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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from              to             
 
Commission file number: 1-8606
Verizon Communications Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
23-2259884
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1095 Avenue of the Americas
 
10036
New York
New York
 
 
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (212395-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Exchange on Which Registered
Common Stock, par value $0.10
 
VZ
 
New York Stock Exchange
Common Stock, par value $0.10
 
VZ
 
The NASDAQ Global Select Market
2.375% Notes due 2022
 
VZ22A
 
New York Stock Exchange
0.500% Notes due 2022
 
VZ22B
 
New York Stock Exchange
1.625% Notes due 2024
 
VZ24B
 
New York Stock Exchange
4.073% Notes due 2024
 
VZ24C
 
New York Stock Exchange
0.875% Notes due 2025
 
VZ25
 
New York Stock Exchange
3.25% Notes due 2026
 
VZ26
 
New York Stock Exchange
1.375% Notes due 2026
 
VZ26B
 
New York Stock Exchange
0.875% Notes due 2027
 
VZ27E
 
New York Stock Exchange
1.375% Notes due 2028
 
VZ28
 
New York Stock Exchange
1.875% Notes due 2029
 
VZ29B
 
New York Stock Exchange
1.250% Notes due 2030
 
VZ30
 
New York Stock Exchange
2.625% Notes due 2031
 
VZ31
 
New York Stock Exchange
2.500% Notes due 2031
 
VZ31A
 
New York Stock Exchange
4.75% Notes due 2034
 
VZ34
 
New York Stock Exchange
3.125% Notes due 2035
 
VZ35
 
New York Stock Exchange
3.375% Notes due 2036
 
VZ36A
 
New York Stock Exchange
2.875% Notes due 2038
 
VZ38B
 
New York Stock Exchange



Table of Contents

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☒  Yes   ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ☒  Yes   ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
☐ 
 
Smaller reporting company
 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ☒  No

At June 30, 2019, 4,135,764,809 shares of the registrant’s common stock were outstanding, after deducting 155,668,837 shares held in treasury.



Table of Contents

TABLE OF CONTENTS

Item No.
 
Page
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
4
 
Three and six months ended June 30, 2019 and 2018
 
 
 
 
 
5
 
Three and six months ended June 30, 2019 and 2018
 
 
 
 
 
6
 
At June 30, 2019 and December 31, 2018
 
 
 
 
 
7
 
Six months ended June 30, 2019 and 2018
 
 
 
 
 
8
 
 
 
Item 2.
33
 
 
 
Item 3.
52
 
 
 
Item 4.
52
 
 
 
 
 
 
Item 1.
52
 
 
 
Item 1A.
52
 
 
 
Item 2.
53
 
 
 
Item 6.
54
 
 
55
 
 
 



Table of Contents

Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Verizon Communications Inc. and Subsidiaries

 
Three Months Ended
 
 
Six Months Ended
 
 
June 30,
 
 
June 30,
 
(dollars in millions, except per share amounts) (unaudited)
2019

 
2018

 
2019

 
2018

 
 
 
 
 
 
 
 
Operating Revenues
 
 
 
 
 
 
 
Service revenues and other
$
27,351

 
$
27,159

 
$
54,548

 
$
53,891

Wireless equipment revenues
4,720

 
5,044

 
9,651

 
10,084

Total Operating Revenues
32,071

 
32,203

 
64,199

 
63,975

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Cost of services (exclusive of items shown below)
7,702

 
8,234

 
15,494

 
16,180

Cost of wireless equipment
5,019

 
5,397

 
10,217

 
10,706

Selling, general and administrative expense
7,268

 
7,605

 
14,466

 
14,449

Depreciation and amortization expense
4,232

 
4,350

 
8,463

 
8,674

Total Operating Expenses
24,221

 
25,586

 
48,640

 
50,009

 
 
 
 
 
 
 
 
Operating Income
7,850

 
6,617

 
15,559

 
13,966

Equity in losses of unconsolidated businesses
(13
)
 
(228
)
 
(19
)
 
(247
)
Other income (expense), net
(1,312
)
 
360

 
(1,017
)
 
285

Interest expense
(1,215
)
 
(1,222
)
 
(2,425
)
 
(2,423
)
Income Before Provision For Income Taxes
5,310

 
5,527

 
12,098

 
11,581

Provision for income taxes
(1,236
)
 
(1,281
)
 
(2,864
)
 
(2,669
)
Net Income
$
4,074

 
$
4,246

 
$
9,234

 
$
8,912

 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
130

 
$
126

 
$
258

 
$
247

Net income attributable to Verizon
3,944

 
4,120

 
8,976

 
8,665

Net Income
$
4,074

 
$
4,246

 
$
9,234

 
$
8,912

 
 
 
 
 
 
 
 
Basic Earnings Per Common Share
 
 
 
 
 
 
 
Net income attributable to Verizon
$
0.95

 
$
1.00

 
$
2.17

 
$
2.10

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

 
4,135

 
4,138

 
4,120

 
 
 
 
 
 
 
 
Diluted Earnings Per Common Share
 
 
 
 
 
 
 
Net income attributable to Verizon
$
0.95

 
$
1.00

 
$
2.17

 
$
2.10

Weighted-average shares outstanding (in millions)
4,139

 
4,139

 
4,140

 
4,123

See Notes to Condensed Consolidated Financial Statements


4

Table of Contents

Condensed Consolidated Statements of Comprehensive Income
Verizon Communications Inc. and Subsidiaries
 
 
Three Months Ended
 
 
Six Months Ended
 
 
June 30,
 
 
June 30,
 
(dollars in millions) (unaudited)
2019

 
2018

 
2019

 
2018

 
 
 
 
 
 
 
 
Net Income
$
4,074

 
$
4,246

 
$
9,234

 
$
8,912

Other Comprehensive Income (Loss), Net of Tax (Expense) Benefit
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $3, $13, $(2) and $6
(67
)
 
(176
)
 
(43
)
 
(83
)
Unrealized gain (loss) on cash flow hedges, net of tax of $193, $55, $198 and $(125)
(537
)
 
(152
)
 
(550
)
 
349

Unrealized gain (loss) on marketable securities, net of tax of $0, $0, $(2) and $1
4

 
1

 
8

 
(4
)
Defined benefit pension and postretirement plans, net of tax of $56, $58, $112 and $118
(169
)
 
(173
)
 
(338
)
 
(346
)
Other comprehensive loss attributable to Verizon
(769
)
 
(500
)
 
(923
)
 
