Table of Contents

 

 

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 March 31, 2017  
   

 

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

New York, New York

 

10036

(Zip Code)

(Address of principal executive offices)  

Registrant’s telephone number, including area code: (212) 395-1000

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

☐  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

    

Emerging growth company

 

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

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

At March 31, 2017, 4,079,369,367 shares of the registrant’s common stock were outstanding, after deducting 163,004,873 shares held in treasury.

 

 

 


Table of Contents
Table of Contents

 

         Page  
PART I – FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited)   
 

Condensed Consolidated Statements of Income

Three months ended March  31, 2017 and 2016

     3  
 

Condensed Consolidated Statements of Comprehensive Income

Three months ended March 31, 2017 and 2016

     4  
 

Condensed Consolidated Balance Sheets

At March  31, 2017 and December  31, 2016

     5  
 

Condensed Consolidated Statements of Cash Flows

Three months ended March  31, 2017 and 2016

     6  
 

Notes to Condensed Consolidated Financial Statements

     7  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      30  
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      53  
Item 4.   Controls and Procedures      53  
PART II – OTHER INFORMATION   
Item 1.   Legal Proceedings      53  
Item 1A.   Risk Factors      53  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      53  
Item 6.   Exhibits      54  
Signature      55  
Certifications      58  


Table of Contents
Part I - Financial Information

Item 1. Financial Statements

Condensed Consolidated Statements of Income

Verizon Communications Inc. and Subsidiaries

 

    

Three Months Ended

March 31,

 
(dollars in millions, except per share amounts) (unaudited)    2017     2016  

Operating Revenues

    

Service revenues and other

   $   26,050     $   28,217  

Wireless equipment revenues

     3,764       3,954  
  

 

 

 

Total Operating Revenues

     29,814       32,171  

Operating Expenses

    

Cost of services (exclusive of items shown below)

     6,858       7,614  

Wireless cost of equipment

     4,808       4,998  

Selling, general and administrative expense

     6,908       7,600  

Depreciation and amortization expense

     4,059       4,017  
  

 

 

 

Total Operating Expenses

     22,633       24,229  

Operating Income

     7,181       7,942  

Equity in losses of unconsolidated businesses

     (21     (20

Other income and (expense), net

     (846     32  

Interest expense

     (1,132     (1,188
  

 

 

 

Income Before Provision For Income Taxes

     5,182       6,766  

Provision for income taxes

     (1,629     (2,336
  

 

 

 

Net Income

   $ 3,553     $ 4,430  
  

 

 

 

Net income attributable to noncontrolling interests

   $ 103     $ 120  

Net income attributable to Verizon

     3,450       4,310  
  

 

 

 

Net Income

   $ 3,553     $ 4,430  
  

 

 

 

Basic Earnings Per Common Share

    

Net income attributable to Verizon

   $ .85     $ 1.06  

Weighted-average shares outstanding (in millions)

     4,082       4,080  

Diluted Earnings Per Common Share

    

Net income attributable to Verizon

   $ .84     $ 1.06  

Weighted-average shares outstanding (in millions)

     4,087       4,085  

Dividends declared per common share

   $ 0.5775     $ 0.5650  

See Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

Condensed Consolidated Statements of Comprehensive Income

Verizon Communications Inc. and Subsidiaries

 

     Three Months Ended
March 31,
 
(dollars in millions) (unaudited)    2017     2016  

Net Income

   $   3,553     $   4,430  

Other Comprehensive Loss, net of taxes

    

Foreign currency translation adjustments

     77       30  

Unrealized loss on cash flow hedges

     (18     (58

Unrealized gain (loss) on marketable securities

     14       (18

Defined benefit pension and postretirement plans

     (137     (45
  

 

 

 

Other comprehensive loss attributable to Verizon

     (64     (91
  

 

 

 

Total Comprehensive Income

   $ 3,489     $ 4,339  
  

 

 

 

Comprehensive income attributable to noncontrolling interests

   $ 103     $ 120  

Comprehensive income attributable to Verizon

     3,386       4,219  
  

 

 

 

Total Comprehensive Income

   $ 3,489     $ 4,339  
  

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

Condensed Consolidated Balance Sheets

Verizon Communications Inc. and Subsidiaries

 

(dollars in millions, except per share amounts) (unaudited)    At March 31,
2017
    At December 31,
2016
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 4,307     $ 2,880  

Accounts receivable, net of allowances of $851 and $845

     16,863       17,513  

Inventories

     1,194       1,202  

Assets held for sale

     149       882  

Prepaid expenses and other

     4,645       3,918  
  

 

 

 

Total current assets

     27,158       26,395  
  

 

 

 

Plant, property and equipment

     235,550       232,215  

Less accumulated depreciation

     150,337       147,464  
  

 

 

 

Plant, property and equipment, net

     85,213       84,751  
  

 

 

 

Investments in unconsolidated businesses

     1,080       1,110  

Wireless licenses

     87,754       86,673  

Goodwill

     27,630       27,205  

Other intangible assets, net

     8,912       8,897  

Non-current assets held for sale

     762       613  

Other assets

     8,222       8,536  
  

 

 

 

Total assets

   $   246,731     $   244,180  
  

 

 

 

Liabilities and Equity

    

Current liabilities

    

Debt maturing within one year

   $ 3,707     $ 2,645  

Accounts payable and accrued liabilities

     14,826       19,593  

Other

     8,131       8,102  
  

 

 

 

Total current liabilities

     26,664       30,340  
  

 

 

 

Long-term debt

     112,839       105,433  

Employee benefit obligations

     22,079       26,166  

Deferred income taxes

     47,847       45,964  

Other liabilities

     12,265       12,245  

Equity

    

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

            

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

     424       424  

Contributed capital

     11,161       11,182  

Reinvested earnings

     16,153       15,059  

Accumulated other comprehensive income

     2,609       2,673  

Common stock in treasury, at cost

     (7,144     (7,263

Deferred compensation – employee stock ownership plans and other

     290       449  

Noncontrolling interests

     1,544       1,508  
  

 

 

 

Total equity

     25,037       24,032  
  

 

 

 

Total liabilities and equity

   $ 246,731     $ 244,180  
  

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

Condensed Consolidated Statements of Cash Flows

Verizon Communications Inc. and Subsidiaries

 

    

Three Months Ended

March 31,

 
(dollars in millions) (unaudited)    2017     2016  

Cash Flows from Operating Activities

    

Net Income

   $ 3,553     $ 4,430  

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

    

Depreciation and amortization expense

     4,059           4,017  

Employee retirement benefits

     (111     356  

Deferred income taxes

     2,025       167  

Provision for uncollectible accounts

     330       353  

Equity in losses of unconsolidated businesses, net of dividends received

     28       29  

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

     (4,694     (1,162

Discretionary contributions to qualified pension plans

     (3,411      

Other, net

     (98     (693
  

 

 

 

Net cash provided by operating activities

     1,681       7,497  
  

 

 

 

Cash Flows from Investing Activities

    

Capital expenditures (including capitalized software)

     (3,067     (3,387

Acquisitions of businesses, net of cash acquired

     (1,746     (161

Acquisitions of wireless licenses

     (196     (131

Other, net

     176       243  
  

 

 

 

Net cash used in investing activities

     (4,833     (3,436
  

 

 

 

Cash Flows from Financing Activities

    

Proceeds from long-term borrowings

        13,054        

Proceeds from asset-backed long-term borrowings

     1,283        

Repayments of long-term borrowings and capital lease obligations

     (5,592     (376

Decrease in short-term obligations, excluding current maturities

     (52     (40

Dividends paid

     (2,354     (2,302

Other, net

     (1,760     33  
  

 

 

 

Net cash provided by (used in) financing activities

     4,579       (2,685
  

 

 

 

Increase in cash and cash equivalents

     1,427       1,376  

Cash and cash equivalents, beginning of period

     2,880       4,470  
  

 

 

 

Cash and cash equivalents, end of period

   $ 4,307     $ 5,846  
  

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

Notes to Condensed Consolidated Financial Statements

Verizon Communications Inc. and Subsidiaries

(Unaudited)

 

1.

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon or the Company) Annual Report on Form 10-K for the year ended December 31, 2016. 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. We have reclassified certain prior year amounts to conform to the current year presentation.

Earnings Per Common Share

There were a total of approximately 5 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the three months ended March 31, 2017 and 2016, respectively. There were no outstanding options to purchase shares that would have been anti-dilutive for the three months ended March 31, 2017 and 2016, respectively.

Recently Adopted Accounting Standards

In January 2017, the accounting standard update related to the simplification of the accounting for goodwill impairment was issued. 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 as of January 1, 2017.

In March 2016, the accounting standard update related to employee share-based payment accounting was issued. 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 is effective as of the first quarter of 2017. The adoption of this standard update did not have a significant impact on our condensed consolidated financial statements.

Recently Issued Accounting Standards

In March 2017, the accounting standard update related to the presentation of net periodic pension cost and net periodic postretirement benefit cost was issued. 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. The impact of the retrospective adoption of this standard update will be an increase to consolidated operating income of approximately $2.2 billion and no impact to consolidated net income for the year ended December 31, 2016.

In February 2017, the accounting standard to clarify the derecognition of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales, was issued. 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 are currently evaluating the impact that this standard update will have on our condensed consolidated financial statements.

 

7


Table of Contents

In January 2017, the accounting standard update to provide clarification on the definition of a business was issued. 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 the 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 ASC 606. This standard is effective as of the first quarter of 2018; however, early adoption is permitted. We are currently evaluating the impact that this standard update will have on our condensed consolidated financial statements.

In November 2016, the accounting standard update related to the classification and presentation of changes in restricted cash was issued. 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 are currently evaluating the impact that this standard update will have on our condensed consolidated financial statements.

In August 2016, the accounting standard update related to the classification of certain cash receipts and cash payments was issued. 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 are currently evaluating the impact that this standard update will have on our condensed consolidated financial statements. 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 condensed consolidated statements of cash flows. Upon adoption of this standard update in the first quarter of 2018, we expect to retrospectively reclassify approximately $1.1 billion of collections of deferred purchase price related to collections from customers for the year ended December 31, 2016 from Cash flows from operating activities to Cash flows from investing activities in our consolidated statements of cash flows.

In June 2016, the accounting standard update related to the measurement of credit losses was issued. 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 are currently evaluating the impact that this standard update will have on our condensed consolidated financial statements.

In February 2016, the accounting standard update related to leases was issued. 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 assessing the impact to our systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.

In May 2014, the accounting standard update related to the recognition of revenue from contracts with customers was issued. This standard update along with related 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 update 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 standard update intends to provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provide more useful information to users of financial statements through improved disclosure requirements. 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 plan to adopt the standard using the modified retrospective approach.

 

8


Table of Contents

We are in the process of evaluating the impact of the standard update. The ultimate impact on revenue resulting from the application of the new standard will be subject to assessments that are dependent on many variables, including, but not limited to, the terms of our contractual arrangements and our mix of business. Upon adoption, we expect that the allocation of revenue between equipment and service for our wireless fixed-term service plans will result in more revenue allocated to equipment and recognized earlier as compared with current GAAP. We expect the timing of recognition of our sales commission expenses will also be impacted, as a substantial portion of these costs, which are currently expensed, will be capitalized and amortized as described above. In 2016, total sales commission expenses were approximately $4.2 billion. In 2017, we expect total sales commission expenses to decline as our wireless customers continue to migrate from our fixed-term service plans to device payment plans which have lower commission structures.

We have established a cross-functional coordinated implementation team to implement the standard update related to the recognition of revenue from contracts with customers. We have identified and are in the process of implementing changes to our systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.

 

2.

Acquisitions and Divestitures

 

Wireless

Spectrum License Transactions

During the fourth quarter of 2016, we entered into a license exchange agreement with affiliates of AT&T Inc. to exchange certain Advanced Wireless Services (AWS) and Personal Communication Services (PCS) spectrum licenses. This non-cash exchange was completed in February 2017, at which time 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 condensed consolidated statement of income for the three months ended March 31, 2017.

During the first quarter of 2017, we entered into a license exchange agreement with affiliates of Sprint Corporation, which provides for the exchange of certain PCS spectrum licenses. These wireless licenses are classified as Assets held for sale on our condensed consolidated balance sheet as of March 31, 2017. This non-cash exchange is expected to be completed in the second quarter of 2017 and we expect to record an immaterial gain.

During the three months ended March 31, 2017, we acquired various other wireless licenses for cash consideration that was not significant.

Wireline

XO Holdings

In February 2017, we completed our acquisition of XO Holdings’ wireline business (XO), which owns and operates one of the largest fiber-based Internet Protocol (IP) and Ethernet networks, for total cash consideration of approximately $1.8 billion, of which $0.1 billion was paid in 2015. Separately, in February 2016, we entered into an agreement to lease certain wireless spectrum from a wholly-owned subsidiary of XO Holdings that holds its wireless spectrum, which included an option to buy the subsidiary. In April 2017, Verizon exercised its option to buy that subsidiary for approximately $0.2 billion, subject to certain adjustments. The transaction is subject to customary regulatory approvals and is expected to close by the end of 2017.

The condensed consolidated financial statements include the results of XO’s operations from the date the acquisition closed. Had this acquisition been completed on January 1, 2017, the results of the acquired operations of XO would not have had a significant impact on the consolidated net income attributable to Verizon.

The acquisition of XO was accounted for as a business combination. The consideration was preliminarily allocated to the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition. Upon closing, we recorded approximately $0.4 billion of goodwill, and $0.3 billion of other intangibles. 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).

 

9


Table of Contents

Data Center Sale

On December 6, 2016, we entered into a definitive agreement, which was subsequently amended on March 21, 2017, with Equinix, Inc. pursuant to which Verizon will sell 23 customer-facing data center sites in the United States and Latin America, for approximately $3.6 billion, subject to certain adjustments. The sale does not affect Verizon’s data center services delivered from 27 sites in Europe, Asia-Pacific and Canada, or its managed hosting and cloud offerings.

We plan to account for a portion of the transaction, consisting of the data center buildings, land and related assets, as a sale of real estate. The real estate assets to be sold of $0.6 billion are currently included in Verizon’s continuing operations and classified as held and used within Plant, property and equipment, net on our condensed consolidated balance sheet at March 31, 2017. The other primarily non-real estate assets and liabilities that will be sold are currently included in Verizon’s continuing operations and reclassified as held for sale. At March 31, 2017, assets to be sold of $0.8 billion, classified as Non-current assets held for sale on our condensed consolidated balance sheet, were principally comprised of goodwill, plant, property and equipment and other intangible assets. The liabilities associated with the sale were not significant and have been included in current and non-current Other liabilities on our condensed consolidated balance sheet at March 31, 2017. The transaction is subject to customary regulatory approvals and closing conditions, and is expected to close during the first half of 2017.

Other

Acquisition of Yahoo! Inc.’s Operating Business

On July 23, 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). Prior to the closing of the Transaction, pursuant to a reorganization agreement, Yahoo will transfer all of the assets and liabilities constituting Yahoo’s operating business to the subsidiaries to be acquired in the Transaction. The assets to be acquired will not include Yahoo’s cash, its ownership interests in Alibaba, Yahoo! Japan and certain other investments, certain undeveloped land recently divested by Yahoo or certain non-core intellectual property. We will receive 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 is not being conveyed with the business.

Yahoo employees who transfer to Verizon will have any unvested Yahoo restricted stock units that they hold converted into cash-settleable Verizon restricted stock units, which will have the same vesting schedule as their Yahoo restricted stock units. The value of those outstanding restricted stock units on the date of signing was approximately $1.0 billion.

On February 20, 2017, Verizon and Yahoo entered into an amendment to the Purchase Agreement, pursuant to which the Transaction purchase price will be 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) will 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 wholly owned subsidiary of Yahoo that Verizon has agreed to purchase pursuant to the Transaction, also entered into an amendment to the related reorganization agreement, pursuant to which Yahoo (which has announced that it intends to change its name to Altaba Inc. following the closing of the Transaction) will retain 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. 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.

The Transaction remains subject to customary closing conditions, including the approval of Yahoo’s stockholders, and is expected to close in the middle of 2017.

Other

During the three months ended March 31, 2017, we acquired various other businesses and investments for cash consideration that was not significant.

 

10


Table of Contents
3.

Wireless Licenses, Goodwill and Other Intangible Assets

 

Wireless Licenses

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

 

       (dollars in millions)  

Balance at January 1, 2017

   $   86,673  

Acquisitions (Note 2)

     76  

Capitalized interest on wireless licenses

     121  

Reclassifications, adjustments and other

     884  
  

 

 

 

Balance at March 31, 2017

   $   87,754  
  

 

 

 

Reclassifications, adjustments and other includes $1.0 billion received in exchanges of wireless licenses in 2017 offset by $0.1 billion of wireless licenses that are classified as Assets held for sale on our condensed consolidated balance sheet at March 31, 2017 (see Note 2 for additional information).

At March 31, 2017, approximately $10.0 billion of wireless licenses were under development for commercial service for which we were capitalizing interest costs.

The average remaining renewal period for our wireless licenses portfolio was 5.3 years as of March 31, 2017.

Goodwill

Changes in the carrying amount of Goodwill are as follows:

 

(dollars in millions)    Wireless      Wireline      Other      Total  

Balance at January 1, 2017

   $ 18,393      $ 3,784      $ 5,028      $ 27,205  

Acquisitions (Note 2)

            418        2        420  

Reclassifications, adjustments and other

            3        2        5  
  

 

 

 

Balance at March 31, 2017

   $     18,393      $     4,205      $     5,032      $     27,630  
  

 

 

 

During the first quarter of 2017, we recognized goodwill of $0.4 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:

 

     At March 31, 2017      At December 31, 2016  
(dollars in millions)    Gross
Amount
     Accumulated
Amortization
    Net
Amount
     Gross
Amount
     Accumulated
Amortization
    Net
Amount
 

Customer lists (8 to 10 years)

   $ 3,163      $ (548   $ 2,615      $ 2,884      $ (480   $ 2,404  

Non-network internal-use
software (5 to 7 years)

     16,459        (11,251     5,208        16,135        (10,913     5,222  

Other (6 to 25 years)

     1,707        (618     1,089        1,854        (583     1,271  
  

 

 

 

Total

   $     21,329      $     (12,417   $     8,912      $     20,873      $     (11,976   $     8,897  
  

 

 

 

 

11


Table of Contents

We recognized other intangible assets of $0.3 billion (primarily customer lists) 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:

 

(dollars in millions)    Three Months Ended
March 31,
 

2017

     $                    452  

2016

     435  

The estimated future amortization expense for Other intangible assets is as follows:

 

Years    (dollars in millions)  

Remainder of 2017

     $                1,438  

2018

     1,632  

2019

     1,409  

2020

     1,168  

2021

     985  

 

4.

Debt

 

Changes to debt during the three months ended March 31, 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

     65       12,989       13,054  

Proceeds from asset-backed long-term borrowings

           1,283       1,283  

Repayments of long-term borrowings and capital leases obligations

     (201     (5,391     (5,592

Decrease in short-term obligations, excluding current maturities

     (52           (52

Reclassifications of long-term debt

     1,165       (1,165      

Other

     85       (310     (225
  

 

 

 

Balance at March 31, 2017

   $ 3,707     $ 112,839     $ 116,546  
  

 

 

 

January Exchange Offers and Cash Offers

On January 25, 2017, we commenced eighteen separate private offers to exchange (the January Exchange Offers) specified series of outstanding Notes issued by Verizon Communications (the Old Notes) for new Notes to be issued by Verizon Communications and, for certain series, cash. In connection with the January Exchange Offers, which expired on January 31, 2017 and settled on February 3, 2017, we issued $3.2 billion aggregate principal amount of Verizon Communications 2.946% Notes due 2022 (the 2022 New Notes), $1.7 billion aggregate principal amount of Verizon Communications 4.812% Notes due 2039 (the 2039 New Notes) and $4.1 billion aggregate principal amount of Verizon Communications 5.012% Notes due 2049 (the 2049 New Notes) plus applicable cash of $0.6 billion (not including accrued and unpaid interest on the Old Notes) in exchange for $8.3 billion aggregate principal amount of tendered Old Notes.

We concurrently commenced eighteen separate offers to purchase for cash (the January Cash Offers) the Old Notes. In connection with the January Cash Offers, which expired on January 31, 2017 and settled on February 3, 2017, we repurchased $0.5 billion aggregate principal amount of Old Notes for $0.5 billion, exclusive of accrued interest. On February 10, 2017, we purchased for $0.1 billion, exclusive of accrued interest, an additional $0.1 billion of Old Notes (the “subsequent cash purchases”) from certain holders whose tenders of Old Notes in the January Cash Offers had been rejected.

 

12


Table of Contents

The table below lists the series of Old Notes included in the January Exchange Offers for the 2022 New Notes and the January Cash Offers, referred to as Group 1:

 

(dollars in millions)    Interest
Rate
    Maturity      Principal
Amount
Outstanding
     Principal
Amount
Accepted for
Exchange
     Principal
Amount
Accepted for
Cash (1)
 

Verizon Communications Inc.

     5.500     2018      $ 737      $ 83      $ 8  
     6.100     2018        753        77        9  
     3.650     2018        2,698        508        97  
     2.550     2019        500        154        35  
     1.375     2019        1,000        376        38  
     2.625     2020        3,304        1,925        55  
          

 

 

 
           $   3,123      $   242  
          

 

 

 

 

(1)  

Includes amounts acquired pursuant to the subsequent cash purchases.

The table below lists the series of Old Notes included in the January Exchange Offers for the 2039 New Notes and the January Cash Offers, referred to as Group 2:

 

(dollars in millions)    Interest
Rate
    Maturity      Principal
Amount
Outstanding
     Principal
Amount
Accepted for
Exchange
     Principal
Amount
Accepted for
Cash (1)
 

Verizon Communications Inc.

     5.150     2023      $ 8,517      $ 715      $ 217  
     7.750     2030        930        184        4  
     7.750     2032        218        2         
     6.400     2033        1,729        640        6  
        

 

 

 
           $   1,541      $   227  
          

 

 

 

 

(1)  

Includes amounts acquired pursuant to the subsequent cash purchases.

The table below lists the series of Old Notes included in the January Exchange Offers for the 2049 New Notes and the January Cash Offers, referred to as Group 3:

 

(dollars in millions)    Interest
Rate
    Maturity      Principal
Amount
Outstanding
     Principal
Amount
Accepted for
Exchange
     Principal
Amount
Accepted for
Cash (1)
 

Verizon Communications Inc.

     5.850     2035      $   1,250      $ 447      $ 4  
     6.250     2037        636        189        5  
     6.400     2038        750        228        6  
     6.900     2038        384        111        4  
     8.950     2039        290        48         
     7.350     2039        412        225        1  
     6.000     2041        1,000        480        20  
     6.550     2043        4,245        1,933        46  
          

 

 

 
           $   3,661      $   86  
          

 

 

 

 

(1)  

Includes amounts acquired pursuant to the subsequent cash purchases.

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. Borrowings under the term loan credit agreement would mature 18 months following the funding date, with a partial mandatory prepayment

 

13


Table of Contents

required within six months following the funding date. None of the $5.5 billion borrowing capacity was used during the three months ended March 31, 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 and (expense), net and were not significant.

In March 2017, we prepaid $1.7 billion of the outstanding $3.3 billion term loan that matures in July 2019. During April 2017, we repaid the remaining outstanding amount under the term loan agreement.

March Tender Offer

On March 13, 2017, we announced the commencement of a tender offer (the March Tender Offer) to purchase for cash any and all of the series of notes listed below. The Tender Offer expired on March 17, 2017 and most of which was settled on March 20, 2017. In addition to the purchase price, any accrued and unpaid interest on the purchased notes was paid to the date of purchase.

 

(dollars in millions, except for Purchase Price)    Interest
Rate
    Maturity      Principal
Amount
Outstanding
    

Purchase

Price (1)

     Principal
Amount
Purchased
 

Verizon Communications Inc.

     8.950     2039      $ 242      $   1,537.18      $ 131  
     7.750     2032        215        1,341.68        36  
     6.550     2043          2,266        1,239.85        847  
     6.400     2033        1,083        1,216.85        612  
     7.350     2039        186        1,324.60        27  
     6.900     2038        270        1,273.29        49  
     7.750     2030        742        1,379.04        160  
     6.400     2038        515        1,206.61        118  
     6.250     2037        443        1,189.56        103  
     5.850     2035        800        1,151.79        249  
     6.000     2041        500        1,151.23        206  
     6.100     2018        667        1,048.45        153  
     5.500     2018        646        1,037.01        113  

Verizon New York Inc.

     7.375     2032        244        1,285.50        39  
     6.500     2028        72        1,177.23        1  

Verizon Pennsylvania LLC

     8.750     2031        53        1,426.33        17  
     8.350     2030        48        1,384.37        16  
     6.000     2028        68        1,139.69        11  

Verizon Delaware LLC

     8.625     2031        10        1,416.70        8  

Verizon Maryland LLC

     8.300     2031        24        1,378.75        2  
     8.000     2029        28        1,332.71        1  
     5.125     2033        179        1,063.06        15  

Verizon Virginia LLC

     8.375     2029        19        1,367.57        9  
     7.875     2022        57        1,206.35         

Verizon New England Inc.

     7.875     2029        173        1,322.35        26  

Verizon New Jersey Inc.

     7.850     2029        87        1,319.96        8  
     8.000     2022        146        1,227.16        25  

GTE LLC

     8.750     2021        207        1,240.28        14  
     6.940     2028        413        1,270.73        85  
     6.840     2018        332        1,056.27        38  
             

 

 

 
              $   3,119  
             

 

 

 

 

(1)  

Per $1,000 principal amount of notes tendered.

 

14


Table of Contents

Debt Issuances and Redemptions

During February 2017, we redeemed $0.2 billion of the $0.6 billion 6.94% GTE LLC Notes due 2028 at 124.8% of the principal amount of the notes redeemed (see “Early Debt Redemptions”).

During February 2017, we issued approximately $1.5 billion aggregate principal amount of 4.95% 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 Verizon Communications Floating Rate Notes due 2022, $1.85 billion aggregate principal amount of Verizon Communications 3.125% Notes due 2022, $3.25 billion aggregate principal amount of Verizon Communications 4.125% Notes due 2027, $3.0 billion aggregate principal amount of Verizon Communications 5.250% Notes due 2037, and $1.5 billion aggregate principal amount of Verizon Communications 5.500% Notes due 2047. The floating rate notes bear interest at a rate equal to the three-month LIBOR plus 1.000% which rate will be reset quarterly. The net proceeds were primarily used for the tender offer and general corporate purposes, including discretionary contributions to our qualified pension plans. We intend to use the remaining net proceeds for the financing, in whole or in part, of our pending acquisition of Yahoo.

