AT&T Versus Verizon: A Financial Comparison

Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

GET A 40% DISCOUNT ON YOU FIRST ORDER

ORDER NOW DISCOUNT CODE >>>> WELCOME40

AT&T Versus Verizon: A Financial Comparison
In February 2015, Diane Tagert, a first-year associate with Danagger Capital Management, was
covering the communications industry. In her first assignment, she was asked to prepare a report that
compared the financial and operating performances of AT&T and Verizon. Although both firms had
wireless and wireline businesses offering voice, data, and video solutions, they had experienced widely
divergent results. See Exhibits 1A, 1B, 2A, and 2B for AT&T’s and Verizon’s respective income
statements and balance sheets. Tagert felt she needed to understand the root cause of these differences
to provide a report that could be incorporated into an actionable investment thesis.
Communication Industry Overview
Over the past two decades, the communications industry had evolved from a set of fragmented
technologies, sectors, and firms that employed discrete platforms for delivering voice, data, and video
into a converged industry that could deliver multiple forms of communication on a single platform.
Numerous technologies could achieve these goals, but the most salient point of differentiation was
whether the platform was wireless or wireline.
Wireless Sector
The wireless communications industry had been intensely competitive and was evolving quickly.
Most wireless providers had migrated from 3G to 4G networks, which allowed them to maximize the
density of their spectrum.a As they did so, they improved capacity and efficiency and decreased their
costs. The resulting improvements had catalyzed the steady move toward 4G devices among
consumers. Smartphones represented most new phone activations in the United States, while tablets,
navigation, and monitoring devices had continued their rapid market penetration.1
The technological evolution had also ushered in changes in customer and competitor behavior.
Most industry observers believed the continued convergence of voice, data, and video on wireless
aWireless spectrum refers to the radio frequency bands resulting from electromagnetic radiation. Due to interference, no two
stations can occupy the same frequency within the same geographic area at the same time.
9-917-543
J U N E 2 3 , 2 0 1 7
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
917-543 | AT&T Versus Verizon: A Financial Comparison
2 BRIEFCASES | HARVARD BUSINESS SCHOOL
platforms represented the next catalyst for industry growth. Providers had responded by bundling
services to attract and retain customers. At the same time, the proliferation of internet-enabled products
had shifted most customers away from buying subsidized phones that locked them into long-term
service contracts.2 Most customers were buying handsets on an installment basis, which allowed them
to upgrade their phones more frequently, incur lower monthly service charges, and eliminate service
contracts. To discourage customers from dropping their service, providers required customers to pay
the outstanding equipment balance in full if they switched phone companies. The shift from subsidized
devices toward installment plans had also shifted providers’ revenue models. In the past, carriers had
often used equipment as a loss leader and instead maximized service revenues and margins. As
customers shifted toward installment plans, however, service revenues and margins had decreased,
while equipment revenues and margins had increased.3
Ninety-four percent of the U.S. population lived in an area with at least four providers.4 Apple,
Google, Microsoft, and Skype, as well as regional and bulk resellers, enabled customers to make
wireless calls.5 Most competition focused on price, network coverage, reliability, customer service, and
the availability of new products and services.6 Network utilization and spectrum efficiency were key
competitive drivers.
Wireline Sector
Wireline networks provided voice, data, and video services to consumers, large and small
enterprises, and other carriers on a wholesale basis.b Legacy circuit-switched networks had continued
to decline as more customers cut the cord, opting for wireless service or Voice over Internet Protocol
(VoIP) and data services using cable or fiber optics.c The growth of mobile platforms did not mean,
however, that fixed networks would be extinct. Most of a packet’s journey was made over a wire; only
the transmission between the device and a cell tower or WiFi router was wireless.d
Like in the wireless sector, trends in customer and carrier behavior were intertwined with advances
in technology. These advances had improved network capacity, decreasing the marginal cost of
moving a packet from point A to point B. In turn, improved efficiency and lower costs made new
products and services available. This pattern was most evident in the movement toward IP-based data
and video, where streaming entertainment services and use of cloud-based applications had become
more popular. In addition, the movement toward IP-based networks changed the competitive
dynamic. In most markets, network providers competed on the pricing of bundled services as well as
on broadband capacity and reliability.7
Net Neutrality
On February 26, 2015, the Federal Communications Commission (FCC) reclassified internet
broadband services as telecommunications services. The ruling favored net neutrality, meaning that
network providers of fixed broadband could not employ differential pricing or service quality based
on application, site, user, or content. Traffic over fixed networks must be handled on a first-come, firstserved
basis. The ruling mandated the following: (i) internet broadband providers could not block
b Wireline, or landline, is physical wire or cable that connects two endpoints in a communications network. The term is
synonymous with traditional telephony using twisted pairs of copper wire.
c Legacy circuit-switched networks using twist pair refers to the traditional means of establishing a telecommunications channel
using copper wires. This type of networking establishes a single physical connection between two endpoints that remains for
the duration of a call.
dPackets are units of data that are encoded based on internet protocol (IP) and travel along a network. Data packets contain raw
information as well as routing information and certain types of metadata.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
AT&T Versus Verizon: A Financial Comparison | 917-543
HARVARD BUSINESS SCHOOL | BRIEFCASES 3
access to lawful content, services, applications, (ii) internet broadband providers could not
discriminate, or throttle, the transmission of network traffic, (iii) broadband providers could not offer
paid prioritization of traffic, and (iv) fixed broadband providers had to be transparent about how they
managed their networks.8
Overview of AT&T9
AT&T was a communications network provider. It offered consumers and businesses wireless,
wireline, broadband data, and video services along with managed networking and wholesale services.
AT&T was organized into two operating units: wireless and wireline. Its wireless business covered
every major metropolitan area within the United States, and through roaming agreements, many
foreign countries. The wireline segment was the incumbent local exchange carrier (ILEC) in 21 states
with retail and wholesale operations.e
Wireless Sector
AT&T’s wireless networks covered 300 million people, and the company’s total subscriber base had
grown from 85.1 million at the end of 2009 to 120.6 million at the end of 2014. (See Exhibit 1C for data
on AT&T’s wireless business.) Its most important segment of customers—postpaid subscribers, who
usually had a contract and switched carriers less frequently—had grown by a compound annual rate
of only 3.3% over the same period. Tagert believed this had led to a less favorable customer mix by
decreasing average revenue per user (ARPU). She also noted that AT&T had mentioned spectrum
constraints in its public filings. To ameliorate these constraints, AT&T planned to free up spectrum by
migrating its 2G customers to the faster 3G and 4G networks.
On the expense side, AT&T’s increased equipment sales and continued penetration of smartphones
had resulted in a $2.67 billion increase in the cost of goods sold (COGS), reflected in operations and
support expense.
f Higher network maintenance, energy, and lease expenses had increased the systems
costs by another $578 million. Selling, general, and administrative (SG&A) expenses had also increased
by $1.1 billion due to higher marketing and customer retention costs, bad debt expense, and higher
professional service costs. Tagert believed the confluence of customer mix, ARPU, network constraints,
and increasing costs had caused AT&T’s wireless operating margins to shrink by 2.5% from 2013.
Wireline Sector
AT&T’s wireline business provided traditional and IP-based voice connections, as well as
broadband and video services to consumer and wholesale markets. Traditional circuit-switched voice
services had been in decline as customers migrated to wireless and VoIP solutions. (See Exhibit 1D for
data on AT&T’s wireline business.) To stem the tide, AT&T’s management adopted a bundled services
strategy that combined broadband internet and video over its U-verse network along with wireless
services. Tagert noticed that both U-verse offerings had enjoyed steady customer growth; according to
the company’s management, advanced IP-data services represented 35% of wireline revenue. She
wondered whether these services could fill the hole left by the decline in circuit-switched business.
e
Incumbent local exchange carriers are the local, or regional, telephone companies that had a monopoly on providing telecom
services prior to the industry opening to competition. In the United States, these companies were the Regional Bell Operating
Companies (RBOCs) that began operating when AT&T was divested into separate entities.
f Note the company does not break out the cost of goods sold independently from the cost of service revenue or other operating
expenses.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
917-543 | AT&T Versus Verizon: A Financial Comparison
4 BRIEFCASES | HARVARD BUSINESS SCHOOL
The broadband, video, and VoIP offered through U-verse had shown consistently high growth for
several years. U-verse was available in more than 57 million locations by the end of 2014. However,
operating margins for the wireline segment had fallen since 2010, and U-verse content costs had
increased by $621 million in 2014. Tagert also believed that many of the company’s business customers
who had discontinued traditional voice and data services that had moved to competitors’ networks.
Finally, there was some uncertainty surrounding U-verse video services, which were regulated as
a TV service. Numerous municipalities and cable companies had petitioned to have U-verse regulated
as a cable service. This classification would affect how AT&T provisioned public, educational, and
governmental programming. According to AT&T’s management, there could be a material adverse
effect on the cost and extent of U-verse’s offerings if the petitioners were successful.
Recent Acquisitions
 In July 2013, AT&T had agreed to acquire Leap Wireless, a prepaid wireless provider operating
under the Cricket brand name. The transaction was valued at $1.26 billion, plus a contingent
payment from the sale of 700 MHz spectrum in the Chicago market. Leap had a CDMA network
covering approximately 96 million people and an LTE network covering an additional 21 million
people. It had 4.5 million subscribers.
 In September 2013, AT&T had agreed to acquire Atlantic Tele-Network for $806 million in cash.
Atlantic Tele-Network had 550,000 wireless subscribers.
 In December 2013, AT&T had consummated a transaction with Crown Castle International for
9,675 cell towers. The transaction was valued at $4.8 billion, and AT&T had agreed to lease the
towers at market rates for an average of 10 years. As the leases expired, Crown Castle would have
the option to purchase the towers. The approximate value of the purchase options was $4.2 billion.
 In May 2014, AT&T agreed to purchase DIRECTV for a combination of cash and stock that valued
DIRECTV at $48.5 billion. The transaction was expected to close during the first half of 2015.
DIRECTV had 20 million digital TV subscribers in the United States and an additional 18 million
subscribers in Latin America. Within three years of closing, AT&T expected to realize $1.6 billion
in annual synergies from increased video scale.
 In January 2015, AT&T had completed the acquisition of GSF Telecom. The transaction was valued
at $2.5 billion, less net debt of $700 million. GSF was a wireless provider operating in Mexico, with
a network covering approximately 70% of the country’s 120 million people.
 In January 2015, AT&T had also entered an agreement to purchase Nextel Mexico from NII for
approximately $1.88 billion. Nextel Mexico had 3.0 million subscribers.
Overview of Verizon Communications10
Verizon Communications was a communications network provider that serviced businesses,
governments, and consumers with voice, data, and video solutions using wireless and wireline
networks. Its wireless network was available in over 500 markets, covering 98% of the U.S. population.
It was the largest wireless provider in the United States in terms of revenue and customers. The
company’s wireline business offered voice, data, and video, as well as data center, networking, cloud,
and security services to businesses, consumers, government, and other carriers. In 2014, Verizon was
the second-largest ILEC in the United States, with operating revenue of $38.4 billion.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
AT&T Versus Verizon: A Financial Comparison | 917-543
HARVARD BUSINESS SCHOOL | BRIEFCASES 5
Wireless Sector
Verizon Wireless was the largest wireless provider in the United States in terms of revenue. It
offered voice, data, and video services nationwide to more than 108 million customers. The business
had been organized as a joint venture, with Vodafone of the United Kingdom owning 45% of the unit.
However, in September 2013, Verizon had agreed to purchase Vodafone’s interest for $130 billion. That
transaction closed in February 2014.
Verizon Wireless’s 108.2 million subscriber base comprised 102 million postpaid users and 6.1
million prepaid customers. (See Exhibit 2C for data on Verizon’s wireless business.) Further, Tagert
noticed that although the compound annual growth in total subscribers was only 2.3%, the growth in
postpaid subscribers was 4.9%. In contrast, Verizon’s base of prepaid users had declined by 17.5%. She
viewed the shifting customer mix as favorable. In the most recent 10-K filing, management had cited
growth in 4G smartphones and tablets and growth in connections per postpaid account as service
revenue drivers. (Table A below shows this growth.)
Table A Growth in Revenue and Postpaid Accounts for Verizon, 2009–2014
2009 2010 2011 2012 2013 2014
Average Monthly Revenue Per Postpaid Account ($) NA 125.75 134.51 144.04 153.93 159.86
Postpaid Accounts (000s) NA 34,268 34,561 35,057 35,083 35,616
Source: Verizon Communications, Inc. December 31, 2014 10-K, filed February 23, 2015.
The shift away from subsidized sales and toward installment sales had affected Verizon. According
to Verizon’s management, the $5.3 billion increase in the cost of services and sales was driven primarily
by increases in device sales and unit costs. Tagert saw that a shift in operating costs had occurred.
Selling, general, and administrative costs as a percent of operating revenue had decreased, and the
percentage costs of service revenue had increased. She also noted the segment operating margin had
decreased.
Wireline Sector
Like AT&T, Verizon’s wireline business offered voice, data, and video services, as well as
networking, data center, security, and cloud-based solutions. Its wireline business had suffered, as
customers had moved away from traditional voice and circuit-switched services. The number of
circuit-switched connections had decreased steadily, leading to a decrease in revenue. (See Exhibit 2D
for data on Verizon’s wireline business.) To counter these trends, Verizon’s management had focused
on higher growth and margin businesses such as wireless and IP-based wireline services including
broadband, video, network management, and cloud-based services. It had also reduced its wireline
footprint. In 2010 and 2015, it shed much of its ILEC business to Frontier Communications in successive
transactions. (See recent acquisitions below.)
Again, like AT&T, Verizon’s IP-based broadband and video services had improved this segment’s
results. Verizon’s FiOS internet and video services had grown over 15% on a compound annual basis
over the preceding five years, and the company’s most recent 10-K filing noted that these services had
constituted 76% of wireline consumer retail revenue by the end of 2014. At that time, FiOS services
were available to nearly 20 million premises, and internet and video services had penetration rates of
41.1% and 35.8%, respectively. Management believed the company’s passive optical network
technology would continue to be a catalyst for growth as consumers demanded more bandwidth for
applications like streaming video, which would require more symmetric services for cloud-based
storage and solutions. Nonetheless, Tagert noticed the global enterprise and wholesale segments had
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
917-543 | AT&T Versus Verizon: A Financial Comparison
6 BRIEFCASES | HARVARD BUSINESS SCHOOL
declined in recent years, and wondered about competition and margins in those segments. She noted
management’s comment that the recent declines in the cost of services and selling, general, and
administrative expenses were due mainly to a reduction in headcount.
Recent Transactions
 In July 2010, Verizon completed the spinoff of its ILEC businesses in 14 states to Frontier
Communications. Verizon shareholders received approximately $8.6 billion, of which $5.3 billion
was in Frontier stock.
 In April 2011, Verizon acquired Terremark Worldwide for approximately $1.3 billion. Terremark
was a global provider of IT and cloud-based services with a focus on the government market.
 In June 2012, Verizon acquired Hughes Telematics for $600 million. Telematics was used for
vehicular information, tracking, and control.
 In February 2014, Verizon completed the acquisition of Vodafone PLC’s 45% interest in Verizon
Wireless for cash, stock, and other consideration totaling approximately $130.0 billion.
 In February 2015, Verizon sold its ILEC businesses in California, Texas, and Florida to Frontier
Communications for approximately $10.5 billion. Frontier agreed to acquire the associated FiOS
customers, which included 1.5 million internet and 1.2 million video customers. The business units
sold generated approximately $5.4 billion of revenue.
 In February 2015, American Tower agreed to pay Verizon $5.0 billion upfront, and received the
right to operate and lease 11,300 cell towers for 28 years. Verizon agreed to lease the towers at
market rates for 10 years.
Understanding Historical Performance
Tagert also noticed both firms had large, highly-unionized workforces with substant
AT&T Versus Verizon: A Financial Comparison | 917-543
HARVARD BUSINESS SCHOOL | BRIEFCASES 7
Exhibit 1A AT&T Income Statements
Operating Results ($ millions): 2010 2011 2012 2013 2014
Total Operating Revenue 124,280 126,723 127,434 128,752 132,447
Less: Cost of Services (Excluding Depreciation) 52,379 57,374 55,228 51,464 60,611
Less: Selling, General & Administrative 32,864 38,844 41,066 28,414 39,697
Less: Impairment & Other Charges 85 2,910 0 0 2,120
EBITDA 38,952 27,595 31,140 48,874 30,019
Less: Depreciation & Amortization 19,379 18,377 18,143 18,395 18,273
EBIT 19,573 9,218 12,997 30,479 11,746
Less: Interest Expense 2,994 3,535 3,444 3,940 3,613
Plus: Equity in Net Income of Affiliates 762 784 752 642 175
Plus: Other Incomea
1,676 249 134 596 1,652
EBT 19,017 6,716 10,439 27,777 9,960
Less: Taxes (1,162) 2,532 2,900 9,224 3,442
Net Income 20,179 4,184 7,539 18,553 6,518
Less: Income Attributable to Minority Interest 315 240 275 304 294
Net Income Attributable to AT&T Shareholders 19,864 3,944 7,264 18,249 6,224
a Other income for 2010 includes $779 million of income from discontinued operations.
Source: Adapted from Company 10-Ks.
Exhibit 1B AT&T Balance Sheets
Assets ($ millions): 2009 2010 2011 2012 2013 2014
Cash & Cash Equivalents 3,741 1,437 3,045 4,868 3,339 8,603
Accounts Receivable 14,845 13,610 13,231 12,657 12,918 14,527
Prepaid Expenses 1,562 1,458 1,102 1,035 960 831
Deferred Taxes 1,247 1,170 1,470 1,036 1,199 1,142
Other Current Assets 3,792 2,276 4,137 3,110 4,780 6,925
Total Current Assets 25,187 19,951 22,985 22,706 23,196 32,028
Property, Plant & Equipment 99,519 103,196 107,087 109,767 110,968 112,898
Licenses 48,741 50,372 51,374 52,352 56,433 60,824
Goodwill & Other Intangibles 78,276 79,041 76,054 74,805 75,052 75,831
Customer Lists 7,393 4,708 2,757 1,391 0 0
Investments in Affiliates 2,921 4,515 3,718 4,581 3,860 250
Other Assets 6,275 6,705 6,467 6,713 8,278 10,998
Total Assets 268,312 268,488 270,442 272,315 277,787 292,829
Liabilities & Owners’ Equity ($ millions):
Accounts Payable & Accrued Liabilities 21,260 20,055 19,956 20,911 21,107 23,592
Prepaid Revenue & Customer Deposits 4,170 4,086 3,872 3,808 4,212 4,105
Deferred Taxes 1,681 72 1,003 1,026 1,774 1,091
Dividends Payable 2,479 2,542 2,608 2,556 2,404 2,438
Current Portion of Long-Term Debt 7,361 7,196 3,453 3,486 5,498 6,056
Total Current Liabilities 36,951 33,951 30,892 31,787 34,995 37,282
Long-Term Debt 64,720 58,971 61,300 66,358 69,290 76,011
Post-Retirement Obligations 27,847 28,803 34,011 41,392 29,946 37,079
Deferred Taxes 23,579 22,070 25,748 28,491 36,308 37,544
Other Long-Term Liabilities 13,226 12,743 12,694 11,592 15,766 17,989
Total Owners’ Equity 101,989 111,950 105,797 92,695 91,482 86,924
Total Liabilities & Owners’ Equity 268,312 268,488 270,442 272,315 277,787 292,829
Source: Adapted from Company 10-Ks.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
917-543 | AT&T Versus Verizon: A Financial Comparison
8 BRIEFCASES | HARVARD BUSINESS SCHOOL
Exhibit 1C AT&T Wireless Segment Data
Wireless Operating Results ($ millions):
a
2009 2010 2011 2012 2013 2014
Service Revenue 48,563 53,510 56,726 59,186 61,552 61,032
Equipment Revenue 4,941 4,990 6,486 7,577 8,347 12,960
Total Segment Operating Revenue 53,504 58,500 63,212 66,763 69,899 73,992
Less: Operations & Support Expense 33,631 36,746 41,581 43,296 44,508 48,924
Less: Depreciation & Amortization 6,043 6,497 6,324 6,873 7,468 7,941
Total Segment Operating Income 13,830 15,257 15,307 16,594 17,923 17,127
Plus: Net Income (Loss) in Affiliates 9 9 (29) (62) (75) (112)
Total Wireless Segment Income 13,839 15,266 15,278 16,532 17,848 17,015
Wireless Subscribers (000s): 2009 2010 2011 2012 2013 2014
Postpaid 64,627 68,041 69,309 70,497 72,638 75,931
Prepaid 5,350 6,524 7,225 7,328 7,384 10,986
Resellers 10,439 11,645 13,644 14,875 14,028 13,855
Connected Devices 4,704 9,326 13,069 14,257 16,326 19,782
Total Wireless Subscribers 85,120 95,536 103,247 106,957 110,376 120,554
Net Wireless Additions (000s):
Postpaid 4,199 2,153 1,429 1,438 1,776 3,290
Prepaid (801) 952 674 128 (13) (775)
Reseller 1,803 1,140 1,874 1,027 (1,074) (346)
Connected Devices 2,077 4,608 3,722 1,171 2,032 3,439
Total Net Wireless Additions 7,278 8,853 7,699 3,764 2,721 5,608
Total Churn Rate 1.47% 1.31% 1.37% 1.35% 1.37% 1.45%
Postpaid Churn Rate 1.13% 1.09% 1.18% 1.09% 1.06% 1.04%
a Segment results are net of actuarial gains and losses from post-retirement benefits.
Source: Adapted from Company 10-Ks.
Exhibit 1D AT&T Wireline Segment Data
Wireline Operating Results ($ millions):a
2009 2010 2011 2012 2013 2014
Service Revenue NA NA NA 58,271 57,700 57,405
Equipment Revenue NA NA NA 1,302 1,114 1,020
Total Segment Operating Revenue 63,621 61,300 59,765 59,573 58,814 58,425
Less: Operations & Support Expense 42,439 41,096 40,879 41,207 41,638 42,471
Less: Depreciation & Amortization 12,743 12,371 11,615 11,123 10,907 10,323
Total Segment Operating Income 8,439 7,833 7,271 7,243 6,269 5,631
Plus: Equity in Income (Loss) of Affiliates 17 11 0 (1) 2 0
Total Wireline Segment Income 8,456 7,844 7,271 7,242 6,271 5,631
Wireline Broadband Connections (000s): 2009 2010 2011 2012 2013 2014
U-verse High Speed Internet NA NA NA 7,717 10,375 12,205
DSL & Other Broadband Connections NA NA NA 8,673 6,050 3,823
Total Wireline Broadband Connections 15,789 16,309 16,427 16,390 16,425 16,028
Wireline Video Connections (000s):
U-verse Video Connections 2,065 2,987 3,791 4,536 5,460 5,943
Wireline Voice Connections (000s):
Consumer Switched Access 26,378 22,515 18,954 15,707 12,403 9,243
Business Switched Access 18,486 17,006 15,613 11,483 10,363 8,939
Wholesale Switched Access 2,590 2,300 2,120 1,776 1,627 1,514
Total Switched Access Lines 47,454 41,821 36,687 28,966 24,393 19,696
U-verse VoIP Connections NA NA NA 2,905 3,849 4,759
Total Wireline Voice Connections 47,454 41,821 36,687 31,871 28,242 24,455
a Segment results are net of actuarial gains and losses from post-retirement benefits.
Source: Adapted from Company 10-Ks.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
AT&T Versus Verizon: A Financial Comparison | 917-543
HARVARD BUSINESS SCHOOL | BRIEFCASES 9
Exhibit 2A Verizon Income Statements
Operating Results ($ millions): 2010 2011 2012 2013 2014
Total Operating Revenue 106,565 110,875 115,846 120,550 127,079
Less: Cost of Services (Excluding Depreciation) 44,149 45,875 46,275 44,887 49,931
Less: Selling, General & Administrative 31,366 35,624 39,951 27,089 41,016
EBITDA 31,050 29,376 29,620 48,574 36,132
Less: Depreciation & Amortization 16,405 16,496 16,460 16,606 16,533
EBIT 14,645 12,880 13,160 31,968 19,599
Less: Interest Expense 2,523 2,827 2,571 2,667 4,915
Plus: Equity in Net Income of Affiliates 508 444 324 142 1,780
Plus: Other Income (Expense) 54 (14) (1,016) (166) (1,194)
EBT 12,684 10,483 9,897 29,277 15,270
Less: Taxes 2,467 285 (660) 5,730 3,314
Net Income 10,217 10,198 10,557 23,547 11,956
Less: Income Attributable to Noncontrolling Interest 7,668 7,794 9,682 12,050 2,331
Net Income Attributable to Verizon Shareholders 2,549 2,404 875 11,497 9,625
Source: Adapted from Company 10-Ks.
Exhibit 2B Verizon Balance Sheets
Assets ($ millions): 2009 2010 2011 2012 2013 2014
Cash & Cash Equivalents 2,009 6,668 13,362 3,093 53,528 10,598
Short-Term Investments 490 545 592 470 601 555
Accounts Receivable 12,573 11,781 11,776 12,576 12,439 13,993
Inventory 1,426 1,131 940 1,075 1,020 1,153
Prepaid Expenses & Other Current Assets 5,247 2,223 4,269 4,021 3,406 3,324
Total Current Assets 21,745 22,348 30,939 21,235 70,994 29,623
Property, Plant & Equipment 91,985 87,711 88,434 88,642 88,956 89,947
Wireless Licenses 72,067 72,996 73,250 77,744 75,747 75,341
Goodwill & Other Intangibles 29,236 27,818 29,235 30,072 30,434 30,367
Investments in Unconsolidated Businesses 3,118 3,497 3,448 3,401 3,432 802
Other Assets 8,756 5,635 5,155 4,128 4,535 6,628
Total Assets 226,907 220,005 230,461 225,222 274,098 232,708
Liabilities & Owners’ Equity ($ millions):
Accounts Payable & Accrued Liabilities 15,223 15,702 14,689 16,182 16,453 16,680
Other Current Liabilities 6,708 7,353 11,223 6,405 6,664 8,649
Current Portion of Long-Term Debt 7,205 7,542 4,849 4,369 3,933 2,735
Total Current Liabilities 29,136 30,597 30,761 26,956 27,050 28,064
Long-Term Debt 55,051 45,252 50,303 47,618 89,658 110,536
Post-Retirement Obligations 32,622 28,164 32,957 34,346 27,682 33,280
Deferred Taxes 19,190 22,818 25,060 24,667 28,639 41,578
Other Long-Term Liabilities 6,765 6,262 5,472 6,092 5,653 5,574
Total Equity Attributable to Shareholders 41,382 38,569 35,970 33,157 38,836 12,298
Plus: Non-Controlling Interest 42,761 48,343 49,938 52,376 56,580 1,378
Total Owners’ Equity 84,143 86,912 85,908 85,533 95,416 13,676
Total Liabilities & Owners’ Equity 226,907 220,005 230,461 225,212 274,098 232,708
Source: Adapted from Company 10-Ks.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
917-543 | AT&T Versus Verizon: A Financial Comparison
10 BRIEFCASES | HARVARD BUSINESS SCHOOL
Exhibit 2C Verizon Wireless Segment Data
Wireless Operating Results ($ millions)a
2009 2010 2011 2012 2013 2014
Service Revenue 52,046 55,629 59,157 63,733 69,033 72,630
Equipment & Other Revenue 8,279 7,778 10,997 12,135 11,990 15,016
Total Segment Revenue 60,325 63,407 70,154 75,868 81,023 87,646
Less: Cost of Service Revenue 19,348 19,245 24,086 24,490 23,648 28,825
Less: Selling, General & Administrative 17,309 18,082 19,579 21,650 23,176 23,602
Less: Depreciation & Amortization 7,030 7,356 7,962 7,960 8,202 8,459
Segment Operating Income 16,638 18,724 18,527 21,768 25,997 26,760
Wireless Subscribers (000s):
b
2009 2010 2011 2012 2013 2014
Postpaid 80,495 83,125 87,382 92,530 96,752 102,079
Prepaid 16,000 19,121 20,416 5,700 6,047 6,132
Total Wireless Subscribers 96,495 102,246 107,798 98,230 102,799 108,211
Net Wireless Additions (000s):
c
Postpaid 3,987 2,529 4,252 5,024 4,118 5,482
Prepaid 948 2,988 1,167 893 354 86
Total Net Wireless Additions 4,935 5,517 5,419 5,917 4,472 5,568
Total Churn Rate 1.41% 1.38% 1.26% 1.19% 1.27% 1.33%
Postpaid Churn Rate 1.07% 1.02% 0.95% 0.91% 0.97% 1.04%
Average Monthly Revenue Per Postpaid Account ($) NA 125.75 134.51 144.04 153.93 159.86
Postpaid Accounts (000s) NA 34,268 34,561 35,057 35,083 35,616
Postpaid Connections Per Account NA 2.43 2.53 2.64 2.76 2.87
a Pension and other post-retirement benefits are excluded from segment results.
b As of the end of the period.
c Excludes acquisition adjustments.
Source: Adapted from Company 2009 to 2014 10-Ks.
Exhibit 2D Verizon Wireline Segment Data
Wireline Operating Results ($ millions)a
2009 2010 2011 2012 2013 2014
Consumer & Small Business 16,115 16,256 16,337 16,746 17,383 18,047
Global Enterprise 15,289 15,316 15,622 14,577 14,182 13,684
Global Wholesale 9,533 8,746 7,973 7,094 6,594 6,222
Other Revenue 1,514 909 750 528 465 476
Total Segment Revenue 42,451 41,227 40,682 38,945 38,624 38,429
Less: Cost of Services & Sales 22,693 22,618 22,158 21,657 21,396 21,332
Less: Selling, General & Administrative 9,947 9,372 9,107 8,860 8,571 8,180
Less: Depreciation & Amortization 8,238 8,469 8,458 8,424 8,327 7,882
Segment Operating Income 1,573 768 959 4 330 1,035
Wireline Broadband Connections (000s): 2009 2010 2011 2012 2013 2014
FiOS Internet Subscribers 3,286 4,082 4,817 5,424 6,072 6,616
Circuit-Switched Broadband 4,874 4,310 3,853 3,371 2,943 2,589
Total Wireline Broadband Connections 8,160 8,392 8,670 8,795 9,015 9,205
FiOS Video Subscribers 2,750 3,472 4,173 4,726 5,262 5,649
Total Voice Connections 28,323 26,001 24,137 22,503 21,085 19,795
a Pension and other post-retirement benefits are excluded from segment results.
Source: Adapted from Company 2009 to 2014 10-Ks.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
AT&T Versus Verizon: A Financial Comparison | 917-543
HARVARD BUSINESS SCHOOL | BRIEFCASES 11
Endnotes
1 AT&T Inc, December 31, 2014 Form 10-K, filed February 20, 2015, accessed June 2017.
2 Ibid.
3 Verizon Communications, Inc. December 31, 2014 Form 10-K. Filed February 23, 2015, accessed June 2017.
4 Ibid.
5 Ibid.
6 Ibid.
7 Ibid.
8 “FCC Adopts Strong, Sustainable Rules to Protect the Open Internet,” Federal Communications Commission
press release (Washington, DC, February, 26, 2015),
http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db0226/DOC-332260A1.pdf, accessed May
2017.
9 All the references in the Overview of AT&T section come from AT&T Inc, December 31, 2014 Form 10-K, filed
February 20, 2015, accessed June 2017.
10 All the references in the Overview of Verizon section come from Verizon Communications, Inc. December 31,
2014 Form 10-K, filed February 23, 2015, accessed June 2017.
11 AT&T Inc, December 31, 2014 Form 10-K, filed February 20, 2015, accessed June 2017 and Verizon
Communications, Inc. December 31, 2014 Form 10-K, filed February 23, 2015, accessed June 2017.
For the exclusive use of S. Yang, 2018.
This document is authorized for use only by Shaoxiang Yang in Finance For Marketing Decision-1 taught by Paul M. Angotta , New York University from January 2018 to May 2018.
Verizon Communications Inc.
1095 Avenue of the Americas
New York, NY 10036
212 395-1000
verizon.com/2017AnnualReport
Giving people the
ability to do more.
2017 Annual Report
We don’t wait
for the future.
We build it.
Humanability
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 1
At Verizon, we have one mission: to give humans the
ability to do more in this world. It’s why we’re partnering
with visionaries from just about every industry you can
imagine, using technology and data to turn innovative
ideas into realities.
We don’t wait for the future. We build it.
Building the future means we’re continuously inventing for
new markets and revenue opportunities yet to emerge. From
smart cities, connected cars and data-driven supply chains
to pioneering disruptive industry transformation, it will all be
made into a reality by our unique technology.
Making cities smarter and greener: Using sensors in
asphalt and roadside cameras running on our powerful
network technology, we’re helping the City of Sacramento
cut its traffic jams, reducing carbon dioxide emissions
and driving time for thousands of drivers. There’s a huge
opportunity to work with hundreds of other cities throughout
the U.S. on this type of project.
Enhancing food safety: We’re turning the idea of connected
cargo and the smart supply chain into reality. We’re working
with partners to track cargo—measuring everything from
temperature changes, humidity and location—in real time
using a sensor the size of a nickel. The market opportunity
for such connected cargo extends well past just the food
chain and into almost every industry depending on logistics,
such as the healthcare industry, where tracking medication
accurately is essential.
Reinventing healthcare: Options for patients have long
been limited by where the best doctors and surgeons were
based, but thanks to the near-zero latency 5G network we’re
deploying, that will soon be a thing of the past. Surgeons will
be able to conduct an operation from thousands of miles
away, remotely operating a robotic version of their hands.
This is just one example of the incredible ideas our advanced
network is helping make a reality.
2 verizon.com/2017AnnualReport
Financial and operational highlights as of December 31, 2017
2017 Highlights
See our investor website (www.verizon.com/about/investors) for reconciliations to U.S. generally accepted accounting principles (GAAP) for the non-GAAP financial
measures included in this annual report.
Forward-looking statements
In this communication 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. We undertake no obligation to revise or publicly release
the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. The following important factors, along with those discussed in our filings with the Securities and Exchange Commission (the
“SEC”), could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: adverse conditions in the
U.S. and international economies; the effects of competition in the markets in which we operate; material changes in technology or technology substitution; disruption of
our key suppliers’ provisioning of products or services; changes in the regulatory environment in which we operate, including any increase in restrictions on our ability to
operate our networks; breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting
financial impact not covered by insurance; our high level of indebtedness; an adverse change in the ratings afforded our debt securities by nationally accredited ratings
organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing; material adverse changes in
labor matters, including labor negotiations, and any resulting financial and/or operational impact; significant increases in benefit plan costs or lower investment returns on
plan assets; changes in tax laws or treaties, or in their interpretation; changes in accounting assumptions that regulatory agencies, including the SEC, may require or that
result from changes in the accounting rules or their application, which could result in an impact on earnings; the inability to implement our business strategies; and the
inability to realize the expected benefits of strategic transactions.
Dividends Declared Per Share
$2.335
Up 2.2%
year over year
$2.23
2017
2016 $2.285
2015
$2.335
$7.36
reported
earnings
per share
$25.3
billion in
cash flow from
operations
116.3
million
wireless retail
connections
$87.5
billion in
wireless
revenues
$3.74
adjusted
earnings per
share (non-GAAP)
11th
consecutive year
of annual dividend
increases
97.9 million
retail postpaid 4G
LTE connections
$126.0
billion in
consolidated
revenues
1.01%
wireless retail
postpaid churn
5.9 million
Fios Internet
subscribers
4.6 million
Fios Video
subscribers
4.0%
growth in Fios
revenues
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 3
Corporate responsibility highlights
At Verizon, we have long believed that it is our responsibility to share our success. It’s not enough to deliver
strong financial performance. We must also make a positive contribution to society and that is why we are
taking actions to support the United Nation’s Sustainable Development Goals. We are specifically focused on
goals 4 and 8: providing young people with relevant skills for good jobs and entrepreneurship, and promoting
an environmentally sustainable economy.
We have set aggressive targets to guide our actions and we are measuring our impact.
Education goal
By 2023, Verizon will help provide six million students with the skills required to put them on the path to success in an
increasingly tech-dependent job market.
Progress:
•In 2017, almost 128,000 students participated in our Verizon Innovative Learning (VIL) initiative.
• More than one million students have participated in our education programs since 2012.
•Key metric: In the schools that began the program in 2014, VIL schools students significantly outperformed their
non-VIL peers on math and reading standardized tests.
Sustainability goals
By 2022, Verizon’s networks and connected solutions will save more
than double the amount of global emissions that our operations
create. By 2025, we will reduce our carbon intensity (a measure of the
overall carbon we emit divided by the terabytes of data carried by our
networks) by 50 percent over the 2016 baseline.
In addition, by 2030 we will plant two million trees in communities
around the world, including 250,000 in areas impacted by the 2017
hurricane season.
Progress:
•In 2017, Verizon’s networks and connected solutions enabled
emissions savings equal to 1.38 times our own operational emissions.
•We are currently measuring our progress toward reducing our
carbon intensity and will report our results on our Corporate
Responsibility website.
•We have planted more than 560,000 trees since 2009.
To read more, please visit our 2017 Corporate Responsibility Report at www.verizon.com/about/responsibility
By 2025,
we will reduce the
carbon intensity
of our operations
by 50 percent
over the 2016
baseline.
Program results indicate:
The percentage of
VIL schools students
who improved in math
was 3X greater
Math Reading
The percentage of
VIL schools students
who improved in reading
was 2X greater
VIL schools students Non-VIL schools students
Based on 6th grade performance for schools that provided complete data after two years.
4 verizon.com/2017AnnualReport
Dear Shareholder,
One quality that defines a great company is how it responds
to change.
Most companies embrace change with a certain degree of
reluctance. That’s never been the Verizon way. Throughout
our history, we have been drivers of change – while also
remaining true to our corporate mission, strategic vision and
core values.
In early 2017, we outlined our plan for maintaining this
balance. We would devote the year to expanding two of our
strongest traditional assets – our loyal, high-quality customer
base and our preeminent network – while also seizing
opportunities in dynamic sectors of our industry.
We successfully introduced Unlimited wireless plans,
added capabilities to our best-in-class networks, combined
our existing Media business and the operating business of
Yahoo! Inc. (Yahoo) to become an insurgent in digital media,
and increased our presence in the telematics and Internet of
Things (IoT) markets. This positions our company not only
for short-term profitability, but also for growth over what is
certain to be a long period of expansion, change, disruption
and opportunity across our industry.
We achieved strong financial and operational results in 2017.
Bigger picture: We anticipated and drove industry trends, and
we used our unique collection of network and media assets
to take full advantage of the rapid evolution of our industry.
These initiatives are paying off. In our wireless business, we
ended 2017 with 116.3 million retail wireless connections, a
1.8 percent increase from the previous year. We added 1.8
million postpaid smartphones, with an industry-leading
postpaid phone churn of less than 0.8 percent for the year,
and 11 consecutive quarters of churn below 0.9 percent.
As a statement of our uncompromising commitment to our
customers and to showcase the strength of our network, we
rolled out our Unlimited offering in the first quarter. Our aim
was to deepen our already-tremendous customer loyalty –
and to attract new customers.
That’s exactly what happened. Our network quality was a
strong selling point, and our Unlimited plans contributed to
customer growth and increased overall demand for highspeed
data services.
Doubling down on network superiority
The success of Unlimited isn’t just about the market
reputation of our network – it’s also about real-world
reliability. We knew these offerings would generate
substantially more traffic for us to handle. When that traffic
came, our network didn’t flinch. In fact, we extended our lead
in network quality as a result of the investments we’ve made
in anticipation of ever-growing demand.
When marketing meets reality, reality wins. We have our
customers’ backs no matter how many videos they stream
or group chats they join, and this network quality advantage
has been recognized by the most respected third-party
evaluators. In 2017, Verizon won more awards than any other
provider in the J.D. Power Wireless Network Quality Study
for the 18th time in a row. RootMetrics ranked Verizon as the
best network in the U.S. for the ninth year running.
The superiority of our network is hardly a secret. There’s
also a deeper layer to this story that does not get as much
attention as it should. Let me share my perspective on why
Verizon’s network quality will be an even bigger asset to our
company and our customers in the future.
I just referred to our anticipation of ever-growing demand.
That isn’t an extrapolation from the growth that we’ve seen
in years past. It’s a prediction that we are on the cusp of a
wholly new era of tech-driven innovation – a Fourth Industrial
Revolution based on connective technologies such as IoT,
next-generation robotics, artificial intelligence, virtual reality,
augmented reality, 3D printing, nanotechnology, wearable
technology and autonomous vehicles.
These innovations—enabled by 5G networks—are at widely
varying stages of maturity and ubiquity. What they have in
Verizon’s core
purpose: To give people
the ability to do more in
this world.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 5
common is this: All are sufficiently powerful to reshape entire
industries, and all are still novel enough to be shaped by
companies that have the vision and the capacity to do so.
There’s no company better positioned to exercise
this leadership than Verizon. The reason: Wireless
technology and next-generation fiber will power the
Fourth Industrial Revolution.
At Verizon, we don’t wait for the future – we build it. Our
$17.2 billion capital investment in 2017 is a down payment
on that future, and we are already achieving state-of-the-art
speed with our blazing-fast nationwide 4G LTE network.
We hit the one-gigabit-per-second mark for speed under
real-world ecosystems, and yet we’ve hardly begun to
exhaust the potential of 4G technology. This network will
remain an extraordinary asset for our company and our
customers for many years to come.
5G is game-changing technology
Even as we push 4G to the next level, we are rapidly
bolstering our leadership position in 5G. This technology
is a game-changer for Verizon as we build the future. It will
allow 10 to 100 times better throughput, 10 times longer
battery life and 1,000 times larger data volumes than
anything offered today.
To give you a sense of 5G’s low latency and speed, consider
an experiment we conducted at the 2017 Indianapolis 500.
We put a driver in a car with blacked-out windows, and only a
5G headcam to use for navigation. The car handled the track
with ease. The near-zero latency of the 5G feed enabled
the driver to “see” the curves and straightaways as reliably
as if the windows had been clear. This is not possible on
4G networks, and 5G’s lower latency will enable many more
applications that do not exist today.
With an agile combination of 4G LTE and 5G infrastructures,
we can enable a surgeon to operate on a patient in an
emergency room on the other side of the country, giving
medical centers everywhere access to high-quality specialist
care. We’re also working with food companies and shippers
to expand the use of nickel-sized sensors that can detect
when storage temperatures along the supply chain have
exceeded safe limits.
We’re collaborating with cities to improve public safety,
emergency response, traffic management, pollution reduction
and other vital services. In Boston, we’ve teamed up with city
officials on a vision of zero fatalities from accidents involving
pedestrians or bicyclists, using predictive data analytics to
make intersections safer. This is just the beginning.
We’ve begun working closely with partners worldwide to set
standards and technical specifications for 5G. We’ve also
started testing in the field. During 2017, we deployed the
largest 5G trial network in the U.S. with active customers.
In November 2017, we announced that we will commercially
launch 5G wireless residential broadband services in three
to five U.S. markets in 2018. That’s at least two years earlier
than most experts had predicted.
The evolution from 4G LTE to 5G is not an either-or question.
We see our network as a collective set of assets — including
4G LTE, fiber, 5G and software-defined networks — which
together we refer to as the Verizon Intelligent Edge Network.
This versatile, multilayered infrastructure can relay and
sort signals via wireless or wireline connections, allowing
us to handle an enormous range of current and potential
applications.
Many of our strategic transactions in 2017 focused on
additions and enhancements to this infrastructure. Our
acquisitions of XO Communications and Straight Path will
strengthen our fiber assets and spectrum portfolio, as will
our purchasing agreements with Corning and Prysmian. To
give you some perspective, those agreements include enough
fiber to reach from Earth to Mars. In other words, these
aren’t piecemeal, business-as-usual additions. They’re major
investments toward a whole new level of network capacity.
6 verizon.com/2017AnnualReport
Even as we make these and other acquisitions, we continue
to uphold our longstanding commitment to financial discipline
and shareholder value. Verizon has generated substantial
savings from process improvements and operational
realignments, and we’ve launched a major initiative to save
$10 billion by 2021 through further reductions and processes
to work smarter and more efficiently. In addition, we expect
the recent tax-reform legislation to have a positive impact
to cash flow from operations in 2018 of approximately $3.5
billion to $4 billion, which we will use primarily to further
strengthen our balance sheet.
Because of our robust balance sheet, we have delivered
on our commitment to produce long-term value for our
shareholders. The Board of Directors declared the 11th
consecutive annual dividend increase in September, returning
significant value to shareholders.
Giving people the ability to do more
With a strong balance sheet and cash flow fueling network
investment, we have the means to achieve Verizon’s core
purpose: To give people the ability to do more in this world.
Our customers are right there with us, eagerly embracing our
most advanced products. What we offer right now through
our 4G LTE and all-fiber Fios services is just the start. With
even faster broadband networks – and especially with 5G
– we will be able to offer wholly new services far beyond
anything commercially available today.
Services like 3D video. Virtual and augmented reality.
Holograms. The potential applications of such technologies
are staggering to consider – everything from immersive
gaming to real-time “same room” interactions with coworkers,
classmates and loved ones who may be thousands of
miles away.
To ensure we take full advantage of this convergence of
connectivity and content, Verizon has made some important
strategic acquisitions. In 2017, we completed the purchase of
the operating business of Yahoo, which significantly expands
our content offerings – as well as the audience to which we
can stream that content. We combined Yahoo’s operating
business with our existing media business to create Oath,
a company that includes diverse media and technology
brands which engage approximately one billion global
content consumers. Oath generated about $6 billion in
revenues in 2017.
This scale enables us to attract high-value content partners,
as we saw in our recent agreements with the National
Football League and the National Basketball Association
to stream live games and other content to users on our
mobile and digital properties. Such partnerships will create
tremendous possibilities as our customer base continues
to expand and our networks continue to achieve new
breakthroughs in speed and quality.
Expanding our digital-media presence is not only exciting,
it’s deeply important to our company’s future. When we
Our goal has
always been
to improve
lives through
innovation.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 7
talk about giving people the ability to do more, it’s about
something even bigger than these transformative advances
in entertainment and communication. It’s about something we
call “humanability,” a word that describes our commitment to
expanding the possibilities of people everywhere – at home,
at work, in their communities and around the world.
This commitment cuts across geographical divides and
sectoral categories. It’s about spreading the benefits of
technology to where they’re needed most.
For example, the economic impact of information technology
has appeared mainly in traditional “digital” industries –
telecom, media, software, and other tech-related fields
whose business models have adapted quickly to new
demands and opportunities. For many “physical” industries –
such as transportation, agriculture and manufacturing — the
immense potential of mobile and digital technology remains
largely unrealized.
This is where our growing role in IoT comes into play. In 2017,
Verizon launched the industry’s first nationwide IoT-friendly,
LTE network which extends battery life while offering enough
bandwidth for communication. Our future 5G networks will
enable deployments on a much larger scale.
Currently, it’s estimated some 8.4 billion connected “things”
are in use, an increase of 31 percent from 2016. That number
is expected to reach more than 20.4 billion by 2020. Our
networks will power much of that growth, and we look
forward to giving businesses and consumers the ability to
do more through this powerful Fourth Industrial Revolution
technology.
One important related field is telematics — the transmission
of information to vehicles and other remote objects. This is
a fast-developing sector, one that will profoundly influence
supply-chain logistics, fleet management and vehicular
design.
In 2016 we bolstered our telematics presence through the
acquisitions of Telogis and Fleetmatics. Verizon is now the
world’s top provider of fleet-management technologies for
businesses large and small. In 2017 our revenues from IoT
services, including telematics, grew organically by
double-digit percentage rates year over year, with great
promise for the future.
A higher calling
Our goal has always been to improve lives through
innovation. As we help build the Fourth Industrial Revolution,
we are establishing partnerships with forward-thinking
innovators across numerous sectors – including government,
education, agriculture and healthcare – to expand
opportunity and improve human well-being in an era of
unprecedented connectivity.
This is the higher calling that has attracted some of the
world’s best, most diverse talent to become part of the
Verizon team. The combined spirit and creativity of our
employees makes Verizon a great place to work, learn and
grow – and make a positive contribution to society.
For example, we worked hand-in-hand with first responders
in communities of all sizes to aid recovery from hurricanes,
wildfires, floods and other natural disasters that struck
throughout the year. Beyond this, in 2017 we donated
$75 million to disaster recovery and community projects
throughout the U.S. and Puerto Rico.
Our employees ran to crises this year, and generously
assisted one another through our employee-to-employee
VtoV emergency aid fund. In addition, Verizon employees
ensured that emergency personnel and residents in disaster
areas were able to rely on our network when they needed it
most. I am deeply proud of every member of our V Team who
contributed to these efforts, whether in the form of expertise,
financial donations, or simply reaching out to colleagues and
neighbors.
And our employee commitment to serving our communities
doesn’t stop there. Every day of 2017, our V Team made
it a mission to connect our customers to life’s victories,
struggles, and people who matter most. From our frontline
to our corporate employees, V Teamers answered the
call this year, delivering the promise of the digital world to
Officilla cullant as que intio.
Elitemo loratione nulleseque ma
non et, commoluptiae cus.
8 verizon.com/2017AnnualReport
families, first responders, businesses and individuals across
the country. To celebrate the work that our employees do
every day and help them share in Verizon’s future success,
we recently invested approximately $380 million in them via
a special stock-based award as part of our tax-reform
reinvestment strategy.
Delivering the promise
If we are truly serious about building the future and acting
as constructive drivers of change, we won’t simply wait to
address the problems that affect our customers and fellow
human beings – we will actively identify the challenges of
tomorrow, and address them today.
That brings me to the last topic I’d like to raise here. As the
CEO of a major technology company that depends for its
very existence upon the development and dissemination
of world-class ideas, I am deeply concerned about the
growing digital divide not only between industries, but
also between people.
Far too many of our communities have been left out of the
digital revolution. Far too many of our young people are
beginning their lives and careers at a crippling disadvantage
because their education has not prepared them for the
challenges of this increasingly global, technology-driven
new economy.
Our company has sought to better understand the causes
and consequences of this digital divide, teaming up with
partners like National Geographic. What’s clear is that if we,
and other leading institutions, don’t act now to narrow this
divide, it will quickly get worse, with deeply harmful results
for our economy and our society.
Verizon is helping to close this gap by helping under-resourced
urban and rural schools provide high-quality STEM
(science, technology, engineering and mathematics)
instruction. Through Verizon Innovative Learning programs,
we’ve served approximately 128,000 students this year.
We do it because of our belief that everyone deserves a
quality education, regardless of their socio-economic status
or geographic location. We do it because we know that the
future of our society depends on the ability of our young
people to become empowered, engaged participants in
tomorrow’s digital world. Toward this end, we have
announced plans to increase our contributions to the
education work of the Verizon Foundation by $200 million
to $300 million over the next two years.
When Verizon talks about building the future and giving
people the ability to do more, we mean it. We know that it
starts with us. We are committed to creating the connections
that bring human beings together, and that transform ideas
into innovation.
Thank you for being part of our journey over this past year.
Let’s build a better future together.
Lowell McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
Selected Financial Data
(dollars in millions, except per share amounts)
2017 2016 2015 2014 2013
Results of Operations
Operating revenues $ 126,034 $ 125,980 $ 131,620 $ 127,079 $ 120,550
Operating income 27,414 27,059 33,060 19,599 31,968
Net income attributable to Verizon 30,101 13,127 17,879 9,625 11,497
Per common share – basic 7.37 3.22 4.38 2.42 4.01
Per common share – diluted 7.36 3.21 4.37 2.42 4.00
Cash dividends declared per common share 2.335 2.285 2.230 2.160 2.090
Net income attributable to noncontrolling interests 449 481 496 2,331 12,050
Financial Position
Total assets $ 257,143 $ 244,180 $ 244,175 $ 232,109 $ 273,184
Debt maturing within one year 3,453 2,645 6,489 2,735 3,933
Long-term debt 113,642 105,433 103,240 110,029 89,188
Employee benefit obligations 22,112 26,166 29,957 33,280 27,682
Noncontrolling interests 1,591 1,508 1,414 1,378 56,580
Equity attributable to Verizon 43,096 22,524 16,428 12,298 38,836
• Significant events affecting our historical earnings trends in 2015 through 2017 are described in “Special Items” in the “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” section.
• 2014 data includes severance, pension and benefit charges, early debt redemption and other costs, gain on spectrum license transactions and
wireless transaction costs. 2013 data includes severance, pension and benefit credits, gain on spectrum license transactions and wireless
transaction costs.
Stock Performance Graph
Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index
2012 2013 2014 2015 2016 2017
$220
$200
$180
$160
$140
$120
$100
$80
Dollars
Verizon
S&P 500 Telecom Services
S&P 500
At December 31,
Data Points in Dollars 2012 2013 2014 2015 2016 2017
Verizon 100.0 118.4 117.8 121.9 147.2 153.2
S&P 500 Telecom Services 100.0 111.3 114.7 118.5 146.3 144.5
S&P 500 100.0 132.4 150.4 152.5 170.7 207.9
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, 2012 with dividends being reinvested.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 9
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Verizon Communications Inc. (Verizon or the Company) is a
holding company that, acting through its subsidiaries, is one of
the world’s leading providers of communications, information
and entertainment products and services to consumers,
businesses and governmental agencies. With a presence
around the world, we offer voice, data and video services and
solutions on our wireless and wireline networks that are
designed to meet customers’ demand for mobility, reliable
network connectivity, security and control. We have a highly
skilled, diverse and dedicated workforce of approximately
155,400 employees as of December 31, 2017.
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. During 2017, we focused on leveraging our network
leadership, retaining and growing our high-quality customer
base while balancing profitability, enhancing ecosystems in
media and telematics, and driving monetization of our
networks and solutions. Our strategy required 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.
We are consistently deploying new network architecture and
technologies to extend our leadership in both fourthgeneration
(4G) and fifth-generation (5G) wireless networks.
In addition, protecting the privacy of our customers’
information and the security of our systems and networks will
continue to be a priority at Verizon. 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.
Highlights of our 2017 financial results include:
• Full year earnings of $7.37 per share on a United States
(U.S.) generally accepted accounting principles (GAAP)
basis.
• Total operating revenue for the year was $126.0 billion.
• Total operating income for the year was $27.4 billion, with
an operating margin of 21.8%.
• Net income for the year was $30.6 billion.
• In 2017, cash flow from operations totaled $25.3 billion.
• Capital expenditures for the year were $17.2 billion.
Business Overview
We have two reportable segments, Wireless and Wireline,
which we operate and manage as strategic business units
and organize by products and services, and customer
groups, respectively.
• Total Wireless segment operating revenues for the year
ended December 31, 2017 totaled $87.5 billion, a decline
of 1.9%.
• Total Wireline segment operating revenues for the year
ended December 31, 2017 totaled $30.7 billion, an
increase of 0.6%.
• Our Media business, branded Oath, had an increase in
operating revenues of 89.7% to $6.0 billion during the
year ended December 31, 2017 primarily due to the
acquisition of Yahoo! Inc.’s (Yahoo) operating business in
June of 2017.
Wireless
Our Wireless segment, doing business as Verizon Wireless,
provides wireless communications products and services
across one of the most extensive wireless networks in the
U.S. We provide these services and equipment sales to
consumer, business and government customers across the
U.S. on a postpaid and prepaid basis. A retail postpaid
connection represents an individual line of service for a
wireless device for which a customer is billed one month in
advance a monthly access charge in return for access to
and usage of network service. Our prepaid service enables
individuals to obtain wireless services without credit
verification by paying for all services in advance.
We are focusing our wireless capital spending on adding
capacity and density to our 4G Long-Term Evolution (LTE)
network. Approximately 98.5% of our total data traffic
during 2017 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 systems. Densification enables us to add capacity
to manage mobile video consumption and demand for the
Internet of Things (IoT), and also positions us for the
deployment of 5G technology. Over the past several years,
we have been leading the development of 5G wireless
technology industry standards and the ecosystems for fixed
and mobile 5G wireless services. We continue to work with
key partners on innovation, standards development and
requirements for this next generation of wireless
technology. During 2017, we deployed the largest 5G trial
network in the U.S. with active customers. In November
2017, we announced that we will commercially launch 5G
wireless residential broadband services in three to five U.S.
markets in 2018.
10 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Wireline
Our Wireline segment provides voice, data and video
communications products and enhanced services, including
broadband video and data services, corporate networking
solutions, security and managed network services and local
and long distance voice services. We provide these
products and services to consumers in the U.S., as well as
to carriers, businesses and government customers both in
the U.S. and around the world.
In our Wireline business, to compensate for the shrinking
market for traditional voice service, we continue to build our
Wireline segment around data, video and advanced
business services—areas where demand for reliable highspeed
connections is growing. We expect our One Fiber
initiative will aid in the densification of our 4G LTE wireless
network and position us for the deployment of 5G
technology. The expansion of our multi-use fiber footprint
also creates opportunities to generate revenue from fiberbased
services in our Wireline business. We continue to
seek ways to increase revenue and further realize operating
and capital efficiencies as well as maximize profitability for
our Fios services.
Corporate and Other
Corporate and other includes the results of our Media
business, branded Oath, our telematics and other
businesses, investments in unconsolidated businesses,
unallocated corporate expenses, pension and other
employee benefit related costs and lease financing.
Corporate and other also includes the historical results of
divested businesses and other adjustments and gains and
losses that are not allocated in assessing segment
performance due to their nature. Although such
transactions are excluded from the business segment
results, they are included in reported consolidated earnings.
Gains and losses 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.
Oath, our organization that combines Yahoo’s operating
business with our existing Media business, includes diverse
media and technology brands that engage approximately a
billion people around the world. We believe that Oath, with
its technology, content and data, will help us expand the
global scale of our digital media business and build brands
for the future. See Note 2 to the consolidated financial
statements for additional information.
In addition, Corporate and other includes the results of our
telematics businesses for all periods presented, which were
reclassified from our Wireline segment effective April 1,
2016. The impact of this reclassification was insignificant to
our consolidated financial statements and our segment
results of operations.
We are also building our growth capabilities in the emerging
IoT market by developing business models to monetize
usage on our network at the connectivity and platform
layers. During the years ended December 31, 2017 and 2016,
we recognized IoT revenues (including telematics) of $1.5
billion and $1.0 billion, a 52% and 40% increase,
respectively, compared to the prior year. This increase was
attributable primarily to our acquisitions of Fleetmatics
Group PLC (Fleetmatics) and Telogis, Inc. (Telogis) in the
second half of 2016, which enable us to provide a
comprehensive suite of services and solutions in the
Telematics market.
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 the year
ended December 31, 2017, these investments included $17.2
billion for capital expenditures. See “Cash Flows Used in
Investing Activities” and “Operating Environment and Trends”
for additional information. We believe that our investments
aimed at expanding our portfolio of products and services will
provide our customers with an efficient, reliable infrastructure
for competing in the information economy.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 11
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Consolidated Results of Operations
In this section, we discuss our overall results of operations and highlight special items that are not included in our segment
results. In “Segment Results of Operations,” we review the performance of our two reportable segments in more detail.
Consolidated Revenues
(dollars in millions)
(Decrease)/Increase
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Wireless $ 87,511 $ 89,186 $ 91,680 $ (1,675) (1.9)% $ (2,494) (2.7)%
Wireline 30,680 30,510 31,150 170 0.6 (640) (2.1)
Corporate and other 9,387 7,778 9,962 1,609 20.7 (2,184) (21.9)
Eliminations (1,544) (1,494) (1,172) (50) (3.3) (322) (27.5)
Consolidated Revenues $ 126,034 $ 125,980 $ 131,620 $ 54 — $ (5,640) (4.3)
2017 Compared to 2016
Consolidated revenues remained consistent during 2017
compared to 2016 primarily due to a decline in revenues at
our Wireless segment, offset by an increase in revenues
within Corporate and other.
Revenues for our segments are discussed separately below
under the heading “Segment Results of Operations”.
Corporate and other revenues increased $1.6 billion, or
20.7%, during 2017 compared to 2016 primarily due to an
increase in revenue as a result of the acquisition of Yahoo’s
operating business on June 13, 2017, as well as fleet service
revenue growth in our telematics business. These increases
were partially offset by the sale (Access Line Sale) of our
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 (HSI) and long distance voice
accounts in these three states, to Frontier Communications
Corporation (Frontier) on April 1, 2016 and the sale of 23
customer-facing data center sites in the U.S. and Latin
America (Data Center Sale) on May 1, 2017, and other
insignificant transactions (see “Operating Results From
Divested Businesses” below). During 2017, our Media
business, branded Oath, generated $6.0 billion in revenues
which represented approximately 64% of revenues in
Corporate and Other.
2016 Compared to 2015
The decrease in consolidated revenues during 2016
compared to 2015 was primarily due to a decline in
revenues at our segments, Wireless and Wireline, as well as
a decline in revenues within Corporate and other.
Revenues for our segments are discussed separately below
under the heading “Segment Results of Operations”.
Corporate and other revenues decreased $2.2 billion, or
21.9%, during 2016 compared to 2015 as a result of the
Access Line Sale that was completed on April 1, 2016. The
results of operations related to these divestitures included
within Corporate and other are discussed separately below
under the heading “Operating Results From Divested
Businesses”. During 2016, our Media business represented
approximately 46% of revenues in Corporate and other,
comprised primarily of revenues from AOL Inc. (AOL), which
we acquired on June 23, 2015. Corporate and other also
includes revenues from new businesses acquired during
2016 of approximately $0.1 billion.
Consolidated Operating Expenses
(dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Cost of services $ 29,409 $ 29,186 $ 29,438 $ 223 0.8% $ (252) (0.9)%
Wireless cost of equipment 22,147 22,238 23,119 (91) (0.4) (881) (3.8)
Selling, general and administrative expense 30,110 31,569 29,986 (1,459) (4.6) 1,583 5.3
Depreciation and amortization expense 16,954 15,928 16,017 1,026 6.4 (89) (0.6)
Consolidated Operating Expenses $ 98,620 $ 98,921 $ 98,560 $ (301) (0.3) $ 361 0.4
Operating expenses for our segments are discussed separately below under the heading “Segment Results of Operations”.
12 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
2017 Compared to 2016
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 2017 primarily due to an
increase in expenses as a result of the acquisition of
Yahoo’s operating business, an increase in content costs
associated with continued programming license fee
increases and an increase in access costs as a result of the
acquisition of XO Holdings’ wireline business (XO) at our
Wireline segment. These increases were partially offset by
the completion of the Access Line Sale on April 1, 2016, the
Data Center Sale on May 1, 2017 and other insignificant
transactions (see “Operating Results From Divested
Businesses”), the fact that we did not incur incremental
costs in 2017 as a result of the union work stoppage that
commenced on April 13, 2016 and ended on June 1, 2016
(2016 Work Stoppage), and by a decline in net pension and
postretirement benefit costs at our Wireline segment
primarily driven by collective bargaining agreements ratified
in June 2016.
Wireless Cost of Equipment
Wireless cost of equipment slightly decreased during 2017,
primarily as a result of a decline in the number of smartphone
and internet units sold, substantially offset by a shift to
higher priced units in the mix of devices sold.
Selling, General and Administrative Expense
Selling, general and administrative expense includes:
salaries and wages and benefits not directly attributable to
a service or product, bad debt charges, taxes other than
income taxes, advertising and sales commission costs,
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 2017 primarily due to a decrease in severance,
pension and benefit charges, an increase in the net gain on
sale of divested businesses (see “Special Items”), a decline
at our Wireless segment in sales commission expense,
employee related costs, bad debt expense, non-income
taxes and advertising expense, and a decrease due to the
Access Line Sale on April 1, 2016 and the Data Center Sale
on May 1, 2017, and other insignificant transactions (see
“Operating Results From Divested Businesses”). These
decreases were partially offset by an increase in expenses
as a result of the acquisition of Yahoo’s operating business
on June 13, 2017, acquisition and integration charges
primarily in connection with the acquisition of Yahoo’s
operating business, product realignment charges (see
“Special Items”) and an increase in expenses as a result of
the acquisition of XO.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during
2017 primarily due to the acquisitions of Yahoo’s operating
business and XO.
2016 Compared to 2015
Cost of Services
Cost of services decreased during 2016 primarily due to the
completion of the Access Line Sale on April 1, 2016 (see
“Operating Results from Divested Businesses”), as well as a
decline in net pension and postretirement benefit cost in our
Wireline segment. Partially offsetting this decrease was an
increase in costs as a result of the acquisition of AOL on
June 23, 2015, the launch of our mobile video application in
the third quarter of 2015 and incremental costs incurred as
a result of the 2016 Work Stoppage.
Wireless Cost of Equipment
Wireless cost of equipment decreased during 2016 primarily
as a result of a 4.6% decline in the number of smartphone
units sold, partially offset by an increase in the average cost
per unit for smartphones.
Selling, General and Administrative Expense
Selling, general and administrative expense increased
during 2016 primarily due to severance, pension and benefit
charges recorded in 2016 as compared to severance,
pension and benefit credits recorded in 2015 (see “Special
Items”), an increase in costs as a result of the acquisition of
AOL on June 23, 2015, and the launch of our mobile video
application in the third quarter of 2015. These increases
were partially offset by a gain on the Access Line Sale (see
“Special Items”), a decline in costs as a result of the
completion of the Access Line Sale on April 1, 2016 (see
“Operating Results from Divested Businesses”), as well as
declines in sales commission expense at our Wireless
segment and declines in employee costs at our Wireline
segment.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 13
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Special Items
Special items included in operating expenses (see “Special Items”) were as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Severance, Pension and Benefit Charges (Credits)
Selling, general and administrative expense $ 1,391 $ 2,923 $ (2,256)
Acquisition and Integration Related Charges
Selling, general and administrative expense 879 — —
Depreciation and amortization 5 — —
Product Realignment
Cost of services and sales 171 — —
Selling, general and administrative expense 292 — —
Depreciation and amortization 219 — —
Net Gain on Sale of Divested Businesses
Selling, general and administrative expense (1,774) (1,007) —
Gain on Spectrum License Transactions
Selling, general and administrative expense (270) (142) (254)
Total Special Items $ 913 $ 1,774 $ (2,510)
See “Special Items” for a description of these items.
Operating Results From Divested Businesses
On April 1, 2016, we completed the Access Line Sale. On May 1, 2017, we completed the Data Center Sale. The results of
operations related to these divestitures and other insignificant transactions are included within Corporate and other for all
periods presented to reflect comparable segment operating results consistent with the information regularly reviewed by our
chief operating decision maker. The results of operations related to these divestitures included within Corporate and other
are as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Operating Results From Divested Businesses
Operating revenues $ 368 $ 2,115 $ 6,224
Cost of services 129 747 2,185
Selling, general and administrative expense 68 246 638
Depreciation and amortization expense 22 127 278
Other Consolidated Results
Other Income (Expense), Net
Additional information relating to Other income (expense), net is as follows:
(dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Interest income $ 82 $ 59 $ 115 $ 23 39.0% $ (56) (48.7)%
Other, net (2,092) (1,658) 71 (434) (26.2) (1,729) nm
Total $ (2,010) $ (1,599) $ 186 $ (411) (25.7) $ (1,785) nm
nm—not meaningful
The change in Other income (expense), net during the year ended December 31, 2017, compared to the similar period in
2016, was primarily driven by early debt redemption costs of $2.0 billion, compared to $1.8 billion recorded during 2016 (see
“Special Item” below), as well as a net loss on foreign currency translation adjustments compared to a net gain in the 2016
period. The change in Other income (expense), net during the year ended December 31, 2016, compared to the similar period
in 2015, was primarily driven by early debt redemption costs of $1.8 billion recorded during the second quarter of 2016.
14 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Special Item
Special item included in Other income (expense), net was as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Early debt redemption costs $ 1,983 $ 1,822 $ —
Interest Expense
(dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Total interest costs on debt balances $ 5,411 $ 5,080 $ 5,504 $ 331 6.5% $ (424) (7.7)%
Less capitalized interest costs 678 704 584 (26) (3.7) 120 20.5
Total $ 4,733 $ 4,376 $ 4,920 $ 357 8.2 $ (544) (11.1)
Average debt outstanding $ 115,693 $ 106,113 $ 112,838
Effective interest rate 4.7% 4.8% 4.9%
Total interest costs on debt balances increased during 2017 primarily due to higher average debt balances. Total interest
costs on debt balances decreased during 2016 primarily due to lower average debt balances and a lower effective interest
rate (see “Consolidated Financial Condition”).
Capitalized interest costs were higher in 2016 primarily due to an increase in wireless licenses that are currently under
development, including those licenses we acquired in the FCC spectrum license auction during 2015. See Note 2 to the
consolidated financial statements for additional information.
(Benefit) Provision for Income Taxes
(dollars in millions)
(Decrease)
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
(Benefit) provision for income taxes $ (9,956) $ 7,378 $ 9,865 $ (17,334) nm $ (2,487) (25.2)%
Effective income tax rate (48.3)% 35.2% 34.9%
nm—not meaningful
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 15
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
The effective income tax rate is calculated by dividing the
(benefit) provision for income taxes by income before
income taxes. The effective income tax rate for 2017 was
(48.3)% compared to 35.2% for 2016. The decrease in the
effective income tax rate and the provision for income taxes
was due to a one-time, non-cash income tax benefit
recorded in the current period as a result of the enactment
of the Tax Cuts and Jobs Act (TCJA) on December 22,
2017. The TCJA significantly revised the U.S. federal
corporate income tax by, among other things, lowering the
corporate income tax rate to 21% beginning in 2018 and
imposing a mandatory repatriation tax on accumulated
foreign earnings. U.S. GAAP accounting for income taxes
requires that Verizon record the impacts of any tax law
change on our deferred income taxes in the quarter that the
tax law change is enacted. Due to the complexities involved
in accounting for the enactment of the TCJA, SEC Staff
Accounting Bulletin (SAB) 118 allows us to provide a
provisional estimate of the impacts of the legislation.
Verizon has provisionally estimated, based on currently
available information, that the enactment of the TCJA
results in a one-time reduction in net deferred income tax
liabilities of approximately $16.8 billion, primarily due to the
re-measurement of U.S. deferred tax liabilities at the lower
21% U.S. federal corporate income tax rate, and no impact
from the repatriation tax. This provisional estimate does not
reflect the effects of any state tax law changes that may
arise as a result of federal tax reform. Verizon will continue
to analyze the effects of the TCJA on its financial
statements and operations and include any adjustments to
tax expense or benefit from continuing operations in the
reporting periods that such adjustments are determined,
consistent with the one-year measurement period set forth
in SAB 118.
The effective income tax rate for 2016 was 35.2%
compared to 34.9% for 2015. The increase in the effective
income tax rate was primarily due to the impact of
$527 million included in the provision for income taxes from
goodwill not deductible for tax purposes in connection with
the Access Line Sale on April 1, 2016. This increase was
partially offset by the impact that lower income before
income taxes in the current period has on each of the
reconciling items specified in the table included in Note 11 to
the consolidated financial statements. 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 2016 compared to severance,
pension and benefit credits recorded in 2015.
A reconciliation of the statutory federal income tax rate to
the effective income tax rate for each period is included in
Note 11 to the consolidated financial statements.
Consolidated Net Income, 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 that we believe are useful to
management, investors and other users of our financial
information in evaluating operating profitability on a more
variable cost basis as they exclude the depreciation and
amortization expense related primarily to capital
expenditures and acquisitions that occurred in prior years,
as well as in evaluating operating performance in relation to
Verizon’s competitors. Consolidated EBITDA is calculated
by adding back interest, taxes, depreciation and
amortization expense, equity in losses of unconsolidated
businesses and other income (expense), net to net income.
Consolidated Adjusted EBITDA is calculated by excluding
the effect of special items from the calculation of
Consolidated EBITDA. We believe this measure is useful to
management, investors and other users of our financial
information in evaluating the effectiveness of our operations
and underlying business trends in a manner that is
consistent with management’s evaluation of business
performance. We believe Consolidated Adjusted EBITDA is
widely used by investors to compare a company’s operating
performance to its competitors by minimizing impacts
caused by differences in capital structure, taxes and
depreciation policies. Further, the exclusion of special items
enables comparability to prior period performance and trend
analysis. See “Special Items” for additional details regarding
these special items.
Operating expenses include pension and other
postretirement benefit related credits and/or charges based
on actuarial assumptions, including projected discount rates
and an estimated return on plan assets. Such estimates are
updated at least annually at the end of the fiscal year to
reflect actual return on plan assets and updated actuarial
assumptions or more frequently if significant events arise
which require an interim remeasurement. 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. We believe the exclusion of these actuarial gains or
losses enables management, investors and other users of
our financial information to assess our performance on a
more comparable basis and is consistent with
management’s own evaluation of performance.
16 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
It is management’s intent to provide non-GAAP financial information to enhance the understanding of Verizon’s GAAP
financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements
prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP
measure so as not to imply that more emphasis should be placed on the non-GAAP measure. We believe that non-GAAP
measures provide relevant and useful information, which is used by management, investors and other users of our financial
information as well as by our management in assessing both consolidated and segment performance. The non-GAAP
financial information presented may be determined or calculated differently by other companies.
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Consolidated Net Income $ 30,550 $ 13,608 $ 18,375
Add (Less):
(Benefit) provision for income taxes (9,956) 7,378 9,865
Interest expense 4,733 4,376 4,920
Other expense (income), net 2,010 1,599 (186)
Equity in losses of unconsolidated businesses 77 98 86
Consolidated Operating Income 27,414 27,059 33,060
Add Depreciation and amortization expense 16,954 15,928 16,017
Consolidated EBITDA 44,368 42,987 49,077
Add (Less):
Severance, pension and benefit charges (credits) 1,391 2,923 (2,256)
Product realignment 463 — —
Gain on spectrum license transactions (270) (142) (254)
Net gain on sale of divested businesses (1,774) (1,007) —
Acquisition and integration related charges 879 — —
Consolidated Adjusted EBITDA $ 45,057 $ 44,761 $ 46,567
The changes in Consolidated Net Income, 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.
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, and customer groups, respectively. 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 (loss) as a measure of operating
performance. We believe this measure is useful to management, investors and other users of our financial information in
evaluating operating profitability on a more variable cost basis as it excludes the depreciation and amortization expenses
related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating
performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization
expense to segment operating income (loss). Segment EBITDA margin is calculated by dividing Segment EBITDA by total
segment operating revenues.