(84
)
Total Comprehensive Income
$
3,305

 
$
3,746

 
$
8,311

 
$
8,828

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
$
130

 
$
126

 
$
258

 
$
247

Comprehensive income attributable to Verizon
3,175

 
3,620

 
8,053

 
8,581

Total Comprehensive Income
$
3,305

 
$
3,746

 
$
8,311

 
$
8,828

See Notes to Condensed Consolidated Financial Statements

5

Table of Contents

Condensed Consolidated Balance Sheets
Verizon Communications Inc. and Subsidiaries

 
At June 30,

 
At December 31,

(dollars in millions, except per share amounts) (unaudited)
2019

 
2018

 
 
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,949

 
$
2,745

Accounts receivable, net of allowances of $745 and $765
24,926

 
25,102

Inventories
1,167

 
1,336

Prepaid expenses and other
5,266

 
5,453

Total current assets
33,308

 
34,636

 
 
 
 
Property, plant and equipment
257,395

 
252,835

Less accumulated depreciation
169,577

 
163,549

Property, plant and equipment, net
87,818

 
89,286

 
 
 
 
Investments in unconsolidated businesses
650

 
671

Wireless licenses
94,333

 
94,130

Goodwill
24,632

 
24,614

Other intangible assets, net
9,474

 
9,775

Operating lease right-of-use assets
22,467

 

Other assets
10,426

 
11,717

Total assets
$
283,108

 
$
264,829

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Debt maturing within one year
$
8,773

 
$
7,190

Accounts payable and accrued liabilities
17,633

 
22,501

Current operating lease liabilities
3,154

 

Other current liabilities
8,654

 
8,239

Total current liabilities
38,214

 
37,930

 
 
 
 
Long-term debt
104,598

 
105,873

Employee benefit obligations
18,040

 
18,599

Deferred income taxes
34,225

 
33,795

Non-current operating lease liabilities
18,254

 

Other liabilities
11,830

 
13,922

Total long-term liabilities
186,947

 
172,189

 
 
 
 
Commitments and Contingencies (Note 12)

 

 
 
 
 
Equity
 
 
 
Series preferred stock ($0.10 par value; 250,000,000 shares authorized; none issued)

 

Common stock ($0.10 par value; 6,250,000,000 shares authorized in each period; 4,291,433,646 issued in each period)
429

 
429

Additional paid in capital
13,419

 
13,437

Retained earnings
47,945

 
43,542

Accumulated other comprehensive income
1,447

 
2,370

Common stock in treasury, at cost (155,668,837 and 159,400,267 shares outstanding)
(6,823
)
 
(6,986
)
Deferred compensation – employee stock ownership plans and other
165

 
353

Noncontrolling interests
1,365

 
1,565

Total equity
57,947

 
54,710

Total liabilities and equity
$
283,108

 
$
264,829

See Notes to Condensed Consolidated Financial Statements

6

Table of Contents

Condensed Consolidated Statements of Cash Flows
Verizon Communications Inc. and Subsidiaries
 
 
Six Months Ended
 
 
June 30,
 
(dollars in millions) (unaudited)
2019

 
2018

 
 
 
 
Cash Flows from Operating Activities
 
 
 
Net Income
$
9,234

 
$
8,912

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
8,463

 
8,674

Employee retirement benefits
(294
)
 
(300
)
Deferred income taxes
588

 
1,354

Provision for uncollectible accounts
738

 
462

Equity in losses of unconsolidated businesses, net of dividends received
50

 
268

Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses
(4,593
)
 
(1,538
)
Discretionary employee benefits contributions
(300
)
 
(1,679
)
Other, net
1,950

 
280

Net cash provided by operating activities
15,836

 
16,433

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Capital expenditures (including capitalized software)
(7,967
)
 
(7,838
)
Acquisitions of businesses, net of cash acquired
(28
)
 
(38
)
Acquisitions of wireless licenses
(199
)
 
(1,155
)
Other, net
(395
)
 
303

Net cash used in investing activities
(8,589
)
 
(8,728
)
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Proceeds from long-term borrowings
6,237

 
4,584

Proceeds from asset-backed long-term borrowings
3,982

 
1,716

Repayments of long-term borrowings and finance lease obligations
(9,630
)
 
(6,568
)
Repayments of asset-backed long-term borrowings
(2,817
)
 
(2,000
)
Dividends paid
(4,981
)
 
(4,845
)
Other, net
(834
)
 
(752
)
Net cash used in financing activities
(8,043
)
 
(7,865
)
 
 
 
 
Decrease in cash, cash equivalents and restricted cash
(796
)
 
(160
)
Cash, cash equivalents and restricted cash, beginning of period
3,916

 
2,888

Cash, cash equivalents and restricted cash, end of period (Note 1)
$
3,120

 
$
2,728

See Notes to Condensed Consolidated Financial Statements


7

Table of Contents

Notes to Condensed Consolidated Financial Statements (Unaudited)
Verizon Communications Inc. and Subsidiaries
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.) and based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements of Verizon Communications Inc. (Verizon or the Company) included in our Annual Report on Form 10-K for the year ended December 31, 2018. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.

In November 2018, we announced a strategic reorganization of our business. Under the new structure, effective April 1, 2019, there are two reportable segments that we operate and manage as strategic business units - Verizon Consumer Group (Consumer) and Verizon Business Group (Business). In conjunction with the new reporting structure, we recast our segment disclosures for all periods presented.

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

Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things (IoT) services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world.

Basis of Presentation
We have reclassified certain prior year amounts to conform to the current year presentation, including impacts for changes in our reportable segments.

Earnings Per Common Share
There were a total of approximately 2 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for both the three and six months ended June 30, 2019. There were a total of approximately 4 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for both the three and six months ended June 30, 2018.

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

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

Cash, cash equivalents and restricted cash are included in the following line items on the condensed consolidated balance sheets:
 
At June 30,

 
At December 31,

 
Increase / (Decrease)

(dollars in millions)
2019

 
2018

 
Cash and cash equivalents
$
1,949

 
$
2,745

 
$
(796
)
Restricted cash:
 
 
 
 
 
Prepaid expenses and other
1,055

 
1,047

 
8

Other assets
116

 
124

 
(8
)
Cash, cash equivalents and restricted cash
$
3,120

 
$
3,916

 
$
(796
)


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 quarter or more frequently if impairment indicators are present. We transitioned into our new segment reporting structure effective April 1, 2019, which resulted in certain changes to our operating segments and reporting units. Upon the

8


date of reorganization, the goodwill of our historical Wireless reporting unit, historical Wireline reporting unit and historical Verizon Connect reporting unit were reallocated to our new Consumer and Business reporting units using a relative fair value approach.