On April 24, 2017, we redeemed in whole $0.5 billion aggregate principal amount of Verizon Communications 6.100% Notes due 2018 at 104.5% of the principal amount of such notes and $0.5 billion aggregate principal amount of Verizon Communications 5.50% Notes due 2018 at 103.3% of the principal amount of such notes, plus accrued and unpaid interest to the date of redemption.

Asset-Backed Debt

As of March 31, 2017, the carrying value of our asset-backed debt was $6.3 billion. Our asset-backed debt includes notes (the Asset-Backed Notes) issued to third-party investors (Investors) and loans (ABS Financing Facility) received from banks and their conduit facilities (collectively, the Banks). Our consolidated asset-backed securitization 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 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 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 condensed 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 condensed 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 condensed consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are included on our condensed consolidated balance sheets.

 

15


Table of Contents

Asset-Backed Notes

In March 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 have an expected weighted-average life of about 2.6 years and bear interest at 2.06% per annum, the Class B junior asset-backed notes have an expected weighted-average life of about 3.38 years and bear interest at 2.45% per annum and the Class C junior asset-backed notes have an expected weighted-average life of about 3.64 years and bear interest at 2.65% per annum.

Under the terms of the asset-backed notes, there is a two-year revolving period during which we may transfer additional receivables to the ABS Entity.

ABS Financing Facility

As of March 31, 2017, outstanding borrowings under the ABS Financing Facility were approximately $2.5 billion. We had the option to request an additional $0.5 billion of committed funding, which was not exercised and expired on March 31, 2017. There is a two year revolving period, 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.

Although the ABS Financing Facility is fully drawn as of March 31, 2017, we have the right to prepay all or a portion thereof at any time without penalty, but in certain cases, with breakage costs. If we choose to prepay, the amount prepaid shall be available for further drawdowns until September 2018, except in certain circumstances.

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.

The assets and liabilities related to our asset-backed debt arrangements included on our condensed consolidated balance sheets were as follows:

 

(dollars in millions)    At March 31,
2017
     At December 31,
2016
 

Assets

     

Account receivable, net

   $   4,628      $   3,383  

Prepaid expenses and other

     298        236  

Other assets

     2,574        2,383  

Liabilities

     

Accounts payable and accrued liabilities

     3        4  

Long-term debt

     6,272        4,988  

See Note 5 for additional information on device payment plan agreement receivables used to secure asset-backed debt.

Credit Facilities

As of March 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.

As of March 31, 2017, the equipment credit facility insured by Eksportkreditnamnden Stockholm, Sweden (EKN), the Swedish export credit agency, was fully drawn. We had the ability to borrow up to $1.0 billion to finance network equipment-related purchases. The facility had borrowings available through June 2017, contingent upon the amount of eligible equipment-related purchases made by Verizon.

 

16


Table of Contents

Additional Financing Activities (Non-Cash Transaction)

During the three months ended March 31, 2017, we financed, primarily through vendor financing arrangements, the purchase of approximately $0.1 billion of long-lived assets consisting primarily of network equipment. At March 31, 2017, $1.2 billion relating to vendor 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 condensed consolidated statements of cash flows.

Early Debt Redemptions

During the first quarter of 2017, we recorded a net pre-tax loss on early debt redemption of $0.8 billion primarily in connection with the January Cash Offers and the March Tender Offer.

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

Guarantees

We guarantee the debentures of our operating telephone company subsidiaries. As of March 31, 2017, $1.0 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.

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 March 31, 2017, $0.8 billion aggregate principal amount of these obligations remain outstanding.

 

5.

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 fixed-term service plans for phones.

Wireless Device Payment Plan Agreement Receivables

The following table displays device payment plan agreement receivables, net, that continue to be recognized in our condensed consolidated balance sheets:

 

(dollars in millions)    At March 31,
2017
    At December 31,
2016
 

Device payment plan agreement receivables, gross

   $   13,154     $   11,797  

Unamortized imputed interest

     (582     (511
  

 

 

 

Device payment plan agreement receivables, net of unamortized imputed interest

     12,572       11,286  

Allowance for credit losses

     (685     (688
  

 

 

 

Device payment plan agreement receivables, net

   $ 11,887     $ 10,598  
  

 

 

 

Classified on our condensed consolidated balance sheets:

    

Accounts receivable, net

   $ 7,436     $ 6,140  

Other assets

     4,451       4,458  
  

 

 

 

Device payment plan agreement receivables, net

   $ 11,887     $ 10,598  
  

 

 

 

Included in our device payment plan agreement receivables, net at March 31, 2017 are net device payment plan agreement receivables of $7.1 billion that have been transferred to ABS Entities and continue to be reported in our condensed consolidated balance sheet.

 

17


Table of Contents

We may offer our customers certain promotions where a customer can trade-in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer will receive trade-in credits that are applied to the customer’s monthly bill. As a result, we recognize a trade-in obligation measured at fair value using weighted-average selling prices obtained in recent resales of devices eligible for trade-in. Device payment plan agreement receivables, net does not reflect this trade-in obligation. At March 31, 2017, the amount of trade-in obligations was not significant.

From time to time, on select devices, certain marketing promotions have been revocably offered to 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.

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 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 when considering 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 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.

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 which 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 were as follows:

 

(dollars in millions)    At March 31,
2017
     At December 31,
2016
 

Unbilled

   $   12,476      $   11,089  

Billed:

     

Current

     552        557  

Past due

     126        151  
  

 

 

 

Device payment plan agreement receivables, gross

   $ 13,154      $ 11,797  
  

 

 

 

 

18


Table of Contents

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

     151       163  

Write-offs

     (154     (95

Allowance related to receivables sold

           (2

Other

           3  
  

 

 

 

Balance at March 31,

   $ 685     $ 513  
  

 

 

 

Sales of Wireless Device Payment Plan Agreement Receivables

During 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. The receivables sold under the RPA are no longer considered assets of Verizon. The outstanding portfolio of device payment plan agreement receivables derecognized from our condensed consolidated balance sheets, but which we continue to service, was $2.7 billion at March 31, 2017 and $9.6 billion at March 31, 2016. At March 31, 2017, the total portfolio of device payment plan agreement receivables, including derecognized device payment plan agreement receivables, that we are servicing was $15.8 billion.

Under the Non-Revolving Program, we transfer the eligible receivables to wholly-owned subsidiaries that are bankruptcy remote special purpose entities (Sellers). The Sellers then sell the receivables to the Purchasers for upfront cash proceeds and additional consideration upon settlement of the receivables (the deferred purchase price). Under the Revolving Program, we sell eligible device payment plan agreement receivables on a revolving basis, subject to a maximum funding limit, to the Purchasers. Sales of eligible receivables by the Sellers, once initiated, generally occur and are settled on a monthly basis. Customer payments made towards receivables sold under the Revolving Program will be available to purchase additional eligible device payment plan agreement receivables originated during the revolving period. We elected to end the revolving period in July 2016.

We continue to bill and collect on the receivables in exchange for a monthly servicing fee, which is not material. Eligible receivables under the RPA excluded device payment plan agreements where a new customer was required to provide a down payment. The sales of receivables under the RPA did not have a material impact on our condensed consolidated statements of income. The cash proceeds received from the Purchasers were recorded within Cash flows provided by operating activities on our condensed consolidated statements of cash flows.

There were no sales of device payment plan agreement receivables under the Revolving Program or the Non-Revolving Program during the three months ended March 31, 2017. During the three months ended March 31, 2016, we sold $2.6 billion of receivables, net of allowances 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 $0.2 billion and recorded a deferred purchase price of $0.4 billion.

Deferred Purchase Price

Under the RPA, 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 considers prices expected to be offered to us by independent third parties. This estimate contemplates changes in value after the launch of a device. The fair value measurements are considered to be Level 3 measurements within the fair value hierarchy. The collection of the deferred purchase price is contingent on collections from customers. During the three months ended March 31, 2017 and 2016, we have collected $0.3 billion and an insignificant amount, respectively, which was returned as deferred purchase price and recorded within Cash flows provided by operating activities on our condensed consolidated statements of cash flows. Collections, which were returned as deferred purchase price and recorded within Cash flows provided by investing activities on our condensed consolidated statements of cash flows were not significant during the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, our deferred purchase price receivable, which is held by the Sellers, was comprised of $1.4 billion included within Prepaid expenses and other in our condensed consolidated balance sheet. At December 31, 2016, our deferred purchase price receivable was comprised of $1.2 billion included within Prepaid expenses and other and $0.4 billion included within Other assets in our condensed consolidated balance sheet.

 

19


Table of Contents

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 condensed consolidated balance sheet.

Continuing Involvement

Verizon has continuing involvement with the sold receivables as it services the receivables. We continue 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 are applied to the sold receivables that apply to owned receivables, and we continue to maintain normal relationships with our customers. The credit quality of the customers we continue to service is consistent throughout the periods presented. To date, we have collected and remitted approximately $8.5 billion, net of fees. To date, cash proceeds received, net of remittances, were $1.6 billion. Credit losses on receivables sold were immaterial during the three months ended March 31, 2017 and 2016, respectively.

In addition, we have continuing involvement related to the sold receivables as we may be responsible for absorbing additional credit losses pursuant to the agreements. The Company’s maximum exposure to loss related to the involvement with the Sellers is limited to the amount of the outstanding deferred purchase price, which was $1.4 billion as of March 31, 2017. The maximum exposure to loss represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby the Company would not receive the portion of the proceeds withheld by the Purchasers. As we believe the probability of these circumstances occurring is remote, the maximum exposure to loss is not an indication of the Company’s expected loss.

 

6.

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 at March 31, 2017:

 

(dollars in millions)        Level  1 (1)          Level  2 (2)          Level  3 (3)              Total  

Assets:

           

Other assets:

           

Equity securities

   $ 118      $      $   –      $ 118  

Fixed income securities

            439               439  

Interest rate swaps

            91               91  

Cross currency swaps

            63               63  

Interest rate cap

            7               7  
  

 

 

 

Total

   $   118      $ 600      $      $ 718  
  

 

 

 

Liabilities:

           

Other liabilities:

           

Interest rate swaps

   $      $ 296      $      $ 296  

Cross currency swaps

            1,682               1,682  
  

 

 

 

Total

   $      $   1,978      $      $   1,978  
  

 

 

 

 

20


Table of Contents

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis at 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 use quoted prices in active markets for our U.S. Treasury securities, therefore these securities are classified as Level 1. For all other 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 within the fair value hierarchy during the three months ended March 31, 2017 and 2016, respectively.

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:

 

     At March 31, 2017      At December 31, 2016  
(dollars in millions)    Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Short- and long-term debt, excluding capital leases

   $   115,536      $   123,751      $   107,128      $   117,584  

 

21


Table of Contents

Derivative Instruments

The following table sets forth the notional amounts of our outstanding derivative instruments:

 

     At March 31, 2017      At December 31, 2016  
(dollars in millions)    Notional Amount      Notional   Amount  

Interest rate swaps

   $ 16,595      $ 13,099  

Cross currency swaps

     12,890        12,890  

Interest rate caps

     2,540        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 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 condensed 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 the first quarter of 2017, we entered into interest rate swaps with a total notional value of $3.5 billion.

The ineffective portion of our interest rate swaps was not material for the three months ended March 31, 2017 and 2016, respectively.

Forward Interest Rate Swaps

In order to manage our exposure to future interest rate changes, we periodically enter into forward interest rate swaps. We designate these contracts as cash flow hedges. During the three months ended March 31, 2016, a pre-tax loss of $0.1 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 and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses.

During the three months ended March 31, 2017 and 2016, pre-tax gains of $0.1 billion and $0.2 billion, respectively, were recognized in Other comprehensive income (loss). A portion of the gains and losses recognized in Other comprehensive income (loss) was reclassified to Other income and (expense), net to offset the related pre-tax foreign currency transaction gain or loss on the underlying debt obligations.

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. In 2016, we designated $0.8 billion total notional value of Euro-denominated debt as a net investment hedge. The notional amount of the Euro-denominated debt as a net investment hedge was $0.8 billion at March 31, 2017 and December 31, 2016, respectively.

Undesignated Derivatives

We also have the following derivative 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. During the three months ended March 31, 2017, we recognized an immaterial increase in Interest expense.

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. Our policy is to deposit our temporary cash investments with major

 

22


Table of Contents

financial institutions. Counterparties to our derivative contracts are also major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex agreements which provide rules for collateral exchange. We generally apply collateralized arrangements with our counterparties for uncleared derivatives to mitigate credit risk. At March 31, 2017 and December 31, 2016, we posted collateral of approximately $0.2 billion, respectively, related to derivative contracts under collateral exchange arrangements, which were recorded as Prepaid expenses and other in our condensed consolidated balance sheets. During the first quarter of 2017, we paid an immaterial amount of cash to extend amendments to certain collateral exchange arrangements. These amendments suspend cash collateral posting for a specified period of time by both counterparties. We may enter into swaps on an uncollateralized basis in certain circumstances. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect the settlement of these transactions to have a material effect on our results of operations or financial condition.

 

7.

Stock-Based Compensation

 

Verizon Communications Long-Term Incentive Plan

The Verizon Communications Inc. Long-Term Incentive Plan (the Plan) permits the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance stock units and other awards. The maximum number of shares available for awards from the Plan is 119.6 million shares.

Restricted Stock Units

The Plan provides 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.

Performance Stock Units

The Plan also provides for grants of Performance Stock Units (PSUs) that generally vest at the end of the third year after the grant. As defined by the 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.

The following table summarizes the Restricted Stock Unit and Performance Stock Unit activity:

 

(shares in thousands)    Restricted
Stock Units
    Performance
Stock Units
 

Outstanding, January 1, 2017

     13,308       17,919  

Granted

     5,105       5,837  

Payments

     (4,826     (6,031

Cancelled/Forfeited

     (44     (147
  

 

 

 

Outstanding, March 31, 2017

     13,543       17,578  
  

 

 

 

As of March 31, 2017, unrecognized compensation expense related to the unvested portion of Verizon’s RSUs and PSUs was approximately $0.7 billion and is expected to be recognized over approximately two years.

The RSUs granted in 2017 have a weighted-average grant date fair value of $50.09 per unit.

 

23


Table of Contents
8.

Employee Benefits

 

We maintain non-contributory defined benefit pension plans for many of our 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 and an estimated return on plan assets. These estimates are updated in the fourth quarter or upon a remeasurement event to reflect actual return on plan assets and updated actuarial assumptions. The adjustment will be recognized in our consolidated statement of income during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains and losses.

Net Periodic Cost

The following table summarizes the benefit (income) cost related to our pension and postretirement health care and life insurance plans:

 

(dollars in millions)    Pension     Health Care and Life  
Three Months Ended March 31,          2017           2016           2017           2016  

Service cost

   $ 70     $ 80     $ 37     $ 61  

Amortization of prior service cost (credit)

     10       (1     (235     (73

Expected return on plan assets

     (316       (271     (13     (15

Interest cost

     171       186       165       224  

Remeasurement loss, net

           165              
  

 

 

 

Net periodic benefit (income) cost

   $ (65   $ 159     $ (46   $   197  
  

 

 

 

Severance, Pension and Benefit Charges

During the three months ended March 31, 2016, we recorded a net pre-tax pension remeasurement charge of approximately $0.2 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension remeasurement charge relates to settlements for employees who received lump-sum distributions in one of Verizon’s seven defined benefit pension plans. The pension remeasurement charge was primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of this pension plan. Our weighted-average discount rate assumption decreased from 4.60% at December 31, 2015 to 4.21% at March 31, 2016.

Severance Payments

During the three months ended March 31, 2017, we paid severance benefits of $0.2 billion. At March 31, 2017, we had a remaining severance liability of $0.5 billion, a portion of which includes future contractual payments to employees separated as of March 31, 2017.

Employer Contributions

During the three months ended March 31, 2017, we contributed $3.6 billion to our qualified pension plans, which included $3.4 billion of discretionary contributions. The discretionary contribution together with previous estimates of $0.6 billion for minimum contributions result in an expected $4.0 billion in pension funding to qualified plans in 2017. The contributions to our nonqualified pension plans were not material during the three months ended March 31, 2017. There have been no material changes with respect to the nonqualified pension and other postretirement benefit plans contributions in 2017 as previously disclosed in Part II. Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

24


Table of Contents
9.

Equity and Accumulated Other Comprehensive Income

 

Equity

Changes in the components of Total equity were as follows:

 

(dollars in millions)    Attributable
to Verizon
    Noncontrolling
Interests
    Total
Equity
 

Balance at January 1, 2017

   $ 22,524     $ 1,508     $ 24,032  

Net income

     3,450       103       3,553  

Other comprehensive loss

     (64           (64
  

 

 

 

Comprehensive income

     3,386       103       3,489  
  

 

 

 

Contributed capital

     (21           (21

Dividends declared

     (2,356           (2,356

Common stock in treasury

     119             119  

Distributions and other

     (159     (67     (226
  

 

 

 

Balance at March 31, 2017

   $   23,493     $   1,544     $   25,037  
  

 

 

 

Common Stock

On February 28, 2017, our previously authorized share buyback program expired. On March 3, 2017, the Verizon Board of Directors approved a new share buyback program, which authorized the repurchase of up to 100 million shares of Verizon common stock terminating no later than the close of business on February 28, 2020. The program permits Verizon to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs.

Verizon did not repurchase any shares of Verizon common stock through its authorized share buyback program during the three months ended March 31, 2017.

Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareowner plans, including 2.7 million common shares issued from Treasury stock during the three months ended March 31, 2017.

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

loss on cash

flow hedges

   

Unrealized

gain on
marketable
securities

    

Defined benefit

pension and
postretirement
plans

    Total  

Balance at January 1, 2017

   $ (713   $ (80   $ 46      $   3,420     $   2,673  

Other comprehensive income

     77          83       6              166  

Amounts reclassified to net income

           (101     8        (137     (230
  

 

 

 

Net other comprehensive income (loss)

     77       (18     14        (137     (64
  

 

 

 

Balance at March 31, 2017

   $   (636   $ (98   $    60      $ 3,283     $ 2,609  
  

 

 

 

The amounts presented above in net other comprehensive income (loss) are net of taxes. The amounts reclassified to net income related to unrealized loss on cash flow hedges in the table above are included in Other income and (expense), net and Interest expense on our condensed consolidated statements of income (see Note 6 for additional information). The amounts reclassified to net income related to unrealized gain on marketable securities in the table above are included in Other income and (expense), net on our condensed 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 condensed consolidated statements of income (see Note 8 for additional information).

 

25


Table of Contents
10.

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 United States.

Wireline     

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

Corporate and other includes the results of our media, including AOL, 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 operations and other adjustments and gains and losses that are not allocated in assessing segment performance due to their non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results as these items are included in the chief operating decision maker’s assessment of segment performance.

On April 1, 2016, we completed 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 and long distance voice accounts in these three states to Frontier Communications Corporation (Frontier). 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 results of operations for this divestiture is 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 not material to our condensed consolidated financial statements or our segment results of operations.

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 reconciliation of segment operating revenues and expenses to consolidated operating revenues and expenses below also includes those items of a non-operational nature. We exclude from segment results the effects of certain items that management does not consider in assessing segment performance, primarily because of their non-operational nature.

We have adjusted prior period consolidated and segment information, where applicable, to conform to current period presentation.

 

26


Table of Contents

The following table provides operating financial information for our two reportable segments:

 

    

Three Months Ended

March 31,

 
(dollars in millions)    2017      2016  

External Operating Revenues

     

Wireless

     

Service

   $ 15,730      $ 16,769  

Equipment

     3,764        3,954  

Other

     1,282        1,196  
  

 

 

 

Total Wireless

     20,776        21,919  

Wireline

     

Consumer Markets

     3,201        3,180  

Enterprise Solutions

     2,466        2,501  

Partner Solutions

     1,016        1,053  

Business Markets

     890        870  

Other

     62        82  
  

 

 

 

Total Wireline

     7,635        7,686  
  

 

 

 

Total reportable segments

   $ 28,411      $ 29,605  
  

 

 

 

Intersegment Revenues

     

Wireless

   $ 102      $ 85  

Wireline

     241        237  
  

 

 

 

Total reportable segments

   $ 343      $ 322  
  

 

 

 

Total Operating Revenues

     

Wireless

   $ 20,878      $ 22,004  

Wireline

     7,876        7,923  
  

 

 

 

Total reportable segments

   $   28,754      $   29,927  
  

 

 

 

Operating Income (Loss)

     

Wireless

   $ 7,076      $ 7,880  

Wireline

     293        (67
  

 

 

 

Total reportable segments

   $ 7,369      $ 7,813  
  

 

 

 

 

27


Table of Contents
(dollars in millions)    At March 31,
2017
    At December 31,
2016
 

Assets

    

Wireless

   $   215,206     $   211,345  

Wireline

     68,376       66,679  
  

 

 

 

Total reportable segments

     283,582       278,024  

Corporate and other

     221,012       213,787  

Eliminations

     (257,863     (247,631
  

 

 

 

Total consolidated – reported

   $ 246,731     $ 244,180  
  

 

 

 

A reconciliation of the reportable segment operating revenues to consolidated operating revenues is as follows:

 

    

Three Months Ended

March 31,

 
(dollars in millions)    2017     2016  

Total reportable segment operating revenues

   $ 28,754     $ 29,927  

Corporate and other

     1,460       1,309  

Eliminations

     (400     (345

Impact of divested operations

           1,280  
  

 

 

 

Total consolidated operating revenues

   $   29,814     $   32,171  
  

 

 

 

Fios revenues are included within our Wireline segment and amounted to approximately $2.9 billion and $2.8 billion, respectively for the three months ended March 31, 2017 and 2016.

A reconciliation of the total of the reportable segments’ operating income to consolidated income before provision for income taxes is as follows:

 

    

Three Months Ended

March 31,

 
(dollars in millions)    2017     2016  

Total reportable segment operating income

   $   7,369     $   7,813  

Corporate and other

     (314     (509

Severance, pension and benefit charges (Note 8)

           (165

Gain on spectrum license transaction (Note 2)

     126       142  

Impact of divested operations

           661  
  

 

 

 

Total consolidated operating income

     7,181       7,942  

Equity in losses of unconsolidated businesses

     (21     (20

Other income and (expense), net

     (846     32  

Interest expense

     (1,132     (1,188
  

 

 

 

Income Before Provision For Income Taxes

   $ 5,182     $ 6,766  
  

 

 

 

No single customer accounted for more than 10% of our total operating revenues during the three months ended March 31, 2017 and 2016.

 

11.

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

 

28


Table of Contents

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.

Verizon is currently involved in approximately 35 federal district court actions alleging that Verizon is infringing various patents. Most of these cases are brought by non-practicing entities and effectively seek only monetary damages; a small number are brought by companies that have sold products and may 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.

 

29


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

Verizon Communications Inc. (Verizon, or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading providers of communications, information and entertainment products and services to consumers, businesses and governmental agencies. With a presence around the world, we offer voice, data and video services and solutions on our wireless and wireline networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security and control. We have two reportable segments, Wireless and Wireline. Our wireless business, operating as Verizon Wireless, provides voice and data services and equipment sales across the United States (U.S.) using one of the most extensive and reliable wireless networks. Our wireline business provides consumer, business and government customers with communications products and enhanced services, including broadband data and video, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services, and also owns and operates one of the most expansive end-to-end Global Internet Protocol (IP) networks. We have a highly skilled, diverse and dedicated workforce of approximately 161,000 employees as of March 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. Our priorities for 2017 are to leverage our network leadership, retain and grow our high quality customer base while balancing profitability, enhance ecosystems in media and telematics, and drive monetization of our networks and solutions. Our strategy requires significant capital investments primarily to acquire wireless spectrum, put the spectrum into service, provide additional capacity for growth in our networks, invest in the fiber-optic network that supports our businesses, maintain our networks and develop and maintain significant advanced information technology systems and data system capabilities. We believe that steady and consistent investments in our networks and platforms will drive innovative products and services and fuel our growth. We are consistently deploying new network architecture and technologies to extend our leadership in both fourth-generation (4G) and fifth-generation (5G). 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.

Strategic Transactions

Acquisition of Yahoo! Inc.

On July 23, 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). On February 20, 2017, Verizon and Yahoo entered into an amendment to the Purchase Agreement, pursuant to which the Transaction purchase price will be 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) will 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 wholly owned subsidiary of Yahoo, that Verizon has agreed to purchase pursuant to the Transaction, also entered into an amendment to a related reorganization agreement, pursuant to which Yahoo (which has announced that it intends to change its name to Altaba Inc. following the closing of the Transaction) will retain 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. 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 Securities and Exchange Commission (SEC).

The Transaction remains subject to customary closing conditions, including the approval of Yahoo’s stockholders, and is expected to close in the middle of 2017.

We believe that our acquisition of Yahoo’s operating business will help us become a scaled distributor in media. Yahoo’s operations are expected to provide us with a valuable portfolio of online content, mobile applications and viewers. Additionally, our acquisition of Yahoo’s operating business is expected to expand our analytics and ad tech capabilities which we expect will enhance both our competitive position in the mobile media marketplace and value proposition to advertisers (see Note 2 to the condensed consolidated financial statements for additional information).

 

30


Table of Contents

Network Evolution

We are reinventing our network architecture around a common fiber platform that will support both our wireless and wireline technologies. We expect that this new “One Fiber” architecture will improve our 4G Long-Term Evolution (LTE) coverage, speed the deployment of 5G technology, deliver high-speed Fios broadband to homes and businesses and create new opportunities in the small and medium business market. We expect to have further opportunities for expansion with our acquisition of XO Holdings’ wireline business (XO), which owns and operates one of the largest fiber-based IP and Ethernet networks. We completed this acquisition on February 1, 2017 for total cash consideration of approximately $1.8 billion, of which $0.1 billion was paid in 2015.

Data Center Sale

On December 6, 2016, we entered into a definitive agreement, which was subsequently amended on March 21, 2017, with Equinix, Inc. (Equinix) pursuant to which Verizon will sell 23 customer-facing data center sites in the U.S. and Latin America, for approximately $3.6 billion, subject to certain adjustments. The sale does not affect Verizon’s data center services delivered from 27 sites in Europe, Asia-Pacific and Canada, or its managed hosting and cloud offerings. The transaction is subject to customary regulatory approvals and closing conditions, and is expected to close during the first half of 2017.

Business Overview

In the sections that follow, we provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and discuss our results of operations, financial position and sources and uses of cash. 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.