You can find additional information about our segments in Note 12 to the consolidated financial statements.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 17
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Wireless
Operating Revenues and Selected Operating Statistics
(dollars in millions, except ARPA and I-ARPA)
(Decrease)/Increase
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Service $ 63,121 $ 66,580 $ 70,396 $ (3,459) (5.2)% $ (3,816) (5.4)%
Equipment 18,889 17,515 16,924 1,374 7.8 591 3.5
Other 5,501 5,091 4,360 410 8.1 731 16.8
Total Operating Revenues $ 87,511 $ 89,186 $ 91,680 $ (1,675) (1.9) $(2,494) (2.7)
Connections (‘000):(1)
Retail connections 116,257 114,243 112,108 2,014 1.8 2,135 1.9
Retail postpaid connections 110,854 108,796 106,528 2,058 1.9 2,268 2.1
Net additions in period (‘000):(2)
Retail connections 2,041 2,155 3,956 (114) (5.3) (1,801) (45.5)
Retail postpaid connections 2,084 2,288 4,507 (204) (8.9) (2,219) (49.2)
Churn Rate:
Retail connections 1.25% 1.26% 1.24%
Retail postpaid connections 1.01% 1.01% 0.96%
Account Statistics:
Retail postpaid ARPA $ 135.99 $ 144.32 $ 152.63 $ (8.33) (5.8) $ (8.31) (5.4)
Retail postpaid I-ARPA $ 166.28 $ 167.70 $ 163.63 $ (1.42) (0.8) $ 4.07 2.5
Retail postpaid accounts (‘000)(1) 35,404 35,410 35,736 (6) — (326) (0.9)
Retail postpaid connections per account(1) 3.13 3.07 2.98 0.06 2.0 0.09 3.0
(1) As of end of period (2) Excluding acquisitions and adjustments
2017 Compared to 2016
Wireless’ total operating revenues decreased by $1.7 billion,
or 1.9%, during 2017 compared to 2016, primarily as a result
of a decline in service revenues, partially offset by an
increase in equipment revenues.
Accounts and Connections
Retail 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 unlimited plans, shared data
plans and corporate accounts, as well as legacy single
connection plans and family plans. A single account may
include monthly wireless services for a variety of connected
devices.
Retail connections represent our retail customer device
postpaid and prepaid connections. Churn is the rate at
which service to connections is terminated. Retail
connections under an account may include those from
smartphones and basic phones (collectively, phones) as well
as tablets and other devices connected to the Internet,
including retail IoT devices. The U.S. wireless market has
achieved a high penetration of smartphones, which reduces
the opportunity for new phone connection growth for the
industry. Retail postpaid connection net additions
decreased during 2017 compared to 2016, primarily due to
an increase in disconnects of Internet devices, partially
offset by a decline in phone disconnects.
18 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
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
2.0% as of December 31, 2017 compared to December 31,
2016. The increase in retail postpaid connections per
account is primarily due to an increase in Internet devices,
including tablets and other connected devices, which
represented 19.0% of our retail postpaid connection base as
of December 31, 2017 compared to 18.3% as of
December 31, 2016. The increase in Internet devices is
primarily driven by other connected devices, primarily
wearables, as of December 31, 2017 compared to
December 31, 2016.
Service Revenue
Service revenue, which does not include recurring device
payment plan billings related to the Verizon device payment
program, decreased by $3.5 billion, or 5.2%, during 2017
compared to 2016, primarily due to lower postpaid service
revenue, including decreased overage revenue and decreased
access revenue. Overage revenue pressure was primarily
related to the introduction of unlimited pricing plans in 2017
and the ongoing migration to the pricing plans introduced in
2016 that feature safety mode and carryover data. Service
revenue was also negatively impacted as a result of the
ongoing customer migration to plans with unsubsidized
service pricing. The pace of migration to unsubsidized price
plans is approaching steady state, as the majority of
customers are on such plans at December 31, 2017.
Customer migration to unsubsidized service pricing was
driven in part by an increase in the activation of devices
purchased under the Verizon device payment program. For
2017, phone activations under the Verizon device payment
program represented approximately 78% of retail postpaid
phones activated compared to approximately 77% during
2016. At December 31, 2017, approximately 80% of our
retail postpaid phone connections were on unsubsidized
service pricing compared to approximately 67% at
December 31, 2016. At December 31, 2017, approximately
49% of our retail postpaid phone connections have a
current participation in the Verizon device payment program
compared to approximately 46% at December 31, 2016.
Service revenue plus recurring device payment plan billings
related to the Verizon device payment program, which
represents the total value received from our wireless
connections, decreased $0.6 billion, or 0.8%, during 2017
compared to 2016.
Retail postpaid ARPA (the average service revenue per
account from retail postpaid accounts), which does not
include recurring device payment plan billings related to the
Verizon device payment program, was negatively impacted
during 2017 compared to 2016, as a result of customer
migration to plans with unsubsidized service pricing,
including our new price plans launched during 2016, which
feature safety mode and carryover data, and the introduction
of unlimited data plans in 2017. Retail postpaid I-ARPA (the
average service revenue per account from retail postpaid
accounts plus recurring device payment plan billings), which
represents the monthly recurring value received on a per
account basis from our retail postpaid accounts, decreased
0.8% during 2017 compared to 2016. The decrease was
driven by service revenue decline, partially offset by
increasing recurring device payment plan billings.
Equipment Revenue
Equipment revenue increased $1.4 billion, or 7.8%, during
2017 compared to 2016, as a result of an increase in the
Verizon device payment program take rate and an increase
in the price of devices, partially offset by an overall decline
in device sales.
Under the Verizon device payment program, we recognize a
higher amount of equipment revenue at the time of sale of
devices. For 2017, phone activations under the Verizon
device payment program represented approximately 78% of
retail postpaid phones activated compared to approximately
77% during 2016.
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 $0.4
billion, or 8.1%, during 2017 compared to 2016, primarily due to
a $0.3 billion increase in financing revenues from our device
payment program and a $0.2 billion volume-driven increase in
revenues related to our device protection package.
2016 Compared to 2015
Wireless’ total operating revenues decreased by $2.5 billion,
or 2.7%, during 2016 compared to 2015, primarily as a result
of a decline in service revenue, partially offset by increases
in equipment and other revenues.
Accounts and Connections
Retail postpaid connection net additions decreased during
2016 compared to 2015, primarily due to a decrease in retail
postpaid connection gross additions as well as a higher
retail postpaid connection churn rate.
Retail Postpaid Connections per Account
Retail postpaid connections per account increased 3.0% as
of December 31, 2016 compared to December 31, 2015,
primarily due to increases in Internet devices, which
represented 18.3% of our retail postpaid connection base as
of December 31, 2016 compared to 16.8% as of
December 31, 2015.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 19
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Service Revenue
Service revenue, which does not include recurring device
payment plan billings related to the Verizon device payment
program, decreased by $3.8 billion, or 5.4%, during 2016
compared to 2015, primarily driven by lower retail postpaid
service revenue. Retail postpaid service revenue was
negatively impacted as a result of customer migration to
plans with unsubsidized service pricing, including our new
price plans launched during 2016 that feature safety mode
and carryover data. Customer migration to unsubsidized
service pricing was driven in part by an increase in the
activation of devices purchased under the Verizon device
payment program. For 2016, phone activations under the
Verizon device payment program were 77% of retail
postpaid phones activated. At December 31, 2016,
approximately 67% of our retail postpaid phone connections
were on unsubsidized service pricing compared to
approximately 42% at December 31, 2015. At December 31,
2016, approximately 46% of our retail postpaid phone
connections participated in the Verizon device payment
program compared to approximately 29% at December 31,
2015. The decrease in service revenue was partially offset
by an increase in retail postpaid connections compared to
the prior year. Service revenue plus recurring device
payment plan billings related to the Verizon device payment
program, which represents the total value received from our
wireless connections, increased 2.0% during 2016.
Retail postpaid ARPA, which does not include recurring
device payment plan billings related to the Verizon device
payment program, was negatively impacted during 2016 as
a result of customer migration to plans with unsubsidized
service pricing, including our new price plans launched
during 2016 that feature safety mode and carryover data.
Retail postpaid I-ARPA, which represents the monthly
recurring value received on a per account basis from our
retail postpaid accounts, increased 2.5% during 2016.
Equipment Revenue
Equipment revenue increased $0.6 billion, or 3.5%, during
2016 compared to 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 the traditional fixed-term service plans, promotional
activity and a decline in overall sales volumes.
Under the Verizon device payment program, we recognize a
higher amount of equipment revenue at the time of sale of
devices. For the year ended December 31, 2016, phone
activations under the Verizon device payment program
represented approximately 70% of retail postpaid phones
activated compared to approximately 54% during 2015.
Other Revenue
Other revenue increased $0.7 billion, or 16.8%, during 2016
compared to 2015, primarily due to financing revenues from
our device payment program, cost recovery surcharges and
a volume-driven increase in revenues related to our device
protection package.
Operating Expenses
(dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Cost of services $ 7,990 $ 7,988 $ 7,803 $ 2 —% $ 185 2.4%
Cost of equipment 22,147 22,238 23,119 (91) (0.4) (881) (3.8)
Selling, general and administrative expense 18,772 19,924 21,805 (1,152) (5.8) (1,881) (8.6)
Depreciation and amortization expense 9,395 9,183 8,980 212 2.3 203 2.3
Total Operating Expenses $ 58,304 $ 59,333 $ 61,707 $ (1,029) (1.7) $ (2,374) (3.8)
Cost of Services
Cost of services remained consistent during 2017 compared
to 2016, primarily due to higher rent expense as a result of
an increase in macro and small cell sites supporting network
capacity expansion and densification, as well as a volumedriven
increase in costs related to the device protection
package offered to our customers. Partially offsetting these
increases were decreases in costs related to roaming, long
distance and cost of data.
Cost of services increased $0.2 billion, or 2.4%, during 2016
compared to 2015, primarily due to higher rent expense as a
result of an increase in macro and small cell sites supporting
network capacity expansion and densification, as well as a
volume-driven increase in costs related to the device
protection package offered to our customers. Partially
offsetting these increases were decreases in network
connection costs and cost of roaming.
20 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Cost of Equipment
Cost of equipment decreased $0.1 billion, or 0.4%, during
2017 compared to 2016, primarily as a result of a decline in
the number of smartphone and internet units sold,
substantially offset by a shift to higher priced units in the
mix of devices sold.
Cost of equipment decreased $0.9 billion, or 3.8%, during
2016 compared to 2015, primarily as a result of a 4.6%
decline in the number of smartphone units sold, partially
offset by an increase in the average cost per unit for
smartphones.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $1.2
billion, or 5.8%, during 2017 compared to 2016, primarily due
to a $0.6 billion decline in sales commission expense as well
as a decline of approximately $0.2 billion in employee
related costs primarily due to reduced headcount, as well as
a decline in bad debt expense, non-income taxes and
advertising expense. The decline in sales commission
expense was driven by an increase in the proportion of
activations under the Verizon device payment program,
which has a lower commission per unit than activations
under traditional fixed-term service plans, as well as an
overall decline in activations.
Selling, general and administrative expense decreased $1.9
billion, or 8.6%, during 2016 compared to 2015, primarily due
to a $1.2 billion decline in sales commission expense as well
as declines in employee related costs, non-income taxes,
bad debt expense and advertising. The decline in sales
commission expense was driven by an overall decline in
activations as well as an increase in the proportion of
activations under the Verizon device payment program,
which has a lower commission per unit than activations
under traditional fixed-term service plans. The decline in
employee related costs was a result of reduced headcount.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during
2017 and 2016 primarily driven by an increase in net
depreciable assets.
Segment Operating Income and EBITDA
(dollars in millions)
(Decrease)/Increase
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Segment Operating Income $ 29,207 $ 29,853 $ 29,973 $(646) (2.2)% $ (120) (0.4)%
Add Depreciation and amortization expense 9,395 9,183 8,980 212 2.3 203 2.3
Segment EBITDA $ 38,602 $ 39,036 $ 38,953 $(434) (1.1) $ 83 0.2
Segment operating income margin 33.4% 33.5% 32.7%
Segment EBITDA margin 44.1% 43.8% 42.5%
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.
Wireline
During the first quarter of 2017, Verizon reorganized the customer groups within its Wireline segment. Previously, the
customer groups in the Wireline segment consisted of Mass Markets (which included Consumer Retail and Small Business
subgroups), Global Enterprise and Global Wholesale. Pursuant to the reorganization, there are now four customer groups
within the Wireline segment: Consumer Markets, which includes the customers previously included in Consumer Retail;
Enterprise Solutions, which includes the large business customers, including multinational corporations, and federal
government customers previously included in Global Enterprise; Partner Solutions, which includes the customers previously
included in Global Wholesale; and Business Markets, a new customer group, which includes U.S.-based small business
customers previously included in Mass Markets and U.S.-based medium business customers, state and local government
customers, and educational institutions previously included in Global Enterprise.
The operating revenues from XO are included in the Wireline segment results as of February 2017, following the completion
of the acquisition, and are included with the Enterprise Solutions, Partner Solutions and Business Markets customer groups.
Total operating revenues of XO for the year ended December 31, 2017 were $1.1 billion.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 21
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
The operating results and statistics for all periods presented below exclude the results of the Access Line Sale in 2016, the
Data Center Sale in 2017, and other insignificant transactions (see “Operating Results from Divested Businesses”). The
results were adjusted to reflect comparable segment operating results consistent with the information regularly reviewed by
our chief operating decision maker.
Operating Revenues and Selected Operating Statistics
(dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Consumer Markets $ 12,777 $ 12,751 $ 12,696 $ 26 0.2% $ 55 0.4%
Enterprise Solutions 9,167 9,164 9,378 3 — (214) (2.3)
Partner Solutions 4,917 4,927 5,189 (10) (0.2) (262) (5.0)
Business Markets 3,585 3,356 3,553 229 6.8 (197) (5.5)
Other 234 312 334 (78) (25.0) (22) (6.6)
Total Operating Revenues $ 30,680 $ 30,510 $ 31,150 $ 170 0.6 $ (640) (2.1)
Connections (‘000):(1)
Total voice connections 12,821 13,939 15,035 (1,118) (8.0) (1,096) (7.3)
Total Broadband connections 6,959 7,038 7,085 (79) (1.1) (47) (0.7)
Fios Internet subscribers 5,850 5,653 5,418 197 3.5 235 4.3
Fios video subscribers 4,619 4,694 4,635 (75) (1.6) 59 1.3
(1) As of end of period
Wireline’s revenues increased $0.2 billion, or 0.6%, during 2017 compared to 2016, primarily due to increases in Business
Markets, as a result of the acquisition of XO, and Fios revenues. The 2016 Work Stoppage negatively impacted revenue for
the year ended December 31, 2016.
Fios revenues were $11.7 billion during 2017 compared to $11.2 billion during 2016. During 2017, our Fios Internet subscriber
base grew by 3.5% and our Fios Video subscriber base decreased by 1.6%, compared to 2016, reflecting the ongoing shift
from traditional linear video to over the top offerings.
Consumer Markets
Consumer Markets operations provide broadband Internet
and video services (including HSI, Fios Internet and Fios
video services) and local and long distance voice services to
residential subscribers.
2017 Compared to 2016
Consumer Markets revenues increased 0.2% during 2017
compared to 2016, due to increases in Fios revenues as a
result of subscriber growth for Fios Internet services fueled
by the introduction of gigabit speed data services, as well as
higher pay-per-view sales due to marquee events during the
third quarter, partially offset by the continued decline of
voice service and HSI revenues.
Consumer Fios revenues increased $0.4 billion, or 3.7%,
during 2017 compared to 2016. Fios represented
approximately 85% of Consumer revenue during 2017
compared to approximately 82% during 2016.
The decline in voice service revenues was primarily due to a
7.5% decline in retail residence voice connections resulting
primarily from competition and technology substitution with
wireless, competing voice over Internet Protocol (VoIP) and
cable telephony services. Total voice connections include
traditional switched access lines in service, as well as Fios
digital voice connections.
2016 Compared to 2015
Consumer Markets revenues increased $0.1 billion, or 0.4%,
during 2016 compared to 2015, due to increases in Fios
revenues as a result of subscriber growth for Fios services,
partially offset by the continued decline of voice service
revenues.
Our Fios connection growth for 2016 was impacted by the
2016 Work Stoppage. Consumer Fios revenues increased
$0.4 billion, or 4.3%, during 2016 compared to 2015. Fios
represented approximately 82% of Consumer revenue
during 2016 compared to approximately 79% during 2015.
The decline of voice service revenues was primarily due to a
7.5% decline in retail residence 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.
22 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Enterprise Solutions
Enterprise Solutions helps customers deliver an adaptive
enterprise, while mitigating risk and maintaining continuity,
to capitalize on the data driven world and create
personalized experiences. Enterprise Solutions provides
professional and integrated managed services, delivering
solutions for large businesses, including multinational
corporations, and federal government customers.
Enterprise Solutions offers traditional circuit-based network
services, and advanced networking solutions including
Private Internet Protocol (IP), Ethernet, and SoftwareDefined
Wide Area Network, along with our traditional voice
services and advanced workforce productivity and
customer contact center solutions. Our Enterprise Solutions
include security services to manage, monitor, and mitigate
cyber-attacks.
2017 Compared to 2016
Enterprise Solutions revenues remained consistent during
2017 compared to 2016. Increased revenues resulting from
the acquisition of XO were fully offset by declines in
traditional data and voice communications services as a
result of competitive price pressures.
2016 Compared to 2015
Enterprise Solutions revenues decreased $0.2 billion, or
2.3%, during 2016 compared to 2015, due to declines in
traditional data and advanced networking solutions and
voice communications services. Also contributing to the
decrease was the negative impact of foreign exchange
rates.
Partner Solutions
Partner Solutions 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.
2017 Compared to 2016
Partner Solutions revenues decreased 0.2% during 2017
compared to 2016, primarily due to declines in traditional
voice revenues due to the effect of technology substitution,
as well as continuing contraction of market rates due to
competition, offset by revenues resulting from the
acquisition of XO. As a result of technology substitution and
the elimination of affiliate access lines due to the acquisition
of XO, the number of core data circuits at December 31,
2017 decreased 26.8% compared to December 31, 2016.
The decline in traditional voice revenue was driven by a
10.1% decline in domestic wholesale connections at
December 31, 2017, compared to December 31, 2016.
2016 Compared to 2015
Partner Solutions revenues decreased $0.3 billion, or 5.0%,
during 2016 compared to 2015, primarily due to declines in
data revenues and traditional voice revenues driven by the
effect of technology substitution as well as the continuing
contraction of market rates due to competition. As a result
of technology substitution, the number of core data circuits
at December 31, 2016 decreased 16.3% compared to
December 31, 2015. The decline in traditional voice revenue
was driven by a 5.8% decline in domestic wholesale
connections at December 31, 2016, compared to
December 31, 2015.
Business Markets
Business Markets offers traditional voice and networking
products, Fios services, IP Networking, advanced voice
solutions, security, and managed IT services to U.S.-based
small and medium businesses, state and local governments,
and educational institutions.
2017 Compared to 2016
Business Markets revenues increased $0.2 billion, or 6.8%,
during 2017 compared to 2016, primarily due to the
acquisition of XO, partially offset by revenue declines
related to the loss of voice and HSI connections as a result
of competitive price pressures.
2016 Compared to 2015
Business Markets revenues decreased $0.2 billion, or 5.5%,
during 2016 compared to 2015, primarily due to revenue
declines related to the loss of voice connections as a result
of competitive price pressures.
Operating Expenses
(dollars in millions)
(Decrease)/Increase
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Cost of services $ 17,922 $ 18,353 $ 18,483 $ (431) (2.3)% $ (130) (0.7)%
Selling, general and administrative expense 6,274 6,476 7,140 (202) (3.1) (664) (9.3)
Depreciation and amortization expense 6,104 5,975 6,353 129 2.2 (378) (5.9)
Total Operating Expenses $ 30,300 $ 30,804 $ 31,976 $ (504) (1.6) $ (1,172) (3.7)
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 23
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Cost of Services
Cost of services decreased $0.4 billion, or 2.3%, during
2017 compared to 2016, primarily due to the fact that we did
not incur incremental costs in 2017 that were incurred in
2016 as a result of the 2016 Work Stoppage, as well as a
decline in net pension and postretirement benefit costs
primarily driven by collective bargaining agreements ratified
in June 2016. These decreases were partially offset by an
increase in content costs associated with continued
programming license fee increases as well as an increase in
access costs as a result of the acquisition of XO.
Cost of services decreased $0.1 billion, or 0.7%, during 2016
compared to 2015, primarily due to a decline in net pension
and postretirement benefit cost, and a decline in access
costs driven by declines in overall wholesale long distance
volumes and rates. These decreases were partially offset by
incremental costs incurred as a result of the 2016 Work
Stoppage as well as an increase in content costs
associated with continued programming license fee
increases and continued Fios subscriber growth.
Selling, General and Administrative Expense
Selling, general and administrative expense decreased $0.2
billion, or 3.1%, during 2017 compared to 2016, due to a
decline in net pension and postretirement benefit costs,
primarily driven by collective bargaining agreements ratified
in June 2016 and the fact that there were no 2016 Work
Stoppage costs in 2017, partially offset by a 9.5% increase
in expenses resulting from the acquisition of XO.
Selling, general and administrative expense decreased $0.7
billion, or 9.3%, during 2016 compared to 2015, primarily due
to declines in employee costs as a result of reduced
headcount, a decline in net pension and postretirement
benefit costs and decreases in non-income taxes.
Depreciation and Amortization Expense
Depreciation and amortization expense increased during
2017 compared to 2016 primarily due to increases in net
depreciable assets as a result of the acquisition of XO.
Depreciation and amortization expense decreased during
2016 compared to 2015 primarily due to decreases in net
depreciable assets.
Segment Operating Income (Loss) and EBITDA
(dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2017 2016 2015 2017 vs. 2016 2016 vs. 2015
Segment Operating Income (Loss) $ 380 $ (294) $ (826) $ 674 nm $ 532 64.4%
Add Depreciation and amortization expense 6,104 5,975 6,353 129 2.2% (378) (5.9)
Segment EBITDA $ 6,484 $ 5,681 $ 5,527 $ 803 14.1 $ 154 2.8
Segment operating income (loss) margin 1.2% (1.0)% (2.7)%
Segment EBITDA margin 21.1% 18.6% 17.7%
nm—not meaningful
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.
24 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Special Items
Severance, Pension and Benefit Charges
(Credits)
During 2017, we recorded pre-tax severance, pension and
benefit charges of approximately $1.4 billion, exclusive of
acquisition related severance charges, in accordance with
our accounting policy to recognize actuarial gains and losses
in the period in which they occur. The pension and benefit
remeasurement charges of approximately $0.9 billion were
primarily driven by a decrease in our discount rate
assumption used to determine the current year liabilities of
our pension and postretirement benefit plans from a
weighted-average of 4.2% at December 31, 2016 to a
weighted-average of 3.7% at December 31, 2017 ($2.6
billion). The charges were partially offset by the difference
between our estimated return on assets of 7.0% and our
actual return on assets of 14.0% ($1.2 billion), a change in
mortality assumptions primarily driven by the use of updated
actuarial tables (MP-2017) issued by the Society of Actuaries
($0.2 billion) and other assumption adjustments ($0.3 billion).
As part of these charges, we also recorded severance costs
of $0.5 billion under our existing separation plans.
During 2016, we recorded net pre-tax severance, pension
and benefit charges of $2.9 billion in accordance with our
accounting policy to recognize actuarial gains and losses in
the period in which they occur. The pension and benefit
remeasurement charges of $2.5 billion were primarily driven
by a decrease in our discount rate assumption used to
determine the current year liabilities of our pension and
other postretirement benefit plans from a weighted-average
of 4.6% at December 31, 2015 to a weighted-average of
4.2% at December 31, 2016 ($2.1 billion), updated health
care trend cost assumptions ($0.9 billion), the difference
between our estimated return on assets of 7.0% and our
actual return on assets of 6.0% ($0.2 billion) and other
assumption adjustments ($0.3 billion). These charges were
partially offset by a change in mortality assumptions
primarily driven by the use of updated actuarial tables (MP2016)
issued by the Society of Actuaries ($0.5 billion) and
lower negotiated prescription drug pricing ($0.5 billion). As
part of these charges, we also recorded severance costs of
$0.4 billion under our existing separation plans.
The net pre-tax severance, pension and benefit charges
during 2016 were comprised of a net pre-tax pension
remeasurement charge of $0.2 billion measured as of
March 31, 2016 related to settlements for employees who
received lump-sum distributions in one of our defined
benefit pension plans, a net pre-tax pension and benefit
remeasurement charge of $0.8 billion measured as of
April 1, 2016 related to curtailments in three of our defined
benefit pension and one of our other postretirement plans, a
net pre-tax pension and benefit remeasurement charge of
$2.7 billion measured as of May 31, 2016 in two defined
benefit pension plans and three other postretirement
benefit plans as a result of our accounting for the
contractual healthcare caps and bargained for changes, a
net pre-tax pension remeasurement charge of $0.1 billion
measured as of May 31, 2016 related to settlements for
employees who received lump-sum distributions in three of
our defined benefit pension plans, a net pre-tax pension
remeasurement charge of $0.6 billion measured as of
August 31, 2016 related to settlements for employees who
received lump-sum distributions in five of our defined
benefit pension plans, and a net pre-tax pension and benefit
credit of $1.9 billion as a result of our fourth quarter
remeasurement of our pension and other postretirement
assets and liabilities based on updated actuarial
assumptions.
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).
The Consolidated Adjusted EBITDA non-GAAP measure
presented in the Consolidated Net Income, Operating
Income and EBITDA discussion (see “Consolidated Results
of Operations”) excludes the severance, pension and
benefit charges (credits) presented above.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 25
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Early Debt Redemptions
During 2017 and 2016, we recorded losses on early debt
redemptions of $2.0 billion and $1.8 billion, respectively.
We recognize losses on early debt redemptions in Other
income (expense), net on our consolidated statements of
income. See Note 6 to the consolidated financial statements
for additional information related to our early debt
redemptions.
Net Gain on Sale of Divested Businesses
During the second quarter of 2017, we completed the Data
Center Sale. In connection with the Data Center Sale and
other insignificant transactions, we recorded a net gain on
the sale of divested businesses of approximately $1.8 billion
in Selling, general and administrative expense on our
consolidated statement of income for the year ended
December 31, 2017.
During the second quarter of 2016, we completed the
Access Line Sale. As a result of this transaction, we
recorded a pre-tax gain of approximately $1.0 billion in
Selling, general and administrative expense on our
consolidated statement of income for the year ended
December 31, 2016. The pre-tax gain included a $0.5 billion
pension and postretirement benefit curtailment gain due to
the elimination of the accrual of pension and other
postretirement benefits for some or all future services of a
significant number of employees covered in three of our
defined benefit pension plans and one of our other
postretirement benefit plans.
The Consolidated Adjusted EBITDA non-GAAP measure
presented in the Consolidated Net Income, Operating
Income and EBITDA discussion (see “Consolidated Results
of Operations”) excludes the gain on the Access Line Sale
described above.
Gain on Spectrum License Transactions
During the fourth quarter of 2017, we completed a license
exchange transaction with affiliates of T-Mobile USA Inc. (TMobile
USA) to exchange certain Advanced Wireless
Services (AWS) and Personal Communication Services
(PCS) spectrum licenses. As a result of this agreement, we
received $0.4 billion of AWS and PCS spectrum licenses at
fair value and recorded a pre-tax gain of $0.1 billion in
Selling, general and administrative expense on our
consolidated statement of income for the year ended
December 31, 2017.
During the first quarter of 2017, we completed a license
exchange transaction with affiliates of AT&T Inc. (AT&T) to
exchange certain AWS and PCS spectrum licenses. As a
result of this non-cash exchange, we received $1.0 billion of
AWS and PCS spectrum licenses at fair value and recorded
a pre-tax gain of $0.1 billion in Selling, general and
administrative expense on our consolidated statement of
income for the year ended December 31, 2017.
During the first quarter of 2016, we completed a license
exchange transaction with affiliates of AT&T to exchange
certain AWS and PCS spectrum 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 pretax
gain of approximately $0.1 billion in Selling, general and
administrative expense on our consolidated statement of
income for the year ended December 31, 2016.
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 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 pretax
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.
The Consolidated Adjusted EBITDA non-GAAP measure
presented in the Consolidated Net Income, Operating
Income and EBITDA discussion (see “Consolidated Results
of Operations”) excludes the gains on the spectrum license
transactions described above.
Acquisition and Integration Related Charges
During the second quarter of 2017, we completed the
acquisition of Yahoo’s operating business. We recorded
acquisition and integration related charges of approximately
$0.9 billion, including $0.6 billion of acquisition related
severance charges during the year ended December 31,
2017, primarily related to the acquisition of Yahoo’s
operating business. These charges were primarily recorded
in Selling, general and administrative expense on our
consolidated statement of income for the year ended
December 31, 2017.
The Consolidated Adjusted EBITDA non-GAAP measure
presented in the Consolidated Net Income, Operating
Income and EBITDA discussion (see “Consolidated Results
of Operations”) excludes the acquisition and integration
related charges described above.
Product Realignment
During the fourth quarter of 2017, we recorded product
realignment charges of approximately $0.7 billion. Product
realignment costs primarily related to charges taken against
certain early-stage developmental technologies. These noncash
charges were recorded in Selling, general and
administrative expense, Cost of services, and Depreciation
and amortization expense on our consolidated statement of
income for the year ended December 31, 2017.
The Consolidated Adjusted EBITDA non-GAAP measure
presented in the Consolidated Net Income, Operating
Income and EBITDA discussion (see “Consolidated Results
of Operations”) excludes the product realignment costs
described above.
26 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Impact of Tax Reform
During the fourth quarter of 2017, we recorded a one-time
corporate tax reduction of approximately $16.8 billion in
Benefit (provision) for income taxes on our consolidated
statement of income for the year ended December 31, 2017.
Operating Environment and Trends
The industries that we operate in are highly competitive,
which we expect to continue particularly as traditional, nontraditional
and emerging service providers seek increased
market share. We believe that our high-quality customer
base and networks differentiate us from our competitors
and give us the ability to plan and manage through changing
economic and competitive conditions. We remain focused
on executing on the fundamentals of the business:
maintaining a high-quality customer base, delivering strong
financial and operating results and generating strong free
cash flows. We will continue to invest for growth, which we
believe is the key to creating value for our shareowners. We
are investing in innovative technologies, such as 5G and
high-speed fiber, as well as the platforms that will position
us to capture incremental profitable growth in new areas,
like media and telematics, to position ourselves at the
center of growth trends of the future.
The U.S. wireless market has achieved a high penetration of
smartphones which reduces the opportunity for new phone
connection growth for the industry. We expect future
revenue growth in the industry to be driven by monetization
of usage through new ecosystems, and penetration
increases in other connected devices including tablets and
IoT devices. Current and potential competitors in the U.S.
wireless market include other national wireless service
providers, various regional wireless service providers,
wireless resellers, cable companies, as well as other
communications and technology companies providing
wireless products and services.
Service and equipment pricing continues to play an
important role in the wireless competitive landscape. We
compete in this area by offering our customers services and
devices that we believe they will regard as the best available
value for the price. As the demand for wireless data services
continues to grow, we and many other wireless service
providers offer service plans at competitive prices that
include unlimited data usage (subject to certain restrictions).
We and other wireless service providers also offer service
plans that provide a specific amount of data access in
varying megabyte or gigabyte sizes and, in some cases, the
ability to carry over unused data allowances. These service
offerings will vary from time to time as part of promotional
offers or in response to the competitive environment.
Many wireless service providers, as well as equipment
manufacturers, offer payment options, such as device
payment 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. We
and many other wireless providers have limited or
discontinued this form of device subsidy. As a result, we
have experienced significant growth in the percentage of
activations on device payment plans and the number of
customers on plans with unsubsidized service pricing;
however, the migration is approaching steady state. We
expect future service revenue growth opportunities to arise
from increased access revenue and also new account
formation. Future service revenue growth opportunities will
be dependent on expanding the penetration of our services
and increasing the number of ways that our customers can
connect with our network and services and the
development of new ecosystems.
Current and potential competitors to our Wireline
businesses include cable companies, wireless service
providers, domestic and foreign telecommunications
providers, satellite television companies, Internet service
providers, over the top providers and other companies that
offer network services and managed enterprise solutions.
In addition, companies with a global presence increasingly
compete with our Wireline businesses. A relatively small
number of telecommunications and integrated service
providers with global operations serve customers in the
global enterprise and, to a lesser extent, the global
wholesale markets. We compete with these full or near-full
service providers for large contracts to provide integrated
services to global enterprises. Many of these companies
have strong market presence, brand recognition, and
existing customer relationships, all of which contribute to
intensifying competition that may affect our future revenue
growth.
Despite this challenging environment, we expect that we will
be able to grow key aspects of our Wireline segment by
providing network reliability, offering consumers product
bundles that include broadband Internet access, digital
television and local and long distance voice services,
offering business and government customers more robust
IP products and services, and accelerating our IoT
strategies. We will also continue to focus on cost
efficiencies to attempt to offset adverse impacts from
unfavorable economic conditions and competitive
pressures.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 27
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
2018 Connection 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 such as wearables. We believe the overall customer
experience of matching the unlimited plan with our highquality
network continues to attract and retain higher value
retail postpaid connections, contributes to continued
increases in the penetration of data services and helps us
remain competitive with other wireless carriers. We expect
to manage churn by providing a consistent, reliable
experience on our wireless network and focusing on
improving the customer experience through simplified
pricing and better execution in our distribution channels.
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, 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 expect to continue to grow our Fios
Internet connections as we seek to increase our penetration
rates within our Fios service areas. In Fios video, the
business continues to face ongoing pressure as observed
throughout the linear television market. We expect to
expand our existing business through initiatives such as
One Fiber, our multi-use fiber deployment.
2018 Operating Revenue Trends
In our Wireless segment, we expect to see a continuation of
the service revenue trends that started in 2017 as the
migration to unsubsidized pricing is largely behind us and as
we gain momentum in new account formation driven by the
introduction of new pricing structures in 2016 and 2017 and
the use of promotions. Equipment revenues are largely
dependent on wireless device sales volumes, the mix of
devices, promotions and upgrade cycles, which are subject
to device lifecycles, iconic device launches and competition
within the wireless industry.
In our Wireline segment, we expect segment revenue
growth driven primarily by revenue growth in Consumer
Markets, offset by revenue declines in Partner Solutions. We
expect Consumer Markets revenue growth to be driven by
growth in our Fios broadband subscriber base, offset by
continuing declines related to retail voice and legacy
broadband connection losses. We expect a continued
decline in core revenues for our Business Markets,
Enterprise Solutions and Partner Solutions customer
offerings; however, we expect revenue growth from
advanced business and fiber-based services, including the
expansion of our fiber footprint, to partially, and in some
cases fully, mitigate these declines for the customer groups.
Due to the implementation of Accounting Standard
Codification (ASC) Topic 606 on January 1, 2018, we
estimate the overall impact from the opening balance sheet
adjustment and ongoing impact from new contracts to result
in an insignificant change to consolidated revenue for the full
year 2018, based on currently available information, as the
expected increase to wireless equipment revenue will be
offset by an expected decrease to wireless service revenue.
We expect initiatives to develop platforms, content and
applications in the media and IoT space will have a longterm
positive impact on revenues, drive usage on our
network and monetize our investments.
2018 Operating Expense and Cash Flow from Operations
Trends
We expect our consolidated operating income margin and
adjusted consolidated EBITDA margin to remain strong as
we continue to undertake initiatives to reduce our overall
cost structure by improving productivity and gaining
efficiency in our operations throughout the business in 2018
and beyond. We have deployed a zero-based budgeting
initiative to take $10 billion of cumulative cash outflows out
of the business over the next four years. As part of this
initiative, we will focus on both operating expenses and
capital expenditures. Every area of the business will be
examined with significant areas of focus being network
costs, distribution and customer care. Expenses related to
newly acquired businesses are expected to apply offsetting
pressure to our margins.
Due to the implementation of ASC Topic 606, we estimate
the overall impact from the opening balance sheet
adjustment and ongoing impact from new contracts to
result in a net decrease, ranging from $0.9 billion to $1.2
billion, to operating expenses primarily related to wireless
and wireline commission expenses for the full year 2018,
based on currently available information.
We expect that the Tax Cuts and Jobs Act will have a
positive impact to Verizon’s cash flow from operations in
2018 of approximately $3.5 billion to $4.0 billion.
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 2.2% during 2017, making
this the eleventh consecutive year in which we have raised
our dividend.
28 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Our goal is to use our cash to create long-term value for our
shareholders. We will continue to look for investment
opportunities that will help us to grow the business,
strengthen our balance sheet, acquire spectrum licenses
(see “Cash Flows from Investing Activities”), pay dividends
to our shareholders and, when appropriate, buy back shares
of our outstanding common stock (see “Cash Flows from
Financing Activities”).
Capital Expenditures
Our 2018 capital program includes capital to fund advanced
networks and services, including expanding our core
networks, adding capacity and density to our 4G LTE
network in order to stay ahead of our customers’ increasing
data demands and pre-position our network for 5G, building
out multi-use fiber to expand the future capabilities of both
our wireless and wireline networks while reducing the cost
to deliver services to our customers and pursuing other
opportunities to drive operating efficiencies. We expect the
new One Fiber architecture will also deliver high-speed Fios
broadband to businesses and create new opportunities in
the small and medium business market. The level and the
timing of the Company’s capital expenditures within these
broad categories can vary significantly as a result of a
variety of factors outside of our control, such as material
weather events. Capital expenditures for 2018 are expected
to be in the range of $17.0 billion to $17.8 billion, including
the commercial launch of 5G. Capital expenditures were
$17.2 billion in 2017 and $17.1 billion in 2016. We believe that
we have significant discretion over the amount and timing of
our capital expenditures on a Company-wide basis as we
are not subject to any agreement that would require
significant capital expenditures on a designated schedule or
upon the occurrence of designated events.
Consolidated Financial Condition
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Cash flows provided by (used in)
Operating activities $ 25,305 $ 22,810 $ 39,027
Investing activities (19,372) (10,983) (30,043)
Financing activities (6,734) (13,417) (15,112)
Decrease in cash and cash equivalents $ (801) $ (1,590) $ (6,128)
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 provide 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, U.S. retail medium-term notes and other
capital market securities that are privately-placed or offered
overseas. In addition, we monetize our device payment plan
agreement receivables through asset-backed debt
transactions.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 29
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated
from operations, primarily from our Wireless segment. Net
cash provided by operating activities during 2017 increased
by $2.5 billion primarily due to an increase in earnings and
changes in working capital, partially offset by our
discretionary contributions to qualified pension plans of
$3.4 billion (approximately $2.1 billion, net of tax benefit) and
the change in the method in which we monetize device
payment plan receivables, as discussed below. As a result of
the discretionary pension contribution in 2017, our
mandatory pension funding through 2020 is expected to be
minimal, which will benefit future cash flows. Further, the
funded status of our qualified pension plan is improved.
Net cash provided by operating activities during 2016
decreased by $16.2 billion primarily due to a change in the
method by which we monetize device payment plan
receivables, as discussed below, as well as a decline in
earnings, an increase in income taxes paid primarily as a
result of the Access Line Sale and the fact that in 2015 we
received $2.4 billion of cash proceeds as a result of our
transaction (Tower Monetization Transaction) with
American Tower Corporation (American Tower). We
completed the Tower Monetization Transaction in March
2015, 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,
of which $2.4 billion related to a portion of the towers for
which the right-of-use has passed to the tower operator.
See Note 2 to the consolidated financial statements for
additional information.
During 2016, we changed the strategic method by which we
monetize device payment plan receivables from sales of
device payment plan receivables, which were recorded
within cash flows provided by operating activities, to assetbacked
debt transactions, which are recorded in cash flows
from financing activities. During 2016 and 2015, we received
cash proceeds related to sales of wireless device payment
plan agreement receivables of approximately $2.0 billion
and $7.2 billion, respectively. See Note 7 to the consolidated
financial statements for additional information. During 2017
and 2016, we received proceeds from asset-backed debt
transactions of approximately $4.3 billion and $5.0 billion,
respectively. See Note 6 to the consolidated financial
statements and “Cash Flows Used in Financing Activities”
for additional information.
Cash Flows Used In Investing Activities
Capital Expenditures
Capital expenditures continue to relate primarily to the use
of capital resources to facilitate the introduction of new
products and services, enhance responsiveness to
competitive challenges 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, 2017 2016 2015
Wireless $ 10,310 $ 11,240 $ 11,725
Wireline 5,339 4,504 5,049
Other 1,598 1,315 1,001
$ 17,247 $ 17,059 $ 17,775
Total as a percentage of
revenue 13.7% 13.5% 13.5%
Capital expenditures decreased at Wireless in 2017 and
2016 primarily due to the shift in investments to fiber assets,
which support the densification of our 4G LTE network and
pre-position us for 5G technology deployment. Capital
expenditures increased at Wireline in 2017 primarily as a
result of an increase in investments to support our multi-use
fiber deployment. Capital expenditures declined at Wireline
in 2016 as a result of the avoidance of capital expenditures
related to the assets included in the Access Line Sale that
were sold to Frontier in April 2016, and reduced capital
spending during the 2016 Work Stoppage.
Acquisitions
During 2017, 2016 and 2015, we invested $0.6 billion, $0.5
billion and $9.9 billion, respectively, in acquisitions of
wireless licenses. During 2017, 2016 and 2015, we also
invested $5.9 billion, $3.8 billion and $3.5 billion,
respectively, in acquisitions of businesses, net of cash
acquired.
30 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
In February 2017, Verizon acquired XO, which owns and
operates one of the largest fiber-based IP and Ethernet
networks, for total cash consideration of approximately $1.5
billion, of which $0.1 billion was paid in 2015.
In June 2017, Verizon acquired Yahoo’s operating business
for cash consideration of approximately $4.5 billion, net of
cash acquired.
In December 2017, Verizon purchased certain fiber-optic
network assets in the Chicago market from WideOpenWest,
Inc. (WOW!) for cash consideration of approximately $0.2
billion.
In July 2016, we acquired Telogis, a global cloud-based
mobile enterprise management business, for $0.9 billion of
cash consideration.
In November 2016, we acquired Fleetmatics, a leading
global provider of fleet and mobile workforce management
solutions, for $60.00 per ordinary share in cash. The
aggregate merger consideration was approximately
$2.5 billion, including cash acquired of $0.1 billion.
In January 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 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. In April 2015, the FCC
granted us these spectrum licenses.
In June 2015, Verizon acquired AOL for cash consideration of
approximately $3.8 billion, net of cash acquired.
During 2017, 2016 and 2015, we acquired various other
businesses and investments for cash consideration that was
not significant.
See “Acquisitions and Divestitures” for additional
information on our acquisitions.
Dispositions
During 2017, we received net cash proceeds of $3.5 billion
in connection with the Data Center Sale on May 1, 2017. We
also completed other insignificant transactions during 2017.
During 2016, we received cash proceeds of $9.9 billion in
connection with the completion of the Access Line Sale on
April 1, 2016.
See “Acquisitions and Divestitures” for additional
information on our dispositions.
Other, net
In May 2015, we 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, we received proceeds of
$0.2 billion related to a sale of real estate.
Cash Flows Used In Financing Activities
We seek to maintain a mix of fixed and variable rate debt to
lower borrowing costs within reasonable risk parameters.
During 2017, 2016 and 2015, net cash used in financing
activities was $6.7 billion, $13.4 billion and $15.1 billion,
respectively.
2017
During 2017, our net cash used in financing activities of $6.7
billion was primarily driven by:
• $24.2 billion used for repayments of long-term borrowings
and capital lease obligations, which included $0.4 billion
used for repayments of asset-backed long-term
borrowings; and
• $9.5 billion used for dividend payments.
These uses of cash were partially offset by proceeds from
long-term borrowings of $32.0 billion, which included $4.3
billion of proceeds from our asset-backed debt
transactions.
Proceeds from and Repayments of Long-Term
Borrowings
At December 31, 2017, our total debt increased to $117.1
billion as compared to $108.1 billion at December 31, 2016.
Our effective interest rate was 4.7% and 4.8% during the
years ended December 31, 2017 and 2016, respectively. The
substantial majority of our total debt portfolio consists of
fixed rate indebtedness, therefore, changes in interest rates
do not have a material effect on our interest payments. See
also “Market Risk” and Note 6 to the consolidated financial
statements for additional details.
At December 31, 2017, approximately $18.0 billion or 15.3%
of the aggregate principal amount of our total debt portfolio
consisted of foreign denominated debt, primarily the Euro
and British Pound Sterling. We have entered into cross
currency swaps on a majority of our foreign denominated
debt in order to fix our future interest and principal
payments in U.S. dollars and mitigate the impact of foreign
currency transaction gains or losses. See “Market Risk” for
additional information.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 31
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
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 2017 includes early
debt redemption costs, see “Special Items” for additional
information, as well as cash paid on debt exchanges and
derivative related transactions.
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 2017, the Board
increased our quarterly dividend payment 2.2% to $0.5900
from $0.5775 per share in the prior period. This is the
eleventh 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 2017, we paid $9.5 billion in
dividends.
2016
During 2016, our net cash used in financing activities of
$13.4 billion was primarily driven by:
• $19.2 billion used for repayments of long-term borrowings
and capital lease obligations; and
• $9.3 billion used for dividend payments.
These uses of cash were partially offset by proceeds from
long-term borrowings of $18.0 billion, which included
$5.0 billion of proceeds from our asset-backed debt
transactions.
Proceeds from and Repayments of Long-Term
Borrowings
At December 31, 2016, our total debt decreased to $108.1
billion as compared to $109.7 billion at December 31, 2015.
Our effective interest rate was 4.8% and 4.9% during the
years ended December 31, 2016 and 2015, respectively. The
substantial majority of our total debt portfolio consisted of
fixed rate indebtedness, therefore, changes in interest rates
did not have a material effect on our interest payments. See
also “Market Risk” and Note 6 to the consolidated financial
statements for additional details.
At December 31, 2016, approximately $11.6 billion or 10.7% of
the aggregate principal amount of our total debt portfolio
consisted of foreign denominated debt, primarily the Euro and
British Pound Sterling. We have entered into cross currency
swaps on a majority of our foreign denominated debt in order
to fix our future interest and principal payments in U.S. dollars
and mitigate the impact of foreign currency transaction gains
or losses. See “Market Risk” for additional information.
Other, net
Other, net financing activities during 2016, includes early
debt redemption costs of $1.8 billion. See “Special Items” for
additional information related to the early debt redemption
costs incurred during the year ended December 31, 2016.
Dividends
During the third quarter of 2016, the Board increased our
quarterly dividend payment 2.2% to $0.5775 from $0.565
per share in the prior period.
As in prior periods, dividend payments were a significant use
of capital resources. During 2016, we paid $9.3 billion in
dividends.
2015
During 2015, our net cash used in financing activities of $15.1
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 $109.7
billion as compared to $112.8 billion at December 31, 2014.
The substantial majority of our total debt portfolio consisted
of fixed rate indebtedness, therefore, changes in interest
rates did not have a material effect on our interest
payments. See Note 6 to the consolidated financial
statements for additional information regarding our debt
activity.
32 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
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.
Other, net
Other, net financing activities during 2015 included
$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
During the third quarter of 2015, the Board increased our
quarterly dividend payment 2.7% to $0.565 per share from
$0.550 per share in the same prior period.
As in prior periods, dividend payments were a significant use
of capital resources. During 2015, we paid $8.5 billion in
dividends.
Asset-Backed Debt
As of December 31, 2017, the carrying value of our assetbacked
debt was $8.9 billion. Our asset-backed debt
includes notes (the Asset-Backed Notes) issued to thirdparty
investors (Investors) and loans (ABS Financing
Facility) received from banks and their conduit facilities
(collectively, the Banks). Our consolidated asset-backed
debt bankruptcy remote legal entities (each, an ABS Entity
or collectively, the ABS Entities) issue the debt or are
otherwise party to the transaction documentation in
connection with our asset-backed debt transactions. Under
the terms of our asset-backed debt, we transfer device
payment plan agreement receivables from Cellco
Partnership and certain other affiliates of Verizon
(collectively, the Originators) to one of the ABS Entities,
which in turn transfers such receivables to another ABS
Entity that issues the debt. Verizon entities retain the equity
interests in the ABS Entities, which represent the rights to
all funds not needed to make required payments on the
asset-backed debt and other related payments and
expenses.
Our asset-backed debt is secured by the transferred device
payment plan agreement receivables and future collections
on such receivables. The device payment plan agreement
receivables transferred to the ABS Entities and related
assets, consisting primarily of restricted cash, will only be
available for payment of asset-backed debt and expenses
related thereto, payments to the Originators in respect of
additional transfers of device payment plan agreement
receivables, and other obligations arising from our assetbacked
debt transactions, and will not be available to pay
other obligations or claims of Verizon’s creditors until the
associated asset-backed debt and other obligations are
satisfied. The Investors or Banks, as applicable, which hold
our asset-backed debt have legal recourse to the assets
securing the debt, but do not have any recourse to Verizon
with respect to the payment of principal and interest on the
debt. Under a parent support agreement, Verizon has
agreed to guarantee certain of the payment obligations of
Cellco Partnership and the Originators to the ABS Entities.
Cash collections on the device payment plan agreement
receivables are required at certain specified times to be
placed into segregated accounts. Deposits to the
segregated accounts are considered restricted cash and
are included in Prepaid expenses and other and Other
assets on our consolidated balance sheets.
Proceeds from our asset-backed debt transactions,
deposits to the segregated accounts and payments to the
Originators in respect of additional transfers of device
payment plan agreement receivables are reflected in Cash
flows from financing activities in our consolidated
statements of cash flows. Repayments of our asset-backed
debt and related interest payments made from the
segregated accounts are non-cash activities and therefore
not reflected within Cash flows from financing activities in
our consolidated statements of cash flows. The assetbacked
debt issued and the assets securing this debt are
included on our consolidated balance sheets.
During September 2016 and May 2017, we entered into loan
agreements through an ABS Entity with a number of
financial institutions. Under these ABS loan agreements, we
have the right to prepay all or a portion of the loans at any
time without penalty, but in certain cases, with breakage
costs. In December 2017, we prepaid $0.4 billion. The
amount prepaid is available for further drawdowns until
September 2018, except in certain circumstances.
Credit Facilities
In July 2017, we entered into credit facilities insured by
various export credit agencies with the ability to borrow up
to $4.0 billion to finance equipment-related purchases. The
facilities have borrowings available, portions of which
extend through October 2019, contingent upon the amount
of eligible equipment-related purchases made by Verizon. At
December 31, 2017, we had not drawn on these facilities.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 33
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
In September 2016, we amended our $8.0 billion credit
facility to increase the availability to $9.0 billion and extend
the maturity to September 2020. As of December 31, 2017,
the unused borrowing capacity under our $9.0 billion credit
facility was approximately $8.9 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.
In March 2016, we entered into a credit facility insured by
Eksportkreditnamnden Stockholm, Sweden (EKN), the
Swedish export credit agency. As of December 31, 2017, we
had an outstanding balance of $0.8 billion. We used this credit
facility to finance network equipment-related purchases.
Common Stock
Common stock has been used from time to time to satisfy
some of the funding requirements of employee and
shareowner plans. During the year ended December 31,
2017, we issued 2.8 million common shares from Treasury
stock, which had an insignificant aggregate value. During
the year ended December 31, 2016, we issued 3.5 million
common shares from Treasury stock, which had an
insignificant aggregate value. During the year ended
December 31, 2015, we issued 22.6 million common shares
from Treasury stock, which had an aggregate value of
$0.9 billion.
On March 3, 2017, the Verizon Board of Directors
authorized a new share buyback program to repurchase up
to 100 million shares of the company’s common stock. The
new program will terminate when the aggregate number of
shares purchased reaches 100 million, or at the close of
business on February 28, 2020, whichever is sooner. The
program permits Verizon to repurchase shares over time,
with the amount and timing of repurchases depending on
market conditions and corporate needs. There were no
repurchases of common stock during 2017 and 2016. During
2015, we repurchased $0.1 billion of our common stock
under our previous share buyback program.
In February 2015, the Verizon Board of Directors authorized
Verizon to enter into an accelerated share repurchase
(ASR) agreement to repurchase $5.0 billion of the
Company’s common stock. On February 10, 2015, in
exchange for an up-front payment totaling $5.0 billion,
Verizon received an initial delivery of 86.2 million shares
having a value of approximately $4.25 billion. 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.
Credit Ratings
Verizon’s credit ratings did not change in 2017, 2016 and
2015.
Securities ratings assigned by rating organizations are
expressions of opinion and are not recommendations to
buy, sell or hold securities. A securities rating is subject to
revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently
of any other rating.
Covenants
Our credit agreements contain covenants that are typical
for large, investment grade companies. These covenants
include requirements to pay interest and principal in a timely
fashion, pay taxes, maintain insurance with responsible and
reputable insurance companies, preserve our corporate
existence, keep appropriate books and records of financial
transactions, maintain our properties, provide financial and
other reports to our lenders, limit pledging and disposition of
assets and mergers and consolidations, and other similar
covenants.
We and our consolidated subsidiaries are in compliance with
all of our restrictive covenants.
2017 Term Loan Agreement
During January 2017, we entered into a term loan credit
agreement with a syndicate of major financial institutions,
pursuant to which we could borrow up to $5.5 billion for
(i) the acquisition of Yahoo and (ii) general corporate
purposes. None of the $5.5 billion borrowing capacity was
used during 2017. In March 2017, the term loan credit
agreement was terminated in accordance with its terms and
as such, the related fees were recognized in Other income
(expense), net and were not significant.
Change In Cash and Cash Equivalents
Our Cash and cash equivalents at December 31, 2017
totaled $2.1 billion, a $0.8 billion decrease compared to
Cash and cash equivalents at December 31, 2016 primarily
as a result of the factors discussed above. Our Cash and
cash equivalents at December 31, 2016 totaled $2.9 billion, a
$1.6 billion decrease compared to Cash and cash
equivalents at December 31, 2015 primarily as a result of the
factors discussed above.
34 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Free Cash Flow
Free cash flow is a non-GAAP financial measure that
reflects an additional way of viewing our liquidity that, when
viewed with our GAAP results, provides a more complete
understanding of factors and trends affecting our cash
flows. We believe it is a more conservative measure of cash
flow since purchases of fixed assets are necessary for
ongoing operations. Free cash flow has limitations due to
the fact that it does not represent the residual cash flow
available for discretionary expenditures. For example, free
cash flow does not incorporate payments made on capital
lease obligations or cash payments for business
acquisitions. Therefore, we believe it is important to view
free cash flow as a complement to our entire consolidated
statements of cash flows. 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, 2017 2016 2015
Net cash provided by
operating activities $ 25,305 $ 22,810 $ 39,027
Less Capital expenditures
(including capitalized
software) 17,247 17,059 17,775
Free cash flow $ 8,058 $ 5,751 $ 21,252
The changes in free cash flow during 2017, 2016 and 2015
were a result of the factors described in connection with net
cash provided by operating activities and capital
expenditures. The change in free cash flow during 2017 was
primarily due to an increase in earnings and changes in
working capital, partially offset by our discretionary
contributions to qualified pension plans of $3.4 billion
(approximately $2.1 billion, net of tax benefit) and the
change in the method in which we monetize device payment
plan receivables, as discussed below. As a result of the
discretionary pension contribution in 2017, our mandatory
pension funding through 2020 is expected to be minimal,
which will benefit future cash flows. Further, the funded
status of our qualified pension plan is improved.
The change in free cash flow during 2016 was primarily due
to a change in the method by which we monetize device
payment plan receivables, as discussed below, as well as a
decline in earnings, an increase in income taxes paid
primarily as a result of the Access Line Sale and the fact
that in 2015 we received $2.4 billion of cash proceeds as a
result of our Tower Monetization Transaction with American
Tower.
During 2016, we changed the strategic method by which we
monetize device payment plan receivables from sales of
device payment plan receivables, which were recorded
within cash flows provided by operating activities, to assetbacked
debt transactions, which are recorded in cash flows
from financing activities. During 2016 and 2015, we received
cash proceeds related to sales of wireless device payment
plan agreement receivables of approximately $2.0 billion
and $7.2 billion, respectively. See Note 7 to the consolidated
financial statements for additional information. During 2017
and 2016, we received proceeds from asset-backed debt
transactions of approximately $4.3 billion and $5.0 billion,
respectively. See Note 6 to the consolidated financial
statements and “Cash Flows Used in Financing Activities”
for additional information.
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 2017,
2016 and 2015, contributions to our qualified pension plans
were $4.0 billion, $0.8 billion and $0.7 billion, respectively.
We also contributed $0.1 billion to our nonqualified pension
plans each year in 2017, 2016 and 2015.
The company’s overall investment strategy is to achieve a
mix of assets that allows us to meet projected benefit
payments while taking into consideration risk and return. In
an effort to reduce the risk of our portfolio strategy and
better align assets with liabilities, we have adopted a liability
driven pension strategy that seeks to better match cash
flows from investments with projected benefit payments.
We expect that the strategy will reduce the likelihood that
assets will decline at a time when liabilities increase
(referred to as liability hedging), with the goal to reduce the
risk of underfunding to the plan and its participants and
beneficiaries; however, we also expect the strategy to result
in lower asset returns. Nonqualified pension contributions
are estimated to be approximately $0.1 billion in 2018.
Contributions to our other postretirement benefit plans
generally relate to payments for benefits on an as-incurred
basis since these other postretirement benefit plans do not
have funding requirements similar to the pension plans. We
contributed $1.3 billion, $1.1 billion and $0.9 billion to our
other postretirement benefit plans in 2017, 2016 and 2015,
respectively. Contributions to our other postretirement
benefit plans are estimated to be approximately $0.8 billion
in 2018.
Leasing Arrangements
See Note 5 to the consolidated financial statements for a
discussion of leasing arrangements.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 35
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Contractual Obligations
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2017.
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) $ 116,459 $ 2,926 $ 12,482 $ 15,805 $ 85,246
Capital lease obligations(2) 1,020 382 411 118 109
Total long-term debt, including current maturities 117,479 3,308 12,893 15,923 85,355
Interest on long-term debt(1) 89,691 5,021 9,765 9,032 65,873
Operating leases(2) 20,734 3,290 5,729 4,253 7,462
Purchase obligations(3) 20,984 7,558 8,960 2,128 2,338
Other long-term liabilities(4) 1,366 1,075 291 — —
Finance obligations(5) 2,093 271 559 582 681
Total contractual obligations $ 252,347 $ 20,523 $ 38,197 $ 31,918 $ 161,709
(1) Items included in long-term debt with variable coupon rates exclude unamortized debt issuance costs, and are described in Note 6 to the
consolidated financial statements. (2) See Note 5 to the consolidated financial statements for additional information. (3) Items included in purchase obligations are primarily commitments to purchase content and network services, equipment, software and marketing
services, which will be used or sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the
future, but represent only those items that are the subject of contractual obligations. We also purchase products and services as needed with no
firm commitment. For this reason, the amounts presented in this table alone do not provide a reliable indicator of our expected future cash
outflows or changes in our expected cash position. See Note 15 to the consolidated financial statements for additional information. (4) Other long-term liabilities include estimated postretirement benefit and qualified pension plan contributions. See Note 10 to the consolidated
financial statements for additional information. (5) Represents future minimum payments under the sublease arrangement for our tower transaction. See Note 5 to the consolidated financial
statements for additional information.
We are not able to make a reasonable estimate of when the unrecognized tax benefits balance of $2.4 billion and related
interest and penalties will be settled with the respective taxing authorities until issues or examinations are further developed.
See Note 11 to the consolidated financial statements for additional information.
Guarantees
We guarantee the debentures of our operating telephone
company subsidiaries as well as the debt obligations of GTE
LLC, as successor in interest to GTE Corporation, that were
issued and outstanding prior to July 1, 2003. See Note 6 to
the consolidated financial statements for additional
information.
As a result of the closing of the Access Line Sale on April 1,
2016, GTE Southwest Inc., Verizon California Inc. and
Verizon Florida LLC are no longer wholly-owned
subsidiaries of Verizon, and the guarantees of $0.6 billion
aggregate principal amount of debentures and first
mortgage bonds of those entities have terminated pursuant
to their terms.
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 15 to the consolidated financial statements for
additional information.
As of December 31, 2017, letters of credit totaling
approximately $0.6 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 15 to the consolidated financial
statements for additional information.
Market Risk
We are exposed to various types of market risk in the
normal course of business, including the impact of interest
rate changes, foreign currency exchange rate fluctuations,
changes in investment, equity and commodity prices and
changes in corporate tax rates. We employ risk
management strategies, which may include the use of a
variety of derivatives including cross currency swaps,
forward interest rate swaps, interest rate swaps and
interest rate caps. We do not hold derivatives for trading
purposes.
36 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
It is our general policy to enter into interest rate, foreign
currency and other derivative transactions only to the
extent necessary to achieve our desired objectives in
optimizing exposure to various market risks. Our objectives
include maintaining a mix of fixed and variable rate debt to
lower borrowing costs within reasonable risk parameters
and to protect against earnings and cash flow volatility
resulting from changes in market conditions. We do not
hedge our market risk exposure in a manner that would
completely eliminate the effect of changes in interest rates
and foreign exchange rates on our earnings.
Counterparties to our derivative contracts are major
financial institutions with whom we have negotiated
derivatives agreements (ISDA master agreements) and
credit support annex agreements (CSA) which provide rules
for collateral exchange. Our CSA agreements entered into
prior to the fourth quarter of 2017 generally require
collateralized arrangements with our counterparties in
connection with uncleared derivatives. At December 31,
2016, we had posted collateral of approximately $0.2 billion
related to derivative contracts under collateral exchange
arrangements, which were recorded as Prepaid expenses
and other in our consolidated balance sheet. Prior to 2017,
we had entered into amendments to our CSA agreements
with substantially all of our counterparties that suspended
the requirement for cash collateral posting for a specified
period of time by both counterparties. During the first and
second quarter of 2017, we paid an insignificant amount of
cash to extend certain of such amendments to certain
collateral exchange arrangements. During the fourth quarter
of 2017, we began negotiating and executing new ISDA
master agreements and CSAs with our counterparties. The
newly executed CSAs contain rating based thresholds such
that we or our counterparties may be required to hold or
post collateral based upon changes in outstanding positions
as compared to established thresholds and changes in
credit ratings. We did not post any collateral at
December 31, 2017. While we may be exposed to credit
losses due to the nonperformance of our counterparties, we
consider the risk remote and do not expect that any such
nonperformance would result in a significant effect on our
results of operations or financial condition due to our
diversified pool of counterparties. See Note 8 to the
consolidated financial statements for additional information
regarding the derivative portfolio.
Interest Rate Risk
We are exposed to changes in interest rates, primarily on
our short-term debt and the portion of long-term debt that
carries floating interest rates. As of December 31, 2017,
approximately 76% 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 $0.3 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, 2017 and 2016.
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,
2017 $ 128,867 $ 119,235 $ 140,216
At
December 31,
2016 117,580 109,029 128,007
Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix
of fixed and variable rate debt. We principally receive fixed
rates and pay variable rates based on the London Interbank
Offered Rate, resulting in a net increase or decrease to
Interest expense. These swaps are designated as fair value
hedges and hedge against interest rate risk exposure of
designated debt issuances. At December 31, 2017, the fair
value of the asset and liability of these contracts were
$0.1 billion and $0.4 billion, respectively. At December 31,
2016, the fair value asset and liability of these contracts
were $0.1 billion and $0.2 billion, respectively. At
December 31, 2017 and 2016, the total notional amount of
the interest rate swaps was $20.2 billion and $13.1 billion,
respectively.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 37
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Interest Rate Caps
We also have interest rate caps which we use as an
economic hedge but for which we have elected not to apply
hedge accounting. We enter into interest rate caps to
mitigate our interest exposure to interest rate increases on
our ABS Financing Facility and Asset-Backed Notes. The
fair value of these contracts was insignificant at
December 31, 2017 and 2016. At December 31, 2017 and
2016, the total notional value of these contracts was $2.8
billion and $2.5 billion, respectively.
Foreign Currency Translation
The functional currency for our foreign operations is
primarily the local currency. The translation of income
statement and balance sheet amounts of our foreign
operations into U.S. dollars is recorded as cumulative
translation adjustments, which are included in Accumulated
other comprehensive income in our consolidated balance
sheets. Gains and losses on foreign currency transactions
are recorded in the consolidated statements of income in
Other income (expense), net. At December 31, 2017, our
primary translation exposure was to the British
Pound Sterling, Euro, Australian Dollar and Japanese Yen.
Cross Currency Swaps
We enter into cross currency swaps to exchange British
Pound Sterling, Euro, Swiss Franc and Australian Dollardenominated
cash flows into U.S. dollars and to fix our cash
payments in U.S. dollars, as well as to mitigate the impact of
foreign currency transaction gains or losses. These swaps
are designated as cash flow hedges. The fair value of the
asset of these contracts was $0.5 billion and insignificant at
December 31, 2017 and 2016, respectively. At December 31,
2017 and 2016, the fair value of the liability of these
contracts was insignificant and $1.8 billion, respectively. At
December 31, 2017 and 2016, the total notional amount of
the cross currency swaps was $16.6 billion and $12.9 billion,
respectively.
Critical Accounting Estimates and
Recently Issued Accounting Standards
Critical Accounting Estimates
A summary of the critical accounting estimates used in
preparing our financial statements is as follows:
• Wireless licenses and Goodwill 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 and assumptions
are uncertain by nature, may change over time and can
vary from actual results. It is possible that in the future
there may be changes in our estimates and assumptions,
including the timing and amount of future cash flows,
margins, growth rates, market participant assumptions,
comparable benchmark companies and related multiples
and discount rates, which could result in different fair
value estimates. Significant and adverse changes to any
one or more of the above-noted estimates and
assumptions could result in a goodwill impairment for one
or more of our reporting units.
Wireless Licenses
The carrying value of our wireless licenses was
approximately $88.4 billion as of December 31, 2017. 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 2017 and 2016, 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
assessments in 2017 and 2016, we qualitatively concluded
that it was more likely than not that the fair value of our
wireless licenses exceeded their carrying value and,
therefore, did not result in an impairment.
38 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
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 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 weightedaverage
cost of capital (WACC), or expected return, that
a marketplace participant would have required as of the
valuation date. We developed the discount rate based on
our consideration of the cost of debt and equity of a
group of guideline companies as of the valuation date.
Accordingly, our discount rate incorporated our estimate
of the expected return a marketplace participant would
have required as of the valuation date, including the risk
premium associated with the current and expected
economic conditions as of the valuation date. The terminal
value growth rate represented our estimate of the
marketplace’s long-term growth rate.
Goodwill
In 2017, Verizon combined Yahoo’s operating business with
our previously existing Media business to create a newly
branded organization, Oath. At December 31, 2017, the
balance of our goodwill was approximately $29.2 billion, of
which $18.4 billion was in our Wireless reporting unit, $4.0
billion was in our Wireline reporting unit, $4.6 billion was in
our Media reporting unit and $2.2 billion was in our other
reporting units. To determine if goodwill is potentially
impaired, we have the option to perform a qualitative
assessment to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying
value. If we elect to bypass the qualitative assessment or if
indications of a potential impairment exist, the determination
of whether an impairment has occurred requires the
determination of fair value of each respective reporting unit.
In 2017 and 2016, we performed a qualitative assessment
for our Wireless reporting unit to determine whether it is
more likely than not that the fair value of the reporting unit
was less than the carrying amount. As part of our
assessment we considered several qualitative factors,
including the business enterprise value of Wireless from
the last quantitative test and the excess of fair value over
carrying value from this test, macroeconomic conditions
(including changes in interest rates and discount rates),
industry and market considerations (including industry
revenue and EBITDA margin projections), the projected
financial performance of Wireless, as well as other factors.
Based on our assessments in 2017 and 2016, we
qualitatively concluded that it was more likely than not that
the fair value of the Wireless reporting unit exceeded its
carrying value and, therefore, did not result in an
impairment.
We performed a quantitative impairment assessment for
our Wireless reporting unit in 2015 and for our Wireline
and other reporting units in 2017, 2016 and 2015. For
2017, 2016 and 2015, our quantitative impairment tests
indicated that the fair value of each of our reporting units
exceeded their carrying value and therefore, 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 of each
of our reporting units would have still exceeded their book
value. However, the excess of fair value over carrying
value for Wireline continues to decline such that it is
reasonably possible that small changes to our valuation
inputs, such as a decline in actual or projected operating
results or an increase in discount rates, or a combination
of such changes, could trigger a goodwill impairment loss
in the future. For our Media reporting unit, some of our
valuation inputs are dependent on discount rates, and the
continued expansion of the digital advertising industry
coupled with the effective execution of our strategic plans
for Oath. These valuation inputs are inherently uncertain,
and an adverse change in one or a combination of these
inputs could trigger a goodwill impairment loss in the
future.
In conjunction with our test for goodwill impairment, our
Wireline reporting unit had fair value that exceeded its
carrying amount by 14% and 20% in 2017 and 2016,
respectively. For our Media reporting unit, its fair value
exceeded its carrying amount by more than 20% in 2017.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 39
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Under our quantitative assessment, the fair value of the
reporting unit is calculated using a market approach and a
discounted cash flow method. The market approach
includes the use of comparative multiples to corroborate
discounted cash flow results. The discounted cash flow
method is based on the present value of two
components—projected cash flows and a terminal value.
The terminal value represents the expected normalized
future cash flows of the reporting unit beyond the cash
flows from the discrete projection period. The fair value of
the reporting unit is calculated based on the sum of the
present value of the cash flows from the discrete period
and the present value of the terminal value. The discount
rate represented our estimate of the WACC, or expected
return, that a marketplace participant would have required
as of the valuation date.
• We maintain benefit plans for most of our employees,
including, for certain employees, pension and other
postretirement benefit plans. At December 31, 2017, 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 longterm
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, 2017 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,
2017*
Pension plans discount rate +0.50 $(1,149)
-0.50 1,282
Rate of return on pension plan
assets +1.00 (165)
-1.00 165
Postretirement plans discount rate +0.50 (995)
-0.50 1,098
Rate of return on postretirement
plan assets +1.00 (12)
-1.00 12
Health care trend rates +1.00 532
-1.00 (516)
* In determining its pension and other postretirement obligation, the
Company used a weighted-average discount rate of 3.7%. 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, 2017. 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 31. 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 accounted for this change as a change in
accounting estimate and, accordingly, accounted 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.
• Our current and deferred income taxes and associated
valuation allowances are impacted by events and
transactions arising in the normal course of business as
well as in connection with the adoption of new accounting
standards, changes in tax laws and rates, acquisitions and
dispositions of businesses and non-recurring items. As a
global commercial enterprise, our income tax rate and the
classification of income taxes can be affected by many
factors, including estimates of the timing and realization
of deferred income tax assets and the timing and amount
of income tax payments. We account for tax benefits
taken or expected to be taken in our tax returns in
accordance with the accounting standard relating to the
uncertainty in income taxes, which requires the use of a
two-step approach for recognizing and measuring tax
benefits taken or expected to be taken in a tax return. We
review and adjust our liability for unrecognized tax
benefits based on our best judgment given the facts,
circumstances and information available at each reporting
date. To the extent that the final outcome of these tax
positions is different than the amounts recorded, such
differences may impact income tax expense and actual
tax payments. We recognize any interest and penalties
accrued related to unrecognized tax benefits in income
tax expense. Actual tax payments may materially differ
from estimated liabilities as a result of changes in tax laws
as well as unanticipated transactions impacting related
income tax balances. See Note 11 to the consolidated
financial statements for additional information.
40 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
• Our Property, plant and equipment balance represents a
significant component of our consolidated assets. We
record Property, plant and equipment at cost. We
depreciate Property, plant and equipment on a straight-line
basis over the estimated useful life of the assets. We expect
that a one-year increase in estimated useful lives of our
Property, plant and equipment would result in a decrease to
our 2017 depreciation expense of $2.7 billion and that a
one-year decrease would result in an increase of
approximately $5.1 billion in our 2017 depreciation expense.
• We maintain allowances for uncollectible accounts
receivable, including our device payment plan agreement
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 our customers’ financial condition or if
future actual default rates on receivables in general differ
from those currently anticipated, we may have to adjust
our allowance for doubtful accounts, which would affect
earnings in the period the adjustments are made.
Recently Issued Accounting Standards
See Note 1 to the consolidated financial statements for a
discussion of recently issued accounting standard updates
not yet adopted as of December 31, 2017.
Acquisitions and Divestitures
Wireless
Spectrum License Transactions
From time to time, we enter into agreements to buy, sell or
exchange spectrum licenses. We believe these spectrum
license transactions have allowed us to continue to enhance
the reliability of our network while also resulting in a more
efficient use of spectrum. See Note 2 to the consolidated
financial statements for additional information regarding our
spectrum license transactions.
Tower Monetization Transaction
In March 2015, we completed a transaction with American
Tower pursuant to which American Tower acquired the
exclusive rights to lease and operate 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.
Straight Path
In May 2017, we entered into a purchase agreement to
acquire Straight Path Communications Inc. (Straight Path), a
holder of millimeter wave spectrum configured for 5G
wireless services, for consideration reflecting an enterprise
value of approximately $3.1 billion. Under the terms of the
purchase agreement, we agreed to pay (i) Straight Path
shareholders $184.00 per share, payable in Verizon shares,
and (ii) certain transaction costs payable in cash of
approximately $0.7 billion, consisting primarily of a fee to be
paid to the FCC. The acquisition is subject to customary
regulatory approvals and closing conditions, and is
expected to close by the end of the first quarter of 2018.
Wireline
Access Line Sale
In February 2015, we entered into a definitive agreement
with Frontier pursuant to which Verizon sold 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 $7.3 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 included the acquisition by Frontier of the
equity interests of Verizon’s incumbent local exchange
carriers in California, Florida and Texas, did not involve any
assets or liabilities of Verizon Wireless. The transaction
closed on April 1, 2016. See Note 2 to the consolidated
financial statements for additional information.
XO Holdings
In February 2016, we entered into a purchase agreement to
acquire XO, which owned and operated one of the largest
fiber-based IP and Ethernet networks in the U.S.
Concurrently, we entered into a separate agreement to
utilize certain wireless spectrum from a wholly-owned
subsidiary of XO Holdings, NextLink Wireless LLC
(NextLink), that holds its wireless spectrum, which included
an option, subject to certain conditions, to buy the
subsidiary. In February 2017, we completed our acquisition
of XO for total cash consideration of approximately $1.5
billion, of which $0.1 billion was paid in 2015.
In April 2017, we exercised our option to buy NextLink for
approximately $0.5 billion, subject to certain adjustments.
The transaction closed in January 2018. The spectrum
acquired as part of the transaction will be used for our 5G
technology deployment.
Data Center Sale
In December 2016, we entered into a definitive agreement,
which was subsequently amended in March 2017, with
Equinix Inc. pursuant to which we agreed to sell 23
customer-facing data center sites in the U.S. and Latin
America for approximately $3.6 billion, subject to certain
adjustments. The transaction closed in May 2017.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 41
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
WideOpenWest, Inc.
In August 2017, we entered into a definitive agreement to
purchase certain fiber-optic network assets in the Chicago
market from WOW!, a leading provider of communications
services. The transaction closed in December 2017. In
addition, the parties entered into a separate agreement
pursuant to which WOW! will complete the build-out of the
network assets we acquired by the second half of 2018. The
total cash consideration for the transactions is expected to
be approximately $0.3 billion, of which $0.2 billion is related
to the transaction that closed in December 2017.
Other
Acquisition of AOL Inc.
In May 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
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 was 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.
Acquisition of Yahoo! Inc.’s Operating Business
In July 2016, Verizon entered into a stock purchase
agreement (the Purchase Agreement) with Yahoo. Pursuant
to the Purchase Agreement, upon the terms and subject to
the conditions thereof, we agreed to acquire the stock of
one or more subsidiaries of Yahoo holding all of Yahoo’s
operating business for approximately $4.83 billion in cash,
subject to certain adjustments (the Transaction).
