verizon device payment program.

Depreciation and Amortization Expense

The increase in depreciation and amortization expense increased during 2015 and 2014, respectively, was primarily driven by an increase in net depreciable assets.

Segment Operating Income and EBITDA

 

           (dollars in millions)   
                       Increase/(Decrease)  
Years Ended December 31,    2015     2014     2013     2015 vs. 2014     2014 vs. 2013  

Segment Operating Income

   $ 29,973      $ 26,760      $ 25,997      $ 3,213         12.0   $ 763         2.9

Add Depreciation and amortization expense

     8,980        8,459        8,202        521         6.2        257         3.1   
  

 

 

   

 

 

      

 

 

    

Segment EBITDA

   $     38,953      $     35,219      $     34,199      $     3,734         10.6      $ 1,020         3.0   
  

 

 

   

 

 

      

 

 

    

Segment operating income margin

     32.7     30.5     32.1          

Segment EBITDA margin

     42.5     40.2     42.2          

Segment EBITDA service margin

     55.3     48.5     49.5          

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.

Non-operational items excluded from Wireless’ Operating income were as follows:

 

     (dollars in millions)  
Years Ended December 31,    2015     2014     2013  

Gain on spectrum license transactions

   $ (254   $ (707   $ (278

Severance, pension and benefit (credits) charges

     5        86        (61

Other costs

           —              109              —     
  

 

 

 
   $ (249   $ (512   $ (339
  

 

 

 


Wireline

Our Wireline segment provides voice, data and video communications products and enhanced services, including broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services. We provide these products and services to consumers in the United States, as well as to carriers, businesses and government customers both in the United States and around the world.

The operating results of Verizon’s local exchange business and related landline activities in California, Florida and Texas, which will be sold to Frontier, are included within our Wireline segment for all periods presented. The assets and liabilities that will be sold are currently included in Verizon’s continuing operations and classified as assets held for sale and liabilities related to assets held for sale on our consolidated balance sheet as of December 31, 2015. We expect this transaction to close at the end of the first quarter of 2016.

Operating Revenues and Selected Operating Statistics

 

                          (dollars in millions)  
            Increase/(Decrease)  
Years Ended December 31,    2015      2014      2013      2015 vs. 2014     2014 vs. 2013  

Consumer retail

   $     16,123       $     15,583       $     14,842       $ 540        3.5   $ 741        5.0%   

Small business

     2,350         2,464         2,541         (114     (4.6     (77     (3.0)     
  

 

 

    

 

 

     

 

 

   

Mass Markets

     18,473         18,047         17,383         426        2.4        664        3.8      

Strategic services

     8,165         8,324         8,140         (159     (1.9     184        2.3      

Core

     4,778         5,325         6,016         (547     (10.3     (691     (11.5)     
  

 

 

    

 

 

     

 

 

   

Global Enterprise

     12,943         13,649         14,156         (706     (5.2     (507     (3.6)     

Global Wholesale

     5,979         6,190         6,560         (211     (3.4     (370     (5.6)     

Other

     325         543         525         (218     (40.1     18        3.4      
  

 

 

    

 

 

     

 

 

   

Total Operating Revenues

   $ 37,720       $ 38,429       $ 38,624       $ (709     (1.8   $ (195     (0.5)     
  

 

 

    

 

 

     

 

 

   

Connections (‘000):(1)

                 

Total voice connections

     18,387         19,795         21,085         (1,408     (7.1     (1,290     (6.1)     

Total Broadband connections

     9,228         9,205         9,015         23        0.2        190        2.1      

Fios Internet subscribers

     7,034         6,616         6,072         418        6.3        544        9.0      

Fios video subscribers

     5,827         5,649         5,262         178        3.2        387        7.4      

(1) As of end of period

Wireline’s revenues decreased $0.7 billion, or 1.8%, during 2015 primarily driven by declines in Global Enterprise, partially offset by higher Mass Markets revenues driven by Fios services. Fios revenues increased $1.1 billion, or 8.6%, during 2015.

Mass Markets

Mass Markets operations provide broadband Internet and video services (including high-speed Internet, Fios Internet and Fios video services), local exchange (basic service and end-user access) and long distance (including regional toll) voice services to residential and small business subscribers.

2015 Compared to 2014

Mass Markets revenues increased $0.4 billion, or 2.4%, during 2015 primarily due to the expansion of Fios services (voice, Internet and video), including our Fios Quantum offerings, as well as changes in our pricing strategies, partially offset by the continued decline of local exchange revenues.

During 2015, we grew our subscriber base by 0.4 million Fios Internet subscribers and by 0.2 million Fios video subscribers, while also improving the penetration rate within our Fios service areas for Fios Internet. As of December 31, 2015, we achieved a penetration rate of 41.8% for Fios Internet compared to a penetration rate of 41.1% for Fios Internet as of December 31, 2014. During 2015, Consumer Fios revenue increased $1.0 billion, or 8.3%. Fios represented approximately 79% of Consumer retail revenue during 2015 compared to approximately 76% during 2014.


The decline of local exchange revenues was primarily due to a 6.9% decline in Consumer retail voice connections resulting primarily from competition and technology substitution with wireless, competing VoIP and cable telephony services. Total voice connections include traditional switched access lines in service as well as Fios digital voice connections. There was also a 7.1% decline in Small business retail voice connections, reflecting competition and a shift to both IP and high-speed circuits, primarily in areas outside of our Fios footprint.

2014 Compared to 2013

Mass Markets revenues increased $0.7 billion, or 3.8%, during 2014 primarily due to the expansion of Fios services (voice, Internet and video), including our Fios Quantum offerings, as well as changes in our pricing strategies, partially offset by the continued decline of local exchange revenues. Fios represented approximately 76% of Consumer retail revenue during 2014 compared to approximately 71% during 2013.

During 2014, we grew our subscriber base by 0.5 million Fios Internet subscribers and by 0.4 million Fios video subscribers, while also improving penetration rates within our Fios service areas. As of December 31, 2014, we achieved penetration rates of 41.1% and 35.8% for Fios Internet and Fios video, respectively, compared to penetration rates of 39.5% and 35.0% for Fios Internet and Fios video, respectively, at December 31, 2013.

The increase in Mass Markets revenues was partially offset by the decline of local exchange revenues primarily due to a 5.5% decline in Consumer retail voice connections resulting primarily from competition and technology substitution with wireless, competing VoIP and cable telephony services. Total voice connections include traditional switched access lines in service as well as Fios digital voice connections. There was also a decline in Small business retail voice connections, primarily reflecting competition and a shift to both IP and high-speed circuits.

Global Enterprise

Global Enterprise offers strategic services and other core communications services to medium and large business customers, multinational corporations and state and federal government customers.

2015 Compared to 2014

Global Enterprise revenues decreased $0.7 billion, or 5.2%, during 2015 primarily due to a $0.4 billion, or 11.7%, decline in core voice services and data networking revenues, which consist of traditional circuit-based services such as frame relay, private line and legacy voice and data services. These core services declined as a result of secular declines. Also contributing to the decrease were lower networking solutions revenues, a decline in customer premise equipment revenues and the negative impact of foreign exchange rates. Networking solutions, which include Private IP, Public Internet, Ethernet and optical network services, declined $0.2 billion, or 4.6%, as a result of competitive price compression.

2014 Compared to 2013

Global Enterprise revenues decreased $0.5 billion, or 3.6%, during 2014 primarily due to a decline in voice services and data networking revenues, which consist of traditional circuit-based services such as frame relay, private line and legacy voice and data services. These core services declined as customers continued to migrate to next generation IP services. Also contributing to the decrease was the contraction of market rates due to competition and a decline in Core customer premise equipment revenues. This decrease was partially offset by an increase in strategic services revenues of $0.2 billion, or 2.3%, primarily due to growth in our application services, such as our cloud and data center offerings and contract center solutions.

Global Wholesale

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

2015 Compared to 2014

Global Wholesale revenues decreased $0.2 billion, or 3.4%, during 2015 primarily due to declines in traditional voice revenues and data revenues driven by the effect of technology substitution as well as continuing contraction of market rates due to competition. The decline in traditional voice revenue was primarily due to a decrease in minutes of use (MOUs) driven by a 6.5% decline in domestic wholesale connections between December 31, 2015 and December 31, 2014. As a result of technology substitution, the number of core data circuits at December 31, 2015 experienced a 14.5% decline compared to December 31, 2014.

2014 Compared to 2013

Global Wholesale revenues decreased $0.4 billion, or 5.6%, during 2014 primarily due to a decline in data and traditional voice revenues. Data revenue declines were driven by the continuing demand for high-speed digital data services from fiber-to-the-cell customers upgrading their core data circuits to Ethernet facilities. As a result of the customer migrations, at December 31, 2014, the number of core data circuits experienced a 14.2% decline. The traditional voice revenue declines are primarily due to a decrease in MOUs and the effect of technology substitution. As of December 31, 2014, we also experienced a 6.2% decline in domestic wholesale connections. Also contributing to the decline in voice revenues is the continuing contraction of market rates due to competition.


Operating Expenses

 

            (dollars in millions)  
            Increase/(Decrease)  
Years Ended December 31,    2015      2014      2013      2015 vs. 2014     2014 vs. 2013      

Cost of services

   $ 20,878       $ 21,332       $ 21,396       $ (454     (2.1 )%    $ (64     (0.3)%   

Selling, general and administrative expense

     7,989         8,180         8,571         (191     (2.3     (391     (4.6)      

Depreciation and amortization expense

     6,678         7,882         8,327         (1,204     (15.3     (445     (5.3)      
  

 

 

    

 

 

     

 

 

   

Total Operating Expenses

   $     35,545       $     37,394       $     38,294       $     (1,849     (4.9   $     (900     (2.4)      
  

 

 

    

 

 

     

 

 

   

Cost of Services

Cost of services decreased during 2015 primarily due to a $0.3 billion decline in employee costs as a result of reduced headcount as well as a $0.3 billion decline in access costs driven by declines in overall wholesale long distance volumes. Partially offsetting these decreases was an increase in content costs of $0.5 billion associated with continued Fios subscriber growth and programming license fee increases.

Cost of services decreased slightly during 2014 primarily due to a decrease in employee costs as a result of reduced headcount and a decline in access costs driven by declines in overall wholesale long distance volumes, which was partially offset by an increase in content costs of $0.4 billion associated with continued Fios subscriber growth and programming license fee increases.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased during 2015 primarily due to declines in employee costs as a result of reduced headcount and decreased administrative expenses, partially offset by an increase in transaction taxes and regulatory expenses.

Selling, general and administrative expense decreased during 2014 primarily due to declines in employee costs as a result of reduced headcount, decreased advertising expense and lower transaction and property taxes.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased during 2015 primarily due to $0.9 billion of depreciation and amortization expense not being recorded on our assets in California, Florida and Texas, which were classified as held for sale as of February 5, 2015, as well as decreases in net depreciable assets.

We will not record depreciation and amortization expense on our depreciable Wireline assets in California, Florida and Texas through the closing of the transaction with Frontier, which is expected to occur at the end of the first quarter of 2016.

Depreciation and amortization expense decreased during 2014 due to decreases in net depreciable assets.

Segment Operating Income and EBITDA

 

           (dollars in millions)  
           Increase/(Decrease)  
Years Ended December 31,    2015     2014     2013     2015 vs. 2014     2014 vs. 2013      

Segment Operating Income

   $ 2,175      $ 1,035      $ 330      $ 1,140        nm      $ 705        nm          

Add Depreciation and amortization expense

     6,678        7,882        8,327        (1,204     (15.3 )%      (445     (5.3)%      
  

 

 

   

 

 

     

 

 

   

Segment EBITDA

   $     8,853      $     8,917      $     8,657      $ (64     (0.7   $ 260        3.0           
  

 

 

   

 

 

     

 

 

   

Segment operating income margin

     5.8     2.7     0.9        

Segment EBITDA margin

     23.5     23.2     22.4        

nm – not meaningful


The changes in Wireline’s Operating income, Segment EBITDA and Segment EBITDA margin during the periods presented were primarily a result of the factors described in connection with operating revenues and operating expenses.

Non-operational items excluded from Wireline’s Operating income were as follows:

 

     (dollars in millions)  
Years Ended December 31,    2015      2014     2013  

Severance, pension and benefit charges

   $ 15       $     189      $       –   

Impact of divested operations

             (12     (43

Other costs

             137          
  

 

 

 
   $ 15       $ 314      $ (43
  

 

 

 

 

Other Items

 

Severance, Pension and Benefit (Credits) Charges

During 2015, we recorded net pre-tax severance, pension and benefit credits of approximately $2.3 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses in the year in which they occur. The credits were primarily driven by an increase in our discount rate assumption used to determine the current year liabilities from a weighted-average of 4.2% at December 31, 2014 to a weighted-average of 4.6% at December 31, 2015 ($2.5 billion), the execution of a new prescription drug contract during 2015 ($1.0 billion) and a change in mortality assumptions primarily driven by the use of updated actuarial tables (MP-2015) issued by the Society of Actuaries ($0.9 billion), partially offset by the difference between our estimated return on assets of 7.25% at December 31, 2014 and our actual return on assets of 0.7% at December 31, 2015 ($1.2 billion), severance costs recorded under our existing separation plans ($0.6 billion) and other assumption adjustments ($0.3 billion).