Wireless

Our Wireless segment, doing business as Verizon Wireless, provides wireless communications services and products 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 in the U.S. on a postpaid and prepaid basis. Postpaid connections represent individual lines of service for which a customer is billed in advance a monthly access charge in return for a monthly network service allowance, and usage beyond the allowance is billed monthly in arrears. Our prepaid service enables individuals to obtain wireless services without credit verification by paying for all services in advance.

We offer various postpaid account service plans, including shared data plans, single connection plans and other plans tailored to the needs of our customers. Our shared data plans typically feature domestic unlimited voice minutes, unlimited domestic and international text, video and picture messaging, and a single data allowance that can be shared among the wireless devices on a customer’s account. These allowances will vary from time to time as part of promotional offers or in response to market circumstances. On February 12, 2017, we announced an introductory plan, our new Verizon Unlimited plan, available to our consumer and small business customers, which offers among other things, unlimited domestic voice, data and texting. Both our shared data plans and the Verizon Unlimited plan include our HD (High Definition) Voice, Video Calling and Mobile Hotspot services on compatible devices.

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, or on a compatible device that they already own, pay lower service fees (unsubsidized service pricing) as compared to those under fixed-term service plans. As of January 2017, we no longer offer consumers fixed-term service plans for phones.

We are focusing our wireless capital spending on adding capacity and density to our 4G LTE network. Approximately 97% of our total data traffic in March 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 Internet of Things (IoT), as well as position us for future 5G technology. We are committed to developing and deploying 5G wireless technology. We are working with key partners to ensure the aggressive pace of innovation, standards development and appropriate requirements for this next generation of wireless technology. Based on the outcome of our ongoing pre-commercial trials, we intend to be the first company to deploy a 5G fixed wireless broadband network in the U.S. We expect to launch a fixed commercial wireless service supported by this network in 2018, depending on the results of pre-commercial trials, which are ongoing.

 

31


Table of Contents

Wireline

Our Wireline segment provides voice, data and video communications products and enhanced services, including broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services. We provide these products and services to consumers in the 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 high-speed connections is growing. We expect our One Fiber initiative in Wireline will allow us to densify our 4G LTE wireless network as well as position us for future 5G technology. We also 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, including AOL Inc. (AOL), 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 operations and other adjustments and gains and losses that are not allocated in assessing segment performance due to their non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results as these items are included in the chief operating decision maker’s assessment of segment performance.

On April 1, 2016, we completed 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 and long distance voice accounts in these three states to Frontier Communications Corporation (Frontier). The transaction, which includes the acquisition by Frontier of the equity interests of Verizon’s incumbent local exchange carriers (ILECs) in California, Florida and Texas, did not involve any assets or liabilities of Verizon Wireless. The results of operations for this divestiture is 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. See “Impact of Divested Operations” and Note 10 to the condensed 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 not material to our condensed consolidated financial statements or 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. For the three months ended March 31, 2017, we recognized IoT revenues, which represent revenues on IoT product and connectivity service revenues, of $0.3 billion, a 75% increase compared to the prior year period. This increase was primarily attributable to our acquisitions of Fleetmatics and Telogis in the second half of 2016, which will enable us to provide a more 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 three months ended March 31, 2017, these investments included $3.1 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.

Trends

There have been no significant changes to the information related to trends affecting our business that was disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

32


Table of Contents
Consolidated Results of Operations

In this section, we discuss our overall results of operations and highlight items of a non-operational nature that are not included in our segment results. In “Segment Results of Operations,” we review the performance of our two reportable segments in more detail.

 

Consolidated Revenues    

 

     Three Months Ended
March 31,
    Increase/  
(dollars in millions)    2017     2016     (Decrease)  

Wireless

   $   20,878     $   22,004     $   (1,126     (5.1 )% 

Wireline

     7,876       7,923       (47     (0.6

Corporate and other

     1,460       2,589       (1,129     (43.6

Eliminations

     (400     (345     (55     15.9  
  

 

 

   

 

 

   

Consolidated Revenues

   $ 29,814     $ 32,171     $ (2,357     (7.3
  

 

 

   

 

 

   

The decrease in consolidated revenues during the three months ended March 31, 2017, compared to the similar period in 2016, was primarily due to declines in revenues at our Wireless segment as well as a decline in revenues within Corporate and other.

Wireless’ revenues decreased $1.1 billion, or 5.1%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily as a result of declines in service revenue, driven by decreased overage revenue, lower postpaid customers in the quarter and impacts from promotional activity.

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

Corporate and other revenues decreased $1.1 billion, or 43.6%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily as a result of the Access Line Sale on April 1, 2016 (see “Impact of Divested Operations”). This decrease was partially offset by fleet service growth in our telematics businesses. During 2017, our media business represented approximately 50% of revenues in Corporate and other, comprised primarily of revenues from AOL.

 

Consolidated Operating Expenses

 

     Three Months Ended
March 31,
     Increase/  
(dollars in millions)    2017      2016      (Decrease)  

Cost of services

   $ 6,858      $ 7,614      $ (756     (9.9 )% 

Wireless cost of equipment

     4,808        4,998        (190     (3.8

Selling, general and administrative expense

     6,908        7,600        (692     (9.1

Depreciation and amortization expense

     4,059        4,017        42       1.0  
  

 

 

    

 

 

   

Consolidated Operating Expenses

   $   22,633      $   24,229      $   (1,596     (6.6
  

 

 

    

 

 

   

Cost of Services

Cost of services decreased $0.8 billion, or 9.9%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to the completion of the Access Line Sale on April 1, 2016 and a decline in net pension and postretirement benefit costs and access costs at our Wireline segment.

Wireless Cost of Equipment

Wireless cost of equipment decreased $0.2 billion, or 3.8%, at our Wireless segment during the three months ended March 31, 2017, compared to the similar period in 2016, primarily as a result of a decline in the number of smartphone and tablet units sold, partially offset by a shift to higher priced units in the mix of devices sold.

 

33


Table of Contents

Selling, General and Administrative Expense

Selling, general and administrative expense decreased $0.7 billion, or 9.1%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to a pension remeasurement charge during the three months ended March 31, 2016 (see “Other Items”), the completion of the Access Line Sale on April 1, 2016 (see “Impact of Divested Operations”), a decline in sales commission expense at our Wireless segment and declines in net pension and postretirement benefit costs and personnel costs at our Wireline segment.

Non-operational Charges (Credits)

Non-operational charges (credits) included in operating expenses were as follows:

 

     Three Months Ended
March 31,
 
(dollars in millions)    2017     2016  

Severance, pension and benefit charges

   $   –     $ 165  

Gain on spectrum license transaction

       (126       (142

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

Impact of Divested Operations

On April 1, 2016, we completed the Access Line Sale. The results of operations related to these divestitures 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:

 

    

Three Months Ended

March 31,

 
(dollars in millions)    2017      2016  

Impact of Divested Operations

     

Operating revenues

   $   –      $   1,280  

Cost of services

       –        482  

Selling, general and administrative expense

       –        137  

 

34


Table of Contents
Other Consolidated Results

Other Income and (Expense), Net

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

 

     Three Months Ended
March 31,
    Increase/  
(dollars in millions)    2017     2016     (Decrease)  

Interest income

   $ 14     $ 15     $ (1     (6.7 )% 

Other, net

     (860     17       (877     nm  
  

 

 

   

 

 

   

Total

   $ (846   $ 32     $   (878     nm  
  

 

 

   

 

 

   
nm – not meaningful         

The change in Other income and (expense), net during the three months ended March 31, 2017, compared to the similar period in 2016 was primarily driven by early debt redemption costs of $0.8 billion recorded during the first quarter of 2017 (see “Other Items”).

 
Interest Expense         
     Three Months Ended
March 31,
    Increase/  
(dollars in millions)    2017     2016     (Decrease)  

Total interest costs on debt balances

   $ 1,307     $ 1,356     $ (49     (3.6 )% 

Less capitalized interest costs

     175       168       7       4.2  
  

 

 

   

 

 

   

Total

   $ 1,132     $ 1,188     $ (56     (4.7
  

 

 

   

 

 

   

Average debt outstanding

   $   111,390     $   109,693      

Effective interest rate

     4.7     4.9    

Total interest costs on debt balances decreased during the three months ended March 31, 2017, compared to the similar period in 2016. The decrease during the three months ended March 31, 2017 was primarily due to a lower effective interest rate (see “Consolidated Financial Condition”).

 
Provision for Income Taxes         
     Three Months Ended
March 31,
    Increase/  
(dollars in millions)    2017     2016     (Decrease)  

Provision for income taxes

   $ 1,629     $ 2,336     $ (707     (30.3 )% 

Effective income tax rate

     31.4     34.5    

The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. The decrease in the effective income tax rate and to the provision for income taxes during the three months ended March 31, 2017, compared to the similar period in 2016, was primarily due to higher tax benefits resulting from the favorable resolution of various income tax matters in the current period as well as the impact of lower income before income taxes in the current period.

Unrecognized Tax Benefits

Unrecognized tax benefits were $1.7 billion at March 31, 2017 and $1.9 billion at December 31, 2016. Interest and penalties related to unrecognized tax benefits were $0.1 billion (after-tax) at March 31, 2017 and December 31, 2016, respectively.

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

 

35


Table of Contents

jurisdictions for various open tax years. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount in the next twelve months. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.

 

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) earnings of unconsolidated businesses and other income and (expense), net to net income.

Consolidated Adjusted EBITDA is calculated by excluding the effect of non-operational items and the impact of divested operations from the calculation of Consolidated EBITDA. 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 non-operational items and the impact of divested operations enables comparability to prior period performance and trend analysis. Consolidated Adjusted EBITDA is also used by rating agencies, lenders and other parties to evaluate our creditworthiness. See “Other Items” for additional details regarding these non-operational 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.

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.

 

     Three Months Ended
March 31,
 
(dollars in millions)    2017     2016  

Consolidated Net Income

   $ 3,553     $ 4,430  

Add (Less):

    

Provision for income taxes

     1,629       2,336  

Interest expense

     1,132       1,188  

Other (income) and expense, net

     846       (32

Equity in losses of unconsolidated businesses

     21       20  
  

 

 

 

Consolidated Operating Income

   $ 7,181     $ 7,942  

Add Depreciation and amortization expense

     4,059       4,017  
  

 

 

 

Consolidated EBITDA

   $   11,240     $   11,959  
  

 

 

 

Add (Less):

    

Severance, pension and benefit charges

       –       165  

Gain on spectrum license transaction

     (126     (142

Impact of divested operations

       –       (661
  

 

 

 

Consolidated Adjusted EBITDA

   $ 11,114     $ 11,321  
  

 

 

 

 

36


Table of Contents

The changes in Consolidated Net Income, Consolidated Operating Income, Consolidated EBITDA and Consolidated adjusted EBITDA in the table above during the three months ended March 31, 2017, compared to the similar period in 2016, 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 10 to the condensed consolidated financial statements.

 

37


Table of Contents
Wireless

Operating Revenues and Selected Operating Statistics

 

     Three Months Ended
March 31,
    Increase/  
(dollars in millions, except ARPA and I-ARPA)    2017     2016     (Decrease)  

Service

   $   15,778     $   16,809     $   (1,031     (6.1 )% 

Equipment

     3,764       3,954       (190     (4.8

Other

     1,336       1,241       95       7.7  
  

 

 

   

 

 

   

Total Operating Revenues

   $ 20,878     $ 22,004     $ (1,126     (5.1
  

 

 

   

 

 

   

Connections (‘000): (1)

        

Retail

     113,913       112,573       1,340       1.2  

Retail postpaid

     108,483       107,171       1,312       1.2  

Net additions in period (‘000): (2)

        

Retail connections

     (324     463       (787     nm  

Retail postpaid connections

     (307     640       (947     nm  

Churn Rate:

        

Retail connections

     1.39     1.23    

Retail postpaid connections

     1.15     0.96    

Account Statistics:

        

Retail postpaid ARPA

   $ 136.98     $ 145.34     $ (8.36     (5.8

Retail postpaid I-ARPA

   $ 166.01     $ 165.03     $ 0.98       0.6  

Retail postpaid accounts (‘000) (1)

     35,270       35,720       (450     (1.3

Retail postpaid connections per account (1)

     3.08       3.00       0.08       2.7  

 

(1)  

As of end of period

(2)  

Excluding acquisitions and adjustments    

nm – not meaningful

Wireless’ total operating revenues decreased by $1.1 billion, or 5.1%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily as a result of a decline in service revenue.

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 shared data plans, such as our Verizon Plan and More Everything plans, our Verizon Unlimited plan, and corporate accounts, as well as legacy single connection plans and family plans. A single account may include monthly wireless services for a variety of connected devices.

Retail connections represent our retail customer device connections. Churn is the rate at which service to connections is terminated. Retail connections under an account may include 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 the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to a decrease in retail postpaid gross additions as well as a higher retail postpaid connection churn rate, driven by higher churn on tablet connections.

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 2.7% as of March 31, 2017, compared to March 31, 2016. The increase in retail postpaid connections per account is primarily due to an increase in Internet devices, which represented 18.3% of our retail postpaid connection base as of March 31, 2017, compared to 17.3% as of March 31, 2016.

 

38


Table of Contents

Service Revenue

Service revenue, which does not include recurring device payment plan billings related to the Verizon device payment program, decreased by $1.0 billion, or 6.1%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily driven by decreased overage revenue, lower postpaid customers in the quarter, and impacts from promotional activity. Overage pressure was primarily related to the ongoing migration to the pricing plans implemented in 2016, which feature safety mode and carryover data, and the introduction of unlimited offerings. Service revenue was also negatively impacted as a result of the ongoing customer migration to plans with unsubsidized service pricing.

Customer migration to unsubsidized service pricing is driven in part by an increase in the activation of devices purchased under the Verizon device payment program. During the first quarter of 2017, phone activations under the Verizon device payment program were 76% of retail postpaid phones activated. At March 31, 2017, approximately 72% of our retail postpaid phone connections were on unsubsidized service pricing compared to approximately 48% at March 31, 2016. At March 31, 2017, approximately 48% of our retail postpaid phone connections participated in the Verizon device payment program compared to approximately 33% at March 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 0.4% during the three months ended March 31, 2017, compared to the similar period in 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 the three months ended March 31, 2017, compared to the similar period in 2016, as a result of customer migration to plans with unsubsidized service pricing, including our new price plans launched during 2016 and 2017, which feature safety mode, and carryover and unlimited data. 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, increased 0.6% during the three months ended March 31, 2017, compared to the similar period in 2016.

Equipment Revenue

Equipment revenue decreased $0.2 billion, or 4.8%, during the three months ended March 31, 2017, compared to the similar period in 2016, as a result of a decline in overall sales volume and an increase in promotional activity, partially offset by an increase in device sales under the Verizon device payment program.

Under the Verizon device payment program, we recognize a higher amount of equipment revenue at the time of sale of devices. For the three months ended March 31, 2017, phone activations under the Verizon device payment program represented approximately 76% of retail postpaid phones activated compared to approximately 68% during the three months ended March 31, 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 $0.1 billion, or 7.7%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to financing revenues from our device payment program and a volume-driven increase in revenues related to our device protection package.

Operating Expenses

 

     Three Months Ended
March 31,
     Increase/  
(dollars in millions)    2017      2016      (Decrease)  

Cost of services

   $ 1,958      $ 1,942      $ 16       0.8

Cost of equipment

     4,808        4,998        (190     (3.8

Selling, general and administrative expense

     4,698        4,891        (193     (3.9

Depreciation and amortization expense

     2,338        2,293        45       2.0  
  

 

 

    

 

 

   

Total Operating Expenses

   $   13,802      $   14,124      $   (322     (2.3
  

 

 

    

 

 

   

 

39


Table of Contents

Cost of Services

Cost of services increased 0.8% during the three months ended March 31, 2017, compared to the similar period in 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 volume-driven increase in costs related to the device protection package offered to our customers. Partially offsetting these increases was a decrease in costs related to long distance and roaming.

Cost of Equipment

Cost of equipment decreased $0.2 billion, or 3.8% during the three months ended March 31, 2017, compared to the similar period in 2016, primarily as a result of a decline in the number of smartphone and tablet units sold, partially offset by a shift to higher priced units in the mix of devices sold.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased $0.2 billion, or 3.9%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to a $0.2 billion decline in sales commission expense. 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.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $0.1 billion, or 2.0%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily driven by an increase in net depreciable assets.

Segment Operating Income and EBITDA

 

    

Three Months Ended

March 31,

    Increase/  
(dollars in millions)    2017     2016     (Decrease)  

Segment Operating Income

   $   7,076     $ 7,880     $ (804     (10.2 )% 

Add Depreciation and amortization expense

     2,338       2,293       45       2.0  
  

 

 

   

 

 

   

Segment EBITDA

   $ 9,414     $   10,173     $   (759     (7.5
  

 

 

   

 

 

   

Segment operating income margin

     33.9     35.8    

Segment EBITDA margin

     45.1     46.2    

The changes in the table above during the three months ended March 31, 2017, compared to the similar period in 2016, were primarily a result of the factors described in connection with operating revenues and operating expenses.

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

 

    

Three Months Ended

March 31,

 
(dollars in millions)    2017     2016  

Gain on spectrum license transaction

   $   (126   $   (142

 

40


Table of Contents
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 for the three months ended March 31, 2017 amounted to $0.2 billion.

The operating results and statistics for all periods presented below exclude the results of the Access Line Sale on April 1, 2016 (see “Impact of Divested Operations”). 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

 

    

Three Months Ended

March 31,

     Increase/  
(dollars in millions)    2017      2016      (Decrease)  

Consumer Markets

   $ 3,201      $ 3,180      $     21       0.7

Enterprise Solutions

     2,466        2,501        (35     (1.4

Partner Solutions

     1,256        1,292        (36     (2.8

Business Markets

     890        870        20       2.3  

Other

     63        80        (17     (21.3
  

 

 

    

 

 

   

Total Operating Revenues

   $   7,876      $   7,923      $ (47     (0.6
  

 

 

    

 

 

   

Connections (‘000): (1)

          

Total voice connections

     13,634        14,781        (1,147     (7.8

Total Broadband connections

     7,011        7,097        (86     (1.2

Fios Internet subscribers

     5,688        5,508        180       3.3  

Fios video subscribers

     4,681        4,678        3       0.1  

 

(1)  

As of end of period

Wireline’s revenues decreased 0.6%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily as a result of declines in Enterprise Solutions and Partner Solutions, partially offset by an increase in Fios revenues. Fios revenues were $2.9 billion during the three months ended March 31, 2017, compared to $2.8 billion during the similar period in 2016. We grew our Fios Internet subscriber base by 3.3%, compared to the similar period in 2016.

Consumer Markets

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

Consumer Markets revenues increased 0.7% during the three months ended March 31, 2017, compared to the similar period in 2016, as increases in Fios revenues due to subscriber growth for Fios services (Internet, video and voice) were partially offset by the continued decline of local exchange revenues.

 

41


Table of Contents

Consumer Fios revenues increased $0.1 billion, or 4.5%, during the three months ended March 31, 2017, compared to the similar period in 2016. Fios represented approximately 84% of Consumer revenue for the three months ended March 31, 2017, compared to approximately 81% during the similar period in 2016.

The decline of local exchange revenues was primarily due to an 8.0% decline in Consumer voice connections resulting primarily from competition and technology substitution with wireless, competing VoIP (voice over IP) and cable telephony services. Total voice connections include traditional switched access lines in service as well as Fios digital voice connections.

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 offers traditional circuit-based network services, and advanced networking solutions including Private IP, Ethernet, and Software Defined 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. Enterprise Solutions provides professional and integrated managed services, delivering solutions for large businesses, including multinational corporations, and federal government customers.

Enterprise Solutions revenues decreased 1.4%, during the three months ended March 31, 2017, compared to the similar period in 2016, due to declines in traditional data, cloud and IT services and voice communications services as a result of competitive price pressures, partially offset by the acquisition of XO during the quarter.

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.

Partner Solutions revenues decreased 2.8% during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to declines in data revenues and traditional voice revenues driven by the effect of technology substitution as well as continuing contraction of market rates due to competition, partially offset by the acquisition of XO during the quarter. As a result of technology substitution, the number of core data circuits at March 31, 2017 decreased 18.0% compared to March 31, 2016. The decline in traditional voice revenue is driven by a 6.4% decline in domestic wholesale connections at March 31, 2017, compared to March 31, 2016.

Business Markets

Business Markets offers traditional voice & 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.

Business Markets revenues increased 2.3% during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to the acquisition of XO during the quarter, partially offset by revenue declines related to the loss of voice and HSI connections. Business Markets northeast footprint delivers ILEC voice and data products, which face secular declines. To counter these declines, we will continue to accelerate the migration of customers to modern fiber-based products as those facilities expand across urban areas.

Operating Expenses

 

    

Three Months Ended

March 31,

     Increase/  
(dollars in millions)    2017      2016      (Decrease)  

Cost of services

   $     4,480      $     4,644      $ (164     (3.5 )% 

Selling, general and administrative expense

     1,611        1,770        (159     (9.0

Depreciation and amortization expense

     1,492        1,576        (84     (5.3
  

 

 

    

 

 

   

Total Operating Expenses

   $ 7,583      $ 7,990      $     (407     (5.1
  

 

 

    

 

 

   

 

42


Table of Contents

Cost of Services

Cost of services decreased $0.2 billion, or 3.5% during the three months ended March 31, 2017, compared to the similar period in 2016 due to a decline in net pension and postretirement benefit costs primarily driven by collective bargaining agreements ratified in June 2016, and a decline in access costs driven by declines in overall wholesale long distance volumes and rates. These decreases were partially offset by an increase in content costs, associated with continued programming license fee increases, and Fios subscriber growth and the acquisition of XO during the quarter.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased $0.2 billion, or 9.0%, during the three months ended March 31, 2017, compared to the similar period in 2016, due to a decline in net pension and postretirement benefit costs, primarily driven by collective bargaining agreements ratified in June 2016 and declines in personnel costs.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $0.1 billion, or 5.3%, during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to decreases in net depreciable assets, offset by the depreciation on XO plant, property and equipment during the quarter.

Segment Operating Income (Loss) and EBITDA

 

    

Three Months Ended

March 31,

    Increase/  
(dollars in millions)    2017     2016     (Decrease)  

Segment Operating Income (Loss)

   $ 293     $ (67   $ 360       nm  

Add Depreciation and amortization expense

     1,492       1,576       (84     (5.3 )% 
  

 

 

   

 

 

   

Segment EBITDA

   $   1,785     $   1,509     $   276       18.3  
  

 

 

   

 

 

   

Segment operating income (loss) margin

     3.7     (0.8 )%     

Segment EBITDA margin

     22.7     19.0    

nm – not meaningful

The changes in the table above during the three months ended March 31, 2017, compared to the similar period in 2016, were primarily a result of the factors described in connection with operating revenues and operating expenses.

Non-operational items excluded from our Wireline segment Operating income (loss) were as follows:

 

    

Three Months Ended

March 31,

 
(dollars in millions)    2017      2016  

Impact of divested operations

   $   –      $   (661)  

 

Other Items

 

Early Debt Redemption Costs

During the three months ended March 31, 2017, we recorded early debt redemption costs of $0.8 billion primarily in connection with the early redemption of $0.2 billion aggregate principal amount of GTE LLC Notes, and the additional redemption pursuant to the January cash offers of $0.5 billion aggregate principal amount of Verizon Communications Notes, the additional redemption of $0.1 billion Verizon Communications Notes, as well as the early redemption pursuant to the March tender offer and acceptance of $2.8 billion aggregate principal amount of Verizon Communications Notes, $0.2 billion aggregate principal amount of debentures of our operating telephone company subsidiaries and $0.1 billion aggregate principal amount of GTE LLC Notes. See Note 4 to the condensed consolidated financial statements for additional information related to our early debt redemptions.

 

43


Table of Contents
Severance, Pension and Benefit Charges

During the three months ended March 31, 2016, we recorded a net pre-tax pension remeasurement charge of approximately $0.2 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension remeasurement charge relates to settlements for employees who received lump-sum distributions in one of Verizon’s seven defined benefit pension plans. The pension remeasurement charge was primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of this pension plan. Our weighted-average discount rate assumption decreased from 4.60% at December 31, 2015 to 4.21% at March 31, 2016.

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 pension remeasurement described above.

 

Gain on Spectrum License Transaction

During the first quarter of 2017, we completed a license exchange transaction with affiliates of AT&T Inc. (AT&T) to exchange certain Advanced Wireless Services (AWS) and Personal Communication Services (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 we recorded a pre-tax gain of approximately $0.1 billion in Selling, general and administrative expense on our condensed consolidated statement of income for the three months ended March 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 pre-tax gain of approximately $0.1 billion in Selling, general and administrative expense on our condensed consolidated statement of income for the three months ended March 31, 2016.

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.

 

Impact of Divested Operations

On April 1, 2016, we completed the sale of our local exchange business and related landline activities in California, Florida and Texas to Frontier.

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 historical financial results of the divested operations described above.

 

44


Table of Contents
Consolidated Financial Condition

 

    

Three Months Ended

March 31,

       
(dollars in millions)    2017     2016     Change  

Cash Flows Provided By (Used In)

      

Operating activities

   $     1,681     $     7,497     $   (5,816

Investing activities

     (4,833     (3,436     (1,397

Financing activities

     4,579       (2,685     7,264  
  

 

 

 

Increase In Cash and Cash Equivalents

   $ 1,427     $ 1,376     $ 51  
  

 

 

 

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 and privately-placed capital market securities. In addition, our available arrangements to monetize our device payment plan agreement receivables include asset-backed securitizations and sales of selected receivables to relationship banks.

 

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 the three months ended March 31, 2017 decreased by $5.8 billion, compared to the similar period in 2016, primarily due to our discretionary contributions to qualified pension plans of $3.4 billion, the change in the method in which we monetize device payment plan receivables, as discussed below, a decline in earnings, and changes in working capital. As a result of the discretionary pension contribution, our mandatory pension funding through 2020 is expected to be minimal, which will benefit future cash flows and improve the funded status of our qualified pension plans.

During 2016, we changed the method in 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 asset-backed securitization transactions, which are recorded in cash flows from financing activities. During the three months ended March 31, 2016, we received cash proceeds related to new sales of wireless device payment plan agreement receivables of approximately $2.0 billion. See Note 5 to the condensed consolidated financial statements for additional information. During the three months ended March 31, 2017, we received proceeds from asset-backed securitization transactions of approximately $1.3 billion. See Note 4 to the condensed 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.

