Verizon Communications, Inc. (NYSE: VZ)

Krause Fund Research Fall 2016 Telecommunications Recommendation: HOLD Verizon Communications, Inc. (NYSE: VZ) November 15, 2016 Analysts Zehua Tan zehua-tan@uiowa.edu Brewer Callahan john-callahan@uiowa.edu Tianqi Yang Tianqi-tang@uiowa.edu Company Overview Verizon Communications, Inc. (VZ) is a long time leading integrated telecommunications company within the telecommunications sector. Verizon primarily offers wireline services and wireless services to its customer. Verizon s current market capital is 214.3 billion. It offers one of the best network coverage and speed in the U.S. We decided to issue a HOLD recommendation for Verizon Communications, Inc. (VZ) at a current price of 46.29. Our target price is between $49 to $53. Verizon Offers Long-term Growth Developing alternative markets - Verizon devotes to create and develop new sources of income. The management has focused three alternative revenue sources: Fois service, advertising market, and the development of 5G technology. Strong and stable dividend per share Verizon is consistent with its high dividend payout policy. The current dividend yield of 4.95% offers an alternative to investors, especially considering the interest rate has been holding low. Significant upside potential on AOL acquisition- Verizon may monetize mobile video and significantly boost advertisement revenue by utilizing AOL s business lines. We expect it will take 4 to 6 years to unlock the full synergies of the AOL merger. Competition in wireless industry has become hostile. As smaller carriers, mainly T-Mobile and Sprint, adopted aggressive pricing strategies to lure Verizon s existing customers. Verizon has to charge less while providing costly plans to maintain its customer base. Current Price $46.29 Target Price $49-$53 Stock Performance Highlights 52-week High $56.53 52-week Low $44.15 Beta Value 0.52 Average Daily Volume 3.57 m Share Highlights Market Capitalization $188.259 b Shares Outstanding 4.08 b Book Value per share $5.02 EPS (as of 12/31/2015) $4.38 P/E Ratio 10.47 Dividend Yield 4.95% Dividend Payout Ratio 50.91% Company Performance Highlights ROA 7.49% ROE 124.48% Sales $131.62 b Financial Ratios Current Ratio 0.64 Debt to Equity 6.71 Industry Metrics ARPU (monthly) 47.07 ARPA (monthly) $152.63 Churn Rate (Postpaid annual) 1.19% One Year Stock Performance VZ is Blue, S&P is Green (Source: Yahoo Finance) 0

Economic Outlook Gross Domestic Product Gross Domestic Product (GDP) represents gross economic production which indicates the growth of the overall domestic economy. The growth of companies in telecom sector can be firmly attached to the expanding of the economy. Telecommunications demand and GDP are historically tied to each other. Personal consumption in telecom services increases as the economy flourishes, since wireline and wireless services are the necessity to produce products and service, as well as maintain the basic operating system of normal businesses. The growth rate of real GDP in the United States has been relatively stable for the recent years. As shown in the graph below, the real GDP growth rate ranges from 1.65 to 2.6% during the past 6 years. 1 acquisition business, as well as purchases of spectrum, those companies are more likely to keep their high debt levels. Since the federal funds rate has been at its lowest level for the recent years, the cost of debt might seem to be less costly to the managements. Although the Federal Reserve is likely to raise its interest rate after the election, we believe that the overall interest rate will still maintain in a relatively low level. Therefore, the companies are still going to invest in those high capitalintensive projects, such as acquision The YTM of a 30-year U.S. Treasury bond is currently at 2.56%, and we expect it continues to keep at this level with slightly changes; therefore, we have used the rate as the risk-free rate. The graph below represents the current U.S. yield curve. Source: U.S. Department of Treasury Inflation Rates Source: Statista Since the telecom sector has reached its mature level in its life cycle, the market size will not necessarily increase as faster as some of other industries, such as technology. Therefore, the earning ability of telecom companies can be tied to the personal consumption which is strongly volatilized by the GDP growth. 3 If the GDP is increasing, people tend to be more willing to spend purpose wireless devices and spend more data. However, reviewing the periods which historical GDP has dropped, the telecom industry did not seem to suffer a major declining in revenue. Real GDP in Q2 2016 was 1.4% with advanced estimates indicating an increase in Q3 to 2.9%. We believe that the organic growth rate of GDP will maintain at a relatively low level Inflation rates are other major driver to the telecommunication companies, since an inflation rate would increase the interest expenses of the companies. Given the competition within the industry getting hostile and price war becoming more intense, the companies will not be able to pass its additional cost onto their customers. Therefore, an increased inflation rate can hurt companies bottom lines, and lower their earnings. Interest Rates Interest rates are the other key economic driver for the telecom sector as it has been maintaining a highly capitalintensive in natural. As the companies in telecom sector continuing to fund themselves in innovating technologies, Source: Bloomberg.com 1