During 2014, we recorded net pre-tax severance, pension and benefit charges of approximately $7.5 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses in the year in which they occur. The charges were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities from a weighted-average of 5.0% at December 31, 2013 to a weighted-average of 4.2% at December 31, 2014 ($5.2 billion), a change in mortality assumptions primarily driven by the use of updated actuarial tables (RP-2014 and MP-2014) issued by the Society of Actuaries in October 2014 ($1.8 billion) and revisions to the retirement assumptions for participants and other assumption adjustments, partially offset by the difference between our estimated return on assets of 7.25% and our actual return on assets of 10.5% ($0.6 billion). As part of this charge, we recorded severance costs of $0.5 billion under our existing separation plans.

During 2013, we recorded net pre-tax severance, pension and benefit credits of approximately $6.2 billion primarily for our pension and postretirement plans in accordance with our accounting policy to recognize actuarial gains and losses in the year in which they occur. The credits were primarily driven by an increase in our discount rate assumption used to determine the current year liabilities from a weighted-average of 4.2% at December 31, 2012 to a weighted-average of 5.0% at December 31, 2013 ($4.3 billion), lower than assumed retiree medical costs and other assumption adjustments ($1.4 billion) and the difference between our estimated return on assets of 7.5% at December 31, 2012 and our actual return on assets of 8.6% at December 31, 2013 ($0.5 billion).

The Consolidated Adjusted EBITDA non-GAAP measure presented in the Consolidated Operating Income and EBITDA discussion (see “Consolidated Results of Operations”) excludes the severance, pension and benefit (credits) charges presented above.

 

Early Debt Redemption and Other Costs

During March 2014, we recorded net debt redemption costs of $0.9 billion in connection with the early redemption of $1.25 billion aggregate principal amount of Cellco Partnership and Verizon Wireless Capital LLC 8.50% Notes due 2018, and the purchase of the following notes pursuant to the Tender Offer: $0.7 billion of the then outstanding $1.5 billion aggregate principal amount of Verizon 6.10% Notes due 2018, $0.8 billion of the then outstanding $1.5 billion aggregate principal amount of Verizon 5.50% Notes due 2018, $0.6 billion of the then outstanding $1.3 billion aggregate principal amount of Verizon 8.75% Notes due 2018, $0.7 billion of the then outstanding $1.25 billion aggregate principal amount of Verizon 5.55% Notes due 2016, $0.4 billion of the then outstanding $0.75 billion aggregate principal amount of Verizon 5.50% Notes due 2017, $0.6 billion of the then outstanding $1.0 billion aggregate principal amount of Cellco Partnership and Verizon Wireless Capital LLC 8.50% Notes due 2018, $0.2 billion of the then outstanding $0.3 billion aggregate principal amount of Alltel Corporation 7.00% Debentures due 2016 and $0.3 billion of the then outstanding $0.6 billion aggregate principal amount of GTE Corporation 6.84% Debentures due 2018.


See Note 7 to the consolidated financial statements for additional information regarding the Tender Offer.

During the fourth quarter of 2014, we recorded net debt redemption costs of $0.5 billion in connection with the early redemption of $0.5 billion aggregate principal amount of Verizon 4.90% Notes due 2015, $0.6 billion aggregate principal amount of Verizon 5.55% Notes due 2016, $1.3 billion aggregate principal amount of Verizon 3.00% Notes due 2016, $0.4 billion aggregate principal amount of Verizon 5.50% Notes due 2017, $0.7 billion aggregate principal amount of Verizon 8.75% Notes due 2018, $1.0 billion of the then outstanding $3.2 billion aggregate principal amount of Verizon 2.50% Notes due 2016, $0.1 billion aggregate principal amount Alltel Corporation 7.00% Debentures due 2016 and $0.4 billion aggregate principal amount of Cellco Partnership and Verizon Wireless Capital LLC 8.50% Notes due 2018, as well as $0.3 billion of other costs.

We recognize early debt redemption costs in Other income and (expense), net on our consolidated statements of income.

 

Gain on Spectrum License Transactions

During the fourth quarter of 2015, we completed a license exchange transaction with an affiliate of T-Mobile USA Inc. (T-Mobile USA) to exchange certain AWS and Personal Communication Services (PCS) licenses. As a result of this non-cash exchange, we received $0.4 billion of AWS and PCS spectrum licenses at fair value and we recorded a pre-tax gain of approximately $0.3 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2015.

During the second quarter of 2014, we completed license exchange transactions with T-Mobile USA to exchange certain AWS and PCS licenses. The exchange included a number of swaps that we expect will result in more efficient use of the AWS and PCS bands. As a result of these exchanges, we received $0.9 billion of AWS and PCS spectrum licenses at fair value and we recorded an immaterial gain.

During the second quarter of 2014, we completed transactions pursuant to two additional agreements with T-Mobile USA with respect to our remaining 700 MHz A block spectrum licenses. Under one agreement, we sold certain of these licenses to T-Mobile USA in exchange for cash consideration of approximately $2.4 billion, and under the second agreement we exchanged the remainder of our 700 MHz A block spectrum licenses as well as AWS and PCS spectrum licenses for AWS and PCS spectrum licenses. As a result, we received $1.6 billion of AWS and PCS spectrum licenses at fair value and we recorded a pre-tax gain of approximately $0.7 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2014.

During the third quarter of 2013, after receiving the required regulatory approvals, Verizon Wireless sold 39 lower 700 MHz B block spectrum licenses to AT&T in exchange for a payment of $1.9 billion and the transfer by AT&T to Verizon Wireless of AWS (10 MHz) licenses in certain markets in the western United States. Verizon Wireless also sold certain lower 700 MHz B block spectrum licenses to an investment firm for a payment of $0.2 billion. As a result, we received $0.5 billion of AWS licenses at fair value and we recorded a pre-tax gain of approximately $0.3 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2013.

The Consolidated Adjusted EBITDA non-GAAP measure presented in the Consolidated Operating Income and EBITDA discussion (see “Consolidated Results of Operations”) excludes the gains on the spectrum license transactions described above.

 

Wireless Transaction Costs

As a result of the third-party indebtedness incurred to finance the Wireless Transaction, we incurred interest expense of $0.4 billion during 2014 (see “Consolidated Financial Condition”). This amount represents the interest expense incurred prior to the closing of the Wireless Transaction.

During 2013, as a result of the Wireless Transaction, we recorded costs of $0.9 billion primarily for interest expense of $0.7 billion related to the issuance of the new notes, as well as $0.2 billion in fees primarily in connection with the bridge credit agreement (see “Consolidated Financial Condition”).

 

Gain on Sale of Omnitel Interest

As a result of the sale of the Omnitel Interest on February 21, 2014, which was part of the consideration for the Wireless Transaction, we recorded a gain of $1.9 billion in Equity in earnings of unconsolidated businesses on our consolidated statement of income during 2014.

 

Impact of Divested Operations

On July 1, 2014, we sold a non-strategic Wireline business that provides communications solutions to a variety of government agencies.

The Consolidated Adjusted EBITDA non-GAAP measure presented in the Consolidated Operating Income and EBITDA discussion (see “Consolidated Results of Operations”) excludes the historical financial results of the divested operations described above.


Consolidated Financial Condition

 

     (dollars in millions)  
Years Ended December 31,    2015     2014     2013  

Cash Flows Provided By (Used In)

      

Operating activities

   $     38,930      $     30,631      $     38,818   

Investing activities

     (30,043     (15,856     (14,833

Financing activities

     (15,015     (57,705     26,450   
  

 

 

 

Increase (Decrease) In Cash and Cash Equivalents

   $ (6,128   $ (42,930   $ 50,435   
  

 

 

 

We use the net cash generated from our operations to fund network expansion and modernization, service and repay external financing, pay dividends, invest in new businesses and, when appropriate, buy back shares of our outstanding common stock. Our sources of funds, primarily from operations and, to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that our capital spending requirements will continue to be financed primarily through internally generated funds. Debt or equity financing may be needed to fund additional investments or development activities or to maintain an appropriate capital structure to ensure our financial flexibility. Our cash and cash equivalents are primarily held domestically and are invested to maintain principal and liquidity. Accordingly, we do not have significant exposure to foreign currency fluctuations. See “Market Risk” for additional information regarding our foreign currency risk management strategies.

Our available external financing arrangements include 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 and privately-placed capital market securities. In addition, in 2015, we established an active program to sell selected device installment plan receivables under the Verizon device payment program to a group of primarily relationship banks (Purchasers).

 

Cash Flows Provided By Operating Activities

Our primary source of funds continues to be cash generated from operations, primarily from our Wireless segment. Net cash provided by operating activities during 2015 increased by $8.3 billion primarily due to $5.9 billion of cash proceeds, net of remittances, related to the sale of wireless device installment receivables as well as $2.4 billion of cash proceeds received related to the Tower Monetization Transaction attributable to the portion of the towers for which the right-of-use has passed to the tower operator (see Note 2) as well as an increase in earnings at our Wireless segment.

During 2015, we established an on-going program to sell from time to time, on an uncommitted basis, selected device installment plan receivables under the Verizon device payment program to the Purchasers. Under the program, we transfer the receivables to wholly-owned subsidiaries that are bankruptcy remote special purpose entities (Sellers). The Sellers then sell the receivables to the Purchasers for cash and additional consideration upon settlement of the receivables (the deferred purchase price). The receivables sold under the program are no longer considered assets of Verizon. We continue to bill and collect on the receivables in exchange for a monthly servicing fee, which is not material.

Net cash provided by operating activities during 2014 decreased by $8.2 billion due in part to a $3.7 billion increase in income tax payments due to the incremental pre-tax income attributable to Verizon included in Verizon’s income since the closing of the Wireless Transaction. Also contributing to the decrease was a $2.3 billion increase in interest payments primarily due to the incremental debt needed to fund the Wireless Transaction as well as a $1.5 billion increase in pension contributions. The decrease in Cash flows provided by operating activities was partially offset by an increase in earnings at our Wireless segment.

On February 21, 2014, we completed the Wireless Transaction which provides full access to the cash flows of Verizon Wireless. Having full access to all the cash flows from our wireless business gives us the ability to continue to invest in our networks and spectrum, meet evolving customer requirements for products and services and take advantage of new growth opportunities across our lines of business.


 

Cash Flows Used In Investing Activities

Capital Expenditures

Capital expenditures continue to be a primary use of capital resources as they facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of our networks.

Capital expenditures, including capitalized software, were as follows:

 

     (dollars in millions)   
Years Ended December 31,      2015         2014         2013   

 

 

Wireless

   $     11,725       $     10,515       $       9,425   
Wireline    5,049      5,750      6,229  

Other

     1,001         926         950   
  

 

 

 
   $ 17,775       $ 17,191       $ 16,604   
  

 

 

 

Total as a percentage of revenue

     13.5%         13.5%         13.8%   

Capital expenditures increased at Wireless in 2015 and 2014 in order to increase the capacity of our 4G LTE network. Capital expenditures declined at Wireline in 2015 and 2014 as a result of decreased legacy spending requirements as well as decreased Fios spending requirements in 2015.

Acquisitions

During 2015, 2014 and 2013, we invested $9.9 billion, $0.4 billion and $0.6 billion, respectively, in acquisitions of wireless licenses. During 2015, 2014 and 2013, we also invested $3.5 billion, $0.2 billion and $0.5 billion, respectively, in acquisitions of investments and businesses, net of cash acquired.

On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Verizon participated in that auction, and was the high bidder on 181 spectrum licenses, for which we paid cash of approximately $10.4 billion. During the fourth quarter of 2014, we made a deposit of $0.9 billion related to our participation in this auction, which is classified within Other, net investing activities on our consolidated statement of cash flows for the year ended December 31, 2014. During the first quarter of 2015, we submitted an application to the FCC and paid $9.5 billion to the FCC to complete payment for these licenses. The cash payment of $9.5 billion is classified within Acquisitions of wireless licenses on our consolidated statement of cash flows for the year ended December 31, 2015. On April 8, 2015, the FCC granted us these spectrum licenses.

On May 12, 2015, we entered into the Merger Agreement with AOL pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes. On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion, net of cash acquired of $0.5 billion. Holders of approximately 6.6 million shares exercised appraisal rights under Delaware law. If they had not exercised these rights, Verizon would have paid an additional $330 million for such shares at closing. See Note 2 to the consolidated financial statements for additional information.

In October 2015, AOL acquired an advertising technology business for cash consideration that was not significant.

In February 2014, Verizon acquired a business dedicated to the development of IP television for cash consideration that was not significant.

During the fourth quarter of 2013, Verizon acquired an industry leader in content delivery networks for $0.4 billion. Additionally, we acquired a technology company for cash consideration that was not significant.

Dispositions

During 2014, we received proceeds of $2.4 billion related to spectrum license transactions and $0.1 billion related to the disposition of a non-strategic Wireline business. See Note 2 to the consolidated financial statements for additional information.

During 2013, we completed the sale of 700 MHz lower B block spectrum licenses and as a result, we received proceeds of $2.1 billion.

Other, net

On May 19, 2015, Verizon consummated a sale-leaseback transaction with a financial services firm for the buildings and real estate at our Basking Ridge, New Jersey location. We received total gross proceeds of $0.7 billion resulting in a deferred gain of $0.4 billion, which will be amortized over the initial leaseback term of twenty years. The leaseback of the buildings and real estate is accounted for as an operating lease. The proceeds received as a result of this transaction have been classified within Other, net investing activities for the year ended December 31, 2015. Also in 2015, Verizon received proceeds of $0.2 billion related to a sale of real estate.