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

Recently Adopted Accounting Standard
The following Accounting Standard Updates (ASUs) were issued by Financial Accounting Standards Board (FASB), and have been recently adopted by Verizon.
 
Description
Date of Adoption
Effect on Financial Statements
 
ASU 2016-02, ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, Leases (Topic 842)
 
The FASB issued Topic 842 requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, Topic 842 will enable users of financial statements to further understand the amount, timing and uncertainty of cash flows arising from leases. Topic 842 allows for a modified retrospective application and is effective as of the first quarter of 2019. Entities are allowed to apply the modified retrospective approach: (1) retrospectively to each prior reporting period presented in the financial statements with the cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented; or (2) retrospectively at the beginning of the period of adoption (January 1, 2019) through a cumulative-effect adjustment. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply.
1/1/2019
We adopted Topic 842 beginning on January 1, 2019, using the modified retrospective approach with a cumulative-effect adjustment to opening retained earnings recorded at the beginning of the period of adoption. Therefore, upon adoption, we have recognized and measured leases without revising comparative period information or disclosure. We recorded an increase of $410 million (net of tax) to retained earnings on January 1, 2019 which related to deferred sale leaseback gains recognized from prior transactions. Additionally, the adoption of the standard had a significant impact in our condensed consolidated balance sheet due to the recognition of $22.1 billion of operating lease liabilities, along with $23.2 billion of operating lease right-of-use-assets.
 

The cumulative after-tax effect of the changes made to our condensed consolidated balance sheet for the adoption of Topic 842 were as follows:
(dollars in millions)
At December 31, 2018

 
Adjustments due to
Topic 842

 
At January 1, 2019

Prepaid expenses and other
$
5,453

 
$
(329
)
 
$
5,124

Operating lease right-of-use assets

 
23,241

 
23,241

Other assets
11,717

 
(2,048
)
 
9,669

Accounts payable and accrued liabilities
22,501

 
(3
)
 
22,498

Other current liabilities
8,239

 
(2
)
 
8,237

Current operating lease liabilities

 
2,931

 
2,931

Deferred income taxes
33,795

 
139

 
33,934

Non-current operating lease liabilities

 
19,203

 
19,203

Other liabilities
13,922

 
(1,815
)
 
12,107

Retained earnings
43,542

 
410

 
43,952

Noncontrolling interests
1,565

 
1

 
1,566



In addition to the increase to the operating lease liabilities and right-of-use assets and the derecognition of deferred sale leaseback gains through opening retained earnings, Topic 842 also resulted in reclassifying the presentation of prepaid and deferred rent to operating lease right-of-use assets. The operating lease right-of-use assets amount also includes the balance of any prepaid lease payments, unamortized initial direct costs, and lease incentives.

We elected the package of practical expedients permitted under the transition guidance within the new standard. Accordingly, we have adopted these practical expedients and did not reassess: (1) whether an expired or existing contract is a lease or contains an embedded lease; (2) lease classification of an expired or existing lease; or (3) capitalization of initial direct costs for an expired or existing lease. In addition, we have elected the land easement transition practical expedient, and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease.

We lease network equipment including towers, distributed antenna systems, small cells, real estate, connectivity mediums which include dark fiber, equipment leases, and other various types of assets for use in our operations under both operating and finance leases. We assess whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease that is accounted for

9


separately, we determine the classification and initial measurement of the right-of-use asset and lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use.

For both operating and finance leases, we recognize a right-of-use asset, which represents our right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Management uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate, which will be updated on a quarterly basis for measurement of new lease liabilities.

In those circumstances where the Company is the lessee, we have elected to account for non-lease components associated with our leases (e.g., common area maintenance costs) and lease components as a single lease component for substantially all of our asset classes. Additionally, in arrangements where we are the lessor, we have customer premise equipment for which we apply the lease and non-lease component practical expedient and account for non-lease components (e.g., service revenue) and lease components as combined components under the revenue recognition guidance in ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606) as the service revenues are the predominant components in the arrangements.

Rent expense for operating leases is recognized on a straight-line basis over the term of the lease and is included in either Cost of services or Selling, general and administrative expense in our condensed consolidated statements of income, based on the use of the facility on which rent is being paid. Variable rent payments related to both operating and finance leases are expensed in the period incurred. Our variable lease payments consist of payments dependent on various external indicators, including real estate taxes, common area maintenance charges and utility usage.

Operating leases with a term of 12 months or less are not recorded on the balance sheet; we recognize a rent expense for these leases on a straight-line basis over the lease term.

We recognize the amortization of the right-of-use asset for our finance leases on a straight-line basis over the shorter of the term of the lease or the useful life of the right-of-use asset in Depreciation and amortization expense in our condensed consolidated statements of income. The interest expense related to finance leases is recognized using the effective interest method based on the discount rate determined at lease commencement and is included within Interest expense in our condensed consolidated statements of income.

See Note 5 for additional information related to leases, including disclosure required under Topic 842.

Recently Issued Accounting Standards
The following ASUs have been recently issued by the FASB.
 
Description
Date of Adoption
Effect on Financial Statements
 
ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326)
 
In June 2016, the FASB issued this standard update which requires 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. An entity will apply the update through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (January 1, 2020). A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. Early adoption of this standard is permitted.
1/1/2020
We are currently evaluating the impacts that this standard update will have on our various financial assets, which we expect to include, but are not limited to, our device payment plan agreement receivables, service receivables and contract assets.

We have established a cross-functional coordinated team to implement the standard update. We are in the process of determining the potential impacts to our processes, including allowance estimation models, and internal controls in order to meet the standard update's accounting and reporting requirements.





 
 


Note 2. Revenues and Contract Costs
We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of wireless equipment.


10


Revenue by Category
We have two reportable segments that we operate and manage as strategic business units - Consumer and Business. Revenue is disaggregated by products and services within Consumer, and customer groups (Global Enterprise, Small and Medium Business, Public Sector and Other, and Wholesale) within Business. See Note 11 for additional information on revenue by segment.

Corporate and other includes the results of our media business, Verizon Media Group (Verizon Media), which operated under the "Oath" brand until January 2019, and other businesses. Verizon Media generated revenues from contracts with customers under Topic 606 of approximately $1.8 billion and $3.6 billion, during the three and six months ended June 30, 2019, respectively. Verizon Media generated revenues from contracts with customers under Topic 606 of approximately $1.9 billion and $3.8 billion during the three and six months ended June 30, 2018, respectively.