 

45


Table of Contents

Capital expenditures, including capitalized software, were as follows:

 

    

Three Months Ended

March 31,

 
(dollars in millions)    2017     2016  

Wireless

   $ 1,831     $ 2,190  

Wireline

     960       1,006  

Other

     276       191  
  

 

 

 
   $ 3,067     $ 3,387  
  

 

 

 

Total as a percentage of revenue

     10.3     10.5

Capital expenditures decreased at Wireless during the three months ended March 31, 2017, compared to the similar period in 2016, primarily due to the timing of investments to increase the capacity of our 4G LTE network. Capital expenditures declined at Wireline as a result of capital expenditures related to the local exchange business and related landline activities in California, Florida and Texas that were sold to Frontier on April 1, 2016, partially offset by an increase in capital expenditures used for the acquisition of fiber assets.

Acquisitions

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 $1.8 billion, of which $0.1 billion was paid in 2015.

During the three months ended March 31, 2017, we acquired various other businesses and investments for cash consideration that was not significant.

 

Cash Flows Provided by (Used In) Financing Activities

We seek to maintain a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. During the three months ended March 31, 2017 and 2016, net cash provided by (used in) financing activities was $4.6 billion and $(2.7) billion, respectively.

During the three months ended March 31, 2017, our net cash provided by financing activities of $4.6 billion was primarily driven by proceeds from long-term debt borrowings of $14.3 billion, including proceeds of approximately $1.3 billion from our asset-backed debt transactions. These proceeds were partially offset by repayments of long-term borrowings and capital lease obligations of $5.6 billion, $2.4 billion paid in cash dividends and net debt related costs of $1.4 billion (see “Other Items” for additional information related to the early debt redemption costs incurred during the first quarter of 2017).

Proceeds from and Repayments of Long-Term Borrowings

At March 31, 2017, our total debt increased to $116.5 billion, compared to $108.1 billion at December 31, 2016. During the three months ended March 31, 2017 and 2016, our effective interest rate was 4.7% and 4.9%, respectively. See Note 4 to the condensed consolidated financial statements for additional information regarding our debt activity.

At March 31, 2017, approximately $11.7 billion, or 10.1%, of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See “Market Risk” for additional information.

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

Asset-Backed Debt

As of March 31, 2017, the carrying value of our asset-backed debt was $6.3 billion. Our asset-backed debt includes notes (the Asset-Backed Notes) issued to third-party investors (Investors) and loans (ABS Financing Facility) received from banks and their conduit facilities (collectively, the Banks). Our consolidated asset-backed securitization 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

 

46


Table of Contents

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 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 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 condensed 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 condensed 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 condensed consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are included on our condensed consolidated balance sheets.

Other, net

Other, net financing activities during the three months ended March 31, 2017 includes net debt related costs of $1.4 billion. See “Other Items” for additional information related to the early debt redemption costs incurred during the first quarter of 2017.

Credit Facilities

As of March 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.

As of March 31, 2017, the equipment credit facility insured by Eksportkreditnamnden Stockholm, Sweden (EKN), the Swedish export credit agency, was fully drawn. We had the ability to borrow up to $1.0 billion to finance network equipment-related purchases. The facility had borrowings available through June 2017, contingent upon the amount of eligible equipment-related purchases made by Verizon.

Dividends

As in prior periods, dividend payments were a significant use of capital resources. During the three months ended March 31, 2017, we paid $2.4 billion in cash dividends.

Covenants

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

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

 

47


Table of Contents
Change In Cash and Cash Equivalents

Our Cash and cash equivalents at March 31, 2017 totaled $4.3 billion, a $1.4 billion increase compared to Cash and cash equivalents at December 31, 2016, primarily as a result of the factors discussed above.

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 condensed 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:

 

    

Three Months Ended

March 31,

        
(dollars in millions)    2017     2016      Change  

Net cash provided by operating activities

   $   1,681     $   7,497      $   (5,816

Less Capital expenditures (including capitalized software)

     3,067       3,387        (320
  

 

 

 

Free cash flow

   $ (1,386   $ 4,110      $ (5,496
  

 

 

 

The change in Free cash flow during the three months ended March 31, 2017, compared to the similar period in 2016, was primarily due to our discretionary contributions to qualified pension plans of $3.4 billion, the change in the method in which we monetize device payment plan receivables, as discussed below, a decline in earnings and changes in working capital. As a result of the discretionary pension contribution, our mandatory pension funding through 2020 is expected to be minimal, which will benefit future cash flows and improve the funded status of our qualified pension plans.

During 2016, we changed the method in 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 asset-backed securitization transactions, which are recorded in cash flows from financing activities. During the three months ended March 31, 2016, we received cash proceeds related to new sales of wireless device payment plan agreement receivables of approximately $2.0 billion. See Note 5 to the condensed consolidated financial statements for additional information. During the three months ended March 31, 2017, we received proceeds from asset-backed securitization transactions of approximately $1.3 billion. See Note 4 to the condensed consolidated financial statements and “Cash Flows Provided by (Used in) Financing Activities” 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.

It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in optimizing exposure to various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates and foreign exchange rates on our earnings. At March 31, 2017 and December 31, 2016, we posted collateral of approximately $0.2 billion, respectively, related to derivative contracts under collateral exchange arrangements. During the first quarter of 2017, we paid an immaterial amount of cash to extend amendments to certain collateral exchange arrangements. These amendments suspend cash collateral posting for a specified period of time by both counterparties. We may enter into swaps on an uncollateralized basis in certain circumstances. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote. As such, we do not expect that our results of operations or financial condition will be materially affected by these risk management strategies. See Note 6 to the condensed consolidated financial statements for additional information regarding the derivative portfolio.

 

48


Table of Contents
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 March 31, 2017, approximately 77% 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.

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 March 31, 2017, the fair value asset and liability of these contracts were $0.1 billion and $0.3 billion, respectively. At December 31, 2016, the fair value asset and liability of these contracts were $0.1 and $0.2 billion, respectively. At March 31, 2017 and December 31, 2016, the total notional amount of the interest rate swaps were $16.6 billion and $13.1 billion, respectively.

Interest Rate Caps

We also have interest rate caps which we use as an economic hedge but for which we have elected not to apply hedge accounting. During 2016, we entered into interest rate caps to mitigate our interest exposure to interest rate increases on our ABS Financing Facility. The fair value of these contracts was not material at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017 and December 31, 2016, the total notional value of these contracts was $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 condensed consolidated balance sheets. Gains and losses on foreign currency transactions are recorded in the condensed consolidated statements of income in Other income and (expense), net. At March 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 and Euro-denominated debt into U.S. dollars and to fix our future interest and principal payments in U.S. dollars, as well as to mitigate the effect of foreign currency transaction gains or losses. These swaps are designated as cash flow hedges. The fair value asset of these contracts was $0.1 billion and not material at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017 and December 31, 2016, the fair value liability of these contracts was $1.7 billion and $1.8 billion, respectively. At March 31, 2017 and December 31, 2016, the total notional amount of the cross currency swaps was $12.9 billion, respectively.

 

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 condensed consolidated financial statements for additional information regarding our spectrum license transactions.

 

49


Table of Contents

Wireline

XO Holdings

In February 2017, we completed our acquisition of XO, which owns and operates one of the largest fiber-based IP and Ethernet networks, for total cash consideration of approximately $1.8 billion, of which $0.1 billion was paid in 2015. Separately, in February 2016, we entered into an agreement to lease certain wireless spectrum from a wholly-owned subsidiary of XO Holdings that holds its wireless spectrum, which included an option to buy the subsidiary. In April 2017, Verizon exercised its option to buy that subsidiary for approximately $0.2 billion, subject to certain adjustments. The transaction is subject to customary regulatory approvals and is expected to close by the end of 2017.

Other

On December 6, 2016, we entered into a definitive agreement, which was subsequently amended on March 21, 2017, with Equinix pursuant to which Verizon will sell 23 customer-facing data center sites in the U.S. and Latin America, for approximately $3.6 billion, subject to certain adjustments. The sale does not affect Verizon’s data center services delivered from 27 sites in Europe, Asia-Pacific and Canada, or its managed hosting and cloud offerings. The transaction is subject to customary regulatory approvals and closing conditions, and is expected to close during the first half of 2017. See Note 2 to the condensed consolidated financial statements for additional information.

Other

Acquisition of Yahoo! Inc.’s Operating Business

On July 23, 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). Prior to the closing of the Transaction, pursuant to a related reorganization agreement, Yahoo will transfer all of the assets and liabilities constituting Yahoo’s operating business to the subsidiaries to be acquired in the Transaction. The assets to be acquired will not include Yahoo’s cash, its ownership interests in Alibaba, Yahoo! Japan and certain other investments, certain undeveloped land recently divested by Yahoo or certain non-core intellectual property. We will receive 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 is not being conveyed with the business.

On February 20, 2017, Verizon and Yahoo entered into an amendment to the Purchase Agreement, pursuant to which the Transaction purchase price will be 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) will 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 wholly owned subsidiary of Yahoo, that Verizon has agreed to purchase pursuant to the Transaction, also entered into an amendment to the related reorganization agreement, pursuant to which Yahoo (which has announced that it intends to change its name to Altaba Inc. following the closing of the Transaction) will retain 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. 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.

The Transaction remains subject to customary closing conditions, including the approval of Yahoo’s stockholders, and is expected to close in the middle of 2017.

Other

From time to time, we enter into strategic agreements to acquire various other businesses and investments. See Note 2 to the condensed consolidated financial statements for additional information.

 

50


Table of Contents
Other Factors That May Affect Future Results

 

Regulatory and Competitive Trends

There have been no material changes to Regulatory and Competitive Trends as previously disclosed in Part I, Item 1. “Business” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Environmental Matters

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.

 

Recently Issued Accounting Standards

See Note 1 to the condensed consolidated financial statements for a discussion of recently issued accounting standard updates not yet adopted as of March 31, 2017.

 

51


Table of Contents
Cautionary Statement Concerning Forward-Looking Statements

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

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

 

   

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

 

   

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

 

   

material changes in technology or technology substitution;

 

   

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

 

   

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

 

   

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

 

   

our high level of indebtedness;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the inability to implement our business strategies; and

 

   

the inability to realize the expected benefits of strategic transactions.

 

52


Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information relating to market risk is included in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Market Risk.”

Item 4. Controls and Procedures

Our chief executive officer and chief financial officer have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report, that ensure that information relating to the registrant which is required to be disclosed in this report is recorded, processed, summarized and reported within required time periods 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. Based on this evaluation, our chief executive officer and chief financial officer have concluded that the registrant’s disclosure controls and procedures were effective as of March 31, 2017.

In the ordinary course of business, we routinely review our system of internal control over financial reporting and make changes to our systems and processes that are intended to ensure an effective internal control environment. There were no changes in the Company’s internal control over financial reporting during the first quarter of 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II - Other Information

Item 1. Legal Proceedings

In October 2013, the California Attorney General’s Office notified Verizon California Inc. and other Verizon companies of potential violations of California state hazardous waste statutes primarily arising from the disposal of electronic components, batteries and aerosol cans at certain California facilities. We are cooperating with this investigation and continue to review our operations relating to the management of hazardous waste. While penalties relating to the alleged violations could exceed $100,000, we do not expect that any penalties ultimately incurred will be material. On April 1, 2016, we completed the sale to Frontier of our landline business operated by Verizon California Inc. and certain other Verizon landline companies. As a result of this transaction, Frontier now owns and operates Verizon California Inc. and has assumed the liabilities of Verizon California Inc. that may arise as a result of these alleged violations.

Item 1A. Risk Factors

There have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On February 28, 2017, our previously authorized share buyback program expired. 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. Under the program, shares may be repurchased in privately negotiated transactions and on the open market, including through plans complying with Rule 10b5-1(c) under the Exchange Act. The timing and number of shares purchased under the program, if any, will depend on market conditions and the Company’s capital allocation priorities.

Verizon did not repurchase any shares of Verizon common stock during the three months ended March 31, 2017. At March 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.

 

53


Table of Contents

Item 6. Exhibits

 

Exhibit
Number

    

Description

10a      Form of 2017 Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan.
10b      Form of 2017 Restricted Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan.
10c      2017 Special Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan for J. Stratton.
12      Computation of Ratio of Earnings to Fixed Charges.
31.1      Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2      Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS      XBRL Instance Document.
101.SCH      XBRL Taxonomy Extension Schema Document.
101.PRE      XBRL Taxonomy Presentation Linkbase Document.
101.CAL      XBRL Taxonomy Calculation Linkbase Document.
101.LAB      XBRL Taxonomy Label Linkbase Document.
101.DEF      XBRL Taxonomy Extension Definition Linkbase Document.

 

54


Table of Contents

Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    VERIZON COMMUNICATIONS INC.
Date: April 27, 2017     By   /s/ Anthony T. Skiadas
           Anthony T. Skiadas
           Senior Vice President and Controller
           (Principal Accounting Officer)

 

55


Table of Contents

Exhibit Index

 

Exhibit
Number

    

Description

10a     

Form of 2017 Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan.

10b     

Form of 2017 Restricted Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan.

10c      2017 Special Performance Stock Unit Agreement pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan for J. Stratton.
12      Computation of Ratio of Earnings to Fixed Charges.
31.1      Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2      Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS      XBRL Instance Document.
101.SCH      XBRL Taxonomy Extension Schema Document.
101.PRE      XBRL Taxonomy Presentation Linkbase Document.
101.CAL      XBRL Taxonomy Calculation Linkbase Document.
101.LAB      XBRL Taxonomy Label Linkbase Document.
101.DEF      XBRL Taxonomy Extension Definition Linkbase Document.

 

56

Exhibit 10a

VERIZON COMMUNICATIONS INC. LONG-TERM INCENTIVE PLAN

2017 PERFORMANCE STOCK UNIT AGREEMENT

AGREEMENT between Verizon Communications Inc. (“Verizon” or the “Company”) and you (the “Participant”) and your heirs and beneficiaries.

1. Purpose of Agreement. The purpose of this Agreement is to provide a grant of performance stock units (“PSUs”) to the Participant.

2. Agreement. This Agreement is entered into pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan, as amended and restated (the “Plan”), and evidences the grant of a performance stock unit award in the form of PSUs pursuant to the Plan. In consideration of the benefits described in this Agreement, which Participant acknowledges are good, valuable and sufficient consideration, the Participant agrees to comply with the terms and conditions of this Agreement, including the Participant’s obligations and restrictions set forth in Exhibit A to this Agreement and the Participant’s non-competition, non-solicitation, confidentiality and other obligations and restrictions set forth in Exhibit B to this Agreement, both of which are incorporated into and are a part of the Agreement. The PSUs and this Agreement are subject to the terms and provisions of the Plan. By executing this Agreement, the Participant agrees to be bound by the terms and provisions of the Plan and this Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement. In addition, the Participant agrees to be bound by the actions of the Human Resources Committee of Verizon Communication’s Board of Directors or any successor thereto (the “Committee”), and any designee of the Committee (to the extent that such actions are exercised in accordance with the terms of the Plan and this Agreement). If there is a conflict between the terms of the Plan and the terms of this Agreement, the terms of this Agreement shall control.

3. Contingency. The grant of PSUs is contingent on the Participant’s timely acceptance of this Agreement and satisfaction of the other conditions contained in it. Acceptance shall be through execution of the Agreement as set forth in paragraph 21. If the Participant does not accept this Agreement by the close of business on June 9, 2017, the Participant shall not be entitled to this grant of PSUs regardless of the extent to which the requirements in paragraph 5 (“Vesting”) are satisfied. In addition, to the extent a Participant is on a Company approved leave of absence, including but not limited to short-term disability leave, he or she will not be entitled to this grant of PSUs until such time as he or she returns to active employment with Verizon or a Related Company (as defined in paragraph 13) and accepts this Agreement within the time period established by the Company.

4. Number of Units. The Participant is granted the number of PSUs as specified in the Participant’s account under the 2017 PSU grant, administered by Fidelity Investments or any successor thereto (“Fidelity”). A PSU is a hypothetical share of Verizon’s common stock. The value of a PSU on any given date shall be equal to the closing price of Verizon’s common stock on the New York Stock Exchange (“NYSE”) as of such date. A Dividend Equivalent Unit (“DEU”) or fraction thereof shall be added to each PSU each time that a dividend is paid on Verizon’s common stock. The amount of each DEU shall be equal to the corresponding dividend paid on a share of Verizon’s common stock. The DEU shall be converted into PSUs or fractions thereof based upon the closing price of Verizon’s common stock traded on the NYSE on the dividend payment date of each declared dividend on Verizon’s common stock, and such PSUs or fractions thereof shall be added to the Participant’s PSU balance. To the extent that Fidelity or the Company makes an error, including but not limited to an administrative error with respect to the number or value of the PSUs granted to the Participant under this Agreement, the DEUs credited to the Participant’s account or the amount of the final award payment, the Company or Fidelity specifically reserves the right to correct such error at any time and the Participant agrees that he or she shall be legally bound by any corrective action taken by the Company or Fidelity.


5. Vesting.

(a) General. The Participant shall vest in the PSUs to the extent provided in paragraph 5(b) (“Performance Requirement”) only if the Participant satisfies the requirements of paragraph 5(c) (“Three-Year Continuous Employment Requirement”), except as otherwise provided in paragraph 7 (“Early Cancellation/Accelerated Vesting of PSUs”).

(b) Performance Requirement.

(1) General. The number of PSUs granted to the Participant, as specified in the Participant’s account under the 2017 PSU grant, is referred to as the “Target Number of PSUs.” The vesting of two-thirds (2/3) of the Target Number of PSUs (the “Target Number of TSR PSUs”) will be determined with reference to total shareholder return metrics as provided in paragraph 5(b)(2). The vesting of one-third (1/3) of the Target Number of PSUs (the “Target Number of FCF PSUs”) will be determined with reference to free cash flow metrics as provided in paragraph 5(b)(3). The total number of PSUs that vest will range from 0 to 200% of the Target Number of PSUs and will equal the sum of the Target Number of TSR PSUs that are eligible to vest pursuant to paragraph 5(b)(2) plus the Target Number of FCF PSUs that are eligible to vest pursuant to paragraph 5(b)(3). Notwithstanding anything in this paragraph 5(b), in all cases vesting remains subject to the requirements of paragraphs 5(c) and 7.

(2) TSR Metric. The percentage of the Target Number of TSR PSUs that shall vest will be based on the TSR (as defined below) of Verizon’s common stock during the three-year period beginning January 1, 2017, and ending at the close of business on December 31, 2019 (the “Award Cycle”), relative to the TSR of the common stock of each of the companies in the Related Dow Peers for the Award Cycle. The “Related Dow Peers” are the companies (other than Verizon) in the Dow Jones Industrial Average (Dow) Index and also including the five largest industry companies that are not in the Dow, as determined by the Committee and as constituted at the close of business on March 3, 2017. Notwithstanding paragraph 5(c), no portion of the Target Number of TSR PSUs shall vest unless the Committee determines that the Verizon Relative TSR Position (as defined below) is greater than 26. If the Committee determines that the Verizon Relative TSR Position is greater than 26, the percentage of the Target Number of TSR PSUs that shall vest (plus any additional PSUs added with respect to DEUs credited on the Target Number of TSR PSUs over the Award Cycle) will equal the Verizon TSR Vested Percentage (as defined below). For example, if (a) the Participant is granted 1,000 PSUs, and (b) those PSUs are credited with an additional 200 PSUs as a result of DEUs paid over the Award Cycle, and (c) the Verizon TSR Vested Percentage is 74%, 592 PSUs shall vest based on TSR (which is the 1,000 PSUs + 200 PSUs from DEUs, times 2/3 to reflect the portion of the total PSUs that will become eligible to vest with reference to TSR, times the Verizon TSR Vested Percentage of 74%).

(3) FCF Metric. The percentage of the Target Number of FCF PSUs that shall vest will be based on Verizon’s FCF (as defined below) for the Award Cycle. Notwithstanding paragraph 5(c), no portion of the Target Number of FCF PSUs shall vest unless the Committee determines that Verizon’s FCF for the Award Cycle is greater than or equal to $XXB. If the Committee determines that Verizon’s FCF for the Award Cycle is greater than or equal to $XXB, the percentage of the Target Number of FCF PSUs that shall vest (plus any additional PSUs added with respect to DEUs credited on the Target Number of FCF PSUs over the Award Cycle) will

 

2


equal the Verizon FCF Vested Percentage (as defined below). For example, if (a) the Participant is granted 1,000 PSUs, and (b) those PSUs are credited with an additional 200 PSUs as a result of DEUs paid over the Award Cycle, and (c) the Verizon FCF Vested Percentage is 125%, 500 PSUs shall vest based on FCF (which is the 1,000 PSUs + 200 PSUs from DEUs, times 1/3 to reflect the portion of the total PSUs that will become eligible to vest with reference to FCF, times the Verizon FCF Vested Percentage of 125%).

(4) Definitions. For purposes of the performance requirement and payout formula set forth in paragraphs 5(b)(1) through 5(b)(3)—

(i) “Verizon TSR Vested Percentage” shall be an amount (between 0% and 200%), which is based on Verizon’s Relative TSR Position, as provided in the following table:

 

  Verizon Relative TSR Position   Verizon TSR Vested Percentage
  1 through 4   200%
  5   172%
  6   165%
  7   158%
  8   151%
  9   144%
  10   137%
  11   130%
  12   123%
  13   116%
  14   109%
  15   102%
  16   95%
  17   88%
  18   81%
  19   74%
  20   67%
  21   60%
  22   53%
  23   46%
  24   39%
  25   32%
  26 through 35   0%

(ii) “Verizon Relative TSR Position” shall be based upon Verizon’s rank during the Award Cycle among the Related Dow Peers in terms of TSR. The Committee shall determine the Verizon TSR Vested Percentage and the Verizon Relative TSR Position for the period. The Committee will make adjustments to preserve the intended incentives, and to the extent consistent with Section 162(m) of the Code (as defined in the Plan), should the common stock of any Related Dow Peer cease to be publicly traded during the Award Cycle. The Committee’s determinations shall be final and binding.

 

3


(iii) “TSR” or “Total Shareholder Return” shall mean the change in the price of a share of common stock from the beginning of a period until the end of the applicable period, adjusted to reflect the reinvestment of dividends (if any) and as may be necessary to take into account stock splits or other events similar to those described in Section 4.3 of the Plan. The Committee shall determine TSR in accordance with its standard practice and its determinations shall be final and binding.

(iv) “Verizon FCF Vested Percentage” shall be an amount (between 0% and 200%), which is based on Verizon’s FCF, as provided in the following table:

 

  Verizon FCF (in Billions)    Verizon FCF Vested Percentage
  Greater than $XX    200%
  $XX    150%
  $XX    100%
  $XX    50%
  Less than $XX    0%

If the Verizon FCF is $XXB or less but greater than $XXB, or less than $XXB but greater than $XXB, or less than $XXB but greater than $XXB, the Verizon FCF Vested Percentage will be interpolated on a straight-line basis between the respective levels (for example, if the Verizon FCF is $XXB, the Verizon FCF Vested Percentage will be 75%).

(v) “FCF” shall mean (a) the sum of Verizon’s net cash provided by operating activities and Verizon’s net cash provided by financing and investing activities attributable to device installment plan receivable securitizations minus (b) capital expenditures, as such terms are used in Verizon’s consolidated financial statements, on a consolidated basis for the Award Cycle. The Committee will (to the extent necessary and without duplication) adjust such net cash less capital expenditures to eliminate the financial impact of (i) acquisitions, divestitures or changes in business structure; (ii) changes in legal, tax, accounting or regulatory policy; and (iii) other items that are extraordinary in nature or not deemed to be in the ordinary course of business. The Committee’s determination of whether, and the extent to which, any such adjustment is necessary shall be final and binding.

(c) Three-Year Continuous Employment Requirement. Except as otherwise determined by the Committee, or except as otherwise provided in paragraph 7 (“Early Cancellation/Accelerated Vesting of PSUs”), the PSUs shall vest only if the Participant is continuously employed by the Company or a Related Company (as defined in paragraph 13) from the date the PSUs are granted through the end of the Award Cycle.

(d) Transfer. Transfer of employment from Verizon to a Related Company, from a Related Company to Verizon, or from one Related Company to another Related Company shall not constitute a separation from employment hereunder, and service with a Related Company shall be treated as service with the Company for purposes of the three-year continuous employment requirement in paragraph 5(c). If the Participant transfers employment pursuant to this paragraph 5(d), the Participant will still be required to satisfy the definition of “Retire” under paragraph 7 of this Agreement in order to be eligible for the accelerated vesting provisions in connection with a retirement.

 

4


6. Payment. All payments under this Agreement shall be made in cash. Subject to paragraph 7(a), as soon as practicable after the end of the Award Cycle (but in no event later than March 15, 2020), the value of the vested PSUs (minus any withholding for taxes) shall be paid to the Participant (subject, however, to any deferral election that the Participant has made under the deferral plan (if any) then available to the Participant). The amount of cash that shall be paid (plus withholding for taxes and any applicable deferral amount) shall equal the number of vested PSUs (as provided in paragraph 5(b)) times the closing price of Verizon’s common stock on the NYSE as of the last trading day in the Award Cycle. If the Participant dies before any payment due hereunder is made, such payment shall be made to the Participant’s beneficiary, as designated under paragraph 11. Once a payment has been made with respect to a PSU, the PSU shall be canceled; however, all other terms of the Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, shall remain in effect.

7. Early Cancellation/Accelerated Vesting of PSUs. Notwithstanding the provisions of paragraph 5, PSUs may vest or be forfeited before the end of the Award Cycle or may be forfeited before the payment date as follows:

(a) Termination for Cause. If the Participant’s employment by the Company or a Related Company is terminated by the Company or a Related Company for Cause (as defined below) at any time prior to the date that the PSUs are paid pursuant to paragraph 6, the PSUs (whether vested or not) shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant.

(b) Retirement Before July 1, 2017, Voluntary Separation On or Before December 31, 2019, or Other Separation Not Described in Paragraph 7(c). If the Participant (i) Retires (as defined below) before July 1, 2017, (ii) voluntarily separates from employment on or before December 31, 2019 for any reason other than Retirement, or (iii) otherwise separates from employment on or before December 31, 2019 under circumstances not described in paragraph 7(c), all the PSUs shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant.

(c) Retirement After June 30, 2017, Involuntary Termination Without Cause On or Before December 31, 2019, Termination Due to Death or Disability On or Before December 31, 2019.

(1) This paragraph 7(c) shall apply if the Participant:

(i) Retires (as defined below) after June 30, 2017, or

(ii) Separates from employment by reason of an involuntary termination without Cause (as determined by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee)), death, or Disability (as defined below) on or before December 31, 2019.