Cash Flows Provided by (Used In) Financing Activities

We seek to maintain a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters. During 2015, 2014 and 2013, net cash provided by (used in) financing activities was $(15.0) billion, $(57.7) billion and $26.5 billion, respectively.

2015

During 2015, our net cash used in financing activities of $15.0 billion was primarily driven by:

 

   

$9.3 billion used for repayments of long-term borrowings and capital lease obligations, including the repayment of $6.5 billion of borrowings under a term loan agreement;

 

   

$8.5 billion used for dividend payments; and

 

   

$5.0 billion payment for our accelerated share repurchase agreement.

These uses of cash were partially offset by proceeds from long-term borrowings of $6.7 billion, which included $6.5 billion of borrowings under a term loan agreement which was used for general corporate purposes, including the acquisition of spectrum licenses, as well as $2.7 billion of cash proceeds received related to the Tower Monetization Transaction attributable to the portion of the towers that we continue to occupy and use for network operations.

Proceeds from and Repayments of Long-Term Borrowings

At December 31, 2015, our total debt decreased to $110.2 billion as compared to $113.3 billion at December 31, 2014. 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 Note 7 to the consolidated financial statements for additional details regarding our debt activity.

At December 31, 2015, approximately $8.2 billion or 7.5% of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See “Market Risk” for additional information.

Verizon may continue to acquire 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 2015, include $2.7 billion of cash proceeds received related to the Tower Monetization Transaction, which relates to the portion of the towers that we continue to occupy and use for network operations, partially offset by the settlement of derivatives upon maturity for $0.4 billion.

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 2015, the Board increased our quarterly dividend payment 2.7% to $.565 per share from $.550 per share in the prior period. This is the ninth 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 2015, we paid $8.5 billion in dividends.

2014

During 2014, our net cash used in financing activities of $57.7 billion was primarily driven by:

 

   

$58.9 billion used to partially fund the Wireless Transaction (see Note 2 to the consolidated financial statements);

 

   

$17.7 billion used for repayments of long-term borrowings and capital lease obligations; and

 

   

$7.8 billion used for dividend payments.

These uses of cash were partially offset by proceeds from long-term borrowings of $31.0 billion.

Proceeds from and Repayments of Long-Term Borrowings

At December 31, 2014, our total debt increased to $113.3 billion as compared to $93.6 billion at December 31, 2013 primarily as a result of additional debt issued to finance the Wireless Transaction. Since the substantial majority of our total debt portfolio consists of fixed rate


indebtedness, changes in interest rates do not have a material effect on our interest payments. Throughout 2014, we accessed the capital markets to optimize the maturity schedule of our debt portfolio and take advantage of lower interest rates, thereby reducing our effective interest rate to 4.9% from 5.2% in 2013. See Note 7 to the consolidated financial statements for additional details regarding our debt activity.

At December 31, 2014, approximately $9.6 billion or 8.5% of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See “Market Risk” for additional information.

See “Other Items” for additional information related to the early debt redemption costs incurred in 2014.

Dividends

During the third quarter of 2014, the Board increased our quarterly dividend payment 3.8% to $.550 per share from $.530 per share in the same period of 2013. As in prior periods, dividend payments were a significant use of capital resources. During 2014, we paid $7.8 billion in dividends compared to $5.9 billion in 2013. The increase is primarily due to the issuance of approximately 1.27 billion additional shares of common stock as a result of the Wireless Transaction.

2013

During 2013, our net cash provided by financing activities of $26.5 billion was primarily driven by proceeds from long-term borrowings of $49.2 billion to fund the Wireless Transaction. This source of cash was partially offset by:

 

   

$8.2 billion used for repayments of long-term borrowings and capital lease obligations;

 

   

$5.9 billion used for dividend payments; and

 

   

$3.2 billion used for a special distribution to a noncontrolling interest.

Proceeds from and Repayments of Long-Term Borrowings

At December 31, 2013, our total debt increased to $93.6 billion as compared to $52.0 billion at December 31, 2012 primarily as a result of additional debt issued to finance the Wireless Transaction. Since the substantial majority of our total debt portfolio consists of fixed rate indebtedness, changes in interest rates do not have a material effect on our interest payments. See Note 7 to the consolidated financial statements for additional details regarding our debt activity.

Dividends

During the third quarter of 2013, the Board increased our quarterly dividend payment 2.9% to $.530 per share from $.515 per share in the same period of 2012. As in prior periods, dividend payments were a significant use of capital resources.

Special Distributions

In May 2013, the Board of Representatives of Verizon Wireless declared a distribution to its owners, which was paid in the second quarter of 2013 in proportion to their partnership interests on the payment date, in the aggregate amount of $7.0 billion. As a result, Vodafone received a cash payment of $3.15 billion and the remainder of the distribution was received by Verizon.

Other, net

The change in Other, net financing activities during 2013 was primarily driven by higher distributions to Vodafone, which owned a 45% noncontrolling interest in Verizon Wireless as of December 31, 2013.

Credit Facility

As of December 31, 2015, the unused borrowing capacity under our $8.0 billion four-year credit facility was approximately $7.9 billion. The credit facility does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has incurred a material adverse change. We use the credit facility for the issuance of letters of credit and for general corporate purposes.

Common Stock

Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareholder plans, including 22.6 million, 18.2 million and 6.9 million common shares issued from Treasury stock during 2015, 2014 and 2013, respectively, which had aggregate values of $0.9 billion, $0.7 billion and $0.3 billion, respectively.


In February 2015, the Verizon Board of Directors authorized Verizon to enter into an accelerated share repurchase (ASR) agreement to repurchase $5.0 billion of the Company’s common stock. On February 10, 2015, in exchange for an upfront payment totaling $5.0 billion, Verizon received an initial delivery of 86.2 million shares having a value of approximately $4.25 billion. On June 5, 2015, Verizon received an additional 15.4 million shares as final settlement of the transaction under the ASR agreement. In total, 101.6 million shares were delivered under the ASR at an average repurchase price of $49.21.

On March 7, 2014, the Verizon Board of Directors approved a share buyback program, which authorizes the repurchase of up to 100 million shares of Verizon common stock terminating no later than the close of business on February 28, 2017. The program permits Verizon to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs. The Board also determined that no additional shares were to be purchased under the prior program. During 2015, we repurchased $0.1 billion of our common stock as part of our previously announced share buyback program. There were no repurchases of common stock during 2014. During 2013, we repurchased $0.2 billion of our common stock under our previous share buyback program.

As a result of the Wireless Transaction, in February 2014, Verizon issued approximately 1.27 billion shares.

Credit Ratings

Verizon’s credit ratings did not change in 2015 or 2014.

During the third quarter of 2013, Verizon’s credit ratings were downgraded by Moody’s Investors Service (Moody’s), Standard & Poor’s Ratings Services (Standard & Poor’s) and Fitch Ratings (Fitch) as a result of Verizon’s announcement of the agreement to acquire Vodafone’s 45% noncontrolling interest in Verizon Wireless for approximately $130 billion including the incurrence of third-party indebtedness to fund the cash portion of the purchase price for the Wireless Transaction. Moody’s downgraded Verizon’s long-term debt ratings one notch from A3 to Baa1, while Standard & Poor’s lowered its corporate credit rating and senior unsecured debt rating one notch from A- to BBB+ and Fitch lowered its long-term issuer default rating and senior unsecured debt rating one notch from A to A-.

Securities ratings assigned by rating organizations are expressions of opinion and are not recommendations to buy, sell or hold securities. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Covenants

Our credit agreements contain covenants that are typical for large, investment grade companies. These covenants include requirements to pay interest and principal in a timely fashion, pay taxes, maintain insurance with responsible and reputable insurance companies, preserve our corporate existence, keep appropriate books and records of financial transactions, maintain our properties, provide financial and other reports to our lenders, limit pledging and disposition of assets and mergers and consolidations, and other similar covenants. Additionally, our term loan credit agreement requires us to maintain a leverage ratio (as such term is defined in those agreements) not in excess of 3.50:1.00 until our credit ratings are equal to or higher than A3 and A-. See Note 7 to the consolidated financial statements for additional details related to our term loan credit agreement.

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

 

Increase (Decrease) In Cash and Cash Equivalents

Our Cash and cash equivalents at December 31, 2015 totaled $4.5 billion, a $6.1 billion decrease compared to Cash and cash equivalents at December 31, 2014 primarily as a result of the factors discussed above. Our Cash and cash equivalents at December 31, 2014 totaled $10.6 billion, a $42.9 billion decrease compared to Cash and cash equivalents at December 31, 2013 primarily as a result of the cash payment made to Vodafone as part of the completion of the Wireless Transaction.

Free Cash Flow

Free cash flow is a non-GAAP financial measure that management believes is useful to investors and other users of Verizon’s financial information in evaluating cash available to pay debt and dividends. Free cash flow is calculated by subtracting capital expenditures from net cash provided by operating activities. The following table reconciles net cash provided by operating activities to Free cash flow:

 

     (dollars in millions)  
Years Ended December 31,    2015      2014      2013  

Net cash provided by operating activities

   $     38,930       $     30,631       $     38,818   

Less Capital expenditures (including capitalized software)

     17,775         17,191         16,604   
  

 

 

 

Free cash flow

   $ 21,155       $ 13,440       $ 22,214   
  

 

 

 


The changes in free cash flow during 2015, 2014 and 2013 were a result of the factors described in connection with net cash provided by operating activities and capital expenditures. During 2015, we received $5.9 billion of cash proceeds, net of remittances, related to the sale of wireless device installment receivables as well as $2.4 billion of cash proceeds received related to the Tower Monetization Transaction attributable to the portion of the towers for which the right-of-use has passed to the tower operator. On February 21, 2014, we completed the Wireless Transaction which provides full access to the cash flows of Verizon Wireless. The completion of the Wireless Transaction resulted in an increase in income tax payments as well as an increase in interest payments, which reduced our net cash provided by operating activities during 2014 (see “Cash Flows Provided by Operating Activities”).

 

Employee Benefit Plan 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 2015 and 2014, contributions to our qualified pension plans were $0.7 billion and $1.5 billion, respectively. During 2013, contributions to our qualified pension plans were not material. We also contributed $0.1 billion, $0.1 billion and $0.1 billion to our nonqualified pension plans in 2015, 2014 and 2013, respectively.

In an effort to reduce the risk of our portfolio strategy and better align assets with liabilities, we have adopted a liability driven pension strategy that seeks to better match cash flows from investments with projected benefit payments. We expect that the strategy will reduce the likelihood that assets will decline at a time when liabilities increase (referred to as liability hedging), with the goal to reduce the risk of underfunding to the plan and its participants and beneficiaries, however, we also expect the strategy to result in lower asset returns. Based on this strategy and the funded status of the plans at December 31, 2015, we expect the minimum required qualified pension plan contribution in 2016 to be $0.6 billion. Nonqualified pension contributions are estimated to be approximately $0.1 billion in 2016.

Contributions to our other postretirement benefit plans generally relate to payments for benefits on an as-incurred basis since the other postretirement benefit plans do not have funding requirements similar to the pension plans. We contributed $0.9 billion, $0.7 billion and $1.4 billion to our other postretirement benefit plans in 2015, 2014 and 2013, respectively. Contributions to our other postretirement benefit plans are estimated to be approximately $0.9 billion in 2016.

 

Leasing Arrangements

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

 

Off Balance Sheet Arrangements and Contractual Obligations

Contractual Obligations and Commercial Commitments

The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2015. 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
     1-3 years      3-5 years      More than
5 years
 

Long-term debt(1)

   $ 109,073       $ 6,054       $ 10,843       $ 14,381       $ 77,795   

Capital lease obligations(2)

     957         271         424         124         138   
  

 

 

 

Total long-term debt, including current maturities

     110,030         6,325         11,267         14,505         77,933   

Interest on long-term debt(1)

     88,562         5,058         9,731         8,880         64,893   

Operating leases(2)

     18,213         2,744         4,697         3,475         7,297   

Purchase obligations(3)

     21,934         8,440         9,166         2,278         2,050   

Other long-term liabilities(4)

     2,402         1,462         940         —           —     

Finance obligations(5)

     2,625         261         538         560         1,266   
  

 

 

 

Total contractual obligations

   $   243,766       $   24,290       $   36,339       $   29,698       $ 153,439   
  

 

 

 

 

(1) 

Items included in long-term debt with variable coupon rates are described in Note 7 to the consolidated financial statements.

 

(2) 

See Note 6 to the consolidated financial statements.


(3) 

The purchase obligations reflected above are primarily commitments to purchase programming and network services, equipment, software, handsets and peripherals, and marketing activities, which will be used or sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject of contractual obligations. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented in this table alone do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position (see Note 16 to the consolidated financial statements).

 

(4) 

Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions (see Note 11 to the consolidated financial statements).

 

(5) 

Represents future minimum payments under the sublease arrangement for our tower transaction (see Note 2 to the consolidated financial statements).

We are not able to make a reliable estimate of when the unrecognized tax benefits balance of $1.6 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).