We also earn revenues, that are not accounted for under Topic 606, from leasing arrangements (such as towers), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent. As allowed by the practical expedient within Topic 842, we have elected to combine the lease and non-lease components for those arrangements of customer premise equipment where we are the lessor as components accounted for under Topic 606. During the three and six months ended June 30, 2019, revenues from arrangements that were not accounted for under Topic 606 were approximately $797 million and $1.6 billion, respectively. During the three and six months ended June 30, 2018, revenues from arrangements that were not accounted for under Topic 606 were approximately $1.1 billion and $2.3 billion, respectively.
 
Remaining Performance Obligations
When allocating the total contract transaction price to identified performance obligations, a portion of the total transaction price may relate to service performance obligations which were not satisfied or are partially satisfied as of the end of the reporting period. Below we disclose information relating to these unsatisfied performance obligations. Upon adoption, we elected to apply the practical expedient available under Topic 606 that provides the option to exclude the expected revenues arising from unsatisfied performance obligations related to contracts that have an original expected duration of one year or less. This situation primarily arises with respect to certain month-to-month service contracts. At June 30, 2019, month-to-month service contracts represented approximately 87% of our wireless postpaid contracts and approximately 57% of our wireline Consumer and Small and Medium Business contracts, compared to June 30, 2018, for which month-to-month service contracts represented approximately 83% of our wireless postpaid contracts and 56% of our wireline Consumer and Small and Medium Business contracts.
 
Additionally, certain contracts provide customers the option to purchase additional services. The fees related to these additional services are recognized when the customer exercises the option (typically on a month-to-month basis).

Contracts for wireless services are generally either month-to-month and cancellable at any time (typically under a device payment plan) or contain terms ranging from greater than one month to up to two years (typically under a fixed-term plan). Additionally, customers may incur charges based on usage or additional optional services purchased in conjunction with entering into a contract that can be cancelled at any time and therefore are not included in the transaction price. The transaction price allocated to service performance obligations, which are not satisfied or are partially satisfied as of the end of the reporting period, are generally related to our fixed-term plans.

Our Consumer group customers also include other telecommunications companies who utilize Verizon's networks to resell wireless service to their respective end customers. Reseller arrangements generally include a stated contract term, which typically extends longer than two years. These arrangements generally include an annual minimum revenue commitment over the term of the contract for which revenues will be recognized in future periods.

Consumer customer contracts for wireline services generally have a service term of two years; however, this term may be shorter than twelve months or may be month-to-month. Certain contracts with Business customers for wireline services extend into future periods, contain fixed monthly fees and usage-based fees, and can include annual commitments in each year of the contract or commitments over the entire specified contract term; however, a significant number of contracts for wireline services with our Business customers have a contract term that is twelve months or less.

Additionally, there are certain contracts with Business customers for wireline services that have a contractual minimum fee over the total contract term. We cannot predict the time period when revenue will be recognized related to those contracts; thus, they are excluded from the time bands below. These contracts have varying terms spanning over approximately five years ending in June 2024 and have aggregate contract minimum payments totaling $3.9 billion.

At June 30, 2019, the transaction price related to unsatisfied performance obligations for total Verizon that is expected to be recognized for 2019, 2020 and thereafter was $10.8 billion, $14.7 billion and $5.9 billion, respectively. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations and changes in the timing and scope of contracts, arising from contract modifications.

Accounts Receivable and Contract Balances
The timing of revenue recognition may differ from the time of billing to our customers. Receivables presented in our consolidated balance sheet represent an unconditional right to consideration. Contract balances represent amounts from an arrangement when either Verizon has performed, by transferring goods or services to the customer in advance of receiving all or partial consideration for such goods and services from the customer,

11


or the customer has made payment to Verizon in advance of obtaining control of the goods and/or services promised to the customer in the contract.

Contract assets primarily relate to our rights to consideration for goods or services provided to customers but for which we do not have an unconditional right at the reporting date. Under a fixed-term plan, total contract revenue is allocated between wireless service and equipment revenues. In conjunction with these arrangements, a contract asset is created, which represents the difference between the amount of equipment revenue recognized upon sale and the amount of consideration received from the customer when the performance obligation related to the transfer of control of the equipment is satisfied. The contract asset is reclassified to accounts receivable as wireless services are provided and billed. We have the right to bill the customer as service is provided over time, which results in our right to the payment being unconditional. The contract asset balances are presented in our consolidated balance sheet as Prepaid expenses and other and Other assets. We assess our contract assets for impairment on a quarterly basis and will recognize an impairment charge to the extent their carrying amount is not recoverable.

Contract liabilities arise when we bill our customers and receive consideration in advance of providing the goods or services promised in the contract. We typically bill service one month in advance, which is the primary component of the contract liability balance. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in our condensed consolidated balance sheet as Other current liabilities and Other liabilities.

The following table presents information about receivables from contracts with customers:
 
At June 30,

 
At January 1,

 
At June 30,

 
At January 1,

(dollars in millions)
2019

 
2019

 
2018

 
2018

Receivables(1)
$
12,173

 
$
12,104

 
$
11,412

 
$
12,073

Device payment plan agreement receivables(2)
10,053

 
8,940

 
5,258

 
1,461

(1) 
Balances do not include receivables related to the following contracts: leasing arrangements (such as towers), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent.
(2) 
Included in device payment plan agreement receivables presented in Note 7. Balances do not include receivables related to contracts completed prior to January 1, 2018 and receivables derived from the sale of equipment on a device payment plan through an authorized agent.

The following table presents information about contract balances:
 
At June 30,

 
At January 1,

 
At June 30,

 
At January 1,

 
2019

 
2019

 
2018

 
2018

Contract asset
$
1,059

 
$
1,003

 
$
1,059

 
$
1,170

Contract liability (1)
4,946

 
4,943

 
4,652

 
4,452


(1) Revenue recognized related to contract liabilities existing at January 1, 2019 and January 1, 2018 were $194 million and $3.9 billion, for the three and six months ended June 30, 2019, respectively, and $327 million and $3.8 billion, for the three and six months ended June 30, 2018.