(2) If the Participant separates from employment on or before December 31, 2019 under circumstances described in paragraph 7(c)(1), the Participant’s PSUs shall be subject to the vesting provisions set forth in paragraph 5(a) and 5(b) (without prorating the award), except that the three-year continuous employment requirement set forth in paragraph 5(c) shall not apply, provided that the Participant has not and does not commit a breach of any of the Participant’s

 

5


obligations and restrictions set forth in Exhibits A and B to this Agreement and provided that the Participant executes, within the time prescribed by Verizon, a release satisfactory to Verizon waiving any claims he or she may have against Verizon and any Related Company (otherwise, paragraph 7(b) shall apply).

(3) Any PSUs that vest pursuant to paragraph 7(c)(2) shall be payable as soon as practicable after the end of the Award Cycle (but in no event later than March 15, 2020).

(4) For purposes of this Agreement, the following definitions shall apply:

(i) “Cause” means (i) incompetence or negligence in the discharge of, or inattention to or neglect of or failure to perform, the duties and responsibilities assigned to the Participant; fraud, misappropriation or embezzlement; or a material breach of the Verizon Code of Conduct (as in effect at the relevant time) or any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, all as determined by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) in his or her discretion, or (ii) commission of any felony of which the Participant is finally adjudged guilty by a court of competent jurisdiction.

(ii) “Disability” shall mean the total and permanent disability of the Participant as defined by, or determined under, the Company’s long-term disability benefit plan.

(iii) “Retire” and “Retirement” means: (i) to retire after having attained at least 15 years of vesting service (as defined under the applicable Verizon tax-qualified 401(k) savings plan) and a combination of age and years of vesting service that equals or exceeds 75 points, or (ii) retirement under any other circumstances determined in writing by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee), provided that, in the case of either (i) or (ii) in this paragraph, the retirement was not occasioned by a discharge for Cause. Notwithstanding the preceding sentence, if the Participant is employed in the United Kingdom, “Retire” or “Retirement” shall mean: (A) subject to applicable law, a termination of employment on the grounds of age, provided that the Participant has attained at least age 65; or (B) retirement under any other circumstances determined in writing by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee), provided that, in the case of either (A) or (B) in this paragraph, the retirement was not occasioned by a discharge for Cause.

(d) Change in Control. If a Participant is involuntarily terminated without Cause within twelve (12) months following the occurrence of a Change in Control of Verizon (as defined in the Plan) and before the end of the Award Cycle, the PSUs shall vest and become payable (without prorating the award) by applying a Verizon TSR Vested Percentage of 100%, and a Verizon FCF Vested Percentage of 100%, to the PSUs without regard to the performance requirements in paragraph 5(b) and the three-year continuous employment requirement in paragraph 5(c) shall be deemed satisfied in full as if the Participant’s employment with the Company or a Related Company had continued through the last day of the Award Cycle; however, all other terms of the Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, shall remain in effect. A Change in Control or an involuntary termination without Cause that occurs after the end of the Award Cycle shall have no effect on whether any PSUs vest or become payable under this paragraph 7(d). If both paragraph 7(c) and this paragraph 7(d) would otherwise apply in the circumstances, this paragraph 7(d) shall control. All payments provided in this paragraph 7(d) shall be made at their regularly scheduled time as specified in paragraph 6.

 

6


(e) Vesting Schedule. Except and to the extent provided in paragraphs 7(c) and (d), nothing in this paragraph 7 shall alter the vesting schedule prescribed by paragraph 5.

8. Shareholder Rights. The Participant shall have no rights as a shareholder with respect to the PSUs. Except as provided in the Plan or in this Agreement, no adjustment shall be made for dividends or other rights for which the record date occurs while the PSUs are outstanding.

9. Amendment of Agreement. Except to the extent required by law or specifically contemplated under this Agreement, neither the Committee nor the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) may, without the written consent of the Participant, change any term, condition or provision affecting the PSUs if the change would have a material adverse effect upon the PSUs or the Participant’s rights thereto. Nothing in the preceding sentence shall preclude the Committee or the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) from exercising administrative discretion with respect to the Plan or this Agreement, and the exercise of such discretion shall be final, conclusive and binding. This discretion includes, but is not limited to, corrections of any errors, including but not limited to any administrative errors, determining the total percentage of PSUs that become payable, and determining whether the Participant has been discharged for Cause, has a Disability, has Retired, has breached any of the Participant’s obligations or restrictions set forth in Exhibits A and B to this Agreement or has satisfied the requirements for vesting and payment under paragraphs 5 and 7 of this Agreement.

10. Assignment. The PSUs shall not be assigned, pledged or transferred except by will or by the laws of descent and distribution. During the Participant’s lifetime, the PSUs may be deferred only by the Participant or by the Participant’s guardian or legal representative in accordance with the deferral regulations, if any, established by the Company.

11. Beneficiary. The Participant shall designate a beneficiary in writing and in such manner as is acceptable to the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee). Each such designation shall revoke all prior designations by the Participant with respect to the Participant’s benefits under the Plan and shall be effective only when filed by the Participant with the Company during the Participant’s lifetime. If the Participant fails to so designate a beneficiary, or if no such designated beneficiary survives the Participant, the Participant’s beneficiary shall be the Participant’s estate.

12. Other Plans and Agreements. Any payment received (or deferred) by the Participant pursuant to this Agreement shall not be taken into account as compensation in the determination of the Participant’s benefits under any pension, savings, life insurance, severance or other benefit plan maintained by Verizon or a Related Company. The Participant acknowledges that this Agreement or any prior PSU agreement shall not entitle the Participant to any other benefits under the Plan or any other plans maintained by the Company or a Related Company.

13. Company and Related Company. For purposes of this Agreement, “Company” means Verizon Communications Inc. “Related Company” means (a) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or proprietary interest of 50 percent or more at any time during the term of this Agreement, or (b) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or other proprietary interest of less than 50 percent at any time during the term of this Agreement but which, in the discretion of the Committee, is treated as a Related Company for purposes of this Agreement.

 

7


14. Employment Status. The grant of the PSUs shall not be deemed to constitute a contract of employment for a particular term between the Company or a Related Company and the Participant, nor shall it constitute a right to remain in the employ of any such Company or Related Company.

15. Withholding. The Participant acknowledges that he or she shall be responsible for any taxes that arise in connection with this grant of PSUs, and the Company shall make such arrangements as it deems necessary for withholding of any taxes it determines are required to be withheld pursuant to any applicable law or regulation.

16. Securities Laws. The Company shall not be required to make payment with respect to any shares of common stock prior to the admission of such shares to listing on any stock exchange on which the stock may then be listed and the completion of any registration or qualification of such shares under any federal or state law or rulings or regulations of any government body that the Company, in its discretion, determines to be necessary or advisable.

17. Committee Authority. The Committee shall have complete discretion in the exercise of its rights, powers, and duties under this Agreement. Any interpretation or construction of any provision of, and the determination of any question arising under, this Agreement shall be made by the Committee in its discretion, as described in paragraph 9. The Committee and the Audit Committee may designate any individual or individuals to perform any of its functions hereunder and utilize experts to assist in carrying out their duties hereunder.

18. Successors. This Agreement shall be binding upon, and inure to the benefit of, any successor or successors of the Company and the person or entity to whom the PSUs may have been transferred by will, the laws of descent and distribution, or beneficiary designation. All terms and conditions of this Agreement imposed upon the Participant shall, unless the context clearly indicates otherwise, be deemed, in the event of the Participant’s death, to refer to and be binding upon the Participant’s heirs and beneficiaries.

19. Construction. In the event that any provision of this Agreement is held invalid or unenforceable, such provision shall be considered separate and apart from the remainder of this Agreement, which shall remain in full force and effect. In the event that any provision, including any of the Participant’s obligations or restrictions set forth in Exhibits A and B to this Agreement, is held to be unenforceable for being unduly broad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended. The PSUs are intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, and to not be subject to any tax, interest or penalty under Section 409A of the Code, and this Agreement shall be construed and interpreted consistent with such intents.

20. Defined Terms. Except where the context clearly indicates otherwise, all capitalized terms used herein shall have the definitions ascribed to them by the Plan, and the terms of the Plan shall apply where appropriate.

21. Execution of Agreement. The Participant shall indicate his or her consent and acknowledgment to the terms of this Agreement (including the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement) and the Plan by executing this Agreement pursuant to the instructions provided and otherwise shall comply with the requirements of paragraph 3. In addition, by consenting to the terms of this Agreement and the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, the Participant expressly agrees and acknowledges that Fidelity may deliver all documents, statements and notices associated with the Plan and this Agreement to the Participant in electronic form. The Participant and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if the Participant and Verizon executed this Agreement (including the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement) in paper form.

 

8


22. Confidentiality. Except to the extent otherwise required by law, the Participant shall not disclose, in whole or in part, any of the terms of this Agreement. This paragraph 22 does not prevent the Participant from disclosing the terms of this Agreement to the Participant’s spouse or beneficiary or to the Participant’s legal, tax, or financial adviser, provided that the Participant take all reasonable measures to assure that the individual to whom disclosure is made does not disclose the terms of this Agreement to a third party except as otherwise required by law.

23. Applicable Law. Except as expressly provided in Exhibit B, the validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

24. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Executive Vice President and Chief Administrative Officer of Verizon at 1095 Avenue of the Americas, New York, New York 10036 and any notice to the Participant shall be addressed to the Participant at the current address shown on the payroll of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy, sent by overnight carrier, or enclosed in a properly sealed envelope as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

25. Dispute Resolution.

(a) General. Except as otherwise provided in paragraph 26 below, all disputes arising under or related to the Plan or this Agreement and all claims in which a Participant seeks damages or other relief that relate in any way to PSUs or other benefits of the Plan are subject to the dispute resolution procedure described below in this paragraph 25.

(i) For purposes of this Agreement, the term “Units Award Dispute” shall mean any claim against the Company or a Related Company, other than Units Damages Disputes described in paragraph (a)(ii) below, regarding (A) the interpretation of the Plan or this Agreement, (B) any of the terms or conditions of the PSUs issued under this Agreement, or (C) allegations of entitlement to PSUs or additional PSUs, or any other benefits, under the Plan or this Agreement; provided, however, that any dispute relating to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement or to the forfeiture of an award as a result of a breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement shall not be subject to the dispute resolution procedures provided for in this paragraph 25.

(ii) For purposes of this Agreement, the term “Units Damages Dispute” shall mean any claims between the Participant and the Company or a Related Company (or against the past or present directors, officers, employees, representatives, or agents of the Company or a Related Company, whether acting in their capacity as such or otherwise), that are related in any way to the Participant’s employment or former employment, including claims of alleged employment discrimination, wrongful termination, or violations of Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, 42 U.S.C. § 1981, the Fair Labor Standards Act, the Family Medical Leave Act, the Sarbanes-Oxley Act, or any other U.S. federal, state or local law, statute, regulation, or ordinance relating to employment or any common law theories of recovery relating to employment, such as breach of contract, tort, or public policy claims, in which the damages or other relief sought relate in any way to PSUs or other benefits of the Plan or this Agreement.

 

9


(b) Internal Dispute Resolution Procedure. All Units Award Disputes, and all Units Damages Dispute alleging breach of contract, tort, or public policy claims with respect to the Plan or this Agreement (collectively, “Plan Disputes”), shall be referred in the first instance to the Verizon Employee Benefits Committee (“EB Committee”) for resolution internally within Verizon. Except where otherwise prohibited by law, all Plan Disputes must be filed in writing with the EB Committee no later than one year from the date that the dispute accrues. Consistent with paragraph 25(c)(i) of this Agreement, all decisions relating to the enforceability of the limitations period contained herein shall be made by the arbitrator. To the fullest extent permitted by law, the EB Committee shall have full power, discretion, and authority to interpret the Plan and this Agreement and to decide all Plan Disputes brought under this Plan and Agreement. Determinations made by the EB Committee shall be final, conclusive and binding, subject only to review by arbitration pursuant to paragraph (c) below under the arbitrary and capricious standard of review. A Participant’s failure to refer a Plan Dispute to the EB Committee for resolution will in no way impair the Company’s right to compel arbitration or the enforceability of the waiver in paragraph 25(c)(ii).

(c) Arbitration. All appeals from determinations by the EB Committee as described in paragraph (b) above, and any Units Damages Dispute, shall be fully and finally settled by arbitration administered by the American Arbitration Association (“AAA”) on an individual basis (and not on a collective or class action basis) before a single arbitrator pursuant to the AAA’s Commercial Arbitration Rules in effect at the time any such arbitration is initiated. Any such arbitration must be initiated in writing pursuant to the aforesaid rules of the AAA no later than one year from the date that the claim accrues, except where a longer limitations period is required by applicable law. However, a Participant’s failure to initiate arbitration within one year will in no way impair the Company’s right, exercised at its discretion, to compel arbitration or the enforceability of the waiver in paragraph 25(c)(ii). Decisions about the applicability of the limitations period contained herein shall be made by the arbitrator. A copy of the AAA’s Commercial Arbitration Rules may be obtained from Human Resources. The Participant agrees that the arbitration shall be held at the office of the AAA nearest the place of the Participant’s most recent employment by the Company or a Related Company, unless the parties agree in writing to a different location. All claims by the Company or a Related Company against the Participant, except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, may also be raised in such arbitration proceedings.

(i) The arbitrator shall have the authority to determine whether any dispute submitted for arbitration hereunder is arbitrable. The arbitrator shall decide all issues submitted for arbitration according to the terms of the Plan, this Agreement (except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement), existing Company policy, and applicable substantive Delaware State and U.S. federal law and shall have the authority to award any remedy or relief permitted by such laws. The final decision of the EB Committee with respect to a Plan Dispute shall be upheld unless such decision was arbitrary or capricious. The decision of the arbitrator shall be final, conclusive, not subject to appeal, and binding and enforceable in any applicable court.

(ii) The Participant understands and agrees that, pursuant to this Agreement, both the Participant and the Company or a Related Company waive any right to sue each

 

10


other in a court of law or equity, to have a trial by jury, or to resolve disputes on a collective, or class, basis (except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement), and that the sole forum available for the resolution of Units Award Disputes and Units Damages Disputes is arbitration as provided in this paragraph 25. If an arbitrator or court finds that the arbitration provisions of this Agreement are not enforceable, both Participant and the Company or a Related Company understand and agree to waive their right to trial by jury of any Units Award Dispute or Units Damages Dispute. This dispute resolution procedure shall not prevent either the Participant or the Company or a Related Company from commencing an action in any court of competent jurisdiction for the purpose of obtaining injunctive relief to prevent irreparable harm pending and in aid of arbitration hereunder; in such event, both the Participant and the Company or a Related Company agree that the party who commences the action may proceed without necessity of posting a bond.

(iii) In consideration of the Participant’s agreement in paragraph (ii) above, the Company or a Related Company will pay all filing, administrative and arbitrator’s fees incurred in connection with the arbitration proceedings. If the AAA requires the Participant to pay the initial filing fee, the Company or a Related Company will reimburse the Participant for that fee. All other fees incurred in connection with the arbitration proceedings, including but not limited to each party’s attorney’s fees, will be the responsibility of such party.

(iv) The parties intend that the arbitration procedure to which they hereby agree shall be the exclusive means for resolving all Units Award Disputes and Units Damages Disputes (subject to the mandatory EB Committee procedure provided for in paragraph 25(b) above). Their agreement in this regard shall be interpreted as broadly and inclusively as reason permits to realize that intent.

(v) The Federal Arbitration Act (“FAA”) shall govern the enforceability of this paragraph 25. If for any reason the FAA is held not to apply, or if application of the FAA requires consideration of state law in any dispute arising under this Agreement or subject to this dispute resolution provision, the laws of the State of Delaware shall apply without giving effect to the conflicts of laws provisions thereof.

(vi) To the extent an arbitrator determines that the Participant was not terminated for Cause and is entitled to the PSUs or any other benefits under the Plan pursuant to the provisions applicable to an involuntary termination without Cause, the Participant’s obligation to execute a release satisfactory to Verizon as provided under paragraph 7(c)(2) shall remain applicable in order to receive the benefit of any PSUs pursuant to this Agreement.

26. Additional Remedies. Notwithstanding the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, and in addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have (including the right of the Company to terminate the Participant for Cause or to involuntarily terminate the Participant without Cause), the Participant acknowledges that—

(a) The Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement are essential to the continued goodwill and profitability of the Company and any Related Company;

 

11


(b) The Participant has broad-based skills that will serve as the basis for other employment opportunities that are not prohibited by the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement;

(c) When the Participant’s employment with the Company or any Related Company terminates, the Participant shall be able to earn a livelihood without violating any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement;

(d) Irreparable damage to the Company or any Related Company shall result in the event that the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement are not specifically enforced and that monetary damages will not adequately protect the Company and any Related Company from a breach of such Participant obligations and restrictions;

(e) If any dispute arises concerning the violation or anticipated or threatened violation by the Participant of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;

(f) The Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement shall continue to apply after any expiration, termination, or cancellation of this Agreement;

(g) The Participant’s breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, including, for example, any breach of the Participant’s non-competition, non-solicitation or confidentiality restrictions, shall result in the Participant’s immediate forfeiture of all rights and benefits, including all PSUs and DEUs, under this Agreement; and

(h) All disputes relating to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, including their interpretation and enforceability and any damages (including but not limited to damages resulting in the forfeiture of an award or benefits under this Agreement) that may result from the breach of such Participant obligations and restrictions shall not be subject to the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, but shall instead be determined in a court of competent jurisdiction.

 

12


Exhibit A – Participant’s Obligations

As part of the Agreement to which this Exhibit A is attached, you, the Participant, agree to the following obligations:

1. Effect of a Material Restatement of Financial Results; Recoupment; Company Policies Regarding Securities Transactions.

(a) General. Notwithstanding anything in this Agreement to the contrary, you agree that, with respect to all PSUs granted to you on or after January 1, 2007 and all short-term incentive awards made to you on or after January 1, 2007, to the extent the Company or any Related Company is required to materially restate any financial results based upon your willful misconduct or gross negligence while employed by the Company or any Related Company (and where such restatement would have resulted in a lower payment being made to you), you will be required to repay all previously paid or deferred (i) PSUs and (ii) short-term incentive awards that were provided to you during the performance periods that are the subject of the restated financial results, plus a reasonable rate of interest. For purposes of this paragraph, “willful misconduct” and “gross negligence” shall be as determined by the Committee. The Audit Committee of the Verizon Board of Directors shall determine whether a material restatement of financial results has occurred. If you do not repay the entire amount required under this paragraph, the Company may, to the extent permitted by applicable law, offset your obligation to repay against any source of income available to it, including but not limited to any money you may have in your nonqualified deferral accounts.

(b) Requirements of Recoupment Policy or Applicable Law. The repayment rights contained in paragraph 1(a) of Exhibit A shall be in addition to, and shall not limit, any other rights or remedies that the Company may have under law or in equity, including, without limitation, (i) any right that the Company may have under any Company recoupment policy that may apply to you, or (ii) any right or obligation that the Company may have regarding the clawback of “incentive-based compensation” under Section 10D of the Securities Exchange Act of 1934, as amended (as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission) or under any other applicable law. By accepting this award of PSUs, you agree and consent to the Company’s application, implementation and enforcement of any such Company recoupment policy (as it may be in effect from time to time) that may apply to you and any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation and expressly agree that the Company may take such actions as are permitted under any such policy (as applicable to you) or applicable law, such as the cancellation of PSUs and repayment of amounts previously paid or deferred with respect to any previously granted PSUs or short-term incentive awards, without further consent or action being required by you.

(c) Company Policies Regarding Securities Transactions. By accepting this award of PSUs, you agree to comply with all Company policies regarding trading in securities or derivative securities (including, without limitation, the Company’s policies prohibiting trading on material inside information regarding the Company or any business with which the Company does business, the Company’s policies prohibiting engaging in financial transactions that would allow you to benefit from a devaluation of the Company’s securities, and any additional policy that the Company may adopt prohibiting you from hedging your economic exposure to the Company’s securities), as such policies are in effect from time to time and for as long as such policies are applicable to you.

 

13


2. Definitions. Except where clearly provided to the contrary or as otherwise defined in this Exhibit A, all capitalized terms used in this Exhibit A shall have the definitions given to those terms in the Agreement to which this Exhibit A is attached.

3. Agreement to Participant’s Obligations. You shall indicate your agreement to the obligations and restrictions set forth in this Exhibit A in accordance with the instructions provided in the Agreement, and your acceptance of the Agreement shall include your acceptance of such obligations and restrictions. As stated in paragraph 21 of the Agreement, you and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if you and Verizon executed this Exhibit A in paper form.

 

14


Exhibit B – Non-Competition, Non-Solicitation, Confidentiality and Other Obligations

As part of the Agreement to which this Exhibit B is attached, you, the Participant, and the Company or any Related Company which employs or employed you, agree to the following obligations:

1. Noncompetition.

(a) Prohibited Conduct. During the period of your employment with the Company or any Related Company, and for a period ending twelve (12) months following a termination of your employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee):

(1) personally engage in Competitive Activities (as defined below); or

(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any company or person affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly traded company shall not constitute “ownership” or “participation in the ownership” for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;

provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any person or entity affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or (ii) engaging in the practice of law as an in-house counsel, sole practitioner or as a partner in (or as an employee of or counsel to) a corporation or law firm in accordance with applicable legal and professional standards. Exception (ii), however, does not apply to any Participant that may be engaging in Competitive Activities or providing services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, wherein such engagement or services being provided are not primarily the practice of law.

(b) Competitive Activities. For purposes of the Agreement, to which this Exhibit B is attached, “Competitive Activities” means any activities relating to products or services of the same or similar type as the products or services (1) which were or are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company or any Related Company, and (2) for which you have any direct or indirect responsibility or any involvement to plan, develop, manage, market, sell, oversee, support, implement or perform, or had any such responsibility or involvement within your most recent 24 months of employment with the Company or any Related Company. Notwithstanding the previous sentence, an activity shall not be treated as a Competitive Activity if the geographic marketing area of such same or similar products or services does not overlap with the geographic marketing area for the applicable products and services of the Company or any Related Company.

 

15


2. Interference With Business Relations. During the period of your employment with the Company or any Related Company, and for a period ending twelve (12) months following a termination of your employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee):

(a) recruit, induce or solicit, directly or indirectly, any employee of the Company or Related Company who was employed by the Company or any Related Company prior to or as of your termination date and whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company for employment or for retention as a consultant or service provider to any person or entity;

(b) hire or participate (with another person or entity) in the process of recruiting, soliciting or hiring, directly or indirectly, (other than for the Company or any Related Company) any person who is then an employee of the Company or any Related Company whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company, or provide, directly or indirectly, names or other information about any employees of the Company or Related Company whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company to any person or entity (other than to the Company or any Related Company) under circumstances that could lead to the use of any such information for purposes of recruiting, soliciting or hiring any such employee for any person or entity;

(c) interfere, or attempt to interfere, directly or indirectly, with any relationship of the Company or any Related Company with any of its employees, agents, or representatives;

(d) solicit or induce, or in any manner attempt to solicit or induce, directly or indirectly, any client, customer, or Prospect (defined below) of the Company or any Related Company (1) to cease being, or not to become, a customer of the Company or any Related Company, or (2) to divert any business of such customer or Prospect from the Company or any Related Company; or

(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, directly or indirectly, the relationship, contractual or otherwise, between the Company or any Related Company and any of its customers, clients, Prospects, suppliers, vendors, service providers, developers, joint ventures, equity investments or partners, inventors, consultants, employees, agents, or representatives.

For purposes of this paragraph 2, “Prospect” shall mean any person or entity from whom or which any business was being solicited by Verizon or any Related Company within the most recent 12 month period of your employment.

3. Proprietary And Confidential Information. You shall at all times, including after any termination of your employment with the Company or any Related Company, preserve the confidentiality of all Proprietary Information (defined below) and trade secrets of the Company or any Related Company, and you shall not use for the benefit of yourself or any person, other than the Company or a Related Company, or disclose to any person, except and to the extent that disclosure of such information is authorized under applicable laws or regulations (e.g., “whistleblower” laws such as 18 USC 1833(b) described below), any Proprietary Information or trade secrets of the Company or any Related Company. “Proprietary Information” means any information or data related to the Company or any Related Company, including information entrusted to the Company or a Related Company by others, which has not been fully disclosed to the public by the Company or a Related Company, which is treated as confidential or otherwise protected within the Company or any Related Company or is of value to

 

16


competitors, such as strategic or tactical business plans; undisclosed business, operational or financial data; ideas, processes, methods, techniques, systems, models, devices, programs, computer software, or related information; documents relating to regulatory matters or correspondence with governmental entities; information concerning any past, pending, or threatened legal dispute; pricing or cost data; the identity, reports or analyses of business prospects; business transactions (including those that are contemplated or planned); research data; personnel information or data; identities of suppliers to the Company or any Related Company or users or purchasers of the Company’s or Related Company’s products or services; the Agreement to which this Exhibit B is attached; and any other non-public information pertaining to or known by the Company or a Related Company, including confidential or non-public information of a third party that you know or should know the Company or a Related Company is obligated to protect. Section 18 USC 1833(b) provides that “An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that—(A) is made—(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.” Nothing in this Agreement is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 U.S.C. § 1833(b).

4. Return Of Company Property; Ownership of Intellectual Property Rights. You agree that on or before termination of your employment for any reason with the Company or any Related Company, you shall return to the Company all property owned by the Company or any Related Company or in which the Company or any Related Company has an interest or to which the Company or any Related Company has any obligation, including any and all files, documents, data, records and any other non-public information (whether on paper or in tapes, disks, memory devices, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company (or, as applicable, a Related Company) is the rightful owner of, and you hereby do grant and assign, all right, title and interest in and to any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; and trademarks that you may have originated, created or developed, or assisted or participated in originating, creating or developing, during your period of employment with the Company or a Related Company, including all intellectual property rights in or based on the foregoing, where any such origination, creation or development (a) involved any use of Company or Related Company time, information or resources, (b) was made in the exercise of any of your duties or responsibilities for or on behalf of the Company or a Related Company, or (c) was related to (i) the Company’s or a Related Company’s past, present or future business, or (ii) the Company’s or a Related Company’s actual or demonstrably anticipated research, development or procurement activities. You shall at all times, both before and after termination of your employment, cooperate with the Company (or, as applicable, any Related Company) and its representatives in executing and delivering documents requested by the Company or a Related Company, and taking any other actions, that are necessary or requested by the Company or a Related Company to assist the Company or any Related Company in patenting, copyrighting, protecting, registering, or enforcing any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; trademarks; or other intellectual property rights, and to vest title thereto solely in the Company (or, as applicable, a Related Company).

5. Definitions. Except where clearly provided to the contrary or as otherwise defined in this Exhibit B, all capitalized terms used in this Exhibit B shall have the definitions given to those terms in the Agreement to which this Exhibit B is attached.