In February 2017, Verizon and Yahoo entered into an
amendment to the Purchase Agreement, pursuant to which
the Transaction purchase price was reduced by $350
million to approximately $4.48 billion in cash, subject to
certain adjustments. Subject to certain exceptions, the
parties also agreed that certain user security and data
breaches incurred by Yahoo (and the losses arising
therefrom) were to be disregarded (1) for purposes of
specified conditions to Verizon’s obligations to close the
Transaction and (2) in determining whether a “Business
Material Adverse Effect” under the Purchase Agreement
has occurred.
Concurrently with the amendment of the Purchase
Agreement, Yahoo and Yahoo Holdings, Inc., a whollyowned
subsidiary of Yahoo that Verizon agreed to purchase
pursuant to the Transaction, also entered into an
amendment to the related reorganization agreement,
pursuant to which Yahoo (which has changed its name to
Altaba Inc. following the closing of the Transaction) retains
50% of certain post-closing liabilities arising out of
governmental or third-party investigations, litigations or
other claims related to certain user security and data
breaches incurred by Yahoo prior to its acquisition by
Verizon, including an August 2013 data breach disclosed by
Yahoo on December 14, 2016. At that time, Yahoo disclosed
that more than one billion of the approximately three billion
accounts existing in 2013 had likely been affected. In
accordance with the original Transaction agreements,
Yahoo will continue to retain 100% of any liabilities arising
out of any shareholder lawsuits (including derivative claims)
and investigations and actions by the SEC.
In June 2017, we completed the Transaction. The aggregate
purchase consideration of the Transaction was
approximately $4.7 billion, including cash acquired of $0.2
billion.
Prior to the closing of the Transaction, pursuant to a related
reorganization agreement, Yahoo transferred all of the
assets and liabilities constituting Yahoo’s operating
business to the subsidiaries that we acquired in the
Transaction. The assets that we acquired did not include
Yahoo’s ownership interests in Alibaba, Yahoo! Japan and
certain other investments, certain undeveloped land
recently divested by Yahoo, certain non-core intellectual
property or its cash, other than the cash from its operating
business we acquired. We received for our benefit and that
of our current and certain future affiliates a non-exclusive,
worldwide, perpetual, royalty-free license to all of Yahoo’s
intellectual property that was not conveyed with the
business.
In October 2017, based upon information that we received in
connection with our integration of Yahoo’s operating
business, we disclosed that we believe that the August 2013
data breach previously disclosed by Yahoo affected all of its
accounts.
Oath, our organization that combines Yahoo’s operating
business with our existing Media business, includes diverse
media and technology brands that engage approximately a
billion people around the world. We believe that Oath, with
its technology, content and data, will help us expand the
global scale of our digital media business and build brands
for the future.
42 verizon.com/2017AnnualReport
Management’s Discussion and Analysis of Financial Condition and Results of Operations continued
Fleetmatics Group PLC
In July 2016, we entered into an agreement to acquire
Fleetmatics. Fleetmatics was a leading global provider of
fleet and mobile workforce management solutions. Pursuant
to the terms of the agreement, we acquired Fleetmatics for
$60.00 per ordinary share in cash. The aggregate merger
consideration was approximately $2.5 billion, including cash
acquired of $0.1 billion. We completed the acquisition on
November 7, 2016.
Other
In July 2016, we acquired Telogis, a global cloud-based
mobile enterprise management software business, for $0.9
billion of cash consideration.
From time to time, we enter into strategic agreements to
acquire various other businesses and investments. 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,” “expects,” “hopes” or similar expressions. For
those statements, we claim the protection of the safe
harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. We
undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements,
except as required by law. Given these risks and
uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements.
The following important factors, along with those discussed
elsewhere in this report and in other filings with the SEC,
could affect future results and could cause those results to
differ materially from those expressed in the forwardlooking
statements:
• adverse conditions in the U.S. and international economies;
• the effects of competition in the markets in which we
operate;
• material changes in technology or technology substitution;
• disruption of our key suppliers’ provisioning of products or
services;
• changes in the regulatory environment in which we
operate, including any increase in restrictions on our
ability to operate our networks;
• breaches of network or information technology security,
natural disasters, terrorist attacks or acts of war or
significant litigation and any resulting financial impact not
covered by insurance;
• our high level of indebtedness;
• an adverse change in the ratings afforded our debt
securities by nationally accredited ratings organizations
or adverse conditions in the credit markets affecting the
cost, including interest rates, and/or availability of further
financing;
• material adverse changes in labor matters, including labor
negotiations, and any resulting financial and/or
operational impact;
• significant increases in benefit plan costs or lower
investment returns on plan assets;
• changes in tax laws or treaties, or in their interpretation;
• changes in accounting assumptions that regulatory
agencies, including the SEC, may require or that result
from changes in the accounting rules or their application,
which could result in an impact on earnings;
• the inability to implement our business strategies; and
• the inability to realize the expected benefits of strategic
transactions.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 43
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,
2017. Based on this assessment, we believe that the internal control over financial reporting of the company is effective as of
December 31, 2017. In connection with this assessment, there were no material weaknesses in the company’s internal control
over financial reporting identified by management. The company’s financial statements included in this Annual Report have
been audited by Ernst & Young LLP, independent registered public accounting firm. Ernst & Young LLP has also provided an
attestation report on the company’s internal control over financial reporting.
Lowell C. McAdam
Chairman and Chief Executive Officer
Matthew D. Ellis
Executive Vice President and
Chief Financial Officer
Anthony T. Skiadas
Senior Vice President and Controller
44 verizon.com/2017AnnualReport
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareowners of
Verizon Communications Inc.:
Opinion on Internal Control over Financial Reporting
We have audited Verizon Communications Inc. and
subsidiaries’ (Verizon) internal control over financial
reporting as of December 31, 2017, based on criteria
established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO
criteria). In our opinion, Verizon maintained, in all material
respects, effective internal control over financial reporting
as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of
Verizon as of December 31, 2017 and 2016, 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, 2017, and the related
notes and our report dated February 23, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
Verizon’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying Report of
Management on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on Verizon’s
internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to Verizon
in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of
the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over
Financial Reporting
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are
being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Ernst & Young LLP
New York, New York
February 23, 2018
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 45
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareowners of
Verizon Communications Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance
sheets of Verizon Communications Inc. and subsidiaries
(Verizon) as of December 31, 2017 and 2016, 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, 2017, and the related
notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all
material respects, the financial position of Verizon at
December 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in
the period ended December 31, 2017, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United
States) (PCAOB), Verizon’s internal control over financial
reporting as of December 31, 2017, 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, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of
Verizon’s management. Our responsibility is to express an
opinion on Verizon’s financial statements based on our
audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to
Verizon in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards
of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of
material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that
respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and
significant estimates made by management, as well as
evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable
basis for our opinion.
Ernst & Young LLP
We have served as Verizon’s auditor since 2000.
New York, New York
February 23, 2018
46 verizon.com/2017AnnualReport
Consolidated Statements of Income
(dollars in millions, except per share amounts)
Years Ended December 31, 2017 2016 2015
Operating Revenues
Service revenues and other $ 107,145 $ 108,468 $ 114,696
Wireless equipment revenues 18,889 17,512 16,924
Total Operating Revenues 126,034 125,980 131,620
Operating Expenses
Cost of services (exclusive of items shown below) 29,409 29,186 29,438
Wireless cost of equipment 22,147 22,238 23,119
Selling, general and administrative expense (including net gain on sale of divested
businesses of $1,774, $1,007 and $0, respectively) 30,110 31,569 29,986
Depreciation and amortization expense 16,954 15,928 16,017
Total Operating Expenses 98,620 98,921 98,560
Operating Income 27,414 27,059 33,060
Equity in losses of unconsolidated businesses (77) (98) (86)
Other income (expense), net (2,010) (1,599) 186
Interest expense (4,733) (4,376) (4,920)
Income Before Benefit (Provision) For Income Taxes 20,594 20,986 28,240
Benefit (provision) for income taxes 9,956 (7,378) (9,865)
Net Income $ 30,550 $ 13,608 $ 18,375
Net income attributable to noncontrolling interests $ 449 $ 481 $ 496
Net income attributable to Verizon 30,101 13,127 17,879
Net Income $ 30,550 $ 13,608 $ 18,375
Basic Earnings Per Common Share
Net income attributable to Verizon $ 7.37 $ 3.22 $ 4.38
Weighted-average shares outstanding (in millions) 4,084 4,080 4,085
Diluted Earnings Per Common Share
Net income attributable to Verizon $ 7.36 $ 3.21 $ 4.37
Weighted-average shares outstanding (in millions) 4,089 4,086 4,093
See Notes to Consolidated Financial Statements
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 47
Consolidated Statements of Comprehensive Income
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Net Income $ 30,550 $ 13,608 $ 18,375
Other Comprehensive Income, net of tax expense (benefit)
Foreign currency translation adjustments 245 (159) (208)
Unrealized gains (losses) on cash flow hedges, net of tax of $(20), $168 and $(160) (31) 198 (194)
Unrealized losses on marketable securities, net of tax of $(10), $(26) and $(4) (14) (55) (11)
Defined benefit pension and postretirement plans, net of tax of $(144), $1,339 and $(91) (214) 2,139 (148)
Other comprehensive income (loss) attributable to Verizon (14) 2,123 (561)
Total Comprehensive Income $ 30,536 $ 15,731 $ 17,814
Comprehensive income attributable to noncontrolling interests 449 481 496
Comprehensive income attributable to Verizon 30,087 15,250 17,318
Total Comprehensive Income $ 30,536 $ 15,731 $ 17,814
See Notes to Consolidated Financial Statements
48 verizon.com/2017AnnualReport
Consolidated Balance Sheets
(dollars in millions, except per share amounts)
At December 31, 2017 2016
Assets
Current assets
Cash and cash equivalents $ 2,079 $ 2,880
Accounts receivable, net of allowances of $939 and $845 23,493 17,513
Inventories 1,034 1,202
Assets held for sale — 882
Prepaid expenses and other 3,307 3,918
Total current assets 29,913 26,395
Property, plant and equipment 246,498 232,215
Less accumulated depreciation 157,930 147,464
Property, plant and equipment, net 88,568 84,751
Investments in unconsolidated businesses 1,039 1,110
Wireless licenses 88,417 86,673
Goodwill 29,172 27,205
Other intangible assets, net 10,247 8,897
Non-current assets held for sale — 613
Other assets 9,787 8,536
Total assets $ 257,143 $ 244,180
Liabilities and Equity
Current liabilities
Debt maturing within one year $ 3,453 $ 2,645
Accounts payable and accrued liabilities 21,232 19,593
Other 8,352 8,102
Total current liabilities 33,037 30,340
Long-term debt 113,642 105,433
Employee benefit obligations 22,112 26,166
Deferred income taxes 31,232 45,964
Other liabilities 12,433 12,245
Total long-term liabilities 179,419 189,808
Commitments and Contingencies (Note 15)
Equity
Series preferred stock ($.10 par value; 250,000,000 shares authorized; none issued) — —
Common stock ($.10 par value; 6,250,000,000 shares authorized in each period;
4,242,374,240 shares issued in each period) 424 424
Additional paid in capital 11,101 11,182
Retained earnings 35,635 15,059
Accumulated other comprehensive income 2,659 2,673
Common stock in treasury, at cost (162,897,868 and 165,689,589 shares outstanding) (7,139) (7,263)
Deferred compensation – employee stock ownership plans and other 416 449
Noncontrolling interests 1,591 1,508
Total equity 44,687 24,032
Total liabilities and equity $ 257,143 $ 244,180
See Notes to Consolidated Financial Statements
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 49
Consolidated Statements of Cash Flows
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Cash Flows from Operating Activities
Net Income $ 30,550 $ 13,608 $ 18,375
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 16,954 15,928 16,017
Employee retirement benefits 440 2,705 (1,747)
Deferred income taxes (14,463) (1,063) 3,516
Provision for uncollectible accounts 1,167 1,420 1,610
Equity in losses of unconsolidated businesses, net of dividends received 117 138 127
Changes in current assets and liabilities, net of effects from acquisition/disposition of
businesses
Accounts receivable (5,436) (5,067) (945)
Inventories 168 61 (99)
Other assets 656 449 942
Accounts payable and accrued liabilities (335) (1,079) 2,545
Discretionary contribution to qualified pension plans (3,411) (186) —
Net gain on sale of divested businesses (1,774) (1,007) —
Other, net 672 (3,097) (1,314)
Net cash provided by operating activities 25,305 22,810 39,027
Cash Flows from Investing Activities
Capital expenditures (including capitalized software) (17,247) (17,059) (17,775)
Acquisitions of businesses, net of cash acquired (5,928) (3,765) (3,545)
Acquisitions of wireless licenses (583) (534) (9,942)
Proceeds from dispositions of businesses 3,614 9,882 48
Other, net 772 493 1,171
Net cash used in investing activities (19,372) (10,983) (30,043)
Cash Flows from Financing Activities
Proceeds from long-term borrowings 27,707 12,964 6,667
Proceeds from asset-backed long-term borrowings 4,290 4,986 —
Repayments of long-term borrowings and capital lease obligations (23,837) (19,159) (9,340)
Repayments of asset-backed long-term borrowings (400) — —
Decrease in short-term obligations, excluding current maturities (170) (149) (344)
Dividends paid (9,472) (9,262) (8,538)
Purchase of common stock for treasury — — (5,134)
Other, net (4,852) (2,797) 1,577
Net cash used in financing activities (6,734) (13,417) (15,112)
Decrease in cash and cash equivalents (801) (1,590) (6,128)
Cash and cash equivalents, beginning of period 2,880 4,470 10,598
Cash and cash equivalents, end of period $ 2,079 $ 2,880 $ 4,470
See Notes to Consolidated Financial Statements
50 verizon.com/2017AnnualReport
Consolidated Statements of Changes in Equity
(dollars in millions, except per share amounts, and shares in thousands)
Years Ended December 31, 2017 2016 2015
Shares Amount Shares Amount Shares Amount
Common Stock
Balance at beginning of year 4,242,374 $ 424 4,242,374 $ 424 4,242,374 $ 424
Balance at end of year 4,242,374 424 4,242,374 424 4,242,374 424
Additional Paid In Capital
Balance at beginning of year 11,182 11,196 11,155
Other (81) (14) 41
Balance at end of year 11,101 11,182 11,196
Retained Earnings
Balance at beginning of year 15,059 11,246 2,447
Net income attributable to Verizon 30,101 13,127 17,879
Dividends declared ($2.335, $2.285, $2.23) per share (9,525) (9,314) (9,080)
Balance at end of year 35,635 15,059 11,246
Accumulated Other Comprehensive Income
Balance at beginning of year attributable to Verizon 2,673 550 1,111
Foreign currency translation adjustments 245 (159) (208)
Unrealized gains (losses) on cash flow hedges (31) 198 (194)
Unrealized losses on marketable securities (14) (55) (11)
Defined benefit pension and postretirement plans (214) 2,139 (148)
Other comprehensive income (loss) (14) 2,123 (561)
Balance at end of year attributable to Verizon 2,659 2,673 550
Treasury Stock
Balance at beginning of year (165,690) (7,263) (169,199) (7,416) (87,410) (3,263)
Shares purchased — — — — (104,402) (5,134)
Employee plans (Note 14) 2,787 124 3,439 150 17,072 740
Shareowner plans (Note 14) 5 — 70 3 5,541 241
Balance at end of year (162,898) (7,139) (165,690) (7,263) (169,199) (7,416)
Deferred Compensation-ESOPs and Other
Balance at beginning of year 449 428 424
Restricted stock equity grant 157 223 208
Amortization (190) (202) (204)
Balance at end of year 416 449 428
Noncontrolling Interests
Balance at beginning of year 1,508 1,414 1,378
Net income attributable to noncontrolling interests 449 481 496
Total comprehensive income 449 481 496
Distributions and other (366) (387) (460)
Balance at end of year 1,591 1,508 1,414
Total Equity $ 44,687 $ 24,032 $ 17,842
See Notes to Consolidated Financial Statements
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 51
Notes to Consolidated Financial Statements
Note 1
Description of Business and Summary of
Significant Accounting Policies
Description of Business
Verizon Communications Inc. (Verizon or the Company) is a
holding company that, acting through its subsidiaries, is one
of the world’s leading providers of communications,
information and entertainment products and services to
consumers, businesses and governmental agencies with a
presence around the world. We have two reportable
segments, Wireless and Wireline. For additional information
concerning our business segments, see Note 12.
The Wireless segment provides wireless communications
products and services, including wireless voice and data
services and equipment sales, across the United States
(U.S.) using one of the most extensive and reliable wireless
networks. We provide these services and equipment sales
to consumer, business and government customers across
the U.S. on a postpaid and prepaid basis.
The Wireline segment provides voice, data and video
communications products and enhanced services, including
broadband video and data services, corporate networking
solutions, security and managed network services and local
and long distance voice services. We provide these
products and services to consumers in the U.S., as well as
to carriers, businesses and government customers both in
the U.S. 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 that
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 requires
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 property, plant 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 obligations, contingencies and the identification and
valuation 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, our eligible
wireless customers purchase wireless devices under a
device payment plan agreement. We may offer certain
promotions that allow a customer to trade in his or her
owned device in connection with the purchase of a new
device.
Under these types of promotions, the customer receives a
credit for the value of the trade-in device. In addition, we
may provide the customer with additional future credits that
will be applied against the customer’s monthly bill as long as
service is maintained. We recognize a liability for the tradein
device measured at fair value, which is approximated by
considering several factors, including the weighted-average
selling prices obtained in recent resales of devices eligible
for trade-in. Future credits are recognized when earned by
the customer.
52 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
From time to time, we offer certain marketing promotions
that allow our customers to upgrade to a new device after
paying down a certain specified portion of their required
device payment plan agreement amount and trading in their
device in good working order. When a customer enters into
a device payment plan agreement with the right to upgrade
to a new 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 we offer on a bundled basis
(i.e., voice, video and data) and separately. Therefore, each
of our products and services has a standalone selling price.
Revenue from the sale of each product or service 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 under 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 under 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 continue to
meet our obligations under the contract. Advertising
revenues derived from contracts under which we are
compensated based on certain performance criteria are
recognized as we complete the contractually specified
performance.
We are considered the principal in our programmatic
advertising contracts as we are the primary obligor. We present
all revenues from these contracts on a gross basis.
We report taxes imposed by governmental authorities on
revenue-producing transactions between us and our
customers, net of taxes we pass through to our customers.
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 14 for additional information.
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 5 million, 6 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, 2017, 2016 and 2015, respectively.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 53
Notes to Consolidated Financial Statements continued
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 includes 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 Other assets. We continually evaluate our
investments in marketable securities for impairment due to
declines in market value considered to be other-thantemporary.
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-thantemporary,
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, with the exception of device payment plan
agreement receivables, which are initially recorded at fair
value based on a number of factors including historical
write-off experience, credit quality of the customer base
and other factors such as macroeconomic conditions. We
maintain allowances for uncollectible accounts receivable,
including our device payment plan agreement 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. Due to the device payment plan
agreement 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 payment plan agreement 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 property, plant and equipment at cost. Property,
plant 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
useful lives of property, plant and equipment during 2016,
we determined that the average useful lives of certain
leasehold improvements would be increased from 5 to 7
years. This change resulted in a decrease to depreciation
expense of $0.2 billion in 2016. We determined that
changes were also 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
$0.3 billion, $0.3 billion and $0.4 billion in 2017, 2016 and
2015, respectively. While the timing and extent of current
deployment plans are subject to ongoing analysis and
modification, we believe that the current estimates of useful
lives are reasonable.
Computer Software Costs
We capitalize the cost of internal-use network and nonnetwork
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 nonnetwork
internal-use software costs are amortized using the
straight-line method over a period of 3 to 7 years and are
included in Other intangible assets, net in our consolidated
balance sheets. For a discussion of our impairment policy
for capitalized software costs, see “Goodwill and Other
Intangible Assets” below. Also, see Note 3 for additional
information of internal-use non-network software reflected
in our consolidated balance sheets.
54 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
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 is performed at the reporting
unit level and compares the fair value of the reporting unit
(calculated using a combination of a market approach and a
discounted cash flow method) to its carrying value. 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, a 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 weighted-average cost
of capital, or expected return, that a marketplace participant
would have required as of the valuation date. If the carrying
value exceeds the fair value, an impairment charge is
booked for the excess carrying value over fair value, limited
to the total amount of goodwill of that reporting unit. Our
assessments in 2017, 2016 and 2015 indicated that the fair
value of each of our Wireless, Wireline, Media and
Telematics reporting units exceeded their carrying value
and therefore did not result in an impairment.
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 re-evaluate the useful life determination for wireless
licenses each year to determine whether events and
circumstances continue to support an indefinite useful life.
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.
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. In 2017 and 2016, 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. The most recent quantitative
assessments 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. Our assessments in
2017, 2016 and 2015 indicated that the fair value of our
wireless licenses exceeded the carrying value and,
therefore, did not result in an impairment.
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 completed and the license is ready for its
intended use.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 55
Notes to Consolidated Financial Statements continued
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 longlived
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 of impairment are 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 re-evaluate 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 basis between financial statement and
income tax assets and liabilities. Deferred income taxes are
recalculated annually at tax rates 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.
Significant management judgment is required in evaluating
our tax positions and in determining our effective tax rate.
We recorded provisional amounts in the consolidated
financial statements for the income tax effects of the Tax
Cuts and Jobs Act (TCJA) based upon currently available
information.
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 9 for
additional information.
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.
56 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
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 10 for additional information.
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 and interest rates. We employ risk management
strategies, which may include the use of a variety of
derivatives including cross currency swaps, forward interest
rate swaps, interest rate swaps and interest rate caps. We
do not hold derivatives for trading purposes. See Note 8 for
additional information.
We measure all derivatives 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 for hedge accounting are
recognized in earnings in the current period. For fair value
hedges, the change in the fair value of the derivative
instruments is recognized in earnings, along with the change
in the fair value of the hedged item. For cash flow hedges,
the change in the fair value of the derivative instruments,
along with the change in the fair value of the hedged item,
are reported in Other comprehensive income (loss) and
recognized in earnings when the hedged item is recognized
in earnings. For net investment hedges of certain of our
foreign operations, the change in the fair value of the
derivative instruments is 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 that lack sufficient equity to permit the
entity to finance its activities without additional
subordinated financial support from other parties, have
equity investors that 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 that 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 2016, the Financial Accounting
Standards Board (FASB) issued Accounting Standards
Update (ASU) 2016-09, “Compensation—Stock
Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.” This standard update
intends to simplify several aspects of the accounting for
share-based payment transactions, including the income tax
consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows.
This standard update was effective as of the first quarter of
2017. The adoption of this standard update did not have a
significant impact on our consolidated financial statements.
During the first quarter of 2017, the FASB issued ASU 2017-
04, “Intangibles—Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment.” The
amendments in this update eliminate the requirement to
perform step two of the goodwill impairment test, which
requires a hypothetical purchase price allocation when an
impairment is determined to have occurred. A goodwill
impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the
carrying amount of goodwill. This standard update is
effective as of the first quarter of 2020; however, early
adoption is permitted for any interim or annual impairment
tests performed after January 1, 2017. Verizon early adopted
this standard on January 1, 2017. The adoption of this
standard update did not have a significant impact on our
consolidated financial statements.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 57
Notes to Consolidated Financial Statements continued
During the first quarter of 2017, the FASB issued ASU 2017-
01, “Business Combinations (Topic 805): Clarifying the
Definition of a Business.” The amendments in this update
provide a framework—the “screen”—in which to evaluate
whether a set of transferred assets and activities is a
business. The screen requires that such set is not a
business when substantially all of the fair value of the gross
assets acquired is concentrated in a single identifiable asset
or a group of similar identifiable assets. The standard also
aligns the definition of outputs with how outputs are
described in Accounting Standards Codification (ASC) 606,
Revenue from Contracts with Customers. This standard is
effective as of the first quarter of 2018; however, early
adoption is permitted. Verizon early adopted this standard,
on a prospective basis, in the fourth quarter of 2017. The
adoption of this standard update did not have a significant
impact on our consolidated financial statements.
During the third quarter of 2017, the FASB issued ASU 2017-
12, “Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities.” The
amendments in this update simplify the application of hedge
accounting and increase the transparency of hedge results.
The updated standard also amends the presentation and
disclosure requirements and changes how companies can
assess the effectiveness of their hedging relationships.
Companies will now have until the end of the first quarter in
which a hedge is entered into to perform an initial
assessment of a hedge’s effectiveness. After initial
qualification, the new guidance permits a qualitative
effectiveness assessment for certain hedges instead of a
quantitative test if the company can reasonably support an
expectation of high effectiveness throughout the term of
the hedge. An initial quantitative test to establish that the
hedge relationship is highly effective is still required. For
cash flow hedges, if the hedge is highly effective, all
changes in the fair value of the derivative hedging
instrument will be recorded in Other comprehensive income
(loss). These changes in fair value will be reclassified to
earnings when the hedged item impacts earnings. The
standard update is effective as of the first quarter of 2019;
however, early adoption is permitted within an interim
period. Verizon early adopted this standard in the fourth
quarter of 2017. The adoption of this standard update did
not have a significant impact on our consolidated financial
statements.
Recently Issued Accounting Standards
In February 2018, the FASB issued ASU 2018-02, “Income
Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income.” This standard update allows
entities, as an accounting policy election, the option to
reclassify from accumulated other comprehensive income
to retained earnings stranded tax effects resulting from the
newly enacted federal corporate income tax rate in TCJA. It
also allows entities to elect to reclassify other stranded tax
effects that relate to TCJA but do not directly relate to the
change in the federal rate such as state taxes. The tax
effects that are stranded in accumulated other
comprehensive income for other reasons such as a change
in valuation allowance may not be reclassified. This standard
update is effective as of the first quarter of 2019; however,
early adoption is permitted. The standard update can be
applied on a retrospective basis to each period in which the
effect of the change in the federal income tax rate in TCJA
the Act is recognized or applied it in the reporting period of
adoption. We are currently evaluating the impact that this
standard update will have on our consolidated financial
statements.
In March 2017, the FASB issued ASU 2017-07,
“Compensation—Retirement Benefits (Topic 715): Improving
the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost.” The amendments in
this update require an employer to report the service cost
component in the same line item or items as other
compensation costs arising from services rendered by the
pertinent employees during the period. The other
components of net benefit cost, including the recognition of
prior service credits, will be presented in the income
statement separately from the service cost component and
outside a subtotal of income from operations. The
amendments in this update also allow only the service cost
component of pension and other postretirement benefit
costs to be eligible for capitalization when applicable. The
amendments in this update would be applied retrospectively
for the presentation of the service cost component and
other components of net periodic benefit cost in the income
statement and prospectively, on and after the effective date,
for the capitalization of the service cost component of net
periodic benefit cost in assets. Disclosures of the nature of
and reason for the change in accounting principle would be
required in the first interim and annual reporting periods of
adoption. This standard update is effective as of the first
quarter of 2018; however, early adoption is permitted as of
the beginning of an annual period for which financial
statements have not been issued. We will adopt this
standard in the first quarter of 2018. The impact of the
retrospective adoption of this standard update will be an
increase to consolidated operating income of approximately
$2.2 billion for the year ended December 31, 2016. There will
be an insignificant impact to consolidated operating income
for the year ended December 31, 2017 and no impact to
consolidated net income for the years ended December 31,
2017 and 2016.
58 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
In February 2017, the FASB issued ASU 2017-05, “Other
Income—Gains and Losses From the Derecognition of
Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope
of Asset Derecognition Guidance and Accounting for Partial
Sales of Nonfinancial Assets.” The new guidance defines an
“in substance nonfinancial asset” as an asset or group of
assets for which substantially all of the fair value consists of
nonfinancial assets and the group or subsidiary is not a
business. The standard requires entities to derecognize
nonfinancial assets or in substance nonfinancial assets
when the entity no longer has (or ceases to have) a
controlling financial interest in the legal entity that holds the
asset and the entity transfers control of the asset. The
standard update also unifies guidance related to partial
sales of nonfinancial assets to be more consistent with the
sale of a business. This standard update is effective as of
the first quarter of 2018; however, early adoption is
permitted. We do not expect that this standard update will
have a significant impact on our consolidated financial
statements.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash.”
The amendments in this update require that cash and cash
equivalent balances in a statement of cash flows include
those amounts deemed to be restricted cash and restricted
cash equivalents. This standard update is effective as of the
first quarter of 2018; however, early adoption is permitted.
We do not expect the adoption of this standard will have a
significant impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement
of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments.” This standard update
addresses eight specific cash flow issues with the objective
of reducing the existing diversity in practice for these
issues. Among the updates, this standard update requires
cash receipts from payments on a transferor’s beneficial
interests in securitized trade receivables to be classified as
cash inflows from investing activities. This standard update
is effective as of the first quarter of 2018; however, early
adoption is permitted. We expect the amendment relating to
beneficial interests in securitization transactions will have an
impact on our presentation of collections of the deferred
purchase price from sales of wireless device payment plan
agreement receivables in our consolidated statements of
cash flows. Upon adoption of this standard update in the
first quarter of 2018, we expect to retrospectively reclassify
approximately $0.6 billion of collections of deferred
purchase price related to collections from customers from
Cash flows from operating activities to Cash flows from
investing activities in our consolidated statement of cash
flows for the year ended December 31, 2017 and $1.1 billion
for the year ended December 31, 2016.
In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” This standard
update requires that certain financial assets be measured at
amortized cost net of an allowance for estimated credit
losses such that the net receivable represents the present
value of expected cash collection. In addition, this standard
update requires that certain financial assets be measured at
amortized cost reflecting an allowance for estimated credit
losses expected to occur over the life of the assets. The
estimate of credit losses must be based on all relevant
information including historical information, current
conditions and reasonable and supportable forecasts that
affect the collectability of the amounts. This standard
update is effective as of the first quarter of 2020; however,
early adoption is permitted. We intend to adopt this
standard update in the first quarter of 2020. We are
currently evaluating the impact that this standard update will
have on our consolidated financial statements upon
adoption.
In February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842).” This standard update intends to increase
transparency and improve comparability by requiring
entities to recognize assets and liabilities on the balance
sheet for all leases, with certain exceptions. In addition,
through improved disclosure requirements, the standard
update will enable users of financial statements to further
understand the amount, timing, and uncertainty of cash
flows arising from leases. This standard update is effective
as of the first quarter of 2019; however, early adoption is
permitted. Verizon’s current operating lease portfolio is
primarily comprised of network, real estate, and equipment
leases. Upon adoption of this standard, we expect our
balance sheet to include a right-of-use asset and liability
related to substantially all operating lease arrangements.
We have established a cross-functional coordinated
implementation team to implement the standard update
related to leases. We are in the process of determining the
scope of arrangements that will be subject to this standard
as well as assessing the impact to our systems, processes
and internal controls to meet the standard update’s
reporting and disclosure requirements.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 59
Notes to Consolidated Financial Statements continued
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers (Topic 606).” This standard,
along with subsequently issued updates, clarifies the
principles for recognizing revenue and develops a common
revenue standard for U.S. generally accepted accounting
principles (GAAP). The standard provides a more robust
framework for addressing revenue issues; improves
comparability of revenue recognition practices across
entities, industries, jurisdictions, and capital markets; and
provides more useful information to users of financial
statements through improved disclosure requirements. The
standard also amends current guidance for the recognition
of costs to obtain and fulfill contracts with customers such
that incremental costs of obtaining and direct costs of
fulfilling contracts with customers will be deferred and
amortized consistent with the transfer of the related good
or service. The two permitted transition methods under the
new standard are the full retrospective method, in which
case the standard would be applied to each prior reporting
period presented and the cumulative effect of applying the
standard would be recognized at the earliest period shown,
or the modified retrospective method, in which case the
standard is applied only to the most current period
presented and the cumulative effect of applying the
standard would be recognized at the date of initial
application. In August 2015, an accounting standard update
was issued that delayed the effective date of this standard
until the first quarter of 2018, at which time we will adopt the
standard using the modified retrospective approach applied
to open contracts. We have a cross-functional coordinated
team working on the implementation of this standard.
Summarized below are the key impacts and areas requiring
significant judgment arising from the initial adoption of Topic
606.
The ultimate impact on revenue resulting from the
application of the new standard is subject to assessments
that are dependent on many variables, including, but not
limited to, the terms of our contractual arrangements and
mix of business. The allocation of revenue between
equipment and service for our wireless subsidy contracts
will result in more revenue allocated to equipment and
recognized upon delivery, and less service revenue
recognized over the contract term than under current
GAAP. Total revenue over the full contract term will be
unchanged and there will be no change to customer billing,
the timing of cash flows or the presentation of cash flows.
Additionally, the new standard requires the deferral of
incremental costs to obtain a customer contract, which are
then amortized to expense, as part of Selling, general and
administrative expense, over the respective periods of
expected benefit. As a result, a significant amount of our
sales commission costs, which would have historically been
expensed as incurred by our Wireless and Wireline
businesses under our previous accounting, will be deferred
and amortized.
Based on currently available information, we expect the
cumulative effect of initially applying the new standard to
result in an increase to the opening balance of retained
earnings ranging from approximately $4.0 billion to $4.6
billion on a pre-tax basis.
We also evaluated the impact of Topic 606 as it relates to
gross versus net revenue presentation for our
programmatic advertising services and the treatment of
financing component inherent in our Wireless direct channel
contracts. We concluded that we are the principal in our
programmatic advertising contracts with our customers and,
therefore, we will continue to present all revenues from
these contracts on a gross basis. With respect to our direct
channel wireless contracts, we have concluded that our
contracts currently do not contain a significant financing
component for our classes of customers. These conclusions
will be reassessed periodically based on current facts and
circumstances.
We have identified and implemented changes to our
systems, processes and internal controls to meet the
standard’s reporting and disclosure requirements.
Note 2
Acquisitions and Divestitures
Wireless
Spectrum License Transactions
Since 2015, we have entered into several strategic spectrum
transactions including:
• In January 2015, the FCC completed an auction of 65MHz
of spectrum, which it identified as the Advanced Wireless
Services (AWS)-3 band. Verizon participated in that
auction and was the high bidder on 181 spectrum licenses,
for which we 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.
During the first quarter of 2015, we submitted an
application to the FCC and paid the remaining $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. The FCC granted us these spectrum licenses in
April 2015.
• 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) spectrum
licenses. As a result, we received $0.4 billion of AWS and
PCS spectrum licenses at fair value and recorded a pretax
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.
60 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
• During the fourth quarter of 2015, we entered into a
license exchange agreement with affiliates of AT&T Inc.
(AT&T) to exchange certain AWS and PCS spectrum
licenses. This non-cash exchange was completed in
March 2016. As a result, we received $0.4 billion of AWS
and PCS spectrum licenses at fair value and recorded a
pre-tax gain of $0.1 billion in Selling, general and
administrative expense on our consolidated statement of
income for the year ended December 31, 2016.
• During the first quarter of 2016, we entered into a license
exchange agreement with affiliates of Sprint Corporation
to exchange certain AWS and PCS spectrum licenses.
This non-cash exchange was completed in September
2016. As a result, we received $0.3 billion of AWS and
PCS spectrum licenses at fair value and recorded an
insignificant gain in Selling, general and administrative
expense on our consolidated statement of income for the
year ended December 31, 2016.
• During the fourth quarter of 2016, 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 February 2017. As
a result, we received $1.0 billion of AWS and PCS
spectrum licenses at fair value and recorded a pre-tax
gain of $0.1 billion in Selling, general and administrative
expense on our consolidated statement of income for the
year ended December 31, 2017.
• During the first quarter of 2017, we entered into a license
exchange agreement with affiliates of Sprint Corporation
to exchange certain PCS spectrum licenses. This noncash
exchange was completed in May 2017. As a result,
we received $0.1 billion of PCS spectrum licenses at fair
value and recorded an insignificant gain in Selling, general
and administrative expense on our consolidated
statement of income for the year ended December 31,
2017.
• During the third quarter of 2017, we entered into a license
exchange agreement with affiliates of T-Mobile USA to
exchange certain AWS and PCS spectrum licenses. This
non-cash exchange was completed in December 2017. As
a result, we received $0.4 billion of AWS and PCS
spectrum licenses at fair value and recorded a pre-tax
gain of $0.1 billion in Selling, general and administrative
expense on our consolidated statement of income for the
year ended December 31, 2017.
Tower Monetization Transaction
In 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 fixedprice
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 sheets, was
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. See
Note 5 for additional information.
Straight Path
In May 2017, we entered into a purchase agreement to acquire
Straight Path Communications Inc. (Straight Path), a holder of
millimeter wave spectrum configured for fifth-generation
(5G) wireless services, for consideration reflecting an
enterprise value of approximately $3.1 billion. Under the terms
of the purchase agreement, we agreed to pay (i) Straight Path
shareholders $184.00 per share, payable in Verizon shares,
and (ii) certain transaction costs payable in cash of
approximately $0.7 billion, consisting primarily of a fee to be
paid to the FCC. The acquisition is subject to customary
regulatory approvals and closing conditions, and is expected
to close by the end of the first quarter of 2018.
Other
During 2017, 2016 and 2015, we entered into and completed
various other wireless license transactions for an
insignificant amount of cash consideration.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 61
Notes to Consolidated Financial Statements continued
Wireline
Access Line Sale
In February 2015, we entered into a definitive agreement
with Frontier Communications Corporation (Frontier)
pursuant to which Verizon sold 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 $7.3
billion net of income taxes), subject to certain adjustments
and including the assumption of $0.6 billion of indebtedness
from Verizon by Frontier (Access Line Sale). The
transaction, which included the acquisition by Frontier of the
equity interests of Verizon’s incumbent local exchange
carriers (ILECs) in California, Florida and Texas, did not
involve any assets or liabilities of Verizon Wireless. The
transaction closed on April 1, 2016.
The transaction resulted in Frontier acquiring approximately
3.3 million voice connections, 1.6 million Fios Internet
subscribers, 1.2 million Fios video subscribers and the related
ILEC businesses from Verizon. For the years ended
December 31, 2016 and 2015, these businesses generated
revenues of approximately $1.3 billion and $5.3 billion,
respectively, and operating income of $0.7 billion and $2.8
billion, respectively, for Verizon. The operating results of
these businesses are excluded from our Wireline segment
for all periods presented to reflect comparable segment
operating results consistent with the information regularly
reviewed by our chief operating decision maker.
During April 2016, Verizon used the net cash proceeds
received of $9.9 billion to reduce its consolidated
indebtedness. See Note 6 for additional information. The
assets and liabilities that were sold were 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 sheets through the completion of
the transaction on April 1, 2016. As a result of the closing of
the transaction, we derecognized property, plant and
equipment of $9.0 billion, goodwill of $1.3 billion, $0.7 billion
of defined benefit pension and other postretirement benefit
plan obligations and $0.6 billion of indebtedness assumed
by Frontier.
We recorded a pre-tax gain of approximately $1.0 billion in
Selling, general and administrative expense on our
consolidated statement of income for the year ended
December 31, 2016. The pre-tax gain included a $0.5 billion
pension and postretirement benefit curtailment gain due to
the elimination of the accrual of pension and other
postretirement benefits for some or all future services of a
significant number of employees covered by three of our
defined benefit pension plans and one of our other
postretirement benefit plans.
XO Holdings
In February 2016, we entered into a purchase agreement to
acquire XO Holdings’ wireline business (XO), which owned
and operated one of the largest fiber-based Internet
Protocol (IP) and Ethernet networks in the U.S.
Concurrently, we entered into a separate agreement to
utilize certain wireless spectrum from a wholly-owned
subsidiary of XO Holdings, NextLink Wireless LLC
(NextLink), that holds its wireless spectrum, which included
an option, subject to certain conditions, to buy the
subsidiary. In February 2017, we completed our acquisition
of XO for total cash consideration of approximately $1.5
billion, of which $0.1 billion was paid in 2015.
In April 2017, we exercised our option to buy NextLink for
approximately $0.5 billion, subject to certain adjustments.
The transaction closed in January 2018. The spectrum
acquired as part of the transaction will be used for our 5G
technology deployment.
The consolidated financial statements include the results of
XO’s operations from the date the acquisition closed. If the
acquisition of XO had been completed as of January 1, 2016,
the results of operations of Verizon would not have been
significantly different than our previously reported results of
operations.
The acquisition of XO was accounted for as a business
combination. The consideration was allocated to the assets
acquired and liabilities assumed based on their fair values as
of the close of the acquisition. We recorded approximately
$1.2 billion of plant, property and equipment, $0.2 billion of
goodwill and $0.2 billion of other intangible assets. 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 XO transaction represents future economic
benefits we expect to achieve as a result of the acquisition.
The goodwill related to this acquisition is included within our
Wireline segment. See Note 3 for additional information.
Data Center Sale
In December 2016, we entered into a definitive agreement,
which was subsequently amended in March 2017, with
Equinix, Inc. (Equinix) pursuant to which we agreed to sell
23 customer-facing data center sites in the U.S. and Latin
America for approximately $3.6 billion, subject to certain
adjustments (Data Center Sale). The transaction closed in
May 2017.
For the years ended December 31, 2017 and 2016, these
sites generated an insignificant amount of revenues and
earnings. As a result of the closing of the transaction, we
derecognized assets with a carrying value of $1.4 billion,
primarily consisting of goodwill, property, plant and
equipment and other intangible assets. The liabilities
associated with the sale were insignificant.
62 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
In connection with the Data Center Sale and other
insignificant divestitures, we recorded a net gain on sale of
divested businesses of approximately $1.8 billion in Selling,
general and administrative expense on our consolidated
statement of income for the year ended December 31, 2017.
WideOpenWest, Inc.
In August 2017, we entered into a definitive agreement to
purchase certain fiber-optic network assets in the Chicago
market from WideOpenWest, Inc. (WOW!), a leading
provider of communications services. The transaction
closed in December 2017. In addition, the parties entered
into a separate agreement pursuant to which WOW! will
complete the build-out of the network assets we acquired
by the second half of 2018. The total cash consideration for
the transactions is expected to be approximately $0.3
billion, of which $0.2 billion is related to the transaction that
closed in December 2017.
Other
Acquisition of AOL Inc.
In May 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 was 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 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 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 property, plant 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(1) 377
Total consideration $ 4,141
Assets acquired:
Goodwill $ 1,938
Intangible assets subject to amortization 2,504
Other 1,551
Total assets acquired 5,993
Liabilities assumed:
Total liabilities assumed 1,851
Net assets acquired: 4,142
Noncontrolling interest (1)
Total consideration $ 4,141
(1) During the years ended December 31, 2017 and 2016, we made cash
payments of $1 million and $179 million, respectively, in respect of
acquisition-date estimated liabilities to be paid. As of December 31,
2017, the remaining balance of estimated liabilities to be paid was
$197 million.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 63
Notes to Consolidated Financial Statements continued
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 goodwill related to this
acquisition is included within Corporate and other. See Note
3 for additional information.
Acquisition of Yahoo! Inc.’s Operating Business
In July 2016, Verizon entered into a stock purchase
agreement (the Purchase Agreement) with Yahoo! Inc.
(Yahoo). Pursuant to the Purchase Agreement, upon the
terms and subject to the conditions thereof, we agreed to
acquire the stock of one or more subsidiaries of Yahoo
holding all of Yahoo’s operating business for approximately
$4.83 billion in cash, subject to certain adjustments (the
Transaction).
In February 2017, Verizon and Yahoo entered into an
amendment to the Purchase Agreement, pursuant to which
the Transaction purchase price was reduced by $350
million to approximately $4.48 billion in cash, subject to
certain adjustments. Subject to certain exceptions, the
parties also agreed that certain user security and data
breaches incurred by Yahoo (and the losses arising
therefrom) were to be disregarded (1) for purposes of
specified conditions to Verizon’s obligations to close the
Transaction and (2) in determining whether a “Business
Material Adverse Effect” under the Purchase Agreement
has occurred.
Concurrently with the amendment of the Purchase
Agreement, Yahoo and Yahoo Holdings, Inc., a whollyowned
subsidiary of Yahoo that Verizon agreed to purchase
pursuant to the Transaction, also entered into an
amendment to the related reorganization agreement,
pursuant to which Yahoo (which has changed its name to
Altaba Inc. following the closing of the Transaction) retains
50% of certain post-closing liabilities arising out of
governmental or third-party investigations, litigations or
other claims related to certain user security and data
breaches incurred by Yahoo prior to its acquisition by
Verizon, including an August 2013 data breach disclosed by
Yahoo on December 14, 2016. At that time, Yahoo disclosed
that more than one billion of the approximately three billion
accounts existing in 2013 had likely been affected. In
accordance with the original Transaction agreements,
Yahoo will continue to retain 100% of any liabilities arising
out of any shareholder lawsuits (including derivative claims)
and investigations and actions by the SEC.
In June 2017, we completed the Transaction. The aggregate
purchase consideration of the Transaction was
approximately $4.7 billion, including cash acquired of $0.2
billion.
Prior to the closing of the Transaction, pursuant to a related
reorganization agreement, Yahoo transferred all of the assets
and liabilities constituting Yahoo’s operating business to the
subsidiaries that we acquired in the Transaction. The assets
that we acquired did not include Yahoo’s ownership interests
in Alibaba, Yahoo! Japan and certain other investments,
certain undeveloped land recently divested by Yahoo, certain
non-core intellectual property or its cash, other than the cash
from its operating business we acquired. We received for our
benefit and that of our current and certain future affiliates a
non-exclusive, worldwide, perpetual, royalty-free license to all
of Yahoo’s intellectual property that was not conveyed with
the business.
In October 2017, based upon information that we received in
connection with our integration of Yahoo’s operating
business, we disclosed that we believe that the August 2013
data breach previously disclosed by Yahoo affected all of its
accounts.
Oath, our organization that combines Yahoo’s operating
business with our existing Media business, includes diverse
media and technology brands that engage approximately a
billion people around the world. We believe that Oath, with
its technology, content and data, will help us expand the
global scale of our digital media business and build brands
for the future.
The acquisition of Yahoo’s operating business has been
accounted for as a business combination. We are currently
assessing the identification and measurement of the assets
acquired and liabilities assumed. The preliminary results,
which are summarized below, will be finalized within 12
months following the close of the acquisition. The
preliminary results do not include any amount for potential
liability arising from certain user security and data breaches
since a reasonable estimate of loss, if any, cannot be
determined at this time. We will continue to evaluate the
accounting for these contingencies in conjunction with
finalizing our accounting for this business combination and
thereafter. When the valuations are finalized, any changes
to the preliminary valuation of assets acquired and liabilities
assumed may result in adjustments to the preliminary fair
value of the net identifiable assets acquired and goodwill.
64 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
The fair values of the assets acquired and liabilities
assumed were determined using the income, cost, market
and multiple period excess earnings 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 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 property, plant 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
Yahoo’s shareholders and the preliminary identification of
the assets acquired, including cash acquired of $0.2 billion,
and liabilities assumed as of the close of the acquisition, as
well as the fair value at the acquisition date of Yahoo’s
noncontrolling interests:
(dollars in millions)
As of
June 13,
2017
Measurementperiod
adjustments (1)
As of
December 31,
2017
Cash payment to Yahoo’s
equity holders $ 4,723 $ (50) $ 4,673
Estimated liabilities to be paid 38 — 38
Total consideration $ 4,761 $ (50) $ 4,711
Assets acquired:
Goodwill $ 874 $ 1,055 $ 1,929
Intangible assets subject to
amortization 2,586 (713) 1,873
Property, plant, and equipment 1,796 9 1,805
Other 1,362 (30) 1,332
Total assets acquired 6,618 321 6,939
Liabilities assumed:
Total liabilities assumed 1,824 354 2,178
Net assets acquired: 4,794 (33) 4,761
Noncontrolling interest (33) (17) (50)
Total consideration $ 4,761 $ (50) $ 4,711
(1) Adjustments to preliminary fair value measurements to reflect new
information obtained about facts and circumstances that existed as
of the acquisition date that, if known, would have affected the
measurement of the amounts recognized as of that date.
On the closing date of the Transaction, each unvested and
outstanding Yahoo restricted stock unit award that was held
by an employee who became an employee of Verizon was
replaced with a Verizon restricted stock unit award, which is
generally payable in cash upon the applicable vesting date.
The value of those outstanding restricted stock units on the
acquisition date was approximately $1.0 billion.
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 is
primarily attributable to increased synergies that are
expected to be achieved from the integration of Yahoo’s
operating business into our Media business. The preliminary
goodwill related to this acquisition is included within
Corporate and other. See Note 3 for additional information.
The consolidated financial statements include the results of
Yahoo’s operating business from the date the acquisition
closed. If the acquisition of Yahoo’s operating business had
been completed as of January 1, 2016, the results of
operations of Verizon would not have been significantly
different than our previously reported results of operations.
Acquisition and Integration Related Charges
In connection with the Yahoo Transaction, we recognized
$0.8 billion of acquisition and integration related charges
during the year ended December 31, 2017, of which $0.5
billion, $0.1 billion and $0.2 billion related to Severance,
Transaction costs and Integration costs, respectively. These
charges were recorded in Selling, general and
administrative expense on our consolidated statements of
income.
Fleetmatics Group PLC
In July 2016, we entered into an agreement to acquire
Fleetmatics Group PLC, a public limited company
incorporated in Ireland (Fleetmatics). Fleetmatics was a
leading global provider of fleet and mobile workforce
management solutions. Pursuant to the terms of the
agreement, we acquired Fleetmatics for $60.00 per
ordinary share in cash. The aggregate merger consideration
was approximately $2.5 billion, including cash acquired of
$0.1 billion. We completed the acquisition on November 7,
2016. As a result of the transaction, Fleetmatics became a
wholly-owned subsidiary of Verizon.
The consolidated financial statements include the results of
Fleetmatics’ operations from the date the acquisition closed.
Had this acquisition been completed on January 1, 2016 or
2015, the results of operations of Verizon would not have
been significantly different than our previously reported
results of operations. Upon closing, we recorded
approximately $1.4 billion of goodwill and $1.1 billion of other
intangibles.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 65
Notes to Consolidated Financial Statements continued
The acquisition of Fleetmatics was accounted for as a
business combination. The consideration was allocated to
the assets acquired and liabilities assumed based on their
fair values as of the close of the acquisition.
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 Fleetmatics transaction
represents future economic benefits we expect to achieve
as a result of the acquisition. The goodwill related to this
acquisition is included within Corporate and other. See Note
3 for additional information.
Other
In July 2016, we acquired Telogis, Inc., a global cloud-based
mobile enterprise management software business, for $0.9
billion of cash consideration. Upon closing, we recorded
$0.5 billion of goodwill that is included within Corporate and
other.
During 2017, 2016 and 2015, we entered into and completed
various other transactions for an insignificant amount of
cash consideration.
Real Estate Transaction
On May 19, 2015, we 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.
Note 3
Wireless Licenses, Goodwill and Other
Intangible Assets
Wireless Licenses
The carrying amounts of Wireless licenses are as follows:
(dollars in millions)
At December 31, 2017 2016
Wireless licenses $ 88,417 $86,673
At December 31, 2017 and 2016, approximately $8.8 billion and
$10.0 billion, respectively, of wireless licenses were under
development for commercial service for which we were
capitalizing interest costs. We recorded approximately $0.5
billion of capitalized interest on wireless licenses for the years
ended December 31, 2017 and 2016.
The average remaining renewal period of our wireless
license portfolio was 5.4 years as of December 31, 2017.
See Note 1 for additional information.
See Note 2 for additional information regarding spectrum
license transactions.
Goodwill
Changes in the carrying amount of Goodwill are as follows:
(dollars in millions)
Wireless Wireline Other Total
Balance at January 1, 2016 $ 18,393 $ 4,331 $ 2,607 $ 25,331
Acquisitions (Note 2) — — 2,310 2,310
Reclassifications, adjustments and other — (547) 111 (436)
Balance at December 31, 2016 $ 18,393 $ 3,784 $ 5,028 $ 27,205
Acquisitions (Note 2) 4 208 1,956 2,168
Reclassifications, adjustments and other — 1 (202) (201)
Balance at December 31, 2017 $ 18,397 $ 3,993 $ 6,782 $ 29,172
During 2016, we allocated $0.1 billion of goodwill on a relative fair value basis from Wireline to Other as a result of the
reclassification of our telematics businesses. See Note 12 for additional information. In addition, during 2016, we allocated
$0.4 billion of goodwill on a relative fair value basis from Wireline to Non-current assets held for sale on our consolidated
balance sheet as of December 31, 2016 as a result of our agreement to sell 23 data center sites. See Note 2 for additional
information. As a result of acquisitions completed during 2016, we recognized preliminary goodwill of $2.3 billion, which is
included within Other. See Note 2 for additional information.
66 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
During 2017, we recognized preliminary goodwill of $1.9 billion within Other as a result of the acquisition of Yahoo’s operating
business and $0.2 billion in Wireline as a result of the acquisition of XO. See Note 2 for additional information.
Other Intangible Assets
The following table displays the composition of Other intangible assets, net:
(dollars in millions)
2017 2016
At December 31,
Gross
Amount
Accumulated
Amortization
Net
Amount
Gross
Amount
Accumulated
Amortization
Net
Amount
Customer lists (5 to 13 years) $ 3,621 $ (691) $ 2,930 $ 2,884 $ (480) $ 2,404
Non-network internal-use software (3 to 7 years) 18,010 (12,374) 5,636 16,135 (10,913) 5,222
Other (2 to 25 years) 2,474 (793) 1,681 1,854 (583) 1,271
Total $ 24,105 $(13,858) $ 10,247 $ 20,873 $(11,976) $ 8,897
At December 31, 2017, we recognized preliminary other
intangible assets of $1.9 billion in Corporate and other as a
result of the acquisition of Yahoo’s operating business and
$0.2 billion in Wireline as a result of the acquisition of XO.
See Note 2 for additional information.
The amortization expense for Other intangible assets was
as follows:
Years (dollars in millions)
2017 $ 2,213
2016 1,701
2015 1,694
Estimated annual amortization expense for Other intangible
assets is as follows:
Years (dollars in millions)
2018 $2,079
2019 1,787
2020 1,478
2021 1,227
2022 1,024
Note 4
Property, Plant and Equipment
The following table displays the details of Property, plant
and equipment, which is stated at cost:
(dollars in millions)
At December 31,
Lives
(years) 2017 2016
Land — $ 806 $ 667
Buildings and equipment 7-45 28,914 27,117
Central office and other network
equipment 3-50 145,093 136,737
Cable, poles and conduit 7-50 47,972 45,639
Leasehold improvements 5-20 8,394 7,627
Work in progress — 6,139 5,710
Furniture, vehicles and other 3-20 9,180 8,718
246,498 232,215
Less accumulated depreciation 157,930 147,464
Property, plant and equipment, net $ 88,568 $ 84,751
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 67
Notes to Consolidated Financial Statements continued
Note 5
Leasing Arrangements
As Lessee
We lease certain facilities and equipment for use in our operations under both capital and operating leases.
Total rent expense under operating leases amounted to $3.8 billion in 2017, $3.6 billion in 2016, and $3.2 billion in 2015.
Amortization of capital leases is included in Depreciation and amortization expense in the consolidated statements of
income. Capital lease amounts included in Property, plant and equipment are as follows:
(dollars in millions)
At December 31, 2017 2016
Capital leases $ 1,463 $ 1,277
Less accumulated amortization (692) (524)
Total $ 771 $ 753
The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2017, are
as follows:
(dollars in millions)
Years
Capital
Leases
Operating
Leases
2018 $ 413 $ 3,290
2019 268 3,046
2020 179 2,683
2021 87 2,301
2022 50 1,952
Thereafter 135 7,462
Total minimum rental commitments 1,132 $ 20,734
Less interest and executory costs 112
Present value of minimum lease payments 1,020
Less current installments 382
Long-term obligation at December 31, 2017 $ 638
Tower Monetization Transaction
During March 2015, we completed a transaction with 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. We
have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates, with options
to renew. Under this agreement, total rent payments amounted to $0.3 billion for both the years ended December 31, 2017
and 2016. We expect to make minimum future lease payments of approximately $2.1 billion. We continue to include the
towers in Property, plant and equipment, net in our consolidated balance sheets and depreciate them accordingly. At
December 31, 2017 and 2016, $0.4 billion and $0.5 billion of towers related to this transaction were included in Property,
plant and equipment, net, respectively. See Note 2 for additional information.
68 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Note 6
Debt
Changes to debt during 2017 are as follows:
(dollars in millions)
Debt
Maturing
within One
Year
Long-term
Debt Total
Balance at January 1, 2017 $ 2,645 $ 105,433 $ 108,078
Proceeds from long-term borrowings 103 27,604 27,707
Proceeds from asset-backed long-term borrowings — 4,290 4,290
Repayments of long-term borrowings and capital leases obligations (8,191) (15,646) (23,837)
Repayments of asset-backed long-term borrowings (400) — (400)
Decrease in short-term obligations, excluding current maturities (170) — (170)
Reclassifications of long-term debt 9,255 (9,255) —
Other 211 1,216 1,427
Balance at December 31, 2017 $ 3,453 $ 113,642 $ 117,095
Debt maturing within one year is as follows:
(dollars in millions)
At December 31, 2017 2016
Long-term debt maturing within one year $ 3,303 $2,477
Short-term notes payable 150 168
Total debt maturing within one year $ 3,453 $2,645
Credit facilities
In September 2016, we amended our $8.0 billion credit
facility to increase the availability to $9.0 billion and extend
the maturity to September 2020. As of December 31, 2017,
the unused borrowing capacity under our $9.0 billion credit
facility was approximately $8.9 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.
In March 2016, we entered into a credit facility insured by
Eksportkreditnamnden Stockholm, Sweden (EKN), the
Swedish export credit agency. As of December 31, 2017, we
had an outstanding balance of $0.8 billion. We used this
credit facility to finance network equipment-related
purchases.
In July 2017, we entered into credit facilities insured by
various export credit agencies with the ability to borrow up
to $4.0 billion to finance equipment-related purchases. The
facilities have borrowings available, portions of which
extend through October 2019, contingent upon the amount
of eligible equipment-related purchases made by Verizon. At
December 31, 2017, we had not drawn on these facilities. In
January 2018, we drew down $0.5 billion.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 69
Notes to Consolidated Financial Statements continued
Long-Term Debt
Outstanding long-term debt obligations are as follows:
(dollars in millions)
At December 31,
Interest
Rates % Maturities 2017 2016
Verizon—notes payable and other 1.38 – 3.96 2018 – 2047 $ 31,370 $ 28,491
4.09 – 5.51 2020 – 2055 67,906 53,909
5.82 – 6.90 2026 – 2054 5,835 11,295
7.35 – 8.95 2029 – 2039 1,106 1,860
Floating 2018 – 2025 6,684 9,750
Verizon Wireless—Alltel assumed notes 6.80 – 7.88 2029 – 2032 234 525
Telephone subsidiaries—debentures 5.13 – 6.50 2028 – 2033 226 319
7.38 – 7.88 2022 – 2032 341 561
8.00 – 8.75 2022 – 2031 229 328
Other subsidiaries—notes payable, debentures and other 6.70 – 8.75 2018 – 2028 748 1,102
Verizon Wireless and other subsidiaries—asset-backed debt 1.42 – 2.65 2021 – 2022 6,293 2,485
Floating 2021 – 2022 2,620 2,520
Capital lease obligations (average rate of 3.6% and 3.5% in 2017 and
2016, respectively) 1,020 950
Unamortized discount, net of premium (7,133) (5,716)
Unamortized debt issuance costs (534) (469)
Total long-term debt, including current maturities 116,945 107,910
Less long-term debt maturing within one year 3,303 2,477
Total long-term debt $ 113,642 $ 105,433
2017
February Exchange Offers and Cash Offers
In February 2017, we completed private exchange and
tender offers for 18 series of notes issued by Verizon
(February Old Notes) for (i) new notes issued by Verizon
(and, for certain series, cash) (February Exchange Offers)
or (ii) cash (February Cash Offers). The February Old Notes
had coupon rates ranging from 1.375% to 8.950% and
maturity dates ranging from 2018 to 2043. In connection
with the February Exchange Offers, we issued $3.2 billion
aggregate principal amount of Verizon 2.946% Notes due
2022, $1.7 billion aggregate principal amount of Verizon
4.812% Notes due 2039 and $4.1 billion aggregate principal
amount of Verizon 5.012% Notes due 2049, plus applicable
cash of $0.6 billion, in exchange for $8.3 billion aggregate
principal amount of February Old Notes. In connection with
the February Cash Offers, we paid $0.5 billion cash to
purchase $0.5 billion aggregate principal amount of
February Old Notes. We subsequently purchased an
additional $0.1 billion aggregate principal amount of
February Old Notes for $0.1 billion cash, from certain
holders whose tenders of notes in the February Cash Offers
had been rejected. In addition to the exchange or purchase
price, any accrued and unpaid interest on Old February
Notes was paid at settlement.
Term Loan Credit Agreements
During January 2017, we entered into a term loan credit
agreement with a syndicate of major financial institutions,
pursuant to which we could borrow up to $5.5 billion for
(i) the acquisition of Yahoo and (ii) general corporate
purposes. None of the $5.5 billion borrowing capacity was
used during 2017. In March 2017, the term loan credit
agreement was terminated in accordance with its terms and
as such, the related fees were recognized in Other income
(expense), net and were not significant.
In March 2017, we prepaid $1.7 billion of the outstanding
$3.3 billion term loan that had an original maturity date of
July 2019. During April 2017, we repaid the remaining
outstanding amount under the term loan agreement.
March Tender Offers
In March 2017, we completed tender offers for 30 series of
notes issued by Verizon and certain of its subsidiaries with
coupon rates ranging from 5.125% to 8.950% and maturity
dates ranging from 2018 to 2043 (March Tender Offers). In
connection with the March Tender Offers, we purchased
$2.8 billion aggregate principal amount of Verizon notes,
$0.2 billion aggregate principal amount of our operating
telephone company subsidiary notes and $0.1 billion
aggregate principal amount of GTE LLC notes for total cash
consideration of $3.8 billion. In addition to the purchase
price, any accrued and unpaid interest on the purchased
notes was paid to the date of purchase.
70 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
August Exchange Offers and Cash Offers
In August 2017, we completed private exchange and tender
offers for 17 series of notes issued by Verizon and GTE LLC
(August Old Notes) for (i) new notes issued by Verizon (and,
for certain series, cash) or (ii) cash (August Exchange
Offers and Cash Offers). The August Old Notes had coupon
rates ranging from 1.375% to 8.750%, and maturity dates
ranging from 2018 to 2023. In connection with the August
Exchange Offers and Cash Offers, we issued $4.0 billion of
Verizon 3.376% Notes due 2025, in exchange for $4.0
billion aggregate principal amount of August Old Notes and
paid $3.0 billion cash to purchase $3.0 billion aggregate
principal amount of August Old Notes. In addition to the
exchange or purchase price, any accrued and unpaid
interest on the August Old Notes accepted for exchange or
purchase was paid at settlement.
August Tender Offers
In August 2017, we completed tender offers for 29 series of
notes issued by Verizon and certain of its subsidiaries with
coupon rates ranging from 5.050% to 8.950% and maturity
dates ranging from 2022 to 2043 (August Tender Offers). In
connection with the August Tender Offers, we purchased
$1.5 billion aggregate principal amount of Verizon notes,
$0.1 billion aggregate principal amount of our operating
telephone company subsidiary notes, $0.2 billion aggregate
principal amount of Alltel Corporation notes, and an
insignificant amount of GTE LLC notes for total cash
consideration of $2.1 billion. In addition to the purchase
price, any accrued and unpaid interest on the purchased
notes was paid to the date of purchase.
October Tender Offers
In October 2017, we completed tender offers for 5 series of
Euro and British Pound Sterling-denominated notes issued
by Verizon with coupon rates ranging from 0.500% to
4.750% and maturity dates ranging from 2022 to 2034
(October Tender Offers). In connection with the October
Tender Offers, we purchased €2.1 billion and £0.7 billion
aggregate principal amount of Verizon notes for total cash
consideration of $3.6 billion. In addition to the purchase
price, any accrued and unpaid interest on the purchased
notes was paid to the date of purchase.
December Tender Offers
In December 2017, we completed tender offers for 31 series
of notes issued by Verizon and certain of its subsidiaries
with coupon rates ranging from 5.050% to 8.950% and
maturity dates ranging from 2018 to 2043 (December
Tender Offers). In connection with the December Tender
Offers, we purchased $0.2 billion aggregate principal
amount of Verizon notes and an insignificant amount of GTE
LLC notes, operating telephone company subsidiary notes,
and Alltel Corporation notes for total cash consideration of
$0.3 billion. In addition to the purchase price, any accrued
and unpaid interest on the purchased notes was paid to the
date of purchase.
December Exchange Offers
In December 2017, we completed private exchange offers
and consent solicitations for 18 series of notes issued by
certain subsidiaries of Verizon (December Old Notes) for
new notes issued by Verizon (and, for certain series, cash)
or, in lieu of new notes in certain circumstances, cash
(December Exchange offers). The December Old Notes had
coupon rates ranging from 5.125% to 8.750% and maturity
dates ranging from 2021 to 2033. In connection with the
December Exchange Offers, we issued $0.1 billion of
Verizon 6.800% Notes due 2029 and $0.1 billion of Verizon
7.875% Notes due 2032, and paid an insignificant amount of
cash, in exchange for $0.2 billion aggregate principal
amount of December Old Notes. In addition to the exchange
or purchase price, any accrued and unpaid interest on
December Old Notes accepted for exchange or purchase
was paid at settlement.
Debt Issuances and Redemptions
During February 2017, we redeemed $0.2 billion of the $0.6
billion 6.940% GTE LLC Notes due 2028 at 124.8% of the
principal amount of the notes repurchased.
During February 2017, we issued approximately $1.5 billion
aggregate principal amount of 4.950% Notes due 2047. The
issuance of these notes resulted in cash proceeds of
approximately $1.5 billion, net of discounts and issuance
costs and after reimbursement of certain expenses. The net
proceeds were used for general corporate purposes.
During March 2017, we issued $11.0 billion aggregate
principal amount of fixed and floating rate notes. The
issuance of these notes resulted in cash proceeds of
approximately $10.9 billion, net of discounts and issuance
costs and after reimbursement of certain expenses. The
issuance consisted of the following series of notes: $1.4
billion aggregate principal amount of Floating Rate Notes
due 2022, $1.85 billion aggregate principal amount of
3.125% Notes due 2022, $3.25 billion aggregate principal
amount of 4.125% Notes due 2027, $3.0 billion aggregate
principal amount of 5.250% Notes due 2037, and $1.5 billion
aggregate principal amount of 5.500% Notes due 2047. The
floating rate notes bear interest at a rate equal to the threemonth
London Interbank Offered Rate (LIBOR) plus 1.000%,
which rate will be reset quarterly. The net proceeds were
primarily used for the March Tender Offers and general
corporate purposes, including discretionary contributions to
our qualified pension plans of $3.4 billion. We also used
certain of the net proceeds to finance our acquisition of
Yahoo’s operating business.
During April 2017, we redeemed in whole $0.5 billion
aggregate principal amount of Verizon 6.100% Notes due
2018 at 104.485% of the principal amount of such notes and
$0.5 billion aggregate principal amount of Verizon 5.500%
Notes due 2018 at 103.323% of the principal amount of such
notes, plus accrued and unpaid interest to the date of
redemption.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 71
Notes to Consolidated Financial Statements continued
During May 2017, we issued $1.5 billion aggregate principal
amount of Floating Rate Notes due 2020. The issuance of
these notes resulted in cash proceeds of approximately $1.5
billion, net of discounts and issuance costs. The floating rate
notes bear interest at a rate equal to three-month LIBOR
plus 0.550%, which will be reset quarterly. The net proceeds
were primarily used for general corporate purposes, which
included the repayment of outstanding indebtedness. In
addition we issued CHF 0.6 billion aggregate principal
amount of 0.375% Bonds due 2023, and CHF 0.4 billion
aggregate principal amount of 1.000% Bonds due 2027. The
issuance of these bonds resulted in cash proceeds of
approximately $1.0 billion, net of discounts and issuance
costs. The net proceeds were primarily used for general
corporate purposes including the repayment of debt.
During May 2017, we initiated a retail notes program in
connection with the issuance and sale from time to time of
our notes that are due nine months or more from the date of
issue. As of December 31, 2017 we have issued $0.9 billion
of retail notes with interest rates ranging from 2.600% to
4.900% and maturity dates ranging from 2022 to 2047.
During June 2017, $1.3 billion of Verizon floating rate notes
matured and were repaid.
During June 2017, we redeemed in whole $0.5 billion
aggregate principal amount of Verizon 1.100% Notes due
2017 at 100.003% of the principal amount of such notes,
plus accrued and unpaid interest to the date of redemption.
During August 2017, we issued $3.0 billion aggregate
principal amount of 4.500% Notes due 2033 resulting in
cash proceeds of approximately $3.0 billion, net of
discounts and issuance costs. In addition, we issued the
following four series of Australian Dollar (AUD) denominated
notes resulting in cash proceeds of $1.7 billion net of
discounts and issuance costs: AUD 0.55 billion aggregate
principal amount of 3.500% Notes due 2023, AUD 0.45
billion aggregate principal amount of 4.050% Notes due
2025, AUD 0.7 billion aggregate principal amount of 4.500%
Notes due 2027 and AUD 0.5 billion aggregate principal
amount of Floating Rate Notes due 2023. The floating rate
notes bear interest at a rate equal to the three-month Bank
Bill Swap Reference Rate plus 1.220% which will be reset
quarterly. In addition, we issued $1.0 billion aggregate
principal amount of 5.150% Notes due 2050 resulting in
cash proceeds of approximately $0.9 billion, net of
discounts, issuance costs and reimbursement of certain
expenses. The proceeds of the notes issued during August
2017 were used for general corporate purposes including
the repayment of debt.
During September 2017, we redeemed in whole $1.3 billion
aggregate principal amount of Verizon 3.650% Notes due
2018, at 101.961% of the principal amount of such notes,
plus accrued and unpaid interest to the date of redemption.
During October 2017, we issued €3.5 billion and £1.0 billion
aggregate principal amount of fixed rate notes. The
issuance of these notes resulted in cash proceeds of
approximately $5.4 billion, net of discounts and issuance
costs and after reimbursement of certain expenses. The
issuance consisted of the following series of notes: €1.25
billion aggregate principal amount of 1.375% Notes due
2026, €0.75 billion aggregate principal amount of 1.875%
Notes due 2029, €1.5 billion aggregate principal amount of
2.875% Notes due 2038, and £1.0 billion aggregate principal
amount of 3.375% Notes due 2036. The net proceeds were
primarily used for the October Tender Offers and general
corporate purposes.
During November 2017, we redeemed in whole $3.5 billion
aggregate principal amount of Verizon 4.500% Notes due
2020, at 106.164% of the principal amount of such notes,
plus accrued and unpaid interest to the date of redemption.
2016
April Tender Offers
In April 2016, we completed three concurrent, but separate,
tender offers for 34 series of notes issued by Verizon and
certain of its subsidiaries with coupon rates ranging from
2.000% to 8.950% and maturity dates ranging from 2016 to
2043 (April Tender Offers).
In connection with the April Tender Offers, we purchased
$6.8 billion aggregate principal amount of Verizon notes,
$1.2 billion aggregate principal amount of our operating
telephone company subsidiary notes, $0.3 billion aggregate
principal amount of GTE LLC notes, and $0.2 billion Alltel
Corporation notes for total cash consideration of $10.2
billion, inclusive of accrued interest of $0.1 billion.
Debt Issuances and Redemptions
During April 2016, we redeemed in whole $0.9 billion
aggregate principal amount of Verizon 2.500% Notes due
2016 at 100.773% of the principal amount of such notes,
$0.5 billion aggregate principal amount of Verizon 2.000%
Notes due 2016 at 100.775% of the principal amount of such
notes, and $0.8 billion aggregate principal amount of
Verizon 6.350% Notes due 2019 at 113.521% of the principal
amount of such notes (April Redemptions). These notes
were purchased and canceled for $2.3 billion, inclusive of an
insignificant amount of accrued interest.
72 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
During August 2016, we issued $6.2 billion aggregate
principal amount of fixed and floating rate notes. The
issuance of these Notes resulted in cash proceeds of
approximately $6.1 billion, net of discounts and issuance
costs and after reimbursement of certain expenses. The
issuance consisted of the following series of notes: $0.4
billion aggregate principal amount of Floating Rate Notes
due 2019, $1.0 billion aggregate principal amount of 1.375%
Notes due 2019, $1.0 billion aggregate principal amount of
1.750% Notes due 2021, $2.3 billion aggregate principal
amount of 2.625% Notes due 2026, and $1.5 billion
aggregate principal amount of 4.125% Notes due 2046. The
floating rate notes bear interest at a rate equal to the threemonth
LIBOR plus 0.370%, which rate will be reset
quarterly. The net proceeds were used for general
corporate purposes, including to repay at maturity on
September 15, 2016, $2.3 billion aggregate principal amount
of our floating rate notes, plus accrued interest on the
notes.
During September 2016, we issued $2.1 billion aggregate
principal amount of 4.200% Notes due 2046. The issuance
of these Notes resulted in cash proceeds of approximately
$2.0 billion, net of discounts and issuance costs and after
reimbursement of certain expenses. The net proceeds were
used to redeem in whole $0.9 billion aggregate principal
amount of Verizon 4.800% Notes due 2044 at 100% of the
principal amount of such notes, plus any accrued and
unpaid interest to the date of redemption, for an
insignificant loss. Proceeds not used for the redemption of
these notes were used for general corporate purposes.
During October 2016, we issued €1.0 billion aggregate
principal amount of 0.500% Notes due 2022, €1.0 billion
aggregate principal amount of 0.875% Notes due 2025,
€1.25 billion aggregate principal amount of 1.375% Notes
due 2028, and £0.45 billion aggregate principal amount of
3.125% Notes due 2035. The issuance of these notes
resulted in cash proceeds of approximately $4.1 billion, net
of discounts and issuance costs and after reimbursement of
certain expenses. The net proceeds from the sale of the
notes were used for general corporate purposes, including
the financing of our acquisition of Fleetmatics and the
repayment of outstanding indebtedness.
During December 2016, we redeemed in whole $2.0 billion
aggregate principal amount of Verizon 1.350% Notes due
2017 at 100.321% of the principal amount of such notes,
plus any accrued and unpaid interest to the date of
redemption, for an insignificant loss. Also in December 2016,
we repurchased $2.5 billion aggregate principal amount of
eight-year Verizon notes at 100% of the aggregate principal
amount of such notes plus accrued and unpaid interest to
the date of redemption.
Asset-Backed Debt
At December 31, 2017, the carrying value of our assetbacked
debt was $8.9 billion. Our asset-backed debt
includes notes (the Asset-Backed Notes) issued to thirdparty
investors (Investors) and loans (ABS Financing
Facility) received from banks and their conduit facilities
(collectively, the Banks). Our consolidated asset-backed
debt bankruptcy remote legal entities (each, an ABS Entity
or collectively, the ABS Entities) issue the debt or are
otherwise party to the transaction documentation in
connection with our asset-backed debt transactions. Under
the terms of our asset-backed debt, we transfer device
payment plan agreement receivables from Cellco
Partnership and certain other affiliates of Verizon
(collectively, the Originators) to one of the ABS Entities,
which in turn transfers such receivables to another ABS
Entity that issues the debt. Verizon entities retain the equity
interests in the ABS Entities, which represent the rights to
all funds not needed to make required payments on the
asset-backed debt and other related payments and
expenses.