The balance of contract assets and contract liabilities recorded in our condensed consolidated balance sheet were as follows:


At June 30,

 
At December 31,

(dollars in millions)
2019

 
2018

Assets
 
 
 
Prepaid expenses and other
$
812

 
$
757

Other assets
247

 
246

Total
$
1,059

 
$
1,003

 
 
 
 
Liabilities
 
 
 
Other current liabilities
$
4,323

 
$
4,207

Other liabilities
623

 
736

Total
$
4,946

 
$
4,943



Contract Costs
Topic 606 requires the recognition of an asset for incremental costs to obtain a customer contract, which are then amortized to expense over the respective periods of expected benefit. We recognize an asset for incremental commission expenses paid to internal and external sales personnel and agents in conjunction with obtaining customer contracts. We only defer these costs when we have determined the commissions are incremental costs that would not have been incurred absent the customer contract and are expected to be recoverable. Costs to obtain a contract are amortized and recorded ratably as commission expense over the period representing the transfer of goods or services to which the assets relate. Costs to obtain wireless contracts are amortized over both of our Consumer and Business customers' estimated device upgrade cycles, as such costs are typically incurred each time a customer upgrades. Costs to obtain wireline contracts are amortized as expense over the estimated customer relationship period for our Consumer customers. Incremental costs to obtain wireline contracts for our Business customers are insignificant.


12


We also defer costs incurred to fulfill contracts that: (1) relate directly to the contract; (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract; and (3) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed as we satisfy our performance obligations and recorded in Cost of services. These costs principally relate to direct costs that enhance our wireline business resources, such as costs incurred to install circuits. Costs to obtain contracts are recorded in Selling, general and administrative expense.

We determine the amortization periods for our costs incurred to obtain or fulfill a customer contract at a portfolio level due to the similarities within these customer contract portfolios.

Other costs, such as general costs or costs related to past performance obligations, are expensed as incurred.

Collectively, costs to obtain a contract and costs to fulfill a contract are referred to as Deferred contract costs, and amortized over a two- to five-year period. Deferred contract costs are classified as current or non-current within Prepaid expenses and other and Other assets, respectively.

The balances of Deferred contract costs included in our condensed consolidated balance sheet were as follows:


At June 30,

 
At December 31,

(dollars in millions)
2019

 
2018

Assets
 
 
 
Prepaid expenses and other
$
2,352

 
$
2,083

Other assets
1,774

 
1,812

Total
$
4,126

 
$
3,895



For the three and six months ended June 30, 2019, we recognized expense of $639 million and $1.3 billion, respectively, associated with the amortization of Deferred contract costs, primarily within Selling, general and administrative expense in our condensed consolidated statements of income. For the three and six months ended June 30, 2018, we recognized expense of $471 million and $877 million, respectively, associated with the amortization of Deferred contract costs, primarily within Selling, general and administrative expense in our condensed consolidated statements of income.

We assess our Deferred contract costs for impairment on a quarterly basis. We recognize an impairment charge to the extent the carrying amount of a deferred cost exceeds the remaining amount of consideration we expect to receive in exchange for the goods and services related to the cost, less the expected costs related directly to providing those goods and services that have not yet been recognized as expenses. There have been no impairment charges recognized for the three and six months ended June 30, 2019 or June 30, 2018.

Note 3. Acquisitions and Divestitures
Spectrum License Transactions
In 2019, the Federal Communications Commission (FCC) completed two millimeter wave spectrum license auctions. Verizon participated in these auctions and was the high bidder on 9 and 1,066 licenses, respectively, in the 24 Gigahertz (GHz) and 28 GHz bands. We submitted an application to the FCC and paid cash of approximately $521 million for the licenses that will be issued. The deposits related to these spectrum licenses are classified within Other assets in our condensed consolidated balance sheets as of June 30, 2019.

During both the three and six months ended June 30, 2019, we entered into and completed various other wireless license transactions for an insignificant amount of cash consideration.

Other
During both the three and six months ended June 30, 2019, we completed various other acquisitions for an insignificant amount of cash consideration.

Note 4. Wireless Licenses, Goodwill, and Other Intangible Assets
Wireless Licenses
The carrying amounts of Wireless licenses are as follows:
 
At June 30,

At December 31,

(dollars in millions)
2019

2018

Wireless licenses
$
94,333

$
94,130




13


At June 30, 2019 and 2018, approximately $6.6 billion and $11.5 billion, respectively, of wireless licenses were under development for commercial service for which we were capitalizing interest costs. We recorded approximately $168 million and $269 million of capitalized interest on wireless licenses for the six months ended June 30, 2019 and 2018, respectively.

The average remaining renewal period of our wireless licenses portfolio was 4.3 years as of June 30, 2019.
 
Goodwill
The Company transitioned into our new reporting structure as of April 1, 2019. The table below shows the reallocation of goodwill from our historical reporting structure to our current reporting structure.

Changes in the carrying amount of Goodwill are as follows:
(dollars in millions)
Consumer

 
Business

 
Wireless

 
Wireline

 
Other

 
Total

Balance at January 1, 2019 (1)
$

 
$

 
$
18,397

 
$
3,871

 
$
2,346

 
$
24,614

Acquisitions

 

 

 
20

 

 
20

Reclassifications, adjustments and other

 

 

 
1

 

 
1

Balance at March 31, 2019

 

 
18,397

 
3,892

 
2,346

 
24,635

Reporting Unit reallocation (2)
17,104

 
7,269

 
(18,397
)
 
(3,892
)
 
(2,084
)
 

Balance at April 1, 2019
17,104

 
7,269

 

 

 
262

 
24,635

Acquisitions


1

 

 

 

 
1

Reclassifications, adjustments and other

 
(4
)
 

 

 

 
(4
)
Balance at June 30, 2019
$
17,104

 
$
7,266

 
$

 
$

 
$
262

 
$
24,632



(1) Goodwill is net of accumulated impairment charge of $4.6 billion, related to our Media reporting unit (included within Other in the table above), which was recorded in the fourth quarter of 2018.
(2) Represents the reallocation of goodwill as a result of the Company reorganizing its segments as described in Note 1.

Other Intangible Assets
The following table displays the composition of Other intangible assets, net:
 
At June 30, 2019
 
 
At December 31, 2018
 
(dollars in millions)
Gross
Amount

 
Accumulated
Amortization

 
Net
Amount

 
Gross
Amount

 
Accumulated
Amortization

 
Net
Amount

Customer lists (8 to 13 years)
$
3,948

 
$
(1,299
)
 
$
2,649

 
$
3,951

 
$
(1,121
)
 
$
2,830

Non-network internal-use software (3 to 7 years)
19,354

 
(13,589
)
 
5,765

 
18,603

 
(12,785
)
 
5,818

Other (2 to 25 years)
1,985

 
(925
)
 
1,060

 
1,988

 
(861
)
 
1,127

Total
$
25,287

 
$
(15,813
)
 
$
9,474

 
$
24,542

 
$
(14,767
)
 
$
9,775



The amortization expense for Other intangible assets was as follows: 
 
Three Months Ended

 
Six Months Ended

(dollars in millions)
June 30,

 
June 30,

2019
$
569

 
$
1,124

2018
557

 
1,091



The estimated future amortization expense for Other intangible assets for the remainder of the current year and next 5 years is as follows:
Years
(dollars in millions)

Remainder of 2019
$
1,086

2020
1,903

2021
1,610

2022
1,335

2023
1,049

2024
795




14


Note 5. Leasing Arrangements
We enter into various lease arrangements for network equipment including towers, distributed antenna systems, small cells, real estate and connectivity mediums including dark fiber, equipment leases, and other various types of assets for use in our operations. Our leases have remaining lease terms ranging from 1 year to 24 years, some of which include options that we can elect to extend the leases term for up to 25 years, and some of which include options to terminate the leases. For the majority of leases entered into during the current period, we have concluded it is not reasonably certain that we would exercise the options to extend the lease or terminate the lease. Therefore, as of the lease commencement date, our lease terms generally do not include these options. We include options to extend the lease when it is reasonably certain that we will exercise that option.