Industry Analysis Industry Overview Telecommunication services is comprised of three industries: alternative carriers, Wireless telecommunications services, and integrated telecommunications Services. Integrated telecommunications industry, which is also known as diversified telecommunication services, has the largest market capitalization, which is about 94.8%, among the three telecom industries. 7 The industry is dominated by two major participants. There are mainly five companies in the industry, and their share is shown in the graph below. Among the five competitors, Verizon and AT&T control over more than 67% of wireless subscribers as it is for the second quarter of 2016. The rest of the companies fight for the remaining 33% of the market share. 5G Wireless Technology In an effort to counter the increasing demand of high-speed services, telecom companies now are focusing on developing 5G wireless technology. 4G LTE and 3G Code Division Multiple Access are the primary network technology platforms. The innovation of 5G wireless technology succeeds, the company will be able to provide higher speed while generating higher margin. Verizon announced that has partnered with Lenovo to further develop the 5G techonology. 13 Not only Verizon is working on to be the company who first releases 5G wireless, AT&T also has focusing its 5G innovation. 14 Developing New Market Other industry trend is to develop a new market so that company can grow its revenue from the new group of customers. For instance, Verizon created the Fios service based on the traditional wireline service which is to utilize the fiber optic cables to provide higher speed. As a start-up service, Fios has helped Verizon to offset part of revenue declining in the wireline segment. The acquisition of AOL can also be seen as a way to develop a new market. The advertising revenue that AOL generates provides the Verizon an alternative market to boost its earning. Moreover, according to AT&T s 10-K, the management also value its new video market as a potential way to raise its earning. Company Analysis Source: FierceWireless Revenue in this industry are mainly generate from wireless segments. The wireless revenue heavily depends on the total number of connections, which means the total number of subscribers. Therefore, companies usually used price war to fight for more customers. Industry Trend As the market of wireless and wireline services approaches saturation, the profit margin of the traditional telecom services gradually declines. The companies, especially Verizon and AT&T, are seeking for ways to boost their income. There are two well-adopted methods. One is through technology innovations. The other one is to develop a new market. Company Descriptions Verizon Communication Inc. is one of the leading telecommunication services providers in the United States. It is a holding company founded on June 30, 2000 and headquartered in New York City. 16 The company offers both communications and information services, as well as entertainment products to its customers. Verizon operates through two segments: wireless and wireline services. It offers both prepaid and postpaid wireless services, as well as wireless devices, such as smartphone, to its clients through its wireless segment. The wireline segment provides voice and broadband services, and network access. Corporate Strategy Verizon is in its mature face and setting itself up to seek for new strategy of growth. With the recent acquisition of AOL, the purchase of 65 MHz of spectrum, and its announcement to acquire Yahoo s operation business, we believe that Verizon is sacrificing short-tern earning to achieve a better 2