Our asset-backed debt is secured by the transferred device
payment plan agreement receivables and future collections
on such receivables. The device payment plan agreement
receivables transferred to the ABS Entities and related
assets, consisting primarily of restricted cash, will only be
available for payment of asset-backed debt and expenses
related thereto, payments to the Originators in respect of
additional transfers of device payment plan agreement
receivables, and other obligations arising from our assetbacked
debt transactions, and will not be available to pay
other obligations or claims of Verizon’s creditors until the
associated asset-backed debt and other obligations are
satisfied. The Investors or Banks, as applicable, which hold
our asset-backed debt have legal recourse to the assets
securing the debt, but do not have any recourse to Verizon
with respect to the payment of principal and interest on the
debt. Under a parent support agreement, Verizon has
agreed to guarantee certain of the payment obligations of
Cellco Partnership and the Originators to the ABS Entities.
Cash collections on the device payment plan agreement
receivables are required at certain specified times to be
placed into segregated accounts. Deposits to the
segregated accounts are considered restricted cash and
are included in Prepaid expenses and other and Other
assets on our consolidated balance sheets.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 73
Notes to Consolidated Financial Statements continued
Proceeds from our asset-backed debt transactions,
deposits to the segregated accounts and payments to the
Originators in respect of additional transfers of device
payment plan agreement receivables are reflected in Cash
flows from financing activities in our consolidated
statements of cash flows. Repayments of our asset-backed
debt and related interest payments made from the
segregated accounts are non-cash activities and therefore
not reflected within Cash flows from financing activities in
our consolidated statements of cash flows. The assetbacked
debt issued and the assets securing this debt are
included on our consolidated balance sheets.
Asset-Backed Notes
In October 2017, we issued approximately $1.4 billion
aggregate principal amount of senior and junior AssetBacked
Notes through an ABS Entity. The Class A-1a senior
Asset-Backed Notes had an expected weighted-average life
to maturity of 2.48 years at issuance and bear interest at
2.060% per annum, the Class A-1b senior Asset-Backed
Notes had an expected weighted -average life to maturity of
2.48 years at issuance and bear interest at one-month
LIBOR + 0.270%, which rate will be reset monthly, the
Class B junior Asset-Backed Notes had an expected
weighted-average life to maturity of 3.12 years at issuance
and bear interest at 2.380% per annum and the Class C
junior Asset-Backed Notes had an expected weightedaverage
life to maturity of 3.35 years at issuance and bear
interest at 2.530% per annum.
In June 2017, we issued approximately $1.3 billion aggregate
principal amount of senior and junior Asset-Backed Notes
through an ABS Entity. The Class A senior Asset-Backed
Notes had an expected weighted-average life to maturity of
2.47 years at issuance and bear interest at 1.920% per
annum, the Class B junior Asset-Backed Notes had an
expected weighted-average life to maturity of 3.11 years at
issuance and bear interest at 2.220% per annum and the
Class C junior Asset-Backed Notes had an expected
weighted-average life to maturity of 3.34 years at issuance
and bear interest at 2.380% per annum.
In March 2017, we issued approximately $1.3 billion
aggregate principal amount of senior and junior AssetBacked
Notes through an ABS Entity. The Class A senior
Asset-Backed Notes had an expected weighted-average life
to maturity of 2.6 years at issuance and bear interest at
2.060% per annum, the Class B junior Asset-Backed Notes
had an expected weighted-average life to maturity of 3.38
years at issuance and bear interest at 2.450% per annum
and the Class C junior Asset-Backed Notes had an
expected weighted-average life to maturity of 3.64 years at
issuance and bear interest at 2.650% per annum.
In November 2016, we issued approximately $1.4 billion
aggregate principal amount of senior and junior AssetBacked
Notes through an ABS Entity. The Class A senior
Asset-Backed Notes had an expected weighted-average life
to maturity of about 2.55 years at issuance and bear interest
at 1.680% per annum. The Class B junior Asset-Backed
Notes had an expected weighted-average life to maturity of
about 3.32 years at issuance and bear interest at
2.150% per annum and the Class C junior Asset-Backed
Notes had an expected weighted-average life to maturity of
3.59 years at issuance and bear interest at 2.360% per
annum.
In July 2016, we issued approximately $1.2 billion aggregate
principal amount of senior and junior Asset-Backed Notes
through an ABS Entity, of which $1.1 billion of notes were
sold to Investors. The Class A senior Asset-Backed Notes
had an expected weighted-average life to maturity of about
2.52 years at issuance and bear interest at 1.420% per
annum. The Class B junior Asset-Backed Notes had an
expected weighted-average life to maturity of about 3.24
years at issuance and bear interest at 1.460% per annum
and the Class C junior Asset-Backed Notes had an
expected weighted-average life to maturity of 3.51 years at
issuance and bear interest at 1.610% per annum.
Under the terms of each series of Asset-Backed Notes,
there is a two year revolving period during which we may
transfer additional receivables to the ABS Entity.
ABS Financing Facility
During September 2016, we entered into a loan agreement
through an ABS Entity with a number of financial
institutions. Under the terms of the loan agreement, such
counterparties made advances under asset-backed loans
backed by device payment plan agreement receivables for
proceeds of $1.5 billion. We had the option of requesting an
additional $1.5 billion of committed funding by December 31,
2016 and during December 2016, we received additional
funding of $1.0 billion under this option. In May 2017, we
received additional funding of $0.3 billion pursuant to an
additional loan agreement with similar terms. These loans
have an expected weighted-average life of about 2.4 years
at issuance and bear interest at floating rates. There is a
two year revolving period, beginning from September 2016,
which may be extended, during which we may transfer
additional receivables to the ABS Entity. Subject to certain
conditions, we may also remove receivables from the ABS
Entity.
Under these loan agreements, we have the right to prepay
all or a portion of the loans at any time without penalty, but
in certain cases, with breakage costs. In December 2017, we
prepaid $0.4 billion. The amount prepaid is available for
further drawdowns until September 2018, except in certain
circumstances. As of December 31, 2017, outstanding
borrowings under the loans were $2.4 billion.
74 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Variable Interest Entities (VIEs)
The ABS Entities meet the definition of a VIE for which we
have determined we are the primary beneficiary as we have
both the power to direct the activities of the entity that most
significantly impact the entity’s performance and the
obligation to absorb losses or the right to receive benefits of
the entity. Therefore, the assets, liabilities and activities of
the ABS Entities are consolidated in our financial results and
are included in amounts presented on the face of our
consolidated balance sheets.
The assets and liabilities related to our asset-backed debt
arrangements included on our consolidated balance sheets
were as follows:
(dollars in millions)
At December 31, 2017 2016
Assets
Account receivable, net $ 8,101 $ 3,383
Prepaid expenses and other 636 236
Other Assets 2,680 2,383
Liabilities
Accounts payable and accrued liabilities 5 4
Short-term portion of long-term debt 1,932 —
Long-term debt 6,955 4,988
See Note 7 for additional information on device payment
plan agreement receivables used to secure asset-backed
debt.
Early Debt Redemption and Other Costs
During 2017 and 2016, we recorded losses on early debt
redemptions of $2.0 billion and $1.8 billion, respectively.
We recognize losses on early debt redemptions in Other
income (expense), net on our consolidated statements of
income and within our Net cash used in financing activities
on our consolidated statements of cash flows.
Additional Financing Activities (Non-Cash Transactions)
During both the years ended December 31, 2017 and 2016,
we financed, primarily through vendor financing
arrangements, the purchase of approximately $0.5 billion of
long-lived assets consisting primarily of network equipment.
At December 31, 2017, $1.2 billion relating to these financing
arrangements, including those entered into in prior years
and liabilities assumed through acquisitions, remained
outstanding. These purchases are non-cash financing
activities and therefore not reflected within Capital
expenditures on our consolidated statements of cash flows.
Guarantees
We guarantee the debentures of our operating telephone
company subsidiaries. As of December 31, 2017, $0.8 billion
aggregate principal amount of these obligations remained
outstanding. Each guarantee will remain in place for the life
of the obligation unless terminated pursuant to its terms,
including the operating telephone company no longer being
a wholly-owned subsidiary of Verizon.
As a result of the closing of the Access Line Sale on April 1,
2016, GTE Southwest Inc., Verizon California Inc. and
Verizon Florida LLC are no longer wholly-owned
subsidiaries of Verizon, and the guarantees of $0.6 billion
aggregate principal amount of debentures and first
mortgage bonds of those entities have terminated pursuant
to their terms.
We also guarantee the debt obligations of GTE LLC as
successor in interest to GTE Corporation that were issued
and outstanding prior to July 1, 2003. As of December 31,
2017, $0.7 billion aggregate principal amount of these
obligations remain outstanding.
Debt Covenants
We and our consolidated subsidiaries are in compliance with
all of our restrictive covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding, excluding
unamortized debt issuance costs, at December 31, 2017 are
as follows:
Years (dollars in millions)
2018 $ 3,308
2019 6,306
2020 6,587
2021 6,403
2022 9,520
Thereafter 85,355
Note 7
Wireless Device Payment Plans
Under the Verizon device payment program, our eligible
wireless customers purchase wireless devices under a
device payment plan agreement. Customers that activate
service on devices purchased under the device payment
program pay lower service fees as compared to those under
our fixed-term service plans, and their device payment plan
charge is included on their standard wireless monthly bill. As
of January 2017, we no longer offer consumers new fixedterm
service plans for phones. However we continue to
service existing plans and provide these plans to business
customers.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 75
Notes to Consolidated Financial Statements continued
Wireless Device Payment Plan Agreement Receivables
The following table displays device payment plan agreement
receivables, net, that continue to be recognized in our
consolidated balance sheets:
(dollars in millions)
At December 31, 2017 2016
Device payment plan agreement
receivables, gross $ 17,770 $ 11,797
Unamortized imputed interest (821) (511)
Device payment plan agreement
receivables, net of unamortized
imputed interest 16,949 11,286
Allowance for credit losses (848) (688)
Device payment plan agreement
receivables, net $ 16,101 $ 10,598
Classified on our consolidated
balance sheets:
Accounts receivable, net $ 11,064 $ 6,140
Other assets 5,037 4,458
Device payment plan agreement
receivables, net $ 16,101 $ 10,598
Included in our device payment plan agreement receivables,
net at December 31, 2017, are net device payment plan
agreement receivables of $10.7 billion that have been
transferred to ABS Entities and continue to be reported in
our consolidated balance sheet. See Note 6 for additional
information.
We may offer certain promotions that allow a customer to
trade in his or her owned device in connection with the
purchase of a new device. Under these types of promotions,
the customer receives a credit for the value of the trade-in
device. In addition, we may provide the customer with
additional future credits that will be applied against the
customer’s monthly bill as long as service is maintained. We
recognize a liability for the trade-in device measured at fair
value, which is determined by considering several factors,
including the weighted-average selling prices obtained in
recent resales of similar devices eligible for trade-in. Future
credits are recognized when earned by the customer.
Device payment plan agreement receivables, net does not
reflect the trade-in device liability. At December 31, 2017, the
amount of trade-in liability was insignificant.
From time to time, we offer certain marketing promotions
that allow our customers to upgrade to a new device after
paying down a certain specified portion of the required
device payment plan agreement amount as well as trading in
their device in good working order. When a customer enters
into a device payment plan agreement with the right to
upgrade to a new device, we account for this trade-in right
as a guarantee obligation.
At the time of the sale of a device, we impute risk adjusted
interest on the device payment plan agreement receivables.
We record the imputed interest as a reduction to the related
accounts receivable. Interest income, which is included
within Service revenues and other on our consolidated
statements of income, is recognized over the financed
device payment term.
When originating device payment plan agreements, we use
internal and external data sources to create a credit risk
score to measure the credit quality of a customer and to
determine eligibility for the device payment program. If a
customer is either new to Verizon Wireless or has less than
210 days of customer tenure with Verizon Wireless (a new
customer), the credit decision process relies more heavily
on external data sources. If the customer has 210 days or
more of customer tenure with Verizon Wireless (an existing
customer), the credit decision process relies on internal
data sources. Verizon Wireless’ experience has been that
the payment attributes of longer tenured customers are
highly predictive for estimating their ability to pay in the
future. External data sources include obtaining a credit
report from a national consumer credit reporting agency, if
available. Verizon Wireless uses its internal data and/or
credit data obtained from the credit reporting agencies to
create a custom credit risk score. The custom credit risk
score is generated automatically (except with respect to a
small number of applications where the information needs
manual intervention) from the applicant’s credit data using
Verizon Wireless’ proprietary custom credit models, which
are empirically derived, demonstrably and statistically
sound. The credit risk score measures the likelihood that
the potential customer will become severely delinquent and
be disconnected for non-payment. For a small portion of
new customer applications, a traditional credit report is not
available from one of the national credit reporting agencies
because the potential customer does not have sufficient
credit history. In those instances, alternate credit data is
used for the risk assessment.
Based on the custom credit risk score, we assign each
customer to a credit class, each of which has a specified
required down payment percentage, which ranges from
zero to 100%, and specified credit limits. Device payment
plan agreement receivables originated from customers
assigned to credit classes requiring no down payment
represent the lowest risk. Device payment plan agreement
receivables originated from customers assigned to credit
classes requiring a down payment represent a higher risk.
76 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Subsequent to origination, Verizon Wireless monitors
delinquency and write-off experience as key credit quality
indicators for its portfolio of device payment plan
agreements and fixed-term service plans. The extent of our
collection efforts with respect to a particular customer are
based on the results of proprietary custom empirically
derived internal behavioral scoring models that analyze the
customer’s past performance to predict the likelihood of the
customer falling further delinquent. These customer scoring
models assess a number of variables, including origination
characteristics, customer account history and payment
patterns. Based on the score derived from these models,
accounts are grouped by risk category to determine the
collection strategy to be applied to such accounts. We
continuously monitor collection performance results and the
credit quality of our device payment plan agreement
receivables based on a variety of metrics, including aging.
Verizon Wireless considers an account to be delinquent and
in default status if there are unpaid charges remaining on
the account on the day after the bill’s due date.
The balance and aging of the device payment plan
agreement receivables on a gross basis was as follows:
(dollars in millions)
At December 31, 2017 2016
Unbilled $ 16,591 $ 11,089
Billed:
Current 975 557
Past due 204 151
Device payment plan agreement
receivables, gross $ 17,770 $ 11,797
Activity in the allowance for credit losses for the device
payment plan agreement receivables was as follows:
(dollars in millions)
2017 2016
Balance at January 1, $ 688 $ 444
Bad debt expense 718 692
Write-offs (558) (479)
Allowance related to receivables sold — 28
Other — 3
Balance at December 31, $ 848 $ 688
Sales of Wireless Device Payment Plan Agreement
Receivables
In 2015 and 2016, we established programs pursuant to a
Receivables Purchase Agreement, or RPA, to sell from time
to time, on an uncommitted basis, eligible device payment
plan agreement receivables to a group of primarily
relationship banks (Purchasers) on both a revolving
(Revolving Program) and non-revolving (Non-Revolving
Program) basis. In December 2017, the RPA and all other
related transaction documents were terminated. Under the
Programs, eligible device payment plan agreement
receivables were transferred to the Purchasers for upfront
cash proceeds and additional consideration upon
settlement of the receivables, referred to as the deferred
purchase price.
There were no sales of device payment plan agreement
receivables under the Programs during 2017. During 2016,
we sold $3.3 billion of receivables, net of allowance and
imputed interest, under the Revolving Program. We received
cash proceeds from new transfers of $2.0 billion and cash
proceeds from reinvested collections of $0.9 billion and
recorded a deferred purchase price of $0.4 billion. During
2015, we sold $6.1 billion of receivables, net of allowances
and imputed interest, under the Non-Revolving Program. In
connection with this sale, we received cash proceeds from
new transfers of $4.5 billion and recorded a deferred
purchase price of $1.7 billion. During 2015, we also sold $3.3
billion of receivables, net of allowances and imputed
interest, under the Revolving Program. In connection with
this sale, we received cash proceeds from new transfers of
$2.7 billion and recorded a deferred purchase price of $0.6
billion.
The sales of receivables under the RPA did not have a
significant impact on our consolidated statements of
income. The cash proceeds received from the Purchasers
were recorded within Cash flows provided by operating
activities on our consolidated statements of cash flows.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 77
Notes to Consolidated Financial Statements continued
Deferred Purchase Price
During 2017, 2016 and 2015, we collected $0.6 billion, $1.1
billion and an insignificant amount, respectively, which was
returned as deferred purchase price and recorded within
Cash flows provided by operating activities on our
consolidated statements of cash flows. Collections,
recorded within Cash flows used in investing activities on
our consolidated statements of cash flows were $0.8 billion
during 2017 and insignificant during 2016. During 2017, we
repurchased all outstanding receivables previously sold to
the Purchasers in exchange for the obligation to pay the
associated deferred purchase price to the wholly-owned
subsidiaries that are bankruptcy remote special purpose
entities (Sellers). At December 31, 2017, our deferred
purchase price receivable was fully satisfied. At
December 31, 2016, our deferred purchase price receivable,
which was held by the Sellers, was comprised of $1.2 billion
included within Prepaid expenses and other and $0.4 billion
included within Other assets in our consolidated balance
sheet. The deferred purchase price was initially recorded at
fair value, based on the remaining device payment amounts
expected to be collected, adjusted, as applicable, for the
time value of money and by the timing and estimated value
of the device trade-in in connection with upgrades. The
estimated value of the device trade-in considered prices
expected to be offered to us by independent third parties.
This estimate contemplated changes in value after the
launch of a device. The fair value measurements were
considered to be Level 3 measurements within the fair value
hierarchy. The collection of the deferred purchase price was
contingent on collections from customers.
Variable Interest Entities (VIEs)
Under the RPA, the Sellers’ sole business consists of the
acquisition of the receivables from Cellco Partnership and
certain other affiliates of Verizon and the resale of the
receivables to the Purchasers. The assets of the Sellers are
not available to be used to satisfy obligations of any Verizon
entities other than the Sellers. We determined that the
Sellers are VIEs as they lack sufficient equity to finance
their activities. Given that we have the power to direct the
activities of the Sellers that most significantly impact the
Sellers’ economic performance, we are deemed to be the
primary beneficiary of the Sellers. As a result, we
consolidate the assets and liabilities of the Sellers into our
consolidated financial statements.
Continuing Involvement
At December 31, 2017 and 2016, the total portfolio of device
payment plan agreement receivables, including derecognized
device payment plan agreement receivables, that we were
servicing was $17.8 billion and $16.1 billion, respectively. There
were no derecognized device payment plan agreement
receivables outstanding at December 31, 2017. The
outstanding portfolio of device payment plan agreement
receivables derecognized from our consolidated balance
sheet, but which we continued to service, was $4.3 billion at
December 31, 2016. To date, we have collected and remitted
approximately $10.1 billion, net of fees. At December 31, 2017,
no amounts remained to be remitted to the Purchasers.
Verizon had continuing involvement with the sold
receivables as it serviced the receivables. We continued to
service the customer and their related receivables on behalf
of the Purchasers, including facilitating customer payment
collection, in exchange for a monthly servicing fee. While
servicing the receivables, the same policies and procedures
were applied to the sold receivables that applied to owned
receivables, and we continued to maintain normal
relationships with our customers. The credit quality of the
customers we continued to service was consistent
throughout the periods presented.
In addition, we had continuing involvement related to the
sold receivables as we were responsible for absorbing
additional credit losses pursuant to the agreements. Credit
losses on receivables sold were $0.1 billion during 2017 and
$0.2 billion during 2016.
Note 8
Fair Value Measurements and Financial
Instruments
Recurring Fair Value Measurements
The following table presents the balances of assets and
liabilities measured at fair value on a recurring basis as of
December 31, 2017:
(dollars in millions)
Level 1(1) Level 2(2) Level 3(3) Total
Assets:
Other assets:
Equity securities $ 74 $ — $ — $ 74
Fixed income securities — 366 — 366
Interest rate swaps — 54 — 54
Cross currency swaps — 450 — 450
Interest rate caps — 6 —6
Total $ 74 $ 876 $ — $ 950
Liabilities:
Other liabilities:
Interest rate swaps $ — $ 413 $ — $ 413
Cross currency swaps — 46 — 46
Total $ — $ 459 $ — $ 459
78 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
The following table presents the balances of assets and
liabilities measured at fair value on a recurring basis as of
December 31, 2016:
(dollars in millions)
Level 1 (1) Level 2 (2) Level 3(3) Total
Assets:
Other assets:
Equity securities $ 123 $ — $ — $ 123
Fixed income securities 10 566 — 576
Interest rate swaps — 71 — 71
Cross currency swaps — 45 — 45
Interest rate caps — 10 — 10
Total $ 133 $ 692 $ — $ 825
Liabilities:
Other liabilities:
Interest rate swaps $ — $ 236 $ — $ 236
Cross currency swaps — 1,803 — 1,803
Total $ — $ 2,039 $ — $ 2,039
(1) quoted prices in active markets for identical assets or liabilities (2) observable inputs other than quoted prices in active markets for
identical assets and liabilities (3) no observable pricing inputs in the market
Equity securities consist of investments in common stock of
domestic and international corporations measured using
quoted prices in active markets.
Fixed income securities consist primarily of investments in
municipal bonds as well as U.S. Treasury securities. We
used quoted prices in active markets for the majority of our
U.S. Treasury securities, therefore these securities were
classified as Level 1. For fixed income securities that do not
have quoted prices in active markets, we use alternative
matrix pricing resulting in these debt securities being
classified as Level 2.
Derivative contracts are valued using models based on
readily observable market parameters for all substantial
terms of our derivative contracts and thus are classified
within Level 2. We use mid-market pricing for fair value
measurements of our derivative instruments. Our derivative
instruments are recorded on a gross basis.
We recognize transfers between levels of the fair value
hierarchy as of the end of the reporting period. There were
no transfers between Level 1 and Level 2 during 2017 and
2016.
Fair Value of Short-term and Long-term Debt
The fair value of our debt is determined using various methods, including quoted prices for identical terms and maturities,
which is a Level 1 measurement, as well as quoted prices for similar terms and maturities in inactive markets and future cash
flows discounted at current rates, which are Level 2 measurements. The fair value of our short-term and long-term debt,
excluding capital leases, was as follows:
(dollars in millions)
At December 31, 2017 2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Short- and long-term debt, excluding capital leases $116,075 $128,658 $107,128 $117,584
Derivative Instruments
The following table sets forth the notional amounts of our
outstanding derivative instruments:
(dollars in millions)
At December 31, 2017 2016
Interest rate swaps $ 20,173 $ 13,099
Cross currency swaps 16,638 12,890
Interest rate caps 2,840 2,540
Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix
of fixed and variable rate debt. We principally receive fixed
rates and pay variable rates based on the LIBOR, resulting
in a net increase or decrease to Interest expense. These
swaps are designated as fair value hedges and hedge
against interest rate risk exposure of designated debt
issuances. We record the interest rate swaps at fair value
on our consolidated balance sheets as assets and liabilities.
Changes in the fair value of the interest rate swaps are
recorded to Interest expense, which are offset by changes
in the fair value of the hedged debt due to changes in
interest rates.
During 2017, we entered into interest rate swaps with a total
notional value of $7.5 billion and settled interest rate swaps
with a total notional value of $0.5 billion. During 2016, we
entered into interest rate swaps with a total notional value
of $6.3 billion and settled interest rate swaps with a total
notional value of $0.9 billion.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 79
Notes to Consolidated Financial Statements continued
The ineffective portion of these interest rate swaps was
insignificant for the years ended December 31, 2017 and
2016.
As of December 31, 2017 and 2016, the following amounts
were recorded on the balance sheets related to cumulative
basis adjustments for fair value hedges:
(dollars in millions)
Line item in balance
sheets in which hedged
item is included
Carrying amount of
hedged liabilities
Cumulative
amount of fair
value hedging
adjustment
included in
the carrying
amount of the
hedged liabilities
2017 2016 2017 2016
Long-term debt $ 22,011 $13,013 $316 $113
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. During
2016, we entered into forward interest rate swaps with a
total notional value of $1.3 billion and subsequently settled
all outstanding forward interest rate swaps. During 2016, a
pre-tax loss of $0.2 billion was recognized in Other
comprehensive income (loss).
Cross Currency Swaps
We have entered into cross currency swaps designated as
cash flow hedges to exchange our British Pound Sterling,
Euro, Swiss Franc and Australian Dollar-denominated cash
flows into U.S. dollars and to fix our cash payments in U.S.
dollars, as well as to mitigate the impact of foreign currency
transaction gains or losses.
During 2017, we entered into cross currency swaps with a
total notional value of $14.0 billion and settled $10.2 billion
notional amount of cross currency swaps. A pre-tax gain of
$1.4 billion was recognized in Other comprehensive income
(loss) with respect to these swaps.
During 2016, we entered into cross currency swaps with a
total notional value of $3.3 billion and settled $0.1 billion
notional amount of cross currency swaps upon redemption
of the related debt. A pre-tax loss of $0.1 billion was
recognized in Other comprehensive income (loss) with
respect to these swaps.
A portion of the gains and losses recognized in Other
comprehensive income (loss) was reclassified to Other
income (expense), net to offset the related pre-tax foreign
currency transaction gain or loss on the underlying hedged
item.
Net Investment Hedges
We have designated certain foreign currency instruments 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. The
notional amount of the Euro-denominated debt as a net
investment hedge was $0.9 billion and $0.8 billion at
December 31, 2017 and 2016, respectively.
Undesignated Derivatives
We also have the following derivative contracts which we
use as an economic hedge but for which we have elected
not to apply hedge accounting.
Interest Rate Caps
We enter into interest rate caps to mitigate our interest
exposure to interest rate increases on our ABS Financing
Facility and Asset-Backed Notes. During 2017, we entered
into interest rate caps with a notional value of $0.3 billion.
During 2016, we entered into such interest rate caps with a
notional value of $2.5 billion. During 2017 and 2016, we
recognized an insignificant increase and reduction in
Interest expense, respectively.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of
credit risk consist primarily of temporary cash investments,
short-term and long-term investments, trade receivables,
including device payment plan agreement receivables,
certain notes receivable, including lease receivables and
derivative contracts.
80 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Counterparties to our derivative contracts are major
financial institutions with whom we have negotiated
derivatives agreements (ISDA master agreements) and
credit support annex agreements (CSA) which provide rules
for collateral exchange. Our CSA agreements entered into
prior to the fourth quarter of 2017 generally require
collateralized arrangements with our counterparties in
connection with uncleared derivatives. At December 31,
2016, we had posted collateral of approximately $0.2 billion
related to derivative contracts under collateral exchange
arrangements, which were recorded as Prepaid expenses
and other in our consolidated balance sheet. Prior to 2017,
we had entered into amendments to our CSA agreements
with substantially all of our counterparties that suspended
the requirement for cash collateral posting for a specified
period of time by both counterparties. During the first and
second quarter of 2017, we paid an insignificant amount of
cash to extend certain of such amendments to certain
collateral exchange arrangements. During the fourth quarter
of 2017, we began negotiating and executing new ISDA
master agreements and CSAs with our counterparties. The
newly executed CSAs contain rating based thresholds such
that we or our counterparties may be required to hold or
post collateral based upon changes in outstanding positions
as compared to established thresholds and changes in
credit ratings. We did not post any collateral at
December 31, 2017. While we may be exposed to credit
losses due to the nonperformance of our counterparties, we
consider the risk remote and do not expect that any such
nonperformance would result in a significant effect on our
results of operations or financial condition due to our
diversified pool of counterparties.
Note 9
Stock-Based Compensation
Verizon Long-Term Incentive Plan
In May 2017, Verizon’s shareholders approved the 2017
Long-Term Incentive Plan (the 2017 Plan) and terminated
Verizon’s authority to grant new awards under the Verizon
2009 Long-Term Incentive Plan (the 2009 Plan). Consistent
with the 2009 Plan, the 2017 Plan provides for broad-based
equity grants to employees, including executive officers, and
permits the granting of stock options, stock appreciation
rights, restricted stock, restricted stock units, performance
shares, performance stock units and other awards. Upon
approval of the 2017 Plan, Verizon reserved the 91 million
shares that were reserved but not issued under the 2009
Plan for future issuance under the 2017 Plan.
Restricted Stock Units
The 2009 Plan and 2017 Plan provide for grants of
Restricted Stock Units (RSUs). For RSUs granted prior to
2017, vesting generally occurs at the end of the third year.
For the 2017 grants, vesting generally occurs in three equal
installments on each anniversary of the grant date. The
RSUs are generally classified as equity awards because the
RSUs will be paid in Verizon common stock upon vesting.
The RSU equity awards are measured using the grant date
fair value of Verizon common stock and are not remeasured
at the end of each reporting period. Dividend equivalent
units are also paid to participants at the time the RSU award
is paid, and in the same proportion as the RSU award.
In connection with our acquisition of Yahoo’s operating
business, on the closing date of the Transaction each
unvested and outstanding Yahoo RSU award that was held by
an employee who became an employee of Verizon was
replaced with a Verizon RSU award, which is generally payable
in cash upon the applicable vesting date. These awards are
classified as liability awards and are measured at fair value at
the end of each reporting period.
Performance Stock Units
The 2009 Plan and 2017 Plan also provide for grants of
Performance Stock Units (PSUs) that generally vest at the
end of the third year after the grant. As defined by the 2009
Plan and 2017 Plan, the Human Resources Committee of the
Board of Directors determines the number of PSUs a
participant earns based on the extent to which the
corresponding performance goals have been achieved over
the three-year performance cycle. The PSUs are classified
as liability awards because the PSU awards are paid in cash
upon vesting. The PSU award liability is measured at its fair
value at the end of each reporting period and, therefore, will
fluctuate based on the price of Verizon common stock as
well as performance relative to the targets. Dividend
equivalent units are also paid to participants at the time that
the PSU award is determined and paid, and in the same
proportion as the PSU award. The granted and cancelled
activity for the PSU award includes adjustments for the
performance goals achieved.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 81
Notes to Consolidated Financial Statements continued
The following table summarizes Verizon’s Restricted Stock
Unit and Performance Stock Unit activity:
Restricted Stock
Units
(shares in thousands)
Equity
Awards
Liability
Awards
Performance
Stock Units
Outstanding January 1,
2015 15,007 — 19,966
Granted 4,958 — 7,044
Payments (5,911) — (6,732)
Cancelled/Forfeited (151) — (3,075)
Outstanding December 31,
2015 13,903 — 17,203
Granted 4,409 — 6,391
Payments (4,890) — (4,702)
Cancelled/Forfeited (114) — (1,143)
Outstanding Adjustments — — 170
Outstanding December 31,
2016 13,308 — 17,919
Granted 4,216 25,168 6,564
Payments (4,825) (8,487) (6,031)
Cancelled/Forfeited (66) (2,690) (217)
Outstanding
December 31, 2017 12,633 13,991 18,235
As of December 31, 2017, unrecognized compensation
expense related to the unvested portion of Verizon’s RSUs
and PSUs was approximately $1.0 billion and is expected to
be recognized over approximately two years.
The RSUs granted in 2017 and 2016 have weighted-average
grant date fair values of $49.93 and $51.86 per unit,
respectively. During 2017, 2016 and 2015, we paid $0.8
billion, $0.4 billion and $0.4 billion, respectively, to settle
RSUs and PSUs classified as liability awards.
Stock-Based Compensation Expense
After-tax compensation expense for stock-based
compensation related to RSUs and PSUs described above
included in Net income attributable to Verizon was $0.4
billion, $0.4 billion and $0.3 billion for 2017, 2016 and 2015,
respectively.
Note 10
Employee Benefits
We maintain non-contributory defined benefit pension plans
for certain employees. In addition, we maintain
postretirement health care and life insurance plans for
certain retirees and their dependents, which are both
contributory and non-contributory, and include a limit on our
share of the cost for certain recent and future retirees. In
accordance with our accounting policy for pension and
other postretirement benefits, operating expenses include
pension and benefit related credits and/or charges based
on actuarial assumptions, including projected discount
rates, an estimated return on plan assets, and health care
trend rates. These estimates are updated in the fourth
quarter to reflect actual return on plan assets and updated
actuarial assumptions or upon a remeasurement. The
adjustment is recognized in the income statement during
the fourth quarter or upon a remeasurement event pursuant
to our accounting policy for the recognition of actuarial
gains and losses.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for certain
employees are subject to collective bargaining agreements.
Modifications in benefits have been bargained from time to
time, and we may also periodically amend the benefits in the
management plans. The following tables summarize benefit
costs, as well as the benefit obligations, plan assets, funded
status and rate assumptions associated with pension and
postretirement health care and life insurance benefit plans.
82 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Obligations and Funded Status
(dollars in millions)
Pension Health Care and Life
At December 31, 2017 2016 2017 2016
Change in Benefit Obligations
Beginning of year $ 21,112 $ 22,016 $ 19,650 $ 24,223
Service cost 280 322 149 193
Interest cost 683 677 659 746
Plan amendments — 428 (545) (5,142)
Actuarial loss, net 1,377 1,017 627 1,289
Benefits paid (1,932) (938) (1,080) (1,349)
Curtailment and termination benefits 11 4 — —
Settlements paid — (1,270) — —
Divestiture (Note 2) — (1,144) — (310)
End of year $ 21,531 $ 21,112 $ 19,460 $ 19,650
Change in Plan Assets
Beginning of year $ 14,663 $ 16,124 $ 1,363 $ 1,760
Actual return on plan assets 2,342 882 134 35
Company contributions 4,141 837 702 917
Benefits paid (1,932) (938) (1,080) (1,349)
Settlements paid — (1,270) — —
Divestiture (Note 2) (39) (972) — —
End of year $ 19,175 $ 14,663 $ 1,119 $ 1,363
Funded Status
End of year $ (2,356) $ (6,449) $ (18,341) $ (18,287)
As a result of the Access Line Sale, which closed on April 1, 2016, we derecognized $0.7 billion of defined benefit pension
and other postretirement benefit plan obligations related to assets held for sale on our consolidated balance sheet as of
December 31, 2016. See Note 2 for additional information.
(dollars in millions)
Pension Health Care and Life
At December 31, 2017 2016 2017 2016
Amounts recognized on the balance sheet
Noncurrent assets $ 21 $ 2 $ — $ —
Current liabilities (63) (88) (637) (639)
Noncurrent liabilities (2,314) (6,363) (17,704) (17,648)
Total $(2,356) $(6,449) $ (18,341) $(18,287)
Amounts recognized in Accumulated Other Comprehensive
Income (Pre-tax)
Prior Service Cost (Benefit) $ 404 $ 443 $ (5,667) $ (6,072)
Total $ 404 $ 443 $ (5,667) $ (6,072)
The accumulated benefit obligation for all defined benefit pension plans was $21.5 billion and $21.1 billion at December 31,
2017 and 2016, respectively.
2017 Postretirement Plan Amendments
During 2017, amendments were made to certain postretirement plans related to retiree medical benefits for management and
certain union represented employees and retirees. The impact of the plan amendments was a reduction in our postretirement
benefit plan obligations of approximately $0.5 billion, which has been recorded as a net increase to Accumulated other
comprehensive income of $0.3 billion (net of taxes of $0.2 billion). The impact of the amount recorded in Accumulated other
comprehensive income that will be reclassified to net periodic benefit cost is insignificant.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 83
Notes to Consolidated Financial Statements continued
2016 Collective Bargaining Negotiations
In the collective bargaining agreements ratified in June 2016, Verizon’s annual postretirement benefit obligation for retiree
healthcare remains capped at the levels established by the previous contracts ratified in 2012. Effective January 2016, prior
to reaching these new collective bargaining agreements, certain retirees began to pay for the costs of retiree healthcare in
accordance with the provisions relating to caps in the previous contracts. In reaching new collective bargaining agreements
in 2016, there is a mutual understanding that the substantive postretirement benefit plans provide that Verizon’s annual
postretirement benefit obligation for retiree healthcare is capped and, accordingly, we began accounting for the contractual
healthcare caps in June 2016. We also adopted changes to our defined benefit pension plans and other postretirement
benefit plans to reflect the agreed upon terms and conditions of the collective bargaining agreements. The impact was a
reduction in our postretirement benefit plan obligations of approximately $5.1 billion and an increase in our defined benefit
pension plan obligations of approximately $0.4 billion, which have been recorded as a net increase to Accumulated other
comprehensive income of $2.9 billion (net of taxes of $1.8 billion). The amount recorded in Accumulated other
comprehensive income will be reclassified to net periodic benefit cost on a straight-line basis over the average remaining
service period of the respective plans’ participants, which, on a weighted-average basis, is 12.2 years for defined benefit
pension plans and 7.8 years for other postretirement benefit plans. The above-noted reclassification resulted in a decrease
to net periodic benefit cost and increase to pre-tax income of approximately $0.7 billion and $0.4 billion, respectively, during
2017 and 2016.
Information for pension plans with an accumulated benefit obligation in excess of plan assets follows:
(dollars in millions)
At December 31, 2017 2016
Projected benefit obligation $ 21,300 $ 21,048
Accumulated benefit obligation 21,242 20,990
Fair value of plan assets 18,923 14,596
Net Periodic Cost
The following table summarizes the benefit cost (income) related to our pension and postretirement health care and life
insurance plans:
(dollars in millions)
Pension Health Care and Life
Years Ended December 31, 2017 2016 2015 2017 2016 2015
Service cost $ 280 $ 322 $ 374 $ 149 $ 193 $ 324
Amortization of prior service cost (credit) 39 21 (5) (949) (657) (287)
Expected return on plan assets (1,262) (1,045) (1,270) (53) (54) (101)
Interest cost 683 677 969 659 746 1,117
Remeasurement loss (gain), net 337 1,198 (209) 546 1,300 (2,659)
Net periodic benefit (income) cost 77 1,173 (141) 352 1,528 (1,606)
Curtailment and termination benefits 11 4 — — — —
Total $ 88 $ 1,177 $ (141) $ 352 $ 1,528 $ (1,606)
Other pre-tax changes in plan assets and benefit
obligations recognized in other comprehensive (income)
loss are as follows:
(dollars in millions)
Pension
Health Care
and Life
At December 31, 2017 2016 2017 2016
Prior service cost (benefit) $ — $ 428 $ (544) $ (5,142)
Reversal of amortization items
Prior service (benefit) cost (39) (21) 949 657
Amounts reclassified to net income — 87 — 451
Total recognized in other comprehensive
(income) loss (pre-tax) $ (39) $ 494 $ 405 $(4,034)
Amounts reclassified to net income for the year ended
December 31, 2016 includes the reclassification to Selling,
general and administrative expense of a pre-tax pension
and postretirement benefit curtailment gain of $0.5 billion
($0.3 billion net of taxes) due to the transfer of employees
to Frontier, which caused the elimination of a significant
amount of future service in three of our defined benefit
pension plans and one of our other postretirement benefit
plans requiring us to recognize a portion of the prior service
credits. See Note 2 for additional information.
The estimated prior service cost for the defined benefit
pension plans that will be amortized from Accumulated
other comprehensive income into net periodic benefit
(income) cost over the next fiscal year is not significant. The
estimated prior service cost for the defined benefit
postretirement plans that will be amortized from
Accumulated other comprehensive income into net periodic
benefit income over the next fiscal year is $1.0 billion.
84 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Assumptions
The weighted-average assumptions used in determining benefit obligations follow:
Pension
Health Care
and Life
At December 31, 2017 2016 2017 2016
Discount Rate 3.70% 4.30% 3.60% 4.20%
Rate of compensation increases 3.00% 3.00% N/A N/A
The weighted-average assumptions used in determining net periodic cost follow:
Pension Health Care and Life
At December 31, 2017 2016 2015 2017 2016 2015
Discount rate in effect for determining service cost 4.70% 4.50% 4.20% 4.60% 4.50% 4.20%
Discount rate in effect for determining interest cost 3.40 3.20 4.20 3.50 3.40 4.20
Expected return on plan assets 7.70 7.00 7.25 4.50 3.80 4.80
Rate of compensation increases 3.00 3.00 3.00 N/A N/A N/A
Effective January 1, 2016, we changed the method we use
to estimate the interest component of net periodic benefit
cost for pension and other postretirement benefits.
Historically, 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. We have elected to utilize a
full yield curve approach in the estimation of interest cost by
applying the specific spot rates along the yield curve used in
the determination of the benefit obligation to the relevant
projected cash flows. We have made this change to provide
a more precise measurement of interest cost by improving
the correlation between projected benefit cash flows to the
corresponding spot yield curve rates. We have accounted
for this change as a change in accounting estimate and
accordingly accounted for it prospectively.
In determining our pension and other postretirement benefit
obligations, we used a weighted-average discount rate of
3.70% and 3.60%, respectively. The rates were selected to
approximate the composite interest rates available on a
selection of high-quality bonds available in the market at
December 31, 2017. 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).
In order to project the long-term target investment return
for the total portfolio, estimates are prepared for the total
return of each major asset class over the subsequent 10-
year period. Those estimates are based on a combination of
factors including the current market interest rates and
valuation levels, consensus earnings expectations and
historical long-term risk premiums. To determine the
aggregate return for the pension trust, the projected return
of each individual asset class is then weighted according to
the allocation to that investment area in the trust’s longterm
asset allocation policy.
The assumed health care cost trend rates follow:
Health Care and Life
At December 31, 2017 2016 2015
Healthcare cost trend rate assumed
for next year 7.00% 6.50% 6.00%
Rate to which cost trend rate
gradually declines 4.50 4.50 4.50
Year the rate reaches the level it is
assumed to remain thereafter 2026 2025 2024
A one-percentage point change in the assumed health care
cost trend rate would have the following effects:
(dollars in millions)
One-Percentage Point Increase Decrease
Effect on 2017 service and interest cost $ 25 $ (24)
Effect on postretirement benefit obligation
as of December 31, 2017 532 (516)
Plan Assets
The company’s overall investment strategy is to achieve a
mix of assets that allows us to meet projected benefit
payments while taking into consideration risk and return.
While target allocation percentages will vary over time, the
current target allocation for plan assets is designed so that
60% of the assets have the objective of achieving a return
in excess of the growth in liabilities (comprised of public
equities, private equities, real estate, hedge funds and
emerging debt) and 38% of the assets are invested as
liability hedging assets (where cash flows from investments
better match projected benefit payments, typically longer
duration fixed income) and 2% is in cash. This allocation will
shift as funded status improves to a higher allocation of
liability hedging assets. Target policies will be revisited
periodically to ensure they are in line with fund objectives.
Both active and passive management approaches are used
depending on perceived market efficiencies and various
other factors. Due to our diversification and risk control
processes, there are no significant concentrations of risk, in
terms of sector, industry, geography or company names.
Pension and healthcare and life plans assets do not include
significant amounts of Verizon common stock.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 85
Notes to Consolidated Financial Statements continued
Pension Plans
The fair values for the pension plans by asset category at December 31, 2017 are as follows:
(dollars in millions)
Asset Category Total Level 1 Level 2 Level 3
Cash and cash equivalents $ 2,889 $ 2,874 $ 15 $ —
Equity securities 2,795 2,794 — 1
Fixed income securities
U.S. Treasuries and agencies 1,382 1,234 148 —
Corporate bonds 2,961 139 2,718 104
International bonds 1,068 17 1,031 20
Other 396 4 392 —
Real estate 627 — — 627
Other
Private equity 580 — — 580
Hedge funds 845 — 660 185
Total investments at fair value 13,543 7,062 4,964 1,517
Investments measured at NAV 5,632
Total $ 19,175 $ 7,062 $ 4,964 $ 1,517
The fair values for the pension plans by asset category at December 31, 2016 are as follows:
(dollars in millions)
Asset Category Total Level 1 Level 2 Level 3
Cash and cash equivalents $ 1,228 $ 1,219 $ 9 $ —
Equity securities 1,883 1,883 — —
Fixed income securities
U.S. Treasuries and agencies 1,251 880 371 —
Corporate bonds 2,375 152 2,126 97
International bonds 713 20 679 14
Real estate 655 — — 655
Other
Private equity 624 — — 624
Hedge funds 526 — 522 4
Total investments at fair value 9,255 4,154 3,707 1,394
Investments measured at NAV 5,408
Total $ 14,663 $ 4,154 $ 3,707 $ 1,394
The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value
using significant unobservable inputs:
(dollars in millions)
Equity
Securities
Corporate
Bonds
International
Bonds
Real
Estate
Private
Equity
Hedge
Funds Total
Balance at January 1, 2016 $ 3 $ 128 $ 20 $ 873 $ 609 $ — $ 1,633
Actual (loss) gain on plan assets (1) (9) (2) 169 12 — 169
Purchases and sales (2) (22) (4) (387) 3 4 (408)
Balance at December 31, 2016 $ — $ 97 $ 14 $ 655 $ 624 $ 4 $ 1,394
Actual (loss) gain on plan assets — (1) — 76 78 — 153
Purchases (sales) 119 27 22 (70) (114) 183 167
Transfers out (118) (19) (16) (34) (8) (2) (197)
Balance at December 31, 2017 $ 1 $ 104 $ 20 $ 627 $ 580 $ 185 $ 1,517
86 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset category at December 31, 2017 are as follows:
(dollars in millions)
Asset Category Total Level 1 Level 2 Level 3
Cash and cash equivalents $ 71 $ 1 $ 70 $ —
Equity securities 294 294 — —
Fixed income securities
U.S. Treasuries and agencies 23 22 1 —
Corporate bonds 141 141 — —
International bonds 60 18 42 —
Total investments at fair value 589 476 113 —
Investments measured at NAV 530
Total $ 1,119 $ 476 $ 113 $ —
The fair values for the other postretirement benefit plans by asset category at December 31, 2016 are as follows:
(dollars in millions)
Asset Category Total Level 1 Level 2 Level 3
Cash and cash equivalents $ 131 $ 1 $ 130 $ —
Equity securities 463 463 — —
Fixed income securities
U.S. Treasuries and agencies 23 22 1 —
Corporate bonds 170 145 25 —
International bonds 60 30 30 —
Total investments at fair value 847 661 186 —
Investments measured at NAV 516
Total $ 1,363 $ 661 $ 186 $ —
The following are general descriptions of asset categories,
as well as the valuation methodologies and inputs used to
determine the fair value of each major category of assets.
Cash and cash equivalents include short-term investment
funds (less than 90 days to maturity), primarily in diversified
portfolios of investment grade money market instruments
and are valued using quoted market prices or other
valuation methods. The carrying value of cash equivalents
approximates fair value due to the short-term nature of
these investments.
Investments in securities traded on national and foreign
securities exchanges are valued by the trustee at the last
reported sale prices on the last business day of the year or,
if no sales were reported on that date, at the last reported
bid prices. Government obligations, corporate bonds,
international bonds and asset-backed debt are valued using
matrix prices with input from independent third-party
valuation sources. Over-the-counter securities are valued at
the bid prices or the average of the bid and ask prices on
the last business day of the year from published sources or,
if not available, from other sources considered reliable such
as multiple broker quotes.
Commingled funds not traded on national exchanges are
priced by the custodian or fund’s administrator at their net
asset value (NAV). Commingled funds held by third-party
custodians appointed by the fund managers provide the
fund managers with a NAV. The fund managers have the
responsibility for providing this information to the custodian
of the respective plan.
The investment manager of the entity values venture capital,
corporate finance, and natural resource limited partnership
investments. Real estate investments are valued at amounts
based upon appraisal reports prepared by either
independent real estate appraisers or the investment
manager using discounted cash flows or market
comparable data. Loans secured by mortgages are carried
at the lesser of the unpaid balance or appraised value of the
underlying properties. The values assigned to these
investments are based upon available and current market
information and do not necessarily represent amounts that
might ultimately be realized. Because of the inherent
uncertainty of valuation, estimated fair values might differ
significantly from the values that would have been used had
a ready market for the securities existed. These differences
could be material.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 87
Notes to Consolidated Financial Statements continued
Forward currency contracts, futures, and options are valued
by the trustee at the exchange rates and market prices
prevailing on the last business day of the year. Both
exchange rates and market prices are readily available from
published sources. These securities are classified by the
asset class of the underlying holdings.
Hedge funds are valued by the custodian at NAV based on
statements received from the investment manager. These
funds are valued in accordance with the terms of their
corresponding offering or private placement memoranda.
Commingled funds, hedge funds, venture capital, corporate
finance, natural resource and real estate limited partnership
investments for which fair value is measured using the NAV
per share as a practical expedient are not leveled within the
fair value hierarchy and are included as a reconciling item to
total investments.
Employer Contributions
In 2017, we contributed $4.0 billion to our qualified pension
plans, which included $3.4 billion of discretionary
contributions, $0.1 billion to our nonqualified pension plans
and $1.3 billion to our other postretirement benefit plans.
Nonqualified pension plans contributions are estimated to
be $0.1 billion and contributions to our other postretirement
benefit plans are estimated to be $0.8 billion in 2018.
Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid as
follows:
(dollars in millions)
Year
Pension
Benefits
Health Care
and Life
2018 $ 2,401 $ 1,246
2019 2,098 1,249
2020 1,464 1,297
2021 1,212 1,318
2022 1,161 1,336
2023 to 2027 5,526 6,277
Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership
plans (ESOP). We match a certain percentage of eligible
employee contributions to certain savings plans with shares
of our common stock from this ESOP. At December 31,
2017, the number of allocated shares of common stock in
this ESOP was 53 million. There were no unallocated shares
of common stock in this ESOP at December 31, 2017. All
leveraged ESOP shares are included in earnings per share
computations.
Total savings plan costs were $0.8 billion in 2017, $0.7
billion in 2016 and $0.9 billion in 2015.
Severance Benefits
The following table provides an analysis of our severance liability recorded in accordance with the accounting standard
regarding employers’ accounting for postemployment benefits:
(dollars in millions)
Year Beginning
of Year
Charged to
Expense Payments Other End of Year
2015 $ 875 $ 551 $ (619) $ (7) $ 800
2016 800 417 (583) 22 656
2017 656 581 (564) (46) 627
Severance, Pension and Benefit Charges (Credits)
During 2017, we recorded net pre-tax severance, pension
and benefit charges of $1.4 billion, exclusive of acquisition
related severance charges, in accordance with our
accounting policy to recognize actuarial gains and losses in
the period in which they occur. The pension and benefit
remeasurement charges of approximately $0.9 billion were
primarily driven by a decrease in our discount rate
assumption used to determine the current year liabilities of
our pension and postretirement benefit plans from a
weighted-average of 4.2% at December 31, 2016 to a
weighted-average of 3.7% at December 31, 2017 ($2.6
billion). The charges were partially offset by the difference
between our estimated return on assets of 7.0% and our
actual return on assets of 14.0% ($1.2 billion), a change in
mortality assumptions primarily driven by the use of updated
actuarial tables (MP-2017) issued by the Society of Actuaries
($0.2 billion) and other assumption adjustments ($0.3 billion).
As part of these charges, we also recorded severance costs
of $0.5 billion under our existing separation plans.
During 2016, we recorded net pre-tax severance, pension
and benefit charges of $2.9 billion in accordance with our
accounting policy to recognize actuarial gains and losses in
the period in which they occur. The pension and benefit
remeasurement charges of $2.5 billion were primarily driven
by a decrease in our discount rate assumption used to
determine the current year liabilities of our pension and
other postretirement benefit plans from a weighted-average
of 4.6% at December 31, 2015 to a weighted-average of
4.2% at December 31, 2016 ($2.1 billion), updated health
care trend cost assumptions ($0.9 billion), the difference
between our estimated return on assets of 7.0% and our
actual return on assets of 6.0% ($0.2 billion) and other
assumption adjustments ($0.3 billion). These charges were
partially offset by a change in mortality assumptions
primarily driven by the use of updated actuarial tables (MP2016)
issued by the Society of Actuaries ($0.5 billion) and
lower negotiated prescription drug pricing ($0.5 billion). As
part of these charges, we also recorded severance costs of
$0.4 billion under our existing separation plans.
88 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
The net pre-tax severance, pension and benefit charges
during 2016 were comprised of a net pre-tax pension
remeasurement charge of $0.2 billion measured as of
March 31, 2016 related to settlements for employees who
received lump-sum distributions in one of our defined
benefit pension plans, a net pre-tax pension and benefit
remeasurement charge of $0.8 billion measured as of
April 1, 2016 related to curtailments in three of our defined
benefit pension and one of our other postretirement plans, a
net pre-tax pension and benefit remeasurement charge of
$2.7 billion measured as of May 31, 2016 in two defined
benefit pension plans and three other postretirement
benefit plans as a result of our accounting for the
contractual healthcare caps and bargained for changes, a
net pre-tax pension remeasurement charge of $0.1 billion
measured as of May 31, 2016 related to settlements for
employees who received lump-sum distributions in three of
our defined benefit pension plans, a net pre-tax pension
remeasurement charge of $0.6 billion measured as of
August 31, 2016 related to settlements for employees who
received lump-sum distributions in five of our defined
benefit pension plans, and a net pre-tax pension and benefit
credit of $1.9 billion as a result of our fourth quarter
remeasurement of our pension and other postretirement
assets and liabilities based on updated actuarial
assumptions.
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).
Note 11
Taxes
The components of income before benefit (provision) for
income taxes are as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Domestic $ 19,645 $ 20,047 $ 27,639
Foreign 949 939 601
Total $ 20,594 $ 20,986 $ 28,240
The components of the (benefit) provision for income taxes
are as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Current
Federal $ 3,630 $ 7,451 $ 5,476
Foreign 200 148 70
State and Local 677 842 803
Total 4,507 8,441 6,349
Deferred
Federal (14,360) (933) 3,377
Foreign (66) (2) 9
State and Local (37) (128) 130
Total (14,463) (1,063) 3,516
Total income tax (benefit)
provision $ (9,956) $ 7,378 $ 9,865
The following table shows the principal reasons for the
difference between the effective income tax rate and the
statutory federal income tax rate:
Years Ended December 31, 2017 2016 2015
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income tax rate, net
of federal tax benefits 1.6 2.2 2.1
Affordable housing credit (0.6) (0.7) (0.5)
Employee benefits including ESOP
dividend (0.5) (0.5) (0.4)
Impact of tax reform remeasurement
(81.6) — —
Noncontrolling interests (0.6) (0.6) (0.5)
Non-deductible goodwill 1.0 2.2 —
Other, net (2.6) (2.4) (0.8)
Effective income tax rate (48.3)% 35.2% 34.9%
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 89
Notes to Consolidated Financial Statements continued
The effective income tax rate for 2017 was (48.3)%
compared to 35.2% for 2016. The decrease in the effective
income tax rate and the provision for income taxes was due
to a one-time, non-cash income tax benefit recorded in the
current period as a result of the enactment of the TCJA on
December 22, 2017. The TCJA significantly revised the U.S.
federal corporate income tax by, among other things,
lowering the corporate income tax rate to 21% beginning in
2018 and imposing a mandatory repatriation tax on
accumulated foreign earnings. U.S. GAAP accounting for
income taxes requires that Verizon record the impacts of
any tax law change on our deferred income taxes in the
quarter that the tax law change is enacted. Due to the
complexities involved in accounting for the enactment of the
TCJA, SEC Staff Accounting Bulletin (SAB) 118 allows us to
provide a provisional estimate of the impacts of the
legislation. Verizon has provisionally estimated, based on
currently available information, that the enactment of the
TCJA results in a one-time reduction in net deferred income
tax liabilities of approximately $16.8 billion, primarily due to
the re-measurement of U.S. deferred tax liabilities at the
lower 21% U.S. federal corporate income tax rate, and no
impact from the repatriation tax. This provisional estimate
does not reflect the effects of any state tax law changes
that may arise as a result of federal tax reform. Verizon will
continue to analyze the effects of the TCJA on its financial
statements and operations and include any adjustments to
tax expense or benefit from continuing operations in the
reporting periods that such adjustments are determined,
consistent with the one-year measurement period set forth
in SAB 118.
The effective income tax rate for 2016 was 35.2%
compared to 34.9% for 2015. The increase in the effective
income tax rate was primarily due to the impact of $527
million included in the provision for income taxes from
goodwill not deductible for tax purposes in connection with
the Access Line Sale on April 1, 2016. This increase was
partially offset by the impact that lower income before
income taxes in the current period has on each of the
reconciling items specified in the table above. 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 2016 in compared to severance,
pension and benefit credits recorded in 2015.
The amounts of cash taxes paid by Verizon are as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Income taxes, net of amounts
refunded $ 4,432 $ 9,577 $ 5,293
Employment taxes 1,207 1,196 1,284
Property and other taxes 1,737 1,796 1,868
Total $ 7,376 $ 12,569 $ 8,445
The increase in cash taxes paid during 2016 compared to
2015 was due to a $3.2 billion increase in income taxes paid
primarily as a result of the Access Line Sale.
Deferred taxes arise because of differences in the book and
tax bases of certain assets and liabilities. Significant
components of deferred tax assets and liabilities are as
follows:
(dollars in millions)
At December 31, 2017 2016
Employee benefits $ 6,174 $ 10,453
Tax loss and credit carry forwards 4,176 3,318
Other—assets 1,938 2,632
12,288 16,403
Valuation allowances (3,293) (2,473)
Deferred tax assets 8,995 13,930
Spectrum and other intangible
amortization 21,148 31,404
Depreciation 14,767 22,848
Other—liabilities 4,281 5,642
Deferred tax liabilities 40,196 59,894
Net deferred tax liability $ 31,201 $ 45,964
The decrease in the net deferred tax liability during 2017
was primarily due to the $16.8 billion re-measurement of
U.S. deferred taxes at the lower 21% U.S. federal corporate
income tax rate.
At December 31, 2017, undistributed earnings of our foreign
subsidiaries indefinitely invested outside the United States
amounted to approximately $1.8 billion. Due to foreign legal
restrictions that require minimum reserves be maintained in
certain countries, not all of the foreign undistributed
earnings are available for repatriation. No U.S. federal
deferred income taxes on these undistributed earnings are
required because, under the TCJA, such earnings have
been subject to U.S. federal tax as a result of the mandatory
repatriation provision. In addition, such earnings will not be
subject to U.S. federal tax when actually distributed under
the new 100% participation exemption as enacted under the
TCJA.
At December 31, 2017, we had net after-tax loss and credit
carry forwards for income tax purposes of approximately
$4.2 billion that primarily relate to state and foreign taxes.
Of these net after-tax loss and credit carry forwards,
approximately $2.6 billion will expire between 2018 and
2037 and approximately $1.6 billion may be carried forward
indefinitely.
90 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
During 2017, the valuation allowance increased
approximately $0.8 billion. The balance of the valuation
allowance at December 31, 2017 and the 2017 activity is
primarily related to state and foreign taxes.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of
unrecognized tax benefits is as follows:
(dollars in millions)
2017 2016 2015
Balance at January 1, $ 1,902 $ 1,635 $ 1,823
Additions based on tax positions
related to the current year 219 338 194
Additions for tax positions of prior
years 756 188 330
Reductions for tax positions of
prior years (419) (153) (412)
Settlements (42) (18) (79)
Lapses of statutes of limitations (61) (88) (221)
Balance at December 31, $ 2,355 $ 1,902 $ 1,635
Included in the total unrecognized tax benefits at
December 31, 2017, 2016 and 2015 is $1.9 billion, $1.5 billion
and $1.2 billion, respectively, that if recognized, would
favorably affect the effective income tax rate.
We recognized the following net after-tax (expenses)
benefits related to interest and penalties in the provision for
income taxes:
Years Ended December 31, (dollars in millions)
2017 $ (77)
2016 (25)
2015 43
The after-tax accruals for the payment of interest and
penalties in the consolidated balance sheets are as follows:
At December 31, (dollars in millions)
2017 $ 269
2016 142
The increase in unrecognized tax benefits during 2017 was
primarily related to the acquisition of Yahoo’s operating
business.
Verizon and/or its subsidiaries file income tax returns in the
U.S. federal jurisdiction, and various state, local and foreign
jurisdictions. As a large taxpayer, we are under audit by the
Internal Revenue Service (IRS) and multiple state and
foreign jurisdictions for various open tax years. The IRS is
currently examining the Company’s U.S. income tax returns
for tax years 2013-2014 and Cellco Partnership’s U.S.
income tax return for tax year 2013-2014. Tax controversies
are ongoing for tax years as early as 2005. The amount of
the liability for unrecognized tax benefits will change in the
next twelve months due to the expiration of the statute of
limitations in various jurisdictions and it is reasonably
possible that various current tax examinations will conclude
or require reevaluations of the Company’s tax positions
during this period. An estimate of the range of the possible
change cannot be made until these tax matters are further
developed or resolved.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 91
Notes to Consolidated Financial Statements continued
Note 12
Segment Information
Reportable Segments
We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and
organize by products and services, and customer groups, respectively. We measure and evaluate our reportable segments
based on segment operating income, consistent with the chief operating decision maker’s assessment of segment
performance.
Our segments and their principal activities consist of the following:
Segment Description
Wireless Wireless’ communications products and services include wireless voice and data services and equipment sales, which are
provided to consumer, business and government customers across the U.S.
Wireline Wireline’s voice, data and video communications products and enhanced services include broadband video and data
services, corporate networking solutions, security and managed network services and local and long distance voice
services. We provide these products and services to consumers in the U.S., as well as to carriers, businesses and
government customers both in the U.S. and around the world.
During the first quarter of 2017, Verizon reorganized the customer groups within its Wireline segment. Previously, the
customer groups in the Wireline segment consisted of Mass Markets (which included Consumer Retail and Small Business
subgroups), Global Enterprise and Global Wholesale. Pursuant to the reorganization, there are now four customer groups
within the Wireline segment: Consumer Markets, which includes the customers previously included in Consumer Retail;
Enterprise Solutions, which includes the large business customers, including multinational corporations, and federal
government customers previously included in Global Enterprise; Partner Solutions, which includes the customers previously
included in Global Wholesale; and Business Markets, a new customer group, which includes U.S.-based small business
customers previously included in Mass Markets and U.S.-based medium business customers, state and local government
customers and educational institutions previously included in Global Enterprise.
Corporate and other includes the results of our Media business, branded Oath, our telematics and other businesses,
investments in unconsolidated businesses, unallocated corporate expenses, pension and other employee benefit related
costs and lease financing. Corporate and other also includes the historical results of divested businesses and other
adjustments and gains and losses that are not allocated in assessing segment performance due to their nature. Although
such transactions are excluded from the business segment results, they are included in reported consolidated earnings.
Gains and losses 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 completed our acquisition of Yahoo’s operating
business on June 13, 2017.
On April 1, 2016, we completed the Access Line Sale. Additionally, on May 1, 2017, we completed the Data Center Sale. See
Note 2 for additional information. The results of operations for these divestitures and other insignificant transactions are
included within Corporate and other for all periods presented to reflect comparable segment operating results consistent
with the information regularly reviewed by our chief operating decision maker.
In addition, Corporate and other includes the results of our telematics businesses for all periods presented, which were
reclassified from our Wireline segment effective April 1, 2016. The impact of this reclassification was insignificant to our
consolidated financial statements and our segment results of operations.
The reconciliation of segment operating revenues and expenses to consolidated operating revenues and expenses below
includes the effects of special items that management does not consider in assessing segment performance, primarily
because of their nature.
We have adjusted prior period consolidated and segment information, where applicable, to conform to the current year
presentation.
92 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
The following table provides operating financial information for our two reportable segments:
(dollars in millions)
2017 Wireless Wireline
Total
Reportable
Segments
External Operating Revenues
Service $ 62,972 $ — $ 62,972
Equipment 18,889 — 18,889
Other 5,270 — 5,270
Consumer Markets — 12,775 12,775
Enterprise Solutions — 9,165 9,165
Partner Solutions — 3,969 3,969
Business Markets — 3,585 3,585
Other — 234 234
Intersegment revenues 380 952 1,332
Total operating revenues 87,511 30,680 118,191
Cost of services 7,990 17,922 25,912
Wireless cost of equipment 22,147 — 22,147
Selling, general and administrative expense 18,772 6,274 25,046
Depreciation and amortization expense 9,395 6,104 15,499
Total operating expenses 58,304 30,300 88,604
Operating income $ 29,207 $ 380 $ 29,587
Assets $ 235,873 $ 75,282 $311,155
Property, plant and equipment, net 43,935 41,351 85,286
Capital expenditures 10,310 5,339 15,649
(dollars in millions)
2016 Wireless Wireline
Total
Reportable
Segments
External Operating Revenues
Service $ 66,362 $ — $ 66,362
Equipment 17,511 — 17,511
Other 4,915 — 4,915
Consumer Markets — 12,751 12,751
Enterprise Solutions — 9,162 9,162
Partner Solutions — 3,976 3,976
Business Markets — 3,356 3,356
Other — 314 314
Intersegment revenues 398 951 1,349
Total operating revenues 89,186 30,510 119,696
Cost of services 7,988 18,353 26,341
Wireless cost of equipment 22,238 — 22,238
Selling, general and administrative expense 19,924 6,476 26,400
Depreciation and amortization expense 9,183 5,975 15,158
Total operating expenses 59,333 30,804 90,137
Operating income (loss) $ 29,853 $ (294) $ 29,559
Assets $ 211,345 $ 66,679 $278,024
Property, plant and equipment, net 42,898 40,205 83,103
Capital expenditures 11,240 4,504 15,744
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 93
Notes to Consolidated Financial Statements continued
(dollars in millions)
2015 Wireless Wireline
Total
Reportable
Segments
External Operating Revenues
Service $ 70,305 $ — $ 70,305
Equipment 16,924 — 16,924
Other 4,294 — 4,294
Consumer Markets — 12,696 12,696
Enterprise Solutions — 9,376 9,376
Partner Solutions — 4,228 4,228
Business Markets — 3,553 3,553
Other — 330 330
Intersegment revenues 157 967 1,124
Total operating revenues 91,680 31,150 122,830
Cost of services 7,803 18,483 26,286
Wireless cost of equipment 23,119 — 23,119
Selling, general and administrative expense 21,805 7,140 28,945
Depreciation and amortization expense 8,980 6,353 15,333
Total operating expenses 61,707 31,976 93,683
Operating income (loss) $ 29,973 $ (826) $ 29,147
Assets $ 185,405 $ 78,305 $ 263,710
Property, plant and equipment, net 40,911 41,044 81,955
Capital expenditures 11,725 5,049 16,774
Reconciliation to Consolidated Financial Information
A reconciliation of the reportable segment operating revenues to consolidated operating revenues is as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Operating Revenues
Total reportable segments $ 118,191 $ 119,696 $ 122,830
Corporate and other 9,019 5,663 3,738
Reconciling items:
Operating results from divested businesses (Note 2) 368 2,115 6,224
Eliminations (1,544) (1,494) (1,172)
Consolidated operating revenues $ 126,034 $ 125,980 $ 131,620
Fios revenues are included within our Wireline segment and amounted to approximately $11.7 billion, $11.2 billion, and $10.7
billion for the years ended December 31, 2017, 2016 and 2015, respectively.
94 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
A reconciliation of the total of the reportable segments’ operating income to consolidated income before provision for
income taxes is as follows:
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Operating Income
Total reportable segments $ 29,587 $ 29,559 $ 29,147
Corporate and other (1,409) (1,721) (1,720)
Reconciling items:
Severance, pension and benefit (charges) credits (Note 10) (1,391) (2,923) 2,256
Net gain on sale of divested businesses (Note 2) 1,774 1,007 —
Acquisition and integration related charges (Note 2) (884) — —
Gain on spectrum license transactions (Note 2) 270 142 254
Operating results from divested businesses 149 995 3,123
Product realignment (682) — —
Consolidated operating income 27,414 27,059 33,060
Equity in losses of unconsolidated businesses (77) (98) (86)
Other income (expense), net (2,010) (1,599) 186
Interest expense (4,733) (4,376) (4,920)
Income Before Benefit (Provision) For Income Taxes $ 20,594 $ 20,986 $ 28,240
A reconciliation of the total of the reportable segments’ assets to consolidated assets is as follows:
(dollars in millions)
At December 31, 2017 2016
Assets
Total reportable segments $ 311,155 $ 278,024
Corporate and other 239,040 213,787
Eliminations (293,052) (247,631)
Total consolidated $ 257,143 $ 244,180
No single customer accounted for more than 10% of our total operating revenues during the years ended December 31, 2017,
2016 and 2015. International operating revenues and long-lived assets are not significant.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 95
Notes to Consolidated Financial Statements continued
Note 13
Comprehensive Income
Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are
excluded from net income. Significant changes in the components of Other comprehensive income, net of provision for
income taxes are described below.
Accumulated Other Comprehensive Income
The changes in the balances of Accumulated other comprehensive income by component are as follows:
(dollars in millions)
Foreign
currency
translation
adjustments
Unrealized
gains
(losses)
on cash
flow
hedges
Unrealized
losses on
marketable
securities
Defined benefit
pension and
postretirement
plans Total
Balance at January 1, 2015 $ (346) $ (84) $ 112 $ 1,429 $ 1,111
Other comprehensive loss (208) (1,063) (5) — (1,276)
Amounts reclassified to net income — 869 (6) (148) 715
Net other comprehensive loss (208) (194) (11) (148) (561)
Balance at December 31, 2015 (554) (278) 101 1,281 550
Other comprehensive (loss) income (159) (225) (13) 2,881 2,484
Amounts reclassified to net income — 423 (42) (742) (361)
Net other comprehensive (loss) income (159) 198 (55) 2,139 2,123
Balance at December 31, 2016 (713) (80) 46 3,420 2,673
Other comprehensive income 245 818 10 327 1,400
Amounts reclassified to net income — (849) (24) (541) (1,414)
Net other comprehensive income (loss) 245 (31) (14) (214) (14)
Balance at December 31, 2017 $ (468) $ (111) $ 32 $ 3,206 $2,659
The amounts presented above in net other comprehensive income (loss) are net of taxes. The amounts reclassified to net
income related to unrealized gain (loss) on cash flow hedges in the table above are included in Other income (expense), net
and Interest expense on our consolidated statements of income. See Note 8 for additional information. The amounts
reclassified to net income related to unrealized gain (loss) on marketable securities in the table above are included in Other
income (expense), net on our consolidated statements of income. The amounts reclassified to net income related to defined
benefit pension and postretirement plans in the table above are included in Cost of services and Selling, general and
administrative expense on our consolidated statements of income. See Note 10 for additional information.
Note 14
Additional Financial Information
The tables that follow provide additional financial
information related to our consolidated financial statements:
Income Statement Information
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Depreciation expense $ 14,741 $ 14,227 $ 14,323
Interest costs on debt balances 5,256 4,961 5,391
Net amortization of debt
discount 155 119 113
Capitalized interest costs (678) (704) (584)
Advertising expense 2,643 2,744 2,749
Balance Sheet Information
(dollars in millions)
At December 31, 2017 2016
Accounts Payable and Accrued Liabilities
Accounts payable $ 7,063 $ 7,084
Accrued expenses 6,756 5,717
Accrued vacation, salaries and wages 4,521 3,813
Interest payable 1,409 1,463
Taxes payable 1,483 1,516
$ 21,232 $ 19,593
Other Current Liabilities
Advance billings and customer deposits $ 3,084 $ 2,914
Dividends payable 2,429 2,375
Other 2,839 2,813
$ 8,352 $ 8,102
96 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Cash Flow Information
(dollars in millions)
Years Ended December 31, 2017 2016 2015
Cash Paid
Interest, net of amounts capitalized $ 4,369 $ 4,085 $ 4,491
Income taxes, net of amounts
refunded 4,432 9,577 5,293
Other, net Cash Flows from
Operating Activities
Changes in device payment plan
agreement receivables-non-current $ (579) $ (3,303) $ (23)
Proceeds from Tower Monetization
Transaction — — 2,346
Other, net 1,251 206 (3,637)
$ 672 $ (3,097) $ (1,314)
Other, net Cash Flows from Financing
Activities
Net debt related costs $ (3,599) $ (1,991) $ (422)
Proceeds from Tower Monetization
Transaction — — 2,742
Other, net (1,253) (806) (743)
$ (4,852) $ (2,797) $ 1,577
On March 3, 2017, the Verizon Board of Directors authorized
a new share buyback program to repurchase up to
100 million shares of the company’s common stock. The new
program will terminate when the aggregate number of
shares purchased reaches 100 million, or at the close of
business on February 28, 2020, whichever is sooner. During
the years ended December 31, 2017 and 2016, Verizon did
not repurchase any shares of Verizon’s common stock under
our authorized share buyback programs. During the year
ended December 31, 2015, Verizon repurchased
approximately 2.8 million shares of the Company’s common
stock under our previous share buyback program for
approximately $0.1 billion. At December 31, 2017, the
maximum number of shares that could be purchased by or
on behalf of Verizon under our share buyback program was
100 million.
In addition to the previously authorized three-year share
buyback program, in 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 up-front payment totaling $5.0 billion,
Verizon received an initial delivery of 86.2 million shares
having a value of approximately $4.25 billion. 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.
Common stock has been used from time to time to satisfy
some of the funding requirements of employee and
shareowner plans. During the year ended December 31,
2017, we issued 2.8 million common shares from Treasury
stock, which had an insignificant aggregate value. During
the year ended December 31, 2016, we issued 3.5 million
common shares from Treasury stock, which had an
insignificant aggregate value. During the year ended
December 31, 2015, we issued 22.6 million common shares
from Treasury stock, which had an aggregate value of $0.9
billion.
Note 15
Commitments and Contingencies
In the ordinary course of business, Verizon is involved in
various commercial litigation and regulatory proceedings at
the state and federal level. Where it is determined, in
consultation with counsel based on litigation and settlement
risks, that a loss is probable and estimable in a given matter,
the Company establishes an accrual. In none of the
currently pending matters is the amount of accrual material.
An estimate of the reasonably possible loss or range of loss
in excess of the amounts already accrued cannot be made
at this time due to various factors typical in contested
proceedings, including (1) uncertain damage theories and
demands; (2) a less than complete factual record;
(3) uncertainty concerning legal theories and their
resolution by courts or regulators; and (4) the unpredictable
nature of the opposing party and its demands. We
continuously monitor these proceedings as they develop
and adjust any accrual or disclosure as needed. We do not
expect that the ultimate resolution of any pending
regulatory or legal matter in future periods, including the
Hicksville matter described below, will have a material effect
on our financial condition, but it could have a material effect
on our results of operations for a given reporting period.
Reserves have been established to cover environmental
matters relating to discontinued businesses and past
telecommunications activities. These reserves include funds
to address contamination at the site of a former Sylvania
facility in Hicksville NY, which had processed nuclear fuel
rods in the 1950s and 1960s. In September 2005, the Army
Corps of Engineers (ACE) accepted the site into its
Formerly Utilized Sites Remedial Action Program. As a
result, the ACE has taken primary responsibility for
addressing the contamination at the site. An adjustment to
the reserves may be made after a cost allocation is
conducted with respect to the past and future expenses of
all of the parties. Adjustments to the environmental reserve
may also be made based upon the actual conditions found
at other sites requiring remediation.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 97
Notes to Consolidated Financial Statements continued
Verizon is currently involved in approximately 40 federal
district court actions alleging that Verizon is infringing
various patents. Most of these cases are brought by nonpracticing
entities and effectively seek only monetary
damages; a small number are brought by companies that
have sold products and could seek injunctive relief as well.