 

Guarantees

We guarantee the debentures and first mortgage bonds of our operating telephone company subsidiaries as well as the debt obligations of GTE Corporation that were issued and outstanding prior to July 1, 2003 (see Note 7 to the consolidated financial statements).

In connection with the execution of agreements for the sale of businesses and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of nonfinancial matters, such as ownership of the securities being sold, as well as financial losses (see Note 16 to the consolidated financial statements).

As of December 31, 2015, letters of credit totaling approximately $0.1 billion, which were executed in the normal course of business and support several financing arrangements and payment obligations to third parties, were outstanding (see Note 16 to the consolidated financial statements).

 

Market Risk

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in investment, equity and commodity prices and changes in corporate tax rates. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, foreign currency and prepaid forwards and collars, interest rate swap agreements, commodity swap and forward agreements and interest rate locks. We do not hold derivatives for trading purposes.

It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in 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. At December 31, 2015 and 2014, we posted collateral of approximately $0.1 billion and $0.6 billion, respectively, related to derivative contracts under collateral exchange arrangements. During the first and second quarter of 2015, we paid an immaterial amount of cash to enter into amendments to certain collateral exchange arrangements. These amendments suspend cash collateral posting for a specified period of time by both counterparties. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote. As such, we do not expect that our results of operations or financial condition will be materially affected by these risk management strategies.

 

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, 2015, approximately 81% of the aggregate principal amount of our total debt portfolio consisted of fixed rate indebtedness, including the effect of interest rate swap agreements designated as hedges. The impact of a 100 basis point change in interest rates affecting our floating rate debt would result in a change in annual interest expense, including our interest rate swap agreements that are designated as hedges, of approximately $0.2 billion. The interest rates on substantially all of our existing long-term debt obligations are unaffected by changes to our credit ratings.

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

   $   117,943      $   108,992      $   128,641  

At December 31, 2014

     126,139         115,695         138,420   

Interest Rate Swaps

We enter into domestic interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. We record the interest rate swaps at fair value on our consolidated balance sheets as assets and liabilities.

During the third quarter of 2015, we entered into interest rate swaps with a total notional value of $3.2 billion. During the fourth quarter of 2015, we entered into interest rate swaps with a total notional value of $2.6 billion. At December 31, 2015 and 2014, the total notional amount of the interest rate swaps was $7.6 billion and $1.8 billion, respectively. The fair value of these contracts was $0.1 billion at December 31, 2015 and was not material at December 31, 2014. The ineffective portion of these interest rate swaps was not material at December 31, 2015 and 2014.

Forward Interest Rate Swaps

In order to manage our exposure to future interest rate changes, we have entered into forward interest rate swaps. We designated these contracts as cash flow hedges. At December 31, 2014, these swaps had a notional value of $2.0 billion. The fair value of these contracts was $0.2 billion at December 31, 2014, which was included within Other liabilities on our consolidated balance sheet. During the third quarter of 2015, we settled these forward interest rate swaps and the pre-tax loss was not material. During the third quarter of 2015, we entered into forward interest rate swaps with a total notional value of $0.8 billion. The fair value of these contracts was not material at December 31, 2015.

 

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 and (expense), net. At December 31, 2015, our primary translation exposure was to the British Pound Sterling, Euro and Australian Dollar.

Cross Currency Swaps

Verizon Wireless previously entered into cross currency swaps designated as cash flow hedges to exchange approximately $1.6 billion of British Pound Sterling and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. In June 2014, we settled $0.8 billion of these cross currency swaps and the gains with respect to these swaps were not material. In December 2015, we settled $0.6 billion of these cross currency swaps on maturity.

During the first quarter of 2014, we entered into cross currency swaps designated as cash flow hedges to exchange approximately $5.4 billion of Euro and British Pound Sterling denominated debt into U.S. dollars. During the second quarter of 2014, we entered into cross currency swaps designated as cash flow hedges to exchange approximately $1.2 billion of British Pound Sterling denominated debt into U.S. dollars. During the fourth quarter of 2014, we entered into cross currency swaps designated as cash flow hedges to exchange approximately $3.0 billion of Euro denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars. Each of these cross currency swaps was entered into in order to mitigate the impact of foreign currency transaction gains or losses.

A portion of the gains and losses recognized in Other comprehensive income was reclassified to Other income and (expense), net to offset the related pre-tax foreign currency transaction gain or loss on the underlying debt obligations. The fair value of the outstanding swaps was $1.6 billion and $0.6 billion, which was primarily included within Other liabilities on our consolidated balance sheets at December 31, 2015 and 2014, respectively. At December 31, 2015, the total notional amount of the cross currency swaps was $9.7 billion. During 2015 and 2014, a pre-tax loss of $1.2 billion and a pre-tax loss of $0.1 billion, respectively, was recognized in Other comprehensive income with respect to these swaps.

Net Investment Hedges

We entered into foreign currency forward contracts that are designated as net investment hedges to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. During the third quarter of 2015, we entered into net investment hedges with a total notional value of $0.9 billion with the contract tenor maturing in 2018. The fair value of these contracts was not material at December 31, 2015.


Critical Accounting Estimates and Recently Issued Accounting Standards

 

Critical Accounting Estimates

A summary of the critical accounting estimates used in preparing our financial statements is as follows:

 

 

Wireless licenses and Goodwill are a significant component of our consolidated assets. Both our wireless licenses and goodwill are treated as indefinite-lived intangible assets and, therefore are not amortized, but rather are tested for impairment annually in the fourth fiscal quarter, unless there are events requiring an earlier assessment or changes in circumstances during an interim period that indicate these assets may not be recoverable. We believe our estimates and assumptions are reasonable and represent appropriate marketplace considerations as of the valuation date. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates are uncertain by nature and can vary from actual results. It is possible that in the future there may be changes in our assumptions, including estimated cash flow projections, margins, growth rates and discount rate, which could result in different fair value estimates and an impairment charge.

Wireless Licenses

The carrying value of our wireless licenses was approximately $86.6 billion as of December 31, 2015. 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 2015, 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. If the estimated fair value of our aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses then an impairment charge would have been recognized. Our quantitative impairment test for 2015 indicated that the fair value significantly exceeded the carrying value and, therefore, did not result in an impairment.

In 2015, using a 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.

In 2014 and 2013, we performed a qualitative impairment assessment to determine whether it is more likely than not that the fair value of our wireless licenses was less than the carrying amount. As part of our assessment we considered several qualitative factors including the business enterprise value of Wireless, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA margin projections), the projected financial performance of Wireless, as well as other factors. Based on our assessment in 2014 and 2013, we qualitatively concluded that it was more likely than not that the fair value of our wireless licenses significantly exceeded their carrying value and therefore, did not result in an impairment.

Goodwill

At December 31, 2015, the balance of our goodwill was approximately $25.3 billion, of which $18.4 billion was in our Wireless reporting unit, $4.3 billion was in our Wireline reporting unit and $2.6 billion was in our other reporting unit. Determining whether an impairment has occurred requires the determination of fair value of each respective reporting unit. The fair value of our reporting units exceeded the carrying values. Accordingly, our annual impairment tests for 2015, 2014 and 2013 did not result in an impairment. In the event of a 10% decline in the fair value of any of our reporting units, the fair value would have still exceeded the book value of the reporting unit and no impairment charge would be recorded.

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.


 

We maintain benefit plans for most of our employees, including, for certain employees, pension and other postretirement benefit plans. At December 31, 2015, in the aggregate, pension plan benefit obligations exceeded the fair value of pension plan assets, which will result in higher future pension plan expense. Other postretirement benefit plans have larger benefit obligations than plan assets, resulting in expense. Significant benefit plan assumptions, including the discount rate used, the long-term rate of return on plan assets, 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, 2015 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, 2015*
 

Pension plans discount rate

     +0.50       $ (1,195
     -0.50         1,333   

Rate of return on pension plan assets

     +1.00         (175
     -1.00         175   

Postretirement plans discount rate

     +0.50         (1,565
     -0.50         1,761   

Rate of return on postretirement plan assets

     +1.00         (21
     -1.00         21   

Health care trend rates

     +1.00         3,074   
     -1.00         (2,516

 

  *

In determining its pension and other postretirement obligation, the Company used a weighted-average discount rate of 4.6%. 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, 2015. 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 $0.3 billion par outstanding).

The annual measurement date for both our pension and other postretirement benefits is December 31st. Effective January 1, 2016, we adopted the full yield curve approach to estimate the interest cost component of net periodic benefit cost for pension and other postretirement benefits. We will account for this change as a change in accounting estimate and, accordingly, will account for it prospectively beginning in the first quarter of 2016. Prior to this change, we estimated the interest cost component utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period.

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.

This change in accounting estimate does not affect the measurement of our total benefit obligations at year end or our annual net periodic benefit cost as the change in the interest cost is offset in the actuarial gain or loss recorded at year end. Accordingly, this change in accounting estimate has no impact on our annual consolidated GAAP results. We estimate the impact of this change on our consolidated GAAP results for the first quarter of 2016 will be a reduction of the interest cost component of net periodic benefit cost and an increase to Net income by approximately $0.1 billion. However, at this time the estimated impact of this change on the remaining 2016 interim periods and for annual 2016 results cannot be reasonably estimated because it is possible that in the future there may be changes to underlying assumptions, including an interim remeasurement of our benefit obligations, which could result in different estimates. Our non-GAAP measure for segment EBITDA is unaffected because net periodic benefit costs are not included in our segment results. For additional discussion of Non-GAAP measures and non-operational items see “Consolidated Results of Operations”.

 

 

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.

 

 

Our Plant, property and equipment balance represents a significant component of our consolidated assets. We record Plant, property and equipment at cost. We depreciate Plant, property and equipment on a straight-line basis over the estimated useful life of the assets. We expect that a one-year increase in estimated useful lives of our Plant, property and equipment would result in a decrease to our 2015 depreciation expense of $2.8 billion and that a one-year decrease would result in an increase of approximately $7.2 billion in our 2015 depreciation expense.

 

 

We maintain allowances for uncollectible accounts receivable, including our device installment plan receivables, for estimated losses resulting from the failure or inability of our customers to make required payments. 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. If there is a deterioration of 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, 2015.

 

Acquisitions and Divestitures

Wireless

Wireless Transaction

On February 21, 2014, we completed the Wireless Transaction for aggregate consideration of approximately $130 billion. The consideration paid was primarily comprised of cash of approximately $58.89 billion, Verizon common stock with a value of approximately $61.3 billion and other consideration.

Omnitel Transaction

On February 21, 2014, Verizon and Vodafone also consummated the sale of the Omnitel Interest (the Omnitel Transaction) by a subsidiary of Verizon to a subsidiary of Vodafone in connection with the Wireless Transaction pursuant to a separate share purchase agreement. As a result, during 2014, we recognized a pre-tax gain of $1.9 billion on the disposal of the Omnitel interest.

See Note 2 to the consolidated financial statements for additional information regarding the Wireless Transaction.

Spectrum License Transactions

In January 2015, the FCC completed an auction of 65 MHz of spectrum in the AWS-3 band. We participated in the auction and were the high bidder on 181 spectrum licenses, for which we paid cash of approximately $10.4 billion. The FCC granted us these spectrum licenses in April 2015.

From time to time, we enter into agreements to buy, sell or exchange spectrum licenses. We believe these spectrum license transactions have allowed us to continue to enhance the reliability of our network while also resulting in a more efficient use of spectrum. See Note 2 to the consolidated financial statements for additional details regarding our spectrum license transactions.

Tower Monetization Transaction

During March 2015, we completed a transaction with American Tower pursuant to which American Tower acquired the exclusive right to lease, acquire or otherwise operate and manage many of our wireless towers for an upfront payment of $5.1 billion, which also included payment for the sale of 162 towers. See Note 2 to the consolidated financial statements for additional information.

Wireline

During July 2014, Verizon sold a non-strategic Wireline business for cash consideration that was not significant. See Note 2 to the consolidated financial statements for additional information.

Access Line Sale

On February 5, 2015, we announced that we have entered into a definitive agreement with Frontier pursuant to which Verizon will sell its local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and high-speed Internet service and long distance voice accounts in these three states for approximately $10.5 billion (approximately $7.5 billion net of income taxes), subject to certain adjustments and including the assumption of $0.6 billion of indebtedness from Verizon by Frontier. We expect this transaction to close at the end of the first quarter of 2016. See Note 2 to the consolidated financial statements for additional information.


Other

Acquisition of AOL Inc.

On May 12, 2015, we entered into the Merger Agreement with AOL pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes.

On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion. Holders of approximately 6.6 million shares exercised their appraisal rights under Delaware law. If they had not exercised these rights, Verizon would have paid an additional $330 million for such shares at the closing.

AOL is a leader in the digital content and advertising platform space. Verizon has been investing in emerging technology that taps into the market shift to digital content and advertising. AOL’s business model aligns with this approach, and we believe that its combination of owned and operated content properties plus a digital advertising platform enhances our ability to further develop future revenue streams. See Note 2 to the consolidated financial statements for additional information.

Other

On September 3, 2015, AOL announced an agreement to acquire an advertising technology business for cash consideration that was not significant. The transaction was completed in October 2015.