During March 2015, we completed a transaction with American Tower Corporation (American Tower) pursuant to which American Tower acquired the exclusive rights to lease and operate approximately 11,300 of our wireless towers for an upfront payment of $5.0 billion. We have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates in 2015, with options to renew. We continue to include the towers in Property, plant and equipment, net in our condensed consolidated balance sheets and depreciate them accordingly. In addition to the rights to lease and operate the towers, American Tower assumed the interest in the underlying ground leases related to these towers. While American Tower can renegotiate the terms of and is responsible for paying the ground leases, we are still the primary obligor for these leases and accordingly, the present value of these ground leases are included in our operating lease right-of-use assets and operating lease liabilities. We do not expect to be required to make ground lease payments unless American Tower defaults, which we determined to be remote.
 
The components of net lease cost were as follows:
 
 
Three Months Ended

 
Six Months Ended

 
 
June 30,

 
June 30,

(dollars in millions)
Classification
2019

 
2019

Operating lease cost (1)
Cost of services
Selling, general and administrative expense
$
1,178

 
$
2,348

Finance lease cost:
 
 
 
 
Amortization of right-of-use assets
Depreciation and amortization expense
82

 
168

Interest on lease liabilities
Interest expense
10

 
19

Short-term lease cost (1)
Cost of services
Selling, general and administrative expense
8

 
24

Variable lease cost (1)
Cost of services
Selling, general and administrative expense
51

 
108

Sublease income
Service revenues and other
(67
)
 
(134
)
Total net lease cost
 
$
1,262

 
$
2,533

(1) All operating lease costs, including short-term and variable lease costs, are split between Cost of services and Selling, general and administrative expense in the condensed consolidated statements of income based on the use of the facility that the rent is being paid on. See Note 1 for additional information. Variable lease costs represent payments that are dependent on a rate or index, or on usage of the asset.
 
Supplemental disclosure for the statement of cash flows related to operating and finance leases were as follows:
 
Six Months Ended

 
June 30,

(dollars in millions)
2019

Cash Flows from Operating Activities
 
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows for operating leases
$
(2,089
)
Operating cash flows for finance leases
(19
)
Cash Flows from Financing Activities
 
Financing cash flows for finance leases
(178
)
Supplemental lease cash flow disclosures
 
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities
1,300

Right-of-use assets obtained in exchange for new finance lease liabilities
221




15


Supplemental disclosures for the balance sheet related to finance leases were as follows:
 
At June 30,

(dollars in millions)
2019

Assets
 
Property, plant and equipment, net
$
823

 
 
Liabilities
 
Debt maturing within one year
$
321

Long-term debt
627

Total Finance lease liabilities
$
948



The weighted-average remaining lease term and the weighted-average discount rate of our leases were as follows:
 
At June 30,

 
2019

Weighted-average remaining lease term (years)
 
Operating Leases
9

Finance Leases
4

Weighted-average discount rate
 
Operating Leases
4.1
%
Finance Leases
4.0
%


The Company's maturity analysis of operating and finance lease liabilities as of June 30, 2019 were as follows:
(dollars in millions)
Operating Leases

 
Finance Leases

Remainder of 2019
$
1,996

 
$
178

2020
3,840

 
291

2021
3,460

 
198

2022
3,067

 
137

2023
2,713

 
88

Thereafter
11,094

 
144

Total lease payments
26,170

 
1,036

Less interest
(4,762
)
 
(88
)
Present value of lease liabilities
21,408

 
948

Less current obligation
(3,154
)
 
(321
)
Long-term obligation at June 30, 2019
$
18,254

 
$
627



As of June 30, 2019, we have contractually obligated lease payments amounting to $477 million for an office facility operating lease that has not yet commenced. We have legally obligated lease payments for various other operating leases that have not yet commenced for which the total obligation was not significant. We have certain rights and obligations for these leases, but have not recognized an operating lease right-of-use asset or an operating lease liability since they have not yet commenced.

Real Estate Transaction
On July 23, 2019, Verizon completed a sale-leaseback transaction for buildings and real estate. We received total gross proceeds of $1.0 billion. We lease backed a portion of the buildings and real estate sold and accounted for it as an operating lease. The term of the leaseback is for two years with four options to renew for an additional three months each.


16


Note 6. Debt

Significant Debt Transactions
The following table shows the transactions that occurred during the six months ended June 30, 2019.

February Exchange Offers
(dollars in millions)
Principal Amount Exchanged

 
Principal Amount Issued

Verizon 1.750% - 5.150% notes and floating rate notes, due 2021 - 2025
$
3,892

 
$

GTE LLC 8.750% debentures, due 2021
21

 

Verizon 4.016% notes due 2029 (1)

 
4,000

Total
$
3,913

 
$
4,000

(1) Total exchange amount issued in consideration does not include an insignificant amount of cash used to settle.

May Tender Offers
(dollars in millions)
Principal Amount Purchased

 
Cash Consideration (1)

Verizon 5.012% notes due 2054
$
3,192

 
$
3,626

Verizon 4.672% notes due 2055
1,308

 
1,404

Total
$
4,500

 
$
5,030

(1) In addition to the purchase price, any accrued and unpaid interest on the purchased notes was paid to the date of purchase.