These cases have progressed to various stages and a small
number may go to trial in the coming 12 months if they are
not otherwise resolved.
In connection with the execution of agreements for the
sales of businesses and investments, Verizon ordinarily
provides representations and warranties to the purchasers
pertaining to a variety of nonfinancial matters, such as
ownership of the securities being sold, as well as indemnity
from certain financial losses. From time to time,
counterparties may make claims under these provisions,
and Verizon will seek to defend against those claims and
resolve them in the ordinary course of business.
Subsequent to the sale of Verizon Information Services
Canada in 2004, we continue to provide a guarantee to
publish directories, which was issued when the directory
business was purchased in 2001 and had a 30-year term
(before extensions). The preexisting guarantee continues,
without modification, despite the subsequent sale of Verizon
Information Services Canada and the spin-off of our
domestic print and Internet yellow pages directories
business. The possible financial impact of the guarantee,
which is not expected to be adverse, cannot be reasonably
estimated as a variety of the potential outcomes available
under the guarantee result in costs and revenues or
benefits that may offset each other. We do not believe
performance under the guarantee is likely.
As of December 31, 2017, letters of credit totaling
approximately $0.6 billion, which were executed in the
normal course of business and support several financing
arrangements and payment obligations to third parties, were
outstanding.
We have several commitments, totaling $21.0 billion,
primarily to purchase programming and network services,
equipment, software and marketing services, which will be
used or sold in the ordinary course of business, from a
variety of suppliers. Of this total amount, $7.6 billion is
attributable to 2018, $9.0 billion is attributable to 2019
through 2020, $2.1 billion is attributable to 2021 through
2022 and $2.3 billion is attributable to years thereafter.
These amounts do not represent our entire anticipated
purchases in the future, but represent only those items that
are the subject of contractual obligations. Our commitments
are generally determined based on the noncancelable
quantities or termination amounts. Purchases against our
commitments totaled approximately $8.2 billion for 2017,
$8.1 billion for 2016, and $10.2 billion for 2015. Since the
commitments to purchase programming services from
television networks and broadcast stations have no
minimum volume requirement, we estimated our obligation
based on number of subscribers at December 31, 2017, and
applicable rates stipulated in the contracts in effect at that
time. We also purchase products and services as needed
with no firm commitment.
98 verizon.com/2017AnnualReport
Notes to Consolidated Financial Statements continued
Note 16
Quarterly Financial Information (Unaudited)
(dollars in millions, except per share amounts)
Net Income attributable to Verizon (1)
Quarter Ended Operating
Revenues
Operating
Income Amount
Per ShareBasic
Per ShareDiluted
Net
Income
2017
March 31 $ 29,814 $ 7,181 $ 3,450 $ 0.85 $ 0.84 $ 3,553
June 30 30,548 8,232 4,362 1.07 1.07 4,478
September 30 31,717 7,208 3,620 0.89 0.89 3,736
December 31 33,955 4,793 18,669 4.57 4.56 18,783
2016
March 31 $ 32,171 $ 7,942 $ 4,310 $ 1.06 $ 1.06 $ 4,430
June 30 30,532 4,554 702 0.17 0.17 831
September 30 30,937 6,540 3,620 0.89 0.89 3,747
December 31 32,340 8,023 4,495 1.10 1.10 4,600
(1) Net income attributable to Verizon per common share is computed independently for each quarter and the sum of the quarters may not equal the
annual amount.
• Results of operations for the first quarter of 2017 include after-tax charges attributable to Verizon of $0.5 billion related to early debt redemption
costs, as well as after-tax credits attributable to Verizon of $0.1 billion related to a gain on spectrum license transactions.
• Results of operations for the second quarter of 2017 include after-tax charges attributable to Verizon of $0.1 billion related to severance, pension
and benefit charges, and after-tax charges attributable to Verizon of $0.4 billion related to acquisition and integration related charges, as well as
after-tax credits attributable to Verizon of $0.9 billion related to a net gain on sale of divested businesses.
• Results of operations for the third quarter of 2017 include after-tax charges attributable to Verizon of $0.3 billion related to early debt redemption
costs and after-tax charges attributable to Verizon of $0.1 billion related to acquisition and integration related charges.
• Results of operations for the fourth quarter of 2017 include after-tax credits attributable to Verizon of $16.8 billion related to the impact of tax
reform, after-tax charges attributable to Verizon of $0.7 billion related to severance, pension and benefit charges, after-tax charges attributable to
Verizon of $0.5 billion related to product realignment costs, as well as after-tax charges attributable to Verizon of $0.4 billion related to early debt
redemption costs. In addition, results of operations for the fourth quarter of 2017 include after-tax credits attributable to Verizon of $0.1 billion
related to a gain on spectrum license transactions and after-tax charges attributable to Verizon of $0.1 billion related to acquisition and integration
related charges.
• Results of operations for the first quarter of 2016 include after-tax charges attributable to Verizon of $0.1 billion related to a pension
remeasurement, as well as after-tax credits attributable to Verizon of $0.1 billion related to a gain on spectrum license transactions.
• Results of operations for the second quarter of 2016 include after-tax charges attributable to Verizon of $2.2 billion related to pension and benefit
remeasurements and after-tax charges attributable to Verizon of $1.1 billion related to early debt redemption costs, as well as after-tax credits
attributable to Verizon of $0.1 billion related to a gain on the Access Line Sale.
• Results of operations for the third quarter of 2016 include after-tax charges attributable to Verizon of $0.5 billion related to a pension
remeasurement and severance costs.
• Results of operations for the fourth quarter of 2016 include after-tax credits attributable to Verizon of $1.0 billion related to severance, pension
and benefit credits.
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 99
Board of Directors
Shellye L. Archambeau
Former Chief Executive Officer
MetricStream, Inc.
Mark T. Bertolini
Chairman and Chief Executive Officer
Aetna Inc.
Richard L. Carrio´n
Executive Chairman
Popular, Inc.
Melanie L. Healey
Former Group President
The Procter & Gamble Company
M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc
Karl-Ludwig Kley
Former Chairman of the Executive Board and
Chief Executive Officer
Merck KGaA
Lowell C. McAdam
Chairman and Chief Executive Officer
Verizon Communications Inc.
Clarence Otis, Jr.
Former Chairman and Chief Executive Officer
Darden Restaurants, Inc.
Rodney E. Slater
Partner
Squire Patton Boggs LLP
Kathryn A. Tesija
Former Executive Vice President and
Chief Merchandising and Supply Chain Officer
Target Corporation
Gregory D. Wasson
Former President and Chief Executive Officer
Walgreens Boots Alliance, Inc.
Gregory G. Weaver
Former Chairman and Chief Executive Officer
Deloitte & Touche LLP
Corporate officers and
executive leadership
Lowell C. McAdam
Chairman and Chief Executive Officer
Matthew D. Ellis
Executive Vice President and Chief Financial Officer
Timothy M. Armstrong
Executive Vice President and President and CEO – Oath
Monty W. Garrett
Senior Vice President of Internal Auditing
James J. Gerace
Senior Vice President and Chief Communications Officer
William L. Horton, Jr.
Senior Vice President, Deputy General Counsel and
Corporate Secretary
Scott Krohn
Senior Vice President and Treasurer
Rima Qureshi
Executive Vice President and Chief Strategy Officer
Marc C. Reed
Executive Vice President and Chief Administrative Officer
Diego Scotti
Executive Vice President and Chief Marketing Officer
Craig L. Silliman
Executive Vice President of Public Policy and
General Counsel
Anthony T. Skiadas
Senior Vice President and Controller
John G. Stratton
Executive Vice President and President – Global Operations
Hans E. Vestberg
Executive Vice President, President – Global Networks and
Chief Technology Officer
100 verizon.com/2017AnnualReport
2017 Annual Report | Verizon Communications Inc. and Subsidiaries 101
Investor information
Stock transfer agent
Questions or requests for assistance regarding changes
to, or transfers of, your registered stock ownership should
be directed to our Transfer Agent, Computershare Trust
Company, N.A. at:
Verizon Communications Inc.
c/o Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Phone: 800 631-2355 or 781 575-3994
Outside the U.S.: 866 725-6576
Website: www.computershare.com/verizon
Email: verizon@computershare.com
Persons using a telecommunications device for the deaf
(TDD) may call: 800 952-9245
Shareowner services
Please contact our Transfer Agent regarding information
about the following services:
Online account access: Registered shareowners
can view account information online at
www.computershare.com/verizon.
Click on “Create Log In” to register. For existing users,
click on “Log In.”
Direct dividend deposit service: Verizon offers an
electronic funds transfer service to registered shareowners
wishing to deposit dividends directly into savings or
checking accounts on dividend payment dates.
Direct invest stock purchase and share ownership plan:
A direct stock purchase and share ownership plan allows
current and new investors to purchase Verizon common
stock and to reinvest their dividends toward the purchase
of additional shares. For more information, go to
www.verizon.com/about/investors/shareowner-services.
Electronic delivery: By receiving links to proxy, annual
report and shareowner materials online, you can help
Verizon reduce the amount of materials we print and mail.
As a thank you for choosing electronic delivery, Verizon will
plant a tree on your behalf. It’s fast and easy, and you can
change your electronic delivery options at any time.
Sign up at www.computershare.com/verizon to take
advantage of the many benefits electronic delivery
offers, including:
• Faster access to financial documents
• Email notification of document availability
• Access to your documents online 24/7
• Convenience of managing your documents (view and print)
If your shares are held by a broker, bank or other nominee,
you may elect to receive an electronic copy of the annual
report and proxy materials online at www.proxyvote.com,
or you can contact your broker.
Investor services
Investor website: Get company information and news on
our investor website—www.verizon.com/about/investors.
Email alerts: Get the latest investor information delivered
directly to you. Subscribe to email alerts on our investor
website.
Stock market information
Shareowners of record as of December 31, 2017: 659,979
Verizon (ticker symbol: VZ) is listed on the New York Stock
Exchange and the Nasdaq Global Select Market.
Dividend information
At its September 2017 meeting, the Board of Directors
increased our quarterly dividend 2.2 percent. On an annual
basis, this increased Verizon’s dividend to $2.36 per share.
Dividends have been paid since 1984.
Form 10-K
To receive a printed copy of the 2017 Annual Report on
Form 10-K, which is filed with the Securities and Exchange
Commission, please contact Investor Relations:
Verizon Communications Inc.
Investor Relations
One Verizon Way
Basking Ridge, NJ 07920
Phone: 212 395-1525
Corporate governance
Verizon’s Bylaws, Code of Conduct, Corporate
Governance Guidelines and the charters of the
committees of our Board of Directors can be found on
the corporate governance section of our website at
www.verizon.com/about/investors/corporate-governance.
If you would like to receive a printed copy of any of these
documents, please contact the Assistant Corporate
Secretary:
Verizon Communications Inc.
Assistant Corporate Secretary
1095 Avenue of the Americas
New York, NY 10036
© 2018. Verizon. All Rights Reserved.
002CSN8D3F
3.EPC05610112500.101
Verizon Communications Inc.
1095 Avenue of the Americas
New York, NY 10036
212 395-1000
verizon.com/2017AnnualReport
A global leader in telecommunications, media & technology
AT&T INC. 2016 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
Cash from operations
(Record)
25% since 2014
$39.3B $39.3B 2016
$35.9B 2015
$31.3B 2014
Free cash flow is cash from operations minus capital expenditures of $22.4B in 2016, $20.0B in 2015 and $21.4B in 2014
$16.9B
70% since 2014
Free cash flow
2016 $16.9B
$9.9B
2015 $15.9B
2014
Capital spending
>$140B
invested between 2012 and 2016 in our
network, including acquisitions of spectrum
and wireless operations
$22.4B
capital expenditures in 2016 alone
Reflecting DTV acquisition and growth in video and IP services
$163.8B
Consolidated revenues
11.6%
Free cash flow dividend payout ratio
is dividends of $11.8B divided by free
cash flow of $16.9B
70%
Free cash flow dividend payout ratio
AT&T I N C .   AT&T INC. || 11
TO OUR INVESTORS
I discussed how our strategy and capital allocation
are moving us forward to achieve this simple
mission. Our strategy was focused on becoming
the premier integrated communications company
in the world, and we have been on a journey to
design and deploy the world-class wireless, fiber
and Internet Protocol (IP) networks to make
that happen.
In 2015, we significantly enhanced our ability to
offer an integrated experience by adding DIRECTV
to our business and becoming one of the largest
pay-TV providers in the world.
The scale and strength of DIRECTV’s media
and entertainment relationships immediately
opened the door for AT&T to introduce new
customer experiences and offer robust premium
entertainment packages seamlessly integrated
into a terrific mobile experience. For example,
early last year, our customers were given the
ability to watch premium DIRECTV entertainment
on their AT&T mobile devices with unlimited data.
Shortly after that, we introduced Data Free TV,
which allowed customers to view all of their
DIRECTV content on their AT&T mobile devices
with no data charges.
And in late November, we introduced DIRECTV
NOW, our game-changing, multi-channel streaming
video product. DIRECTV NOW offers an elegant
user interface that’s seamlessly integrated with
our mobility service at price points the industry
had never seen before. It clearly struck a chord
with consumers; in the first month after launch,
more than 200,000 customers subscribed to the
service. And we’re just getting started.
In last year’s letter, I explained AT&T’s overriding mission:
Connect people with their world, everywhere they live, work
and play, and do it better than anyone else.
>200K
DIRECTV NOW customer subscriptions
in the first month after launch
2  2 || AT&T I N C . AT&T INC.
A BOLD NEXT STEP:
TIME WARNER
Our customers’ response to these innovative
services gave us confidence that owning meaningful
premium content would allow us to innovate faster
with a single-minded focus on what customers
really want from their entertainment experience.
That confidence led us to an agreement last fall
to acquire one of the world’s best creators of
premium content — Time Warner. Once we close
the deal, which we expect to happen before
year-end, the amazing creative talent and content
of Warner Bros., HBO and Turner Networks will
be part of the AT&T family.
Bringing Time Warner’s great content under
the AT&T umbrella will allow us to expand our
mission of connecting people with their world.
We remain intent on being the premier integrated
communications company in the world, but our
strategic vision has expanded beyond simple
connectivity to incorporate premium content
creation for our customers.
Looking ahead, our
strategy is to create
the best entertainment
and communications
experiences in the world.
Combining Time Warner’s premium content with
our leading customer relationships across mobile,
TV and broadband networks positions us as a
global leader in the converging Telecom, Media
and Technology industry for years to come.
With Time Warner, we intend to disrupt the existing
linear pay-TV model and innovate with new content,
addressable advertising and subscription models.
Disruption requires bold steps, and combining
AT&T’s scaled distribution with Time Warner’s
scaled content creation will allow us to drive a level
of competition, innovation and consumer choice
the industry and its customers haven’t seen before.
Beyond its far-reaching customer benefits, the
Time Warner acquisition will also have significant
financial benefits. It will be accretive to adjusted
earnings per share and free cash flow per share
within a year of close. It diversifies our revenue
mix, adding higher growth and a nice international
complement.
And by making us both a provider and a purchaser
of content, combining with Time Warner also
gives us an effective hedge against increasing
content costs in our existing entertainment
distribution business.
OUR STRATEGY
To create the best entertainment and
communications experiences for our customers,
we’re committed to steady and consistent
investment in the following areas:
Deliver an effortless customer experience
This underpins everything we do. When we design
products, processes or a user experience, we strive
to build “effortless” into every touch point. Whether
a customer is searching for a product, viewing
content, interacting with customer care or having
service installed — it must be simple, seamless
AT&T I N C .   AT&T INC. || 33
and effortless. To make effortless a competitive
advantage requires continuous investment and
improvement. We made a lot of progress in 2016
with substantial investments to integrate the
DIRECTV experience, from billing to customer care
and provisioning. We still have a long way to go, but
you can rest assured that significant capital has
been allocated to this critical strategic priority.
Lead in connectivity and integrated solutions
It all begins with connectivity. Premier network
assets are the foundation for delivering the
integrated mobile, video and data solutions our
customers want. Today, every time our customers
access their content, we use one or all of the
following technologies to connect them — wireless
LTE, Wi-Fi, satellite, IP networks and fiber optics.
But our customers should neither know nor care
about any of this. Our job is simply to deliver
seamless connectivity to every device and sensor
in their office, car, home — you name it — and
make sure it is fast, highly secure and reliable.
We continue to invest heavily to make this possible.
As a result, today we can offer:
• Ubiquitous, mobile, fast and highly secure
connectivity to nearly 400 million people and
businesses in the United States and Mexico —
a seamless, cross-border North American
network that’s unique in the marketplace.

• An ultra-fast 100% fiber network marketed to
nearly 4 million consumer locations across
46 metros nationwide.
RANDALL STEPHENSON
Chairman, Chief Executive Officer and President
• High-speed fiber connections to more than
1.2 million U.S. business locations.
• Global IP network services that connect
businesses on 6 continents representing
99% of the world’s economy.

• High-speed internet connections to more than
60 million U.S. customer locations.
• Highly efficient satellites capable of delivering
HD and Ultra-HD video covering nearly everyone
in the United States and Latin America.
4   4 || AT&T I N C . AT&T INC.
Produce and assemble world-class
entertainment
Great content wins every time. And that’s what
we’re all about delivering — wherever, whenever
and however customers want it. Increasingly,
they want it on their mobile screens. DIRECTV
gave us the scale in content relationships that
we needed to assemble the entertainment for
our new DIRECTV NOW video streaming service.
Our Otter Media joint venture with The Chernin
Group is creating and assembling some of the
best digital, short-form content around. And Time
Warner will make us a global leader in producing
and assembling world-class, premium content.
By owning great content, we can build truly
differentiated entertainment services, whether
it’s traditional TV, mobile or over-the-top.
Serve our customers globally
Our customers are global and so are we. That’s
why we continue to invest to ensure that we can
provide integrated solutions that connect people
and businesses around the world. We are a leader
in transforming our network from hardware- to
software-centric. This software-defined network
makes it easier for us to offer our products globally.
Our global focus is why we’re the leader in serving
multinational businesses.
Time Warner will also enhance our global
capabilities with rich content offerings throughout
the world. Combined with our global presence, we
expect significant synergies in our Latin American
mobility and TV businesses.
Operate with an industry-leading cost structure
We’re focused on building a modern network
architecture that will provide the highest efficiency
and productivity in the industry. To make that
happen, we’re moving forward on a number of
fronts. The biggest by far is our software-centric
network transformation, which will allow us to
deliver the most network traffic at the lowest
marginal cost in the industry. Additionally,
we’re streamlining operations, simplifying offers,
getting the best prices from our supply chain,
automating customer self-service and making
more interactions digital to reduce the time it
takes to provide service. And that’s on top of the
$2.5 billion in annual synergies we anticipate by
the end of 2018 from the integration of DIRECTV.
That includes taking advantage of our scale to
achieve the industry’s best video content costs,
as well as efficiencies from streamlining installation
and customer care. In 2015, we largely eliminated
subsidized mobile handsets and, as a result,
achieved record EBITDA service margins in our
mobility business in 2016.
Equip our people for the future
AT&T received a lot of news media attention in
2016 for the progress we’re making in equipping
our people with the right skills for the future.
I am so proud of our employees for their clear
commitment to adapt to a fast-changing world
where capabilities must constantly be refreshed.
As the pace of technological change accelerates,
our people are adapting as never before. We’re
using innovative training and building profiles of
future job requirements to help our employees
pivot their skills from hardware to software, from
legacy wireline to mobile and entertainment, and
from data recorders to data scientists.
AT&T I N C .   AT&T INC. || 55
EXECUTING OUR STRATEGY
To deliver on our strategy,
we have organized AT&T
around our customers.
Each business unit serves a distinct, growing
market, but a common thread runs through them
all — the ability to offer customers integrated
solutions that are tailored to their needs and
effortless to use.
Business Solutions is our largest segment,
generating $71 billion in revenues in 2016. We
achieved growth in wireless and strategic business
services, which now account for nearly 75% of our
Business Solutions revenues. And we expanded
our suite of smart solutions such as FlexWare,
Network on Demand and NetBond — offering our
customers a new level of control and security in
how they manage critical business data. We also
continued to build on our leadership in the Internet
of Things — from connected cars to smart cities.
Entertainment Group, our next largest segment,
generated revenues of $51 billion in 2016. As
I mentioned above, we achieved successful launches
of our DIRECTV NOW and TV Everywhere offerings,
and we saw a strong customer response to our
new Data Free TV offer. We also expanded our
AT&T FiberSM service and now serve nearly 4 million
locations across 46 U.S. markets.
Our U.S. Mobility operations added 6.2 million
wireless subscribers in a highly competitive market
and finished the year with an exceptionally low
postpaid churn rate. We added more than 1.5 million
prepaid subscribers and grew associated revenues
by more than 20% for the year.
International revenues were more than $7 billion
in 2016 and came from our wireless operations in
Mexico and our pay-TV business throughout Latin
America. We’re now the fastest-growing wireless
carrier in Mexico. We finished the year up by more
than 3.3 million subscribers — an increase of 38%
from 2015. Our 4G LTE network now covers 78 million
people in Mexico. And our DIRECTV Latin America
operations delivered free cash flow improvement
amidst the region’s challenging macro-economic
environment.
C A P I T A L A L L O C A T I O N
As I discussed last year, our capital allocation
approach is very straightforward. And our
proposed acquisition of Time Warner has not
changed how we think about it.
Our first priority continues to be investing
for growth.
We operate in a highly capital-intensive industry.
Leadership and competitive advantage over the
long term require sustained investment. In fact,
over the past 5 years, we have invested more than
$33B
Consumer Mobility
$71B
Business Solutions
$7B
International
$51B
Revenues in 2016 Entertainment Group
6   6 || AT&T I N C . AT&T INC.
and political environment in the United States,
we’re hopeful for meaningful corporate tax reform,
and we are already seeing signs of streamlining
and rationalizing stifling regulations imposed
on our industry. If tax and regulatory reforms
materialize over the next year, you should expect
AT&T to accelerate several investments into 2017
and 2018.
Our second priority is to provide a consistent
cash return to our owners through a methodical
dividend policy.
LORI
LEE
Senior Executive Vice
President and Global
Marketing Officer
JOHN
STANKEY
Chief Executive Officer
— AT&T Entertainment
Group, AT&T Services, Inc.
JOHN
STEPHENS
Senior Executive Vice
President and Chief
Financial Officer
ROBERT
QUINN JR.
Senior Executive Vice
President — External
and Legislative Affairs,
AT&T Services, Inc.
DAVID
MCATEE II
Senior Executive Vice
President and General
Counsel
AT&T LEADERSHIP TEAM
JOHN
DONOVAN
Chief Strategy Officer
and Group President
— AT&T Technology
and Operations
BILL
BLASE JR.
Senior Executive Vice
President — Human
Resources
DAVID
HUNTLEY
Senior Executive Vice
President and Chief
Compliance Officer
THADDEUS
ARROYO
Chief Executive Officer
— Business Solutions
and International
R A N DA L L
STEPHENSON
Chairman, Chief
Executive Officer
and President
$140 billion, including capital investments in our
wireless and wireline networks and acquisitions
of wireless spectrum and operations, to build out
one of the most advanced wireless, fiber and IP
networks in the world.
We believe it’s critical to lead in developing new
technologies to ensure we have the integrated
products and services that will set us apart and
give us the lowest cost structure with the greatest
efficiency and productivity in the industry. We
expect to remain one of the largest investors in the
United States. And as we assess the new business
AT&T I N C .   AT&T INC. || 77
We have increased the quarterly dividend for
33 consecutive years, and we are proud of that
achievement.
In 2014, as we invested significantly to build out our
wireless, fiber and IP networks, our dividend payout
as a percentage of cash flows moved above our
historic average. But in 2015 through 2016, our ratio
moved back in line with our normal targeted levels,
as we completed those major investment projects.
And our Time Warner deal will only enhance our
dividend coverage ratio.
In a highly capital-intensive industry where the
ability to invest is a competitive advantage, we
believe a strong balance sheet and a commitment
to maintaining strong investment-grade debt is
critical. That doesn’t change with our Time Warner
deal. By the end of the first year after we close
Time Warner, we expect net debt to adjusted
EBITDA to be in the 2.5x range.
We’re confident that our future cash flows will
be sufficient to bring our debt levels back into
our traditional target range by the end of year 4
after merger close. In fact, for those 4 years, we’re
planning to use nearly all of our cash flow after
dividends to pay down debt.
Historically, we’ve kept our balance sheet strong and
demonstrated disciplined, systematic investment
throughout the various business cycles.
This has enabled us to maintain a market-leading
position in good times and bad. In fact, through
the most recent financial crisis, our strong balance
sheet let us invest at record levels to meet
customer demand as smartphone usage exploded.
As a result, we came out of the financial crisis with
one of the highest-quality smartphone customer
bases in the world and a best-in-class network.
This is an investment pattern that we have repeated
time and again.
As always, our overriding
priority is to create value
for you, our shareholders.
We recognize that how we allocate and invest
capital is critical to generating that value. To
that end, we tie most of our executive team’s
compensation to achieving a targeted return
on invested capital. You can be certain we are
motivated and very focused on providing returns
on your investment.
F I N A N C I A L O U T L O O K
The continued execution of our strategy, combined
with growing contributions from DIRECTV, our
operations in Mexico and Latin America, and our
proposed acquisition of Time Warner, will help us
continue the strong momentum we had in 2016.
Last year, we continued to grow revenues, expand
adjusted operating margins and increase adjusted
earnings in an increasingly competitive environment.
33 YEARS
of consecutive increases in the quarterly dividend
88  || AT&T I N C . AT&T INC.
of the largest employee pension programs around.
To secure these programs for our employees
and retirees, over the past 4 years we’ve contributed
more than $10 billion into our employee pension
plans, making them among the best-funded plans
in the United States. It’s all part of our broader
commitment to invest in America by investing
in our workforce and supporting good jobs in
our communities.
These are exciting times at AT&T. Overseeing it all is
a Board of Directors that brings to the job a diversity
of backgrounds and talents. They’re hands-on and
fully engaged — pushing us with tough questions
and making us better with sound, forward-looking
advice. And they’ve reviewed and approved our
strategy, including our Time Warner decision.
I can assure you that our employee team will
continue to deliver the kind of strong execution
you’ve come to expect. I couldn’t be more thankful
for their efforts. And I couldn’t be more grateful
to you for your continued confidence in AT&T.
Sincerely,
RANDALL STEPHENSON
Chairman, Chief Executive Officer and President
February 8, 2017
We also achieved strong free cash flow as we
continued to invest for growth and return value
to shareholders.
In 2017, we expect that our strategy will help us
deliver continued revenue growth, adjusted earnings
per share growth and operating margin expansion.
What you won’t see us do is let a focus on shortterm
results keep us from investing in growth.
Our financial outlook may change should we
identify opportunities that require investment
above what we anticipate today. But we remain
a company that’s not afraid to take the longterm
view of our business, as our Time Warner
acquisition demonstrates.
Above all, we’re committed to sustaining the
long-term health of our business so we can deliver
above-market returns to our owners, as we did
in 2016.
OUR TEAM
All that we accomplished in 2016 was only possible
because of our people. They are not only a workforce
for today, but also for tomorrow. In addition to
serving current customer needs, they’re taking
advantage of training and re-skilling opportunities
to help them prepare for the jobs of tomorrow.
We know of no other company that’s retraining its
employees on such a large scale. We’re preparing
our team for the future in another important
way, as well. And that’s providing employees with
the financial literacy and financial planning tools
to help them achieve a secure retirement. We’re
committed to doing our part, too. We have one
>$10B
Contributions over the past 4 years
to employee pension plans
AT&T I N C .   AT&T INC. || 99
Selected Financial and Operating Data 10
Management’s Discussion and Analysis of
Financial Condition and Results of Operations 11
Consolidated Financial Statements 45
Notes to Consolidated Financial Statements 50
Report of Management 84
Report of Independent Registered Public Accounting Firm 85
Board of Directors 87
Executive Officers 88
AT&T INC. FINANCIAL REVIEW 2016
10  10 || AT&T I N C . AT&T INC.
At December 31 and for the year ended: 2016 2015 2014 2013 2012
Financial Data
Operating revenues $163,786 $146,801 $132,447 $128,752 $127,434
Operating expenses $139,439 $122,016 $120,235 $ 98,000 $114,380
Operating income $ 24,347 $ 24,785 $ 12,212 $ 30,752 $ 13,054
Interest expense $ 4,910 $ 4,120 $ 3,613 $ 3,940 $ 3,444
Equity in net income of affiliates $ 98 $ 79 $ 175 $ 642 $ 752
Other income (expense) – net $ 277 $ (52) $ 1,581 $ 596 $ 134
Income tax expense $ 6,479 $ 7,005 $ 3,619 $ 9,328 $ 2,922
Net Income $ 13,333 $ 13,687 $ 6,736 $ 18,722 $ 7,574
Less: Net Income Attributable to
Noncontrolling Interest $ (357) $ (342) $ (294) $ (304) $ (275)
Net Income Attributable to AT&T $ 12,976 $ 13,345 $ 6,442 $ 18,418 $ 7,299
Earnings Per Common Share:
Net Income Attributable to AT&T $ 2.10 $ 2.37 $ 1.24 $ 3.42 $ 1.26
Earnings Per Common Share – Assuming Dilution:
Net Income Attributable to AT&T $ 2.10 $ 2.37 $ 1.24 $ 3.42 $ 1.26
Cash and cash equivalents $ 5,788 $ 5,121 $ 8,603 $ 3,339 $ 4,868
Total assets $403,821 $402,672 $296,834 $281,423 $275,834
Long-term debt $113,681 $118,515 $ 75,778 $ 69,091 $ 66,152
Total debt $123,513 $126,151 $ 81,834 $ 74,589 $ 69,638
Capital expenditures $ 22,408 $ 20,015 $ 21,433 $ 21,228 $ 19,728
Dividends declared per common share $ 1.93 $ 1.89 $ 1.85 $ 1.81 $ 1.77
Book value per common share $ 20.22 $ 20.12 $ 17.40 $ 18.10 $ 17.14
Ratio of earnings to fixed charges 3.59 4.01 2.91 6.03 2.97
Debt ratio 49.9% 50.5% 47.5% 44.1% 42.1%
Weighted-average common shares outstanding (000,000) 6,168 5,628 5,205 5,368 5,801
Weighted-average common shares outstanding
with dilution (000,000) 6,189 5,646 5,221 5,385 5,821
End of period common shares outstanding (000,000) 6,139 6,145 5,187 5,226 5,581
Operating Data
Total wireless customers (000) 146,832 137,324 120,554 110,376 106,957
Video connections (000) 37,748 37,934 5,943 5,460 4,536
In-region network access lines in service (000) 13,986 16,670 19,896 24,639 29,279
Broadband connections (000) 15,605 15,778 16,028 16,425 16,390
Number of employees 268,540 281,450 243,620 243,360 241,810
Selected Financial and Operating Data
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 1 111
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dollars in millions except per share and per subscriber amounts
new wireless operations in Mexico, and gains in fixed
strategic services and our IP-based AT&T U-verse®
(U-verse) services.
Equipment revenues decreased $222, or 1.5%, in 2016
and increased $1,114, or 8.0%, in 2015. The decline in
2016 reflects fewer domestic wireless handset sales and
additional promotional offers, partially offset by the sale
of higher-priced devices. The increase in 2015 was also
due to postpaid wireless subscribers choosing to purchase
devices on installment payment agreements rather than
the device subsidy models.
OVERVIEW
Operating revenues increased $16,985, or 11.6%, in 2016
and $14,354, or 10.8%, in 2015.
Service revenues increased $17,207, or 13.1%, in 2016
and $13,240, or 11.2%, in 2015. The increase in 2016
was primarily due to our 2015 acquisition of DIRECTV and
increases in IP broadband and fixed strategic service
revenues. These were partially offset by continued
declines in our legacy wireline voice and data products
and lower wireless revenues from offerings that entitle
customers to lower monthly service rates. The increase in
2015 was primarily due to our acquisition of DIRECTV, our
RESULTS OF OPERATIONS
For ease of reading, AT&T Inc. is referred to as “we,” “AT&T” or the “Company” throughout this document, and the names of
the particular subsidiaries and affiliates providing the services generally have been omitted. AT&T is a holding company whose
subsidiaries and affiliates operate in the communications and entertainment services industry. Our subsidiaries and affiliates
provide services and equipment that deliver voice, video and broadband services both domestically and internationally. During
2015, we completed our acquisitions of DIRECTV and wireless properties in Mexico. The following discussion of changes in our
operating revenues and expenses is affected by the timing of these acquisitions. In accordance with U.S. generally accepted
accounting principles (GAAP), our 2015 results include 160 days of DIRECTV-related operations compared with a full year in
2016. You should read this discussion in conjunction with the consolidated financial statements and accompanying notes. A
reference to a “Note” in this section refers to the accompanying Notes to Consolidated Financial Statements. In the tables
throughout this section, percentage increases and decreases that are not considered meaningful are denoted with a dash.
Certain amounts have been reclassified to conform to the current period’s presentation.
Consolidated Results Our financial results are summarized in the table below. We then discuss factors affecting our overall
results for the past three years. These factors are discussed in more detail in our “Segment Results” section. We also discuss
our expected revenue and expense trends for 2017 in the “Operating Environment and Trends of the Business” section.
Percent Change
2016 vs. 2015 vs.
2016 2015 2014 2015 2014
Operating Revenues
Service $148,884 $131,677 $118,437 13.1% 11.2%
Equipment 14,902 15,124 14,010 (1.5) 8.0
Total Operating Revenues 163,786 146,801 132,447 11.6 10.8
Operating expenses
Cost of services and sales
Equipment 18,757 19,268 18,946 (2.7) 1.7
Broadcast, programming and operations 19,851 11,996 4,075 65.5 —
Other cost of services 38,276 35,782 37,124 7.0 (3.6)
Selling, general and administrative 36,347 32,919 39,697 10.4 (17.1)
Asset abandonments and impairments 361 35 2,120 — (98.3)
Depreciation and amortization 25,847 22,016 18,273 17.4 20.5
Total Operating Expenses 139,439 122,016 120,235 14.3 1.5
Operating Income 24,347 24,785 12,212 (1.8) —
Interest expense 4,910 4,120 3,613 19.2 14.0
Equity in net income of affiliates 98 79 175 24.1 (54.9)
Other income (expense) – net 277 (52) 1,581 — —
Income Before Income Taxes 19,812 20,692 10,355 (4.3) 99.8
Net Income 13,333 13,687 6,736 (2.6) —
Net Income Attributable to AT&T $ 12,976 $ 13,345 $ 6,442 (2.8)% —%
12  12 || AT&T I N C . AT&T INC.
Operating expenses increased $17,423, or 14.3%, in 2016
and $1,781, or 1.5%, in 2015.
Equipment expenses decreased $511, or 2.7%, in 2016
and increased $322, or 1.7%, in 2015. Expense decreases
in 2016 were primarily driven by lower domestic wireless
handset sales, partially offset by increased sales volumes
to our Mexico wireless customers. The increase in 2015
was primarily due to customers choosing higher-priced
wireless devices.
Broadcast, programming and operations expenses
increased $7,855, or 65.5%, in 2016 and $7,921 in 2015.
Cost increases in both years were due to our acquisition
of DIRECTV. Higher content costs in both years were
slightly offset by fewer U-verse TV subscribers.
Other cost of services expenses increased $2,494, or
7.0%, in 2016 and decreased $1,342, or 3.6%, in 2015.
The expense increase in 2016 was primarily due to our
acquisition of DIRECTV and an increase in noncash
financing-related costs associated with our pension and
postretirement benefits. The expense increase also
reflects a $1,185 change in our annual pension
postemployment benefit actuarial adjustment, which
consisted of a loss in 2016 and a gain in 2015. These
increases were partially offset by prior year network
rationalization charges, lower net expenses associated
with our deferral and amortization of customer fulfillment
costs and a decline in network and access charges.
The expense decrease in 2015 was primarily due to a
$3,078 reduction resulting from the annual
remeasurement of our benefit plans, which was a gain in
2015 and a loss in 2014. Also contributing to the 2015
decrease were higher Connect America and High Cost
Funds’ receipts from the Universal Service Fund and the
fourth-quarter 2014 sale of our Connecticut wireline
operations, offset by the addition of DIRECTV, increased
network rationalization charges related to Leap Wireless
International, Inc. (Leap), merger and integration charges
and wireless handset insurance costs.
Selling, general and administrative expenses increased
$3,428, or 10.4%, in 2016 and decreased $6,778, or
17.1%, in 2015. The increase in 2016 was primarily
due to our acquisitions in 2015 and increased
advertising activity. Expenses also include an increase
of $1,991 as a result of recording an actuarial loss in
2016 and an actuarial gain in 2015. These increases
were offset by noncash gains of $714 on wireless
spectrum transactions, lower wireless commissions
expenses and fewer employee separation costs.
In 2015, expenses decreased $6,943 as a result of
recording an actuarial gain in 2015 and an actuarial loss
in 2014. The 2015 decrease was also due to lower
employee-related charges resulting from workforce
reductions, declines in wireless commissions and the
fourth-quarter 2014 sale of our Connecticut wireline
operations, offset by costs resulting from the acquisition
of DIRECTV.
Asset abandonments and impairments During the fourth
quarter of 2016, we recorded a noncash charge of $361
for the impairment of wireless and other assets. These
assets primarily arose from capitalized costs for wireless
sites that are no longer in our construction plans.
In 2015, we recorded a noncash charge of $35 for the
abandonment of certain wireless sites. In 2014, we
recorded a noncash charge of $2,120 for the
abandonment in place of certain network assets; we
completed a study of our network assets and determined
that specific copper assets would not be necessary to
support future network activity, due to declining customer
demand for our legacy voice and data products and the
transition of our networks to next generation IP-based
technology. (See Note 6)
Depreciation and amortization expense increased $3,831,
or 17.4%, in 2016 and $3,743, or 20.5%, in 2015. The
amortization expense increased $2,495, or 92.0%, in 2016
and $2,198 in 2015. The increases were due to the
amortization of intangibles from recent acquisitions.
Depreciation expense increased $1,336, or 6.9%, in
2016. The increase was primarily due to the acquisitions
of DIRECTV and ongoing capital investment for network
upgrades. The increases were partially offset by a $462
decrease associated with our change in the estimated
useful lives and salvage values of certain assets
associated with our transition to an IP-based network
(see Note 1). The 2015 depreciation expense increased
$1,545, or 8.7%, primarily due to the acquisitions of
DIRECTV and our wireless properties in Mexico, as well
as ongoing capital spending for network upgrades. The
increases were partially offset by the abandonment of
certain wireline network assets, which occurred in 2014,
and network assets becoming fully depreciated.
Operating income decreased $438, or 1.8%, in 2016
and increased $12,573 in 2015. Our operating margin
was 14.9% in 2016, compared to 16.9% in 2015 and 9.2%
in 2014. Contributing $3,176 to the decrease in operating
income in 2016 was a noncash actuarial loss of $1,024
and an actuarial gain of $2,152 in 2015. This decrease
was partially offset by continued efforts to reduce
operating costs and achieve merger synergies.
Contributing $10,021 to the increase in operating income
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. |
| 1 313
segment operating revenue and income is derived from
our segment results table in Note 4, and may total
more than 100 percent due to losses in one or more
segments. We have four reportable segments:
(1) Business Solutions, (2) Entertainment Group,
(3) Consumer Mobility and (4) International.
We also evaluate segment performance based on EBITDA
and/or EBITDA margin, which is defined as Segment
Contribution, excluding equity in net income (loss) of
affiliates and depreciation and amortization. We believe
EBITDA to be a relevant and useful measurement to our
investors as it is part of our internal management
reporting and planning processes and it is an important
metric that management uses to evaluate operating
performance. EBITDA does not give effect to cash used
for debt service requirements and thus does not reflect
available funds for distributions, reinvestment or other
discretionary uses. EBITDA margin is EBITDA divided by
total revenues.
The Business Solutions segment accounted for
approximately 44% of our 2016 total segment operating
revenues as compared to 49% in 2015 and 52% of our
2016 total Segment Contribution as compared to 59%
in 2015. This segment provides services to business
customers, including multinational companies;
governmental and wholesale customers; and individual
subscribers who purchase wireless services through
employer-sponsored plans. We provide advanced IP-based
services including Virtual Private Networks (VPN);
Ethernet-related products and broadband, collectively
referred to as fixed strategic services; as well as
traditional data and voice products. We utilize our wireless
and wired networks (referred to as “wired” or “wireline”)
to provide a complete integrated communications solution
to our business customers.
The Entertainment Group segment accounted for
approximately 32% of our 2016 total segment operating
revenues as compared to 24% in 2015 and 19% of our
2016 total Segment Contribution as compared to 7%
in 2015. This segment provides video, internet, voice
communication, and interactive and targeted advertising
services to customers located in the United States or in
U.S. territories. We utilize our copper and IP-based wired
network and/or our satellite technology.
The Consumer Mobility segment accounted for
approximately 20% of our 2016 total segment operating
revenues as compared to 24% in 2015 and 31% of our 2016
total Segment Contribution as compared to 35% in 2015.
This segment provides nationwide wireless service to
consumers and wholesale and resale wireless subscribers
located in the United States or in U.S. territories. We utilize
our networks to provide voice and data services, including
high-speed internet, video and home monitoring services
over wireless devices.
in 2015 was a noncash actuarial gain of $2,152 compared
to an actuarial loss of $7,869 in 2014, partially offset by
higher acquisition-related charges and expenses relating
to growth areas of our business.
Interest expense increased $790, or 19.2%, in 2016 and
$507, or 14.0%, in 2015. The increases were primarily due to
higher average debt balances, including debt issued and
debt acquired in connection with our acquisition of DIRECTV.
The increase in 2016 was also driven by higher average
interest rates, and in 2015 was partially offset by lower
average interest rates and an increase in capitalized interest
resulting from spectrum acquired in the Advanced Wireless
Service (AWS)-3 Auction (see Note 5).
Equity in net income of affiliates increased $19, or
24.1%, in 2016 and decreased $96, or 54.9%, in 2015.
Our results in 2016 and 2015 included income from our
investments in Game Show Network and SKY Mexico,
partially offset by losses from Otter Media Holdings. In
2014, results included earnings from América Móvil S.A.
de C.V. (América Móvil) partially offset by our mobile wallet
joint venture. (See Note 8)
Other income (expense) – net We had other income of
$277 in 2016, other expense of $52 in 2015 and other
income of $1,581 in 2014. Results for 2016 included net
gains on the sale of non-strategic assets and investments
of $184 and interest and dividend income of $118.
Other expense for 2015 included foreign exchange losses
of $74, net losses on the sale of non-strategic assets and
investments of $87 and interest and dividend income of
$95. Results for 2014 included a combined net gain of
$1,470 on the sale of América Móvil shares, our Connecticut
wireline operations and other non-strategic assets and
investments, and interest and dividend income of $68.
Income tax expense decreased $526, or 7.5%, in 2016 and
increased $3,386 in 2015. The decrease in income tax expense
in 2016 and increase in income tax expense in 2015 were
primarily due to a change in income before income taxes. The
decrease in 2016 also reflects a benefit resulting from our
Mexico restructuring. Our effective tax rate was 32.7% in 2016,
33.9% in 2015 and 34.9% in 2014 (see Note 11).
Segment Results
Our segments are strategic business units that offer
different products and services over various technology
platforms and/or in different geographies that are
managed accordingly. Our segment results presented in
Note 4 and discussed below for each segment follow
our internal management reporting. We analyze our
segments based on Segment Contribution, which consists
of operating income, excluding acquisition-related costs
and other significant items, and equity in net income
(loss) of affiliates for investments managed within each
segment. Each segment’s percentage calculation of total
14  14 || AT&T I N C . AT&T INC.
dollars using official exchange rates. Our International segment
is subject to foreign currency fluctuations.
Our operating assets are utilized by multiple segments
and consist of our wireless and wired networks as well as
an international satellite fleet. We manage our assets to
provide for the most efficient, effective and integrated
service to our customers, not by segment, and therefore
asset information and capital expenditures by segment are
not presented. Depreciation is allocated based on network
usage or asset utilization by segment.
The International segment accounted for approximately 4% of
our 2016 total segment operating revenues as compared to 3%
in 2015. This segment provides entertainment services in Latin
America and wireless services in Mexico. Video entertainment
services are provided to primarily residential customers using
satellite technology. We utilize our regional and national
wireless networks in Mexico to provide consumer and business
customers with wireless data and voice communication
services. Our international subsidiaries conduct business in their
local currency, and operating results are converted to U.S.
Business Solutions
Segment Results
Percent Change
2016 vs. 2015 vs.
2016 2015 2014 2015 2014
Segment operating revenues
Wireless service $31,850 $30,687 $30,182 3.8% 1.7%
Fixed strategic services 11,389 10,461 9,298 8.9 12.5
Legacy voice and data services 16,364 18,468 20,225 (11.4) (8.7)
Other service and equipment 3,615 3,558 3,860 1.6 (7.8)
Wireless equipment 7,770 7,953 7,041 (2.3) 13.0
Total Segment Operating Revenues 70,988 71,127 70,606 (0.2) 0.7
Segment operating expenses
Operations and support 44,330 44,946 45,826 (1.4) (1.9)
Depreciation and amortization 9,832 9,789 9,355 0.4 4.6
Total Segment Operating Expenses 54,162 54,735 55,181 (1.0) (0.8)
Segment Operating Income 16,826 16,392 15,425 2.6 6.3
Equity in Net Income of Affiliates — — — — —
Segment Contribution $16,826 $16,392 $15,425 2.6% 6.3%
The following tables highlight other key measures of performance for the Business Solutions segment:
Percent Change
2016 vs. 2015 vs.
At December 31 (in 000s) 2016 2015 2014 2015 2014
Business Wireless Subscribers
Postpaid 50,688 48,290 45,160 5.0% 6.9%
Reseller 65 85 11 (23.5) —
Connected devices1 30,649 25,284 19,943 21.2 26.8
Total Business Wireless Subscribers 81,402 73,659 65,114 10.5 13.1
Business IP Broadband Connections 977 911 822 7.2% 10.8%
Percent Change
2016 vs. 2015 vs.
(in 000s) 2016 2015 2014 2015 2014
Business Wireless Net Additions2,4
Postpaid 759 1,203 2,064 (36.9)% (41.7)%
Reseller (33) 13 6 — —
Connected devices1 5,330 5,315 3,439 0.3 54.6
Business Wireless Net Subscriber Additions 6,056 6,531 5,509 (7.3) 18.6
Business Wireless Postpaid Churn2,3,4 1.00% 0.99% 0.90% 1 BP 9 BP
Business IP Broadband Net Additions 66 89 191 (25.8)% (53.4)%
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
2 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the
beginning of that month. The churn rate for the year is equal to the average of the churn rate for each month of that period.
4 Includes impacts of the year-end 2016 shutdown of our 2G network.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. |
| 1 515
Other service and equipment revenues increased $57,
or 1.6%, in 2016 and decreased $302, or 7.8%, in 2015.
Other service revenues include project-based revenue, which
is nonrecurring in nature, as well as revenues from other
managed services, outsourcing, government professional
service and customer premises equipment. The increase in
2016 was primarily due to nonrecurring customer premises
equipment contracts. The decline in 2015 is primarily due to
lower project-based and equipment revenues, as well as
impacts from foreign exchange rates.
Wireless equipment revenues decreased $183, or 2.3%, in
2016 and increased $912, or 13.0%, in 2015. The decrease
in 2016 was primarily due to a decrease in handsets sold
and increased promotional offers, partially offset by an
increase in sales under our equipment installment
agreements, including our AT&T NextSM (AT&T Next)
program. The increase in 2015 was primarily due to the
increase in purchases of devices on installment agreements
rather than the device subsidy model and increased sales of
higher-priced smartphones. We expect wireless equipment
revenues to be pressured in 2017 as customers are retaining
their handsets for longer periods of time and more new
subscribers are bringing their own devices.
Operations and support expenses decreased $616, or 1.4%,
in 2016 and $880, or 1.9%, in 2015. Operations and support
expenses consist of costs incurred to provide our products
and services, including costs of operating and maintaining
our networks and personnel costs, such as compensation
and benefits.
Expense decreases in 2016 were primarily due to:
• Lower network costs of $283 resulting from workforce
reductions and other cost initiative actions.
• Declines in wireless commission expenses of $225 due
to lower sales volumes and lower average commission
rates, including those paid under the AT&T Next program,
combined with fewer handset upgrade transactions.
• Lower net expenses of $219 associated with fulfillment
cost deferrals (see Note 1).
• Reductions of $186 in equipment costs, driven by lower
wireless handset volumes partially offset by the sale of
higher-priced wireless devices and higher-priced
customer premises equipment.
Partially offsetting the decreases in 2016 were higher
wireless handset insurance cost of $195 and the impact
of Connect America and High Cost Funds’ receipts.
Expense decreases in 2015 were primarily due to:
• Lower commission costs of $995 resulting
from lower average commission rates and fewer
upgrade transactions.
• Declines in employee-related charges of $508 resulting
from workforce reductions and other cost initiatives.
Operating revenues decreased $139, or 0.2%, in 2016
and increased $521, or 0.7%, in 2015. Revenue declines
in 2016 were driven by continued declines in demand for
our legacy voice and data services and lower wireless
equipment revenues, partially offset by continued growth
in fixed strategic and wireless services. The increase in
2015 was driven by wireless revenues and continued
growth in fixed strategic services, partially offset by
continued declines in demand for our legacy voice and
data services and foreign exchange pressures.
Wireless service revenues increased $1,163, or 3.8%, in
2016 and $505, or 1.7%, in 2015. The revenue increases
reflect smartphone and tablet gains, handset insurance
sales, as well as customer migrations from our Consumer
Mobility segment.
Business wireless subscribers increased 10.5%, to 81.4 million
subscribers at December 31, 2016 compared to 13.1%, to
73.7 million subscribers at December 31, 2015. Postpaid
subscribers increased 5.0% in 2016 compared to 6.9% in 2015
reflecting the addition of new customers as well as migrations
from our Consumer Mobility segment, partially offset by
continuing competitive pressures in the industry. Connected
devices, which have lower average revenue per average
subscriber (ARPU) and lower churn, increased 21.2% in 2016
compared to 26.8% in 2015 primarily reflecting growth in
our connected car business.
The effective management of subscriber churn is critical to
our ability to maximize revenue growth and to maintain and
improve margins. Business wireless postpaid churn increased
to 1.00% in 2016 from 0.99% in 2015 and 0.90% in 2014.
Fixed strategic services revenues increased $928, or 8.9%,
in 2016 and $1,163, or 12.5%, in 2015. Our revenues
increased in 2016 and 2015 due to Ethernet increases of
$224 and $389, U-verse services increases of $172 and
$247, Dedicated Internet services increases of $230 and
$190 and VPN increases of $89 and $116, respectively.
Due to advances in technology, our most advanced business
solutions are subject to change periodically. We review and
evaluate our fixed strategic service offerings annually, which
may result in an updated definition and the recast of our
historical financial information to conform to the current
period presentation. Any modifications will be reflected in
the first quarter.
Legacy voice and data service revenues decreased $2,104,
or 11.4%, in 2016 and $1,757, or 8.7%, in 2015. Traditional
data revenues in 2016 and 2015 decreased $1,255 and
$958 and long-distance and local voice revenues decreased
$823 and $797. The decreases were primarily due to lower
demand as customers continue to shift to our more
advanced IP-based offerings or our competitors.
16  16 || AT&T I N C . AT&T INC.
• Reductions of $269 in access costs due to lower
interconnect, roaming and traffic compensation costs.
• Lower customer service costs of $146 largely resulting
from our simplified offerings and increased efforts to
resolve customer inquiries on their first call.
Partially offsetting the decreases in 2015 were:
• Higher wireless handset insurance cost of $370.
• Increased equipment expense of $304 due to
the continuing trend of customers choosing
higher-cost devices.
• Higher bad debt expense of $173 resulting from
growth in our AT&T Next subscriber base.
Depreciation expense increased $43, or 0.4%, in 2016
and $434, or 4.6%, in 2015. The increases were primarily
due to ongoing capital spending for network upgrades and
expansion and accelerating depreciation related to the
shutdown of our U.S. 2G network, partially offset by fully
depreciated assets. The increase in 2016 was largely offset
by the change in estimated useful lives and salvage values
of certain assets associated with our transition to an
IP-based network (see Note 1).
Operating income increased $434, or 2.6%, in 2016 and
$967, or 6.3%, in 2015. Our Business Solutions segment
operating income margin was 23.7% in 2016, compared to
23.0% in 2015 and 21.8% in 2014. Our Business Solutions
EBITDA margin was 37.6% in 2016, compared to 36.8% in
2015 and 35.1% in 2014.
Entertainment Group
Segment Results
Percent Change
2016 vs. 2015 vs.
2016 2015 2014 2015 2014
Segment operating revenues
Video entertainment $36,460 $20,271 $ 6,826 79.9% —%
High-speed internet 7,472 6,601 5,522 13.2 19.5
Legacy voice and data services 4,829 5,914 7,592 (18.3) (22.1)
Other service and equipment 2,534 2,508 2,293 1.0 9.4
Total Segment Operating Revenues 51,295 35,294 22,233 45.3 58.7
Segment operating expenses
Operations and support 39,338 28,345 18,992 38.8 49.2
Depreciation and amortization 5,862 4,945 4,473 18.5 10.6
Total Segment Operating Expenses 45,200 33,290 23,465 35.8 41.9
Segment Operating Income (Loss) 6,095 2,004 (1,232) — —
Equity in Net Income (Loss) of Affiliates 9 (4) (2) — —
Segment Contribution $ 6,104 $ 2,000 $ (1,234) —% —%
The following tables highlight other key measures of performance for the Entertainment Group segment:
Percent Change
2016 vs. 2015 vs.
At December 31 (in 000s) 2016 2015 2014 2015 2014
Linear Video Connections1
Satellite 21,012 19,784 — 6.2% —%
U-verse 4,253 5,614 5,920 (24.2) (5.2)
Total Linear Video Connections 25,265 25,398 5,920 (0.5) —
Broadband Connections
IP 12,888 12,356 11,383 4.3 8.5
DSL 1,291 1,930 3,061 (33.1) (36.9)
Total Broadband Connections 14,179 14,286 14,444 (0.7) (1.1)
Retail Consumer Switched Access Lines 5,853 7,286 9,243 (19.7) (21.2)
U-verse Consumer VoIP Connections 5,425 5,212 4,759 4.1 9.5
Total Retail Consumer Voice Connections 11,278 12,498 14,002 (9.8)% (10.7)%
1 Includes the impact of customers that migrated to DIRECTV NOW. At December 31, 2016, we had more than 200 DIRECTV NOW subscribers.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. |
| 1 717
Operating revenues increased $16,001, or 45.3%, in 2016
and $13,061, or 58.7%, in 2015, largely due to our
acquisition of DIRECTV in July 2015. Also contributing to the
increases was continued growth in consumer IP broadband,
which offset lower revenues from legacy voice and data
products. U-verse video revenue also contributed to higher
results in 2015.
As consumers continue to demand more mobile access to
video, we have launched streaming access to our
subscribers, including mobile access for existing satellite
and U-verse subscribers. In November 2016, we launched
DIRECTV NOW, our newest video streaming option that does
not require either satellite or U-verse service (commonly
called over-the-top video service).
Video entertainment revenues increased $16,189, or 79.9%,
in 2016 and $13,445 in 2015, primarily related to our
acquisition of DIRECTV. We are now focusing our sales efforts
on satellite service as there are lower marginal content costs
for satellite subscribers. U-verse video revenues were $900
lower in 2016, primarily due to a 24.2% decrease in U-verse
video connections, when compared to 2015, and $932 higher
in 2015 when compared to 2014. As of December 31, 2016,
more than 80% of our linear video subscribers were on the
DIRECTV platform.
High-speed internet revenues increased $871, or 13.2%, in
2016 and $1,079, or 19.5%, in 2015. When compared to
2015, IP broadband subscribers increased 4.3%, to 12.9
million subscribers at December 31, 2016. When compared
to 2014, IP broadband subscribers increased 8.5%, to
12.4 million subscribers at December 31, 2015. While IP
broadband subscribers increased in 2016 and 2015, net
additions declined in both years due to fewer U-verse
sales promotions in each year and competitive pressures.
The churn of video customers also contributed to lower net
additions, as a portion of these video subscribers also
chose to disconnect their IP broadband service.
To compete more effectively against other broadband
providers, in 2016 we continued to deploy our all-fiber,
high-speed wireline network, which has improved customer
retention rates.
Legacy voice and data service revenues decreased $1,085, or
18.3%, in 2016 and $1,678, or 22.1%, in 2015. For 2016,
legacy voice and data services represented approximately 9%
of our total Entertainment Group revenue compared to 17%
for 2015 and 34% for 2014 and reflect decreases of $663
and $1,083 in local voice and long-distance, and $422 and
$593 in traditional data revenues. The decreases reflect the
continued migration of customers to our more advanced
IP-based offerings or to competitors. At December 31, 2016,
approximately 9% of our broadband connections were DSL
compared to 14% at December 31, 2015.
Operations and support expenses increased $10,993, or
38.8%, in 2016 and $9,353, or 49.2%, in 2015. Operations
and support expenses consist of costs incurred to provide
our products and services, including costs of operating and
maintaining our networks and providing video content, as
well as personnel costs, such as compensation and benefits.
Increased expenses in both periods were primarily due to our
acquisition of DIRECTV, which increased our Entertainment
Group expenses by $11,748 in 2016 and $9,683 in 2015.
The DIRECTV related increases were primarily due to higher
content costs, customer support and service related charges,
and advertising expenses. The increase in 2016 also reflects
pressure from annual content cost increases, including the
NFL SUNDAY TICKET®.
Partially offsetting the increased expenses in both years were
lower employee charges resulting from ongoing workforce
reductions and our focus on cost initiatives. Lower equipment
costs also partially offset increased expenses in 2015.
Percent Change
2016 vs. 2015 vs.
(in 000s) 2016 2015 2014 2015 2014
Linear Video Net Additions1,2
Satellite 1,228 240 — —% —%
U-verse (1,361) (306) 663 — —
Linear Net Video Additions (133) (66) 663 — —
Broadband Net Additions
IP 532 973 1,899 (45.3) (48.8)
DSL (639) (1,130) (1,768) 43.5 36.1
Net Broadband Additions (107) (157) 131 31.8% —%
1 Excludes acquisition-related additions during the period.
2 Includes disconnections for customers that migrated to DIRECTV NOW. Net DIRECTV NOW additions were more than 200.
18  18 || AT&T I N C . AT&T INC.
Operating income increased $4,091 in 2016 and $3,236 in
2015. Our Entertainment Group segment operating income
margin was 11.9% in 2016, 5.7% in 2015, and (5.5)% in
2014. Our Entertainment Group EBITDA margin was 23.3%
in 2016, 19.7% in 2015, and 14.6% in 2014.
Depreciation expenses increased $917, or 18.5%, in 2016
and $472, or 10.6%, in 2015. The increases were primarily
due to our acquisition of DIRECTV and ongoing capital
spending for network upgrades and expansion, partially
offset by fully depreciated assets. The increase in 2016 was
partially offset by the change in estimated useful lives and
salvage value of certain assets associated with our transition
to an IP-based network (see Note 1).
Consumer Mobility
Segment Results
Percent Change
2016 vs. 2015 vs.
2016 2015 2014 2015 2014
Segment operating revenues
Service $27,536 $29,150 $30,850 (5.5)% (5.5)%
Equipment 5,664 5,916 5,919 (4.3) (0.1)
Total Segment Operating Revenues 33,200 35,066 36,769 (5.3) (4.6)
Segment operating expenses
Operations and support 19,659 21,477 23,891 (8.5) (10.1)
Depreciation and amortization 3,716 3,851 3,827 (3.5) 0.6
Total Segment Operating Expenses 23,375 25,328 27,718 (7.7) (8.6)
Segment Operating Income 9,825 9,738 9,051 0.9 7.6
Equity in Net Income (Loss) of Affiliates — — (1) — —
Segment Contribution $ 9,825 $ 9,738 $ 9,050 0.9% 7.6%
The following tables highlight other key measures of performance for the Consumer Mobility segment:
Percent Change
2016 vs. 2015 vs.
At December 31 (in 000s) 2016 2015 2014 2015 2014
Consumer Mobility Subscribers
Postpaid 27,095 28,814 30,610 (6.0)% (5.9)%
Prepaid 13,536 11,548 9,965 17.2 15.9
Branded 40,631 40,362 40,575 0.7 (0.5)
Reseller 11,884 13,690 13,844 (13.2) (1.1)
Connected devices1 942 929 1,021 1.4 (9.0)
Total Consumer Mobility Subscribers 53,457 54,981 55,440 (2.8)% (0.8)%
1 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
Percent Change
2016 vs. 2015 vs.
(in 000s) 2016 2015 2014 2015 2014
Consumer Mobility Net Additions1,4
Postpaid 359 463 1,226 (22.5)% (62.2)%
Prepaid 1,575 1,364 (311) 15.5 —
Branded Net Additions 1,934 1,827 915 5.9 99.7
Reseller (1,813) (168) (351) — 52.1
Connected devices2 19 (131) (465) — 71.8
Consumer Mobility Net Subscriber Additions 140 1,528 99 (90.8)% —%
Total Churn1,3,4 2.15% 1.94% 2.06% 21 BP (12) BP
Postpaid Churn1,3,4 1.19% 1.25% 1.22% (6) BP 3 BP
1 Excludes migrations between AT&T segments and/or subscriber categories and acquisition-related additions during the period.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the
beginning of that month. The churn rate for the year is equal to the average of the churn rate for each month of that period.
4
Includes the impacts of the year-end 2016 shutdown of our U.S. 2G network.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. |
| 1 919
Operating revenues decreased $1,866, or 5.3%, in 2016 and
$1,703, or 4.6%, in 2015. Decreased revenues reflect declines
in postpaid service revenues due to customers migrating to
our Business Solutions segment and choosing Mobile Share
plans, partially offset by higher prepaid service revenues. Our
business wireless offerings allow for individual subscribers to
purchase wireless services through employer-sponsored plans
for a reduced price. The migration of these subscribers to the
Business Solutions segment negatively impacted our
consumer postpaid subscriber total and service revenue
growth. The shutdown of our 2G network also resulted in
higher overall churn as subscribers in our reseller and
connected device categories upgraded their devices at lower
rates than postpaid and prepaid subscribers.
Service revenue decreased $1,614, or 5.5%, in 2016 and
$1,700, or 5.5%, in 2015. The decreases were largely due
to the migration of subscribers to Business Solutions and
postpaid customers continuing to shift to no-device
subsidy plans that allow for discounted monthly service
charges under our Mobile Share plans. Revenues from
postpaid customers declined $2,285, or 10.4%, in 2016
and $2,252, or 9.3%, in 2015. Without the migration of
customers to Business Solutions, postpaid wireless
revenues would have decreased approximately 5.6% in
2016 and 4.0% for 2015. The decreases were partially
offset by higher prepaid service revenues of $953, or
20.4%, in 2016 and $457, or 10.9%, in 2015.
Equipment revenue decreased $252, or 4.3%, in 2016
and $3, or 0.1%, in 2015. The decreases in equipment
revenues resulted from lower handset sales and upgrades
and increased promotional activities, partially offset by
the sale of higher-priced devices and increases in devices
purchased on installment payment agreements. In 2016,
we had fewer customers upgrading their handsets and
more new customers bringing their own devices. We
expect these customer trends to continue in 2017.
Operations and support expenses decreased $1,818, or
8.5%, in 2016 and $2,414, or 10.1%, in 2015. Operations
and support expenses consist of costs incurred to provide
our products and services, including costs of operating and
maintaining our networks and personnel expenses, such as
compensation and benefits.
Expense decreases in 2016 were primarily due to:
• Declines in equipment costs of $554 due to lower
handset volumes partially offset by higher prices.
• Reduced selling and commission expenses of $302
resulting from fewer upgrade transactions and lower
average commission rates.
• Lower network costs of $246 driven by a decline
in interconnect costs resulting from our ongoing
network transition to more efficient
Ethernet/IP-based technologies.
• Declines of $204 associated with bad debt expense.
• Lower customer service costs of $145 due to cost
efficiencies including lower vendor and professional
services from reduced call center volumes.
Expense decreases in 2015 were primarily due to:
• Reduced selling and commission expenses of $861
from lower average commission rates and fewer
upgrade transactions.
• Lower network costs of $434 driven by a decline
in interconnect costs resulting from our ongoing
network transition to more efficient Ethernet/IPbased
technologies.
• Reductions of $406 for equipment costs, reflecting
lower handset volumes partially offset by the sale
of higher-priced devices.
• Lower customer service costs of $275 primarily due to
cost efficiencies including lower vendor and professional
services from reduced call center volumes.
• Declines of $209 primarily due to incollect roaming fee
rate declines, partially offset by increased data volume.
Depreciation expense decreased $135, or 3.5%, in 2016
and increased $24, or 0.6%, in 2015. The decrease in 2016
was primarily due to fully depreciated assets, partially offset
by ongoing capital spending for network upgrades and
expansion and accelerating depreciation related to the
shutdown of our U.S. 2G network. The increase in 2015
was primarily due to ongoing capital spending for network
upgrades and expansion that was largely offset by fully
depreciated assets.
Operating income increased $87, or 0.9%, in 2016 and
$687, or 7.6%, in 2015. Our Consumer Mobility segment
operating income margin increased to 29.6% in 2016,
compared to 27.8% in 2015 and 24.6% in 2014. Our
Consumer Mobility EBITDA margin increased to 40.8% in
2016, compared to 38.8% in 2015 and 35.0% in 2014.
20  20 || AT&T I N C . AT&T INC.
International
Segment Results
Percent Change
2016 vs. 2015 vs.
2016 2015 2014 2015 2014
Segment operating revenues
Video entertainment $4,910 $2,151 $ — —% —%
Wireless service 1,905 1,647 — 15.7 —
Equipment 468 304 — 53.9 —
Total Segment Operating Revenues 7,283 4,102 — 77.5 —
Segment operating expenses
Operations and support 6,830 3,930 — 73.8 —
Depreciation and amortization 1,166 655 — 78.0 —
Total Segment Operating Expenses 7,996 4,585 — 74.4 —
Segment Operating Income (Loss) (713) (483) — (47.6) —
Equity in Net Income (Loss) of Affiliates 52 (5) 153 — —
Segment Contribution $ (661) $ (488) $153 (35.5)% —%
The following tables highlight other key measures of performance for the International segment:
Percent Change
2016 vs. 2015 vs.
At December 31 (in 000s) 2016 2015 2014 2015 2014
Mexico Wireless Subscribers
Postpaid 4,965 4,289 — 15.8% —%
Prepaid 6,727 3,995 — 68.4 —
Branded 11,692 8,284 — 41.1 —
Reseller 281 400 — (29.8) —
Total Mexico Wireless Subscribers 11,973 8,684 — 37.9 —
Latin America Satellite Subscribers
PanAmericana 7,206 7,066 — 2.0 —
SKY Brazil1 5,249 5,444 — (3.6) —
Total Latin America Satellite Subscribers 12,455 12,510 — (0.4)% —%
1 Excludes subscribers of our International segment equity investments in SKY Mexico, in which we own a 41.3% stake. SKY Mexico had 7.9 million subscribers at September 30, 2016
and 7.3 million subscribers at December 31, 2015.
Percent Change
2016 vs. 2015 vs.
(in 000s) 2016 2015 2014 2015 2014
Mexico Wireless Net Additions
Postpaid 677 177 — —% —%
Prepaid 2,732 (169) — — —
Branded Net Additions 3,409 8 — — —
Reseller (120) (104) — (15.4) —
Mexico Wireless Net Subscriber Additions 3,289 (96) — — —
Latin America Satellite Net Additions
PanAmericana 140 76 — 84.2 —
SKY Brazil1 (195) (223) — 12.6 —
Latin America Satellite Net Subscriber Additions (55) (147) — 62.6% —%
1 Excludes SKY Mexico net subscriber additions of 643,000 for the nine months ended September 30, 2016 and 646,000 for the year ended December 31, 2015.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 2 1 21
Operating Results
Our International segment consists of the Latin American
operations acquired in our July 2015 acquisition of DIRECTV
as well as the Mexican wireless operations acquired earlier
in 2015 (see Note 5). Video entertainment services are
provided to primarily residential customers using satellite
technology in various countries in Latin America, including
Brazil, Argentina and Colombia. Our International segment is
subject to foreign currency fluctuations, with most of our
international subsidiaries conducting business in their local
currency. Operating results are converted to U.S. dollars
using official exchange rates.
Operating revenues increased $3,181, or 77.5%, in 2016.
Revenue growth in 2016 includes increases of $2,759 from
video services in Latin America and $422, or 21.6%, in
Mexico, primarily due to an increase in our wireless
subscriber base offset by lower ARPU.
Operations and support expenses increased $2,900, or
73.8%, in 2016. Operations and support expenses consist of
costs incurred to provide our products and services,
including costs of operating and maintaining our networks
and providing video content and personnel expenses, such
as compensation and benefits. The increase in the 2016
expenses was largely attributable to operations in Latin
America reflecting our mid-2015 DIRECTV acquisition.
Depreciation expense increased $511, or 78.0%, in 2016.
The increase was primarily due to the acquisition of DIRECTV
operations and our wireless network upgrade in Mexico.
Operating income decreased $230, or 47.6%, in 2016.
Our International segment operating income margin was
(9.8)% in 2016 and (11.8)% in 2015. Our International
EBITDA margin was 6.2% in 2016 and 4.2% in 2015.
Supplemental Operating Information
As a supplemental discussion of our operating results, for comparison purposes, we are providing a view of our combined
domestic wireless operations (AT&T Mobility).
AT&T Mobility Results
Percent Change
2016 vs. 2015 vs.
2016 2015 2014 2015 2014
Operating revenues
Service $59,386 $59,837 $61,032 (0.8)% (2.0)%
Equipment 13,435 13,868 12,960 (3.1) 7.0
Total Operating Revenues 72,821 73,705 73,992 (1.2) (0.4)
Operating expenses
Operations and support 43,886 45,789 48,348 (4.2) (5.3)
EBITDA 28,935 27,916 25,644 3.7 8.9
Depreciation and amortization 8,292 8,113 7,744 2.2 4.8
Total Operating Expenses 52,178 53,902 56,092 (3.2) (3.9)
Operating Income 20,643 19,803 17,900 4.2 10.6
Equity in Net Income (Loss) of Affiliates — — (1) — —
Operating Contribution $20,643 $19,803 $17,899 4.2% 10.6%
22  22 || AT&T I N C . AT&T INC.
margin increased to 48.7% in 2016, compared to 46.7% in
2015 and 42.0% in 2014. (EBITDA service margin is
operating income before depreciation and amortization,
divided by total service revenues.)
Operating income increased $840, or 4.2%, in 2016 and
$1,903, or 10.6%, in 2015. The operating income margin of
AT&T Mobility increased to 28.3% in 2016, compared to
26.9% in 2015 and 24.2% in 2014. AT&T Mobility’s EBITDA
margin increased to 39.7% in 2016, compared to 37.9% in
2015 and 34.7% in 2014. AT&T Mobility’s EBITDA service
The following tables highlight other key measures of performance for AT&T Mobility:
Percent Change
2016 vs. 2015 vs.
At December 31 (in 000s) 2016 2015 2014 2015 2014
Wireless Subscribers1
Postpaid smartphones 59,096 58,073 56,644 1.8% 2.5%
Postpaid feature phones and data-centric devices 18,687 19,032 19,126 (1.8) (0.5)
Postpaid 77,783 77,105 75,770 (0.9) 1.8
Prepaid 13,536 11,548 9,965 17.2 15.9
Branded 91,319 88,653 85,735 3.0 3.4
Reseller 11,949 13,774 13,855 (13.2) (0.6)
Connected devices2 31,591 26,213 20,964 20.5 25.0
Total Wireless Subscribers 134,859 128,640 120,554 4.8 6.7
Branded smartphones 70,817 67,200 62,443 5.4 7.6
Mobile Share connections 57,028 61,275 52,370 (6.9) 17.0
Smartphones under our installment programs
at end of period 30,688 26,670 15,308 15.1% 74.2%
1 Represents 100% of AT&T Mobility wireless subscribers.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
Percent Change
2016 vs. 2015 vs.
(in 000s) 2016 2015 2014 2015 2014
Wireless Net Additions1,4
Postpaid 1,118 1,666 3,290 (32.9)% (49.4)%
Prepaid 1,575 1,364 (311) 15.5 —
Branded Net Additions 2,693 3,030 2,979 (11.1) 1.7
Reseller (1,846) (155) (346) — 55.2
Connected devices2 5,349 5,184 2,975 3.2 74.3
Wireless Net Subscriber Additions 6,196 8,059 5,608 (23.1) 43.7
Smartphones sold under our installment programs
during period 17,871 17,320 15,268 3.2% 13.4%
Total Churn3,4 1.48% 1.39% 1.45% 9 BP (6) BP
Branded Churn3,4 1.62% 1.63% 1.69% (1) BP (6) BP
Postpaid Churn3,4 1.07% 1.09% 1.04% (2) BP 5 BP
Postpaid Phone Only Churn3,4 0.92% 0.99% 0.97% (7) BP 2 BP
1 Excludes acquisition-related additions during the period.
2 Includes data-centric devices such as session-based tablets, monitoring devices and automobile systems. Excludes postpaid tablets.
3 Calculated by dividing the aggregate number of wireless subscribers who canceled service during a month divided by the total number of wireless subscribers at the
beginning of that month. The churn rate for the year is equal to the average of the churn rate for each month of that period.
4 Includes the impacts of the year-end 2016 shutdown of our U.S. 2G network.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 2 323
compared to 87% at December 31, 2015. Virtually all of our
postpaid smartphone subscribers are on plans that provide
for service on multiple devices at reduced rates, and such
subscribers tend to have higher retention and lower churn
rates. Device connections on our Mobile Share and unlimited
wireless data integrated offer plans now represent 84% of
our postpaid customer base compared to 79% at
December 31, 2015. During 2016, approximately 10% of our
postpaid customer base, or 7.9 million subscribers chose this
new integrated offer. Such offerings are intended to
encourage existing subscribers to upgrade their current
services and/or add connected devices, attract subscribers
from other providers and minimize subscriber churn.
During the first quarter of 2016, we discontinued offering
subsidized smartphones to most of our customers.
Under this no-subsidy model, subscribers must purchase a
device on installments under an equipment installment
program or choose to bring their own device (BYOD), with
no annual service contract. At December 31, 2016, about
52% of the postpaid smartphone base is on an installment
program compared to nearly 46% at December 31, 2015.
Of the postpaid smartphone gross adds and upgrades during
2016, 93% were either equipment installment plans or BYOD,
compared to 77% in 2015. While BYOD customers do not
generate equipment revenue or expense, the service revenue
helps improve our margins. During 2016, we added
approximately 2.3 million BYOD customers, compared to 1.8
million in 2015. BYOD sales represented 11% of total
postpaid smartphone sales in 2016 compared to 7% in 2015.