During the fourth quarter of 2014, Redbox Instant by Verizon, a venture between Verizon and Redbox Automated Retail, LLC (Redbox), a wholly-owned subsidiary of Outerwall Inc., ceased providing service to its customers. In accordance with an agreement between the parties, Redbox withdrew from the venture on October 20, 2014 and Verizon wound down and dissolved the venture during the fourth quarter of 2014. As a result of the termination of the venture, we recorded a pre-tax loss of $0.1 billion in the fourth quarter of 2014.

During February 2014, Verizon acquired a business dedicated to the development of IP television for cash consideration that was not significant.

During the fourth quarter of 2013, Verizon acquired an industry leader in content delivery networks for $0.4 billion.

See Note 2 to the consolidated financial statements for additional information.


Cautionary Statement Concerning Forward-Looking Statements

In this report we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

 

   

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

 

   

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

 

   

material changes in technology or technology substitution;

 

   

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

 

   

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

 

   

breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial impact not covered by insurance;

 

   

our high level of indebtedness;

 

   

an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing;

 

   

material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact;

 

   

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

 

   

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

 

   

changes in accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; and

 

   

the inability to implement our business strategies.


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, 2015. Based on this assessment, we believe that the internal control over financial reporting of the company is effective as of December 31, 2015. 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/    Lowell C. McAdam

        Lowell C. McAdam

        Chairman and Chief Executive Officer

/s/    Francis J. Shammo

        Francis J. Shammo

        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 on Internal Control Over Financial Reporting

To The Board of Directors and Shareowners of Verizon Communications Inc.:

We have audited Verizon Communications Inc. and subsidiaries’ (Verizon) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Verizon’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Verizon maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Verizon as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2015 and our report dated February 23, 2016 expressed an unqualified opinion thereon.

 

   /s/ Ernst & Young LLP

        Ernst & Young LLP

        New York, New York

        February 23, 2016


Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareowners of Verizon Communications Inc.:

We have audited the accompanying consolidated balance sheets of Verizon Communications Inc. and subsidiaries (Verizon) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of Verizon’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Verizon at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Verizon’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2016 expressed an unqualified opinion thereon.

 

   /s/  Ernst & Young LLP

        Ernst & Young LLP

        New York, New York

        February 23, 2016


Consolidated Statements of Income Verizon Communications Inc. and Subsidiaries

 

     (dollars in millions, except per share amounts)  
Years Ended December 31,    2015     2014     2013  

Operating Revenues

      

Service revenues and other

     $    114,696        $    116,122        $    112,454   

Wireless equipment revenues

     16,924        10,957        8,096   
  

 

 

 

Total Operating Revenues

     131,620        127,079        120,550   

Operating Expenses

      

Cost of services (exclusive of items shown below)

     29,438        28,306        28,534   

Wireless cost of equipment

     23,119        21,625        16,353   

Selling, general and administrative expense

     29,986        41,016        27,089   

Depreciation and amortization expense

     16,017        16,533        16,606   
  

 

 

 

Total Operating Expenses

     98,560        107,480        88,582   

Operating Income

     33,060        19,599        31,968   

Equity in (losses) earnings of unconsolidated businesses

     (86     1,780        142   

Other income and (expense), net

     186        (1,194     (166

Interest expense

     (4,920     (4,915     (2,667
  

 

 

 

Income Before Provision For Income Taxes

     28,240        15,270        29,277   

Provision for income taxes

     (9,865     (3,314     (5,730
  

 

 

 

Net Income

     $      18,375        $      11,956        $      23,547   
  

 

 

 

Net income attributable to noncontrolling interests

     $           496        $        2,331        $      12,050   

Net income attributable to Verizon

     17,879        9,625        11,497   
  

 

 

 

Net Income

     $      18,375        $      11,956        $      23,547   
  

 

 

 

Basic Earnings Per Common Share

      

Net income attributable to Verizon

     $          4.38        $          2.42        $          4.01   

Weighted-average shares outstanding (in millions)

     4,085        3,974        2,866   

Diluted Earnings Per Common Share

      

Net income attributable to Verizon

     $          4.37        $          2.42        $          4.00   

Weighted-average shares outstanding (in millions)

     4,093        3,981        2,874   

See Notes to Consolidated Financial Statements


Consolidated Statements of Comprehensive Income Verizon Communications Inc. and Subsidiaries

 

     (dollars in millions)  
Years Ended December 31,    2015     2014     2013  

Net Income

   $ 18,375      $ 11,956      $ 23,547    

Other Comprehensive Income, net of taxes

      

Foreign currency translation adjustments

     (208     (1,199     60    

Unrealized gains (losses) on cash flow hedges

     (194     (197     25    

Unrealized gains (losses) on marketable securities

     (11     (5     16    

Defined benefit pension and postretirement plans

     (148     154        22    
  

 

 

 

Other comprehensive income (loss) attributable to Verizon

     (561     (1,247     123    

Other comprehensive loss attributable to noncontrolling interests

            (23     (15)   
  

 

 

 

Total Comprehensive Income

   $ 17,814      $ 10,686      $ 23,655    
  

 

 

 

Comprehensive income attributable to noncontrolling interests

     496        2,308        12,035    

Comprehensive income attributable to Verizon

     17,318        8,378        11,620    
  

 

 

 

Total Comprehensive Income

   $   17,814      $   10,686      $   23,655    
  

 

 

 

See Notes to Consolidated Financial Statements


Consolidated Balance Sheets Verizon Communications Inc. and Subsidiaries

(dollars in millions, except per share amounts)

At December 31,    2015     2014  

Assets

    

Current assets

    

Cash and cash equivalents

     $        4,470        $      10,598    

Short-term investments

     350        555    

Accounts receivable, net of allowances of $882 and $739

     13,457        13,993    

Inventories

     1,252        1,153    

Assets held for sale

     792        552    

Prepaid expenses and other

     1,959        2,648    
  

 

 

 

Total current assets

     22,280        29,499    
  

 

 

 

Plant, property and equipment

     220,163        230,508    

Less accumulated depreciation

     136,622        140,561    
  

 

 

 

Plant, property and equipment, net

     83,541        89,947    
  

 

 

 

Investments in unconsolidated businesses

     796        802    

Wireless licenses

     86,575        75,341    

Goodwill

     25,331        24,639    

Other intangible assets, net

     8,338        5,728    

Non-current assets held for sale

     10,267        –     

Deposit for wireless licenses

            921    

Other assets

     7,512        5,739    
  

 

 

 

Total assets

     $    244,640        $    232,616    
  

 

 

 

Liabilities and Equity

    

Current liabilities

    

Debt maturing within one year

     $        6,489        $        2,735    

Accounts payable and accrued liabilities

     19,362        16,680    

Liabilities related to assets held for sale

     463        –     

Other

     8,738        8,572    
  

 

 

 

Total current liabilities

     35,052        27,987    
  

 

 

 

Long-term debt

     103,705        110,536    

Employee benefit obligations

     29,957        33,280    

Deferred income taxes

     45,484        41,563    

Non-current liabilities related to assets held for sale

     959        –     

Other liabilities

     11,641        5,574    

Equity

    

Series preferred stock ($.10 par value; none issued)

            –     

Common stock ($.10 par value; 4,242,374,240 shares issued in each period)

     424        424    

Contributed capital

     11,196        11,155    

Reinvested earnings

     11,246        2,447    

Accumulated other comprehensive income

     550        1,111    

Common stock in treasury, at cost

     (7,416     (3,263

Deferred compensation – employee stock ownership plans and other

     428        424    

Noncontrolling interests

     1,414        1,378    
  

 

 

 

Total equity

     17,842        13,676    
  

 

 

 

Total liabilities and equity

     $    244,640        $    232,616    
  

 

 

 

See Notes to Consolidated Financial Statements


Consolidated Statements of Cash Flows Verizon Communications Inc. and Subsidiaries

 

     (dollars in millions)  
Years Ended December 31,    2015     2014     2013  

Cash Flows from Operating Activities

      

Net Income

   $ 18,375      $ 11,956      $ 23,547    

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization expense

     16,017        16,533        16,606    

Employee retirement benefits

     (1,747     8,130        (5,052)   

Deferred income taxes

     3,516        (92     5,785    

Provision for uncollectible accounts

     1,610        1,095        993    

Equity in losses (earnings) of unconsolidated businesses, net of dividends received

     127        (1,743     (102)   

Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses

      

Accounts receivable

     (945     (2,745     (843)   

Inventories

     (99     (132     56    

Other assets

     942        (695     (143)   

Accounts payable and accrued liabilities

     2,545        1,412        925    

Other, net

     (1,411     (3,088     (2,954)   
  

 

 

 

Net cash provided by operating activities

     38,930        30,631        38,818    
  

 

 

 

Cash Flows from Investing Activities

      

Capital expenditures (including capitalized software)

     (17,775     (17,191     (16,604)   

Acquisitions of investments and businesses, net of cash acquired

     (3,545     (182     (494)   

Acquisitions of wireless licenses

     (9,942     (354     (580)   

Proceeds from dispositions of wireless licenses

            2,367        2,111    

Proceeds from dispositions of businesses

     48        120        –     

Other, net

     1,171        (616     734    
  

 

 

 

Net cash used in investing activities

     (30,043     (15,856     (14,833)   
  

 

 

 

Cash Flows from Financing Activities

      

Proceeds from long-term borrowings

     6,667        30,967        49,166    

Repayments of long-term borrowings and capital lease obligations

     (9,340     (17,669     (8,163)   

Decrease in short-term obligations, excluding current maturities

     (344     (475     (142)   

Dividends paid

     (8,538     (7,803     (5,936)   

Proceeds from sale of common stock

     40        34        85    

Purchase of common stock for treasury

     (5,134            (153)   

Special distribution to noncontrolling interest

                   (3,150)   

Acquisition of noncontrolling interest

            (58,886     –     

Other, net

     1,634        (3,873     (5,257)   
  

 

 

 

Net cash provided by (used in) financing activities

     (15,015     (57,705     26,450    
  

 

 

 

Increase (decrease) in cash and cash equivalents

     (6,128     (42,930     50,435    

Cash and cash equivalents, beginning of period

     10,598        53,528        3,093    
  

 

 

 

Cash and cash equivalents, end of period

   $ 4,470      $ 10,598      $ 53,528    
  

 

 

 

See Notes to Consolidated Financial Statements


Consolidated Statements of Changes in Equity Verizon Communications Inc. and Subsidiaries

 

     (dollars in millions, except per share amounts, and shares in thousands)  
Years Ended December 31,    2015            2014            2013         
     Shares     Amount     Shares     Amount     Shares     Amount  
  

 

 

 

Common Stock

            

Balance at beginning of year

     4,242,374      $ 424        2,967,610      $ 297        2,967,610      $ 297    

Common shares issued (Note 2)

                   1,274,764        127               –    
  

 

 

 

Balance at end of year

     4,242,374        424        4,242,374        424        2,967,610        297    
  

 

 

 

Contributed Capital

            

Balance at beginning of year

       11,155          37,939          37,990    

Acquisition of noncontrolling interest (Note 2)

                (26,898       –    

Other

       41          114          (51)   
  

 

 

 

Balance at end of year

       11,196          11,155          37,939    
  

 

 

 

Reinvested Earnings (Accumulated Deficit)

            

Balance at beginning of year

       2,447          1,782          (3,734)   

Net income attributable to Verizon

       17,879          9,625          11,497    

Dividends declared ($2.23, $2.16, $2.09) per share

       (9,080       (8,960       (5,981)   
  

 

 

 

Balance at end of year

       11,246          2,447          1,782    
  

 

 

 

Accumulated Other Comprehensive Income

            

Balance at beginning of year attributable to Verizon

       1,111          2,358          2,235    

Foreign currency translation adjustments

       (208       (1,199       60    

Unrealized gains (losses) on cash flow hedges

       (194       (197       25    

Unrealized gains (losses) on marketable securities

       (11       (5       16    

Defined benefit pension and postretirement plans

       (148       154          22    
  

 

 

 

Other comprehensive income (loss)

       (561       (1,247       123    
  

 

 

 

Balance at end of year attributable to Verizon

       550          1,111          2,358    
  

 

 

 

Treasury Stock

            

Balance at beginning of year

     (87,410     (3,263     (105,610     (3,961     (109,041     (4,071)   

Shares purchased

     (104,402     (5,134                   (3,500     (153)   

Employee plans (Note 15)

     17,072        740        14,132        541        6,835        260    

Shareowner plans (Note 15)

     5,541        241        4,105        157        96          

Other

                   (37                   –    
  

 

 

 

Balance at end of year

     (169,199     (7,416     (87,410     (3,263     (105,610     (3,961)   
  

 

 

 

Deferred Compensation-ESOPs and Other

            

Balance at beginning of year

       424          421          440    

Restricted stock equity grant

       208          166          152    

Amortization

       (204       (163       (171)   
  

 

 

 

Balance at end of year

       428          424          421    
  

 

 

 

Noncontrolling Interests

            

Balance at beginning of year

       1,378          56,580          52,376    

Acquisition of noncontrolling interest (Note 2)

                (55,960       –    

Net income attributable to noncontrolling interests

       496          2,331          12,050    

Other comprehensive loss

                (23       (15)   
  

 

 

 

Total comprehensive income

       496          2,308          12,035    
  

 

 

 

Distributions and other

       (460       (1,550       (7,831)   
  

 

 

 

Balance at end of year

       1,414          1,378          56,580    
  

 

 

 

Total Equity

     $ 17,842        $ 13,676        $   95,416    
  

 

 

 

See Notes to Consolidated Financial Statements


Notes to Consolidated Financial Statements Verizon Communications Inc. and Subsidiaries

 

Note 1

Description of Business and Summary of Significant Accounting Policies

Description of Business

Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading providers of communications, information and entertainment products and services to consumers, businesses and governmental agencies with a presence around the world. We have two reportable segments, Wireless and Wireline. For further information concerning our business segments, see Note 13.