 

17


6. Agreement to Non-Competition, Non-Solicitation, Confidentiality and Other Obligations.

 

  (a)

You acknowledge that the geographic boundaries, scope of prohibited activities, and time duration of the restrictions set forth in paragraphs 1 and 2 above are reasonable in nature and are no broader than are necessary to maintain the confidential information, trade secrets and the goodwill of the Company and its Related Companies and to protect the other legitimate business interests of the Company and its Related Companies and are not unduly restrictive on you. In addition, you and the Company agree and intend that the covenants contained in paragraphs 1 and 2 shall be deemed to be a series of separate covenants and agreements, one for each and every county or political subdivision of each applicable state of the United States and each country of the world. It is the desire and intent of the parties hereto that the provisions of this Exhibit B be enforced to the fullest extent permissible under the governing laws and public policies of the State of New Jersey, and to the extent applicable, each jurisdiction in which enforcement is sought. Accordingly, if any provision in this Exhibit A or deemed to be included in this Exhibit A shall be adjudicated to be invalid or unenforceable, such provision, without any action on the part of the parties hereto, shall be deemed amended to delete or to modify (including, without limitation, a reduction in duration, geographical area or prohibited business activities) the portion adjudicated to be invalid or unenforceable, such deletion or modification to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made, and such deletion or modification to be made only to the extent necessary to cause the provision as amended to be valid and enforceable.

 

  (b)

You shall indicate your agreement to the obligations and restrictions set forth in this Exhibit B in accordance with the instructions provided in the Agreement, and your acceptance of the Agreement shall include your acceptance of such obligations and restrictions. As stated in paragraph 21 of the Agreement, you and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if you and Verizon executed this Exhibit B in paper form.

7. Governing Law and Non-exclusive Forum. The parties expressly agree: (a) that, because the Plan is centrally administered in the State of New Jersey by employees of a Verizon Communications Inc. affiliate, the subject matter of this Exhibit B bears a reasonable relationship to the State of New Jersey; (b) that this Exhibit B is made under, shall be construed in accordance with, and governed in all respects by the laws of the State of New Jersey without giving effect to that jurisdiction’s choice of law rules; and (c) the parties consent to the non-exclusive jurisdiction and venue of the courts of the State of New Jersey, and the federal courts of the United States of America located in the State of New Jersey, over any action, claim, controversy or proceeding arising under this Exhibit B, and irrevocably waive any objection they may now or hereafter have to the non-exclusive jurisdiction and venue of such courts.

 

18

Exhibit 10b

VERIZON COMMUNICATIONS INC. LONG-TERM INCENTIVE PLAN

2017 RESTRICTED STOCK UNIT AGREEMENT

AGREEMENT between Verizon Communications Inc. (“Verizon” or the “Company”) and you (the “Participant”) and your heirs and beneficiaries.

1. Purpose of Agreement. The purpose of this Agreement is to provide a grant of restricted stock units (“RSUs”) to the Participant.

2. Agreement. This Agreement is entered into pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan, as amended and restated (the “Plan”), and evidences the grant of a restricted stock unit award in the form of RSUs pursuant to the Plan. In consideration of the benefits described in this Agreement, which Participant acknowledges are good, valuable and sufficient consideration, the Participant agrees to comply with the terms and conditions of this Agreement, including the Participant’s obligations and restrictions set forth in Exhibit A to this Agreement and the Participant’s non-competition, non-solicitation, confidentiality and other obligations and restrictions set forth in Exhibit B to this Agreement, both of which are incorporated into and are a part of the Agreement. The RSUs and this Agreement are subject to the terms and provisions of the Plan. By executing this Agreement, the Participant agrees to be bound by the terms and provisions of the Plan and this Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement. In addition, the Participant agrees to be bound by the actions of the Human Resources Committee of Verizon Communication’s Board of Directors or any successor thereto (the “Committee”), and any designee of the Committee (to the extent that such actions are exercised in accordance with the terms of the Plan and this Agreement). If there is a conflict between the terms of the Plan and the terms of this Agreement, the terms of this Agreement shall control.

3. Contingency. The grant of RSUs is contingent on the Participant’s timely acceptance of this Agreement and satisfaction of the other conditions contained in it. Acceptance shall be through execution of the Agreement as set forth in paragraph 21. If the Participant does not accept this Agreement by the close of business on June 9, 2017, the Participant shall not be entitled to this grant of RSUs regardless of the extent to which the requirements in paragraph 5 (“Vesting”) are satisfied. In addition, to the extent a Participant is on a Company approved leave of absence, including but not limited to short-term disability leave, he or she will not be entitled to this grant of RSUs until such time as he or she returns to active employment with Verizon or a Related Company (as defined in paragraph 13) and accepts this Agreement within the time period established by the Company.

4. Number of Units. The Participant is granted the number of RSUs as specified in the Participant’s account under the 2017 RSU grant, administered by Fidelity Investments or any successor thereto (“Fidelity”). A RSU is a hypothetical share of Verizon’s common stock. The value of a RSU on any given date shall be equal to the closing price of Verizon’s common stock on the New York Stock Exchange (“NYSE”) as of such date. A Dividend Equivalent Unit (“DEU”) or fraction thereof shall be added to each RSU each time that a dividend is paid on Verizon’s common stock. The amount of each DEU shall be equal to the corresponding dividend paid on a share of Verizon’s common stock. The DEU shall be converted into RSUs or fractions thereof based upon the closing price of Verizon’s common stock traded on the NYSE on the dividend payment date of each declared dividend on Verizon’s common stock, and such RSUs or fractions thereof shall be added to the Participant’s RSU balance. To the extent that Fidelity or the Company makes an error, including but not limited to an administrative error with respect to the number or value of the RSUs granted to the Participant under this Agreement, the DEUs credited to the Participant’s account or the amount of the final award payment, the Company or Fidelity specifically reserves the right to correct such error at any time and the Participant agrees that he or she shall be legally bound by any corrective action taken by the Company or Fidelity.


5. Vesting.

(a) General. The Participant shall vest in the RSUs as follows: one-third of the total number of RSUs subject to this grant (including DEUs credited with respect to such RSUs) shall vest on March 3, 2018, one-third of the total number of RSUs subject to this grant (including DEUs credited with respect to such RSUs) shall vest on March 3, 2019, and the remaining number of RSUs subject to this grant (including DEUs credited with respect to such RSUs) shall vest on March 3, 2020. The Participant must be continuously employed by the Company or a Related Company (as defined in paragraph 13) from the date the RSUs are granted through each of the applicable vesting dates specified in this paragraph 5(a) as a condition to the vesting of the applicable installment of the RSUs, except as otherwise provided in paragraph 7 (“Early Cancellation/Accelerated Vesting of RSUs”) or as otherwise provided by the Committee.

(b) Transfer. Transfer of employment from Verizon to a Related Company, from a Related Company to Verizon, or from one Related Company to another Related Company shall not constitute a separation from employment hereunder, and service with a Related Company shall be treated as service with the Company for purposes of the continuous employment requirement in paragraph 5(a). If the Participant transfers employment pursuant to this paragraph 5(b), the Participant will still be required to satisfy the definition of “Retire” under paragraph 7 of this Agreement in order to be eligible for the accelerated vesting provisions in connection with a retirement.

6. Payment. All payments under this Agreement shall be made in shares of Verizon common stock. Subject to paragraph 7(a), as soon as practicable after the vesting date of the applicable installment of the RSUs specified in Section 5(a) (but in no event later than two and one-half months after the applicable vesting date), the number of shares that vested on the applicable vesting date (minus any withholding for taxes) shall be paid to the Participant (subject, however, to any deferral election that the Participant has made under the deferral plan (if any) then available to the Participant). The number of shares that shall be paid (plus withholding for taxes and any applicable deferral amount) shall equal the number of RSUs that vested on the applicable vesting date. If the Participant dies before any payment due hereunder is made, such payment shall be made to the Participant’s beneficiary, as designated under paragraph 11. Once a payment has been made with respect to a RSU, the RSU shall be cancelled; however, all other terms of the Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, shall remain in effect.

7. Early Cancellation/Accelerated Vesting of RSUs. Notwithstanding the provisions of paragraph 5, RSUs may vest or be forfeited before the applicable vesting and payment dates set forth above as follows:

(a) Termination for Cause. If the Participant’s employment by the Company or a Related Company is terminated by the Company or a Related Company for Cause (as defined below) at any time prior to the date that the RSUs are paid pursuant to paragraph 6, the RSUs (whether vested or not) shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant.

(b) Retirement Before July 1, 2017, Voluntary Separation On or Before March 3, 2020, or Other Separation Not Described in Paragraph 7(c). If the Participant (i) Retires (as defined below) before July 1, 2017, (ii) voluntarily separates from employment on or before March 3, 2020 for any reason other than Retirement, or (iii) otherwise separates from employment on or before March 3, 2020 under circumstances not described in paragraph 7(c), all then-unvested RSUs shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant.

 

2


(c) Retirement After June 30, 2017, Involuntary Termination Without Cause On or Before March 3, 2020, Termination Due to Death or Disability On or Before March 3, 2020.

(1) This paragraph 7(c) shall apply if the Participant:

(i) Retires (as defined below) after June 30, 2017, or

(ii) Separates from employment by reason of an involuntary termination without Cause (as determined by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee)), death, or Disability (as defined below) on or before March 3, 2020.

(2) If the Participant separates from employment on or before March 3, 2020 under circumstances described in paragraph 7(c)(1), the Participant’s then-unvested RSUs shall vest (without prorating the award) without regard to the continuous employment requirement set forth in paragraph 5(a), provided that the Participant has not and does not commit a breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement and provided that the Participant executes, within the time prescribed by Verizon, a release satisfactory to Verizon waiving any claims he or she may have against Verizon and any Related Company (otherwise, paragraph 7(b) shall apply).

(3) Any RSUs that vest pursuant to paragraph 7(c)(2) shall be payable as soon as practicable after the vesting date of the applicable installment of the RSUs specified in Section 5(a) that would have applied had such RSUs not vested earlier under paragraph 7(c)(2) (but in no event later than two and one-half months after the applicable vesting date).

(4) Defined Terms. For purposes of this Agreement, the following definitions shall apply:

(i) “Cause” means (i) incompetence or negligence in the discharge of, or inattention to or neglect of or failure to perform, the duties and responsibilities assigned to the Participant; fraud, misappropriation or embezzlement; or a material breach of the Verizon Code of Conduct (as in effect at the relevant time) or any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, all as determined by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) in his or her discretion, or (ii) commission of any felony of which the Participant is finally adjudged guilty by a court of competent jurisdiction.

(ii) “Disability” shall mean the total and permanent disability of the Participant as defined by, or determined under, the Company’s long-term disability benefit plan.

(iii) “Retire” and “Retirement” means: (i) to retire after having attained at least 15 years of vesting service (as defined under the applicable Verizon tax-qualified 401(k) savings plan) and a combination of age and years of vesting service that equals or exceeds 75 points, or (ii) retirement under any other circumstances determined in writing by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee), provided that, in the case of either (i) or (ii) in this paragraph, the retirement was not occasioned by a discharge for Cause. Notwithstanding the preceding sentence, if the Participant is employed in the United Kingdom, “Retire” or “Retirement” shall mean: (A) subject to applicable law, a termination of employment on the grounds of age, provided that the

 

3


Participant has attained at least age 65; or (B) retirement under any other circumstances determined in writing by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee), provided that, in the case of either (A) or (B) in this paragraph, the retirement was not occasioned by a discharge for Cause.

(d) Change in Control. If a Participant is involuntarily terminated without Cause within twelve (12) months following the occurrence of a Change in Control of Verizon (as defined in the Plan), all then-unvested RSUs shall vest and become payable (without prorating the award) and the continuous employment requirement in paragraph 5(a) shall be deemed satisfied in full as if the Participant’s employment with the Company or a Related Company had continued through the applicable vesting date; provided, however, that all other terms of the Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, shall remain in effect. A Change in Control or an involuntary termination without Cause that occurs after the applicable vesting date of the RSUs set forth in paragraph 5(a) shall have no effect on whether any RSUs vest or become payable under this paragraph 7(d). If both paragraph 7(c) and this paragraph 7(d) would otherwise apply in the circumstances, this paragraph 7(d) shall control. All payments provided in this paragraph 7(d) shall be made at their regularly scheduled time as specified in paragraph 6.

(e) Vesting Schedule. Except and to the extent provided in paragraphs 7(c) and (d), nothing in this paragraph 7 shall alter the vesting schedule prescribed by paragraph 5.

8. Shareholder Rights. The Participant shall have no rights as a shareholder with respect to the RSUs until the date on which the Participant becomes the holder of record with respect to any shares of Verizon common stock to which this grant relates. Except as provided in the Plan or in this Agreement, no adjustment shall be made for dividends or other rights for which the record date occurs while the RSUs are outstanding.

9. Amendment of Agreement. Except to the extent required by law or specifically contemplated under this Agreement, neither the Committee nor the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) may, without the written consent of the Participant, change any term, condition or provision affecting the RSUs if the change would have a material adverse effect upon the RSUs or the Participant’s rights thereto. Nothing in the preceding sentence shall preclude the Committee or the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) from exercising administrative discretion with respect to the Plan or this Agreement, and the exercise of such discretion shall be final, conclusive and binding. This discretion includes, but is not limited to, corrections of any errors, including but not limited to any administrative errors, and determining whether the Participant has been discharged for Cause, has a Disability, has Retired, has breached any of the Participant’s obligations or restrictions set forth in Exhibits A and B to this Agreement or has satisfied the requirements for vesting and payment under paragraphs 5 and 7 of this Agreement.

10. Assignment. The RSUs shall not be assigned, pledged or transferred except by will or by the laws of descent and distribution. During the Participant’s lifetime, the RSUs may be deferred only by the Participant or by the Participant’s guardian or legal representative in accordance with the deferral regulations, if any, established by the Company.

11. Beneficiary. The Participant shall designate a beneficiary in writing and in such manner as is acceptable to the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee). Each such designation shall revoke all prior designations by the Participant with respect to the Participant’s benefits under the Plan and shall be effective only when filed by the Participant with the Company during the Participant’s lifetime. If the Participant fails to so designate a beneficiary, or if no such designated beneficiary survives the Participant, the Participant’s beneficiary shall be the Participant’s estate.

 

4


12. Other Plans and Agreements. Any payment received (or deferred) by the Participant pursuant to this Agreement shall not be taken into account as compensation in the determination of the Participant’s benefits under any pension, savings, life insurance, severance or other benefit plan maintained by Verizon or a Related Company. The Participant acknowledges that this Agreement or any prior RSU agreement shall not entitle the Participant to any other benefits under the Plan or any other plans maintained by the Company or a Related Company.

13. Company and Related Company. For purposes of this Agreement, “Company” means Verizon Communications Inc. “Related Company” means (a) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or proprietary interest of 50 percent or more at any time during the term of this Agreement, or (b) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or other proprietary interest of less than 50 percent at any time during the term of this Agreement but which, in the discretion of the Committee, is treated as a Related Company for purposes of this Agreement.

14. Employment Status. The grant of the RSUs shall not be deemed to constitute a contract of employment for a particular term between the Company or a Related Company and the Participant, nor shall it constitute a right to remain in the employ of any such Company or Related Company.

15. Withholding. The Participant acknowledges that he or she shall be responsible for any taxes that arise in connection with this grant of RSUs, and the Company shall make such arrangements as it deems necessary for withholding of any taxes it determines are required to be withheld pursuant to any applicable law or regulation.

16. Securities Laws. The Company shall not be required to make payment with respect to any shares of common stock prior to the admission of such shares to listing on any stock exchange on which the stock may then be listed and the completion of any registration or qualification of such shares under any federal or state law or rulings or regulations of any government body that the Company, in its discretion, determines to be necessary or advisable.

17. Committee Authority. The Committee shall have complete discretion in the exercise of its rights, powers, and duties under this Agreement. Any interpretation or construction of any provision of, and the determination of any question arising under, this Agreement shall be made by the Committee in its discretion, as described in paragraph 9. The Committee and the Audit Committee may designate any individual or individuals to perform any of its functions hereunder and utilize experts to assist in carrying out their duties hereunder.

18. Successors. This Agreement shall be binding upon, and inure to the benefit of, any successor or successors of the Company and the person or entity to whom the RSUs may have been transferred by will, the laws of descent and distribution, or beneficiary designation. All terms and conditions of this Agreement imposed upon the Participant shall, unless the context clearly indicates otherwise, be deemed, in the event of the Participant’s death, to refer to and be binding upon the Participant’s heirs and beneficiaries.

19. Construction. In the event that any provision of this Agreement is held invalid or unenforceable, such provision shall be considered separate and apart from the remainder of this Agreement, which shall remain in full force and effect. In the event that any provision, including any of the Participant’s

 

5


obligations or restrictions set forth in Exhibits A and B to this Agreement, is held to be unenforceable for being unduly broad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended. The RSUs are intended not to be subject to any tax, interest or penalty under Section 409A of the Code, and this Agreement shall be construed and interpreted consistent with such intent.

20. Defined Terms. Except where the context clearly indicates otherwise, all capitalized terms used herein shall have the definitions ascribed to them by the Plan, and the terms of the Plan shall apply where appropriate.

21. Execution of Agreement. The Participant shall indicate his or her consent and acknowledgment to the terms of this Agreement (including the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement) and the Plan by executing this Agreement pursuant to the instructions provided and otherwise shall comply with the requirements of paragraph 3. In addition, by consenting to the terms of this Agreement and the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, the Participant expressly agrees and acknowledges that Fidelity may deliver all documents, statements and notices associated with the Plan and this Agreement to the Participant in electronic form. The Participant and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if the Participant and Verizon executed this Agreement (including the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement) in paper form.

22. Confidentiality. Except to the extent otherwise required by law, the Participant shall not disclose, in whole or in part, any of the terms of this Agreement. This paragraph 22 does not prevent the Participant from disclosing the terms of this Agreement to the Participant’s spouse or beneficiary or to the Participant’s legal, tax, or financial adviser, provided that the Participant take all reasonable measures to assure that the individual to whom disclosure is made does not disclose the terms of this Agreement to a third party except as otherwise required by law.

23. Applicable Law. Except as expressly provided in Exhibit B, the validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

24. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Executive Vice President and Chief Administrative Officer of Verizon at 1095 Avenue of the Americas, New York, New York 10036 and any notice to the Participant shall be addressed to the Participant at the current address shown on the payroll of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy, sent by overnight carrier, or enclosed in a properly sealed envelope as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

25. Dispute Resolution.

(a) General. Except as otherwise provided in paragraph 26 below, all disputes arising under or related to the Plan or this Agreement and all claims in which a Participant seeks damages or other relief that relate in any way to RSUs or other benefits of the Plan are subject to the dispute resolution procedure described below in this paragraph 25.

(i) For purposes of this Agreement, the term “Units Award Dispute” shall mean any claim against the Company or a Related Company, other than Units Damages Disputes

 

6


described in paragraph (a)(ii) below, regarding (A) the interpretation of the Plan or this Agreement, (B) any of the terms or conditions of the RSUs issued under this Agreement, or (C) allegations of entitlement to RSUs or additional RSUs, or any other benefits, under the Plan or this Agreement; provided, however, that any dispute relating to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement or to the forfeiture of an award as a result of a breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement shall not be subject to the dispute resolution procedures provided for in this paragraph 25.

(ii) For purposes of this Agreement, the term “Units Damages Dispute” shall mean any claims between the Participant and the Company or a Related Company (or against the past or present directors, officers, employees, representatives, or agents of the Company or a Related Company, whether acting in their capacity as such or otherwise), that are related in any way to the Participant’s employment or former employment, including claims of alleged employment discrimination, wrongful termination, or violations of Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, 42 U.S.C. § 1981, the Fair Labor Standards Act, the Family Medical Leave Act, the Sarbanes-Oxley Act, or any other U.S. federal, state or local law, statute, regulation, or ordinance relating to employment or any common law theories of recovery relating to employment, such as breach of contract, tort, or public policy claims, in which the damages or other relief sought relate in any way to RSUs or other benefits of the Plan or this Agreement.

(b) Internal Dispute Resolution Procedure. All Units Award Disputes, and all Units Damages Dispute alleging breach of contract, tort, or public policy claims with respect to the Plan or this Agreement (collectively, “Plan Disputes”), shall be referred in the first instance to the Verizon Employee Benefits Committee (“EB Committee”) for resolution internally within Verizon. Except where otherwise prohibited by law, all Plan Disputes must be filed in writing with the EB Committee no later than one year from the date that the dispute accrues. Consistent with paragraph 25(c)(i) of this Agreement, all decisions relating to the enforceability of the limitations period contained herein shall be made by the arbitrator. To the fullest extent permitted by law, the EB Committee shall have full power, discretion, and authority to interpret the Plan and this Agreement and to decide all Plan Disputes brought under this Plan and Agreement. Determinations made by the EB Committee shall be final, conclusive and binding, subject only to review by arbitration pursuant to paragraph (c) below under the arbitrary and capricious standard of review. A Participant’s failure to refer a Plan Dispute to the EB Committee for resolution will in no way impair the Company’s right to compel arbitration or the enforceability of the waiver in paragraph 25(c)(ii).

(c) Arbitration. All appeals from determinations by the EB Committee as described in paragraph (b) above, and any Units Damages Dispute, shall be fully and finally settled by arbitration administered by the American Arbitration Association (“AAA”) on an individual basis (and not on a collective or class action basis) before a single arbitrator pursuant to the AAA’s Commercial Arbitration Rules in effect at the time any such arbitration is initiated. Any such arbitration must be initiated in writing pursuant to the aforesaid rules of the AAA no later than one year from the date that the claim accrues, except where a longer limitations period is required by applicable law. However, a Participant’s failure to initiate arbitration within one year will in no way impair the Company’s right, exercised at its discretion, to compel arbitration or the enforceability of the waiver in paragraph 25(c)(ii). Decisions about the applicability of the limitations period contained herein shall be made by the arbitrator. A copy of the AAA’s Commercial Arbitration Rules may be obtained from Human Resources. The Participant agrees that the arbitration shall be held at the office of the AAA nearest the place of the Participant’s most recent employment by the Company or

 

7


a Related Company, unless the parties agree in writing to a different location. All claims by the Company or a Related Company against the Participant, except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, may also be raised in such arbitration proceedings.

(i) The arbitrator shall have the authority to determine whether any dispute submitted for arbitration hereunder is arbitrable. The arbitrator shall decide all issues submitted for arbitration according to the terms of the Plan, this Agreement (except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement), existing Company policy, and applicable substantive Delaware State and U.S. federal law and shall have the authority to award any remedy or relief permitted by such laws. The final decision of the EB Committee with respect to a Plan Dispute shall be upheld unless such decision was arbitrary or capricious. The decision of the arbitrator shall be final, conclusive, not subject to appeal, and binding and enforceable in any applicable court.

(ii) The Participant understands and agrees that, pursuant to this Agreement, both the Participant and the Company or a Related Company waive any right to sue each other in a court of law or equity, to have a trial by jury, or to resolve disputes on a collective, or class, basis (except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement), and that the sole forum available for the resolution of Units Award Disputes and Units Damages Disputes is arbitration as provided in this paragraph 25. If an arbitrator or court finds that the arbitration provisions of this Agreement are not enforceable, both Participant and the Company or a Related Company understand and agree to waive their right to trial by jury of any Units Award Dispute or Units Damages Dispute. This dispute resolution procedure shall not prevent either the Participant or the Company or a Related Company from commencing an action in any court of competent jurisdiction for the purpose of obtaining injunctive relief to prevent irreparable harm pending and in aid of arbitration hereunder; in such event, both the Participant and the Company or a Related Company agree that the party who commences the action may proceed without necessity of posting a bond.

(iii) In consideration of the Participant’s agreement in paragraph (ii) above, the Company or a Related Company will pay all filing, administrative and arbitrator’s fees incurred in connection with the arbitration proceedings. If the AAA requires the Participant to pay the initial filing fee, the Company or a Related Company will reimburse the Participant for that fee. All other fees incurred in connection with the arbitration proceedings, including but not limited to each party’s attorney’s fees, will be the responsibility of such party.

(iv) The parties intend that the arbitration procedure to which they hereby agree shall be the exclusive means for resolving all Units Award Disputes and Units Damages Disputes (subject to the mandatory EB Committee procedure provided for in paragraph 25(b) above). Their agreement in this regard shall be interpreted as broadly and inclusively as reason permits to realize that intent.

(v) The Federal Arbitration Act (“FAA”) shall govern the enforceability of this paragraph 25. If for any reason the FAA is held not to apply, or if application of the FAA requires consideration of state law in any dispute arising under this Agreement or subject to this dispute resolution provision, the laws of the State of Delaware shall apply without giving effect to the conflicts of laws provisions thereof.

 

8


(vi) To the extent an arbitrator determines that the Participant was not terminated for Cause and is entitled to the RSUs or any other benefits under the Plan pursuant to the provisions applicable to an involuntary termination without Cause, the Participant’s obligation to execute a release satisfactory to Verizon as provided under paragraph 7(c)(2) shall remain applicable in order to receive the benefit of any RSUs pursuant to this Agreement.

26. Additional Remedies. Notwithstanding the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, and in addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have (including the right of the Company to terminate the Participant for Cause or to involuntarily terminate the Participant without Cause), the Participant acknowledges that—

(a) The Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement are essential to the continued goodwill and profitability of the Company and any Related Company;

(b) The Participant has broad-based skills that will serve as the basis for other employment opportunities that are not prohibited by the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement;

(c) When the Participant’s employment with the Company or any Related Company terminates, the Participant shall be able to earn a livelihood without violating any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement;

(d) Irreparable damage to the Company or any Related Company shall result in the event that the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement are not specifically enforced and that monetary damages will not adequately protect the Company and any Related Company from a breach of any of such Participant obligations and restrictions;

(e) If any dispute arises concerning the violation or anticipated or threatened violation by the Participant of any of the Participant’s obligations and restrictions set forth in Exhibits A or B, an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;

(f) The Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement shall continue to apply after any expiration, termination, or cancellation of this Agreement;

(g) The Participant’s breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, including, for example, any breach of the Participant’s non-competition, non-solicitation or confidentiality restrictions, shall result in the Participant’s immediate forfeiture of all rights and benefits, including all RSUs and DEUs, under this Agreement; and

(h) All disputes relating to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, including their interpretation and enforceability and any damages (including but not limited to damages resulting in the forfeiture of an award or benefits under this Agreement) that may result from the breach of such Participant obligations and restrictions shall not be subject to the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, but shall instead be determined in a court of competent jurisdiction.