Debt Redemptions, Repurchases and Repayments
(dollars in millions)
Principal Redeemed / Repaid

 
Amount Paid as % of Principal (1)

March 2019
 
 
 
Verizon 5.900% notes due 2054
$
500

 
100.000
%
Verizon 1.375% notes due 2019
206

 
100.000
%
Verizon 1.750% notes due 2021
621

 
100.000
%
Verizon 3.000% notes due 2021
930

 
101.061
%
Verizon 3.500% notes due 2021
315

 
102.180
%
Open market repurchases of various Verizon notes
163

 
Various

March 2019 total
2,735

 
 
 
 
 
 
June 2019
 
 
 
Verizon 2.625% notes due 2020
831

 
100.037
%
Verizon 3.500% notes due 2021
736

 
102.238
%
Verizon floating rate (LIBOR + 0.770%) notes due 2019
229

 
100.000
%
June 2019 total
1,796

 
 
Total
$
4,531

 
 
(1) Percentages represent price paid to redeem, repurchase and repay.


17


Debt Issuances
(amounts in millions)
Principal Amount Issued

 
Net Proceeds (1)

March 2019
 
 
 
Verizon 3.875% notes due 2029 (2)
$
1,000

 
$
994

Verizon 5.000% notes due 2051
510

 
506

March 2019 total
$
1,510

 
$
1,500

 
 
 
 
June 2019
 
 
 
Verizon 0.875% notes due 2027
1,250

 
1,391

Verizon 1.250% notes due 2030
1,250

 
1,385

Verizon 2.500% notes due 2031
£
500

 
647

June 2019 total


 
3,423

Total
 
 
$
4,923

(1) Net proceeds were net of discount and issuance costs.
(2) An amount equal to the net proceeds from this green bond will be used to fund, in whole or in part, "Eligible Green Investments." "Eligible Green Investments" include new and existing investments made by us during the period from two years prior to the issuance of the green bond through the maturity date of the green bond, in the following categories: (1) renewable energy; (2) energy efficiency; (3) green buildings; (4) sustainable water management; and (5) biodiversity and conservation.

Short-Term Borrowing and Commercial Paper Program
During the three months ended June 30, 2019, we repaid $600 million in aggregate from the short term credit facility and there was no outstanding balance as of June 30, 2019.

As of June 30, 2019, we had $200 million of commercial paper outstanding.

Asset-Backed Debt
As of June 30, 2019, the carrying value of our asset-backed debt was $11.3 billion. Our asset-backed debt includes Asset-Backed Notes (ABS Notes) issued to third-party investors (Investors) and loans (ABS Financing Facilities) received from banks and their conduit facilities (collectively, the Banks). Our consolidated asset-backed debt bankruptcy remote legal entities (each, an ABS Entity or collectively, the ABS Entities) issue the debt or are otherwise party to the transaction documentation in connection with our asset-backed debt transactions. Under the terms of our asset-backed debt, Cellco Partnership (Cellco) and certain other affiliates of Verizon (collectively, the Originators) transfer device payment plan agreement receivables to one of the ABS Entities, which in turn transfers such receivables to another ABS Entity that issues the debt. Verizon entities retain the equity interests in the ABS Entities, which represent the rights to all funds not needed to make required payments on the asset-backed debt and other related payments and expenses.

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

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

Proceeds from our asset-backed debt transactions are reflected in Cash flows from financing activities in our condensed consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are included in our condensed consolidated balance sheets.

18



ABS Notes
During the six months ended June 30, 2019, we completed the following ABS Notes transactions:
(dollars in millions)
Interest Rates %
 
Expected Weighted-average Life to Maturity (in years)
Principal Amount Issued

March 2019
 
 
 
 
A-1a Senior class notes
2.930
 
2.50
$
900

A-1b Senior floating rate class notes
 LIBOR + 0.330
(1) 
2.50
100

B Junior class notes
3.020
 
3.22
69

C Junior class notes
3.220
 
3.40
53

March 2019 total
 
 
 
1,122

 
 
 
 
 
June 2019
 
 
 
 
A-1a Senior class notes
2.330
 
2.52
855

A-1b Senior floating rate class notes
 LIBOR + 0.450
(1) 
2.52
145

B Junior class notes
2.400
 
3.28
69

C Junior class notes
2.600
 
3.47
53

June 2019 total
 
 
 
1,122

Total
 
 
 
$
2,244

(1) The one-month London Interbank Offered Rate (LIBOR) rate at June 30, 2019 was 2.398%.

Under the terms of each series of ABS Notes, there is a two year revolving period during which we may transfer additional receivables to the ABS Entity. In April 2019, the two year revolving period of the ABS Notes issued in March 2017 ended and we began to repay principal on the 2017-1 Class A senior ABS Notes. During the three and six months ended June 30, 2019, we made aggregate principal repayments of $794 million and $1.4 billion, respectively, for all ABS Notes.

ABS Financing Facilities
In May 2018, we entered into an ABS financing facility with a number of financial institutions (2018 ABS Financing Facility). One loan agreement was entered into in connection with the 2018 ABS financing facility. During the three months ended June 30, 2019, the remaining $540 million outstanding under the loan agreement was prepaid, and the loan agreement was terminated.

In September 2016, we entered into an ABS Financing Facility with a number of financial institutions, which was amended and restated in May 2019 (2019 ABS Financing Facility). Under the terms of the 2019 ABS Financing Facility, the financial institutions made advances under asset-backed loans backed by device payment plan agreement receivables of both consumer and business customers. Two loan agreements were entered into in connection with the 2019 ABS Financing Facility in September 2016 and May 2017 and a third was entered into in May 2019. The 2016 and 2017 loan agreements had a final maturity date in March 2021 and bore interest at a floating rate. The two year revolving period of the two loan agreements ended in September 2018. The 2019 loan agreement has a final maturity date in May 2023 and bears interest at floating rates. There is a one year revolving period until May 2020, which may be extended with the approval of the financial institutions. Under all of the loan agreements, we have the right to prepay all or a portion of the advances at any time without penalty, but in certain cases, with breakage costs. Subject to certain conditions, we may also remove receivables from the ABS Entity. During the three months ended June 30, 2019, we paid off both the 2016 and 2017 loans for an aggregate of $671 million primarily with proceeds from the 2019 loan agreement. As of June 30, 2019, there was an outstanding balance under the 2019 ABS Financing Facility of $1.8 billion. In August 2019, we prepaid $1.5 billion of the loan made in May 2019 under the 2019 ABS Financing Facility.

Variable Interest Entities (VIEs)
The ABS Entities meet the definition of a VIE for which we have determined that 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 condensed consolidated balance sheets.


19


The assets and liabilities related to our asset-backed debt arrangements included in our condensed consolidated balance sheets were as follows:
 
At June 30,

 
At December 31,

(dollars in millions)
2019

 
2018

Assets
 
 
 
Account receivable, net
$
10,095

 
$
8,861

Prepaid expenses and other
1,020

 
989

Other assets
3,353

 
2,725

 
 
 
 
Liabilities
 
 
 
Accounts payable and accrued liabilities
11

 
7

Short-term portion of long-term debt
4,477

 
5,352

Long-term debt
6,775

 
4,724



See Note 7 for additional information on device payment plan agreement receivables used to secure asset-backed debt.