The Wireless segment provides wireless communications products and services across one of the most extensive and reliable wireless networks in the United States (U.S.) and has the largest fourth-generation (4G) Long-Term Evolution (LTE) technology and third-generation (3G) networks of any U.S. wireless service provider.

The Wireline segment provides voice, data and video communications products and enhanced services, including broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services. We provide these products and services to consumers in the United States, as well as to carriers, businesses and government customers both in the United States and around the world.

Consolidation

The method of accounting applied to investments, whether consolidated, equity or cost, involves an evaluation of all significant terms of the investments that explicitly grant or suggest evidence of control or influence over the operations of the investee. The consolidated financial statements include our controlled subsidiaries, as well as variable interest entities (VIE) where we are deemed to be the primary beneficiary. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in Net income and Total equity. Investments in businesses which we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Investments in which we do not have the ability to exercise significant influence over operating and financial policies are accounted for under the cost method. Equity and cost method investments are included in Investments in unconsolidated businesses in our consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated.

Basis of Presentation

We have reclassified certain prior year amounts to conform to the current year presentation.

Use of Estimates

We prepare our financial statements using U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

Examples of significant estimates include: the allowance for doubtful accounts, the recoverability of plant, property and equipment, the recoverability of intangible assets and other long-lived assets, fair values of financial instruments, unrecognized tax benefits, valuation allowances on tax assets, accrued expenses, pension and postretirement benefit assumptions, contingencies and the identification of assets acquired and liabilities assumed in connection with business combinations.

Revenue Recognition

Multiple Deliverable Arrangements

We offer products and services to our wireless and wireline customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.

Wireless

Our Wireless segment earns revenue primarily by providing access to and usage of its network as well as the sale of equipment. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in arrears and recognized when service is rendered. Equipment sales revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from providing wireless services. For agreements involving the resale of third-party services in which we are considered the primary obligor in the arrangements, we record the revenue gross at the time of the sale.


Under the Verizon device payment program (formerly known as Verizon Edge), our eligible wireless customers purchase phones or tablets at unsubsidized prices on an installment basis (a device installment plan). Certain devices are subject to promotions that allow customers to upgrade to a new device after paying down the minimum percentage of the device installment plan and trading in their device. When a customer has the right to upgrade to a new device by paying down the minimum percentage of the device installment plan and trading in their device, we account for this trade-in right as a guarantee obligation. The full amount of the trade-in right’s fair value (not an allocated value) is recognized as a guarantee liability and the remaining allocable consideration is allocated to the device. The value of the guarantee liability effectively results in a reduction to the revenue recognized for the sale of the device.

In multiple element arrangements that bundle devices and monthly wireless service, revenue is allocated to each unit of accounting using a relative selling price method. At the inception of the arrangement, the amount allocable to the delivered units of accounting is limited to the amount that is not contingent upon the delivery of the monthly wireless service (the noncontingent amount). We effectively recognize revenue on the delivered device at the lesser of the amount allocated based on the relative selling price of the device or the noncontingent amount owed when the device is sold.

Wireline

Our Wireline segment earns revenue based upon usage of its network and facilities and contract fees. In general, fixed monthly fees for voice, video, data and certain other services are billed one month in advance and recognized when earned. Revenue from services that are not fixed in amount and are based on usage is generally billed in arrears and recognized when service is rendered.

We sell each of the services offered in bundled arrangements (i.e., voice, video and data), as well as separately; therefore each product or service has a standalone selling price. For these arrangements, revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service. These services include Fios services, individually or in bundles, and High Speed Internet.

When we bundle equipment with maintenance and monitoring services, we recognize equipment revenue when the equipment is installed in accordance with contractual specifications and ready for the customer’s use. The maintenance and monitoring services are recognized monthly over the term of the contract as we provide the services.

Installation-related fees, along with the associated costs up to but not exceeding these fees, are deferred and amortized over the estimated customer relationship period.

Other

Advertising revenues are generated through display advertising and search advertising. Display advertising revenue is generated by the display of graphical advertisements and other performance-based advertising. Search advertising revenue is generated when a consumer clicks on a text-based advertisement on their screen. Agreements for advertising typically take the forms of impression-based contracts, time-based contracts or performance-based contracts. Advertising revenues derived from impression-based contracts, in which we provide impressions in exchange for a fixed fee, are generally recognized as the impressions are delivered. Advertising revenues derived from time-based contracts, in which we provide promotions over a specified time period for a fixed fee, are recognized on a straight-line basis over the term of the contract, provided that we meet and will continue to meet our obligations under the contract. Advertising revenues derived from contracts where we are compensated based on certain performance criteria are recognized as we complete the contractually specified performance.

We report taxes imposed by governmental authorities on revenue-producing transactions between us and our customers on a net basis.

Maintenance and Repairs

We charge the cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, principally to Cost of services as these costs are incurred.

Advertising Costs

Costs for advertising products and services as well as other promotional and sponsorship costs are charged to Selling, general and administrative expense in the periods in which they are incurred (see Note 15).

Earnings Per Common Share

Basic earnings per common share are based on the weighted-average number of shares outstanding during the period. Where appropriate, diluted earnings per common share include the dilutive effect of shares issuable under our stock-based compensation plans.

There were a total of approximately 8 million, 7 million and 8 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the years ended December 31, 2015, 2014 and 2013, respectively. For the year ended December 31, 2015, there were no outstanding options to purchase shares that would have been anti-dilutive. Outstanding options to purchase shares that were not included in the computation of diluted earnings per common share, because to do so would have been anti-dilutive for the period, were not significant for the years ended December 31, 2014 and 2013, respectively.


On January 28, 2014, at a special meeting of our shareholders, we received shareholder approval to increase our authorized shares of common stock by 2 billion shares to an aggregate of 6.25 billion authorized shares of common stock. On February 4, 2014, this authorization became effective. On February 21, 2014, we issued approximately 1.27 billion shares of common stock upon completing the acquisition of Vodafone Group Plc’s indirect 45% interest in Cellco Partnership d/b/a Verizon Wireless. See Note 2 for additional information.

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates quoted market value and include amounts held in money market funds.

Marketable Securities

We have investments in marketable securities, which are considered “available-for-sale” under the provisions of the accounting standard for certain debt and equity securities, and are included in the accompanying consolidated balance sheets in Short-term investments or Other assets. We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other-than-temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other-than-temporary, a charge to earnings is recorded for the loss, and a new cost basis in the investment is established.

Allowance for Doubtful Accounts

Accounts receivable are recorded in the consolidated financial statements at cost net of an allowance for credit losses. We maintain allowances for uncollectible accounts receivable, including our device installment plan receivables, for estimated losses resulting from the failure or inability of our customers to make required payments. Similar to traditional service revenue accounting treatment, we record device installment plan 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. Due to the device installment plan being incorporated in the standard Verizon Wireless bill, the collection and risk strategies continue to follow historical practices. We monitor the aging of our accounts with device installment plan receivables and write off account balances if collection efforts are unsuccessful and future collection is unlikely.

Inventories

Inventory consists of wireless and wireline equipment held for sale, which is carried at the lower of cost (determined principally on either an average cost or first-in, first-out basis) or market.

Plant and Depreciation

We record plant, property and equipment at cost. Plant, property and equipment are generally depreciated on a straight-line basis.

Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.

When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the plant accounts, and any gains or losses on disposition are recognized in income.

We capitalize and depreciate network software purchased or developed along with related plant assets. We also capitalize interest associated with the acquisition or construction of network-related assets. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of the network-related assets.

In connection with our ongoing review of the estimated remaining average useful lives of plant, property and equipment, we determined that changes were necessary to the remaining estimated useful lives of certain assets as a result of technology upgrades, enhancements, and planned retirements. These changes resulted in an increase in depreciation expense of $0.4 billion and $0.6 billion in 2015 and 2014, respectively. While the timing and extent of current deployment plans are subject to ongoing analysis and modification, we believe the current estimates of useful lives are reasonable.

Computer Software Costs

We capitalize the cost of internal-use network and non-network software that has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal-use network and non-network software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Planning, software maintenance and training costs are expensed in the period in which they are incurred. Also, we capitalize interest associated with the development of internal-use network and non-network software. Capitalized non-network internal-use software costs are amortized using the straight-line method over a period of 3 to 8 years and are included in Other intangible assets, net in our consolidated balance sheets. For a discussion of our impairment policy for capitalized software costs, see “Goodwill and Other Intangible Assets” below. Also, see Note 3 for additional detail of internal-use non-network software reflected in our consolidated balance sheets.


Goodwill and Other Intangible Assets

Goodwill

Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Impairment testing for goodwill is performed annually in the fourth fiscal quarter or more frequently if impairment indicators are present. To determine if goodwill is potentially impaired, we have the option to perform a qualitative assessment. However, we may elect to bypass the qualitative assessment and perform an impairment test even if no indications of a potential impairment exist. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. Step one, performed to identify potential impairment, compares the fair value of the reporting unit (calculated using a market approach and/or a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed to measure the amount of the impairment charge. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment charge is recognized.

Intangible Assets Not Subject to Amortization

A significant portion of our intangible assets are wireless licenses that provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). License renewals have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses. As a result, we treat the wireless licenses as an indefinite-lived intangible asset. We reevaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life.

We test our wireless licenses for potential impairment annually or more frequently if impairment indicators are present. We have the option to first perform a qualitative assessment to determine whether it is necessary to perform a quantitative impairment test. However, we may elect to bypass the qualitative assessment in any period and proceed directly to performing the quantitative impairment test. The most recent quantitative assessment of our wireless licenses occurred in 2015. Our quantitative assessment consisted of comparing the estimated fair value of our aggregate wireless licenses to the aggregated carrying amount as of the test date. Using a quantitative assessment, we estimated the fair value of our aggregate 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. If the estimated fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses then an impairment charge is recognized. In 2014 and 2013, we performed a qualitative assessment to determine whether it is more likely than not that the fair value of our wireless licenses was less than the carrying amount. As part of our assessment, we considered several qualitative factors including the business enterprise value of our Wireless segment, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA (Earnings before interest, taxes, depreciation and amortization) margin projections), the projected financial performance of our Wireless segment, as well as other factors.

Interest expense incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses. The capitalization period ends when the development is discontinued or substantially complete and the license is ready for its intended use.

Intangible Assets Subject to Amortization and Long-Lived Assets

Our intangible assets that do not have indefinite lives (primarily customer lists and non-network internal-use software) are amortized over their estimated useful lives. All of our intangible assets subject to amortization and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications were present, we would test for recoverability by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, we would perform the next step, which is to determine the fair value of the asset and record an impairment, if any. We reevaluate the useful life determinations for these intangible assets each year to determine whether events and circumstances warrant a revision to their remaining useful lives.

For information related to the carrying amount of goodwill, wireless licenses and other intangible assets, as well as the major components and average useful lives of our other acquired intangible assets, see Note 3.

Fair Value Measurements

Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:


Level 1—Quoted prices in active markets for identical assets or liabilities

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3—No observable pricing inputs in the market

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy.

Income Taxes

Our effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations and tax planning strategies available to us in the various jurisdictions in which we operate.

Deferred income taxes are provided for temporary differences in the bases between financial statement and income tax assets and liabilities. Deferred income taxes are recalculated annually at tax rates then in effect. We record valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized.

We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The first step is recognition: we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability.

The accounting standard relating to income taxes generated by leveraged lease transactions requires that changes in the projected timing of income tax cash flows generated by a leveraged lease transaction be recognized as a gain or loss in the year in which the change occurs.

Significant management judgment is required in evaluating our tax positions and in determining our effective tax rate.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based compensation awards made to employees and directors based on estimated fair values. See Note 10 for further details.

Foreign Currency Translation

The functional currency of our foreign operations is generally the local currency. For these foreign entities, we translate income statement amounts at average exchange rates for the period, and we translate assets and liabilities at end-of-period exchange rates. We record these translation adjustments in Accumulated other comprehensive income, a separate component of Equity, in our consolidated balance sheets. We report exchange gains and losses on intercompany foreign currency transactions of a long-term nature in Accumulated other comprehensive income. Other exchange gains and losses are reported in income.

Employee Benefit Plans

Pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Prior service costs and credits resulting from changes in plan benefits are generally amortized over the average remaining service period of the employees expected to receive benefits. Expected return on plan assets is determined by applying the return on assets assumption to the actual fair value of plan assets. Actuarial gains and losses are recognized in operating results in the year in which they occur. These gains and losses are measured annually as of December 31 or upon a remeasurement event. Verizon management employees no longer earn pension benefits or earn service towards the company retiree medical subsidy (see Note 11).

We recognize a pension or a postretirement plan’s funded status as either an asset or liability on the consolidated balance sheets. Also, we measure any unrecognized prior service costs and credits that arise during the period as a component of Accumulated other comprehensive income, net of applicable income tax.