 

9


Exhibit A – Participant’s Obligations

As part of the Agreement to which this Exhibit A is attached, you, the Participant, agree to the following obligations:

1. Effect of a Material Restatement of Financial Results; Recoupment; Company Policies Regarding Securities Transactions.

(a) General. Notwithstanding anything in this Agreement to the contrary, you agree that, with respect to all RSUs granted to you on or after January 1, 2007 and all short-term incentive awards made to you on or after January 1, 2007, to the extent the Company or any Related Company is required to materially restate any financial results based upon your willful misconduct or gross negligence while employed by the Company or any Related Company (and where such restatement would have resulted in a lower payment being made to you), you will be required to repay all previously paid or deferred (i) RSUs and (ii) short-term incentive awards that were provided to you during the performance periods that are the subject of the restated financial results, plus a reasonable rate of interest. For purposes of this paragraph, “willful misconduct” and “gross negligence” shall be as determined by the Committee. The Audit Committee of the Verizon Board of Directors shall determine whether a material restatement of financial results has occurred. If you do not repay the entire amount required under this paragraph, the Company may, to the extent permitted by applicable law, offset your obligation to repay against any source of income available to it, including but not limited to any money you may have in your nonqualified deferral accounts.

(b) Requirements of Recoupment Policy or Applicable Law. The repayment rights contained in paragraph 1(a) of Exhibit A shall be in addition to, and shall not limit, any other rights or remedies that the Company may have under law or in equity, including, without limitation, (i) any right that the Company may have under any Company recoupment policy that may apply to you, or (ii) any right or obligation that the Company may have regarding the clawback of “incentive-based compensation” under Section 10D of the Securities Exchange Act of 1934, as amended (as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission) or under any other applicable law. By accepting this award of RSUs, you agree and consent to the Company’s application, implementation and enforcement of any such Company recoupment policy (as it may be in effect from time to time) that may apply to you and any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation and expressly agree that the Company may take such actions as are permitted under any such policy (as applicable to you) or applicable law, such as the cancellation of RSUs and repayment of amounts previously paid or deferred with respect to any previously granted RSUs or short-term incentive awards, without further consent or action being required by you.

(c) Company Policies Regarding Securities Transactions. By accepting this award of RSUs, you agree to comply with all Company policies regarding trading in securities or derivative securities (including, without limitation, the Company’s policies prohibiting trading on material inside information regarding the Company or any business with which the Company does business, the Company’s policies prohibiting engaging in financial transactions that would allow you to benefit from a devaluation of the Company’s securities, and any additional policy that the Company may adopt prohibiting you from hedging your economic exposure to the Company’s securities), as such policies are in effect from time to time and for as long as such policies are applicable to you.

 

10


2. Definitions. Except where clearly provided to the contrary or as otherwise defined in this Exhibit A, all capitalized terms used in this Exhibit A shall have the definitions given to those terms in the Agreement to which this Exhibit A is attached.

3. Agreement to Participant’s Obligations. You shall indicate your agreement to the obligations and restrictions set forth in this Exhibit A in accordance with the instructions provided in the Agreement, and your acceptance of the Agreement shall include your acceptance of such obligations and restrictions. As stated in paragraph 21 of the Agreement, you and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if you and Verizon executed this Exhibit A in paper form.

 

11


Exhibit B – Non-Competition, Non-Solicitation, Confidentiality and Other Obligations

As part of the Agreement to which this Exhibit B is attached, you (the Participant) and the Company or any Related Company which employs or employed you, agree to the following obligations:

1. Non-competition.

(a) Prohibited Conduct. During the period of your employment with the Company or any Related Company, and for a period ending twelve (12) months following a termination of your employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee):

(1) personally engage in Competitive Activities (as defined below); or

(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any company or person affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly traded company shall not constitute “ownership” or “participation in the ownership” for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;

provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any person or entity affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or (ii) engaging in the practice of law as an in-house counsel, sole practitioner or as a partner in (or as an employee of or counsel to) a corporation or law firm in accordance with applicable legal and professional standards. Exception (ii), however, does not apply to any Participant that may be engaging in Competitive Activities or providing services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, wherein such engagement or services being provided are not primarily the practice of law.

(b) Competitive Activities. For purposes of the Agreement, to which this Exhibit B is attached, “Competitive Activities” means any activities relating to products or services of the same or similar type as the products or services (1) which were or are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company or any Related Company, and (2) for which you have any direct or indirect responsibility or any involvement to plan, develop, manage, market, sell, oversee, support, implement or perform, or had any such responsibility or involvement within your most recent 24 months of employment with the Company or any Related Company. Notwithstanding the previous sentence, an activity shall not be treated as a Competitive Activity if the geographic marketing area of such same or similar products or services does not overlap with the geographic marketing area for the applicable products and services of the Company or any Related Company.

 

12


2. Interference With Business Relations. During the period of your employment with the Company or any Related Company, and for a period ending twelve (12) months following a termination of your employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee):

(a) recruit, induce or solicit, directly or indirectly, any employee of the Company or Related Company who was employed by the Company or any Related Company prior to or as of your termination date and whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company for employment or for retention as a consultant or service provider to any person or entity;

(b) hire or participate (with another person or entity) in the process of recruiting, soliciting or hiring, directly or indirectly, (other than for the Company or any Related Company) any person who is then an employee of the Company or any Related Company whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company, or provide, directly or indirectly, names or other information about any employees of the Company or Related Company whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company to any person or entity (other than to the Company or any Related Company) under circumstances that could lead to the use of any such information for purposes of recruiting, soliciting or hiring any such employee for any person or entity;

(c) interfere, or attempt to interfere, directly or indirectly, with any relationship of the Company or any Related Company with any of its employees, agents, or representatives;

(d) solicit or induce, or in any manner attempt to solicit or induce, directly or indirectly, any client, customer, or Prospect (defined below) of the Company or any Related Company (1) to cease being, or not to become, a customer of the Company or any Related Company, or (2) to divert any business of such customer or Prospect from the Company or any Related Company; or

(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, directly or indirectly, the relationship, contractual or otherwise, between the Company or any Related Company and any of its customers, clients, Prospects, suppliers, vendors, service providers, developers, joint ventures, equity investments or partners, inventors, consultants, employees, agents, or representatives.

For purposes of this paragraph 2, “Prospect” shall mean any person or entity from whom or which any business was being solicited by Verizon or any Related Company within the most recent 12 month period of your employment.

3. Proprietary And Confidential Information. You shall at all times, including after any termination of your employment with the Company or any Related Company, preserve the confidentiality of all Proprietary Information (defined below) and trade secrets of the Company or any Related Company, and you shall not use for the benefit of yourself or any person, other than the Company or a Related Company, or disclose to any person, except and to the extent that disclosure of such information is authorized under applicable laws or regulations (e.g., “whistleblower” laws such as 18 USC 1833(b) described below), any Proprietary Information or trade secrets of the Company or any Related Company. “Proprietary Information” means any information or data related to the Company or any Related Company, including information entrusted to the Company or a Related Company by others, which has not been fully disclosed to the public by the Company or a Related Company, which is treated as

 

13


confidential or otherwise protected within the Company or any Related Company or is of value to competitors, such as strategic or tactical business plans; undisclosed business, operational or financial data; ideas, processes, methods, techniques, systems, models, devices, programs, computer software, or related information; documents relating to regulatory matters or correspondence with governmental entities; information concerning any past, pending, or threatened legal dispute; pricing or cost data; the identity, reports or analyses of business prospects; business transactions (including those that are contemplated or planned); research data; personnel information or data; identities of suppliers to the Company or any Related Company or users or purchasers of the Company’s or Related Company’s products or services; the Agreement to which this Exhibit B is attached; and any other non-public information pertaining to or known by the Company or a Related Company, including confidential or non-public information of a third party that you know or should know the Company or a Related Company is obligated to protect. Section 18 USC 1833(b) provides that “An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that—(A) is made—(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.” Nothing in this Agreement is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 U.S.C. § 1833(b).

4. Return Of Company Property; Ownership of Intellectual Property Rights. You agree that on or before termination of your employment for any reason with the Company or any Related Company, you shall return to the Company all property owned by the Company or any Related Company or in which the Company or any Related Company has an interest or to which the Company or any Related Company has any obligation, including any and all files, documents, data, records and any other non-public information (whether on paper or in tapes, disks, memory devices, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company (or, as applicable, a Related Company) is the rightful owner of, and you hereby do grant and assign, all right, title and interest in and to any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; and trademarks that you may have originated, created or developed, or assisted or participated in originating, creating or developing, during your period of employment with the Company or a Related Company, including all intellectual property rights in or based on the foregoing, where any such origination, creation or development (a) involved any use of Company or Related Company time, information or resources, (b) was made in the exercise of any of your duties or responsibilities for or on behalf of the Company or a Related Company, or (c) was related to (i) the Company’s or a Related Company’s past, present or future business, or (ii) the Company’s or a Related Company’s actual or demonstrably anticipated research, development or procurement activities. You shall at all times, both before and after termination of your employment, cooperate with the Company (or, as applicable, any Related Company) and its representatives in executing and delivering documents requested by the Company or a Related Company, and taking any other actions, that are necessary or requested by the Company or a Related Company to assist the Company or any Related Company in patenting, copyrighting, protecting, registering, or enforcing any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; trademarks; or other intellectual property rights, and to vest title thereto solely in the Company (or, as applicable, a Related Company).

5. Definitions. Except where clearly provided to the contrary or as otherwise defined in this Exhibit B, all capitalized terms used in this Exhibit B shall have the definitions given to those terms in the Agreement to which this Exhibit B is attached.

 

14


6. Agreement to Non-Competition, Non-Solicitation, Confidentiality and Other Obligations.

 

  (a)

You acknowledge that the geographic boundaries, scope of prohibited activities, and time duration of the restrictions set forth in paragraphs 1 and 2 above are reasonable in nature and are no broader than are necessary to maintain the confidential information, trade secrets and the goodwill of the Company and its Related Companies and to protect the other legitimate business interests of the Company and its Related Companies and are not unduly restrictive on you. In addition, you and the Company agree and intend that the covenants contained in paragraphs 1 and 2 shall be deemed to be a series of separate covenants and agreements, one for each and every county or political subdivision of each applicable state of the United States and each country of the world. It is the desire and intent of the parties hereto that the provisions of this Exhibit B be enforced to the fullest extent permissible under the governing laws and public policies of the State of New Jersey, and to the extent applicable, each jurisdiction in which enforcement is sought. Accordingly, if any provision in this Exhibit A or deemed to be included in this Exhibit A shall be adjudicated to be invalid or unenforceable, such provision, without any action on the part of the parties hereto, shall be deemed amended to delete or to modify (including, without limitation, a reduction in duration, geographical area or prohibited business activities) the portion adjudicated to be invalid or unenforceable, such deletion or modification to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made, and such deletion or modification to be made only to the extent necessary to cause the provision as amended to be valid and enforceable.

 

  (b)

You shall indicate your agreement to the obligations and restrictions set forth in this Exhibit B in accordance with the instructions provided in the Agreement, and your acceptance of the Agreement shall include your acceptance of such obligations and restrictions. As stated in paragraph 21 of the Agreement, you and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if you and Verizon executed this Exhibit B in paper form.

7. Governing Law and Non-exclusive Forum. The parties expressly agree: (a) that, because the Plan is centrally administered in the State of New Jersey by employees of a Verizon Communications Inc. affiliate, the subject matter of this Exhibit B bears a reasonable relationship to the State of New Jersey; (b) that this Exhibit B is made under, shall be construed in accordance with, and governed in all respects by the laws of the State of New Jersey without giving effect to that jurisdiction’s choice of law rules; and (c) the parties consent to the non-exclusive jurisdiction and venue of the courts of the State of New Jersey, and the federal courts of the United States of America located in the State of New Jersey, over any action, claim, controversy or proceeding arising under this Exhibit B, and irrevocably waive any objection they may now or hereafter have to the non-exclusive jurisdiction and venue of such courts.

 

15

Exhibit 10c

VERIZON COMMUNICATIONS INC. LONG-TERM INCENTIVE PLAN

2017 SPECIAL PERFORMANCE STOCK UNIT AGREEMENT

AGREEMENT between Verizon Communications Inc. (“Verizon” or the “Company”) and you (the “Participant”) and your heirs and beneficiaries.

1. Purpose of Agreement. The purpose of this Agreement is to provide a special grant of performance stock units (“PSUs”) to the Participant.

2. Agreement. This Agreement is entered into pursuant to the 2009 Verizon Communications Inc. Long-Term Incentive Plan, as amended and restated (the “Plan”) and evidences the grant of a performance stock unit award in the form of PSUs pursuant to the Plan. In consideration of the benefits described in this Agreement, which Participant acknowledges are good, valuable and sufficient consideration, the Participant agrees to comply with the terms and conditions of this Agreement, including the Participant’s obligations and restrictions set forth in Exhibit A to this Agreement and the Participant’s non-competition, non-solicitation, confidentiality and other obligations and restrictions set forth in Exhibit B to this Agreement, both of which are incorporated into and are a part of the Agreement. The PSUs and this Agreement are subject to the terms and provisions of the Plan. By executing this Agreement, the Participant agrees to be bound by the terms and provisions of the Plan and this Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement. In addition, the Participant agrees to be bound by the actions of the Human Resources Committee of Verizon Communication’s Board of Directors or any successor thereto (the “Committee”), and any designee of the Committee (to the extent that such actions are exercised in accordance with the terms of the Plan and this Agreement). If there is a conflict between the terms of the Plan and the terms of this Agreement, the terms of this Agreement shall control.

3. Contingency. The grant of PSUs is contingent on the Participant’s timely acceptance of this Agreement and satisfaction of the other conditions contained in it. Acceptance shall be through execution of the Agreement as set forth in paragraph 21. If the Participant does not accept this Agreement by the close of business on June 16, 2017, the Participant shall not be entitled to this grant of PSUs regardless of the extent to which the requirements in paragraph 5 (“Vesting”) are satisfied.

4. Number of Units. The Participant is granted the number of PSUs as specified in the Participant’s account under the 2017 Special PSU grant, administered by Fidelity Investments or any successor thereto (“Fidelity”). A PSU is a hypothetical share of Verizon’s common stock. The value of a PSU on any given date shall be equal to the closing price of Verizon’s common stock on the New York Stock Exchange (“NYSE”) as of such date. A Dividend Equivalent Unit (“DEU”) or fraction thereof shall be added to each PSU each time that a dividend is paid on Verizon’s common stock. The amount of each DEU shall be equal to the corresponding dividend paid on a share of Verizon’s common stock. The DEU shall be converted into PSUs or fractions thereof based upon the closing price of Verizon’s common stock traded on the NYSE on the dividend payment date of each declared dividend on Verizon’s common stock, and such PSUs or fractions thereof shall be added to the Participant’s PSU balance. To the extent that Fidelity or the Company makes an error, including but not limited to an administrative error with respect to the number or value of the PSUs granted to the Participant under this Agreement, the DEUs credited to the Participant’s account or the amount of the final award payment, the Company or Fidelity specifically reserves the right to correct such error at any time and the Participant agrees that he or she shall be legally bound by any corrective action taken by the Company or Fidelity.


5. Vesting.

(a) General. The Participant shall vest in the PSUs to the extent provided in paragraph 5(b) (“Performance Requirement”) only if the Participant satisfies the requirements of paragraph 5(c) (“Three-Year Continuous Employment Requirement”), except as otherwise provided in paragraph 7 (“Early Cancellation/Accelerated Vesting of PSUs”).

(b) Performance Requirement.

(1) General. The number of PSUs granted to the Participant, as specified in the Participant’s account under the 2017 Special PSU grant, is referred to as the “Target Number of PSUs.” The percentage of the Target Number of PSUs that shall vest will be based on Verizon’s annual average Return on Equity for the three-year period beginning January 1, 2017, and ending at the close of business on December 31, 2019 (the “Performance Period”). Notwithstanding paragraph 5(c), no portion of the Target Number of PSUs shall vest unless the Committee determines that Verizon’s average annual Return on Equity for the Performance Period is equal to or greater than 30%. If the Committee determines that Verizon’s average annual Return on Equity for the Performance Period is equal to or greater than 30%, the percentage of the Target Number of PSUs that shall vest (plus any additional PSUs added with respect to DEUs credited on the Target Number of PSUs prior to the Vesting Date (defined in paragraph 5(c)) will equal the PSU Vested Percentage (as defined below). For example, if (a) the Participant is granted 1,000 PSUs, and (b) those PSUs are credited with an additional 200 PSUs as a result of DEUs paid prior to the Vesting Date, and (c) the PSU Vested Percentage is 50%, the Participant will vest in (1,000 PSUs + 200 PSUs from DEUs) times 50%, or 600 PSUs, which shall be payable in shares of Verizon common stock as described in paragraph 6.

(2) Definitions. For purposes of the performance requirement and payout formula set forth in paragraph 5(b)(1) –

(i) “PSU Vested Percentage” shall be an amount (between 0% and 150%), which is based on Verizon’s annual average Return on Equity during the Performance Period, as provided in the following table:

 

Verizon Return on Equity

  PSU Vested  Percentage

60% or Greater

  150%

45%

  100%

30%

  50%

Less than 30%

  0%

If Verizon’s average annual Return on Equity during the Performance Period is less than 60% but greater than 45%, or less than 45% but greater than 30%, the PSU Vested Percentage will be interpolated on a straight-line basis between the respective levels (for example, if Verizon’s average annual Return on Equity during the Performance Period is 37.5%, PSU Vested Percentage will be 75%).

(ii) “Return on Equity” shall have the same meaning as described in Section 2.20 of Verizon’s Short-Term Incentive Plan and, consistent with the terms of the plan, will not be impacted by pension accounting.

 

2


(c) Three-Year Continuous Employment Requirement. Except as otherwise determined by the Committee, or except as otherwise provided in paragraph 7 (“Early Cancellation/Accelerated Vesting of PSUs”), the PSUs shall vest only if the Participant is continuously employed by the Company or a Related Company (as defined in paragraph 13) from March 14, 2017 (the date the PSUs are granted) through March 13, 2020 (the “Vesting Date”).

(d) Transfer. Transfer of employment from Verizon to a Related Company, from a Related Company to Verizon, or from one Related Company to another Related Company shall not constitute a separation from employment hereunder, and service with a Related Company shall be treated as service with the Company for purposes of the three-year continuous employment requirement in paragraph 5(c).

6. Payment. All payments under this Agreement shall be made in shares of Verizon common stock except for any fractional shares, which shall be paid in cash. Subject to paragraph 7(a), as soon as practicable after the Vesting Date (but in no event later than two and one-half months thereafter) the number of shares of the vested PSUs (minus any withholding for taxes) shall be paid to the Participant. The number of shares that shall be paid (plus withholding for taxes) shall equal the number of vested PSUs (as provided in paragraph 5(b)). If the Participant dies before any payment due hereunder is made, such payment shall be made to the Participant’s beneficiary, as designated under paragraph 11. Once a payment has been made with respect to a PSU, the PSU shall be canceled; however, all other terms of the Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, shall remain in effect. Moreover, the Participant is required to hold all shares that are paid under the terms of this Agreement for a minimum of one year after the date the shares become vested. Thus, the Participant is required to hold all shares paid under this Agreement at least through March 13, 2021. Such restriction shall not apply if the Participant dies or becomes disabled at any time prior to the end of this one-year holding period.

7. Early Cancellation/Accelerated Vesting of PSUs. Notwithstanding the provisions of paragraph 5, PSUs may vest or be forfeited prior to the Vesting Date or may be forfeited before the payment date as follows:

(a) Termination for Cause. If the Participant’s employment by the Company or a Related Company is terminated by the Company or a Related Company for Cause (as defined below) at any time prior to the date that the PSUs are paid pursuant to paragraph 6, the PSUs (whether vested or not) shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant.

(b) Voluntary Separation (including Retirement) On or Before the Vesting Date, or Other Separation Not Described in Section 7(c). If the Participant (i) voluntarily separates from employment on or before the Vesting Date for any reason, including Retirement, or (ii) otherwise separates from employment on or before Vesting Date under circumstances not described in paragraph 7(c), all PSUs shall automatically terminate and be cancelled as of the applicable termination date without payment of any consideration by the Company and without any other action by the Participant.

(c) Involuntary Termination Without Cause On or Before the Vesting Date, or Termination Due to Death or Disability On or Before the Vesting Date.

(1) This paragraph 7(c) shall apply if the Participant separates from employment by reason of an involuntary termination without Cause (as determined by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee)), death, or Disability (as defined below) on or before the Vesting Date.

 

3


(2) If the Participant separates from employment on or before the Vesting Date under circumstances described in paragraph 7(c)(1), the Participant’s PSUs shall be subject to the vesting provisions set forth in paragraph 5(a) and 5(b) (without prorating the award), except that the three-year continuous employment requirement set forth in paragraph 5(c) shall not apply, provided that the Participant has not and does not commit a breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement and provided that the Participant executes, within the time prescribed by Verizon, a release satisfactory to Verizon waiving any claims he may have against Verizon and any Related Company (otherwise, paragraph 7(b) shall apply).

(3) Any PSUs that vest pursuant to paragraph 7(c)(2) shall be payable as soon as practicable after the Vesting Date (but in no event later than two and one-half months thereafter).

(4) For purposes of this Agreement, the following definitions shall apply:

(i) “Cause” means (i) incompetence or negligence in the discharge of, or inattention to or neglect of or failure to perform, the duties and responsibilities assigned to the Participant; fraud, misappropriation or embezzlement; or a material breach of the Verizon Code of Conduct (as in effect at the relevant time) or any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, all as determined by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) in his or her discretion, or (ii) commission of any felony of which the Participant is finally adjudged guilty by a court of competent jurisdiction.

(ii) “Disability” shall mean the total and permanent disability of the Participant as defined by, or determined under, the Company’s long-term disability benefit plan.

(iii) “Retire” and “Retirement” means: (i) to retire after having attained at least 15 years of vesting service (as defined under the applicable Verizon tax-qualified 401(k) savings plan) and a combination of age and years of vesting service that equals or exceeds 75 points, or (ii) retirement under any other circumstances determined in writing by the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee), provided that, in the case of either (i) or (ii) in this paragraph, the retirement was not occasioned by a discharge for Cause.

(d) Change in Control. If the Participant is involuntarily terminated without Cause within twelve (12) months following the occurrence of a Change in Control of Verizon (as defined in the Plan) and before the Vesting Date, the PSUs shall vest and become payable (without prorating the award) by applying a PSU Vested Percentage of 100% to the PSUs without regard to the performance requirement in paragraph 5(b) and the three-year continuous employment requirement in paragraph 5(c) shall be deemed satisfied in full as if the Participant’s employment with the Company or a Related Company had continued through the Vesting Date; however, all other terms of the Agreement, including but not limited to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, shall remain in effect. A Change in Control or an involuntary termination without Cause that occurs after the Vesting Date shall have no effect on whether any PSUs vest or become payable under this paragraph 7(d). If both paragraph 7(c) and this paragraph 7(d) would otherwise apply in the circumstances, this paragraph 7(d) shall control. All payments provided in this paragraph 7(d) shall be made at their regularly scheduled time as specified in paragraph 6.

 

4


(e) Vesting Schedule. Except and to the extent provided in paragraphs 7(c) and (d), nothing in this paragraph 7 shall alter the vesting schedule prescribed by paragraph 5.

8. Shareholder Rights. The Participant shall have no rights as a shareholder with respect to the PSUs until the date on which the Participant becomes the holder of record with respect to any shares of Verizon common stock to which this grant relates. Except as provided in the Plan or in this Agreement, no adjustment shall be made for dividends or other rights for which the record date occurs while the PSUs are outstanding.

9. Amendment of Agreement. Except to the extent required by law or specifically contemplated under this Agreement, neither the Committee nor the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) may, without the written consent of the Participant, change any term, condition or provision affecting the PSUs if the change would have a material adverse effect upon the PSUs or the Participant’s rights thereto. Nothing in the preceding sentence shall preclude the Committee or the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee) from exercising administrative discretion with respect to the Plan or this Agreement, and the exercise of such discretion shall be final, conclusive and binding. This discretion includes, but is not limited to, corrections of any errors, including but not limited to any administrative errors, determining the total percentage of PSUs that become payable, and determining whether the Participant has been discharged for Cause, has a Disability, has Retired, has breached any of the Participant’s obligations or restrictions set forth in Exhibits A and B to this Agreement or has satisfied the requirements for vesting and payment under paragraphs 5 and 7 of this Agreement.

10. Assignment. The PSUs shall not be assigned, pledged or transferred except by will or by the laws of descent and distribution.

11. Beneficiary. The Participant shall designate a beneficiary in writing and in such manner as is acceptable to the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee). Each such designation shall revoke all prior designations by the Participant with respect to the Participant’s benefits under the Plan and shall be effective only when filed by the Participant with the Company during the Participant’s lifetime. If the Participant fails to so designate a beneficiary, or if no such designated beneficiary survives the Participant, the Participant’s beneficiary shall be the Participant’s estate.

12. Other Plans and Agreements. Any payment received by the Participant pursuant to this Agreement shall not be taken into account as compensation in the determination of the Participant’s benefits under any pension, savings, life insurance, severance or other benefit plan maintained by Verizon or a Related Company. The Participant acknowledges that this Agreement or any prior PSU agreement shall not entitle the Participant to any other benefits under the Plan or any other plans maintained by the Company or a Related Company.

13. Company and Related Company. For purposes of this Agreement, “Company” means Verizon Communications Inc. “Related Company” means (a) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or proprietary interest of 50 percent or more at any time during the term of this Agreement, or (b) any corporation, partnership, joint venture, or other entity in which Verizon Communications Inc. holds a direct or indirect ownership or other proprietary interest of less than 50 percent at any time during the term of this Agreement but which, in the discretion of the Committee, is treated as a Related Company for purposes of this Agreement.

 

5


14. Employment Status. The grant of the PSUs shall not be deemed to constitute a contract of employment for a particular term between the Company or a Related Company and the Participant, nor shall it constitute a right to remain in the employ of any such Company or Related Company.

15. Withholding. The Participant acknowledges that he or she shall be responsible for any taxes that arise in connection with this grant of PSUs, and the Company shall make such arrangements as it deems necessary for withholding of any taxes it determines are required to be withheld pursuant to any applicable law or regulation.

16. Securities Laws. The Company shall not be required to make payment with respect to any shares of common stock prior to the admission of such shares to listing on any stock exchange on which the stock may then be listed and the completion of any registration or qualification of such shares under any federal or state law or rulings or regulations of any government body that the Company, in its discretion, determines to be necessary or advisable.