long-term growth. As discussed before, Verizon is also working on expanding new markets to continue to grow. Products and Markets Verizon is comprised by two product segments: wireless and wireline. Wireless Segment Verizon Wireless is the largest wireless service provider in the U.S. in terms of retail connects and revenue. It provides both wireless communication services and wireless devices to its customers. The segment has the largest 4G LTE technology and 3G networks in the U.S. Its wireless services serve approximately 312 million people in the U.S. and cover all of the 100 most populous U.S. metropolitan areas. 13 Wireless services are offered on a prepaid and postpaid basis. Approximately 95% of Verizon s wireless connections are on a postpaid basis as of December 31, 2015. The wireless segment also has wireless devices available to its clients, including smartphones, basic phones, tablets, and other Internet access devices. Wireline Segment Verizon s wireline segment is comprised by three operations: Mass Market, Global Enterprise and Global Wholesale. Mass Market operations includes broadband Internet and video services, and local long exchange and long distance voice services. 13 Global Enterprise mainly serves business customers and federal government customers. Global wholesale includes data, voice, local dial tone, and broadband. Verizon generates majority of its revenue from those two segments. According to Verizon s most recent 10-K, $90.7 billion of its revenue, which is around 70% of its total revenue, is generated from its wireless segment. The wireline segment provides $37.7 billion, which is approximately all the rest of total operating revenue. 13 Competition Verizon operates under a highly competitive environment, facing competition from not only traditional carriers including AT&T, T-Mobile, and Sprint, but also other technology companies, such as Apple and Microsoft. Operating in a highly competitive industry, Verizon needs to compete with other competitors in various factors including price, average revenue per user (ARPU), and churn rate. in the table below, Verizon overall has a slight price advantage over AT&T. As one of the key factors of the Telecom sector, ARPU indicates how profitable companies are. Although Verizon had been generating the highest ARPU from 2013 to 2015, it has underperformed since the first quarter of 2016. As shown in the graph below, AT&T had $52.70 and $52.69, which are the highest among the four major U.S. carriers, for the first and second quarter in 2016 respectively. 9 However, Verizon is still able to maintain its ARPU at a relatively high level, which is over $47; therefore, the earnings of Verizon are still anticipated to hold stable. Source: Statista Churn rate is another crucial indicator in the Telecom sector since it represents companies ability to retain their current customers. The chart below shows the average churn rate for the four U.S. carriers from the first quarter of 2015 to the second quarter of 2016. 2 In terms of churn rate, Verizon has held its leading role among the four major carriers. Overall, Verizon and AT&T are better at retaining their current subscribers than Sprint and T-Mobile. 10 In order to continuing to enjoy the lowest rate, the management of Verizon plans to keep focusing heavily on providing highquality customer service so that Verizon will be able to retain current customers and attract new customers. Pricing of services and equipment is essential to attract subscribers. With switching between carriers getting simplified, the competition between carriers has eventually become a price battle. The company that can offer more coverage with a lower price is preferred in the market. As the strongest competitor of Verizon, AT&T offers similar wireless plans with a comparable quality of services. As seen 3

can offset the influence of decreasing number of subscribers in the traditional wireline segment. Another positive that is worth mentioning is the quality of its customer service and ability to retain its customer. Verizon has been maintaining the lowest churn rate for the past five years. 8 Although AT&T managed to retain its customer better in the first two quarters of 2016, the Verizon still has one of the lowest churn rate within the industry. Source: Statista Although AT&T generated a higher ARPU for the past two quarters, Verizon is still expected to play strong due to the substantial increased amount of postpaid subscribers in the second quarter of 2016. Catalysts for Growth/Change As Verizon announced its commitment of developing and deploying 5G technology in 2015, this wireless technology is now the spotlight of the whole industry. With the data being processed growing larger, the current 4G LTE technology is no longer able to fulfill market s needs. 6 To adopt customers needs, Verizon needs to upgrade its wireless technology. Moreover, similar to 4G LTE replacing 3G technology with a faster speed and a lower cost, 5G wireless technology is expected to lower the current cost and provide a higher throughput than 4G technology. Therefore, Verizon can expect a boost in revenue once it fully develops and supplies 5G technology to its users. Another potential driver for growth is to diversify its revenue stream by expanding digital media and interactive entertainment. With the wireless market becoming mature, the potential growth of revenue is limited; therefore, companies need to seek for other ways to stimulate revenue growth. After acquiring AOL, Verizon now is able to expand its service to digital media and interactive entertainment. By combining the video streaming into Verizon s current 4G service, it will make Verizon more appealing than other competitors. Furthermore, multimedia broadcast service technology will allow Verizon to enhance its current network efficiency; thus, Verizon can become more competitive in terms of attracting customers than its competitors. 