Derivative Instruments

We enter into derivative transactions primarily to manage our exposure to fluctuations in foreign currency exchange rates, interest rates, equity and commodity prices. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, foreign currency and prepaid forwards and collars, interest rate swap agreements, commodity swap and forward agreements and interest rate locks. We do not hold derivatives for trading purposes.


We measure all derivatives, including derivatives embedded in other financial instruments, at fair value and recognize them as either assets or liabilities on our consolidated balance sheets. Our derivative instruments are valued primarily using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified as Level 2. Changes in the fair values of derivative instruments not qualifying as hedges or any ineffective portion of hedges are recognized in earnings in the current period. Changes in the fair values of derivative instruments used effectively as fair value hedges are recognized in earnings, along with changes in the fair value of the hedged item. Changes in the fair value of the effective portions of cash flow hedges are reported in Other comprehensive income (loss) and recognized in earnings when the hedged item is recognized in earnings. Changes in the fair value of the effective portion of net investment hedges of certain of our foreign operations are reported in Other comprehensive income (loss) as part of the cumulative translation adjustment and partially offset the impact of foreign currency changes on the value of our net investment.

Variable Interest Entities

VIEs are entities which lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, have equity investors which do not have the ability to make significant decisions relating to the entity’s operations through voting rights, do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We consolidate the assets and liabilities of VIEs when we are deemed to be the primary beneficiary. The primary beneficiary is the party which has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

Recently Adopted Accounting Standards

During the first quarter of 2015, we adopted the accounting standard update related to the reporting of discontinued operations and disclosures of disposals of components of an entity, which changes the criteria for reporting discontinued operations. As a result of this standard update, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The prospective adoption of this standard update did not have an impact on our consolidated financial statements.

During the fourth quarter of 2015, we early adopted the accounting standard update related to the balance sheet classification of deferred taxes. The standard update requires that deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. We applied the amendments in this accounting standard update retrospectively to all periods presented. The adoption of this standard update did not have a significant impact on our consolidated financial statements.

Recently Issued Accounting Standards

In September 2015, the accounting standard update related to the simplification of the accounting for measurement-period adjustments in business combinations was issued. This standard update requires an acquirer to recognize measurement-period adjustments in the reporting period in which the adjustments are determined and to record the effects on earnings of any changes resulting from the change in provisional amounts, calculated as if the accounting had been completed at the acquisition date. We will adopt this standard update during the first quarter of 2016. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.

In May 2015, the accounting standard update related to disclosures for investments in certain entities that calculate net asset value per share was issued. This standard update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The standard update also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. We will adopt this standard update during the first quarter of 2016 and apply it retrospectively to all periods presented. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.

In April 2015, the accounting standard update related to the simplification of the presentation of debt issuance costs was issued. This standard update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the accounting standard update related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements was issued. This standard adds Securities and Exchange Commission (SEC) paragraphs pursuant to an SEC Staff Announcement that the SEC staff would not object to an entity deferring and presenting debt issuance costs associated with a line-of-credit arrangement as an asset and subsequently amortizing the costs ratably over the term of the arrangement. We will adopt these standard updates during the first quarter of 2016. The adoption of these standard updates is not expected to have a significant impact on our consolidated financial statements.

In June 2014, an accounting standard update was issued related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The standard update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. We will adopt this standard update during the first quarter of 2016. The adoption of this standard update is not expected to have a significant impact on our consolidated financial statements.


In May 2014, the accounting standard update related to the recognition of revenue from contracts with customers was issued. This standard update clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The standard update intends to provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provide more useful information to users of financial statements through improved disclosure requirements. Upon adoption of this standard update, we expect that the allocation and timing of revenue recognition will be impacted. In August 2015, an accounting standard update was issued that delays the effective date of this standard until the first quarter of 2018. Companies are permitted to early adopt the standard in the first quarter of 2017.

There are two adoption methods available for implementation of the standard update related to the recognition of revenue from contracts with customers. Under one method, the guidance is applied retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, the guidance is applied only to the most current period presented, recognizing the cumulative effect of the change as an adjustment to the beginning balance of retained earnings, and also requires additional disclosures comparing the results to the previous guidance. We are currently evaluating these adoption methods and the impact that this standard update will have on our consolidated financial statements.

 

Note 2

Acquisitions and Divestitures

Wireless

Wireless Transaction

On September 2, 2013, Verizon entered into a stock purchase agreement (the Stock Purchase Agreement) with Vodafone Group Plc (Vodafone) and Vodafone 4 Limited (Seller), pursuant to which Verizon agreed to acquire Vodafone’s indirect 45% interest in Cellco Partnership d/b/a Verizon Wireless (the Partnership, and such interest, the Vodafone Interest) for aggregate consideration of approximately $130 billion.

On February 21, 2014, pursuant to the terms and subject to the conditions set forth in the Stock Purchase Agreement, Verizon acquired (the Wireless Transaction) from Seller all of the issued and outstanding capital stock (the Transferred Shares) of Vodafone Americas Finance 1 Inc., a subsidiary of Seller (VF1 Inc.), which indirectly through certain subsidiaries (together with VF1 Inc., the Purchased Entities) owned the Vodafone Interest. In consideration for the Transferred Shares, upon completion of the Wireless Transaction, Verizon (i) paid approximately $58.89 billion in cash, (ii) issued approximately 1.27 billion shares of Verizon’s common stock, par value $0.10 per share (the Stock Consideration), which was valued at approximately $61.3 billion at the closing of the Wireless Transaction, (iii) issued senior unsecured Verizon notes in an aggregate principal amount of $5.0 billion (the Verizon Notes), (iv) sold Verizon’s indirectly owned 23.1% interest in Vodafone Omnitel N.V. (Omnitel, and such interest, the Omnitel Interest), valued at $3.5 billion and (v) provided other consideration, which included the assumption of preferred stock valued at approximately $1.7 billion. The total cash paid to Vodafone and the other costs of the Wireless Transaction, including financing, legal and bank fees, were financed through the incurrence of third-party indebtedness. See Note 7 for additional information.

In accordance with the accounting standard on consolidation, a change in a parent’s ownership interest while the parent retains a controlling financial interest in its subsidiary is accounted for as an equity transaction and remeasurement of assets and liabilities of previously controlled and consolidated subsidiaries is not permitted. As a result, we accounted for the Wireless Transaction by adjusting the carrying amount of the noncontrolling interest to reflect the change in Verizon’s ownership interest in the Partnership. Any difference between the fair value of the consideration paid and the amount by which the noncontrolling interest is adjusted has been recognized in equity attributable to Verizon.

Omnitel Transaction

On February 21, 2014, Verizon and Vodafone also consummated the sale of the Omnitel Interest (the Omnitel Transaction) by a subsidiary of Verizon to a subsidiary of Vodafone in connection with the Wireless Transaction pursuant to a separate share purchase agreement. As a result, during 2014, we recognized a pre-tax gain of $1.9 billion on the disposal of the Omnitel interest in Equity in (losses) earnings of unconsolidated businesses on our consolidated statement of income.

Verizon Notes (Non-Cash Transaction)

The Verizon Notes were issued pursuant to Verizon’s existing indenture. The Verizon Notes were issued in two separate series, with $2.5 billion due February 21, 2022 (the eight-year Verizon Notes) and $2.5 billion due February 21, 2025 (the eleven-year Verizon Notes). The Verizon Notes bear interest at a floating rate, which will be reset quarterly, with interest payable quarterly in arrears, beginning May 21, 2014. The eight-year Verizon notes bear interest at a floating rate equal to three-month London Interbank Offered Rate (LIBOR), plus 1.222%, and the eleven-year Verizon notes bear interest at a floating rate equal to three-month LIBOR, plus 1.372%. The indenture that governs the Verizon Notes contains certain negative covenants, including a negative pledge covenant and a merger or similar transaction covenant, affirmative covenants and events of default that are customary for companies maintaining an investment grade credit rating. An event of default for either series of the Verizon Notes may result in acceleration of the entire principal amount of all debt securities of that series. Beginning two years after the closing of the Wireless Transaction,


Verizon may redeem all or any portion of the outstanding Verizon Notes held by Vodafone or any of its affiliates for a redemption price of 100% of the principal amount plus accrued and unpaid interest. The Verizon Notes may only be transferred by Vodafone to third parties in specified amounts during specified periods, commencing January 1, 2017. Any Verizon Notes held by third parties will not be redeemable by Verizon prior to their maturity dates. Verizon has agreed to file a registration statement with respect to the Verizon Notes at least three months prior to the Verizon Notes becoming transferable.

Other Consideration (Non-Cash Transaction)

Included in the other consideration provided to Vodafone is the indirect assumption of long-term obligations with respect to 5.143% Class D and Class E cumulative preferred stock (Preferred Stock) issued by one of the Purchased Entities. Both the Class D shares (825,000 shares outstanding) and Class E shares (825,000 shares outstanding) are mandatorily redeemable in April 2020 at $1,000 per share plus any accrued and unpaid dividends. Dividends accrue at 5.143% per annum and will be treated as interest expense. Both the Class D and Class E shares have been classified as liability instruments and were recorded at fair value as determined at the closing of the Wireless Transaction.

Deferred Tax Liabilities

Certain deferred taxes directly attributable to the Wireless Transaction have been calculated based on an analysis of taxes attributable to the difference between the tax basis of the investment in the noncontrolling interest that is assumed compared to Verizon’s book basis. As a result, Verizon recorded a deferred tax liability of approximately $13.5 billion.

Spectrum License Transactions

Since 2013, we have entered into several strategic spectrum transactions including:

 

   

During the first quarter of 2013, we completed license exchange transactions with T-Mobile License LLC and Cricket License Company, LLC, a subsidiary of Leap Wireless, to exchange certain Advanced Wireless Services (AWS) licenses. These non-cash exchanges included a number of intra-market swaps that we expect will enable Verizon Wireless to make more efficient use of the AWS band. As a result of these exchanges, we received an aggregate $0.5 billion of AWS licenses at fair value and recorded an immaterial gain.

 

   

During the third quarter of 2013, after receiving the required regulatory approvals, Verizon Wireless sold 39 lower 700 MHz B block spectrum licenses to AT&T Inc. (AT&T) in exchange for a payment of $1.9 billion and the transfer by AT&T to Verizon Wireless of AWS (10 MHz) licenses in certain markets in the western United States. Verizon Wireless also sold certain lower 700 MHz B block spectrum licenses to an investment firm for a payment of $0.2 billion. As a result, we received $0.5 billion of AWS licenses at fair value and we recorded a pre-tax gain of approximately $0.3 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2013.

 

   

During the second quarter of 2014, we completed license exchange transactions with T-Mobile USA, Inc. (T-Mobile USA) to exchange certain AWS and Personal Communication Services (PCS) licenses. The exchange included a number of swaps that we expect will result in more efficient use of the AWS and PCS bands. As a result of these exchanges, we received $0.9 billion of AWS and PCS spectrum licenses at fair value and we recorded an immaterial gain.

 

   

During the second quarter of 2014, we completed transactions pursuant to two additional agreements with T-Mobile USA with respect to our remaining 700 MHz A block spectrum licenses. Under one agreement, we sold certain of these licenses to T-Mobile USA in exchange for cash consideration of approximately $2.4 billion, and under the second agreement we exchanged the remainder of our 700 MHz A block spectrum licenses as well as AWS and PCS spectrum licenses for AWS and PCS spectrum licenses. As a result, we received $1.6 billion of AWS and PCS spectrum licenses at fair value and we recorded a pre-tax gain of approximately $0.7 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2014.

 

   

During the third quarter of 2014, we entered into a license exchange agreement with affiliates of AT&T to exchange certain AWS and PCS spectrum licenses. This non-cash exchange was completed in January 2015 at which time we recorded an immaterial gain.

 

   

On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as the AWS-3 band. Verizon participated in that auction and was the high bidder on 181 spectrum licenses, for which we paid cash of approximately $10.4 billion. During the fourth quarter of 2014, we made a deposit of $0.9 billion related to our participation in this auction which is classified within Other, net investing activities on our consolidated statement of cash flows for the year ended December 31, 2014. During the first quarter of 2015, we submitted an application to the FCC and paid $9.5 billion to the FCC to complete payment for these licenses. The cash payment of $9.5 billion is classified within Acquisitions of wireless licenses on our consolidated statement of cash flows for the year ended December 31, 2015. On April 8, 2015, the FCC granted us these spectrum licenses.

 

   

During the fourth quarter of 2015, we completed a license exchange transaction with an affiliate of T-Mobile USA to exchange certain AWS and PCS spectrum licenses. As a result we received $0.4 billion of AWS and PCS spectrum licenses at fair value and recorded a pre-tax gain of approximately $0.3 billion in Selling, general and administrative expense on our consolidated statement of income for the year ended December 31, 2015.


   

During the fourth quarter of 2015, we entered into a license exchange agreement with affiliates of AT&T to exchange certain AWS and PCS spectrum licenses. This non-cash exchange is expected to be completed during the first quarter of 2016 and we expect to record an immaterial gain.

 

   

During the first quarter of 2016, we entered into a license exchange agreement with affiliates of Sprint Corporation, which provides for the exchange of certain AWS and PCS spectrum licenses. This non-cash exchange is expected to be completed in the second quarter of 2016 and we expect to record an immaterial gain.