17. Committee Authority. The Committee shall have complete discretion in the exercise of its rights, powers, and duties under this Agreement. Any interpretation or construction of any provision of, and the determination of any question arising under, this Agreement shall be made by the Committee in its discretion, as described in paragraph 9. The Committee and the Audit Committee may designate any individual or individuals to perform any of its functions hereunder and utilize experts to assist in carrying out their duties hereunder.

18. Successors. This Agreement shall be binding upon, and inure to the benefit of, any successor or successors of the Company and the person or entity to whom the PSUs may have been transferred by will, the laws of descent and distribution, or beneficiary designation. All terms and conditions of this Agreement imposed upon the Participant shall, unless the context clearly indicates otherwise, be deemed, in the event of the Participant’s death, to refer to and be binding upon the Participant’s heirs and beneficiaries.

19. Construction. In the event that any provision of this Agreement is held invalid or unenforceable, such provision shall be considered separate and apart from the remainder of this Agreement, which shall remain in full force and effect. In the event that any provision, including any of the Participant’s obligations or restrictions set forth in Exhibits A and B to this Agreement, is held to be unenforceable for being unduly broad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended. The PSUs are intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, and to not be subject to any tax, interest or penalty under Section 409A of the Code, and this Agreement shall be construed and interpreted consistent with such intents.

20. Defined Terms. Except where the context clearly indicates otherwise, all capitalized terms used herein shall have the definitions ascribed to them by the Plan, and the terms of the Plan shall apply where appropriate.

21. Execution of Agreement. The Participant shall indicate his or her consent and acknowledgment to the terms of this Agreement (including the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement) and the Plan by executing this Agreement pursuant to the instructions provided and otherwise shall comply with the requirements of paragraph 3. In addition, by consenting to the terms of this Agreement and the Participant’s obligations and restrictions set forth in Exhibits A and B to this

 

6


Agreement, the Participant expressly agrees and acknowledges that Fidelity may deliver all documents, statements and notices associated with the Plan and this Agreement to the Participant in electronic form. The Participant and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if the Participant and Verizon executed this Agreement (including the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement) in paper form.

22. Confidentiality. Except to the extent otherwise required by law, the Participant shall not disclose, in whole or in part, any of the terms of this Agreement. This paragraph 22 does not prevent the Participant from disclosing the terms of this Agreement to the Participant’s spouse or beneficiary or to the Participant’s legal, tax, or financial adviser, provided that the Participant take all reasonable measures to assure that the individual to whom disclosure is made does not disclose the terms of this Agreement to a third party except as otherwise required by law.

23. Applicable Law. Except as expressly provided in Exhibit B, the validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

24. Notice. Any notice to the Company provided for in this Agreement shall be addressed to the Company in care of the Executive Vice President and Chief Administrative Officer of Verizon at 1095 Avenue of the Americas, New York, New York 10036 and any notice to the Participant shall be addressed to the Participant at the current address shown on the payroll of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy, sent by overnight carrier, or enclosed in a properly sealed envelope as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

25. Dispute Resolution.

(a) General. Except as otherwise provided in paragraph 26 below, all disputes arising under or related to the Plan or this Agreement and all claims in which a Participant seeks damages or other relief that relate in any way to PSUs or other benefits of the Plan are subject to the dispute resolution procedure described below in this paragraph 25.

(i) For purposes of this Agreement, the term “Units Award Dispute” shall mean any claim against the Company or a Related Company, other than Units Damages Disputes described in paragraph (a)(ii) below, regarding (A) the interpretation of the Plan or this Agreement, (B) any of the terms or conditions of the PSUs issued under this Agreement, or (C) allegations of entitlement to PSUs or additional PSUs, or any other benefits, under the Plan or this Agreement; provided, however, that any dispute relating to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement or to the forfeiture of an award as a result of a breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement shall not be subject to the dispute resolution procedures provided for in this paragraph 25.

(ii) For purposes of this Agreement, the term “Units Damages Dispute” shall mean any claims between the Participant and the Company or a Related Company (or against the past or present directors, officers, employees, representatives, or agents of the Company or a Related Company, whether acting in their capacity as such or otherwise), that are related in any way to the Participant’s employment or former employment, including claims of alleged employment discrimination, wrongful termination, or violations of Title

 

7


VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, 42 U.S.C. § 1981, the Fair Labor Standards Act, the Family Medical Leave Act, the Sarbanes-Oxley Act, or any other U.S. federal, state or local law, statute, regulation, or ordinance relating to employment or any common law theories of recovery relating to employment, such as breach of contract, tort, or public policy claims, in which the damages or other relief sought relate in any way to PSUs or other benefits of the Plan or this Agreement.

(b) Internal Dispute Resolution Procedure. All Units Award Disputes, and all Units Damages Dispute alleging breach of contract, tort, or public policy claims with respect to the Plan or this Agreement (collectively, “Plan Disputes”), shall be referred in the first instance to the Verizon Employee Benefits Committee (“EB Committee”) for resolution internally within Verizon. Except where otherwise prohibited by law, all Plan Disputes must be filed in writing with the EB Committee no later than one year from the date that the dispute accrues. Consistent with paragraph 25(c)(i) of this Agreement, all decisions relating to the enforceability of the limitations period contained herein shall be made by the arbitrator. To the fullest extent permitted by law, the EB Committee shall have full power, discretion, and authority to interpret the Plan and this Agreement and to decide all Plan Disputes brought under this Plan and Agreement. Determinations made by the EB Committee shall be final, conclusive and binding, subject only to review by arbitration pursuant to paragraph (c) below under the arbitrary and capricious standard of review. A Participant’s failure to refer a Plan Dispute to the EB Committee for resolution will in no way impair the Company’s right to compel arbitration or the enforceability of the waiver in paragraph 25(c)(ii).

(c) Arbitration. All appeals from determinations by the EB Committee as described in paragraph (b) above, and any Units Damages Dispute, shall be fully and finally settled by arbitration administered by the American Arbitration Association (“AAA”) on an individual basis (and not on a collective or class action basis) before a single arbitrator pursuant to the AAA’s Commercial Arbitration Rules in effect at the time any such arbitration is initiated. Any such arbitration must be initiated in writing pursuant to the aforesaid rules of the AAA no later than one year from the date that the claim accrues, except where a longer limitations period is required by applicable law. However, a Participant’s failure to initiate arbitration within one year will in no way impair the Company’s right, exercised at its discretion, to compel arbitration or the enforceability of the waiver in paragraph 25(c)(ii). Decisions about the applicability of the limitations period contained herein shall be made by the arbitrator. A copy of the AAA’s Commercial Arbitration Rules may be obtained from Human Resources. The Participant agrees that the arbitration shall be held at the office of the AAA nearest the place of the Participant’s most recent employment by the Company or a Related Company, unless the parties agree in writing to a different location. All claims by the Company or a Related Company against the Participant, except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, may also be raised in such arbitration proceedings.

(i) The arbitrator shall have the authority to determine whether any dispute submitted for arbitration hereunder is arbitrable. The arbitrator shall decide all issues submitted for arbitration according to the terms of the Plan, this Agreement (except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement), existing Company policy, and applicable substantive Delaware State and U.S. federal law and shall have the authority to award any remedy or relief permitted by such laws. The final decision of the EB Committee with respect to a Plan Dispute shall be upheld unless such decision was arbitrary or capricious. The decision of the arbitrator shall be final, conclusive, not subject to appeal, and binding and enforceable in any applicable court.

 

8


(ii) The Participant understands and agrees that, pursuant to this Agreement, both the Participant and the Company or a Related Company waive any right to sue each other in a court of law or equity, to have a trial by jury, or to resolve disputes on a collective, or class, basis (except for breaches of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement), and that the sole forum available for the resolution of Units Award Disputes and Units Damages Disputes is arbitration as provided in this paragraph 25. If an arbitrator or court finds that the arbitration provisions of this Agreement are not enforceable, both Participant and the Company or a Related Company understand and agree to waive their right to trial by jury of any Units Award Dispute or Units Damages Dispute. This dispute resolution procedure shall not prevent either the Participant or the Company or a Related Company from commencing an action in any court of competent jurisdiction for the purpose of obtaining injunctive relief to prevent irreparable harm pending and in aid of arbitration hereunder; in such event, both the Participant and the Company or a Related Company agree that the party who commences the action may proceed without necessity of posting a bond.

(iii) In consideration of the Participant’s agreement in paragraph (ii) above, the Company or a Related Company will pay all filing, administrative and arbitrator’s fees incurred in connection with the arbitration proceedings. If the AAA requires the Participant to pay the initial filing fee, the Company or a Related Company will reimburse the Participant for that fee. All other fees incurred in connection with the arbitration proceedings, including but not limited to each party’s attorney’s fees, will be the responsibility of such party.

(iv) The parties intend that the arbitration procedure to which they hereby agree shall be the exclusive means for resolving all Units Award Disputes and Units Damages Disputes (subject to the mandatory EB Committee procedure provided for in paragraph 25(b) above). Their agreement in this regard shall be interpreted as broadly and inclusively as reason permits to realize that intent.

(v) The Federal Arbitration Act (“FAA”) shall govern the enforceability of this paragraph 25. If for any reason the FAA is held not to apply, or if application of the FAA requires consideration of state law in any dispute arising under this Agreement or subject to this dispute resolution provision, the laws of the State of Delaware shall apply without giving effect to the conflicts of laws provisions thereof.

(vi) To the extent an arbitrator determines that the Participant was not terminated for Cause and is entitled to the PSUs or any other benefits under the Plan pursuant to the provisions applicable to an involuntary termination without Cause, the Participant’s obligation to execute a release satisfactory to Verizon as provided under paragraph 7(c)(2) shall remain applicable in order to receive the benefit of any PSUs pursuant to this Agreement.

26. Additional Remedies. Notwithstanding the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, and in addition to any other rights or remedies, whether legal, equitable, or otherwise, that each of the parties to this Agreement may have (including the right of the Company to terminate the Participant for Cause or to involuntarily terminate the Participant without Cause), the Participant acknowledges that –

 

9


(a) The Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement are essential to the continued goodwill and profitability of the Company and any Related Company;

(b) The Participant has broad-based skills that will serve as the basis for other employment opportunities that are not prohibited by the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement;

(c) When the Participant’s employment with the Company or any Related Company terminates, the Participant shall be able to earn a livelihood without violating any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement;

(d) Irreparable damage to the Company or any Related Company shall result in the event that the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement are not specifically enforced and that monetary damages will not adequately protect the Company and any Related Company from a breach of such Participant obligations and restrictions;

(e) If any dispute arises concerning the violation or anticipated or threatened violation by the Participant of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, an injunction may be issued restraining such violation pending the determination of such controversy, and no bond or other security shall be required in connection therewith;

(f) The Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement shall continue to apply after any expiration, termination, or cancellation of this Agreement;

(g) The Participant’s breach of any of the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, including, for example, any breach of the Participant’s non-competition, non-solicitation or confidentiality restrictions, shall result in the Participant’s immediate forfeiture of all rights and benefits, including all PSUs and DEUs, under this Agreement; and

(h) All disputes relating to the Participant’s obligations and restrictions set forth in Exhibits A and B to this Agreement, including their interpretation and enforceability and any damages (including but not limited to damages resulting in the forfeiture of an award or benefits under this Agreement) that may result from the breach of such Participant obligations and restrictions shall not be subject to the dispute resolution procedures, including arbitration, of paragraph 25 of this Agreement, but shall instead be determined in a court of competent jurisdiction.

 

10


Exhibit A – Participant’s Obligations

As part of the Agreement to which this Exhibit A is attached, you, the Participant, agree to the following obligations:

1. Effect of a Material Restatement of Financial Results; Recoupment; Company Policies Regarding Securities Transactions.

(a) General. Notwithstanding anything in this Agreement to the contrary, you agree that, with respect to all PSUs granted to you on or after January 1, 2007 and all short-term incentive awards made to you on or after January 1, 2007, to the extent the Company or any Related Company is required to materially restate any financial results based upon your willful misconduct or gross negligence while employed by the Company or any Related Company (and where such restatement would have resulted in a lower payment being made to you), you will be required to repay all previously paid or deferred (i) PSUs and (ii) short-term incentive awards that were provided to you during the performance periods that are the subject of the restated financial results, plus a reasonable rate of interest. For purposes of this paragraph, “willful misconduct” and “gross negligence” shall be as determined by the Committee. The Audit Committee of the Verizon Board of Directors shall determine whether a material restatement of financial results has occurred. If you do not repay the entire amount required under this paragraph, the Company may, to the extent permitted by applicable law, offset your obligation to repay against any source of income available to it, including but not limited to any money you may have in your nonqualified deferral accounts.

(b) Requirements of Recoupment Policy or Applicable Law. The repayment rights contained in paragraph 1(a) of Exhibit A shall be in addition to, and shall not limit, any other rights or remedies that the Company may have under law or in equity, including, without limitation, (i) any right that the Company may have under any Company recoupment policy that may apply to you, or (ii) any right or obligation that the Company may have regarding the clawback of “incentive-based compensation” under Section 10D of the Securities Exchange Act of 1934, as amended (as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission) or under any other applicable law. By accepting this award of PSUs, you agree and consent to the Company’s application, implementation and enforcement of any such Company recoupment policy (as it may be in effect from time to time) that may apply to you and any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation and expressly agree that the Company may take such actions as are permitted under any such policy (as applicable to you) or applicable law, such as the cancellation of PSUs and repayment of amounts previously paid or deferred with respect to any previously granted PSUs or short-term incentive awards, without further consent or action being required by you.

(c) Company Policies Regarding Securities Transactions. By accepting this award of PSUs, you agree to comply with all Company policies regarding trading in securities or derivative securities (including, without limitation, the Company’s policies prohibiting trading on material inside information regarding the Company or any business with which the Company does business, the Company’s policies prohibiting engaging in financial transactions that would allow you to benefit from a devaluation of the Company’s securities, and any additional policy that the Company may adopt prohibiting you from hedging your economic exposure to the Company’s securities), as such policies are in effect from time to time and for as long as such policies are applicable to you.

 

11


2. Definitions. Except where clearly provided to the contrary or as otherwise defined in this Exhibit A, all capitalized terms used in this Exhibit A shall have the definitions given to those terms in the Agreement to which this Exhibit A is attached.

3. Agreement to Participant’s Obligations. You shall indicate your agreement to the obligations and restrictions set forth in this Exhibit A in accordance with the instructions provided in the Agreement, and your acceptance of the Agreement shall include your acceptance of such obligations and restrictions. As stated in paragraph 21 of the Agreement, you and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if you and Verizon executed this Exhibit A in paper form.

 

12


Exhibit B – Non-Competition, Non-Solicitation, Confidentiality and Other Obligations

As part of the Agreement to which this Exhibit B is attached, you, the Participant, and the Company or any Related Company which employs or employed you, agree to the following obligations:

1. Noncompetition.

(a) Prohibited Conduct. During the period of your employment with the Company or any Related Company, and for a period ending twelve (12) months following a termination of your employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee):

(1) personally engage in Competitive Activities (as defined below); or

(2) work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any company or person affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities; provided that your purchase or holding, for investment purposes, of securities of a publicly traded company shall not constitute “ownership” or “participation in the ownership” for purposes of this paragraph so long as your equity interest in any such company is less than a controlling interest;

provided that this paragraph (a) shall not prohibit you from (i) being employed by, or providing services to, a consulting firm, provided that you do not personally engage in Competitive Activities or provide consulting or advisory services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or any person or entity affiliated with such person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, or (ii) engaging in the practice of law as an in-house counsel, sole practitioner or as a partner in (or as an employee of or counsel to) a corporation or law firm in accordance with applicable legal and professional standards. Exception (ii), however, does not apply to any Participant that may be engaging in Competitive Activities or providing services to any person, partnership, firm, corporation, institution or other entity engaged in Competitive Activities, wherein such engagement or services being provided are not primarily the practice of law.

(b) Competitive Activities. For purposes of the Agreement, to which this Exhibit B is attached, “Competitive Activities” means any activities relating to products or services of the same or similar type as the products or services (1) which were or are sold (or, pursuant to an existing business plan, will be sold) to paying customers of the Company or any Related Company, and (2) for which you have any direct or indirect responsibility or any involvement to plan, develop, manage, market, sell, oversee, support, implement or perform, or had any such responsibility or involvement within your most recent 24 months of employment with the Company or any Related Company. Notwithstanding the previous sentence, an activity shall not be treated as a Competitive Activity if the geographic marketing area of such same or similar products or services does not overlap with the geographic marketing area for the applicable products and services of the Company or any Related Company.

2. Interference With Business Relations. During the period of your employment with the Company or any Related Company, and for a period ending twelve (12) months following a termination of your

 

13


employment for any reason with the Company or any Related Company, you shall not, without the prior written consent of the Executive Vice President and Chief Administrative Officer of Verizon (or his or her designee):

(a) recruit, induce or solicit, directly or indirectly, any employee of the Company or Related Company who was employed by the Company or any Related Company prior to or as of your termination date and whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company for employment or for retention as a consultant or service provider to any person or entity;

(b) hire or participate (with another person or entity) in the process of recruiting, soliciting or hiring, directly or indirectly, (other than for the Company or any Related Company) any person who is then an employee of the Company or any Related Company whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company, or provide, directly or indirectly, names or other information about any employees of the Company or Related Company whom you worked with or had contact with, or had confidential information about, while employed by the Company or any Related Company to any person or entity (other than to the Company or any Related Company) under circumstances that could lead to the use of any such information for purposes of recruiting, soliciting or hiring any such employee for any person or entity;

(c) interfere, or attempt to interfere, directly or indirectly, with any relationship of the Company or any Related Company with any of its employees, agents, or representatives;

(d) solicit or induce, or in any manner attempt to solicit or induce, directly or indirectly, any client, customer, or Prospect (defined below) of the Company or any Related Company (1) to cease being, or not to become, a customer of the Company or any Related Company, or (2) to divert any business of such customer or Prospect from the Company or any Related Company; or

(e) otherwise interfere with, disrupt, or attempt to interfere with or disrupt, directly or indirectly, the relationship, contractual or otherwise, between the Company or any Related Company and any of its customers, clients, Prospects, suppliers, vendors, service providers, developers, joint ventures, equity investments or partners, inventors, consultants, employees, agents, or representatives.

For purposes of this paragraph 2, “Prospect” shall mean any person or entity from whom or which any business was being solicited by Verizon or any Related Company within the most recent 12 month period of your employment.

3. Proprietary And Confidential Information. You shall at all times, including after any termination of your employment with the Company or any Related Company, preserve the confidentiality of all Proprietary Information (defined below) and trade secrets of the Company or any Related Company, and you shall not use for the benefit of yourself or any person, other than the Company or a Related Company, or disclose to any person, except and to the extent that disclosure of such information is authorized under applicable laws or regulations (e.g., “whistleblower” laws such as 18 USC 1833(b) described below), any Proprietary Information or trade secrets of the Company or any Related Company. “Proprietary Information” means any information or data related to the Company or any Related Company, including information entrusted to the Company or a Related Company by others, which has not been fully disclosed to the public by the Company or a Related Company, which is treated as confidential or otherwise protected within the Company or any Related Company or is of value to competitors, such as strategic or tactical business plans; undisclosed business, operational or financial data; ideas, processes, methods, techniques, systems, models, devices, programs, computer software, or

 

14


related information; documents relating to regulatory matters or correspondence with governmental entities; information concerning any past, pending, or threatened legal dispute; pricing or cost data; the identity, reports or analyses of business prospects; business transactions (including those that are contemplated or planned); research data; personnel information or data; identities of suppliers to the Company or any Related Company or users or purchasers of the Company’s or Related Company’s products or services; the Agreement to which this Exhibit B is attached; and any other non-public information pertaining to or known by the Company or a Related Company, including confidential or non-public information of a third party that you know or should know the Company or a Related Company is obligated to protect. Section 18 USC 1833(b) provides that “An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that – (A) is made – (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.” Nothing in this Agreement is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by 18 U.S.C. § 1833(b).

4. Return Of Company Property; Ownership of Intellectual Property Rights. You agree that on or before termination of your employment for any reason with the Company or any Related Company, you shall return to the Company all property owned by the Company or any Related Company or in which the Company or any Related Company has an interest or to which the Company or any Related Company has any obligation, including any and all files, documents, data, records and any other non-public information (whether on paper or in tapes, disks, memory devices, or other machine-readable form), office equipment, credit cards, and employee identification cards. You acknowledge that the Company (or, as applicable, a Related Company) is the rightful owner of, and you hereby do grant and assign, all right, title and interest in and to any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; and trademarks that you may have originated, created or developed, or assisted or participated in originating, creating or developing, during your period of employment with the Company or a Related Company, including all intellectual property rights in or based on the foregoing, where any such origination, creation or development (a) involved any use of Company or Related Company time, information or resources, (b) was made in the exercise of any of your duties or responsibilities for or on behalf of the Company or a Related Company, or (c) was related to (i) the Company’s or a Related Company’s past, present or future business, or (ii) the Company’s or a Related Company’s actual or demonstrably anticipated research, development or procurement activities. You shall at all times, both before and after termination of your employment, cooperate with the Company (or, as applicable, any Related Company) and its representatives in executing and delivering documents requested by the Company or a Related Company, and taking any other actions, that are necessary or requested by the Company or a Related Company to assist the Company or any Related Company in patenting, copyrighting, protecting, registering, or enforcing any programs; ideas, inventions and discoveries (patentable or unpatentable); works of authorship, data, information, and other copyrightable material; trademarks; or other intellectual property rights, and to vest title thereto solely in the Company (or, as applicable, a Related Company).

5. Definitions. Except where clearly provided to the contrary or as otherwise defined in this Exhibit B, all capitalized terms used in this Exhibit B shall have the definitions given to those terms in the Agreement to which this Exhibit B is attached.

6. Agreement to Non-Competition, Non-Solicitation, Confidentiality and Other Obligations.

 

  (a)

You acknowledge that the geographic boundaries, scope of prohibited activities, and time duration of the restrictions set forth in paragraphs 1 and 2 above are reasonable in nature and are

 

15


 

no broader than are necessary to maintain the confidential information, trade secrets and the goodwill of the Company and its Related Companies and to protect the other legitimate business interests of the Company and its Related Companies and are not unduly restrictive on you. In addition, you and the Company agree and intend that the covenants contained in paragraphs 1 and 2 shall be deemed to be a series of separate covenants and agreements, one for each and every county or political subdivision of each applicable state of the United States and each country of the world. It is the desire and intent of the parties hereto that the provisions of this Exhibit B be enforced to the fullest extent permissible under the governing laws and public policies of the State of New Jersey, and to the extent applicable, each jurisdiction in which enforcement is sought. Accordingly, if any provision in this Exhibit A or deemed to be included in this Exhibit A shall be adjudicated to be invalid or unenforceable, such provision, without any action on the part of the parties hereto, shall be deemed amended to delete or to modify (including, without limitation, a reduction in duration, geographical area or prohibited business activities) the portion adjudicated to be invalid or unenforceable, such deletion or modification to apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made, and such deletion or modification to be made only to the extent necessary to cause the provision as amended to be valid and enforceable.

 

  (b)

You shall indicate your agreement to the obligations and restrictions set forth in this Exhibit B in accordance with the instructions provided in the Agreement, and your acceptance of the Agreement shall include your acceptance of such obligations and restrictions. As stated in paragraph 21 of the Agreement, you and Verizon hereby expressly agree that the use of electronic media to indicate confirmation, consent, signature, acceptance, agreement and delivery shall be legally valid and have the same legal force and effect as if you and Verizon executed this Exhibit B in paper form.

7. Governing Law and Non-exclusive Forum. The parties expressly agree: (a) that, because the Plan is centrally administered in the State of New Jersey by employees of a Verizon Communications Inc. affiliate, the subject matter of this Exhibit B bears a reasonable relationship to the State of New Jersey; (b) that this Exhibit B is made under, shall be construed in accordance with, and governed in all respects by the laws of the State of New Jersey without giving effect to that jurisdiction’s choice of law rules; and (c) the parties consent to the non-exclusive jurisdiction and venue of the courts of the State of New Jersey, and the federal courts of the United States of America located in the State of New Jersey, over any action, claim, controversy or proceeding arising under this Exhibit B, and irrevocably waive any objection they may now or hereafter have to the non-exclusive jurisdiction and venue of such courts.

 

16

EXHIBIT 12

Computation of Ratio of Earnings to Fixed Charges

Verizon Communications Inc. and Subsidiaries

 

(dollars in millions)    Three Months Ended
March 31, 2017
 

Earnings:

  

Income before provision for income taxes

   $ 5,182  

Equity in losses of unconsolidated businesses

     21  

Dividends from unconsolidated businesses

     7   

Interest expense (1)

     1,132  

Portion of rent expense representing interest

     298  

Amortization of capitalized interest

     49  
  

 

 

 

Earnings, as adjusted

   $   6,689  
  

 

 

 

Fixed Charges:

  

Interest expense (1)

   $ 1,132  

Portion of rent expense representing interest

     298  

Capitalized interest

     175  
  

 

 

 

Fixed charges

   $ 1,605  
  

 

 

 

Ratio of earnings to fixed charges

     4.17  
  

 

 

 

 

(1)

We classify interest expense recognized on uncertain tax positions as income tax expense and therefore such interest expense is not included in the Ratio of Earnings to Fixed Charges.

EXHIBIT 31.1

I, Lowell C. McAdam, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Verizon Communications Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 27, 2017     /s/ Lowell C. McAdam
         Lowell C. McAdam
         Chairman and Chief Executive Officer

EXHIBIT 31.2

I, Matthew D. Ellis, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Verizon Communications Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 27, 2017     /s/ Matthew D. Ellis
         Matthew D. Ellis
         Executive Vice President
   

         and Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE

I, Lowell C. McAdam, Chairman and Chief Executive Officer of Verizon Communications Inc. (the Company), certify that:

 

(1)

the report of the Company on Form 10-Q for the quarterly period ending March 31, 2017 (the Report) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (the Exchange Act); and

 

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods referred to in the Report.

 

Date: April 27, 2017     /s/ Lowell C. McAdam
         Lowell C. McAdam
         Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Verizon Communications Inc. and will be retained by Verizon Communications Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE

I, Matthew D. Ellis, Executive Vice President and Chief Financial Officer of Verizon Communications Inc. (the Company), certify that:

 

(1)

the report of the Company on Form 10-Q for the quarterly period ending March 31, 2017 (the Report) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (the Exchange Act); and

 

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods referred to in the Report.

 

Date: April 27, 2017

   

/s/ Matthew D. Ellis

   

     Matthew D. Ellis

   

     Executive Vice President

   

         and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Verizon Communications Inc. and will be retained by Verizon Communications Inc. and furnished to the Securities and Exchange Commission or its staff upon request.