Credit Facilities
As of June 30, 2019, the unused borrowing capacity under our $9.5 billion credit facility was approximately $9.4 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 $1.0 billion credit facility insured by Eksportkreditnamnden, an export credit agency with a maturity date of December 2024. As of June 30, 2019, the outstanding balance was $647 million. 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 providing us with the ability to borrow up to $4.0 billion to finance equipment-related purchases with maturity dates ranging from July 2022 to May 2027. The facilities have multiple borrowings available, portions of which extend through October 2019, contingent upon the amount of eligible equipment-related purchases that we make. During the three and six months ended June 30, 2019, we drew down $450 million and $874 million, respectively, from these facilities. During the six months ended June 30, 2018, we drew down $1.7 billion from these facilities. As of June 30, 2019, we had an outstanding balance of $3.5 billion.

Non-Cash Transaction
During the six months ended June 30, 2019 and 2018, we financed, primarily through vendor financing arrangements, the purchase of approximately $221 million and $862 million respectively, of long-lived assets consisting primarily of network equipment. At both June 30, 2019 and 2018, $1.0 billion and $1.4 billion, respectively, 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 are not reflected within Capital expenditures in our condensed consolidated statements of cash flows.

Early Debt Redemptions
During both the three and six months ended June 30, 2019, we recorded losses on early debt redemptions of $1.5 billion related to the May tender offers and other insignificant transactions, which were recorded in Other income (expense), net in our condensed consolidated statements of income.

During the six months ended June 30, 2018, we recorded losses on early debt redemptions of $249 million related to the 2018 March tender offers for 13 series of notes issued by Verizon with coupon rates ranging from 1.750% to 5.012% and maturity dates ranging from 2021 to 2055, which were recorded in Other income (expense), net in our condensed consolidated statements of income.

Guarantees
We guarantee the debentures of our operating telephone company subsidiaries. As of June 30, 2019, $796 million 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.

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 June 30, 2019, $423 million aggregate principal amount of these obligations remained outstanding.

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 wireless monthly bill. As of January 2017, we no longer offer Consumer customers new fixed-term, subsidized service plans for phones; however, we continue to offer subsidized plans to our Business

20


customers. We also continue to service existing plans for customers who have not yet purchased and activated devices under the Verizon device payment program.

Wireless Device Payment Plan Agreement Receivables
The following table displays device payment plan agreement receivables, net, recognized in our condensed consolidated balance sheets:
 
At June 30,

 
At December 31,

(dollars in millions)
2019

 
2018

Device payment plan agreement receivables, gross
$
18,327

 
$
19,313

Unamortized imputed interest
(455
)
 
(546
)
Device payment plan agreement receivables, net of unamortized imputed interest
17,872

 
18,767

Allowance for credit losses
(487
)
 
(597
)
Device payment plan agreement receivables, net
$
17,385

 
$
18,170

 
 
 
 
Classified in our condensed consolidated balance sheets:
 
 
 
Accounts receivable, net
$
12,486

 
$
12,624

Other assets
4,899

 
5,546

Device payment plan agreement receivables, net
$
17,385

 
$
18,170



Included in our device payment plan agreement receivables, net at June 30, 2019 and December 31, 2018, are net device payment plan agreement receivables of $13.4 billion and $11.5 billion, respectively, that have been transferred to ABS Entities and continue to be reported in our condensed consolidated balance sheets. See Note 6 for additional information. We believe the carrying value of our installment loans receivables approximate their fair value using a Level 3 expected cash flow model.

We may offer certain promotions that allow a customer to trade in their 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 June 30, 2019 and December 31, 2018 the amount of trade-in liability was $60 million and $64 million, respectively.

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.

For indirect channel wireless contracts with customers, 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 in our condensed 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 reliability to make future payments. 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 specified offers of credit including an account level spending limit and either a maximum amount of credit allowed per device or a required down payment percentage. During the fourth quarter of 2018 Verizon Wireless moved all customers, new and existing, from a required down payment percentage, between zero and 100%, to a maximum amount of credit per device.

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

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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 were as follows:
 
At June 30,

 
At December 31,

(dollars in millions)
2019

 
2018

Unbilled
$
17,042

 
$
18,043

Billed:
 
 
 
Current
1,028

 
986

Past due
257

 
284

Device payment plan agreement receivables, gross
$
18,327

 
$
19,313



Activity in the allowance for credit losses for the device payment plan agreement receivables was as follows:
(dollars in millions)
2019

 
2018

Balance at January 1,
$
597

 
$
848

Bad debt expense
401

 
237

Write-offs
(511
)
 
(331
)
Balance at June 30,
$
487

 
$
754



Note 8. Fair Value Measurements
Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2019:
(dollars in millions)
Level 1(1)

 
Level 2(2)

 
Level 3(3)

 
Total

Assets:
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Fixed income securities
$

 
$
434

 
$

 
$
434

Interest rate swaps

 
529

 

 
529

Cross currency swaps

 
170

 

 
170

Interest rate caps

 
2

 

 
2

Foreign exchange forwards

 
5

 

 
5

Total
$

 
$
1,140

 
$

 
$
1,140

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
189

 
$

 
$
189

Cross currency swaps

 
814

 

 
814

Forward starting interest rate swaps

 
536

 

 
536

Interest rate caps

 
1

 

 
1

Total
$

 
$
1,540

 
$

 
$
1,540



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The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:
(dollars in millions)
Level 1(1)

 
Level 2(2)

 
Level 3(3)

 
Total

Assets:
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Fixed income securities
$

 
$
405

 
$

 
$
405

Interest rate swaps

 
3

 

 
3

Cross currency swaps

 
220

 

 
220

Interest rate caps

 
14

 

 
14

Total
$

 
$
642

 
$

 
$
642

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
813

 
$

 
$
813

Cross currency swaps

 
536

 

 
536

Forward starting interest rate swaps

 
60

 

 
60

Interest rate caps

 
4

 

 
4

Total
$

 
$
1,413

 
$

 
$
1,413

 
(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) 
Unobservable pricing inputs in the market

Certain of our equity investments do not have readily determinable fair values and are excluded from the tables above. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and are included in Investments in unconsolidated businesses in our condensed consolidated balance sheets. As of June 30, 2019 and December 31, 2018, the carrying amount of our investments without readily determinable fair values were $289 million and $248 million, respectively. During the three and six months ended June