Our equipment installment purchase programs, including
AT&T Next, allow for postpaid subscribers to purchase
certain devices in installments over a period of up to
30 months. Additionally, after a specified period of time,
AT&T Next subscribers also have the right to trade in the
original device for a new device with a new installment plan
and have the remaining unpaid balance satisfied. For
installment programs, we recognize equipment revenue at
the time of the sale for the amount of the customer
receivable, net of the fair value of the trade-in right
guarantee and imputed interest. A significant percentage of
our customers choosing equipment installment programs pay
a lower monthly service charge, which results in lower
service revenue recorded for these subscribers.
Connected Devices
Connected devices includes data-centric devices such as
session-based tablets, monitoring devices and automobile
systems. Connected device subscribers increased 20.5%
during 2016 and 25.0% in 2015. During 2016, we added
approximately 4.9 million “connected” cars through
agreements with various carmakers. We believe that these
connected car agreements give us the opportunity to create
future retail relationships with the car owners.
Subscriber Relationships
As the wireless industry continues to mature, future wireless
growth will become increasingly dependent on our ability to
offer innovative services, plans and devices and a wireless
network that has sufficient spectrum and capacity to support
these innovations on as broad a geographic basis as possible.
To attract and retain subscribers in a maturing market, we
have launched a wide variety of plans, including Mobile Share
and AT&T Next. Additionally, beginning in 2016, we
introduced an integrated offer that allows for unlimited
wireless data when combined with our video services, ending
the year with more than 7.9 million subscribers on this offer.
The year-end 2016 shutdown of our U.S. 2G network
contributed to higher disconnections and churn of
subscribers, particularly in the fourth quarter 2016.
Although many 2G subscribers, especially in our postpaid
and prepaid categories, chose to upgrade to newer
devices before the end of the year, a portion did not.
We discontinued service on virtually all of our 2G cell sites
in early 2017, and as of February 1, 2017, had 766,000
subscribers that remain on 2G devices. Our 2G subscribers
at December 31 are as follows:
Percent
(in 000s) 2016 2015 Change
Postpaid (primarily phones) 89 928 (90.4)%
Prepaid 77 387 (80.1)
Reseller1 337 2,796 (87.9)
Connected devices2 1,813 5,635 (67.8)
Total 2G Subscribers 2,316 9,746 (76.2)%
1 Primarily included in our Consumer Mobility segment.
2 Primarily included in our Business Solutions segment.
ARPU
Postpaid phone only ARPU was $59.45 and postpaid
phone only ARPU plus AT&T Next subscriber installment
billings was $69.76 in 2016, compared to $60.45 and $68.03
in 2015 and $62.99 and $65.80 in 2014, respectively.
Churn
The effective management of subscriber churn is critical to
our ability to maximize revenue growth and to maintain and
improve margins. Total churn was higher in 2016 and was
negatively impacted by the loss of 2G subscribers, which
contributed more than 20 basis points of pressure to total
churn throughout the year. Postpaid churn and postpaid
phone only churn were lower in 2016 despite competitive
pressure in the industry.
Branded Subscribers
Branded subscribers increased 3.0% in 2016 and 3.4% in
2015. These increases reflect growth of 17.2% and 15.9%
in prepaid subscribers and 0.9% and 1.8% in postpaid
subscribers, respectively. At December 31, 2016, 91% of our
postpaid phone subscriber base used smartphones,
24  24 || AT&T I N C . AT&T INC.
access to video and broadcast services. We expect continued
pressure on pricing during 2017 as we respond to this intense
competition, especially in the wireless and video services.
Included on our consolidated balance sheets are assets held
by benefit plans for the payment of future benefits. Our
pension plans are subject to funding requirements of the
Employee Retirement Income Security Act of 1974, as
amended (ERISA). In September 2013, we made a voluntary
contribution of a preferred equity interest in AT&T Mobility II
LLC to the trust used to pay pension benefits. We also
agreed to make a cash contribution to the trust of $175 no
later than the due date of our federal income tax return for
2014, 2015 and 2016. During 2016, we accelerated the final
contribution and completed our obligation with a $350 cash
payment. The trust is entitled to receive cumulative annual
cash distributions of $560, which will result in a $560
contribution during 2017. We expect only minimal ERISA
contribution requirements to our pension plans for 2017.
However, a weakness in the equity, fixed income and real
asset markets could require us in future years to make
contributions to the pension plans in order to maintain
minimum funding requirements as established by ERISA.
Investment returns on these assets depend largely on trends
in the U.S. securities markets and the U.S. economy. In
addition, our policy of recognizing actuarial gains and losses
related to our pension and other postretirement plans in the
period in which they arise subjects us to earnings volatility
caused by changes in market conditions. Changes in our
discount rate, which are tied to changes in the bond market,
and changes in the performance of equity markets, may
have significant impacts on the valuation of our pension and
other postretirement obligations at the end of 2017 (see
“Accounting Policies and Estimates”).
OPERATING ENVIRONMENT OVERVIEW
AT&T subsidiaries operating within the United States are
subject to federal and state regulatory authorities. AT&T
subsidiaries operating outside the United States are subject
to the jurisdiction of national and supranational regulatory
authorities in the markets where service is provided.
In the Telecommunications Act of 1996 (Telecom Act),
Congress established a national policy framework intended
to bring the benefits of competition and investment in
advanced telecommunications facilities and services to all
Americans by opening all telecommunications markets to
competition and reducing or eliminating regulatory burdens
that harm consumer welfare. Since the Telecom Act was
passed, the Federal Communications Commission (FCC) and
some state regulatory commissions have maintained or
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
2017 Revenue Trends We expect our operating
environment in 2017 to be highly competitive, as companies
and consumers continue to demand instant connectivity,
higher speeds and an integrated experience across their
devices for both video and data. Our recent regulatory
environment has been unfriendly to investment in broadband
services but we are hopeful that the results of the 2016
Federal election will begin to create a regulatory environment
that is more predictable and more conducive to long-term
investment planning. We are also hopeful that U.S. corporate
tax reform will be enacted which should stimulate the
economy and increase business investment overall. In 2017,
we expect the following:
• Consolidated operating revenue growth, driven by our
ability to offer integrated wireless, video and wireline
services, as well as continuing growth in fixed
strategic services.
• Robust competition in wireless and video will
continue to pressure service revenue and ARPU for
those products.
• Major customer categories will continue to increase
their use of internet-based broadband/data services
and video services.
• Traditional voice and data service revenue declines.
• Our 2015 acquisitions of DIRECTV and wireless
properties in Mexico will increase revenues, although
we expect to incur significant integration costs in the
same period.
2017 Expense Trends We expect consolidated operating
income margins to expand in 2017 as growth in AT&T Next is
reducing subsidized handset costs over time and we lower
our marginal cost of providing video services and operating
our network. We intend to continue our focus on cost
reductions, driving savings through automation, supply chain,
benefit design, digitizing transactions and optimizing network
costs. In addition, the ongoing transition of our network to a
more efficient software-based technology is expected to
continue driving favorable expense trends over the next
several years. However, expenses related to growth areas of
our business along with the integration of our newly acquired
operations, will place offsetting pressure on our operating
income margin.
Market Conditions During 2016, the ongoing slow recovery
in the general U.S. economy continued to negatively affect
our customers. Certain industries, such as energy and retail
businesses, are being especially cautious. Residential
customers continue to be price sensitive in selecting offerings,
and continue to focus on products that give them efficient
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 2 525
We provide satellite video service through our subsidiary
DIRECTV, whose satellites are licensed by the FCC. The
Communications Act of 1934 and other related acts give the
FCC broad authority to regulate the U.S. operations of
DIRECTV. In addition, states representing a majority of our
local service access lines have adopted legislation that
enables us to provide IP-based service through a single
statewide or state-approved franchise (as opposed to the
need to acquire hundreds or even thousands of municipalapproved
franchises) to offer a competitive video product.
We also are supporting efforts to update and improve
regulatory treatment for retail services. Regulatory reform
and passage of legislation is uncertain and depends on
many factors.
We provide wireless services in robustly competitive markets,
but are subject to substantial and increasing governmental
regulation. Wireless communications providers must obtain
licenses from the FCC to provide communications services at
specified spectrum frequencies within specified geographic
areas and must comply with the FCC rules and policies
governing the use of the spectrum. While wireless
communications providers’ prices and offerings are generally
not subject to state regulation, states sometimes attempt to
regulate or legislate various aspects of wireless services,
such as in the area of consumer protection.
The FCC has recognized that the explosive growth of
bandwidth-intensive wireless data services requires the U.S.
government to make more spectrum available. In February
2012, Congress set forth specific spectrum blocks to be
auctioned and licensed by February 2015 (the “AWS-3
Auction”) and also authorized the FCC to conduct an
“incentive auction,” to make available for wireless
broadband use certain spectrum that is currently used by
broadcast television licensees (the “600 MHz Auction”).
We participated in the AWS-3 Auction. The 600 MHz
Auction (Auction 1000) began on March 29, 2016, and
after multiple phases, this auction is expected to conclude
in the first half of 2017.
We have also submitted a bid to provide a nationwide
mobile broadband network for the First Responder Network
Authority (FirstNet). Should our bid be accepted, the actual
reach of the network will depend on participation by the
individual states.
In May 2014, in a separate proceeding, the FCC issued an
order revising its policies governing mobile spectrum
holdings. The FCC rejected the imposition of caps on the
amount of spectrum any carrier could acquire, retaining its
expanded certain regulatory requirements that were imposed
decades ago on our traditional wireline subsidiaries when
they operated as legal monopolies. However, based on their
public statements and written opinions, we expect the new
leadership at the FCC to chart a more predictable and
balanced regulatory course that will encourage long-term
investment and benefit consumers. In addition, we are
pursuing, at both the state and federal levels, additional
legislative and regulatory measures to reduce regulatory
burdens that are no longer appropriate in a competitive
telecommunications market and that inhibit our ability to
compete more effectively and offer services wanted and
needed by our customers, including initiatives to transition
services from traditional networks to all IP-based networks.
At the same time, we also seek to ensure that legacy
regulations are not further extended to broadband or
wireless services, which are subject to vigorous competition.
In February 2015, the FCC released an order classifying
both fixed and mobile consumer broadband internet access
services as telecommunications services, subject to
comprehensive regulation under the Telecom Act. The FCC’s
decision significantly expands its existing authority to
regulate the provision of fixed and mobile broadband
internet access services. AT&T and other providers of
broadband internet access services challenged the FCC’s
decision before the U.S. Court of Appeals for the D.C. Circuit.
On June 14, 2016, a panel of the Court of Appeals upheld
the FCC’s rules by a 2-1 vote. In July 2016, AT&T and
several of the other parties that challenged the rules filed
petitions with the Court of Appeals asking that the case be
reheard either by the panel or by the full Court of Appeals.
Those petitions remain pending.
In October 2016, a sharply divided FCC adopted new rules
governing the use of customer information by providers of
broadband internet access service. Those rules are more
restrictive in certain respects than those governing other
participants in the internet economy, including so-called
“edge” providers such as Google and Facebook. Several
petitions for reconsideration of the new rules have been
filed, as well as a request for stay. The current Chairman of
the FCC opposed the new rules when they were adopted,
and we expect the FCC will rule on these petitions promptly.
In January 2017, the FCC removed from its list of active
proceedings proposed rules on cable set-top boxes and
the bulk data connections that telecom companies
provide to businesses.
26  26 || AT&T I N C . AT&T INC.
different technological platforms, including wireless, satellite
and wireline. In 2017, we expect our largest revenue stream
to come from business customers, followed by U.S.
consumer video and broadband, U.S. consumer mobility
and then international video and mobility.
Integration of Data/Broadband and Entertainment
Services As the communications industry continues to
move toward internet-based technologies that are capable
of blending wireline, satellite and wireless services, we plan
to offer services that take advantage of these new and more
sophisticated technologies. In particular, we intend to
continue to focus on expanding our high-speed internet and
video offerings and on developing IP-based services that
allow customers to integrate their home or business fixed
services with their mobile service. During 2017, we will
continue to develop and provide unique integrated video,
mobile and broadband solutions. In late 2016, we began
offering an over-the-top video service (DIRECTV NOW); data
usage from streaming entertainment content will not count
toward data limits for customers who also purchase our
wireless service. We believe this offering will facilitate our
customers’ desire to view video anywhere on demand and
encourage customer retention.
Wireless We expect to deliver revenue growth in the
coming years. We are in a period of rapid growth in
wireless video usage and believe that there are substantial
opportunities available for next-generation converged
services that combine technologies and services.
For example, we entered into agreements with many
automobile manufacturers and began providing vehicleembedded
security and entertainment services.
As of December 31, 2016, we served 146.8 million wireless
subscribers in North America, with nearly 135 million in the
United States. Our LTE technology covers almost 400 million
people in North America. In the United States, we cover all
major metropolitan areas and almost 320 million people.
We also provide 4G coverage using another technology
(HSPA+), and when combined with our upgraded backhaul
network, we are able to enhance our network capabilities
and provide superior mobile broadband speeds for data and
video services. Our wireless network also relies on other
GSM digital transmission technologies for 3G data
communications. We have shut down virtually all 2G cell
sites, which enables us to position that spectrum to provide
the more advanced services demanded by our customers.
Our acquisition of two Mexican wireless providers in 2015
brought a GSM network covering both the United States and
Mexico and enabled our customers to use wireless services
without roaming on other companies’ networks. We believe
this seamless access will prove attractive to customers and
case-by-case review policy. Moreover, it increased the
amount of spectrum that could be acquired before
exceeding an aggregation “screen” that would automatically
trigger closer scrutiny of a proposed transaction. On the
other hand, it indicated that it will separately consider an
acquisition of “low band” spectrum that exceeds one-third of
the available low band spectrum as presumptively harmful
to competition. In addition, the FCC imposed limits on
certain bidders in the 600 MHz Auction, including AT&T,
restricting them from bidding on up to 40 percent of the
available spectrum in markets that cover as much as
70-80 percent of the U.S. population. On balance, the order
and the spectrum screen should allow AT&T to obtain
additional spectrum to meet our customers’ needs, but
because AT&T uses more “low band” spectrum in its network
than some other national carriers, the separate consideration
of low band spectrum acquisitions might affect AT&T’s ability
to expand capacity in these bands (low band spectrum has
better propagation characteristics than “high band”
spectrum). We seek to ensure that we have the opportunity,
through the auction process and otherwise, to obtain the
spectrum we need to provide our customers with highquality
service in the future.
As the wireless industry continues to mature, future wireless
growth will become increasingly dependent on our ability to
offer innovative video and data services and a wireless
network that has sufficient spectrum and capacity to
support these innovations. We continue to invest significant
capital in expanding our network capacity, as well as to
secure and utilize spectrum that meets our long-term needs.
To that end, in 2015 we submitted winning bids for 251
AWS spectrum licenses for a near-nationwide contiguous
block of high-quality AWS spectrum in the AWS-3 Auction
(FCC Auction 97). Our strategy also includes redeploying
spectrum previously used for basic 2G services to support
more advanced mobile internet services on our 3G and 4G
networks. We have bid on FirstNet, which if awarded will
provide access to a nationwide low band 20 MHz of
spectrum, assuming all states “opt in,” and we are
participating in the current FCC 600 MHz Auction (Auction
1000). We will continue to invest in our wireless network as
we look to provide future service offerings and participate in
technologies such as 5G and millimeter-wave bands.
Expected Growth Areas
Over the next few years, we expect our growth to come
from IP-based broadband services, video entertainment and
wireless services from our expanded North American
footprint. With our 2015 acquisitions of DIRECTV and
wireless properties in Mexico, our revenue mix is much
more diversified. We can now provide integrated services
to diverse groups of customers in the United States on
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 2 727
COMPETITION
Competition continues to increase for communications and
digital entertainment services. Technological advances have
expanded the types and uses of services and products
available. In addition, lack of or a reduced level of
regulation of comparable legacy services has lowered costs
for these alternative communications service providers. As
a result, we face heightened competition as well as some
new opportunities in significant portions of our business.
We face substantial and increasing competition in our
wireless businesses. Under current FCC rules, multiple
licensees, who provide wireless services on the cellular, PCS,
Advanced Wireless Services, 700 MHz and other spectrum
bands, may operate in each of our U.S. service areas, which
results in the potential presence of multiple competitors.
Our competitors include brands such as Verizon Wireless,
Sprint, T-Mobile/Metro PCS, a larger number of regional
providers of cellular, PCS and other wireless communications
services and resellers of those services. In addition, we face
competition from providers who offer voice, text messaging
and other services as applications on data networks.
More than 98% of the U.S. population lives in areas with at
least three mobile telephone operators, and almost 94% of
the population lives in areas with at least four competing
carriers. We are one of three providers in Mexico, with the
most significant market share controlled by América Móvil.
We may experience significant competition from companies
that provide similar services using other communications
technologies and services. While some of these technologies
and services are now operational, others are being
developed or may be developed. We compete for customers
based principally on service/device offerings, price, network
quality, coverage area and customer service.
Our subsidiaries providing communications and digital
entertainment services will face continued competitive
pressure in 2017 from multiple providers, including
wireless, satellite, cable and other VoIP providers, online
video providers, and interexchange carriers and resellers.
In addition, the desire for high-speed data on demand,
including video, are continuing to lead customers to
terminate their traditional wired services and use our or
competitors’ wireless, satellite and internet-based services.
In most U.S. markets, we compete for customers, often on
pricing of bundled services, with large cable companies,
such as Comcast Corporation, Cox Communications Inc.
and Charter Communications (marketed as Spectrum), for
high-speed internet, video and voice services and other
smaller telecommunications companies for both longdistance
and local services. In addition, in Latin American
countries served by our DIRECTV subsidiary, we also
face competition from other video providers, including
América Móvil and Telefónica.
provide a significant growth opportunity. We also announced
in 2015 our plan to invest $3,000 to upgrade our network in
Mexico to provide LTE coverage to 100 million people and
businesses by year-end 2018. As of year-end 2016, this
LTE network covered approximately 78 million people and
businesses in Mexico.
REGULATORY DEVELOPMENTS
Set forth below is a summary of the most significant
regulatory proceedings that directly affected our operations
during 2016. Industry-wide regulatory developments are
discussed above in Operating Environment Overview.
While these issues may apply only to certain subsidiaries,
the words “we,” “AT&T” and “our” are used to simplify the
discussion. The following discussions are intended as a
condensed summary of the issues rather than as a
comprehensive legal analysis and description of all of
these specific issues.
International Regulation Our subsidiaries operating
outside the United States are subject to the jurisdiction
of regulatory authorities in the market where service is
provided. Our licensing, compliance and advocacy initiatives
in foreign countries primarily enable the provision of
enterprise (i.e., large business), wireless and satellite
television services. AT&T is engaged in multiple efforts with
foreign regulators to open markets to competition, foster
conditions favorable to investment, and increase our scope
of fully authorized services and products.
Federal Regulation In February 2015, the FCC released
an order in response to the D.C. Circuit’s January 2014
decision adopting new rules, and classifying both fixed
and mobile consumer broadband internet access services
as telecommunications services, subject to comprehensive
regulation under the Telecom Act. The FCC’s decision
significantly expands the FCC’s existing authority to
regulate the provision of fixed and mobile broadband
internet access services. The FCC also asserted jurisdiction
over internet interconnection arrangements, which until
now have been unregulated. These actions could have an
adverse impact on our fixed and mobile broadband
services and operating results. AT&T and several other
parties, including US Telecom and CTIA trade groups,
have appealed the FCC’s order. On June 14, 2016, a
panel of the Court of Appeals upheld the FCC’s rules
by a 2-1 vote. On July 29, 2016, AT&T and several of
the other parties that challenged the rules filed petitions
with the Court of Appeals asking that the case be
reheard either by the panel or by the full Court.
Those petitions remain pending.
28  28 || AT&T I N C . AT&T INC.
Our Entertainment Group and Business Solutions segments
generally remain subject to regulation for certain legacy
wireline wholesale services by state regulatory commissions
for intrastate services and by the FCC for interstate services.
Under the Telecom Act, companies seeking to interconnect
to our wireline subsidiaries’ networks and exchange local
calls enter into interconnection agreements with us. Many
unresolved issues in negotiating those agreements are
subject to arbitration before the appropriate state
commission. These agreements (whether fully agreed-upon
or arbitrated) are often then subject to review and approval
by the appropriate state commission.
Our Entertainment Group and Business Solutions segments
operate portions of their business under state-specific forms
of regulation for retail services that were either legislatively
enacted or authorized by the appropriate state regulatory
commission. Some states regulate prices of retail services,
while others adopt a regulatory framework that incorporates
deregulation and price restrictions on a subset of our
services. Some states may impose minimum customer
service standards with required payments if we fail to meet
the standards.
We continue to lose legacy voice and data subscribers
due to competitors (e.g., wireless, cable and VoIP
providers) who can provide comparable services at lower
prices because they are not subject to traditional
telephone industry regulation (or the extent of regulation
is in dispute), utilize different technologies, or promote a
different business model (such as advertising based).
In response to these competitive pressures, for a number
of years we have used a bundling strategy that rewards
customers who consolidate their services (e.g., telephone,
high-speed internet, wireless and video) with us.
We continue to focus on bundling services, including
combined packages of wireless data and voice and
video service through our satellite and IP-based services.
We will continue to develop innovative and integrated
services that capitalize on our wireless and IP-based
network and satellites.
Additionally, we provide local and interstate telephone
and switched services to other service providers, primarily
large Internet Service Providers using the largest class of
nationwide internet networks (internet backbone), wireless
carriers, other telephone companies, cable companies and
systems integrators. These services are subject to additional
competitive pressures from the development of new
technologies, the introduction of innovative offerings and
increasing satellite, wireless, fiber-optic and cable
transmission capacity for services. We face a number of
international competitors, including Orange Business
Services, BT, Singapore Telecommunications Limited and
Verizon Communications Inc., as well as competition from
a number of large systems integrators.
ACCOUNTING POLICIES AND STANDARDS
Critical Accounting Policies and Estimates Because of
the size of the financial statement line items they relate to
or the extent of judgment required by our management,
some of our accounting policies and estimates have a more
significant impact on our consolidated financial statements
than others. The following policies are presented in the
order in which the topics appear in our consolidated
statements of income.
Allowance for Doubtful Accounts We record expense
to maintain an allowance for doubtful accounts for
estimated losses that result from the failure or inability
of our customers to make required payments. When
determining the allowance, we consider the probability
of recoverability based on past experience, taking into
account current collection trends as well as general
economic factors, including bankruptcy rates. Credit risks
are assessed based on historical write-offs, net of
recoveries, as well as an analysis of the aged accounts
and installment receivable balances with reserves
generally increasing as the receivable ages. Accounts
receivable may be fully reserved for when specific
collection issues are known to exist, such as pending
bankruptcy or catastrophes. The analysis of receivables
is performed monthly, and the allowances for doubtful
accounts are adjusted through expense accordingly. A
10% change in the amounts estimated to be uncollectible
would result in a change in the provision for uncollectible
accounts of approximately $147.
Pension and Postretirement Benefits Our actuarial
estimates of retiree benefit expense and the associated
significant weighted-average assumptions are discussed
in Note 12. Our assumed weighted-average discount rate
for pension and postretirement benefits of 4.40% and
4.30%, respectively, at December 31, 2016, reflects the
hypothetical rate at which the projected benefit
obligations could be effectively settled or paid out to
participants. We determined our discount rate based on
a range of factors, including a yield curve composed of
the rates of return on several hundred high-quality, fixed
income corporate bonds available at the measurement
date and corresponding to the related expected durations
of future cash outflows for the obligations. These bonds
were all rated at least Aa3 or AA- by one of the
nationally recognized statistical rating organizations,
denominated in U.S. dollars, and neither callable,
convertible nor index linked. For the year ended
December 31, 2016, when compared to the year ended
December 31, 2015, we decreased our pension discount
rate by 0.20%, resulting in an increase in our pension
plan benefit obligation of $2,189 and decreased our
postretirement discount rate by 0.20%, resulting in an
increase in our postretirement benefit obligation of $906.
For the year ended December 31, 2015, we increased our
pension discount rate by 0.30%, resulting in a decrease
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 2 929
Asset Valuations and Impairments We record assets
acquired in business combinations at fair value.
For impairment testing, we estimate fair values using
models that predominantly rely on the expected cash
flows to be derived from the use of the asset.
Goodwill, wireless licenses and orbital slots are
significant assets on our consolidated balance sheets,
where impairment testing is performed.
Goodwill and other indefinite lived intangible assets are
not amortized but tested at least annually for impairment.
We test goodwill on a reporting unit basis by comparing
the estimated fair value of each reporting unit to its book
value. If the fair value exceeds the book value, then no
impairment is measured. We estimate fair values using an
income approach (also known as a discounted cash flow)
and a market multiple approach. The income approach
utilizes our 10-year cash flow projections with a
perpetuity value discounted at an appropriate weighted
average cost of capital. The market multiple approach
uses the multiples of publicly traded companies whose
services are comparable to those offered by the reporting
units. In 2016, the calculated fair value of the reporting
units exceeded book value in all circumstances, and no
additional testing was necessary. In the event of a 10%
drop in the fair values of the reporting units, the fair
values would have still exceeded the book values of the
reporting units.
We assess fair value for wireless licenses using a
discounted cash flow model (the Greenfield Approach)
and a corroborative market approach based on auction
prices. The Greenfield Approach assumes a company
initially owns only the wireless licenses and makes
investments required to build an operation comparable
to current use. Inputs to the model include subscriber
growth, churn, revenue per user, capital investment and
acquisition costs per subscriber, ongoing operating costs,
and resulting EBITDA margins. We based our assumptions
on a combination of average marketplace participant data
and our historical results, trends and business plans.
These licenses are tested annually for impairment on an
aggregated basis, consistent with their use on a national
scope for the United States and Mexico. For impairment
testing, we assume subscriber and revenue growth will
trend up to projected levels, with a long-term growth rate
reflecting expected long-term inflation trends. We assume
churn rates will initially exceed our current experience,
but decline to rates that are in line with industry-leading
churn. For the U.S. licenses, EBITDA margins are assumed
to trend toward 37% annually. We used a discount rate of
8.50% for the United States and 11.0% for Mexico, based
on the optimal long-term capital structure of a market
participant and its associated cost of debt and equity,
in our pension plan benefit obligation of $1,977 and
increased our postretirement discount rate by 0.30%,
resulting in a decrease in our postretirement benefit
obligation of $854.
Our expected long-term rate of return on pension plan
assets is 7.75% for 2017 and 2016. Our expected longterm
rate of return on postretirement plan assets is 5.75%
for 2017 and 2016. Our expected return on plan assets is
calculated using the actual fair value of plan assets. If all
other factors were to remain unchanged, we expect that
a 0.50% decrease in the expected long-term rate of
return would cause 2017 combined pension and
postretirement cost to increase $230, which under our
accounting policy would be adjusted to actual returns
in the current year as part of our fourth-quarter
remeasurement of our retiree benefit plans. In 2016,
the actual return on our combined pension and
postretirement plan assets was 7.5%, resulting in an
actuarial gain of $59.
We recognize gains and losses on pension and
postretirement plan assets and obligations immediately
in our operating results. These gains and losses are
generally measured annually as of December 31 and
accordingly will normally be recorded during the fourth
quarter, unless an earlier remeasurement is required.
Should actual experience differ from actuarial
assumptions, the projected pension benefit obligation and
net pension cost and accumulated postretirement benefit
obligation and postretirement benefit cost would be
affected in future years. Note 12 also discusses the
effects of certain changes in assumptions related to
medical trend rates on retiree healthcare costs.
Depreciation Our depreciation of assets, including use
of composite group depreciation and estimates of useful
lives, is described in Notes 1 and 6. During 2016, we
aligned the estimated useful lives and salvage values
for certain network assets that are impacted by our IP
strategy with our updated business cases and
engineering studies. During 2014, we completed studies
evaluating the periods over which we were utilizing our
software assets, which resulted in our extending our
estimated useful lives for certain capitalized software to
five years to better reflect the estimated periods during
which these assets will remain in service. Prior to 2014,
all capitalized software costs were primarily amortized
over a three-year period.
If all other factors were to remain unchanged, we expect
that a one-year increase in the useful lives of our plant
in service would have resulted in a decrease of
approximately $3,273 in our 2016 depreciation expense
and that a one-year decrease would have resulted in an
increase of approximately $4,834 in our 2016
depreciation expense.
30  30 || AT&T I N C . AT&T INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
We use our judgment to determine whether it is more
likely than not that we will sustain positions that we have
taken on tax returns and, if so, the amount of benefit to
initially recognize within our financial statements. We
regularly review our uncertain tax positions and adjust
our unrecognized tax benefits (UTBs) in light of changes
in facts and circumstances, such as changes in tax law,
interactions with taxing authorities and developments in
case law. These adjustments to our UTBs may affect our
income tax expense. Settlement of uncertain tax positions
may require use of our cash.
New Accounting Standards
See Note 1 for a discussion of recently issued or adopted
accounting standards.
OTHER BUSINESS MATTERS
Time Warner Inc. Acquisition On October 22, 2016, we
entered into and announced a merger agreement (Merger
Agreement) to acquire Time Warner Inc. (Time Warner) in a
50% cash and 50% stock transaction for $107.50 per share
of Time Warner common stock, or approximately $85,400 at
the date of the announcement (Merger). Combined with
Time Warner’s net debt at September 30, 2016, the total
transaction value is approximately $108,700. Each share of
Time Warner common stock will be exchanged for $53.75
per share in cash and a number of shares of AT&T common
stock equal to the exchange ratio. If the average stock price
(as defined in the Merger Agreement) at the time of closing
the Merger is between (or equal to) $37.411 and $41.349
per share, the exchange ratio will be the quotient of $53.75
divided by the average stock price. If the average stock
price is greater than $41.349, the exchange ratio will be
1.300. If the average stock price is less than $37.411, the
exchange ratio will be 1.437. Post-transaction, Time Warner
shareholders will own between 14.4% and 15.7% of AT&T
shares on a fully-diluted basis based on the number of
AT&T shares outstanding. The cash portion of the purchase
price will be financed with new debt and cash. See
“Liquidity” for a discussion of our financing arrangements.
Time Warner is a global leader in media and entertainment
whose major businesses encompass an array of some of
the most respected and successful media brands. The deal
combines Time Warner’s vast library of content and ability to
create new premium content for audiences around the world
with our extensive customer relationships and distribution;
one of the world’s largest pay-TV subscriber bases; and
leading scale in TV, mobile and broadband distribution.
to calculate the present value of the projected cash
flows. If either the projected rate of long-term growth of
cash flows or revenues declined by 0.5%, or if the
discount rate increased by 0.5%, the fair values of the
wireless licenses would still be higher than the book
value of the licenses. The fair value of the wireless
licenses in the United States and Mexico each exceeded
the book value by more than 10%.
Orbital slots are also valued using the Greenfield
Approach. The projected cash flows are based on various
factors, including satellite cost, other capital investment
per subscriber, acquisition costs per subscriber and usage
per subscriber, as well as revenue growth, subscriber
growth and churn rates. For impairment testing purposes,
we assumed sustainable long-term growth assumptions
consistent with the business plan and industry
counterparts in the United States. We used a discount
rate of 10.50% to calculate the present value of the
projected cash flows. If either the projected rate of
long-term growth of cash flows or revenues declined by
0.5%, or if the discount rate increased by 0.5%, the fair
values of the orbital slots would still be higher than the
book value of the orbital slots. The fair value of the
orbital slots exceeded the book value by more than 10%.
We review customer relationships and other finite-lived
intangible assets for impairment whenever events or
circumstances indicate that the carrying amount may not
be recoverable over their remaining life. For this analysis,
we compare the expected undiscounted future cash flows
attributable to the asset to its book value.
We review our investments to determine whether market
declines are temporary and accordingly reflected in
accumulated other comprehensive income, or other-thantemporary
and recorded as an expense in “Other income
(expense) – net” in the consolidated statements of
income. This evaluation is based on the length of time
and the severity of decline in the investment’s value.
Income Taxes Our estimates of income taxes and
the significant items giving rise to the deferred assets
and liabilities are shown in Note 11 and reflect our
assessment of actual future taxes to be paid on
items reflected in the financial statements, giving
consideration to both timing and probability of these
estimates. Actual income taxes could vary from these
estimates due to future changes in income tax law or
the final review of our tax returns by federal, state or
foreign tax authorities.
AT&T I N C .   AT&T INC. |
| 31 31
SportsNet LA Litigation On November 2, 2016, the U.S.
Department of Justice filed a civil antitrust complaint in
federal court (Central District of California) against DIRECTV
Group Holdings, LLC and AT&T Inc., as successor in interest
to DIRECTV, alleging that DIRECTV, in 2014, unlawfully
exchanged strategic information with certain competitors in
connection with negotiations with SportsNet LA about
carrying the Los Angeles Dodgers games. The complaint
alleges that DIRECTV’s conduct violated Section 1 of the
Sherman Act. The complaint seeks a declaration that
DIRECTV’s conduct unlawfully restrained trade and seeks an
injunction (1) barring DIRECTV and AT&T from engaging in
unlawful information sharing in connection with future
negotiations for video programming distribution, (2) requiring
DIRECTV and AT&T to monitor relevant communications
between their executives and competitors and to periodically
report to the Department of Justice, and (3) requiring
DIRECTV and AT&T to implement training and compliance
programs. The complaint asks that the government be
awarded its litigation costs. We vigorously dispute these
allegations. On January 10, 2017, we filed a motion to
dismiss the complaint. The motion remains pending.
Federal Trade Commission Litigation Involving
DIRECTV In March 2015, the Federal Trade Commission
(FTC) filed a civil suit in the U.S. District Court for the
Northern District of California against DIRECTV seeking
injunctive relief and unspecified money damages under
Section 5 of the Federal Trade Commission Act and Section
4 of the Restore Online Shoppers’ Confidence Act. The FTC’s
allegations concern DIRECTV’s advertising, marketing and
sale of programming packages. The FTC alleges that
DIRECTV did not adequately disclose all relevant terms.
We are disputing these allegations vigorously. A trial on the
matter is expected to begin in early 2017.
Unlimited Data Plan Claims In October 2014, the FTC
filed a civil suit in the U.S. District Court for the Northern
District of California against AT&T Mobility, LLC seeking
injunctive relief and unspecified money damages under
Section 5 of the Federal Trade Commission Act. The FTC’s
allegations concern the application of AT&T’s Maximum
Bit Rate (MBR) program to customers who enrolled in our
Unlimited Data Plan from 2007-2010. MBR temporarily
reduces in certain instances the download speeds of a small
portion of our legacy Unlimited Data Plan customers each
month after the customer exceeds a designated amount of
data during the customer’s billing cycle. MBR is an industrystandard
practice that is designed to affect only the most
data-intensive applications (such as video streaming).
Texts, emails, tweets, social media posts, internet browsing
and many other applications are typically unaffected.
The Merger Agreement was approved by Time Warner
shareholders on February 15, 2017 and remains subject to
review by the U.S. Department of Justice. While subject to
change, we expect that Time Warner will not need to
transfer any of its FCC licenses to AT&T in order to conduct
its business operations after the closing of the transaction. It
is also a condition to closing that necessary consents from
certain foreign governmental entities must be obtained. The
transaction is expected to close before year-end 2017.
Under certain circumstances relating to a competing
transaction, Time Warner may be required to pay a $1,725
termination fee to us in connection with or following a
termination of the agreement. Under certain circumstances
relating to the inability to obtain the necessary regulatory
approvals, we may be required to pay Time Warner $500
following a termination of the agreement.
Litigation Challenging DIRECTV’s NFL SUNDAY
TICKET More than two dozen putative class actions were
filed in the U.S. District Courts for the Central District of
California and the Southern District of New York against
DIRECTV and the National Football League (NFL). These
cases were brought by residential and commercial DIRECTV
subscribers that have purchased NFL SUNDAY TICKET. The
plaintiffs allege that (i) the 32 NFL teams have unlawfully
agreed not to compete with each other in the market for
nationally televised NFL football games and instead have
“pooled” their broadcasts and assigned to the NFL the
exclusive right to market them; and (ii) the NFL and DIRECTV
have entered into an unlawful exclusive distribution
agreement that allows DIRECTV to charge “supra-competitive”
prices for the NFL SUNDAY TICKET package.
The complaints seek unspecified treble damages and
attorneys’ fees along with injunctive relief. The first
complaint, Abrahamian v. National Football League, Inc., et
al., was served in June 2015. In December 2015, the Judicial
Panel on Multidistrict Litigation transferred the cases outside
the Central District of California to that court for
consolidation and management of pre-trial proceedings.
In June 2016, the plaintiffs filed a consolidated amended
complaint. We vigorously dispute the allegations the
complaints have asserted. In August 2016, DIRECTV filed a
motion to compel arbitration and the NFL defendants filed a
motion to dismiss the complaint. A hearing on both motions
is currently scheduled in February 2017.
32  32 || AT&T I N C . AT&T INC.
2017 and 2020. After expiration of the current agreements,
work stoppages or labor disruptions may occur in the
absence of new contracts or other agreements being reached.
Environmental We are subject from time to time to
judicial and administrative proceedings brought by various
governmental authorities under federal, state or local
environmental laws. We reference in our Forms 10-Q and
10-K certain environmental proceedings that could result in
monetary sanctions (exclusive of interest and costs) of one
hundred thousand dollars or more. However, we do not
believe that any of those currently pending will have a
material adverse effect on our results of operations.
LIQUIDITY AND CAPITAL RESOURCES
We had $5,788 in cash and cash equivalents available at
December 31, 2016. Cash and cash equivalents included
cash of $1,803 and money market funds and other cash
equivalents of $3,985. Approximately $776 of our cash and
cash equivalents resided in foreign jurisdictions, some of
which are subject to restrictions on repatriation. Cash and
cash equivalents increased $667 since December 31, 2015.
In 2016, cash inflows were primarily provided by cash
receipts from operations, including cash from our sale
and transfer of certain wireless equipment installment
receivables to third parties, and long-term debt issuances.
These inflows were offset by cash used to meet the needs
of the business, including, but not limited to, payment of
operating expenses, funding capital expenditures, debt
repayments, dividends to stockholders, and the acquisition
of wireless spectrum and other operations. We discuss
many of these factors in detail below.
Cash Provided by or Used in Operating Activities
During 2016, cash provided by operating activities was
$39,344 compared to $35,880 in 2015. Higher operating
cash flows in 2016 were primarily due to our acquisition
of DIRECTV and the timing of working capital payments.
During 2015, cash provided by operating activities was
$35,880 compared to $31,338 in 2014. Higher operating
cash flows in 2015 were primarily due to improved
operating results, our acquisition of DIRECTV and working
capital improvements.
Cash Used in or Provided by Investing Activities
During 2016, cash used in investing activities consisted
primarily of $21,516 for capital expenditures, excluding
interest during construction and $2,959 for the acquisition
of wireless spectrum, Quickplay Media, Inc. and other
operations. These expenditures were partially offset by net
cash receipts of $646 from the disposition of various assets
and $506 from the sale of securities.
Contrary to the FTC’s allegations, our MBR program is
permitted by our customer contracts, was fully disclosed
in advance to our Unlimited Data Plan customers, and
was implemented to protect the network for the benefit
of all customers. In March 2015, our motion to dismiss
the litigation on the grounds that the FTC lacked
jurisdiction to file suit was denied. In May 2015, the Court
granted our motion to certify its decision for immediate
appeal. The United States Court of Appeals for the Ninth
Circuit subsequently granted our petition to accept the
appeal, and on August 29, 2016, issued its decision
reversing the district court and finding that the FTC
lacked jurisdiction to proceed with the action. The FTC
has asked the Court of Appeals to reconsider the decision
but the Court has not ruled on that request. In addition
to the FTC case, several class actions have been filed also
challenging our MBR program. We vigorously dispute the
allegations the complaints have asserted.
In June 2015, the FCC issued a Notice of Apparent Liability
and Order (NAL) to AT&T Mobility, LLC concerning our MBR
policy that applies to Unlimited Data Plan customers
described above. The NAL alleges that we violated the
FCC’s Open Internet Transparency Rule by using the term
“unlimited” in connection with the offerings subject to the
MBR policy and by failing adequately to disclose the speed
reductions that apply once a customer reaches a specified
data threshold. The NAL proposes a forfeiture penalty of
$100, and further proposes to order us to correct any
misleading and inaccurate statements about our unlimited
plans, inform customers of the alleged violation, revise our
disclosures to address the alleged violation and inform these
customers that they may cancel their plans without penalty
after reviewing the revised disclosures. In July 2015, we
filed our response to the NAL. We believe that the NAL is
unlawful and should be withdrawn, because we have fully
complied with the Open Internet Transparency Rule and the
FCC has no authority to impose the proposed remedies.
The matter is currently pending before the FCC.
Labor Contracts As of January 31, 2017, we employed
approximately 268,000 persons. Approximately 48% of our
employees are represented by the Communications Workers
of America, the International Brotherhood of Electrical
Workers or other unions. Contracts covering approximately
20,000 mobility employees across the country and
approximately 25,000 traditional wireline employees in our
Southwest and Midwest regions have expired or will expire
in 2017. Additionally, negotiations continue with
approximately 15,000 traditional wireline employees in our
West region where the contract expired in April 2016.
Approximately 11,000 former DIRECTV employees were
eligible for and chose union representation. Bargaining has
resulted in approximately 70% of these employees now
being covered under ratified contracts that expire between
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 3 333
During 2016, we received net proceeds of $10,140 from the
issuance of $10,013 in long-term debt in various markets,
with an average weighted maturity of approximately 12
years and a weighted average coupon of 3.8%. Debt issued
included:
• February issuance of $1,250 of 2.800% global notes
due 2021.
• February issuance of $1,500 of 3.600% global notes
due 2023.
• February issuance of $1,750 of 4.125% global notes
due 2026.
• February issuance of $1,500 of 5.650% global notes
due 2047.
• May issuance of $750 of 2.300% global notes due 2019.
• May issuance of $750 of 2.800% global notes due 2021.
• May issuance of $1,100 of 3.600% global notes
due 2023.
• May issuance of $900 of 4.125% global notes due 2026.
• May issuance of $500 of 4.800% global notes due 2044.
During 2016, we redeemed $10,823 in debt, primarily
consisting of the following repayments:
• February redemption of $1,250 of AT&T floating rate
notes due 2016.
• March prepayment of the remaining $1,000 outstanding
under a $2,000 18-month credit agreement by and
between AT&T and Mizuho.
• May redemption of $1,750 of 2.950% global notes
due 2016.
• June prepayment of $5,000 of outstanding advances
under our $9,155 Syndicated Credit Agreement (See
“Credit Facilities” below).
• August redemption of $1,500 of 2.400% global notes
due 2016.
In March 2016, we completed a debt exchange in which
$16,049 of DIRECTV notes with stated rates of 1.750% to
6.375% were tendered and accepted in exchange for
$16,049 of new AT&T Inc. global notes with stated rates
of 1.750% to 6.375% plus a $16 cash payment.
The majority of our capital expenditures are spent on our
wireless and wireline networks, our video services and related
support systems. Capital expenditures, excluding interest
during construction, increased $2,298 in 2016. The increase
was primarily due to DIRECTV operations, fiber buildout, and
wireless network expansion in Mexico. In connection with
capital improvements, we have negotiated favorable payment
terms (referred to as vendor financing). In 2016, vendor
financing related to capital investments was $492. We do
not report capital expenditures at the segment level.
We expect our 2017 capital expenditures to be in the
$22,000 range, and we expect our capital expenditures to
be in the 15% range of service revenues or lower for each
of the years 2017 through 2019. The amount of capital
expenditures is influenced by demand for services and
products, capacity needs and network enhancements.
Our capital spending also takes into account existing tax law
and does not reflect anticipated tax reform. We are also
focused on ensuring DIRECTV merger commitments are met.
To that end, as of December 31, 2016, we have built out
our fiber-to-the-premises network to 3.8 million customer
locations of the 12.5 million locations we committed to
reach by mid-2019.
Cash Used in or Provided by Financing Activities
We paid dividends of $11,797 in 2016, $10,200 in 2015,
and $9,552 in 2014. The increases in 2016 and 2015 were
primarily due to the increase in shares outstanding resulting
from our acquisition of DIRECTV and the increase in the
quarterly dividend approved by our Board of Directors in the
fourth quarter of each year. In October 2016, our Board of
Directors approved a 2.1% increase in the quarterly dividend
from $0.48 to $0.49 per share. This follows a 2.1% dividend
increase approved by our Board in December 2015.
Dividends declared by our Board of Directors totaled
$1.93 per share in 2016, $1.89 per share in 2015, and
$1.85 per share in 2014. Our dividend policy considers the
expectations and requirements of stockholders, capital
funding requirements of AT&T and long-term growth
opportunities. It is our intent to provide the financial
flexibility to allow our Board of Directors to consider
dividend growth and to recommend an increase in dividends
to be paid in future periods. All dividends remain subject to
declaration by our Board of Directors.
34  34 || AT&T I N C . AT&T INC.
Excluding the impact of acquisitions or anticipated tax
reform, the emphasis of our 2017 financing activities will be
the issuance of debt and the payment of dividends, subject
to approval by our Board of Directors, and the repayment of
debt. We plan to fund our financing uses of cash through a
combination of cash from operations, debt issuances and
asset sales. We have obtained bridge loan and term loan
financing to be used upon closing of our acquisition of Time
Warner. The timing and mix of debt issuance will be guided
by credit market conditions and interest rate trends.
Credit Facilities
The following is a summary of certain terms of our various
credit and loan agreements and does not purport to be
complete and is qualified in its entirety by reference to
each agreement filed as exhibits to our Annual Report on
Form 10-K.
General
In December 2015, we entered into a five-year, $12,000
revolving credit agreement (the “Revolving Credit
Agreement”) with certain banks. As of December 31, 2016,
we have no amounts outstanding under this agreement.
In January 2015, we entered into a $9,155 credit
agreement (the “Syndicated Credit Agreement”) containing
(i) a $6,286 term loan (“Loan A”) and (ii) a $2,869 term
loan (“Loan B”), with certain banks. In March 2015, we
borrowed all amounts available under the agreement.
Loan A will be due on March 2, 2018. Amounts borrowed
under Loan B will be subject to amortization from March 2,
2018, with 25% of the aggregate principal amount thereof
being payable prior to March 2, 2020, and all remaining
principal amount due on March 2, 2020. In June 2016, we
repaid $4,000 of the outstanding amount under Loan A
and $1,000 of the outstanding amount under Loan B. After
repayment, the amortization in Loan B has been satisfied.
As of December 31, 2016, we have $2,286 outstanding
under Loan A and $1,869 outstanding under Loan B.
On October 22, 2016, in connection with entering into the
Time Warner merger agreement, AT&T entered into a
$40,000 bridge loan with JPMorgan Chase Bank and Bank
of America, as lenders (the “Bridge Loan”).
On November 15, 2016, we entered into a $10,000 term
loan credit agreement (the “Term Loan”) with a syndicate of
20 lenders. In connection with this Term Loan, the “Tranche
B Commitments” totaling $10,000 under the Bridge Loan
were reduced to zero. The “Tranche A Commitments” under
the Bridge Loan totaling $30,000 remain in effect.
No amounts will be borrowed under either the Bridge Loan
or the Term Loan prior to the closing of the Time Warner
merger. Borrowings under either agreement will be used
solely to finance a portion of the cash to be paid in the
In September 2016, we completed a debt exchange in which
$5,615 of notes of AT&T or one or more of its subsidiaries
with stated rates of 5.350% to 8.250% were tendered and
accepted in exchange for $4,500 of new AT&T Inc. global
notes with a stated rate of 4.500% and $2,500 of new
AT&T Inc. global notes with a stated rate of 4.550%.
In February 2017, aggregate bids exceeded the level
required to clear Auction 1000. This auction, including the
assignment phase, is expected to conclude in the first half
of 2017. Our commitment to purchase 600 MHz spectrum
licenses for which we submitted bids is expected to be
more than satisfied by the deposits made to the FCC in
the third quarter of 2016.
Our weighted average interest rate of our entire long-term
debt portfolio, including the impact of derivatives, was
approximately 4.2% at December 31, 2016 and 4.0% at
December 31, 2015. We had $122,381 of total notes and
debentures outstanding (see Note 9) at December 31, 2016,
which included Euro, British pound sterling, Swiss franc,
Brazilian real and Canadian dollar denominated debt of
approximately $24,292.
On February 9, 2017, we completed the following long-term
debt issuances:
• $1,250 of 3.200% global notes due 2022.
• $750 of 3.800% global notes due 2024.
• $2,000 of 4.250% global notes due 2027.
• $3,000 of 5.250% global notes due 2037.
• $2,000 of 5.450% global notes due 2047.
• $1,000 of 5.700% global notes due 2057.
At December 31, 2016, we had $9,832 of debt maturing
within one year, substantially all of which was related to
long-term debt issuances. Debt maturing within one year
includes the following notes that may be put back to us by
the holders:
• $1,000 of annual put reset securities issued by
BellSouth Corporation that may be put back to us
each April until maturity in 2021.
• An accreting zero-coupon note that may be redeemed
each May until maturity in 2022. If the zero-coupon
note (issued for principal of $500 in 2007) is held to
maturity, the redemption amount will be $1,030.
Our Board of Directors has approved repurchase
authorizations of 300 million shares each in 2013 and 2014
(see Note 14). For the year ended December 31, 2015, we
repurchased approximately eight million shares totaling
$269 under these authorizations and for the year ended
December 31, 2016, we repurchased approximately
11 million shares totaling $444 under these authorizations.
At December 31, 2016, we had approximately 396 million
shares remaining from the 2013 and 2014 authorizations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 3 535
Bridge Loan
The obligations of the lenders under the Bridge Loan to
provide advances will terminate on the earliest of (i)
October 23, 2017, subject to extension in certain cases to
April 23, 2018, (ii) the closing of the Time Warner merger
without the borrowing of advances under the Bridge Loan
and (iii) the termination of the Merger Agreement.
Advances would bear interest, at AT&T’s option, either:
• at a variable annual rate equal to: (1) the highest of (a)
the prime rate of JPMorgan Chase Bank, (b) 0.5% per
annum above the federal funds rate, and (c) the LIBOR
applicable to dollars for a period of one month plus
1.00%, plus (2) an applicable margin, as set forth in this
agreement (the “Applicable Margin for Base Advances
(Bridge Loan)”); or
• at a rate equal to: (i) LIBOR (adjusted upwards to reflect
any bank reserve costs) for a period of one, two, three
or six months, as applicable, plus (ii) an applicable
margin, as set forth in this agreement (the “Applicable
Margin for Eurodollar Rate Advances (Bridge Loan)”).
The Applicable Margin for Eurodollar Rate Advances
(Bridge Loan) will be equal to 0.750%, 1.000%, 1.125%,
1.250% or 1.500% per annum depending on AT&T’s credit
ratings. The Applicable Margin for Base Advances (Bridge
Loan) will be equal to the greater of (x) 0.00% and (y) the
relevant Applicable Margin for Eurodollar Rate Advances
(Bridge Loan) minus 1.00% per annum, depending on
AT&T’s credit ratings.
The Applicable Margin for Eurodollar Rate Advances
(Bridge Loan) and the Applicable Margin for Base Advances
(Bridge Loan) are scheduled to increase by an additional
0.25% on the 90th day after the closing of the Merger and
another 0.25% every 90 days thereafter.
AT&T pays a commitment fee of 0.090%, 0.100%, 0.125% or
0.175% of the commitment amount per annum, depending
on AT&T’s credit ratings.
We also must pay an additional fee of 0.500%, 0.750% and
1.000% on the amount of advances outstanding as of the
90th, 180th and 270th day after advances are made.
The Bridge Loan requires that the commitments of the
lenders be reduced and outstanding advances be repaid with
the net cash proceeds if we incur certain additional debt, we
issue certain additional stock or we have certain sales or
dispositions of assets by AT&T or its subsidiaries, in each case
subject to exceptions set forth in the Bridge Loan.
Advances under the Bridge Loan are conditioned on the
absence of a material adverse effect on Time Warner and
certain customary conditions and repayment of all advances
must be made no later than 364 days after the date on
which the advances are made.
Merger, the refinancing of debt of Time Warner and its
subsidiaries and the payment of related expenses. Prior to
the closing date of the Merger, only a payment or
bankruptcy event of default would permit the lenders to
terminate their commitments under either the Bridge Loan
or the Term Loan.
Each of our credit and loan agreements contains covenants
that are customary for an issuer with an investment grade
senior debt credit rating, as well as a net debt-to-EBITDA
(earnings before interest, taxes, depreciation and
amortization, and other modifications described in each
agreement) financial ratio covenant requiring AT&T to
maintain, as of the last day of each fiscal quarter, a ratio of
not more than 3.5-to-1. The events of default are customary
for agreements of this type and such events would result in
the acceleration of, or would permit the lenders to
accelerate, as applicable, required payments and would
increase each agreement’s relevant Applicable Margin by
2.00% per annum.
Revolving Credit Agreement
The obligations of the lenders to advance funds under the
Revolving Credit Agreement will end on December 11, 2020,
unless prior to that date either: (i) AT&T reduces to $0 the
commitments of the lenders, or (ii) certain events of default
occur. We and lenders representing more than 50% of the
facility amount may agree to extend their commitments for
two one-year periods beyond the December 11, 2020 end
date, under certain circumstances.
Advances under this agreement would bear interest, at
AT&T’s option, either:
• at a variable annual rate equal to (1) the highest of:
(a) the base rate of the bank affiliate of Citibank, N.A.,
(b) 0.50% per annum above the Federal funds rate, and
(c) the London Interbank Offered Rate (LIBOR)
applicable to U.S. dollars for a period of one month
plus 1.00% per annum, plus (2) an applicable margin (as
set forth in this agreement); or
• at a rate equal to: (i) LIBOR for a period of one, two,
three or six months, as applicable, plus (ii) an applicable
margin (as set forth in this agreement).
The Syndicated Credit Agreement
Advances bear interest at a rate equal to: (i) the LIBOR for
deposits in dollars (adjusted upwards to reflect any bank
reserve costs) for a period of three or six months, as
applicable, plus (ii) the applicable margin, as set forth in this
agreement. The applicable margin under Loan A equals
1.000%, 1.125% or 1.250% per annum depending on AT&T’s
credit ratings. The applicable margin under Loan B equals
1.125%, 1.250% or 1.375% per annum, depending on AT&T’s
credit ratings.
36  36 || AT&T I N C . AT&T INC.
Collateral Arrangements
During 2016, we posted $1,022 of additional cash collateral,
on a net basis, to banks and other participants in our
derivative arrangements. Cash postings under these
arrangements vary with changes in credit ratings and netting
agreements. (See Note 10)
Other
Our total capital consists of debt (long-term debt and debt
maturing within one year) and stockholders’ equity. Our
capital structure does not include debt issued by our equity
method investments. At December 31, 2016, our debt ratio
was 49.9%, compared to 50.5% at December 31, 2015, and
47.5% at December 31, 2014. The debt ratio is affected by
the same factors that affect total capital, and reflects the
debt issued in 2016 and our repurchases of outstanding
shares of AT&T common stock, and debt redemptions during
2016. Total capital decreased $2,168 in 2016 compared to
an increase of $77,687 in 2015. The 2016 capital decrease
was primarily due to a decrease in debt balances, partially
offset by an increase in retained earnings.
A significant amount of our cash outflows is related to tax
items and benefits paid for current and former employees.
Total taxes incurred, collected and remitted by AT&T during
2016, 2015, and 2014 were $25,099, $21,501 and $20,870.
These taxes include income, franchise, property, sales, excise,
payroll, gross receipts and various other taxes and fees.
Total health and welfare benefits provided to certain active
and retired employees and their dependents totaled $4,753
in 2016, with $1,156 paid from plan assets. Of those
benefits, $4,407 related to medical and prescription drug
benefits. In addition, in December 2016, we prefunded $400
for future benefit payments. During 2016, we paid $3,614 of
pension benefits out of plan assets.
During 2016, we also received approximately $5,281 from
monetization of various assets, compared to $4,534 in 2015,
primarily from our sales of certain equipment installment
receivables and real estate holdings. We plan to continue
to explore monetization opportunities in 2017.
In September 2013, we made a voluntary contribution of a
preferred equity interest in AT&T Mobility II LLC (Mobility),
the holding company for our wireless business, to the trust
used to pay pension benefits under our qualified pension
plans. In 2014, the U.S. Department of Labor published in
the Federal Register their final retroactive approval of our
voluntary contribution.
The preferred equity interest had a fair value of $8,477 at
December 31, 2016 and $9,104 on the contribution date
and has a liquidation value of $8,000. The trust is entitled
to receive cumulative cash distributions of $560 per
annum, which are distributed quarterly in equal amounts
Term Loan
Under the Term Loan, there are two tranches of
commitments, each in a total amount of $5,000.
The obligations of the lenders under the Term Loan to
provide advances will terminate on the earliest of (i) October
23, 2017, subject to extension in certain cases to April 23,
2018, (ii) the closing of the Time Warner merger without the
borrowing of advances under the Term Loan and (iii) the
termination of the Merger Agreement.
Advances would bear interest, at AT&T’s option, either:
• at a variable annual rate equal to: (1) the highest of (a)
the prime rate of JPMorgan Chase Bank, N.A., (b) 0.5%
per annum above the federal funds rate, and (c) the
LIBOR rate applicable to dollars for a period of one
month plus 1.00%, plus (2) an applicable margin, as set
forth in the Term Loan (the “Applicable Margin for Base
Advances (Term Loan)”); or
• at a rate equal to: (i) LIBOR (adjusted upwards to reflect
any bank reserve costs) for a period of one, two, three
or six months, as applicable, plus (ii) an applicable
margin, as set forth in the Term Loan (the “Applicable
Margin for Eurodollar Rate Advances (Term Loan)”).
The Applicable Margin for Eurodollar Rate Advances (Term
Loan) under Tranche A is equal to 1.000%, 1.125% or
1.250% per annum, depending on AT&T’s credit ratings. The
Applicable Margin for Eurodollar Rate Advances (Term Loan)
under Tranche B is equal to 1.125%, 1.250% or 1.375% per
annum, depending on AT&T’s credit ratings. The Applicable
Margin for Base Advances (Term Loan) is equal to the
greater of (x) 0.00% and (y) the relevant Applicable Margin
for Eurodollar Rate Advances (Term Loan) minus 1.00% per
annum, depending on AT&T’s credit ratings.
AT&T pays a commitment fee of 0.090%, 0.100%, or 0.125%
of the commitment amount per annum, depending on
AT&T’s credit ratings.
Advances under the Term Loan are conditioned on the
absence of a material adverse effect on Time Warner and
certain customary conditions.
Repayment of all advances with respect to Tranche A must
be made no later than two years and six months after the
date on which such advances are made. Amounts borrowed
under Tranche B will be subject to amortization commencing
two years and nine months after the date on which such
advances are made, with 25% of the aggregate principal
amount thereof being payable prior to the date that is four
years and six months after the date on which such advances
are made, and all remaining principal amount due and
payable on the date that is four years and six months after
the date on which such advances are made.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 3737
and accounted for as contributions. We distributed $560
to the trust during 2016. So long as we make the
distributions, we will have no limitations on our ability to
declare a dividend or repurchase shares. This preferred
equity interest is a plan asset under ERISA and is
recognized as such in the plan’s separate financial
statements. However, because the preferred equity interest
is not unconditionally transferable to an unrelated party, it
is not reflected in plan assets in our consolidated financial
statements and instead has been eliminated in
consolidation. We also agreed to make a cash contribution
to the trust of $175 no later than the due date of our
federal income tax return for 2014, 2015 and 2016. During
2016, we completed our obligation, which included an
acceleration of the final contribution.
The preferred equity interest is not transferable by the trust
except through its put and call features. After a period of
five years from the contribution or, if earlier, the date upon
which the pension plan trust is fully funded as determined
under GAAP, AT&T has a right to purchase from the pension
plan trust some or all the preferred equity interest at the
greater of their fair market value or minimum liquidation
CONTRACTUAL OBLIGATIONS,
COMMITMENTS AND CONTINGENCIES
Our contractual obligations as of December 31, 2016 are in the following table:
Contractual Obligations
Payments Due By Period
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
Long-term debt obligations1 $130,280 $ 9,609 $16,953 $17,793 $ 85,925
Interest payments on long-term debt 82,249 5,440 10,065 8,891 57,853
Finance obligations2 3,341 239 492 512 2,098
Operating lease obligations3 29,657 3,915 7,154 6,019 12,569
Unrecognized tax benefits4 4,484 984 — — 3,500
Purchase obligations5 35,436 9,181 11,214 7,799 7,242
Total Contractual Obligations $285,447 $29,368 $45,878 $41,014 $169,187
1
Represents principal or payoff amounts of notes and debentures at maturity or, for putable debt, the next put opportunity (see Note 9).
2
Represents future minimum payments under the Crown Castle and other arrangements (see Note 16).
3
Represents operating lease payments (see Note 6).
4
The noncurrent portion of the UTBs is included in the “More than 5 Years” column, as we cannot reasonably estimate the timing or amounts of additional cash payments, if
any, at this time (see Note 11).
5
The purchase obligations will be funded with cash provided by operations or through incremental borrowings. The minimum commitment for certain obligations is based on
termination penalties that could be paid to exit the contracts. If we elect to exit these contracts, termination fees for all such contracts in the year of termination could be
approximately $1,043 in 2017, $1,091 in the aggregate for 2018 and 2019, $404 in the aggregate for 2020 and 2021, and $161 in the aggregate thereafter. Certain termination
fees are excluded from the above table, as the fees would not be paid every year and the timing of such payments, if any, is uncertain.
value plus any unpaid cumulative dividends. In addition,
AT&T will have the right to purchase the preferred equity
interest in the event AT&T’s ownership of Mobility is less
than 50% or there is a transaction that results in the
transfer of 50% or more of the pension plan trust’s assets to
an entity not under common control with AT&T (collectively,
a change of control). The pension plan trust has the right to
require AT&T to purchase the preferred equity interest at the
greater of their fair market value or minimum liquidation
value plus any unpaid cumulative dividends, and in
installments, as specified in the contribution agreement upon
the occurrence of any of the following: (1) at any time if the
ratio of debt to total capitalization of Mobility exceeds that
of AT&T, (2) the date on which AT&T is rated below
investment grade for two consecutive calendar quarters,
(3) upon a change of control if AT&T does not exercise its
purchase option, or (4) at any time after a seven-year period
from the contribution date. In the event AT&T elects or is
required to purchase the preferred equity interest, AT&T may
elect to settle the purchase price in cash or shares of AT&T
common stock or a combination thereof.
Certain items were excluded from this table, as the year
of payment is unknown and could not be reliably estimated
since past trends were not deemed to be an indicator of
future payment, because the settlement of the obligation
will not require the use of cash, or because the items are
immaterial. These items include: deferred income taxes of
$60,128 (see Note 11); postemployment benefit obligations
of $33,578, contributions associated with our voluntary
contribution of the Mobility preferred equity interest, and
expected pension and postretirement payments (see Note
12); other noncurrent liabilities of $21,748; third-party debt
guarantees; fair value of our interest rate swaps; capital
lease obligations; and vendor financing.
38  38 || AT&T I N C . AT&T INC.
Maturity
Fair Value
2017 2018 2019 2020 2021 Thereafter Total 12/31/16
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay Variable Notional
Amount Maturing $700 $4,100 $4,100 $ — $750 $— $9,650 $65
Weighted-Average Variable Rate Payable1 3.5% 4.0% 4.6% 4.9% 5.0% —
Weighted-Average Fixed Rate Receivable 4.1% 4.0% 4.3% 4.5% 4.5% —
1 Interest payable based on current and implied forward rates for One, Three, or Six Month LIBOR plus a spread ranging between approximately 14 and 425 basis points.
MARKET RISK
We are exposed to market risks primarily from changes
in interest rates and foreign currency exchange rates.
These risks, along with other business risks, impact our
cost of capital. It is our policy to manage our debt
structure and foreign exchange exposure in order to
manage capital costs, control financial risks and maintain
financial flexibility over the long term. In managing market
risks, we employ derivatives according to documented
policies and procedures, including interest rate swaps,
interest rate locks, foreign currency exchange contracts
and combined interest rate foreign currency contracts
(cross-currency swaps). We do not use derivatives for
trading or speculative purposes. We do not foresee
significant changes in the strategies we use to manage
market risk in the near future.
Interest Rate Risk
The majority of our financial instruments are medium- and
long-term fixed-rate notes and debentures. Changes in
interest rates can lead to significant fluctuations in the fair
value of these instruments. The principal amounts by
expected maturity, average interest rate and fair value of our
liabilities that are exposed to interest rate risk are described
in Notes 9 and 10. In managing interest expense, we control
our mix of fixed and floating rate debt, principally through the
use of interest rate swaps. We have established interest rate
risk limits that we closely monitor by measuring interest rate
sensitivities in our debt and interest rate derivatives portfolios.
Most of our foreign-denominated long-term debt has been
swapped from fixed-rate or floating-rate foreign currencies
to fixed-rate U.S. dollars at issuance through cross-currency
swaps, removing interest rate risk and foreign currency
exchange risk associated with the underlying interest and
principal payments. Likewise, periodically we enter into
interest rate locks to partially hedge the risk of increases in
the benchmark interest rate during the period leading up
to the probable issuance of fixed-rate debt. We expect
gains or losses in our cross-currency swaps and interest
rate locks to offset the losses and gains in the financial
instruments they hedge.
Following are our interest rate derivatives subject to
material interest rate risk as of December 31, 2016. The
interest rates illustrated below refer to the average rates
we expect to pay based on current and implied forward
rates and the average rates we expect to receive based
on derivative contracts. The notional amount is the
principal amount of the debt subject to the interest rate
swap contracts. The fair value asset (liability) represents
the amount we would receive (pay) if we had exited the
contracts as of December 31, 2016.
Foreign Exchange Risk
We are exposed to foreign currency exchange risk through
our foreign affiliates and equity investments in foreign
companies. We do not hedge foreign currency translation
risk in the net assets and income we report from these
sources. However, we do hedge a portion of the exchange
risk involved in anticipation of highly probable foreign
currency-denominated transactions and cash flow streams,
such as those related to issuing foreign-denominated debt,
receiving dividends from foreign investments, and other
receipts and disbursements.
Through cross-currency swaps, most of our foreigndenominated
debt has been swapped from fixed-rate or
floating-rate foreign currencies to fixed-rate U.S. dollars at
issuance, removing interest rate and foreign currency
exchange risk associated with the underlying interest and
principal payments. We expect gains or losses in our
cross-currency swaps to offset the gains and losses in the
financial instruments they hedge.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 3 939
STOCK PERFORMANCE GRAPH
Comparison of Five Year Cumulative Total Return
AT&T Inc., S&P 500 Index, and S&P 500 Integrated Telecom Index
80
100
120
140
160
180
200
220
240
12/11 12/12 12/13 12/14 12/15 12/16
AT&T Inc. S&P 500 Index S&P 500 Integrated
Telecom Index
118
115
116
154
129
128
175
130
130
177
141
134
198
183
167
The comparison above assumes $100 invested on December 31, 2011, in AT&T common stock, Standard & Poor’s 500
Index (S&P 500), and Standard & Poor’s 500 Integrated Telecom Index (S&P 500 Integrated Telecom). Total return equals
stock price appreciation plus reinvestment of dividends.
In anticipation of other foreign currency-denominated
transactions, we often enter into foreign exchange forward
contracts to provide currency at a fixed rate. Our policy is to
measure the risk of adverse currency fluctuations by
calculating the potential dollar losses resulting from changes
in exchange rates that have a reasonable probability of
occurring. We cover the exposure that results from changes
that exceed acceptable amounts.
For the purpose of assessing specific risks, we use a
sensitivity analysis to determine the effects that market risk
exposures may have on the fair value of our financial
instruments and results of operations. To perform the
sensitivity analysis, we assess the risk of loss in fair values
from the effect of a hypothetical 10% fluctuation of the U.S.
dollar against foreign currencies from the prevailing foreign
currency exchange rates, assuming no change in interest
rates. We had no foreign exchange forward contracts
outstanding at December 31, 2016.
RISK FACTORS
In addition to the other information set forth in this
document, including the matters contained under the caption
“Cautionary Language Concerning Forward-Looking
Statements,” you should carefully read the matters described
below. We believe that each of these matters could
materially affect our business. We recognize that most of
these factors are beyond our ability to control and therefore
we cannot predict an outcome. Accordingly, we have
organized them by first addressing general factors, then
industry factors and, finally, items specifically applicable to us.
The current U.S. economy has changed our customers’
buying habits and a failure to adequately respond could
materially adversely affect our business.
We provide services and products predominantly to
consumers and large and small businesses in the
United States. We also provide services to larger businesses
throughout the world. The slow economic recovery in the
United States continues to pressure some of our customers’
demand for and ability to pay for existing services,
especially wired and video services, and their interest in
purchasing new services. Customers have changed their
buying habits in response to both ongoing economic
conditions and technological advances. We have responded
by offering more bundled offerings and we are likely to
40  40 || AT&T I N C . AT&T INC.
experience greater pressure on pricing and margins as
we continue to compete for customers who have less
discretionary income.
U.S. corporate tax reform and changes in Federal
regulatory trends should lead to improvements in the
U.S. economy which would benefit our business and
consumer customers.
In recent years, the U.S. economy has suffered from a
lack of capital investment. High Federal corporate tax
rates and a restrictive regulatory environment have
significantly impeded the ability of businesses to invest.
Following the 2016 Federal election, the U.S.
Congressional leadership has indicated that passing
legislation to lower these tax rates is now a priority.
Similarly, the new FCC has indicated a priority to
eliminating outdated and ineffective regulatory burdens,
including those that create disincentives to invest in
broadband services. Both tax and regulatory reform are
expected to result in higher investment and increased
demand for employment with wage improvement. As a
provider of advanced business services and integrated
consumer entertainment and broadband offerings, we
would be well positioned to take advantage of these
economic improvements.
Adverse changes in medical costs and the U.S. securities
markets and continued low interest rates could
materially increase our benefit plan costs.
Our costs to provide current benefits and funding for future
benefits are subject to increases, primarily due to continuing
increases in medical and prescription drug costs, and can be
affected by lower returns on funds held by our pension and
other benefit plans, which are reflected in our financial
statements for that year. Investment returns on these funds
depend largely on trends in the U.S. securities markets and
the U.S. economy. We have experienced historically low
interest rates during the last several years. While annual
market returns and increased volatility have pressured asset
returns in the short-term, we expect long-term market returns
to stabilize. During 2016, overall bond rates decreased
slightly, which results in higher benefit obligations. Conversely,
an increase in overall bond rates will result in lower benefit
obligations. In calculating the costs included on our financial
statements of providing benefits under our plans, we have
made certain assumptions regarding future investment
returns, medical costs and interest rates. While we have made
some changes to the benefit plans to limit our risk from
increasing medical costs, if actual investment returns, medical
costs and interest rates are worse than those previously
assumed, our costs will increase.
The Financial Accounting Standards Board requires
companies to recognize the funded status of defined
benefit pension and postretirement plans as an asset or
liability in our statement of financial position and to
recognize changes in that funded status in the year in
which the changes occur. We have elected to reflect the
annual adjustments to the funded status in our
consolidated statement of income. Therefore, an increase
in our costs or adverse market conditions will have a
negative effect on our operating results.
Adverse changes in global financial markets could limit
our ability and our larger customers’ ability to access
capital or increase the cost of capital needed to fund
business operations.
While the global financial markets were generally stable
during 2016, a continuing uncertainty surrounding global
growth rates has resulted in increasing volatility in the credit,
currency, equity and fixed income markets. Uncertainty
regarding future U.S. trade policy and political developments
in Europe could significantly affect global financial markets
in 2017. Volatility in other areas, such as in emerging
markets, may affect companies’ access to the credit markets,
leading to higher borrowing costs for companies or, in some
cases, the inability of these companies to fund their ongoing
operations. In addition, we contract with large financial
institutions to support our own treasury operations, including
contracts to hedge our exposure on interest rates and
foreign exchange and the funding of credit lines and other
short-term debt obligations, including commercial paper.
These financial institutions also face stricter capital-related
and other regulations in the United States and Europe, as
well as ongoing legal and financial issues concerning their
loan portfolios, which may hamper their ability to provide
credit or raise the cost of providing such credit. A company’s
cost of borrowing is also affected by evaluations given by
various credit rating agencies and these agencies have been
applying tighter credit standards when evaluating a
company’s debt levels and future growth prospects. While
we have been successful in continuing to access the credit
and fixed income markets when needed, adverse changes in
the financial markets could render us either unable to
access these markets or able to access these markets only
at higher interest costs and with restrictive financial or other
conditions, severely affecting our business operations.
Changes in available technology could increase
competition and our capital costs.
The communications and digital entertainment industry
has experienced rapid changes in the past several years.
The development of wireless, cable and IP technologies has
significantly increased the commercial viability of alternatives
to traditional wired service and enhanced the capabilities of
wireless networks. In addition, our customers continue to
increase demand for services that can be accessed on
mobile devices, especially video services. While our
customers can use their traditional video subscription to
access mobile programming, an increasing number of
customers are also using mobile devices as the primary
means of viewing video and an increasing number of
non-traditional video providers are developing content and
technologies to satisfy that demand. In order to remain
competitive, we now offer a mobile TV service and continue
to deploy sophisticated wired and wireless networks,
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. |
| 41 41
cell and fixed landline sites. To this end, we have
participated in spectrum auctions, at increasing financial
cost, and continue to deploy technology advancements in
order to further improve our network.
Network service enhancements and product launches may
not occur as scheduled or at the cost expected due to
many factors, including delays in determining equipment
and wireless handset operating standards, supplier delays,
increases in network equipment and handset component
costs, regulatory permitting delays for tower sites or
enhancements, or labor-related delays. Deployment of new
technology also may adversely affect the performance of
the network for existing services. If we cannot acquire
needed spectrum or deploy the services customers desire
on a timely basis and at adequate cost, then our ability to
attract and retain customers, and therefore maintain and
improve our operating margins, could be materially
adversely affected.
Increasing competition for wireless customers could
materially adversely affect our operating results.
We have multiple wireless competitors in each of our service
areas and compete for customers based principally on
service/device offerings, price, network quality, coverage
area and customer service. In addition, we are facing
growing competition from providers offering services using
advanced wireless technologies and IP-based networks as
well as traditional wireline networks. We expect market
saturation to continue to cause the wireless industry’s
customer growth rate to moderate in comparison with
historical growth rates, leading to increased competition for
customers. We also expect that our customers’ growing
demand for high-speed video and data services will place
constraints on our network capacity. This competition and
our capacity issues will continue to put pressure on pricing
and margins as companies compete for potential customers.
Our ability to respond will depend, among other things, on
continued improvement in network quality and customer
service as well as effective marketing of attractive products
and services. These efforts will involve significant expenses
and require strategic management decisions on, and timely
implementation of, equipment choices, network deployment,
and service offerings.
Increasing costs to provide services could adversely
affect operating margins.
Our operating costs, including customer acquisition and
retention costs, could continue to put pressure on margins
and customer retention levels. In addition, virtually all our
video programming is provided by other companies and
historically the rates they charge us for programming have
often increased more than the rate of inflation. As an
offsetting factor, we have announced an agreement to
acquire Time Warner Inc., a global leader in media and
entertainment content. We also are attempting to use our
increased scale and access to wireless customers to change
this trend but such negotiations are difficult and also may
including satellites, as well as research other new
technologies. If the new technologies we have adopted or
on which we have focused our research efforts fail to be
cost-effective and accepted by customers, our ability to
remain competitive could be materially adversely affected.