13 Key Investment Positive and Negatives Investment Positives As a leading company in the telecom industry, Verizon has developed its advantages over its competitors. One of them is the quality of the network it provides to its customer. For instance, the Fois service, which is the unique wireline service it created, offers its customers a traffic-free Internet experience. 13 Moreover, this brand new service also increases Verizon s subscribers, which Investment Negatives With the acquisition of AOL and the purchase of 65 MHz of spectrum, Verizon s cash level decrease significantly, and its debt level reaches the highest within the industry. The high level of long-term debt not only raise the risk that investors attach to it, but also significantly increase the cost of debt. Therefore, the company is expected to pay out numerous amount of its earning to repay its debt. Valuation Analysis We have decided to issue Verizon Communications Inc. a Hold rating based upon the results from our valuation models and our nature outlook of the whole industry. With an increasing competition in both prices and data plans, the ARPU of Verizon will slightly decrease. However, Verizon will still be able to expand its customer base to offset the influence of the declining in ARPU. Moreover, we expect that the future revenue of AOL continues to play strong. Therefore, in accordance with the outcomes from DCF and EP models and the sensitivity analysis, we expect the target price for Verizon Communications Inc. falls between $49 to $53. Revenue decomposition and forecasts To forecast the future revenue for Verizon through its consistent value of 2020, we decompose the revenue into three components: wireless, wireline, and other. We found that the major driver of the wireless revenue is the total retail connections, because the total wireless service revenue can be predicted by the average revenue per user multiplied by the total connections that the company currently have. We believe that the Verizon can still gradually grow its number of subscribers because the company holds a strong position in wireless space, and its overall network quality and service quality exceed its competitors. 15 Moreover, the fact that Verizon has maintain a relatively low churn rate within the industry also indicates that its ability to attract customers. Another factor that drives the total wireless operating revenue up is the increasing number of people using smartphones. Verizon also generates a numerous amount of revenue from its wireless equipment. With the bundling of smartphones and data plans, majority of 4

people start to purchase their smartphones from telecommunication companies instead of directly from smartphone companies. However, with the mature of the smartphone market, the year to year growth rate of the equipment sale is expected to decrease. For the wireline revenue, the key factor that drives the revenue up is the expanding of Fios market. With people shifting from wireline to wireless, the revenue from the wireline segment is expected to decrease. However, to generate more revenue from the wireline market, the company has shifted its focus from the tradition wireline services to a new service called Fios, a data streaming service that achieves a higher speed using fiber optic cables. Combining those two factors, we target the growth rate of the wireline services at -4.48%. The other revenue represents the revenue from AOL Inc. With the year to year growth rate of the net revenue from AOL continuing to hold strong, we expect the other revenue will keep increase as the AOL Inc. expands. DCF and EP Models To determine the intrinsic value of Verizon, we applied our determined drivers and assumptions to perform a discounted cash flow analysis and economic profit valuation model. The variable WACC is calculated based on the debt maturity table provided by Bloomberg, which is explained in the WACC section below. Free cash flow is calculated by the NOPLAT subtracting the change in invested capital. The CV of cash flow is determined by the CV of ROIC, NOPLAT growth, and the WACC. Both prices from DCF and EP models are adjusted to today s date. Based on our models, our intrinsic values were calculated to be $52.85 and $51.99 for DCF model and EP model, respectively. It is only higher than the current price by less than $5, which supports our Hold rating. WACC Cost of Equity To calculate the cost of equity, we adopted the CAPM approach using the 3-year Treasury bond yield rate as our risk-free rate. The equity risk premium and the Beta are found from Bloomberg. Cost of Debt In order to calculate the cost of debt, we found Verizon s debt