Tower Monetization Transaction

During March 2015, we completed a transaction with American Tower Corporation (American Tower) pursuant to which American Tower acquired the exclusive rights to lease and operate approximately 11,300 of our wireless towers for an upfront payment of $5.0 billion. Under the terms of the leases, American Tower has exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, American Tower has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. As part of this transaction, we also sold 162 towers for $0.1 billion. We have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates, with options to renew. The upfront payment, including the towers sold, which is primarily included within Other liabilities on our consolidated balance sheet, is accounted for as deferred rent and as a financing obligation. The $2.4 billion accounted for as deferred rent, which is presented within Other, net cash flows provided by operating activities, relates to the portion of the towers for which the right-of-use has passed to the tower operator. The $2.7 billion accounted for as a financing obligation, which is presented within Other, net cash flows used in financing activities, relates to the portion of the towers that we continue to occupy and use for network operations.

Other

During 2015, 2014 and 2013, we acquired various other wireless licenses and markets for cash consideration that was not significant. Additionally, during 2013, we obtained control of previously unconsolidated wireless partnerships, which were previously accounted for under the equity method and are now consolidated, which resulted in an immaterial gain. In 2013, we recorded $0.2 billion of goodwill as a result of these transactions.

Wireline

Access Line Sale

On February 5, 2015, we announced that we have entered into a definitive agreement with Frontier Communications Corporation (Frontier) pursuant to which Verizon will sell its local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and high-speed Internet service and long distance voice accounts in these three states for approximately $10.5 billion (approximately $7.5 billion net of income taxes), subject to certain adjustments and including the assumption of $0.6 billion of indebtedness from Verizon by Frontier. The transaction, which includes the acquisition by Frontier of the equity interests of Verizon’s incumbent local exchange carriers (ILECs) in California, Florida and Texas, does not involve any assets or liabilities of Verizon Wireless. The assets and liabilities that will be sold are currently included in Verizon’s continuing operations and classified as assets held for sale and liabilities related to assets held for sale on our consolidated balance sheet as of December 31, 2015. For the years ended December 31, 2015 and 2014, these businesses generated approximately $5.4 billion of revenues, excluding revenues with affiliates, for each respective year and operating income of approximately $0.8 billion and an immaterial loss, respectively, based on the stand-alone financial results of the businesses. These amounts include direct expenses incurred of approximately $2.7 billion in each of the years ended December 31, 2015 and 2014 and (credits) charges related to pension and benefit actuarial valuation adjustments for these ILEC employees of $(0.2) billion and $0.6 billion for the years ended December 31, 2015 and 2014, respectively. The amounts also include indirect overhead expenses, which are a significant component of our cost structure. These stand-alone financial results also include approximately $1.0 billion of depreciation and amortization for the years ended December 31, 2015 and 2014, respectively. In our consolidated results, the depreciation and amortization of these ILEC assets ceased at the beginning of 2015 in accordance with the accounting model for assets held for sale. The transaction is subject to the satisfaction of certain closing conditions including, among others, receipt of federal approvals from the FCC and the antitrust authorities and state regulatory approvals. All federal and state regulatory approvals have been obtained. We expect this transaction to close at the end of the first quarter of 2016.

Based on the number of voice connections and Fios Internet and video subscribers, respectively, as of December 31, 2015, the transaction would result in Frontier acquiring approximately 3.4 million voice connections, 1.6 million Fios Internet subscribers, 1.2 million Fios video subscribers and the related ILEC businesses from Verizon. The operating results of these businesses, collectively, are included within our Wireline segment for all periods presented.


The following table summarizes the major classes of assets and liabilities of our local exchange and related landline activities in California, Florida and Texas which are classified as held for sale on our consolidated balance sheet as of December 31, 2015:

 

      (dollars in millions)  

Assets held for sale:

  

Accounts receivable

   $ 435   

Prepaid expense and other

     58   
  

 

 

 

Total current assets held for sale

     493   

Plant, property and equipment, net

     8,884   

Goodwill (Note 3)

     1,328   

Other assets

     55   
  

 

 

 

Total non-current assets held for sale

     10,267   
  

 

 

 

Total assets held for sale

   $ 10,760   
  

 

 

 

Liabilities related to assets held for sale:

  

Accounts payable and accrued liabilities

   $ 256   

Other current liabilities

     207   
  

 

 

 

Total current liabilities related to assets held for sale

     463   

Long-term debt

     594   

Employee benefit obligations

     289   

Other liabilities

     76   
  

 

 

 

Total non-current liabilities related to assets held for sale

     959   
  

 

 

 

Total liabilities related to assets held for sale

   $ 1,422   
  

 

 

 

Other

On July 1, 2014, we sold a non-strategic Wireline business that provides communications solutions to a variety of government agencies for net cash proceeds of $0.1 billion and recorded an immaterial gain.

During the fourth quarter of 2015, Verizon completed a sale of real estate for which we received total gross proceeds of $0.2 billion and recognized an immaterial deferred gain. The proceeds received as a result of this transaction have been classified within Cash flows used in investing activities on our consolidated statement of cash flows for the year ended December 31, 2015.

Other

Acquisition of AOL Inc.

On May 12, 2015, we entered into an Agreement and Plan of Merger (the Merger Agreement) with AOL Inc. (AOL) pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes.

On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion. Holders of approximately 6.6 million shares exercised appraisal rights under Delaware law. If they had not exercised these rights, Verizon would have paid an additional $330 million for such shares at the closing.

AOL is a leader in the digital content and advertising platform space. Verizon has been investing in emerging technology that taps into the market shift to digital content and advertising. AOL’s business model aligns with this approach, and we believe that its combination of owned and operated content properties plus a digital advertising platform enhances our ability to further develop future revenue streams.

The acquisition of AOL has been accounted for as a business combination. The identification of the assets acquired and liabilities assumed are finalized and we are in the process of finalizing our valuations for deferred taxes. These adjustments are not expected to have a material impact on our consolidated financial statements. The valuations will be finalized within 12 months following the close of the acquisition.

The fair values of the assets acquired and liabilities assumed were determined using the income, cost and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined


in Accounting Standards Codification (ASC) 820, other than long-term debt assumed in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of acquired technology and customer relationships. The income approach indicates value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for plant, property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.

The following table summarizes the consideration to AOL’s shareholders and the identification of the assets acquired, including cash acquired of $0.5 billion, and liabilities assumed as of the close of the acquisition, as well as the fair value at the acquisition date of AOL’s noncontrolling interests:

 

(dollars in millions)    As of June 23, 2015  

Cash payment to AOL’s equity holders

   $ 3,764   

Estimated liabilities to be paid

     377   
  

 

 

 

Total consideration

   $ 4,141   
  

 

 

 

Assets acquired:

  

Goodwill

   $ 1,903   

Intangible assets subject to amortization

     2,504   

Other

     1,551   
  

 

 

 

Total assets acquired

     5,958   

Liabilities assumed:

  

Total liabilities assumed

     1,816   

Net assets acquired:

     4,142   

Noncontrolling interest

     (1
  

 

 

 

Total consideration

   $ 4,141   
  

 

 

 

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired. The goodwill recorded as a result of the AOL transaction represents future economic benefits we expect to achieve as a result of combining the operations of AOL and Verizon as well as assets acquired that could not be individually identified and separately recognized. The preliminary goodwill related to this acquisition is included within Corporate and other (see Note 3 for additional details).

Pro Forma Information

If the acquisition of AOL had been completed as of January 1, 2014, our results of operations, including Operating revenues and Net income attributable to Verizon, would not have been materially different from our previously reported results of operations.

Real Estate Transaction

On May 19, 2015, Verizon consummated a sale-leaseback transaction with a financial services firm for the buildings and real estate at our Basking Ridge, New Jersey location. We received total gross proceeds of $0.7 billion resulting in a deferred gain of $0.4 billion, which will be amortized over the initial leaseback term of twenty years. The leaseback of the buildings and real estate is accounted for as an operating lease. The proceeds received as a result of this transaction have been classified within Cash flows used in investing activities on our consolidated statement of cash flows for the year ended December 31, 2015.

Other

On September 3, 2015, AOL announced an agreement to acquire an advertising technology business for cash consideration that was not significant. The transaction was completed in October 2015.

On October 7, 2014, Redbox Instant by Verizon, a venture between Verizon and Redbox Automated Retail, LLC (Redbox), a wholly-owned subsidiary of Outerwall Inc., ceased providing service to its customers. In accordance with an agreement between the parties, Redbox withdrew from the venture on October 20, 2014 and Verizon wound down and dissolved the venture during the fourth quarter of 2014. As a result of the termination of the venture, we recorded a pre-tax loss of $0.1 billion in the fourth quarter of 2014.

During February 2014, Verizon acquired a business dedicated to the development of Internet Protocol (IP) television for cash consideration that was not significant.


During the fourth quarter of 2013, Verizon acquired an industry leader in content delivery networks for $0.4 billion. Upon closing, we recorded $0.3 billion of goodwill. Additionally, we acquired a technology company for cash consideration that was not significant. The consolidated financial statements include the results of the operations of each of these acquisitions from the date each acquisition closed.

On February 20, 2016, Verizon entered into a purchase agreement to acquire XO Holdings’ wireline business which owns and operates one of the largest fiber-based IP and Ethernet networks outside of Verizon’s footprint for approximately $1.8 billion, subject to adjustment. The transaction is subject to customary regulatory approvals and is expected to close in the first half of 2017. Separately, Verizon entered into an agreement to lease certain wireless spectrum from XO Holdings and has an option to buy XO Holdings’ entity that owns its wireless spectrum exercisable under certain circumstances.

 

Note 3

Wireless Licenses, Goodwill and Other Intangible Assets

Wireless Licenses

Changes in the carrying amount of Wireless licenses are as follows:

 

      (dollars in millions)  

Balance at January 1, 2014

   $             75,747   

Acquisitions (Note 2)

     444   

Dispositions (Note 2)

     (1,978

Capitalized interest on wireless licenses

     167   

Reclassifications, adjustments and other

     961   
  

 

 

 

Balance at December 31, 2014

   $ 75,341   

Acquisitions (Note 2)

     10,474   

Capitalized interest on wireless licenses

     389   

Reclassifications, adjustments and other

     371   
  

 

 

 

Balance at December 31, 2015

   $ 86,575   
  

 

 

 

Reclassifications, adjustments and other includes the exchanges of wireless licenses in 2015 and 2014 as well as $0.3 billion of Wireless licenses that are classified as Assets held for sale on our consolidated balance sheets at December 31, 2015 and 2014, respectively. See Note 2 for additional details.

At December 31, 2015 and 2014, approximately $10.4 billion and $0.4 billion, respectively, of wireless licenses were under development for commercial service for which we were capitalizing interest costs. The increase is primarily due to licenses acquired in the AWS-3 auction.

The average remaining renewal period of our wireless license portfolio was 5.6 years as of December 31, 2015. See Note 1 for additional details.

Goodwill

Changes in the carrying amount of Goodwill are as follows:

 

                 (dollars in millions)  
      Wireless     Wireline     Other      Total  

Balance at January 1, 2014

   $   18,376      $   6,258      $           –       $   24,634   

Acquisitions (Note 2)

     15        40                55   

Dispositions (Note 2)

            (38             (38

Reclassifications, adjustments and other

     (1     (11             (12
  

 

 

 

Balance at December 31, 2014

   $ 18,390      $ 6,249      $           –       $ 24,639   

Acquisitions (Note 2)

     3               2,035         2,038   

Reclassifications, adjustments and other

            (1,918     572         (1,346
  

 

 

 

Balance at December 31, 2015

   $ 18,393      $ 4,331      $     2,607       $ 25,331   
  

 

 

 

As a result of the acquisition of AOL in the second quarter of 2015, we recognized preliminary Goodwill of $1.9 billion, which is included within Other (see Note 2 for additional details). We also allocated $0.6 billion of goodwill on a relative fair value basis from Wireline to Other as a result of an internal reorganization. This increase was partially offset by a decrease in Goodwill in Wireline primarily due to the reclassification of $1.3 billion of Goodwill to Non-current assets held for sale on our consolidated balance sheet at December 31, 2015 as a result of our agreement to sell our local exchange business and related landline activities in California, Florida and Texas to Frontier (see Note 2 for additional details). The amount of Goodwill reclassified was based on a relative fair value basis.


Other Intangible Assets

The following table displays the composition of Other intangible assets, net:

 

                   (dollars in millions)  
     2015         2014   
At December 31,    Gross
Amount
     Accumulated
Amortization
    Net
Amount
     Gross
Amount
     Accumulated
Amortization
    Net
Amount
 

Customer lists (5 to 14 years)

   $ 4,139       $ (2,365   $ 1,774       $ 3,618       $ (2,924   $ 694   

Non-network internal-use software (3 to 8 years)

     14,542         (9,620     4,922         12,791         (8,428     4,363   

Other (5 to 25 years)

     2,220         (578     1,642         1,073         (402     671   
  

 

 

 

Total

   $ 20,901       $ (12,563   $ 8,338       $   17,482       $ (11,754   $ 5,728   
  

 

 

 

The amortization expense for Other intangible assets was as follows:

 

Years    (dollars in millions)  

2015

   $ 1,694   

2014

     1,567   

2013

     1,587   

Estimated annual amortization expense for Other intangible assets is as follows:

 

Years