Changes to federal, state and foreign government
regulations and decisions in regulatory proceedings
could further increase our operating costs and/or alter
customer perceptions of our operations, which could
materially adversely affect us.
Our subsidiaries providing wired services are subject to
significant federal and state regulation while many of our
competitors are not. In addition, our subsidiaries and
affiliates operating outside the United States are also
subject to the jurisdiction of national and supranational
regulatory authorities in the market where service is
provided. Our wireless and satellite video subsidiaries are
regulated to varying degrees by the FCC and some state
and local agencies. Adverse regulations and rulings by the
FCC relating to broadband and satellite video issues could
impede our ability to manage our networks and recover
costs and lessen incentives to invest in our networks.
The development of new technologies, such as IP-based
services, also has created or potentially could create
conflicting regulation between the FCC and various state
and local authorities, which may involve lengthy litigation to
resolve and may result in outcomes unfavorable to us. In
addition, increased public focus on a variety of issues related
to our operations, such as privacy issues, government
requests or orders for customer data, and potential global
climate changes, have led to proposals at state, federal and
foreign government levels to change or increase regulation
on our operations. Should customers decide that our
competitors operate in a more customer-friendly
environment, we could be materially adversely affected.
Continuing growth in and the converging nature of
wireless and broadband services will require us to
deploy increasing amounts of capital and require
ongoing access to spectrum in order to provide
attractive services to customers.
Wireless and broadband services are undergoing rapid and
significant technological changes and a dramatic increase
in usage, in particular, the demand for faster and seamless
usage of video and data across mobile and fixed devices.
We must continually invest in our wireless and wireline
networks in order to improve our wireless and broadband
services to meet this increasing demand and remain
competitive. Improvements in these services depend
on many factors, including continued access to and
deployment of adequate spectrum and the capital needed
to expand our wireline network to support transport of
these services. In order to stem broadband subscriber
losses to cable competitors in our non-fiber wireline areas,
we have been expanding our all-fiber wireline network.
We must maintain and expand our network capacity and
coverage for transport of video, data and voice between
42  42 || AT&T I N C . AT&T INC.
not result in a material adverse effect on our operations.
However, as such attacks continue to increase in scope and
frequency, we may be unable to prevent a significant attack
in the future. Our ability to maintain and upgrade our video
programming also depends on our ability to successfully
deploy and operate video satellites. Our inability to deploy
or operate our networks or customer support systems could
result in significant expenses, potential legal liability, a loss
of current or future customers and reputation damage, any
of which could have a material adverse effect on our
operations and financial condition.
The impact of our pending acquisition of Time Warner,
including our ability to obtain governmental approvals
on favorable terms including any required divestitures;
the risk that the businesses will not be integrated
successfully; the risk that the cost savings and any other
synergies from the acquisition may not be fully realized
or may take longer to realize than expected; our costs in
financing the acquisition and potential adverse effects
on our share price and dividend amount due to the
issuance of additional shares; the addition of Time
Warner’s existing debt to our balance sheet; disruption
from the acquisition making it more difficult to maintain
relationships with customers, employees or suppliers;
and competition and its effect on pricing, spending, third
party relationships and revenues.
As discussed in “Other Business Matters,” on
October 22, 2016, we agreed to acquire Time Warner for a
total transaction value of approximately $108,700 (including
Time Warner’s net debt). We believe that the acquisition will
give us the scale, resources and ability to deploy video
content more efficiently to more customers than otherwise
possible and to provide very attractive integrated offerings of
video, broadband and wireless services; compete more
effectively against other video providers as well as other
technology, media and communications companies; and
produce cost savings and other potential synergies.
Achieving these results will depend upon obtaining
governmental approvals on favorable terms within the time
limits contemplated by the parties. Delays in closing,
including as a result of delays in obtaining regulatory
approval, could divert attention from ongoing operations on
the part of management and employees, adversely affecting
customers and suppliers and therefore revenues. If such
approvals are obtained and the transaction is consummated,
then we must integrate a large number of operational and
administrative systems, which may involve significant
management time and create uncertainty for employees,
customers and suppliers. The integration process may also
result in significant expenses and charges against earnings,
both cash and noncash. While we have successfully merged
large companies into our operations in the past, delays in
the process could have a material adverse effect on
our revenues, expenses, operating results and financial
condition. This acquisition also will increase the amount of
result in programming disruption. If we are unable to restrain
these costs or provide programming desired by our
customers, it could impact margins and our ability to
attract and retain customers.
A number of our competitors offering comparable legacy
services that rely on alternative technologies and business
models are typically subject to less (or no) regulation, and
therefore are able to operate with lower costs. In addition,
these competitors generally can focus on discrete customer
segments since they do not have regulatory obligations to
provide universal service. These competitors also have cost
advantages compared to us, due in part to operating on
newer, more technically advanced and lower-cost networks
and a nonunionized workforce, lower employee benefits and
fewer retirees. To this end, we have begun initiatives at both
the state and federal levels to obtain regulatory approvals,
where needed, to transition services from our older copperbased
network to an advanced IP-based network. If we do
not obtain regulatory approvals for our network transition or
obtain approvals with onerous conditions, we could
experience significant cost and competitive disadvantages.
Unfavorable litigation or governmental investigation
results could require us to pay significant amounts or
lead to onerous operating procedures.
We are subject to a number of lawsuits both in the
United States and in foreign countries, including, at any
particular time, claims relating to antitrust; patent
infringement; wage and hour; personal injury; customer
privacy violations; regulatory proceedings; and selling and
collection practices. We also spend substantial resources
complying with various government standards, which may
entail related investigations and litigation. In the wireless
area, we also face current and potential litigation relating
to alleged adverse health effects on customers or
employees who use such technologies including, for
example, wireless devices. We may incur significant
expenses defending such suits or government charges and
may be required to pay amounts or otherwise change our
operations in ways that could materially adversely affect
our operations or financial results.
Cyber attacks, equipment failures, natural disasters
and terrorist acts may materially adversely affect
our operations.
Cyber attacks, major equipment failures or natural disasters,
including severe weather, terrorist acts or other breaches of
network or IT security that affect our wireline and wireless
networks, including telephone switching offices, microwave
links, third-party-owned local and long-distance networks on
which we rely, our cell sites or other equipment, our video
satellites, our customer account support and information
systems, or employee and business records could have a
material adverse effect on our operations. While we have
been subject to security breaches or cyber attacks, these did
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 4 3 43
The acquisitions of DIRECTV, GSF Telecom and Nextel
Mexico have increased our exposure to both changes in
the international economy and to the level of regulation
on our business, and these risks could offset our
expected growth opportunities from these acquisitions.
These three acquisitions have increased the magnitude of
our international operations, particularly in Mexico and the
rest of Latin America. We need to comply with a wide
variety of new and complex local laws, regulations and
treaties and government involvement in private business
activity. We are now exposed to restrictions on cash
repatriation, foreign exchange controls, fluctuations in
currency values, changes in relationships between U.S. and
foreign governments, trade restrictions including potential
border taxes, and other regulations that may affect
materially our earnings. While the countries involved
represent significant opportunities to sell our advanced
services, a number of these same countries have
experienced unstable growth patterns and at times have
experienced high inflation, currency devaluation, foreign
exchange controls, instability in the banking sector and
high unemployment. Should these conditions persist,
customers in these countries may be unable to purchase
the services we offer or pay for services already provided.
In addition, operating in foreign countries also typically
involves participating with local businesses, either to comply
with local laws or, for example, to enhance product
marketing. Involvement with foreign firms exposes us to the
risk of being unable to control the actions of those firms
and therefore exposes us to violating the Foreign Corrupt
Practices Act (FCPA). Violations of the FCPA could have a
material adverse effect on our operating results.
Increases in our debt levels to fund acquisitions,
additional spectrum purchases, or other strategic
decisions could adversely affect our ability to finance
future debt at attractive rates and reduce our ability to
respond to competition and adverse economic trends.
We increased the amount of our debt during 2015 and
2016 to fund acquisitions, as well as spectrum purchases
needed to compete in our industry. While we believe such
decisions were prudent and necessary to take advantage of
both growth opportunities and respond to industry
developments, we have experienced a credit-rating
downgrade. Banks and potential purchasers of our publiclytraded
debt may decide that these strategic decisions and
similar actions we may take in the future, as well as
expected trends in the industry, will continue to increase the
risk of investing in our debt and may demand a higher rate
of interest, impose restrictive covenants or otherwise limit
the amount of potential borrowing.
debt on our balance sheet (both Time Warner’s debt and
the indebtedness needed to pay a portion of the purchase
price) leading to additional interest expense and, due to
additional shares being issued, will result in additional cash
being required for any dividends declared. Both of these
factors could put pressure on our financial flexibility to
continue capital investments, develop new services and
declare future dividends. In addition, events outside of our
control, including changes in regulation and laws as well as
economic trends, could adversely affect our ability to realize
the expected benefits from this acquisition.
Our failure to successfully integrate our July 2015
acquisition of DIRECTV, including our failure to achieve
the cost savings and any other synergies from the
acquisition either on schedule or in the amounts
expected; the potential adverse effects on our dividend
amount due to the issuance of additional shares and the
addition of acquisition-related debt to our balance sheet;
disruption from the acquisition making it more difficult
to maintain relationships with customers, employees or
suppliers; and competition and its effect on pricing,
spending, third-party relationships and revenues, all may
materially adversely affect our operating results.
We completed our acquisition of DIRECTV in July 2015.
We believe that the acquisition gives us the scale, resources
and ability to deploy video services to more customers than
otherwise possible and to provide an integrated bundle of
broadband, video and wireless services enabling us to
compete more effectively against cable operators as well as
other technology, media and communications companies. In
addition, we believe the acquisition has resulted in cost
savings, especially in the area of video content costs, and
other potential synergies, enabling us to expand and
enhance our broadband deployment and provide more video
options across multiple fixed and mobile devices. We must
comply with various regulatory conditions and integrate a
large number of video network and other operational
systems and administrative systems. The integration process
may also result in significant expenses and charges against
earnings, both cash and noncash. While we have
successfully merged large companies into our operations
in the past, delays in the process could have a material
adverse effect on our revenues, expenses, operating results
and financial condition. This acquisition has increased the
amount of debt on our balance sheet (both from DIRECTV’s
debt and the indebtedness needed to pay a portion of the
purchase price) leading to additional interest expense and,
due to additional shares being issued, will result in
additional cash being required for any dividends declared.
Both of these factors could put pressure on our financial
flexibility to continue capital investments, develop new
services and declare future dividends. In addition, events
outside of our control, including changes in regulation and
laws as well as economic trends, could adversely affect our
ability to realize the expected benefits from this acquisition.
4 4   44 || AT&T I N C . AT&T INC.
• The ability of our competitors to offer product/service offerings
at lower prices due to lower cost structures and regulatory and
legislative actions adverse to us, including state regulatory
proceedings relating to unbundled network elements and
non-regulation of comparable alternative technologies (e.g., VoIP).
• The continued development and delivery of attractive and
profitable video offerings through satellite and IP-based
networks; the extent to which regulatory and build-out
requirements apply to our offerings; and the availability, cost
and/or reliability of the various technologies and/or content
required to provide such offerings.
• Our continued ability to maintain margins, attract and offer a
diverse portfolio of wireless service and devices and device
financing plans.
• The availability and cost of additional wireless spectrum and
regulations and conditions relating to spectrum use, licensing,
obtaining additional spectrum, technical standards and
deployment and usage, including network management rules.
• Our ability to manage growth in wireless video and data
services, including network quality and acquisition of adequate
spectrum at reasonable costs and terms.
• The outcome of pending, threatened or potential litigation
(which includes arbitrations), including, without limitation, patent
and product safety claims by or against third parties.
• The impact from major equipment failures on our networks,
including satellites operated by DIRECTV; the effect of security
breaches related to the network or customer information; our
inability to obtain handsets, equipment/software or have
handsets, equipment/software serviced in a timely and
cost-effective manner from suppliers; and in the case of
satellites launched, timely provisioning of services from vendors;
or severe weather conditions, natural disasters, pandemics,
energy shortages, wars or terrorist attacks.
• The issuance by the Financial Accounting Standards Board or
other accounting oversight bodies of new accounting standards
or changes to existing standards.
• Our ability to integrate our acquisition of DIRECTV.
• Our ability to close our pending acquisition of Time Warner Inc.
and successfully integrate its operations.
• Our ability to adequately fund our wireless operations, including
payment for additional spectrum, network upgrades and
technological advancements.
• Our increased exposure to video competition and foreign
economies due to our recent acquisitions of DIRECTV and
Mexican wireless properties, including foreign exchange
fluctuations as well as regulatory and political uncertainty.
• Changes in our corporate strategies, such as changing
network-related requirements or acquisitions and dispositions,
which may require significant amounts of cash or stock, to
respond to competition and regulatory, legislative and
technological developments.
• The uncertainty surrounding further congressional action to
address spending reductions, which may result in a significant
decrease in government spending and reluctance of businesses
and consumers to spend in general.
• The uncertainty and impact of anticipated regulatory and
corporate tax reform, which may impact the overall economy
and incentives for business investments.
Readers are cautioned that other factors discussed in this report,
although not enumerated here, also could materially affect our
future earnings.
CAUTIONARY LANGUAGE CONCERNING
FORWARD-LOOKING STATEMENTS
Information set forth in this report contains forward-looking statements
that are subject to risks and uncertainties, and actual results could
differ materially. Many of these factors are discussed in more detail in
the “Risk Factors” section. We claim the protection of the safe harbor
for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
The following factors could cause our future results to differ materially
from those expressed in the forward-looking statements:
• Adverse economic and/or capital access changes in the markets
served by us or in countries in which we have significant
investments, including the impact on customer demand and our
ability and our suppliers’ ability to access financial markets at
favorable rates and terms.
• Changes in available technology and the effects of such
changes, including product substitutions and deployment costs.
• Increases in our benefit plans’ costs, including increases due to
adverse changes in the United States and foreign securities
markets, resulting in worse-than-assumed investment returns
and discount rates; adverse changes in mortality assumptions;
adverse medical cost trends, and unfavorable or delayed
implementation or repeal of healthcare legislation, regulations
or related court decisions.
• The final outcome of FCC and other federal, state or foreign
government agency proceedings (including judicial review, if
any, of such proceedings) involving issues that are important to
our business, including, without limitation, special access and
business data services, intercarrier compensation;
interconnection obligations; pending Notices of Apparent
Liability; the transition from legacy technologies to IP-based
infrastructure including the withdrawal of legacy TDM-based
services; universal service; broadband deployment; E911
services; competition policy; privacy; net neutrality including the
FCC’s order classifying broadband as Title II services subject to
much more comprehensive regulation; unbundled network
elements and other wholesale obligations; multi-channel video
programming distributor services and equipment; availability of
new spectrum, on fair and balanced terms, and wireless and
satellite license awards and renewals.
• The final outcome of state and federal legislative efforts
involving issues that are important to our business, including
deregulation of IP-based services, relief from Carrier of Last
Resort obligations and elimination of state commission review
of the withdrawal of services.
• Enactment of additional state, local, federal and/or foreign
regulatory and tax laws and regulations, or changes to existing
standards and actions by tax agencies and judicial authorities
including the resolution of disputes with any taxing jurisdictions,
pertaining to our subsidiaries and foreign investments, including
laws and regulations that reduce our incentive to invest in our
networks, resulting in lower revenue growth and/or higher
operating costs.
• Our ability to absorb revenue losses caused by increasing
competition, including offerings that use alternative technologies
or delivery methods (e.g., cable, wireless, VoIP and over-the-top
video service) and our ability to maintain capital expenditures.
• The extent of competition including from governmental
networks and other providers and the resulting pressure on
customer and access line totals and segment operating margins.
• Our ability to develop attractive and profitable product/service
offerings to offset increasing competition.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share and per subscriber amounts
AT&T I N C .   AT&T INC. || 4 5 45
2016 2015 2014
Operating Revenues
Service $148,884 $131,677 $118,437
Equipment 14,902 15,124 14,010
Total operating revenues 163,786 146,801 132,447
Operating Expenses
Cost of services and sales
Equipment 18,757 19,268 18,946
Broadcast, programming and operations 19,851 11,996 4,075
Other cost of services (exclusive of depreciation
and amortization shown separately below) 38,276 35,782 37,124
Selling, general and administrative 36,347 32,919 39,697
Asset abandonments and impairments 361 35 2,120
Depreciation and amortization 25,847 22,016 18,273
Total operating expenses 139,439 122,016 120,235
Operating Income 24,347 24,785 12,212
Other Income (Expense)
Interest expense (4,910) (4,120) (3,613)
Equity in net income of affiliates 98 79 175
Other income (expense) – net 277 (52) 1,581
Total other income (expense) (4,535) (4,093) (1,857)
Income Before Income Taxes 19,812 20,692 10,355
Income tax expense 6,479 7,005 3,619
Net Income 13,333 13,687 6,736
Less: Net Income Attributable to Noncontrolling Interest (357) (342) (294)
Net Income Attributable to AT&T $ 12,976 $ 13,345 $ 6,442
Basic Earnings Per Share Attributable to AT&T $ 2.10 $ 2.37 $ 1.24
Diluted Earnings Per Share Attributable to AT&T $ 2.10 $ 2.37 $ 1.24
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Income
Dollars in millions except per share amounts
46  46 || AT&T I N C . AT&T INC.
Consolidated Statements of Comprehensive Income
Dollars in millions
2016 2015 2014
Net income $13,333 $13,687 $6,736
Other comprehensive income, net of tax:
Foreign Currency:
Translation adjustments (includes $20, $(16) and $0 attributable to
noncontrolling interest), net of taxes of $357, $(595) and $(45) (777) (1,188) (75)
Reclassification adjustment included in net income,
net of taxes of $0, $0 and $224 — — 416
Available-for-sale securities:
Net unrealized gains, net of taxes of $36, $0, and $40 58 — 65
Reclassification adjustment included in net income,
net of taxes of $(1), $(9) and $(10) (1) (15) (16)
Cash flow hedges:
Net unrealized gains (losses), net of taxes of $371, $(411) and $140 690 (763) 260
Reclassification adjustment included in net income,
net of taxes of $21, $20 and $18 38 38 36
Defined benefit postretirement plans:
Net prior service credit arising during period,
net of taxes of $305, $27 and $262 497 45 428
Amortization of net prior service credit included in net income,
net of taxes of $(525), $(523) and $(588) (858) (860) (959)
Reclassification adjustment included in net income,
net of taxes of $0, $0 and $11 — — 26
Other comprehensive income (loss) (353) (2,743) 181
Total comprehensive income 12,980 10,944 6,917
Less: Total comprehensive income attributable to noncontrolling interest (377) (326) (294)
Total Comprehensive Income Attributable to AT&T $12,603 $10,618 $6,623
The accompanying notes are an integral part of the consolidated financial statements.
AT&T I N C .   AT&T INC. || 47 47
December 31,
2016 2015
Assets
Current Assets
Cash and cash equivalents $ 5,788 $ 5,121
Accounts receivable – net of allowances for doubtful accounts of $661 and $704 16,794 16,532
Prepaid expenses 1,555 1,072
Other current assets 14,232 13,267
Total current assets 38,369 35,992
Property, Plant and Equipment – Net 124,899 124,450
Goodwill 105,207 104,568
Licenses 94,176 93,093
Customer Lists and Relationships – Net 14,243 18,208
Other Intangible Assets – Net 8,441 9,409
Investments in Equity Affiliates 1,674 1,606
Other Assets 16,812 15,346
Total Assets $403,821 $402,672
Liabilities and Stockholders’ Equity
Current Liabilities
Debt maturing within one year $ 9,832 $ 7,636
Accounts payable and accrued liabilities 31,138 30,372
Advanced billings and customer deposits 4,519 4,682
Accrued taxes 2,079 2,176
Dividends payable 3,008 2,950
Total current liabilities 50,576 47,816
Long-Term Debt 113,681 118,515
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes 60,128 56,181
Postemployment benefit obligation 33,578 34,262
Other noncurrent liabilities 21,748 22,258
Total deferred credits and other noncurrent liabilities 115,454 112,701
Stockholders’ Equity
Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2016
and 2015: issued 6,495,231,088 at December 31, 2016 and 2015) 6,495 6,495
Additional paid-in capital 89,604 89,763
Retained earnings 34,734 33,671
Treasury stock (356,237,141 at December 31, 2016
and 350,291,239 at December 31, 2015, at cost) (12,659) (12,592)
Accumulated other comprehensive income 4,961 5,334
Noncontrolling interest 975 969
Total stockholders’ equity 124,110 123,640
Total Liabilities and Stockholders’ Equity $403,821 $402,672
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Balance Sheets
Dollars in millions except per share amounts
48  48 || AT&T I N C . AT&T INC.
2016 2015 2014
Operating Activities
Net income $ 13,333 $(13,687 ($( 6,736
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 25,847 22,016 18,273
Undistributed earnings from investments in equity affiliates (37) (49) (27)
Provision for uncollectible accounts 1,474 1,416 1,032
Deferred income tax expense 2,947 4,117 1,948
Net (gain) loss from sale of investments, net of impairments (169) 91 (1,461)
Actuarial loss (gain) on pension and postretirement benefits 1,024 (2,152) 7,869
Asset abandonments and impairments 361 35 2,120
Changes in operating assets and liabilities:
Accounts receivable (1,003) 30 (693)
Other current assets 1,708 (1,182) (1,018)
Accounts payable and accrued liabilities 118 1,354 2,310
Equipment installment receivables and related sales (576) (3,023) (5,043)
Deferred fulfillment costs (2,359) (1,437) (347)
Retirement benefit funding (910) (735) (560)
Other − net (2,414) 1,712 199
Total adjustments 26,011 22,193 24,602
Net Cash Provided by Operating Activities 39,344 35,880 31,338
Investing Activities
Capital expenditures:
Purchase of property and equipment (21,516) (19,218) (21,199)
Interest during construction (892) (797) (234)
Acquisitions, net of cash acquired (2,959) (30,759) (3,141)
Dispositions 646 83 8,123
Sales (purchases) of securities, net 506 1,545 (1,890)
Other — 2 4
Net Cash Used in Investing Activities (24,215) (49,144) (18,337)
Financing Activities
Net change in short-term borrowings with original maturities of three months or less — (1) (16)
Issuance of long-term debt 10,140 33,969 15,926
Repayment of long-term debt (10,823) (10,042) (10,400)
Issuance of other long-term financing obligations — — 107
Purchase of treasury stock (512) (269) (1,617)
Issuance of treasury stock 146 143 39
Dividends paid (11,797) (10,200) (9,552)
Other (1,616) (3,818) (2,224)
Net Cash (Used in) Provided by Financing Activities (14,462) 9,782 (7,737)
Net increase (decrease) in cash and cash equivalents 667 (3,482) 5,264
Cash and cash equivalents beginning of year 5,121 8,603 3,339
Cash and Cash Equivalents End of Year $ 5,788 $( 5,121 $( 8,603
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows
Dollars in millions
AT&T I N C .   AT&T INC. || 4 949
2016 2015 2014
Shares Amount Shares Amount Shares Amount
Common Stock
Balance at beginning of year 6,495 $ 6,495 6,495 $ 6,495 6,495 $ (6,495
Issuance of stock — — — — — —
Balance at end of year 6,495 $ 6,495 6,495 $ 6,495 6,495 $ (6,495
Additional Paid-In Capital
Balance at beginning of year $ 89,763 $ 91,108 $(91,091
Issuance of treasury stock (43) (1,597) 4
Share-based payments (140) 252 47
Change related to acquisition of interests
held by noncontrolling owners 24 — (34)
Balance at end of year $ 89,604 $ 89,763 $(91,108
Retained Earnings
Balance at beginning of year $ 33,671 $ 31,081 $(34,269
Net income attributable to AT&T
($2.10, $2.37 and $1.24 per diluted share) 12,976 13,345 6,442
Dividends to stockholders
($1.93, $1.89 and $1.85 per share) (11,913) (10,755) (9,630)
Balance at end of year $ 34,734 $ 33,671 $(31,081
Treasury Stock
Balance at beginning of year (350) $ (12,592) (1,308) $ (47,029) (1,269) $(45,619)
Repurchase of common stock (17) (655) (8) (278) (48) (1,617)
Issuance of treasury stock 11 588 966 34,715 9 207
Balance at end of year (356) $ (12,659) (350) $ (12,592) (1,308) $(47,029)
Accumulated Other Comprehensive Income
Attributable to AT&T, net of tax:
Balance at beginning of year $ 5,334 $ 8,061 $( 7,880
Other comprehensive income (loss) attributable to AT&T (373) (2,727) 181
Balance at end of year $ 4,961 $ 5,334 $( 8,061
Noncontrolling Interest:
Balance at beginning of year $ 969 $ 554 $( 494
Net income attributable to noncontrolling interest 357 342 294
Distributions (346) (294) (233)
Acquisitions of noncontrolling interests — 383 69
Acquisition of interests held by
noncontrolling owners (25) — (70)
Translation adjustments attributable to
noncontrolling interest, net of taxes 20 (16) —
Balance at end of year $ 975 $ 969 $( 554
Total Stockholders’ Equity at beginning of year $123,640 $ 90,270 $(94,610
Total Stockholders’ Equity at end of year $124,110 $123,640 $(90,270
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
Dollars and shares in millions except per share amounts
50  50 || AT&T I N C . AT&T INC.
Notes to Consolidated Financial Statements
Dollars in millions except per share amounts
realization is uncertain. We review these items regularly in
light of changes in federal and state tax laws and changes in
our business.
Cash and Cash Equivalents Cash and cash equivalents
include all highly liquid investments with original maturities
of three months or less. The carrying amounts approximate
fair value. At December 31, 2016, we held $1,803 in
cash and $3,985 in money market funds and other cash
equivalents. Of our total cash and cash equivalents, $776
resided in foreign jurisdictions, some of which is subject to
restrictions on repatriation.
Revenue Recognition Revenues derived from wireless,
fixed telephone, data and video services are recognized
when services are provided. This is based upon either usage
(e.g., minutes of traffic/bytes of data processed), period of
time (e.g., monthly service fees) or other established fee
schedules. Our service revenues are billed either in advance,
arrears or are prepaid.
We record revenue reductions for estimated future
adjustments to customer accounts at the time revenue
is recognized based on historical experience. We report
revenues from transactions between us and our customers
net of taxes. Cash incentives given to customers are
recorded as a reduction of revenue. Revenues related to
nonrefundable, upfront service activation and setup fees are
deferred and recognized over the associated service contract
period or customer life. Revenue recognized from contracts
that bundle services and equipment is limited to the lesser
of the amount allocated based on the relative selling price
of the equipment and service already delivered or the
amount paid and owed by the customer for the equipment
and service already delivered. Service revenues also include
billings to our customers for various regulatory fees imposed
on us by governmental authorities. We record the sale of
equipment to customers when we no longer have any
requirements to perform, title has passed, and the products
are accepted by customers. We record the sale of equipment
and services to customers as gross revenue when we are
the principal in the arrangement and net of the associated
costs incurred when we are not considered the principal.
We offer to our customers the option to purchase certain
wireless devices in installments over a period of up to
30 months, and, in many cases, they have the right to trade
in the original equipment within a set period and have the
remaining unpaid balance satisfied upon the purchase of a
new device under a new installment plan. For customers
that elect these equipment installment payment programs,
we recognize revenue for the entire amount of the customer
receivable, net of fair value of the trade-in right guarantee
and imputed interest.
Allowance for Doubtful Accounts We record expense to
maintain an allowance for doubtful accounts for estimated
losses that result from the failure or inability of our
customers to make required payments deemed collectable
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation Throughout this document, AT&T
Inc. is referred to as “AT&T,” “we” or the “Company.” The
consolidated financial statements include the accounts of the
Company and our majority-owned subsidiaries and affiliates,
including the results of DIRECTV and wireless properties in
Mexico for the period from acquisition to the reporting date.
Our subsidiaries and affiliates operate in the communications
and digital entertainment services industry, providing services
and equipment that deliver voice, video and broadband
services domestically and internationally.
All significant intercompany transactions are eliminated in
the consolidation process. Investments in less than majorityowned
subsidiaries and partnerships where we have
significant influence are accounted for under the equity
method. Earnings from certain investments accounted for
using the equity method are included for periods ended
within up to one quarter of our period end. We also record
our proportionate share of our equity method investees’
other comprehensive income (OCI) items, including actuarial
gains and losses on pension and other postretirement benefit
obligations and cumulative translation adjustments.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that
affect the amounts reported in the financial statements
and accompanying notes, including estimates of probable
losses and expenses. Actual results could differ from those
estimates. Certain prior period amounts have been
conformed to the current period’s presentation.
Network Asset Lives and Salvage Values During the
fourth quarter of 2016, we aligned the estimated useful
lives and salvage values for certain network assets that are
impacted by our IP strategy with our updated business cases
and engineering studies. This change in accounting estimate
decreased depreciation expense and impacted net income
$286, or $0.05 per diluted share, for 2016.
Customer Fulfillment Costs During the second quarter
of 2016, we updated our analysis of the economic lives of
customer relationships, which included a review of satellite
customer data following the DIRECTV acquisition. As of
April 1, 2016, we extended the amortization period to better
reflect the estimated economic lives of satellite and certain
business customer relationships. This change in accounting
estimate decreased other cost of services and impacted net
income $236, or $0.04 per diluted share, for 2016.
Income Taxes We provide deferred income taxes for
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and
the computed tax basis of those assets and liabilities.
We provide valuation allowances against the deferred tax
assets (included, together with our deferred income tax
assets, as part of our reportable net deferred income tax
liabilities on our consolidated balance sheets), for which the
AT&T I N C .   AT&T INC. || 51 51
from the customer when the service was provided or
product was delivered. When determining the allowance,
we consider the probability of recoverability of accounts
receivable based on past experience, taking into account
current collection trends as well as general economic
factors, including bankruptcy rates. Credit risks are assessed
based on historical write-offs, net of recoveries, as well as
an analysis of the aged accounts receivable balances with
allowances generally increasing as the receivable ages.
Accounts receivable may be fully reserved for when specific
collection issues are known to exist, such as catastrophes
or pending bankruptcies.
Inventory Inventories, which are included in “Other current
assets” on our consolidated balance sheets, were $2,039 at
December 31, 2016, and $4,033 at December 31, 2015.
Wireless devices and accessories, which are valued at the
lower of cost or net realizable value, were $1,951 at
December 31, 2016, and $3,998 at December 31, 2015.
Property, Plant and Equipment Property, plant and
equipment is stated at cost, except for assets acquired
using acquisition accounting, which are initially recorded
at fair value (see Note 6). The cost of additions and
substantial improvements to property, plant and equipment
is capitalized, and includes internal compensation costs for
these projects; however, noncash actuarial gains or losses
included in compensation costs are excluded from amounts
reported as “capital expenditures.” The cost of maintenance
and repairs of property, plant and equipment is charged to
operating expenses. Property, plant and equipment costs are
depreciated using straight-line methods over their estimated
economic lives. Certain subsidiaries follow composite group
depreciation methodology. Accordingly, when a portion of
their depreciable property, plant and equipment is retired
in the ordinary course of business, the gross book value is
reclassified to accumulated depreciation, and no gain or
loss is recognized on the disposition of these assets.
Property, plant and equipment is reviewed for recoverability
whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be
recoverable. We recognize an impairment loss when the
carrying amount of a long-lived asset is not recoverable. The
carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset.
During the fourth quarter of 2016, we identified certain
assets for impairment. These assets primarily related to
capitalized costs for wireless sites that are no longer in
our construction plans. (See Note 6)
The liability for the fair value of an asset retirement
obligation is recorded in the period in which it is incurred if
a reasonable estimate of fair value can be made. In periods
subsequent to initial measurement, we recognize period-toperiod
changes in the liability resulting from the passage of
time and revisions to either the timing or the amount of the
original estimate. The increase in the carrying value of the
associated long-lived asset is depreciated over the
corresponding estimated economic life.
Software Costs We capitalize certain costs incurred
in connection with developing or obtaining internal-use
software. Capitalized software costs are included in
“Property, Plant and Equipment” on our consolidated
balance sheets. In addition, there is certain network
software that allows the equipment to provide the features
and functions unique to the AT&T network, which we
include in the cost of the equipment categories for
financial reporting purposes.
We amortize our capitalized software costs over a three-year
to five-year period, reflecting the estimated period during
which these assets will remain in service, which also aligns
with the estimated useful lives used in the industry.
Goodwill and Other Intangible Assets AT&T has five
major classes of intangible assets: goodwill; licenses, which
include Federal Communications Commission (FCC) and
other wireless licenses and orbital slots; other indefinitelived
intangible assets, primarily made up of the AT&T
and international DIRECTV trade names including SKY;
customer lists and various other finite-lived intangible
assets (see Note 7).
Goodwill represents the excess of consideration paid over
the fair value of identifiable net assets acquired in business
combinations. Wireless licenses (including FCC licenses)
provide us with the exclusive right to utilize certain radio
frequency spectrum to provide wireless communications
services. While wireless licenses are issued for a fixed period
of time (generally 10 years), renewals of wireless licenses
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 lives of our wireless licenses. Orbital slots
represent the space in which we operate the broadcast
satellites that support our digital video entertainment service
offerings. Similar to our wireless licenses, there are no
factors that limit the useful lives of our orbital slots. We
acquired the rights to the AT&T and other trade names in
previous acquisitions. We have the effective ability to retain
these exclusive rights permanently at a nominal cost.
Goodwill, licenses and other indefinite-lived intangible
assets are not amortized but are tested at least annually
for impairment. The testing is performed on the value as of
October 1 each year, and compares the book value of the
assets to their fair value. Goodwill is tested by comparing
the book value of each reporting unit, deemed to be our
principal operating segments or one level below them
(Business Solutions, Entertainment Group, Consumer Mobility,
and Mexico Wireless, Brazil and PanAmericana in the
International segment), to the fair value using both
discounted cash flow as well as market multiple approaches.
Wireless licenses are tested on an aggregate basis,
52  52 || AT&T I N C . AT&T INC.
separate component of accumulated other comprehensive
income (accumulated OCI) in the accompanying consolidated
balance sheets (see Note 3). Operations in countries with
highly inflationary economies consider the U.S. dollar as the
functional currency.
We do not hedge foreign currency translation risk in the net
assets and income we report from these sources. However,
we do hedge a portion of the foreign currency exchange risk
involved in anticipation of highly probable foreign currencydenominated
transactions, which we explain further in our
discussion of our methods of managing our foreign currency
risk (see Note 10).
Pension and Other Postretirement Benefits
See Note 12 for a comprehensive discussion of our pension
and postretirement benefit expense, including a discussion
of the actuarial assumptions, our policy for recognizing the
associated gains and losses and our method used to
estimate service and interest cost components.
New Accounting Standards
Cash Flows In August 2016, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2016-15, “Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments”
(ASU 2016-15), which provides guidance related to cash
flows presentation and is effective for annual reporting
periods beginning after December 15, 2017, subject to early
adoption. The majority of the guidance in ASU 2016-15 is
consistent with our current cash flow classifications.
However, cash receipts on the deferred purchase price
described in Note 15 will be classified as cash flows from
investing activities instead of our current presentation as
cash flows from operations. Under ASU 2016-15, we will
continue to recognize cash receipts on owned equipment
installment receivables as cash flows from operations.
AT&T’s cash flows from operating activities included cash
receipts on the deferred purchase price of $731 for the
year ended December 31, 2016, and $536 for the year
ended December 31, 2015.
Leases In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)” (ASU 2016-02), which
replaces existing leasing rules with a comprehensive lease
measurement and recognition standard and expanded
disclosure requirements. ASU 2016-02 will require lessees
to recognize most leases on their balance sheets as
liabilities, with corresponding “right-of-use” assets and is
effective for annual reporting periods beginning after
December 15, 2018, subject to early adoption. For income
statement recognition purposes, leases will be classified as
either a finance or an operating lease without relying upon
the bright-line tests under current GAAP.
consistent with our use of the licenses on a national scope,
using a discounted cash flow approach. Orbital slots are
similarly aggregated for purposes of impairment testing.
We also corroborate the value of wireless licenses with a
market approach as the AWS-3 auction provided market
price information for national wireless licenses. Trade names
are tested by comparing the book value to a fair value
calculated using a discounted cash flow approach on a
presumed royalty rate derived from the revenues related
to the brand name.
Intangible assets that have finite useful lives are amortized
over their useful lives (see Note 7). Customer lists and
relationships are amortized using primarily the sum-of-themonths-digits
method of amortization over the period in
which those relationships are expected to contribute to our
future cash flows. The remaining finite-lived intangible assets
are generally amortized using the straight-line method.
Broadcast Programming and Other Costs We recognize
the costs of television programming distribution rights when
we distribute the related programming. We expense the
costs of television programming rights to distribute live
sporting events using the straight-line method over the
course of the season or tournament, which approximates
the pattern of usage.
Advertising Costs We expense advertising costs for
products and services or for promoting our corporate
image as we incur them (see Note 18).
Traffic Compensation Expense We use various
estimates and assumptions to determine the amount
of traffic compensation expense recognized during any
reporting period. Switched traffic compensation costs are
accrued utilizing estimated rates and volumes by product,
formulated from historical data and adjusted for known rate
changes. Such estimates are adjusted monthly to reflect
newly available information, such as rate changes and new
contractual agreements. Bills reflecting actual incurred
information are generally not received within three months
subsequent to the end of the reporting period, at which
point a final adjustment is made to the accrued traffic
compensation expense. Dedicated traffic compensation
costs are estimated based on the number of circuits and
the average projected circuit costs.
Foreign Currency Translation We are exposed to foreign
currency exchange risk through our foreign affiliates and
equity investments in foreign companies. Our foreign
subsidiaries and foreign investments generally report their
earnings in their local currencies. We translate their foreign
assets and liabilities at exchange rates in effect at the
balance sheet dates. We translate their revenues and
expenses using average rates during the year. The resulting
foreign currency translation adjustments are recorded as a
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 5 353
Upon initial evaluation, we believe the key change upon
adoption will be the balance sheet recognition. At adoption,
we will recognize a right-to-use asset and corresponding
lease liability on our consolidated balance sheets. The
income statement recognition of lease expense appears
similar to our current methodology. We are continuing to
evaluate the magnitude and other potential impacts to our
financial statements.
Revenue Recognition In May 2014, the FASB issued ASU
No. 2014-09, “Revenue from Contracts with Customers
(Topic 606)” (ASC 606) and has modified the standard
thereafter. This standard replaces existing revenue recognition
rules with a comprehensive revenue measurement and
recognition standard and expanded disclosure requirements.
ASC 606, as amended, becomes effective for annual reporting
periods beginning after December 15, 2017, at which point
we plan to adopt the standard.
The FASB allows two adoption methods under ASC 606.
We currently plan to adopt the standard using the “modified
retrospective method.” Under that method, we will apply
the rules to all contracts existing as of January 1, 2018,
recognizing in beginning retained earnings an adjustment
for the cumulative effect of the change and providing
additional disclosures comparing results to previous
accounting standards.
Upon initial evaluation, we believe the key changes in the
standard that impact our revenue recognition relate to the
allocation of contract revenues between various services
and equipment, and the timing of when those revenues are
recognized. We are still in the process of determining the
impacts due to the ongoing changes in how the industry
sells devices and services to customers. As a result of our
accounting policy change for customer set-up and installation
costs made in 2015, we believe that the requirement to
defer such costs under the new standard will not result in a
significant change to our results. However, the requirement
to defer incremental contract acquisition costs and recognize
them over the contract period or expected customer life
will result in the recognition of a deferred charge on our
balance sheets.
Financial Instruments In January 2016, the FASB issued
ASU No. 2016-01, “Financial Instruments – Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities” (ASU 2016-01), which will require us
to record changes in the fair value of our equity investments,
except for those accounted for under the equity method, in
net income instead of in accumulated other comprehensive
income. ASU 2016-01 will become effective for fiscal years
and interim periods beginning after December 15, 2017, and,
with the exception of certain disclosure requirements, is not
subject to early adoption.
NOTE 2. EARNINGS PER SHARE
A reconciliation of the numerators and denominators
of basic and diluted earnings per share is shown in
the table below:
Year Ended December 31, 2016 2015 2014
Numerators
Numerator for basic earnings
per share:
Net income $13,333 $13,687 $6,736
Less: Net income attributable
to noncontrolling interest (357) (342) (294)
Net income attributable to AT&T 12,976 13,345 6,442
Dilutive potential
common shares:
Share-based payment 13 13 13
Numerator for diluted earnings
per share $12,989 $13,358 $6,455
Denominators (000,000)
Denominator for basic earnings
per share:
Weighted-average number of
common shares outstanding 6,168 5,628 5,205
Dilutive potential common
shares:
Share-based payment
(in shares) 21 18 16
Denominator for diluted
earnings per share 6,189 5,646 5,221
Basic earnings per share
attributable to AT&T $ 2.10 $ 2.37 $ 1.24
Diluted earnings per share
attributable to AT&T $ 2.10 $ 2.37 $ 1.24
54  54 || AT&T I N C . AT&T INC.
NOTE 4. SEGMENT INFORMATION
Our segments are strategic business units that offer
products and services to different customer segments over
various technology platforms and/or in different geographies
that are managed accordingly. We analyze our segments
based on Segment Contribution, which consists of operating
income, excluding acquisition-related costs and other
significant items (as discussed below), and equity in net
income (loss) of affiliates for investments managed within
each segment. We have four reportable segments:
(1) Business Solutions, (2) Entertainment Group,
(3) Consumer Mobility and (4) International.
We also evaluate segment performance based on EBITDA
and/or EBITDA margin, which is defined as Segment
Contribution excluding equity in net income (loss) of
affiliates and depreciation and amortization. We believe
EBITDA to be a relevant and useful measurement to our
NOTE 3. OTHER COMPREHENSIVE INCOME
Changes in the balances of each component included in accumulated OCI are presented below. All amounts are net of tax
and exclude noncontrolling interest.
Following our 2015 acquisitions of DIRECTV and wireless businesses in Mexico, we have additional foreign operations that are
exposed to fluctuations in the exchange rates used to convert operations, assets and liabilities into U.S. dollars. Since the dates
of acquisition, when compared to the U.S. dollar, the Brazilian real exchange rate has appreciated 17.9%, the Argentine peso
exchange rate has depreciated 22.8% and Mexican peso exchange rate has depreciated 20.5%.
Foreign Net Unrealized Net Unrealized Defined Accumulated
Currency Gains (Losses) on Gains (Losses) Benefit Other
Translation Available-for- on Cash Flow Postretirement Comprehensive
Adjustment Sale Securities Hedges Plans Income
Balance as of December 31, 2013 $ (367) $ 450 $ 445 $ 7,352 $ 7,880
Other comprehensive income (loss)
before reclassifications (75) 65 260 428 678
Amounts reclassified from accumulated OCI 4161 (16)1 362 (933)3 (497)
Net other comprehensive income (loss) 341 49 296 (505) 181
Balance as of December 31, 2014 (26) 499 741 6,847 8,061
Other comprehensive income (loss)
before reclassifications (1,172) — (763) 45 (1,890)
Amounts reclassified from accumulated OCI —1 (15)1 382 (860)3 (837)
Net other comprehensive income (loss) (1,172) (15) (725) (815) (2,727)
Balance as of December 31, 2015 (1,198) 484 16 6,032 5,334
Other comprehensive income (loss)
before reclassifications (797) 58 690 497 448
Amounts reclassified from accumulated OCI —1 (1)1 382 (858)3 (821)
Net other comprehensive income (loss) (797) 57 728 (361) (373)
Balance as of December 31, 2016 $(1,995) $541 $744 $5,671 $4,961
1
(Gains) losses are included in Other income (expense) – net in the consolidated statements of income.
2
(Gains) losses are included in interest expense in the consolidated statements of income. See Note 10 for additional information.
3
The amortization of prior service credits associated with postretirement benefits, net of amounts capitalized as part of construction labor, are included in Cost of services
and sales and Selling, general and administrative in the consolidated statements of income (see Note 12).
investors as it is part of our internal management
reporting and planning processes and it is an important
metric that management uses to evaluate segment operating
performance. EBITDA does not give effect to cash used for
debt service requirements and thus does not reflect available
funds for distributions, reinvestment or other discretionary
uses. EBITDA margin is EBITDA divided by total revenues.
The Business Solutions segment provides services to
business customers, including multinational companies;
governmental and wholesale customers; and individual
subscribers who purchase wireless services through
employer-sponsored plans. We provide advanced IP-based
services including Virtual Private Networks (VPN); Ethernetrelated
products and broadband, collectively referred to as
fixed strategic services; as well as traditional data and voice
products. We utilize our wireless and wired networks
(referred to as “wired” or “wireline”) to provide a complete
communications solution to our business customers.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 5 555
being evaluated, including interest costs and expected
return on plan assets for our pension and postretirement
benefit plans.
Certain operating items are not allocated to our business
segments, and those include:
• Acquisition-related items which consist of (1) items
associated with the merger and integration of acquired
businesses and (2) the noncash amortization of
intangible assets acquired in acquisitions.
• Certain significant items which consist of (1) noncash
actuarial gains and losses from pension and other
postretirement benefits, (2) employee separation
charges associated with voluntary and/or strategic
offers, (3) losses resulting from abandonment or
impairment of assets and (4) other items for which
the segments are not being evaluated.
Interest expense and other income (expense) – net, are
managed only on a total company basis and are,
accordingly, reflected only in consolidated results.
Our operating assets are utilized by multiple segments
and consist of our wireless and wired networks as well
as our satellite fleet. We manage our assets to provide for
the most efficient, effective and integrated service to our
customers, not by segment, and, therefore, asset information
and capital expenditures by segment are not presented.
Depreciation is allocated based on network usage or
asset utilization by segment.
The Entertainment Group segment provides video, internet,
voice communication, and interactive and targeted
advertising services to customers located in the United
States or in U.S. territories. We utilize our copper and
IP-based wired network and/or our satellite technology.
The Consumer Mobility segment provides nationwide
wireless service to consumers and wholesale and resale
wireless subscribers located in the United States or in U.S.
territories. We utilize our networks to provide voice and
data services, including high-speed internet, video and
home monitoring services over wireless devices.
The International segment provides entertainment
services in Latin America and wireless services in Mexico.
Video entertainment services are provided to primarily
residential customers using satellite technology. We utilize
our regional and national wireless networks in Mexico to
provide consumer and business customers with wireless
data and voice communication services. Our international
subsidiaries conduct business in their local currency, and
operating results are converted to U.S. dollars using
official exchange rates.
In reconciling items to consolidated operating income and
income before income taxes, Corporate and Other includes:
(1) operations that are not considered reportable segments
and that are no longer integral to our operations or which
we no longer actively market, and (2) impacts of corporatewide
decisions for which the individual segments are not
For the year ended December 31, 2016
Operations and Depreciation Operating Equity in Net
Support and Income Income (Loss) Segment
Revenues Expenses EBITDA Amortization (Loss) of Affiliates Contribution
Business Solutions $ 70,988 $ 44,330 $26,658 $ 9,832 $16,826 $ — $16,826
Entertainment Group 51,295 39,338 11,957 5,862 6,095 9 6,104
Consumer Mobility 33,200 19,659 13,541 3,716 9,825 — 9,825
International 7,283 6,830 453 1,166 (713) 52 (661)
Segment Total 162,766 110,157 52,609 20,576 32,033 $61 $32,094
Corporate and Other 1,043 1,173 (130) 65 (195)
Acquisition-related items — 1,203 (1,203) 5,177 (6,380)
Certain significant items (23) 1,059 (1,082) 29 (1,111)
AT&T Inc. $163,786 $113,592 $50,194 $25,847 $24,347
56  56 || AT&T I N C . AT&T INC.
For the year ended December 31, 2015
Operations and Depreciation Operating Equity in Net
Support and Income Income (Loss) Segment
Revenues Expenses EBITDA Amortization (Loss) of Affiliates Contribution
Business Solutions $ 71,127 $ 44,946 $26,181 $ 9,789 $ 16,392 $ — $16,392
Entertainment Group 35,294 28,345 6,949 4,945 2,004 (4) 2,000
Consumer Mobility 35,066 21,477 13,589 3,851 9,738 — 9,738
International 4,102 3,930 172 655 (483) (5) (488)
Segment Total 145,589 98,698 46,891 19,240 27,651 $ (9) $27,642
Corporate and Other 1,297 1,057 240 64 176
Acquisition-related items (85) 1,987 (2,072) 2,712 (4,784)
Certain significant items — (1,742) 1,742 — 1,742
AT&T Inc. $146,801 $100,000 $46,801 $22,016 $ 24,785
For the year ended December 31, 2014
Operations and Depreciation Operating Equity in Net
Support and Income Income (Loss) Segment
Revenues Expenses EBITDA Amortization (Loss) of Affiliates Contribution
Business Solutions $ 70,606 $ 45,826 $24,780 $ 9,355 $ 15,425 $ — $15,425
Entertainment Group 22,233 18,992 3,241 4,473 (1,232) (2) (1,234)
Consumer Mobility 36,769 23,891 12,878 3,827 9,051 (1) 9,050
International — — — — — 153 153
Segment Total 129,608 88,709 40,899 17,655 23,244 $150 $23,394
Corporate and Other 2,839 2,471 368 105 263
Acquisition-related items — 785 (785) 487 (1,272)
Certain significant items — 9,997 (9,997) 26 (10,023)
AT&T Inc. $132,447 $101,962 $30,485 $18,273 $ 12,212
The following table is a reconciliation of operating income (loss) to “Income Before Income Taxes” reported in our
consolidated statements of income:
2016 2015 2014
Business Solutions $16,826 $16,392 $15,425
Entertainment Group 6,104 2,000 (1,234)
Consumer Mobility 9,825 9,738 9,050
International (661) (488) 153
Segment Contribution 32,094 27,642 23,394
Reconciling Items:
Corporate and Other (195) 176 263
Merger and integration charges (1,203) (2,072) (785)
Amortization of intangibles acquired (5,177) (2,712) (487)
Actuarial gain (loss) (1,024) 2,152 (7,869)
Employee separation costs (344) (375) —
Gain on wireless spectrum transactions 714 — —
Storm related and other items (67) — —
Asset abandonments and impairments (390) (35) (2,154)
Segment equity in net income (loss) of affiliates (61) 9 (150)
AT&T Operating Income 24,347 24,785 12,212
Interest expense 4,910 4,120 3,613
Equity in net income of affiliates 98 79 175
Other income (expense) – net 277 (52) 1,581
Income Before Income Taxes $19,812 $20,692 $10,355
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 5 757
The following table sets forth revenues earned from subscribers, and property, plant and equipment located in different
geographic areas.
2016 2015 2014
Net Property, Net Property, Net Property,
Revenues Plant & Equipment Revenues Plant & Equipment Revenues Plant & Equipment
United States $154,039 $118,664 $140,234 $118,515 $129,772 $112,092
Latin America
Brazil 2,797 1,265 1,224 1,384 142 33
Other 2,348 1,828 1,157 1,530 99 67
Mexico 2,472 2,520 2,046 2,369 94 20
Other 2,130 622 2,140 652 2,340 686
Total $163,786 $124,899 $146,801 $124,450 $132,447 $112,898
NOTE 5. ACQUISITIONS, DISPOSITIONS AND OTHER ADJUSTMENTS
Acquisitions
DIRECTV In July 2015, we completed our acquisition
of DIRECTV, a leading provider of digital television
entertainment services in both the United States and
Latin America. For accounting purposes, the transaction
was valued at $47,409. Our consolidated balance sheets
include the assets and liabilities of DIRECTV, which have
been measured at fair value.
The fair values of the assets acquired and liabilities
assumed were determined using income, cost and market
approaches. The fair value measurements were primarily
based on significant inputs that are not observable in the
market and are considered Level 3 under the Fair Value
Measurement and Disclosure framework, other than
long-term debt assumed in the acquisition (see Note 10).
The income approach was primarily used to value the
intangible assets, consisting primarily of acquired customer
relationships, orbital slots and trade names. The income
approach estimates fair value for an asset based on the
present value of cash flows projected to be generated
by the asset. Projected cash flows are discounted at a
required rate of return that reflects the relative risk of
achieving the cash flows 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 primarily 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.
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,
and represents the future economic benefits that we
expect to achieve as a result of acquisition. Purchased
goodwill is not expected to be deductible for tax purposes.
The goodwill was allocated to our Entertainment Group
and International segments.
The following table summarizes the fair values of the
DIRECTV assets acquired and liabilities assumed and
related deferred income taxes as of the acquisition date.
Assets acquired
Cash $ 4,797
Accounts receivable 2,038
All other current assets 1,534
Property, plant and equipment (including satellites) 9,320
Intangible assets not subject to amortization
Orbital slots 11,946
Trade name 1,371
Intangible assets subject to amortization
Customer lists and relationships 19,508
Trade name 2,915
Other 445
Investments and other assets 2,375
Goodwill 34,619
Total assets acquired 90,868
Liabilities assumed
Current liabilities, excluding
current portion of long-term debt 5,645
Long-term debt 20,585
Other noncurrent liabilities 16,875
Total liabilities assumed 43,105
Net assets acquired 47,763
Noncontrolling interest (354)
Aggregate value of consideration paid $47,409
58  58 || AT&T I N C . AT&T INC.
Spectrum Acquisitions and swaps On occasion, we swap
spectrum with other wireless providers to ensure we have
efficient and contiguous coverage across our markets and
service areas. During 2016, we swapped FCC licenses with
a fair value of approximately $2,122 with other carriers and
recorded a net gain of $714.
During 2015, we acquired $489 of wireless spectrum, not
including the AWS auction. During 2014, we acquired
$1,263 of wireless spectrum, not including Leap Wireless
International, Inc. (Leap) discussed below.
Leap In March 2014, we acquired Leap, a provider of
prepaid wireless service, for $15.00 per outstanding share of
Leap’s common stock, or $1,248 (excluding Leap’s cash on
hand), plus one nontransferable contingent value right (CVR)
per share. The CVR entitled each Leap stockholder to a pro
rata share of the net proceeds of the sale of the Chicago
700 MHz A-band FCC license held by Leap. In November
2016, we completed the sale of the Chicago 700 MHz
A-band FCC license and proceeds will be distributed to the
former Leap stockholders during the first quarter of 2017,
as required by the agreement.
Pending Acquisition
Time Warner Inc. On October 22, 2016, we entered into
and announced a merger agreement (Merger Agreement) to
acquire Time Warner Inc. (Time Warner) in a 50% cash and
50% stock transaction for $107.50 per share of Time Warner
common stock, or approximately $85,400 at the date of the
announcement (Merger). Combined with Time Warner’s net
debt at September 30, 2016, the total transaction value is
approximately $108,700. Each share of Time Warner
common stock will be exchanged for $53.75 per share in
cash and a number of shares of AT&T common stock equal
to the exchange ratio. If the average stock price (as defined
in the Merger Agreement) at the time of closing the Merger
is between (or equal to) $37.411 and $41.349 per share, the
exchange ratio will be the quotient of $53.75 divided by the
average stock price. If the average stock price is greater
than $41.349, the exchange ratio will be 1.300.
If the average stock price is less than $37.411, the
exchange ratio will be 1.437. Post-transaction, Time Warner
shareholders will own between 14.4% and 15.7% of AT&T
shares on a fully-diluted basis based on the number of AT&T
shares outstanding. The cash portion of the purchase price
will be financed with new debt and cash (see Note 9).
For the 160-day period ended December 31, 2015, our
consolidated statement of income included $14,561 of
revenues and $(46) of operating income, which included
$2,254 of intangible amortization, from DIRECTV and its
affiliates. The following unaudited pro forma consolidated
results of operations assume that the acquisition of
DIRECTV was completed as of January 1, 2014.
(Unaudited)
Year Ended December 31,
2015 2014
Total operating revenues $165,694 $165,595
Net Income Attributable to AT&T 12,683 6,412
Basic Earnings Per Share
Attributable to AT&T $ 2.06 $ 1.04
Diluted Earnings Per Share
Attributable to AT&T $ 2.06 $ 1.04
Nextel Mexico In April 2015, we completed our
acquisition of the subsidiaries of NII Holdings Inc.,
operating its wireless business in Mexico, for $1,875,
including approximately $427 of net debt and other
adjustments. The subsidiaries offered service under the
name Nextel Mexico.
The purchase price allocation of assets acquired was:
$376 in licenses, $1,167 in property, plant and equipment,
$128 in customer lists and $193 of goodwill. The goodwill
was allocated to our International segment.
GSF Telecom In January 2015, we acquired Mexican
wireless company GSF Telecom Holdings, S.A.P.I. de C.V.
(GSF Telecom) for $2,500, including net debt of
approximately $700. GSF Telecom offered service under
both the Iusacell and Unefon brand names in Mexico.
The purchase price allocation of assets acquired was:
$735 in licenses, $658 in property, plant and equipment,
$378 in customer lists, $26 in trade names and $956 of
goodwill. The goodwill was allocated to our International
segment.
AWS-3 Auction In January 2015, we submitted winning
bids of $18,189 in the Advanced Wireless Service (AWS)-3
Auction (FCC Auction 97), a portion of which represented
spectrum clearing and First Responder Network Authority
funding. We provided the Federal Communications
Commission (FCC) an initial down payment of $921 in
October 2014 and paid the remaining $17,268 in the
first quarter of 2015.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 5 959
Time Warner is a global leader in media and entertainment
whose major businesses encompass an array of some of
the most respected and successful media brands. The deal
combines Time Warner’s vast library of content and ability to
create new premium content for audiences around the world
with our extensive customer relationships and distribution;
one of the world’s largest pay-TV subscriber bases; and
leading scale in TV, mobile and broadband distribution.
The Merger Agreement was approved by Time Warner
shareholders on February 15, 2017 and remains subject to
review by the U.S. Department of Justice. While subject to
change, we expect that Time Warner will not need to
transfer any of its FCC licenses to AT&T in order to conduct
its business operations after the closing of the transaction.
It is also a condition to closing that necessary consents from
certain public utility commissions and foreign governmental
entities must be obtained. The transaction is expected to
close before year-end 2017. If the Merger is terminated as a
result of reaching the termination date (and at that time one
or more of the conditions relating to certain regulatory
approvals have not been satisfied) or there is a final,
non-appealable order preventing the transaction relating to
antitrust laws, communications laws, utilities laws or foreign
regulatory laws, then under certain circumstances we would
be obligated to pay Time Warner $500.
Dispositions
Connecticut Wireline In October 2014, we sold our
incumbent local exchange operations in Connecticut for
$2,018 and recorded a pre-tax gain of $76, which is
included in “Other income (expense) – net,” in our
consolidated statements of income. In conjunction with
the sale, we allocated $743 of goodwill from our former
Wireline reporting unit. Because the book value of the
goodwill did not have a corresponding tax basis, the
resulting net income impact of the sale was a loss of $360.
América Móvil In 2014, we sold our remaining equity
method investment in América Móvil S.A. de C.V. (América
Móvil) for approximately $5,885 and recorded a pre-tax gain
of $1,330, which is included in “Other income (expense) –
net,” in our consolidated statements of income.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at
December 31:
Lives (years) 2016 2015
Land — $ 1,643 $ 1,638
Buildings and improvements 2-44 35,036 33,784
Central office equipment1 3-10 92,954 93,643
Cable, wiring and conduit 15-50 79,279 75,784
Satellites 12-15 2,710 2,088
Other equipment 2-23 88,436 81,972
Software 3-5 14,472 11,347
Under construction — 5,118 5,971
319,648 306,227
Accumulated depreciation
and amortization 194,749 181,777
Property, plant and
equipment – net $124,899 $124,450
1 Includes certain network software.
Our depreciation expense was $20,661 in 2016, $19,289 in
2015 and $17,773 in 2014. Depreciation expense included
amortization of software totaling $2,362 in 2016, $1,660 in
2015 and $1,504 in 2014.
We periodically assess our network assets for impairment
and during the fourth quarter of 2016 we recorded a
noncash pretax charge of $278 for the impairment of certain
wireless assets that were under construction. These assets
primarily related to capitalized costs for wireless sites that
are no longer in our construction plans. During 2014, due
to declining customer demand for our legacy voice and
data products and the migration of our networks to next
generation technologies, we decided to abandon in place
specific copper network assets classified as cable, wiring
and conduit. These abandoned assets had a gross book
value of approximately $7,141, with accumulated
depreciation of $5,021. In 2014, we recorded a $2,120
noncash pretax charge for this abandonment. These charges
are included in “Asset abandonments and impairments” in
our consolidated statements of income.
Certain facilities and equipment used in operations are
leased under operating or capital leases. Rental expenses
under operating leases were $4,482 for 2016, $5,025 for
2015 and $4,345 for 2014. At December 31, 2016, the
future minimum rental payments under noncancelable
operating leases for the years 2017 through 2021 were
$3,915, $3,706, $3,448, $3,208 and $2,811, with $12,569
due thereafter. Certain real estate operating leases contain
renewal options that may be exercised. Capital leases are
not significant.
60  60 || AT&T I N C . AT&T INC.
The majority of our goodwill acquired during 2016 related
to the final valuation of DIRECTV, Nextel Mexico and GSF
Telecom, as well as our acquisition of Quickplay Media.
Other changes to our goodwill in 2016 include foreign
currency translation adjustments.
The majority of our goodwill acquired during 2015 related
to our acquisitions of DIRECTV, Nextel Mexico and GSF
Telecom. Other changes to our goodwill in 2015 include
foreign currency translation adjustments and the final
valuation of Leap.
The allocation of goodwill represents goodwill previously
assigned to our Wireless and Wireline segments. As part of
our organizational realignment in 2015, the goodwill from
the previous Wireless segment was allocated to the Business
Solutions and Consumer Mobility segments and the goodwill
from the previous Wireline segment was allocated to the
Business Solutions and Entertainment Group segments.
The allocations were based on the relative fair value of the
portions of the previous Wireless and Wireline segments
which were moved into the new Business Solutions,
Entertainment Group and Consumer Mobility segments.
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth the changes in the carrying amounts of goodwill by segment, which is the same as reporting
unit for Business Solutions, Entertainment Group and Consumer Mobility. The International segment has three reporting units:
Mexico Wireless, Brazil and PanAmericana.
Business Entertainment Consumer
Solutions Group Mobility International Wireless Wireline Total
Balance as of December 31, 2014 $ — $ — $ — $ — $ 36,469 $ 33,223 $ 69,692
Goodwill acquired — 30,839 — 4,672 6 — 35,517
Foreign currency translation
adjustments — — — (638) — — (638)
Allocation of goodwill 45,351 7,834 16,512 — (36,471) (33,226) —
Other — — — (2) (4) 3 (3)
Balance as of December 31, 2015 45,351 38,673 16,512 4,032 — — 104,568
Goodwill acquired 22 380 14 65 — — 481
Foreign currency translation
adjustments — — — 167 — — 167
Other (9) — — — — — (9)
Balance as of December 31, 2016 $45,364 $39,053 $16,526 $4,264 $ — $ — $105,207
Our other intangible assets are summarized as follows:
December 31, 2016 December 31, 2015
Gross Currency Gross Currency
Carrying Translation Accumulated Carrying Translation Accumulated
Other Intangible Assets Amount Adjustment Amortization Amount Adjustment Amortization
Amortized intangible assets:
Customer lists and relationships:
Wireless acquisitions $ 942 $ — $ 715 $ 1,055 $ — $ 679
BellSouth Corporation 4,450 — 4,429 4,450 — 4,347
DIRECTV 19,547 (125) 5,618 19,505 (294) 1,807
AT&T Corp. 33 — 26 33 — 23
Mexican wireless 506 (108) 214 485 (60) 110
Subtotal 25,478 (233) 11,002 25,528 (354) 6,966
Trade name 2,942 (7) 1,394 2,905 — 424
Other 707 (3) 283 686 — 195
Total $ 29,127 $(243) $12,679 $29,119 $(354) $7,585
Indefinite-lived intangible assets
not subject to amortization:
Licenses
Wireless licenses $ 82,474 $81,147
Orbital slots 11,702 11,946
Trade name 6,479 6,437
Total $100,655 $99,530
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. |
| 61 61
The following table is a reconciliation of our investments
in equity affiliates as presented on our consolidated
balance sheets:
2016 2015
Beginning of year $1,606 $ 250
Additional investments 208 77
DIRECTV investments acquired — 1,232
Equity in net income of affiliates 98 79
Dividends and distributions received (61) (30)
Currency translation adjustments (156) —
Other adjustments (21) (2)
End of year $1,674 $1,606
Undistributed earnings from equity affiliates were $196 and
$162 at December 31, 2016 and 2015.
NOTE 9. DEBT
Long-term debt of AT&T and its subsidiaries, including interest
rates and maturities, is summarized as follows at December 31:
2016 2015
Notes and debentures1
Interest Rates Maturities2
0.49% – 2.99% 2016 – 2022 $ 26,396 $ 34,265
3.00% – 4.99% 2016 – 2049 66,520 54,678
5.00% – 6.99% 2016 – 2095 26,883 31,140
7.00% – 9.50% 2016 – 2097 5,050 5,805
Other 4 15
Fair value of interest rate swaps
recorded in debt 48 109
124,901 126,012
Unamortized (discount) premium – net (2,201) (842)
Unamortized issuance costs (319) (323)
Total notes and debentures 122,381 124,847
Capitalized leases 869 884
Other 259 416
Total long-term debt, including
current maturities 123,509 126,147
Current maturities of long-term debt (9,828) (7,632)
Total long-term debt $113,681 $118,515
1 Includes credit agreement borrowings.
2 Maturities assume putable debt is redeemed by the holders at the next opportunity.
We had outstanding Euro, British pound sterling, Canadian
dollar, Swiss franc and Brazilian real denominated debt of
approximately $24,292 and $26,221 at December 31, 2016
and 2015. The weighted-average interest rate of our entire
long-term debt portfolio, including the impact of derivatives,
increased from 4.0% at December 31, 2015 to 4.2% at
December 31, 2016.
We review indefinite-lived intangible assets for impairment
annually (see Note 1). Wireless licenses provide us with the
exclusive right to utilize certain radio frequency spectrum
to provide mobile communications services in the United
States and Mexico. Orbital slots represent the space in
which we operate the broadcast satellites that support
our digital video entertainment service offerings.
Amortized intangible assets are definite-life assets, and, as
such, we record amortization expense based on a method
that most appropriately reflects our expected cash flows
from these assets, over a weighted-average life of
8.5 years (9.2 years for customer lists and relationships
and 4.2 years for trade names and other). Amortization
expense for definite-life intangible assets was $5,186 for
the year ended December 31, 2016, $2,728 for the year
ended December 31, 2015 and $500 for the year ended
December 31, 2014. Amortization expense is estimated
to be $4,612 in 2017, $3,573 in 2018, $2,516 in 2019,
$2,038 in 2020, and $1,563 in 2021.
In 2016, we wrote off approximately $117 of fully
amortized intangible assets (primarily customer lists).
In 2015, we wrote off approximately $1,483 of fully
amortized intangible assets (primarily customer lists).
We review amortized intangible assets for impairment
whenever events or circumstances indicate that the
carrying amount may not be recoverable over the
remaining life of the asset or asset group.
NOTE 8. EQUITY METHOD INVESTMENTS
Investments in partnerships, joint ventures and less than
majority-owned subsidiaries in which we have significant
influence are accounted for under the equity method.
Our investments in equity affiliates at December 31, 2016
primarily include our interests in SKY Mexico, Game Show
Network and Otter Media Holdings.
SKY Mexico We hold a 41.3% interest in SKY Mexico,
which is a leading pay-TV provider in Mexico.
Game Show Network (GSN) We hold a 42.0% interest
in GSN, a television network dedicated to game-related
programming and internet interactive game playing.
Otter Media Holdings We hold a 48.3% interest in Otter
Media Holdings, a venture between The Chernin Group and
AT&T that is focused on acquiring, investing and launching
over-the-top subscription video services.
62  62 || AT&T I N C . AT&T INC.
As of December 31, 2016 and 2015, we were in compliance
with all covenants and conditions of instruments governing
our debt. Substantially all of our outstanding long-term
debt is unsecured. Maturities of outstanding long-term
notes and debentures, as of December 31, 2016, and the
corresponding weighted-average interest rate scheduled for
repayment are as follows:
There2017
2018 2019 2020 2021 after
Debt
repayments1 $9,609 $8,840 $8,113 $9,179 $8,614 $85,926
Weightedaverage
interest rate 2.7% 3.6% 3.7% 2.8% 4.0% 4.7%
1 Debt repayments assume putable debt is redeemed by the holders at the
next opportunity.
Credit Facilities
General
In December 2015, we entered into a five-year,
$12,000 revolving credit agreement (the “Revolving Credit
Agreement”) with certain banks. As of December 31, 2016,
we have no amounts outstanding under this agreement.
In January 2015, we entered into a $9,155 credit
agreement (the “Syndicated Credit Agreement”) containing
(i) a $6,286 term loan (“Loan A”) and (ii) a $2,869 term
loan (“Loan B”), with certain banks. In March 2015, we
borrowed all amounts available under the agreement. Loan
A will be due on March 2, 2018. Amounts borrowed under
Loan B will be subject to amortization from March 2, 2018,
with 25% of the aggregate principal amount thereof being
payable prior to March 2, 2020, and all remaining principal
amount due on March 2, 2020. In June 2016, we repaid
$4,000 of the outstanding amount under Loan A and
$1,000 of the outstanding amount under Loan B. After
repayment, the amortization in Loan B has been satisfied.
As of December 31, 2016, we have $2,286 outstanding
under Loan A and $1,869 outstanding under Loan B.
On October 22, 2016, in connection with entering into
the Time Warner merger agreement, AT&T entered into a
$40,000 bridge loan with JPMorgan Chase Bank and
Bank of America, as lenders (the “Bridge Loan”).
On November 15, 2016, we entered into a $10,000 term
loan credit agreement (the “Term Loan”) with a syndicate
of 20 lenders. In connection with this Term Loan, the
“Tranche B Commitments” totaling $10,000 under the
Bridge Loan were reduced to zero. The “Tranche A
Commitments” under the Bridge Loan totaling $30,000
remain in effect.
No amounts will be borrowed under either the Bridge Loan
or the Term Loan prior to the closing of the Time Warner
merger. Borrowings under either agreement will be used
solely to finance a portion of the cash to be paid in the
Current maturities of long-term debt include debt that
may be put back to us by the holders in 2017. We have
$1,000 of annual put reset securities that may be put
each April until maturity in 2021. If the holders do not
require us to repurchase the securities, the interest rate
will be reset based on current market conditions. Likewise,
we have an accreting zero-coupon note that may be
redeemed each May, until maturity in 2022. If the zerocoupon
note (issued for principal of $500 in 2007) is
held to maturity, the redemption amount will be $1,030.
Debt maturing within one year consisted of the following at
December 31:
2016 2015
Current maturities of long-term debt $9,828 $7,632
Bank borrowings1 4 4
Total $9,832 $7,636
1 Outstanding balance of short-term credit facility of a foreign subsidiary.
Financing Activities
During 2016, we issued $10,140 in long-term debt in various
markets, with an average weighted maturity of approximately
12 years and a weighted average coupon of 3.8%. We
redeemed $10,823 in borrowings of various notes with
stated rates of 1.00% to 9.10%.
During 2016 we completed the following long-term debt
issuances:
• February issuance of $1,250 of 2.800% global notes
due 2021.
• February issuance of $1,500 of 3.600% global notes
due 2023.
• February issuance of $1,750 of 4.125% global notes
due 2026.
• February issuance of $1,500 of 5.650% global notes
due 2047.
• May issuance of $750 of 2.300% global notes due 2019.
• May issuance of $750 of 2.800% global notes due 2021.
• May issuance of $1,100 of 3.600% global notes
due 2023.
• May issuance of $900 of 4.125% global notes due 2026.
• May issuance of $500 of 4.800% global notes due 2044.
On February 9, 2017, we completed the following long-term
debt issuances:
• $1,250 of 3.200% global notes due 2022.
• $750 of 3.800% global notes due 2024.
• $2,000 of 4.250% global notes due 2027.
• $3,000 of 5.250% global notes due 2037.
• $2,000 of 5.450% global notes due 2047.
• $1,000 of 5.700% global notes due 2057.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 6 3 63
Merger, the refinancing of debt of Time Warner and its
subsidiaries and the payment of related expenses. Prior
to the closing date of the Merger, only a payment or
bankruptcy event of default would permit the lenders
to terminate their commitments under either the Bridge
Loan or the Term Loan.
Each of our credit and loan agreements contains covenants
that are customary for an issuer with an investment
grade senior debt credit rating, as well as a net debt-toEBITDA
(earnings before interest, taxes, depreciation and
amortization, and other modifications described in each
agreement) financial ratio covenant requiring AT&T to
maintain, as of the last day of each fiscal quarter, a ratio
of not more than 3.5-to-1. The events of default are
customary for agreements of this type and such events
would result in the acceleration of, or would permit the
lenders to accelerate, as applicable, required payments
and would increase each agreement’s relevant Applicable
Margin by 2.00% per annum.
Revolving Credit Agreement
The obligations of the lenders to advance funds under the
Revolving Credit Agreement will end on December 11, 2020,
unless prior to that date either: (i) AT&T reduces to $0 the
commitments of the lenders, or (ii) certain events of default
occur. We and lenders representing more than 50% of the
facility amount may agree to extend their commitments for
two one-year periods beyond the December 11, 2020 end
date, under certain circumstances.
Advances under this agreement would bear interest, at
AT&T’s option, either:
• at a variable annual rate equal to (1) the highest of:
(a) the base rate of the bank affiliate of Citibank, N.A.,
(b) 0.50% per annum above the Federal funds rate, and
(c) the London Interbank Offered Rate (LIBOR)
applicable to U.S. dollars for a period of one month
plus 1.00% per annum, plus (2) an applicable margin
(as set forth in this agreement); or
• at a rate equal to: (i) LIBOR for a period of one, two,
three or six months, as applicable, plus (ii) an applicable
margin (as set forth in this agreement).
We will pay a facility fee of 0.070%, 0.090%, 0.100% or
0.125% per annum, depending on AT&T’s credit rating, of
the amount of lender commitments.
The Syndicated Credit Agreement
Advances bear interest at a rate equal to: (i) the LIBOR for
deposits in dollars (adjusted upwards to reflect any bank
reserve costs) for a period of three or six months, as
applicable, plus (ii) the applicable margin, as set forth in
this agreement. The applicable margin under Loan A equals
1.000%, 1.125% or 1.250% per annum depending on AT&T’s
credit ratings. The applicable margin under Loan B equals
1.125%, 1.250% or 1.375% per annum, depending on
AT&T’s credit ratings.
Bridge Loan
The obligations of the lenders under the Bridge Loan to
provide advances will terminate on the earliest of (i)
October 23, 2017, subject to extension in certain cases to
April 23, 2018, (ii) the closing of the Time Warner merger
without the borrowing of advances under the Bridge Loan
and (iii) the termination of the Merger Agreement.