rating to be BBB+ as reported on Bloomberg. The rating class is primarily due to the significant amount of debt Verizon used to acquire AOL Inc. However, according to John Butler, the company will be rated as A- if it can pay back $11 billion of its debt by 2018. According to the debt maturity schedule on Bloomberg, the company will be able to return to A- rating. Therefore, using the default spread schedule from Damodaran Online. The default rates are 2.25% and 1.75% for the BBB+ and A- credit ratings, respectively. The marginal tax rate of 37% for Verizon is applied to calculate the after-tax cost of debt. 15 Source: Bloomberg 15 Dividend Discount Model The dividend discount model gives us an intrinsic value that is significantly higher than the DCF and EP models, because Verizon has offered its shareholders a fairly high and stable dividend per share, and it is expected to continue to distribute a high dividend in the future. Studying the dividend payout trend over the recent years, we targeted our carrying value of dividend per share at $2.5 and the dividend payout ratio at 60.53%. Given the fact that the company pays a significant amount of dividend, there is no surprise that the DDM model would conclude a higher price. Therefore, we think that the intrinsic value from the DDM model is less reasonable. However, the DDM model still has its value, since a company that continues to distribute a significant dividend value can be worth to invest for long-term investor. Relative P/E Valuation Relative P/E valuation tends to be less reasonable, due to the significate different in size between the competitors. Therefore, instead of using T-Mobile and Sprint, we decided to include two Chinese telecom companies in our valuation model: China Mobile Limited and China Telecom Corp. Ltd. Similar as Verizon and AT&T in the U.S., China Mobile and China Telecom are the two biggest telecom companies in China. However, since the their capital structures are not consistent with Verizon and AT&T. We have decided not to use the price from the relative P/E valuation model. 5

Sensitivity Analysis Overview The sensitivity analysis is to evaluate the impacts that the key drivers have on the intrinsic values. Examining the correlation between those key drivers and the intrinsic values can help to understand better how a variation in a specific key driver would have on the intrinsic values. We decided to create five sensitivity table to test the sensitivity of our models to those major drivers. WACC vs. NOPLAT The purpose of the WACC is to measure the cost of every dollar in capital based on company s current capital structure. Therefore, since the debt structure is more likely to vary for the foreseeable future, a variable WACC has to be applied. The NOPLAT, which stands for the net operating profit less adjusted taxes, is to measure company s operating efficiency. Both of the values are used in the DCF model to determine the target market price. As it is shown in the sensitivity test in the model, the higher the NOPLAT is the higher the price is. On the other hand, the intrinsic value decrease when the WACC raises. The table below shows that given a 0.1% increase in WACC and $10 increase in the NOPLAT, the target price would drop from $52.85 to $50.55, which is 4.35% of decrease. Marginal Tax Rate vs. Beta Beta represents the volatility of a stock in comparison of the whole market. It can also be seen as the systematic risk of a stock. Marginal tax rate is the tax rate applied each addition dollar the company makes. Therefore, an increase marginal tax rate will result in a decrease in the stock price. Similarly, the beta also has a negative correlation with the stock price. According to the sensitivity test, when the beta increases by 12.66%, and the marginal tax rate raises by 2%, the target price will decrease by $8.88, which represents a 17.16% of decrease. CV Growth (EPS) vs. Market Risk Premium Both of the CV EPS Growth rate and the market risk premium are used to determine the target market price of our DDM model. However, how they impact the price is different. The target price will increase as the CV EPS growth rate increases; however, the target price will decrease as the market risk premium increases. As seen in the table, the target price will increase by 2.32% if the CV growth rate increases from 3% to 3.2%. On the other hand, the target price will decrease by 1.5% if the market risk premium increases from 6.16% to 6.66%. CV of ROIC vs. Pre-tax Cost of Debt CV ROIC and pre-tax cost of debt are both applied to calculated the target price from our EP model. However, they drive the target price in a reverse way. Our sensitivity table shows that the price will increase by 0.1235% when the CV ROIC increases by 0.595%. On the other hand, our target price will decrease by 1.39% if the pre-tax cost of debt increases by 11.67%. Dividend per Share vs. Cost of Equity The DPS and the cost of equity are applied to determine the price for the DDM model. Since the DDM model values a company by discounting back the future dividend, the DPS has a positive correlation with the intrinsic value. On the other hand, the cost of equity indicates the return that the shareholders require; therefore, it has a negative correlation with the intrinsic value. As shown in the sensitivity model, the intrinsic value raises by 0.02% if the dividend per share increases by 8.1%. However, the target price will drop by 1.81% if the cost of equity increases from 7.41% to 7.49%. 6