Advances would bear interest, at AT&T’s option, either:
• at a variable annual rate equal to: (1) the highest of (a)
the prime rate of JPMorgan Chase Bank, (b) 0.5% per
annum above the federal funds rate, and (c) the LIBOR
applicable to dollars for a period of one month plus
1.00%, plus (2) an applicable margin, as set forth in this
agreement (the “Applicable Margin for Base Advances
(Bridge Loan)”); or
• at a rate equal to: (i) LIBOR (adjusted upwards to reflect
any bank reserve costs) for a period of one, two, three
or six months, as applicable, plus (ii) an applicable
margin, as set forth in this agreement (the “Applicable
Margin for Eurodollar Rate Advances (Bridge Loan)”).
The Applicable Margin for Eurodollar Rate Advances (Bridge
Loan) will be equal to 0.750%, 1.000%, 1.125%, 1.250% or
1.500% per annum depending on AT&T’s credit ratings. The
Applicable Margin for Base Advances (Bridge Loan) will be
equal to the greater of (x) 0.00% and (y) the relevant
Applicable Margin for Eurodollar Rate Advances (Bridge
Loan) minus 1.00% per annum, depending on AT&T’s
credit ratings.
The Applicable Margin for Eurodollar Rate Advances (Bridge
Loan) and the Applicable Margin for Base Advances (Bridge
Loan) are scheduled to increase by an additional 0.25% on
the 90th day after the closing of the Merger and another
0.25% every 90 days thereafter.
AT&T pays a commitment fee of 0.070%, 0.090%, 0.100%,
0.125% or 0.175% of the commitment amount per annum,
depending on AT&T’s credit ratings.
We also must pay an additional fee of 0.500%, 0.750% and
1.000% on the amount of advances outstanding as of the
90th, 180th and 270th day after advances are made.
The Bridge Loan requires that the commitments of the
lenders be reduced and outstanding advances be repaid with
the net cash proceeds if we incur certain additional debt, we
issue certain additional stock or we have certain sales or
dispositions of assets by AT&T or its subsidiaries, in each
case subject to exceptions set forth in the Bridge Loan.
Advances under the Bridge Loan are conditioned on the
absence of a material adverse effect on Time Warner and
certain customary conditions and repayment of all advances
must be made no later than 364 days after the date on
which the advances are made.
64  64 || AT&T I N C . AT&T INC.
Term Loan
Under the Term Loan, there are two tranches of
commitments, each in a total amount of $5,000.
The obligations of the lenders under the Term Loan
to provide advances will terminate on the earliest of
(i) October 23, 2017, subject to extension in certain cases
to April 23, 2018, (ii) the closing of the Time Warner
merger without the borrowing of advances under the Term
Loan and (iii) the termination of the Merger Agreement.
Advances would bear interest, at AT&T’s option, either:
• at a variable annual rate equal to: (1) the highest of
(a) the prime rate of JPMorgan Chase Bank, N.A.,
(b) 0.5% per annum above the federal funds rate, and
(c) the LIBOR rate applicable to dollars for a period of
one month plus 1.00%, plus (2) an applicable margin,
as set forth in the Term Loan (the “Applicable Margin
for Base Advances (Term Loan)”); or
• at a rate equal to: (i) LIBOR (adjusted upwards to reflect
any bank reserve costs) for a period of one, two, three
or six months, as applicable, plus (ii) an applicable
margin, as set forth in the Term Loan (the “Applicable
Margin for Eurodollar Rate Advances (Term Loan)”).
The Applicable Margin for Eurodollar Rate Advances (Term
Loan) under Tranche A is equal to 1.000%, 1.125% or
1.250% per annum, depending on AT&T’s credit ratings.
The Applicable Margin for Eurodollar Rate Advances (Term
Loan) under Tranche B is equal to 1.125%, 1.250% or
1.375% per annum, depending on AT&T’s credit ratings.
The Applicable Margin for Base Advances (Term Loan) is
equal to the greater of (x) 0.00% and (y) the relevant
Applicable Margin for Eurodollar Rate Advances (Term Loan)
minus 1.00% per annum, depending on AT&T’s credit ratings.
AT&T pays a commitment fee of 0.090%, 0.100%, or
0.125% of the commitment amount per annum,
depending on AT&T’s credit ratings.
Advances under the Term Loan are conditioned on the
absence of a material adverse effect on Time Warner and
certain customary conditions.
Repayment of all advances with respect to Tranche A
must be made no later than two years and six months
after the date on which such advances are made. Amounts
borrowed under Tranche B will be subject to amortization
commencing two years and nine months after the date on
which such advances are made, with 25% of the aggregate
principal amount thereof being payable prior to the date
that is four years and six months after the date on which
such advances are made, and all remaining principal
amount due and payable on the date that is four years
and six months after the date on which such advances
are made.
NOTE 10. FAIR VALUE MEASUREMENTS AND DISCLOSURE
The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy that gives highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active
markets that we have the ability to access.
Level 2 Inputs to the valuation methodology include:
• Quoted prices for similar assets and liabilities in active markets.
• Quoted prices for identical or similar assets or liabilities in inactive markets.
• Inputs other than quoted market prices that are observable for the asset or liability.
• Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
• Fair value is often based on developed models in which there are few, if any, external observations.
The fair value measurements level of an asset or liability within
the fair value hierarchy is based on the lowest level of any
input that is significant to the fair value measurement. Our
valuation techniques maximize the use of observable inputs
and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a
fair value calculation that may not be indicative of future net
realizable value or reflective of future fair values. We believe
our valuation methods are appropriate and consistent with
other market participants. The use of different methodologies or
assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement
at the reporting date. There have been no changes in the
methodologies used since December 31, 2015.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 6 5 65
Long-Term Debt and Other Financial Instruments
The carrying amounts and estimated fair values of our long-term debt, including current maturities, and other financial
instruments, are summarized as follows:
December 31, 2016 December 31, 2015
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes and debentures1 $122,381 $128,726 $124,847 $128,993
Bank borrowings 4 4 4 4
Investment securities 2,587 2,587 2,704 2,704
1 Includes credit agreement borrowings.
The carrying amount of debt with an original maturity of less than one year approximates fair value. The fair value
measurements used for notes and debentures are considered Level 2 and are determined using various methods, including
quoted prices for identical or similar securities in both active and inactive markets.
Following is the fair value leveling for available-for-sale securities and derivatives as of December 31, 2016, and
December 31, 2015:
December 31, 2016
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $1,215 $ — $ — $ 1,215
International equities 594 — — 594
Fixed income bonds — 508 — 508
Asset Derivatives1
Interest rate swaps — 79 — 79
Cross-currency swaps — 89 — 89
Liability Derivatives1
Interest rate swaps — (14) — (14)
Cross-currency swaps — (3,867) — (3,867)
1 Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets”
in our consolidated balance sheets.
December 31, 2015
Level 1 Level 2 Level 3 Total
Available-for-Sale Securities
Domestic equities $ 1,132 $ — $ — $ 1,132
International equities 569 — — 569
Fixed income bonds — 680 — 680
Asset Derivatives1
Interest rate swaps — 136 — 136
Cross-currency swaps — 556 — 556
Foreign exchange contracts — 3 — 3
Liability Derivatives1
Cross-currency swaps — (3,466) — (3,466)
1 Derivatives designated as hedging instruments are reflected as “Other assets,” “Other noncurrent liabilities” and, for a portion of interest rate swaps, “Other current assets”
in our consolidated balance sheets.
66  66 || AT&T I N C . AT&T INC.
Investment Securities
Our investment securities include equities, fixed income
bonds and other securities. A substantial portion of the fair
values of our available-for-sale securities was estimated
based on quoted market prices. Investments in securities
not traded on a national securities exchange are valued
using pricing models, quoted prices of securities with
similar characteristics or discounted cash flows. Realized
gains and losses on securities are included in “Other
income (expense) – net” in the consolidated statements of
income using the specific identification method. Unrealized
gains and losses, net of tax, on available-for-sale securities
are recorded in accumulated OCI. Unrealized losses that
are considered other than temporary are recorded in
“Other income (expense) – net” with the corresponding
reduction to the carrying basis of the investment. Fixed
income investments of $245 have maturities of less than
one year, $58 within one to three years, $46 within three
to five years, and $159 for five or more years.
Our cash equivalents (money market securities), shortterm
investments (certificate and time deposits) and
nonrefundable customer deposits are recorded at amortized
cost, and the respective carrying amounts approximate
fair values. Short-term investments and nonrefundable
customer deposits are recorded in “Other current assets”
and our investment securities are recorded in “Other
Assets” on the consolidated balance sheets.
Derivative Financial Instruments
We enter into derivative transactions to manage certain
market risks, primarily interest rate risk and foreign currency
exchange risk. This includes the use of interest rate swaps,
interest rate locks, foreign exchange forward contracts and
combined interest rate foreign exchange contracts (crosscurrency
swaps). We do not use derivatives for trading or
speculative purposes. We record derivatives on our
consolidated balance sheets at fair value that is derived
from observable market data, including yield curves and
foreign exchange rates (all of our derivatives are Level 2).
Cash flows associated with derivative instruments are
presented in the same category on the consolidated
statements of cash flows as the item being hedged.
Fair Value Hedging We designate our fixed-to-floating
interest rate swaps as fair value hedges. The purpose of
these swaps is to manage interest rate risk by managing our
mix of fixed-rate and floating-rate debt. These swaps involve
the receipt of fixed-rate amounts for floating interest rate
payments over the life of the swaps without exchange of
the underlying principal amount. Accrued and realized gains
or losses from interest rate swaps impact interest expense in
the consolidated statements of income. Unrealized gains on
interest rate swaps are recorded at fair market value as
assets, and unrealized losses on interest rate swaps are
recorded at fair market value as liabilities. Changes in the
fair values of the interest rate swaps are exactly offset by
changes in the fair value of the underlying debt. Gains or
losses realized upon early termination of our fair value
hedges are recognized in interest expense. In the years
ended December 31, 2016, and December 31, 2015, no
ineffectiveness was measured on interest rate swaps
designated as fair value hedges.
Cash Flow Hedging We designate our cross-currency
swaps as cash flow hedges. We have entered into multiple
cross-currency swaps to hedge our exposure to variability in
expected future cash flows that are attributable to foreign
currency risk generated from the issuance of our Euro,
British pound sterling, Canadian dollar and Swiss franc
denominated debt. These agreements include initial and
final exchanges of principal from fixed foreign currency
denominations to fixed U.S. dollar denominated amounts, to
be exchanged at a specified rate that is usually determined
by the market spot rate upon issuance. They also include an
interest rate swap of a fixed or floating foreign-denominated
rate to a fixed U.S. dollar denominated interest rate.
Unrealized gains on derivatives designated as cash
flow hedges are recorded at fair value as assets, and
unrealized losses on derivatives designated as cash
flow hedges are recorded at fair value as liabilities. For
derivative instruments designated as cash flow hedges,
the effective portion is reported as a component of
accumulated OCI until reclassified into interest expense in
the same period the hedged transaction affects earnings.
The gain or loss on the ineffective portion is recognized
as “Other income (expense) – net” in the consolidated
statements of income in each period. We evaluate the
effectiveness of our cross-currency swaps each quarter.
In the years ended December 31, 2016, and December 31,
2015, no ineffectiveness was measured on cross-currency
swaps designated as cash flow hedges.
Periodically, we enter into and designate interest rate locks
to partially hedge the risk of changes in interest payments
attributable to increases in the benchmark interest rate
during the period leading up to the probable issuance of
fixed-rate debt. We designate our interest rate locks as
cash flow hedges. Gains and losses when we settle our
interest rate locks are amortized into income over the life
of the related debt, except where a material amount is
deemed to be ineffective, which would be immediately
reclassified to “Other income (expense) – net” in the
consolidated statements of income. Over the next
12 months, we expect to reclassify $59 from accumulated
OCI to interest expense due to the amortization of net
losses on historical interest rate locks.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 6 7 67
We hedge a portion of the exchange risk involved in
anticipation of highly probable foreign currency-denominated
transactions. In anticipation of these transactions, we often
enter into foreign exchange contracts to provide currency
at a fixed rate. Gains and losses at the time we settle or
take delivery on our designated foreign exchange contracts
are amortized into income in the same period the hedged
transaction affects earnings, except where an amount is
deemed to be ineffective, which would be immediately
reclassified to “Other income (expense) – net” in the
consolidated statements of income. In the years ended
December 31, 2016, and December 31, 2015, no
ineffectiveness was measured on foreign exchange
contracts designated as cash flow hedges.
Collateral and Credit-Risk Contingency We have
entered into agreements with our derivative counterparties
establishing collateral thresholds based on respective credit
ratings and netting agreements. At December 31, 2016, we
had posted collateral of $3,242 (a deposit asset) and held
no collateral. Under the agreements, if AT&T’s credit rating
had been downgraded one rating level by Fitch Ratings,
before the final collateral exchange in December, we would
have been required to post additional collateral of $150. If
DIRECTV Holdings LLC’s credit rating had been downgraded
below BBB- (S&P), we would owe an additional $274.
At December 31, 2015, we had posted collateral of $2,343
(a deposit asset) and held collateral of $124 (a receipt
liability). We do not offset the fair value of collateral,
whether the right to reclaim cash collateral (a receivable) or
the obligation to return cash collateral (a payable) exists,
against the fair value of the derivative instruments.
Following are the notional amounts of our outstanding
derivative positions:
2016 2015
Interest rate swaps $ 9,650 $ 7,050
Cross-currency swaps 29,642 29,642
Foreign exchange contracts — 100
Total $39,292 $36,792
Following are the related hedged items affecting our
financial position and performance:
Effect of Derivatives on the
Consolidated Statements of Income
Fair Value Hedging Relationships
For the years ended December 31, 2016 2015 2014
Interest rate swaps (Interest expense):
Gain (Loss) on interest rate swaps $(61) $(16) $(29)
Gain (Loss) on long-term debt 61 16 29
In addition, the net swap settlements that accrued
and settled in the periods above were included in
interest expense.
Cash Flow Hedging Relationships
For the years ended December 31, 2016 2015 2014
Cross-currency swaps:
Gain (Loss) recognized in
accumulated OCI $1,061 $(813) $528
Interest rate locks:
Gain (Loss) recognized in
accumulated OCI — (361) (128)
Interest income (expense)
reclassified from accumulated
OCI into income (59) (58) (44)
NOTE 11. INCOME TAXES
Significant components of our deferred tax liabilities (assets)
are as follows at December 31:
2016 2015
Depreciation and amortization $44,903 $46,067
Licenses and nonamortizable intangibles 22,892 20,732
Employee benefits (10,045) (10,517)
Deferred fulfillment costs 3,204 2,172
Net operating loss and other carryforwards (4,304) (4,029)
Other – net (216) (1,478)
Subtotal 56,434 52,947
Deferred tax assets valuation allowance 2,283 2,141
Net deferred tax liabilities $58,717 $55,088
Noncurrent deferred tax liabilities $60,128 $56,181
Less: Noncurrent deferred tax assets (1,411) (1,093)
Net deferred tax liabilities $58,717 $55,088
At December 31, 2016, we had combined net operating
loss carryforwards (tax effected) for federal income tax
purposes of $144, state of $830 and foreign of $1,981,
expiring through 2032. Additionally, we had federal credit
carryforwards of $0 and state credit carryforwards of $1,348,
expiring primarily through 2036.
We recognize a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some
portion, or all, of a deferred tax asset will not be realized.
Our valuation allowances at December 31, 2016 and 2015
related primarily to state and foreign net operating losses
and state credit carryforwards.
We recognize the financial statement effects of a tax
return position when it is more likely than not, based on
the technical merits, that the position will ultimately be
sustained. For tax positions that meet this recognition
threshold, we apply our judgment, taking into account
applicable tax laws, our experience in managing tax audits
68  68 || AT&T I N C . AT&T INC.
and relevant GAAP, to determine the amount of tax benefits
to recognize in our financial statements. For each position,
the difference between the benefit realized on our tax
return and the benefit reflected in our financial statements
is recorded on our consolidated balance sheets as an
unrecognized tax benefit (UTB). We update our UTBs at
each financial statement date to reflect the impacts of
audit settlements and other resolutions of audit issues,
the expiration of statutes of limitation, developments in
tax law and ongoing discussions with taxing authorities.
A reconciliation of the change in our UTB balance from
January 1 to December 31 for 2016 and 2015 is as follows:
Federal, State and Foreign Tax 2016 2015
Balance at beginning of year $6,898 $4,465
Increases for tax positions
related to the current year 318 1,333
Increases for tax positions
related to prior years 473 660
Decreases for tax positions
related to prior years (1,168) (396)
Lapse of statute of limitations (25) (16)
Settlements 50 10
Current year acquisitions — 864
Foreign currency effects (30) (22)
Balance at end of year 6,516 6,898
Accrued interest and penalties 1,140 1,138
Gross unrecognized income tax benefits 7,656 8,036
Less: Deferred federal and state
income tax benefits (557) (582)
Less: Tax attributable to timing
items included above (3,398) (3,460)
Less: UTBs included above that relate
to acquisitions that would impact
goodwill if recognized during the
measurement period — (842)
Total UTB that, if recognized, would
impact the effective income tax
rate as of the end of the year $3,701 $3,152
Periodically we make deposits to taxing jurisdictions
which reduce our UTB balance but are not included in the
reconciliation above. The amount of deposits that reduced
our UTB balance was $3,084 at December 31, 2016, and
$3,027 at December 31, 2015.
Accrued interest and penalties included in UTBs were $1,140
as of December 31, 2016, and $1,138 as of December 31,
2015. We record interest and penalties related to federal,
state and foreign UTBs in income tax expense. The net
interest and penalty expense (benefit) included in income tax
expense was $24 for 2016, $83 for 2015, and $(64) for 2014.
We file income tax returns in the U.S. federal jurisdiction and
various state, local and foreign jurisdictions. As a large
taxpayer, our income tax returns are regularly audited by the
Internal Revenue Service (IRS) and other taxing authorities.
The IRS has completed field examinations of our tax returns
through 2010. All audit periods prior to 2003 are closed for
federal examination purposes. Contested issues from our 2003
through 2010 returns are at various stages of resolution with
the IRS Appeals Division; we are unable to estimate the
impact the resolution of these issues may have on our UTBs.
The components of income tax (benefit) expense are as follows:
2016 2015 2014
Federal:
Current $2,915 $2,496 $1,610
Deferred 3,127 3,828 2,060
6,042 6,324 3,670
State and local:
Current 282 72 (102)
Deferred 339 671 (73)
621 743 (175)
Foreign:
Current 335 320 163
Deferred (519) (382) (39)
(184) (62) 124
Total $6,479 $7,005 $3,619
“Income Before Income Taxes” in the Consolidated
Statements of Income included the following components
for the years ended December 31:
2016 2015 2014
U.S. income before
income taxes $20,911 $21,519 $10,244
Foreign income (loss)
before income taxes (1,099) (827) 111
Total $19,812 $20,692 $10,355
A reconciliation of income tax expense (benefit) and the
amount computed by applying the statutory federal income
tax rate (35%) to income from continuing operations before
income taxes is as follows:
2016 2015 2014
Taxes computed at federal
statutory rate $6,934 $7,242 $3,624
Increases (decreases) in
income taxes resulting from:
State and local income
taxes – net of federal
income tax benefit 416 483 (113)
Connecticut wireline sale — — 350
Loss of foreign tax credits
in connection with
América Móvil sale — — 386
Mexico restructuring (471) — —
Other – net (400) (720) (628)
Total $6,479 $7,005 $3,619
Effective Tax Rate 32.7% 33.9% 34.9%
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 6 969
NOTE 12. PENSION AND POSTRETIREMENT BENEFITS
Pension Benefits and Postretirement Benefits
Substantially all of our U.S. management employees hired
before January 1, 2015 are covered by one of our
noncontributory pension programs. The vast majority of
domestic nonmanagement employees, including those hired
after 2015, also participate in our noncontributory pension
programs. Management participants generally receive benefits
under either cash balance pension programs that include
annual or monthly credits based on salary as well as an
interest credit, or a traditional pension formula (i.e., a
stated percentage of employees’ adjusted career income).
Nonmanagement employees’ pension benefits are generally
calculated using one of two formulas: a flat dollar amount
applied to years of service according to job classification or
a cash balance plan with negotiated annual pension band
credits as well as interest credits. Most nonmanagement
employees can elect to receive their pension benefits in
either a lump sum payment or an annuity.
We also provide a variety of medical, dental and life insurance
benefits to certain retired employees under various plans and
accrue actuarially determined postretirement benefit costs as
active employees earn these benefits.
We acquired DIRECTV on July 24, 2015. DIRECTV sponsored a
noncontributory defined benefit pension plan, which provided
benefits to most employees based on either years of service
and final average salary, or eligible compensation while
employed by DIRECTV. DIRECTV also maintained (1) a
postretirement benefit plan for those retirees eligible to
participate in health care and life insurance benefits,
generally until they reach age 65 and (2) an unfunded
nonqualified pension plan for certain eligible employees.
At December 31, 2015, we recorded the fair value of the
DIRECTV plans using assumptions and accounting policies
consistent with those disclosed by AT&T.
In December 2014, we announced an opportunity for certain
management employees who were retirement eligible as of
March 31, 2015 to elect an enhanced, full lump sum payment
option of their accrued pension if they retired on or before
March 31, 2015. The lump sum value totaled approximately
$1,200 which was distributed in 2015. We recorded special
termination benefits of $149 as a result of the offer.
In the fourth quarter of 2014, we changed the method we
use to estimate the service and interest components of net
periodic benefit cost for pension (as of October 1, 2014) and
other postretirement benefits (as of December 31, 2014).
This change did not affect the measurement of our total
benefit obligations or our annual net periodic benefit cost
as the change in service and interest costs was completely
offset in the actuarial (gain) loss reported. This change
compared to the previous method resulted in a decrease
of $150 in the service and interest components for pension
cost in the fourth quarter of 2014. For the year ended
December 31, 2015, the change resulted in an incremental
decrease of $740 in service and interest components for
pension and postretirement costs. Prior to the fourth quarter
of 2014, we estimated these service and interest cost
components utilizing a single weighted-average discount rate
derived from the yield curve used to measure the benefit
obligation at the beginning of the period. We have elected
to utilize a full yield curve approach in the estimation of
these components by applying the specific spot rates along
the yield curve used in the determination of the benefit
obligation to the relevant projected cash flows. We have
made this change to provide a more precise measurement
of service and interest costs by improving the correlation
between projected benefit cash flows to the corresponding
spot yield curve rates. We have accounted for this change
as a change in accounting estimate that is inseparable
from a change in accounting principle and accordingly
have accounted for it prospectively.
Obligations and Funded Status
For defined benefit pension plans, the benefit obligation is
the “projected benefit obligation,” the actuarial present value,
as of our December 31 measurement date, of all benefits
attributed by the pension benefit formula to employee service
rendered to that date. The amount of benefit to be paid
depends on a number of future events incorporated into the
pension benefit formula, including estimates of the average
life of employees and their beneficiaries and average years
of service rendered. It is measured based on assumptions
concerning future interest rates and future employee
compensation levels.
For postretirement benefit plans, the benefit obligation is the
“accumulated postretirement benefit obligation,” the actuarial
present value as of measurement date of all future benefits
attributed under the terms of the postretirement benefit plan
to employee service.
70  70 || AT&T I N C . AT&T INC.
The following table presents the change in the projected benefit obligation for the years ended December 31:
Pension Benefits Postretirement Benefits
2016 2015 2016 2015
Benefit obligation at beginning of year $55,464 $59,543 $27,898 $30,709
Service cost – benefits earned during the period 1,112 1,212 192 222
Interest cost on projected benefit obligation 1,980 1,902 972 967
Amendments (206) (8) (600) (74)
Actuarial (gain) loss 1,485 (3,079) (529) (1,988)
Special termination benefits — 149 — —
Benefits paid (3,614) (4,681) (1,941) (1,958)
DIRECTV acquisition — 470 — 20
Transfer for sale of Connecticut wireline operations — (42) — —
Plan transfers (38) (2) 35 —
Benefit obligation at end of year $56,183 $55,464 $26,027 $27,898
The following table presents the change in the fair value of plan assets for the years ended December 31 and the plans’
funded status at December 31:
Pension Benefits Postretirement Benefits
2016 2015 2016 2015
Fair value of plan assets at beginning of year $ 42,195 $ 45,163 $ 6,671 $ 7,846
Actual return on plan assets 3,123 604 407 64
Benefits paid1 (3,614) (4,681) (1,156) (1,239)
Contributions 910 735 — —
DIRECTV acquisition — 418 — —
Transfer for sale of Connecticut wireline operations — (42) — —
Plan transfers and other (4) (2) (1) —
Fair value of plan assets at end of year3 42,610 42,195 5,921 6,671
Unfunded status at end of year2 $(13,573) $(13,269) $(20,106) $(21,227)
1 At our discretion, certain postretirement benefits may be paid from AT&T cash accounts, which does not reduce Voluntary Employee Benefit Association (VEBA) assets.
Future benefit payments may be made from VEBA trusts and thus reduce those asset balances.
2 Funded status is not indicative of our ability to pay ongoing pension benefits or of our obligation to fund retirement trusts. Required pension funding is determined in
accordance with the Employee Retirement Income Security Act of 1974, as amended (ERISA) regulations.
3 Net assets available for benefits were $51,087 at December 31, 2016 and $50,909 at December 31, 2015 and include the preferred equity interest in AT&T Mobility II LLC
discussed below, which was valued at $8,477 and $8,714, respectively.
In July 2014, the U.S. Department of Labor published in
the Federal Register their final retroactive approval of our
September 9, 2013 voluntary contribution of a preferred
equity interest in AT&T Mobility II LLC, the primary holding
company for our wireless business, to the trust used to
pay pension benefits under our qualified pension plans.
The preferred equity interest had a value of $9,104 on
the contribution date and was valued at $8,477 at
December 31, 2016. The trust is entitled to receive
cumulative cash distributions of $560 per annum, which will
be distributed quarterly in equal amounts and will be
accounted for as contributions. We distributed $560 to the
trust during 2016. So long as we make the distributions, we
will have no limitations on our ability to declare a dividend,
or repurchase shares. This preferred equity interest is a plan
asset under ERISA and is recognized as such in the plan’s
separate financial statements. However, because the
preferred equity interest is not unconditionally transferable
to an unrelated party (see Note 14), it is not reflected in
plan assets in our consolidated financial statements and
instead has been eliminated in consolidation. At the time of
the contribution of the preferred equity interest, we made an
additional cash contribution of $175 and agreed to annual
cash contributions of $175 no later than the due date for
our federal income tax return for each of 2014, 2015 and
2016. During 2016, we accelerated the final contribution and
completed our obligation with a $350 cash payment to the
trust. These contributions combined with our existing
pension assets are in excess of 90% of the pension
obligation at December 31, 2016.
As noted above, this preferred equity interest represents a
plan asset of our pension trust, which is recognized in the
separate financial statements of our pension plan as a
qualified plan asset for funding purposes. The following
table presents a reconciliation of our pension plan assets
recognized in the consolidated financial statements of the
Company with the net assets available for benefits
included in the separate financial statements of the
pension plan at December 31:
2016 2015
Plan assets recognized in the
consolidated financial statements $42,610 $42,195
Preferred equity interest in Mobility 8,477 8,714
Net assets available for benefits $51,087 $50,909
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 7 1 71
The accumulated benefit obligation for our pension plans
represents the actuarial present value of benefits based
on employee service and compensation as of a certain
date and does not include an assumption about future
compensation levels. The accumulated benefit obligation
for our pension plans was $54,538 at December 31, 2016,
and $54,007 at December 31, 2015.
Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
Periodic Benefit Costs
Our combined net pension and postretirement cost (credit) recognized in our consolidated statements of income was $303,
$(2,821) and $7,232 for the years ended December 31, 2016, 2015 and 2014. A portion of pension and postretirement
benefit costs is capitalized as part of the benefit load on internal construction and capital expenditures, providing a small
reduction in the net expense recorded. The following table presents the components of net periodic benefit cost:
Pension Benefits Postretirement Benefits
2016 2015 2014 2016 2015 2014
Service cost – benefits earned during the period $ 1,112 $ 1,212 $ 1,134 $ 192 $ 222 $ 233
Interest cost on projected benefit obligation 1,980 1,902 2,470 972 967 1,458
Expected return on assets (3,115) (3,317) (3,380) (355) (421) (653)
Amortization of prior service credit (103) (103) (94) (1,277) (1,278) (1,448)
Actuarial (gain) loss 1,478 (373) 5,419 (581) (1,632) 2,093
Net pension and postretirement (credit) cost $ 1,352 $ (679) $ 5,549 $(1,049) $(2,142) $ 1,683
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income
The following table presents the after-tax changes in benefit obligations recognized in OCI and the after-tax prior service
credits that were amortized from OCI into net periodic benefit costs:
Pension Benefits Postretirement Benefits
2016 2015 2014 2016 2015 2014
Balance at beginning of year $512 $575 $583 $5,510 $6,257 $6,812
Prior service (cost) credit 128 1 45 372 45 383
Amortization of prior service credit (65) (64) (58) (793) (792) (898)
Reclassification to income of prior service credit — — 5 — — (40)
Total recognized in other comprehensive (income) loss 63 (63) (8) (421) (747) (555)
Balance at end of year $575 $512 $575 $5,089 $5,510 $6,257
The estimated prior service credits that will be amortized from accumulated OCI into net periodic benefit cost over the next
fiscal year are $123 ($76 net of tax) for pension and $1,342 ($832 net of tax) for postretirement benefits.
Amounts recognized on our consolidated balance sheets at
December 31 are listed below:
Pension Benefits Postretirement Benefits
2016 2015 2016 2015
Current portion of
employee benefit
obligation1 $ — $ — $ (1,644) $ (1,766)
Employee benefit
obligation2 (13,573) (13,269) (18,462) (19,461)
Net amount
recognized $(13,573) $(13,269) $(20,106) $(21,227)
1 Included in “Accounts payable and accrued liabilities.”
2 Included in “Postemployment benefit obligation.”
72  72 || AT&T I N C . AT&T INC.
We utilize a full yield curve approach in the estimation
of the service and interest components of net periodic
benefit costs for pension and other postretirement
benefits. Under this approach, we apply discounting using
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 spot rates align to each of the projected
benefit obligations and service cost cash flows. The
service cost component relates to the active participants
in the plan, so the relevant cash flows on which to apply
the yield curve are considerably longer in duration on
average than the total projected benefit obligation cash
flows, which also include benefit payments to retirees.
Interest cost is computed by multiplying each spot rate
by the corresponding discounted projected benefit
obligation cash flows. The full yield curve approach
reduces any actuarial gains and losses based upon
interest rate expectations (e.g., built-in gains in interest
cost in an upward sloping yield curve scenario), or
gains and losses merely resulting from the timing and
magnitude of cash outflows associated with our
benefit obligations. Neither the annual measurement
of our total benefit obligations nor annual net benefit
cost is affected by the full yield curve approach.
Expected Long-Term Rate of Return In 2017, our expected
long-term rate of return is 7.75% on pension plan assets
and 5.75% on postretirement plan assets. Our long-term
rates of return reflect the average rate of earnings expected
on the funds invested, or to be invested, to provide for the
benefits included in the projected benefit obligations. In
setting the long-term assumed rate of return, management
Assumptions
In determining the projected benefit obligation and the net pension and postretirement benefit cost, we used the following
significant weighted-average assumptions:
Pension Benefits Postretirement Benefits
2016 2015 2014 2016 2015 2014
Weighted-average discount rate for determining projected
benefit obligation at December 31 4.40% 4.60% 4.30% 4.30% 4.50% 4.20%
Discount rate in effect for determining service cost 4.90% 4.60% 5.00% 5.00% 4.60% 5.00%
Discount rate in effect for determining interest cost1 3.70% 3.30% 4.60% 3.60% 3.30% 5.00%
Long-term rate of return on plan assets 7.75% 7.75% 7.75% 5.75% 5.75% 7.75%
Composite rate of compensation increase for determining
projected benefit obligation 3.00% 3.10% 3.00% 3.00% 3.10% 3.00%
Composite rate of compensation increase for determining
net pension cost (benefit) 3.10% 3.00% 3.00% 3.10% 3.00% 3.00%
1 Weighted-average discount rate of 5.00% in effect for pension costs from January 1, 2014 through September 30, 2014. Discount rates in effect of 4.90% for service cost and
3.50% for interest cost from October 1, 2014 through December 31, 2014. A discount rate of 5.00% was used for postretirement costs for the year ended December 31, 2014.
We recognize gains and losses on pension and postretirement
plan assets and obligations immediately in our operating
results. These gains and losses are measured annually as of
December 31 and accordingly will be recorded during the
fourth quarter, unless earlier remeasurements are required.
Discount Rate Our assumed weighted-average discount
rate for pension and postretirement benefits of 4.40% and
4.30% respectively, at December 31, 2016, reflects the
hypothetical rate at which the projected benefit obligation
could be effectively settled or paid out to participants.
We determined our discount rate based on a range of
factors, including a yield curve composed of the rates
of return on several hundred high-quality, fixed income
corporate bonds available at the measurement date and
corresponding to the related expected durations of future
cash outflows. These bonds were all rated at least Aa3 or
AA- by one of the nationally recognized statistical rating
organizations, denominated in U.S. dollars, and neither
callable, convertible nor index linked. For the year ended
December 31, 2016, when compared to the year ended
December 31, 2015, we decreased our pension discount
rate by 0.20%, resulting in an increase in our pension plan
benefit obligation of $2,189 and decreased our
postretirement discount rate 0.20%, resulting in an
increase in our postretirement benefit obligation of $906.
For the year ended December 31, 2015, we increased our
pension discount rate by 0.30%, resulting in a decrease in
our pension plan benefit obligation of $1,977 and
increased our postretirement discount rates by 0.30%,
resulting in a decrease in our postretirement benefit
obligation of $854.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 7 373
growth in administrative expenses and an annual 3.00%
growth in dental claims.
A one percentage-point change in the assumed combined
medical and dental cost trend rate would have the
following effects:
One Percentage- One PercentagePoint
Increase Point Decrease
Increase (decrease) in total of
service and interest cost components $ 50 $ (44)
Increase (decrease) in accumulated
postretirement benefit obligation 511 (458)
Plan Assets
Plan assets consist primarily of private and public equity,
government and corporate bonds, and real assets (real estate
and natural resources). The asset allocations of the pension
plans are maintained to meet ERISA requirements. Any plan
contributions, as determined by ERISA regulations, are made
to a pension trust for the benefit of plan participants. As part
of our voluntary contribution of the Mobility preferred equity
interest, we will contribute $560 of cash distributions during
2017. We do not have significant ERISA required contributions
to our pension plans for 2017.
We maintain VEBA trusts to partially fund postretirement
benefits; however, there are no ERISA or regulatory
requirements that these postretirement benefit plans be
funded annually.
The principal investment objectives are to ensure the
availability of funds to pay pension and postretirement
benefits as they become due under a broad range of future
economic scenarios, maximize long-term investment return
with an acceptable level of risk based on our pension and
postretirement obligations, and diversify broadly across and
within the capital markets to insulate asset values against
adverse experience in any one market. Each asset class has
broadly diversified characteristics. Substantial biases toward
any particular investing style or type of security are sought to
be avoided by managing the aggregation of all accounts with
portfolio benchmarks. Asset and benefit obligation forecasting
studies are conducted periodically, generally every two to
three years, or when significant changes have occurred in
market conditions, benefits, participant demographics or
funded status. Decisions regarding investment policy are made
with an understanding of the effect of asset allocation on
funded status, future contributions and projected expenses.
considers capital markets future expectations, the asset mix
of the plans’ investments and average historical asset return.
Actual long-term returns can, in relatively stable markets,
also serve as a factor in determining future expectations.
We consider many factors that include, but are not limited
to, historical returns on plan assets, current market
information on long-term returns (e.g., long-term bond rates)
and current and target asset allocations between asset
categories. The target asset allocation is determined based
on consultations with external investment advisers. If all
other factors were to remain unchanged, we expect that a
0.50% decrease in the expected long-term rate of return
would cause 2017 combined pension and postretirement
cost to increase $230. However, any differences in the rate
and actual returns will be included with the actuarial gain
or loss recorded in the fourth quarter when our plans
are remeasured.
Composite Rate of Compensation Increase Our expected
composite rate of compensation increase cost of 3.00% in
2016 and 3.10% in 2015 reflects the long-term average rate
of salary increases.
Mortality Tables At December 31, 2016, we updated our
assumed mortality rates to reflect our best estimate of
future mortality, which decreased our pension obligation by
$793 and decreased our postretirement obligations by $227.
At December 31, 2015, we updated our assumed mortality
rates, which decreased our pension obligation by $859 and
decreased our postretirement obligations by $274.
Healthcare Cost Trend Our healthcare cost trend
assumptions are developed based on historical cost data,
the near-term outlook and an assessment of likely long-term
trends. Based on historical experience, updated expectations
of healthcare industry inflation and recent prescription drug
cost experience, our 2017 assumed annual healthcare
prescription drug cost trend for non-Medicare eligible
participants will increase to 6.50%, grading down to our
ultimate trend rate of 4.50% in 2025 and for Medicareeligible
participants will remain at an assumed annual and
ultimate trend rate of 4.50%. This change in assumption
increased our obligation by $21. In 2016, our assumed
annual healthcare prescription drug cost trend rate for
non-Medicare eligible participants was 6.25%, trending to
our ultimate trend rate of 4.50% in 2023. Medicare-eligible
retirees who receive access to retiree health insurance
coverage through a private insurance marketplace are not
subject to assumed healthcare trend. In addition to the
healthcare cost trend in 2016, we assumed an annual 2.50%
74  74 || AT&T I N C . AT&T INC.
Real estate and natural resource direct investments are
valued at amounts based upon appraisal reports. Fixed
income securities valuation is based upon observable
prices for comparable assets, broker/dealer quotes
(spreads or prices), or a pricing matrix that derives
spreads for each bond based on external market data,
including the current credit rating for the bonds, credit
spreads to Treasuries for each credit rating, sector addons
or credits, issue-specific add-ons or credits as well as
call or other options.
Purchases and sales of securities are recorded as of the
trade date. Realized gains and losses on sales of
securities are determined on the basis of average cost.
Interest income is recognized on the accrual basis.
Dividend income is recognized on the ex-dividend date.
Non-interest bearing cash and overdrafts are valued at
cost, which approximates fair value.
Fair Value Measurements
See Note 10 for a discussion of fair value hierarchy that
prioritizes the inputs to valuation techniques used to
measure fair value.
At December 31, 2016, AT&T securities represented less
than 0.5% of assets held by our pension trust and 6% of
assets (primarily common stock) held by our VEBA trusts
included in these financial statements.
Investment Valuation
Investments are stated at fair value. Fair value is the price
that would be received to sell an asset or paid to transfer
a liability at the measurement date.
Investments in securities traded on a national securities
exchange are valued at the last reported sales price on
the final business day of the year. If no sale was reported
on that date, they are valued at the last reported bid
price. Investments in securities not traded on a national
securities exchange are valued using pricing models,
quoted prices of securities with similar characteristics or
discounted cash flows. Shares of registered investment
companies are valued based on quoted market prices,
which represent the net asset value of shares held
at year-end.
Other commingled investment entities are valued at
quoted redemption values that represent the net asset
values of units held at year-end which management has
determined approximates fair value.
The plans’ weighted-average asset targets and actual allocations as a percentage of plan assets, including the notional exposure
of future contracts by asset categories at December 31, are as follows:
Pension Assets Postretirement (VEBA) Assets
Target 2016 2015 Target 2016 2015
Equity securities:
Domestic 20% – 30% 24% 22% 17% – 27% 22% 26%
International 10% – 20% 15 15 14% – 24% 19 14
Fixed income securities 35% – 45% 39 40 33% – 43% 38 34
Real assets 6% – 16% 11 10 0% – 6% 1 1
Private equity 4% – 14% 11 12 0% – 7% 2 2
Other 0% – 5% — 1 13% – 23% 18 23
Total 100% 100% 100% 100%
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 7 575
The following tables set forth by level, within the fair value hierarchy, the pension and postretirement assets and liabilities at
fair value as of December 31, 2016:
Pension Assets and Liabilities at Fair Value as of December 31, 2016 Level 1 Level 2 Level 3 Total
Non-interest bearing cash $ 94 $ — $ — $ 94
Interest bearing cash — 77 — 77
Foreign currency contracts — 7 — 7
Equity securities:
Domestic equities 8,299 — — 8,299
International equities 4,389 — 5 4,394
Fixed income securities:
Asset-backed securities — 399 — 399
Mortgage-backed securities — 838 — 838
Collateralized mortgage-backed securities — 208 — 208
Collateralized mortgage obligations/REMICS — 269 — 269
Corporate and other fixed income instruments and funds 75 8,442 40 8,557
Government and municipal bonds 80 4,889 — 4,969
Real estate and real assets — — 2,273 2,273
Securities lending collateral 207 1,977 — 2,184
Receivable for variation margin 8 — — 8
Purchased options — 1 — 1
Assets at fair value 13,152 17,107 2,318 32,577
Investments sold short and other liabilities at fair value (643) (7) (4) (654)
Total plan net assets at fair value $12,509 $17,100 $2,314 $ 31,923
Assets held at net asset value practical expedient
Private equity funds 4,648
Real estate funds 2,392
Commingled funds 5,721
Total assets held at net asset value practical expedient 12,761
Other assets (liabilities)1 (2,074)
Total Plan Net Assets $42,610
1 Other assets (liabilities) include amounts receivable, accounts payable and net adjustment for securities lending payable.
Postretirement Assets and Liabilities at Fair Value as of December 31, 2016 Level 1 Level 2 Level 3 Total
Interest bearing cash $ 175 $ 593 $ — $ 768
Foreign currencies 6 — — 6
Equity securities:
Domestic equities 1,178 7 — 1,185
International equities 896 2 — 898
Fixed income securities:
Asset-backed securities — 33 4 37
Collateralized mortgage-backed securities — 108 13 121
Collateralized mortgage obligations — 32 2 34
Corporate and other fixed income instruments and funds — 422 7 429
Government and municipal bonds 20 659 — 679
Securities lending collateral — 128 — 128
Total plan net assets at fair value $2,275 $1,984 $26 $ 4,285
Assets held at net asset value practical expedient
Private equity funds 118
Real estate funds 61
Commingled funds 1,667
Total assets held at net asset value practical expedient 1,846
Other assets (liabilities)1 (210)
Total Plan Net Assets $5,921
1 Other assets (liabilities) include amounts receivable, accounts payable and net adjustment for securities lending payable.
76  76 || AT&T I N C . AT&T INC.
The tables below set forth a summary of changes in the fair value of the Level 3 pension and postretirement assets for the
year ended December 31, 2016:
Fixed Real Estate
Income and
Pension Assets Equities Funds Real Assets Total
Balance at beginning of year $— $ 44 $ 2,062 $ 2,106
Realized gains (losses) — (17) (103) (120)
Unrealized gains (losses) 3 19 377 399
Transfers in (4) — 77 73
Transfers out — (2) — (2)
Purchases 3 — 65 68
Sales (1) (4) (205) (210)
Balance at end of year $ 1 $ 40 $2,273 $2,314
Fixed
Income
Postretirement Assets Funds Total
Balance at beginning of year $15 $15
Realized gains (losses) (2) (2)
Unrealized gains (losses) 2 2
Transfers in 16 16
Sales (5) (5)
Balance at end of year $26 $26
The following tables set forth by level, within the fair value hierarchy, the pension and postretirement assets and liabilities at
fair value as of December 31, 2015:
Pension Assets and Liabilities at Fair Value as of December 31, 2015 Level 1 Level 2 Level 3 Total
Non-interest bearing cash $ 160 $ — $ — $ 160
Interest bearing cash — 25 — 25
Foreign currency contracts — 25 — 25
Equity securities:
Domestic equities 8,315 4 — 8,319
International equities 4,287 — — 4,287
Fixed income securities:
Asset-backed securities — 403 1 404
Mortgage-backed securities — 792 — 792
Collateralized mortgage-backed securities — 278 — 278
Collateralized mortgage obligations/REMICS — 345 — 345
Corporate and other fixed income instruments and funds 65 8,274 43 8,382
Government and municipal bonds 75 4,495 — 4,570
Real estate and real assets — — 2,062 2,062
Securities lending collateral 512 3,538 — 4,050
Receivable for variation margin 13 — — 13
Assets at fair value 13,427 18,179 2,106 33,712
Investments sold short and other liabilities at fair value (824) (12) — (836)
Total plan net assets at fair value $12,603 $18,167 $2,106 $32,876
Assets held at net asset value practical expedient
Private equity funds 4,926
Real estate funds 2,295
Commingled funds 5,854
Total assets held at net asset value practical expedient 13,075
Other assets (liabilities)1 (3,756)
Total Plan Net Assets $42,195
1 Other assets (liabilities) include amounts receivable, accounts payable and net adjustment for securities lending payable.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 7 777
Postretirement Assets and Liabilities at Fair Value as of December 31, 2015 Level 1 Level 2 Level 3 Total
Interest bearing cash $ 220 $1,292 $ — $1,512
Foreign currencies 4 — — 4
Equity securities:
Domestic equities 1,187 9 — 1,196
International equities 869 2 — 871
Fixed income securities:
Asset-backed securities — 35 2 37
Collateralized mortgage-backed securities — 120 13 133
Collateralized mortgage obligations — 45 — 45
Corporate and other fixed income instruments and funds — 378 — 378
Government and municipal bonds — 617 — 617
Securities lending collateral 6 189 — 195
Futures Contracts 1 — — 1
Total plan net assets at fair value $2,287 $2,687 $15 $4,989
Assets held at net asset value practical expedient
Private equity funds 155
Real estate funds 81
Commingled funds 1,682
Total assets held at net asset value practical expedient 1,918
Other assets (liabilities)1 (236)
Total Plan Net Assets $6,671
1 Other assets (liabilities) include amounts receivable, accounts payable and net adjustment for securities lending payable.
The tables below set forth a summary of changes in the fair value of the Level 3 pension and postretirement assets for the
year ended December 31, 2015:
Fixed Real Estate and
Pension Assets Equities Income Funds Real Assets Total
Balance at beginning of year $ — $ 51 $2,140 $2,191
Realized gains (losses) (1) (19) 247 227
Unrealized gains (losses) 1 16 192 209
Purchases — 1 195 196
Sales — (5) (712) (717)
Balance at end of year $ — $ 44 $2,062 $2,106
Fixed
Postretirement Assets Income Funds Total
Balance at beginning of year $ 2 $ 2
Transfers in 15 15
Transfers out (1) (1)
Sales (1) (1)
Balance at end of year $15 $15
78  78 || AT&T I N C . AT&T INC.
Estimated Future Benefit Payments
Expected benefit payments are estimated using the same
assumptions used in determining our benefit obligation
at December 31, 2016. Because benefit payments will
depend on future employment and compensation levels,
average years employed, average life spans, and payment
elections, among other factors, changes in any of these
assumptions could significantly affect these expected
amounts. The following table provides expected benefit
payments under our pension and postretirement plans:
Pension Postretirement
Benefits Benefits
2017 $ 4,938 $1,809
2018 4,437 1,797
2019 4,312 1,788
2020 4,264 1,783
2021 4,200 1,776
Years 2022 – 2026 19,764 8,225
Supplemental Retirement Plans
We also provide certain senior- and middle-management
employees with nonqualified, unfunded supplemental
retirement and savings plans. While these plans are
unfunded, we have assets in a designated nonbankruptcy
remote trust that are independently managed and
used to provide for these benefits. These plans include
supplemental pension benefits as well as compensationdeferral
plans, some of which include a corresponding
match by us based on a percentage of the
compensation deferral.
We use the same significant assumptions for the
composite rate of compensation increase in determining
our projected benefit obligation and the net pension and
postemployment benefit cost. Our discount rates of 4.20%
at December 31, 2016 and 4.40% at December 31, 2015
were calculated using the same methodologies used in
calculating the discount rate for our qualified pension and
postretirement benefit plans. The following tables provide
the plans’ benefit obligations and fair value of assets at
December 31 and the components of the supplemental
retirement pension benefit cost. The net amounts are
recorded as “Other noncurrent liabilities” on our
consolidated balance sheets.
The following table provides information for our
supplemental retirement plans with accumulated benefit
obligations in excess of plan assets at December 31:
2016 2015
Projected benefit obligation $(2,378) $(2,444)
Accumulated benefit obligation (2,314) (2,372)
Fair value of plan assets — —
The following tables present the components of net periodic
benefit cost and other changes in plan assets and benefit
obligations recognized in OCI:
Net Periodic Benefit Cost 2016 2015 2014
Service cost – benefits earned
during the period $ 12 $ 9 $ 7
Interest cost on projected
benefit obligation 83 77 109
Amortization of prior
service cost (credit) (1) 1 (1)
Actuarial (gain) loss 72 (36) 243
Net supplemental retirement
pension cost $166 $ 51 $358
Other Changes Recognized in
Other Comprehensive Income 2016 2015 2014
Prior service (cost) credit $ 1 $(1) $(11)
Amortization of prior
service cost (credit) (1) 1 (1)
Total recognized in other
comprehensive (income)
loss (net of tax) $— $— $(12)
The estimated prior service credit for our supplemental
retirement plan benefits that will be amortized from
accumulated OCI into net periodic benefit cost over
the next fiscal year is $(1).
Deferred compensation expense was $148 in 2016,
$122 in 2015 and $121 in 2014. Our deferred
compensation liability, included in “Other noncurrent
liabilities,” was $1,273 at December 31, 2016, and
$1,221 at December 31, 2015.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 7 979
Contributory Savings Plans
We maintain contributory savings plans that cover
substantially all employees. Under the savings plans, we
match in cash or company stock a stated percentage of
eligible employee contributions, subject to a specified
ceiling. There are no debt-financed shares held by the
Employee Stock Ownership Plans, allocated or unallocated.
Our match of employee contributions to the savings plans
is fulfilled with purchases of our stock on the open market
or company cash. Benefit cost is based on the cost of
shares or units allocated to participating employees’
accounts and was $631, $653 and $654 for the years
ended December 31, 2016, 2015 and 2014.
NOTE 13. SHARE-BASED PAYMENTS
Under our various plans, senior and other management
employees and nonemployee directors have received
nonvested stock and stock units. In conjunction with the
acquisition of DIRECTV, restricted stock units issued under
DIRECTV plans were converted to AT&T shares. The
remaining shares will vest over a period of one to two years
in accordance with the terms of those plans. We do not
intend to issue any additional grants under the DIRECTV
plans. Any future grants will be made under the AT&T plans.
We grant performance stock units, which are nonvested
stock units, based upon our stock price at the date of grant
and award them in the form of AT&T common stock and
cash at the end of a three-year period, subject to the
achievement of certain performance goals. We treat the
cash settled portion of these awards as a liability. We grant
forfeitable restricted stock and stock units, which are valued
at the market price of our common stock at the date of
grant and predominantly vest over a four- or five-year
period. We also grant other nonvested stock units and
award them in cash at the end of a three-year period,
subject to the achievement of certain market based
conditions. As of December 31, 2016, we were authorized
to issue up to approximately 130 million shares of
common stock (in addition to shares that may be issued
upon exercise of outstanding options or upon vesting of
performance stock units or other nonvested stock units)
to officers, employees and directors pursuant to these
various plans.
We account for our share-based payment arrangements
based on the fair value of the awards on their respective
grant date, which may affect our ability to fully realize the
value shown on our consolidated balance sheets of deferred
tax assets associated with compensation expense. We record
a valuation allowance when our future taxable income is not
expected to be sufficient to recover the asset. Accordingly,
there can be no assurance that the current stock price of
our common shares will rise to levels sufficient to realize
the entire tax benefit currently reflected on our consolidated
balance sheets. However, to the extent we generate excess
tax benefits (i.e., that additional tax benefits in excess of
the deferred taxes associated with compensation expense
previously recognized) the potential future impact on
income would be reduced.
Our consolidated statements of income include the
compensation cost recognized for those plans as operating
expenses, as well as the associated tax benefits, which are
reflected in the table below:
2016 2015 2014
Performance stock units $480 $299 $226
Restricted stock and stock units 152 147 93
Other nonvested stock units 21 5 (1)
Total $653 $451 $318
Income tax benefit $250 $172 $122
A summary of the status of our nonvested stock units as of
December 31, 2016, and changes during the year then
ended is presented as follows (shares in millions):
Weighted-Average
Nonvested Stock Units Shares Grant-Date Fair Value
Nonvested at January 1, 2016 36 $ 33.78
Granted 16 36.65
Vested (19) 33.12
Forfeited (2) 35.16
Nonvested at December 31, 2016 31 $35.57
As of December 31, 2016, there was $587 of total
unrecognized compensation cost related to nonvested
share-based payment arrangements granted. That cost is
expected to be recognized over a weighted-average period
of 2.24 years. The total fair value of shares vested during
the year was $614 for 2016, compared to $450 for 2015
and $327 for 2014.
It is our intent to satisfy share option exercises using our
treasury stock. Cash received from stock option exercises
was $179 for 2016, $46 for 2015 and $43 for 2014.
80  80 || AT&T I N C . AT&T INC.
minimum liquidation value plus any unpaid cumulative
dividends, and in installments, as specified in the
contribution agreement upon the occurrence of any of
the following: (1) at any time if the ratio of debt to total
capitalization of Mobility exceeds that of AT&T, (2) the date
on which AT&T Inc. is rated below investment grade for
two consecutive calendar quarters, (3) upon a change of
control if AT&T does not exercise its purchase option, or
(4) at any time after a seven-year period from the
contribution date. In the event AT&T elects or is required
to purchase the preferred equity interest, AT&T may elect
to settle the purchase price in cash or shares of AT&T
common stock or a combination thereof. Because the
preferred equity interest was not considered outstanding
for accounting purposes at year-end, it did not affect
the calculation of earnings per share for any of the
periods presented.
NOTE 15. SALES OF EQUIPMENT INSTALLMENT RECEIVABLES
We offer our customers the option to purchase certain
wireless devices in installments over a period of up
to 30 months and, in many cases, they have the right
to trade in the original equipment for a new device
within a set period and have the remaining unpaid
balance satisfied. As of December 31, 2016 and
December 31, 2015, gross equipment installment
receivables of $5,665 and $5,719 were included on
our consolidated balance sheets, of which $3,425 and
$3,239 are notes receivable that are included in
“Accounts receivable – net.”
In 2014, we entered into an uncommitted agreement
pertaining to the sale of equipment installment
receivables and related security with Citibank and various
other relationship banks as purchasers (collectively, the
Purchasers). Under this agreement, we transferred certain
receivables to the Purchasers for cash and additional
consideration upon settlement of the receivables, referred
to as the deferred purchase price. Under the terms of
the agreement, we continue to bill and collect the
payments from our customers on behalf of the
Purchasers. Since inception, cash proceeds received,
net of remittances (excluding amounts returned as
deferred purchase price), were $3,436.
NOTE 14. STOCKHOLDERS’ EQUITY
Stock Repurchase Program From time to time, we
repurchase shares of common stock for distribution through
our employee benefit plans or in connection with certain
acquisitions. In March 2013, our Board of Directors
approved an authorization to repurchase 300 million
shares, under which we repurchased shares during 2014.
In March 2014, our Board of Directors approved an
additional authorization to repurchase up to 300 million
shares of our common stock. For the year ended
December 31, 2016, we had repurchased approximately
11 million shares for distribution through our employee
benefit plans totaling $444 under these authorizations.
For the year ended December 31, 2015, we had
repurchased approximately eight million shares totaling
$269 under these authorizations.
To implement these authorizations, we used open market
repurchase programs, relying on Rule 10b5-1 of the
Securities Exchange Act of 1934 where feasible.
Authorized Shares There are 14 billion authorized
common shares of AT&T stock and 10 million authorized
preferred shares of AT&T stock. As of December 31, 2016
and 2015, no preferred shares were outstanding.
Dividend Declarations In October 2016, the Company
declared an increase in its quarterly dividend to $0.49 per
share of common stock. In December 2015, the Company
declared an increase in its quarterly dividend to $0.48 per
share of common stock.
Preferred Equity Interest The preferred equity interest
discussed in Note 12 is not transferable by the trust except
through its put and call features, and therefore has been
eliminated in consolidation. After a period of five years
from the contribution or, if earlier, the date upon which the
pension plan trust is fully funded as determined under
GAAP, AT&T has a right to purchase from the pension plan
trust some or all of the preferred equity interest at the
greater of the fair market value or minimum liquidation
value plus any unpaid cumulative dividends. In addition,
AT&T will have the right to purchase the preferred equity
interest in the event AT&T’s ownership of Mobility is less
than 50% or there is a transaction that results in the
transfer of 50% or more of the pension plan trust’s assets
to an entity not under common control with AT&T
(collectively, a change of control). The pension plan trust
has the right to require AT&T to purchase the preferred
equity interest at the greater of their fair market value or
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. |
| 81 81
NOTE 16. TOWER TRANSACTION
In December 2013, we closed our transaction with Crown
Castle International Corp. (Crown Castle) in which Crown
Castle gained the exclusive rights to lease and operate
9,048 wireless towers and purchased 627 of our wireless
towers for $4,827 in cash. The leases have various terms
with an average length of approximately 28 years.
As the leases expire, Crown Castle will have fixed price
purchase options for these towers totaling approximately
$4,200, based on their estimated fair market values at the
end of the lease terms. We sublease space on the towers
from Crown Castle for an initial term of 10 years at current
market rates, subject to optional renewals in the future.
We determined our continuing involvement with the
tower assets prevented us from achieving sale-leaseback
accounting for the transaction, and we accounted for the cash
proceeds from Crown Castle as a financing obligation on our
consolidated balance sheets. We record interest on the
financing obligation using the effective interest method at
a rate of approximately 3.9%. The financing obligation
is increased by interest expense and estimated future net
cash flows generated and retained by Crown Castle from
operation of the tower sites, and reduced by our contractual
payments. We continue to include the tower assets in
“Property, plant and equipment” on our consolidated
balance sheets and depreciate them accordingly.
At December 31, 2016 and 2015, the tower assets had a
balance of $921 and $960, respectively. Our depreciation
expense for these assets was $39 for each of 2016, 2015
and 2014.
Payments made to Crown Castle under this arrangement
were $230 for 2016. At December 31, 2016, the future
minimum payments under the sublease arrangement are
$234 for 2017, $239 for 2018, $244 for 2019, $248 for
2020, $253 for 2021, and $2,052 thereafter.
NOTE 17. CONTINGENT LIABILITIES
We are party to numerous lawsuits, regulatory proceedings
and other matters arising in the ordinary course of business.
In evaluating these matters on an ongoing basis, we take
into account amounts already accrued on the balance sheet.
In our opinion, although the outcomes of these proceedings
are uncertain, they should not have a material adverse effect
on our financial position, results of operations or cash flows.
We have contractual obligations to purchase certain goods
or services from various other parties. Our purchase
obligations are expected to be approximately $9,181 in
2017, $11,214 in total for 2018 and 2019, $7,799 in total
for 2020 and 2021 and $7,242 in total for years thereafter.
See Note 10 for a discussion of collateral and creditrisk
contingencies.
The following table sets forth a summary of equipment
installment receivables sold:
2016 2015 2014
Gross receivables sold $7,629 $7,436 $4,707
Net receivables sold1 6,913 6,704 4,126
Cash proceeds received 4,574 4,439 2,528
Deferred purchase price recorded 2,368 2,266 1,629
1 Receivables net of allowance, imputed interest and trade-in right guarantees.
The deferred purchase price is initially recorded at estimated
fair value, which is based on remaining installment payments
expected to be collected, adjusted by the expected timing
and value of device trade-ins, and subsequently carried at
the lower of cost or net realizable value. The estimated
value of the device trade-ins considers prices offered to us
by independent third parties that contemplate changes in
value after the launch of a device model. The fair value
measurements used are considered Level 3 under the Fair
Value Measurement and Disclosure framework (see Note 10).
The following table shows the equipment installment
receivables, previously sold to the Purchasers, that we
repurchased in exchange for the associated deferred
purchase price:
2016 2015 2014
Fair value of repurchased receivables $1,675 $685 $—
Carrying value of deferred
purchase price 1,638 534 —
Gain on repurchases1 $ 37 $151 $—
1 These gains are included in “Selling, general and administrative” in the
consolidated statements of income.
At December 31, 2016 and December 31, 2015, our
deferred purchase price receivable was $3,090 and $2,961,
respectively, of which $1,606 and $1,772 are included in
“Other current assets” on our consolidated balance sheets,
with the remainder in “Other Assets.” Our maximum
exposure to loss as a result of selling these equipment
installment receivables is limited to the amount of our
deferred purchase price at any point in time.
The sales of equipment installment receivables did not have
a material impact on our consolidated statements of income
or to “Total Assets” reported on our consolidated balance
sheets. We reflect the cash flows related to the arrangement
as operating activities in our consolidated statements of
cash flows because the cash received from the Purchasers
upon both the sale of the receivables and the collection of
the deferred purchase price is not subject to significant
interest rate risk.
82  82 || AT&T I N C . AT&T INC.
Labor Contracts As of January 31, 2017, we employed
approximately 268,000 persons. Approximately 48% of
our employees are represented by the Communications
Workers of America, the International Brotherhood of
Electrical Workers or other unions. Contracts covering
approximately 20,000 mobility employees across the
country and approximately 25,000 traditional wireline
employees in our Southwest and Midwest regions have
expired or will expire in 2017. Additionally, negotiations
continue with approximately 15,000 traditional wireline
employees in our West region where the contract expired
in April 2016. Approximately 11,000 former DIRECTV
employees were eligible for and chose union
representation. Bargaining has resulted in approximately
70% of these employees now being covered under ratified
contracts that expire between 2017 and 2020. After
expiration of the current agreements, work stoppages or
labor disruptions may occur in the absence of new
contracts or other agreements being reached.
NOTE 18. ADDITIONAL FINANCIAL INFORMATION
December 31,
Consolidated Balance Sheets 2016 2015
Current customer fulfillment costs (included in Other current assets) $ 3,398 $ 2,923
Accounts payable and accrued liabilities:
Accounts payable $22,027 $21,047
Accrued payroll and commissions 2,450 2,629
Current portion of employee benefit obligation 1,644 1,766
Accrued interest 2,023 1,974
Other 2,994 2,956
Total accounts payable and accrued liabilities $31,138 $30,372
Consolidated Statements of Income 2016 2015 2014
Advertising expense $3,768 $3,632 $3,272
Interest expense incurred $5,802 $4,917 $3,847
Capitalized interest (892) (797) (234)
Total interest expense $4,910 $4,120 $3,613
Consolidated Statements of Cash Flows 2016 2015 2014
Cash paid during the year for:
Interest $5,696 $4,822 $4,099
Income taxes, net of refunds 3,721 1,851 1,532
No customer accounted for more than 10% of consolidated revenues in 2016, 2015 or 2014.
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
AT&T I N C .   AT&T INC. || 83 83
NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables represent our quarterly financial results:
2016 Calendar Quarter
First Second Third Fourth1 Annual
Total Operating Revenues $40,535 $40,520 $40,890 $41,841 $163,786
Operating Income 7,131 6,560 6,408 4,248 24,347
Net Income 3,885 3,515 3,418 2,515 13,333
Net Income Attributable to AT&T 3,803 3,408 3,328 2,437 12,976
Basic Earnings Per Share Attributable to AT&T2 $ 0.62 $ 0.55 $ 0.54 $ 0.39 $ 2.10
Diluted Earnings Per Share Attributable to AT&T2 $ 0.61 $ 0.55 $ 0.54 $ 0.39 $ 2.10
Stock Price
High $ 39.45 $ 43.21 $ 43.47 $ 42.73
Low 33.51 37.86 39.71 36.13
Close 39.17 43.21 40.61 42.53
1 Includes an actuarial loss on pension and postretirement benefit plans (Note 12), asset impairment charge (Note 1) and change in accounting estimate (Note 1).
2 Quarterly earnings per share impacts may not add to full-year earnings per share impacts due to the difference in weighted-average common shares for the quarters versus
the weighted-average common shares for the year.
2015 Calendar Quarter
First Second Third Fourth1 Annual
Total Operating Revenues $32,576 $33,015 $39,091 $42,119 $146,801
Operating Income 5,557 5,773 5,923 7,532 24,785
Net Income 3,339 3,184 3,078 4,086 13,687
Net Income Attributable to AT&T 3,263 3,082 2,994 4,006 13,345
Basic Earnings Per Share Attributable to AT&T2 $ 0.63 $ 0.59 $ 0.50 $ 0.65 $ 2.37
Diluted Earnings Per Share Attributable to AT&T2 $ 0.63 $ 0.59 $ 0.50 $ 0.65 $ 2.37
Stock Price
High $ 35.07 $ 36.45 $ 35.93 $ 34.99
Low 32.41 32.37 30.97 32.17
Close 32.65 35.52 32.58 34.41
1 Includes an actuarial gain on pension and postretirement benefit plans (Note 12) and asset abandonment charges (Note 6).
2 Quarterly earnings per share impacts may not add to full-year earnings per share impacts due to the difference in weighted-average common shares for the quarters versus
the weighted-average common shares for the year.
84  84 || AT&T I N C . AT&T INC.
Report of Management
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.
The integrity and objectivity of the data in these financial statements, including estimates and judgments relating to matters
not concluded by year end, are the responsibility of management, as is all other information included in the Annual Report,
unless otherwise indicated.
The financial statements of AT&T Inc. (AT&T) have been audited by Ernst & Young LLP, Independent Registered Public
Accounting Firm. Management has made available to Ernst & Young LLP all of AT&T’s financial records and related data,
as well as the minutes of stockholders’ and directors’ meetings. Furthermore, management believes that all representations
made to Ernst & Young LLP during its audit were valid and appropriate.
Management maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed by AT&T is recorded, processed, summarized, accumulated and communicated to its management, including its
principal executive and principal financial officers, to allow timely decisions regarding required disclosure, and reported
within the time periods specified by the Securities and Exchange Commission’s rules and forms.
Management also seeks to ensure the objectivity and integrity of its financial data by the careful selection of its managers,
by organizational arrangements that provide an appropriate division of responsibility and by communication programs aimed
at ensuring that its policies, standards and managerial authorities are understood throughout the organization.
The Audit Committee of the Board of Directors meets periodically with management, the internal auditors and the
independent auditors to review the manner in which they are performing their respective responsibilities and to discuss
auditing, internal accounting controls and financial reporting matters. Both the internal auditors and the independent
auditors periodically meet alone with the Audit Committee and have access to the Audit Committee at any time.
Assessment of Internal Control
The management of AT&T is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934. AT&T’s internal control system was
designed to provide reasonable assurance to the company’s management and Board of Directors regarding the preparation
and fair presentation of published financial statements.
AT&T management assessed the effectiveness of the company’s internal control over financial reporting as of
December 31, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 framework). Based on its assessment,
AT&T management believes that, as of December 31, 2016, the company’s internal control over financial reporting is
effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this
Annual Report, has issued an attestation report on the company’s internal control over financial reporting.
Randall Stephenson John J. Stephens
Chairman of the Board, Senior Executive Vice President and
Chief Executive Officer and President Chief Financial Officer
AT&T I N C .   AT&T INC. || 8 5 85
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of AT&T Inc.
We have audited the accompanying consolidated balance sheets of AT&T Inc. (the Company) as of December 31, 2016 and
2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility
of the Company’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 the Company at December 31, 2016 and 2015, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2016, 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),
the Company’s internal control over financial reporting as of December 31, 2016, 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 17, 2017 expressed an unqualified opinion thereon.
Dallas, Texas
February 17, 2017
86  86 || AT&T I N C . AT&T INC.
The Board of Directors and Stockholders of AT&T Inc.
We have audited AT&T Inc.’s (the Company) internal control over financial reporting as of December 31, 2016, 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). The Company’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. 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, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, 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 the Company as of December 31, 2016 and 2015, and the related consolidated
statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years
in the period ended December 31, 2016 and our report dated February 17, 2017 expressed an unqualified opinion thereon.
Dallas, Texas
February 17, 2017
Report of Independent Registered Public Accounting Firm
AT&T I N C .   AT&T INC. || 87 87
AT&T Inc. Board of Directors
Randall L. Stephenson, 56 (4)
Chairman of the Board,
Chief Executive Officer and President
AT&T Inc.
Dallas, Texas
Director since 2005
Background: Telecommunications
Matthew K. Rose, 57 (3,4,5)
Lead Director
Chairman of the Board
and Chief Executive Officer
Burlington Northern Santa Fe, LLC
Director since 2010
Background: Freight transport
Samuel A. Di Piazza, Jr, 66 (1,4,6)
Retired Global Chief Executive Officer
PricewaterhouseCoopers International
Limited
Director since 2015
DIRECTV Director 2010–2015
Background: Public accounting
Richard W. Fisher, 67 (2,3)
Former President and
Chief Executive Officer
Federal Reserve Bank
of Dallas
Director since 2015
Background: Finance, trade, regulatory
Scott T. Ford, 54 (2,4,5)
Member and Chief Executive Officer
Westrock Group, LLC
Director since 2012
Background: Telecommunications
Glenn H. Hutchins, 61 (2,6)
Chairman
North Island
Co-Founder
Silver Lake
Director since 2014
Background: Technology,
public policy
William E. Kennard, 60 (3,6)
Former U.S. Ambassador to the
European Union
Former Chairman of the Federal
Communications Commission
Director since 2014
Background: Law, telecommunications,
public policy
Michael B. McCallister, 64 (1,5)
Retired Chairman of the Board
and Chief Executive Officer
Humana Inc.
Director since 2013
Background: Health care
Beth E. Mooney, 62 (2,3)
Chairman and Chief Executive Officer
KeyCorp
Director since 2013
Background: Banking
Joyce M. Roché, 69 (3,4,5)
Author and Retired President
and Chief Executive Officer
Girls Incorporated
Director since 1998
Southern New England Telecommunications
Director 1997–1998
Background: Marketing
Cynthia B. Taylor, 55 (1,6)
President and Chief Executive Officer
Oil States International, Inc.
Director since 2013
Background: Public accounting,
oil and gas
Laura D’Andrea Tyson, Ph.D., 69 (1,4,6)
Distinguished Professor of the
Graduate School
University of California, Berkeley
Director since 1999
Ameritech Director 1997–1999
Background: Economics, education,
public policy
Geoffrey Y. Yang, 57 (2)
Founding Partner
and Managing Director
Redpoint Ventures
Director since June 2016
Background: Technology, media, entertainment
Committees of the Board:
(1) Audit
(2) Corporate Development and Finance
(3) Corporate Governance and Nominating
(4) Executive
(5) Human Resources
(6) Public Policy and Corporate Reputation
(Information is provided
as of February 17, 2017.)
88  88 || AT&T I N C . AT&T INC.
Randall Stephenson, 56
Chairman, Chief Executive Officer
and President
John Donovan, 56
Chief Strategy Officer
and Group PresidentAT&T
Technology and Operations
David McAtee II, 48
Senior Executive Vice President
and General Counsel
John Stankey, 54
Chief Executive OfficerAT&T
Entertainment Group,
AT&T Services, Inc.
Thaddeus Arroyo, 53
Chief Executive OfficerBusiness
Solutions
and International
David Huntley, 58
Senior Executive Vice President
and Chief Compliance Officer
Robert Quinn Jr., 56
Senior Executive Vice PresidentExternal
and Legislative Affairs,
AT&T Services, Inc.
John Stephens, 57
Senior Executive Vice President
and Chief Financial Officer
Bill Blase Jr., 61
Senior Executive Vice PresidentHuman
Resources
Lori Lee, 51
Senior Executive Vice President
and Global Marketing Officer
(Information is provided
as of February 17, 2017.)
Executive Officers of AT&T Inc. and Its Affiliates
AT&T INC. | 89
INVESTOR RELATIONS
Securities analysts and other members
of the professional financial community
may contact the Investor Relations staff
as listed on our website at
www.att.com/investor.relations
INDEPENDENT AUDITOR
Ernst & Young LLP
2323 Victory Ave., Suite 2000
Dallas, TX 75219
CORPORATE OFFICES AND
NON-STOCKHOLDER INQUIRIES
AT&T Inc.
208 S. Akard St.
Dallas, TX 75202
210-821-4105
Annual Report printed on paper
containing 10% post-consumer
recycled content
TO L L – F R E E S TO C K H O L D E R
HOTLINE
Call us at 1-800-351-7221 between
8 a.m. and 7 p.m. Central time,
Monday through Friday
(TDD 1-888-403-9700) for help with:
Common stock account inquiries
Requests for assistance with your
common stock account, including
stock transfers
Information on The DirectSERVICE™
Investment Program for Stockholders
of AT&T Inc. (sponsored and
administered by Computershare
TrustCompany, N.A.)
W R I T T E N S TO C K H O L D E R
REQUESTS
Please mail all account inquiries and
other requests for assistance regarding
your stock ownership to:
AT&T Inc.
c/o Computershare Trust
Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
You may also reach the transfer agent
for AT&T Inc. at att@computershare.com
or visit the website at
www.computershare.com/att
© 2017 AT&T Intellectual Property. All rights reserved. AT&T, the AT&T logo and all other marks contained herein are trademarks of AT&T
Intellectual Property and/or AT&T affiliated companies. All brands, product names, company names, trademarks and service marks are the
properties of their respective owners.
© 2017 Turner Broadcasting System, Inc. A Time Warner Company. All Rights Reserved. HBO® and related channels and service marks are the
property of Home Box Office, Inc.
© 2017 Telepictures Productions Inc. In partnership with Warner Bros. Entertainment.
FEATURED ON THE FRONT COVER
Media images, courtesy of their respective owners, top left to bottom right
Rogue, The Big Bang Theory, Kingdom, Bridge of Spies, Taylor Swift, Conan O’Brien, The Rich Eisen Show, Batman vs. Superman: Dawn
of Justice, Game of Thrones®, available with an HBO® subscription, NHL Center Ice, The Ellen DeGeneres Show, NFL SUNDAY TICKET®.
STOCKHOLDER INFORMATION
D I R E C T S E RV I C E I N V E S T M E N T
PROGRAM
The DirectSERVICE Investment Program
for Stockholders of AT&T Inc. is sponsored
and administered by Computershare
Trust Company, N.A. The program allows
current stockholders to reinvest dividends,
purchase additional AT&T Inc. stock or
enroll in an individual retirement account.
For more information, call 1-800-351-7221.
STOCK TRADING INFORMATION
AT&T Inc. is listed on the New York
Stock Exchange. Ticker symbol: T
I N FO R M AT I O N O N T H E
INTERNET
Information about AT&T Inc. is available
on the internet at www.att.com
ANNUAL MEETING
The annual meeting of stockholders
will be held at 9 a.m. local time Friday,
April 28, 2017, at:
Dallas City Performance Hall
2520 Flora Street
Dallas, TX 75201
SEC FILINGS
AT&T Inc.’s U.S. Securities and Exchange
Commission filings, including the latest
10-K and proxy statement, are available
on our website at
www.att.com/investor.relations
90 | AT&T INC.
AT&T I N C .
208 S. AKARD ST., DALLAS, TX 75202
att.com

Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

GET A 40% DISCOUNT ON YOU FIRST ORDER

ORDER NOW DISCOUNT CODE >>>> WELCOME40

 

 

Posted in Uncategorized