Reference 1.Bureau of Economic Analysis. (2016, October 28). Retrieved from Percent Change From Preceding Period in Real Gross Domestic Product, Real Gross Domestic Income, and Other Major NIPA Aggregates: http://www.bea.gov/itable/itable.cfm?reqid=9&ste p=3&isuri=1&910=x&911=0&903=316&904=1990 &905=1000&906=a#reqid=9&step=3&isuri=1&90 4=1990&903=316&906=a&905=1000&910=x&91 1=0 2. Dano, M. (2016, August 15). How Verizon, AT&T, T- Mobile, Sprint and more stacked up in Q2 2016: The top 7 carriers. Retrieved from FierceWireless: http://www.fiercewireless.com/wireless/howverizon-at-t-t-mobile-sprint-and-more-stacked-upq2-2016-top-7-carriers 3. Sinton, D., & Teufel, A. S. (2011). Fisher Investments on Telecom. Hoboken: John Wiley& Sons, Inc. 4. Industry snapshot (2016). Retrieved from http://markets.on.nytimes.com/research/markets/us markets/industry.asp?industrystartrow=1 5. Internet of things newsroom AT&T. (2016, November 14). Retrieved November 14, 2016, from http://about.att.com/sites/internet-of-things 6. Fidelity (1998). Retrieved November 14, 2016, from http://research2.fidelity.com/fidelity/research/report s/pdf/getreport.asp?feedid=596&doctag=14306& versiontag=20160913 7. Statista (2016). US wireless carrier market share 2016. Retrieved November 14, 2016, from http://www.statista.com/statistics/199359/marketshare-of-wireless-carriers-in-the-us-bysubscriptions/ 8. President, S. V. (2016b). US wireless telecom carriers churn rate 2013-2016 statistic. Retrieved November 14, 2016, from http://www.statista.com/statistics/283511/averagemonthly-churn-rate-top-wireless-carriers-us/ November 15, 2016, from http://www.statista.com/statistics/283510/netsubscriber-additions-top-wireless-carriers-us/ 11. Innovation in telecommunications. (n.d.) Retrieved from https://cyber.harvard.edu/commonsbasedresearch/sit es/commonsbasedresearch/images/telecommunicati ons 12. Internet of things newsroom AT&T. (2016b, November 14). Retrieved November 15, 2016, from http://about.att.com/sites/internet-of-things 13. Verizon 10-K 14. AT&T 10-K 15. Bloomberg Terminal 16. Mergent Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report. 9. President, S. V. (2016). ARPU wireless carrier United States 2013-2016 statistic. Retrieved November 14, 2016, from http://www.statista.com/statistics/283513/arpu-topwireless-carriers-us/ 10. President, S. V. (2016c). US wireless carriers net subscriber additions 2013-2016 statistic. Retrieved 7

Revenue Decomposition Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV(2020) Wireless Revenues Service 69,033 72,630 70,396 66,178 66,886 66,966 67,107 68,184 Y/Y Growth 8.32% 5.21% -3.08% -5.99% 1.07% 0.12% 0.21% 1.61% Equipment & Other 11,990 15,016 21,284 22,306 23,358 24,442 25,557 26,702 Y/Y Growth -1.20% 25.24% 41.74% 4.80% 4.72% 4.64% 4.56% 4.48% Total Operating Revnues 81,023 87,646 91,680 88,483 90,244 91,408 92,664 94,886 Y/Y Growth 6.79% 8.17% 4.60% -3.49% 1.99% 1.29% 1.37% 2.40% Wireless Connections (000') Total Retail Connections 102,799 108,211 112,108 114,462 116,797 118,070 119,346 121,577 Y/Y Growth 4.65% 5.26% 3.60% 2.10% 2.04% 1.09% 1.08% 1.87% Wireless Churn Rate: Retail postpaid connections 0.97% 1.04% 0.96% 0.95% 0.95% 0.95% 0.95% 0.95% Retail connections 1.27% 1.33% 1.24% 1.19% 1.19% 1.19% 1.19% 1.19% Wireless Account Statistics Retail ARPU(Monthly) 52.58 54.69 50.78 48.18 47.72 47.26 46.86 46.74 Y/Y Growth 6.87% 3.85% -7.70% -5.40% -0.95% -0.96% -0.86% -0.26% Wireline Revenues Mass Markets 17,383 18,047 18,473 17,671 16,943 16,287 15,698 15,174 Y/Y Growth 4.08% 3.82% 2.36% -4.54% -4.30% -4.03% -3.75% -3.45% Global Enterprise 14,156 13,649 12,943 12,263 11,604 10,964 10,346 9,749 Y/Y Growth -7.47% -3.58% -5.17% -5.25% -5.38% -5.51% -5.64% -5.77% Global Wholesale 6,560 6,190 5,979 5,611 5,327 5,068 4,796 4,551 Y/Y Growth -9.39% -5.64% -3.41% -6.15% -5.07% -4.87% -5.36% -5.10% Other 525 543 325 282 245 213 185 161 Y/Y Growth -2.60% 3.43% -40.15% -13.11% -13.11% -13.11% -13.11% -13.11% Total Operating Revenues 38,624 38,429 37,720 35,828 34,120 32,532 31,025 29,635 Y/Y Growth -2.91% -0.50% -1.84% -5.01% -4.77% -4.65% -4.63% -4.48% Wireline Connections (000') Total voice connections 21,085 19,795 18,387 16,493 14,768 13,200 11,777 10,488 Y/Y Growth -6.30% -6.12% -7.11% -10.30% -10.46% -10.62% -10.78% -10.94% Total Broadband connections 9,015 9,205 9,228 8,767 8,284 7,787 7,281 6,772 Y/Y Growth 2.50% 2.11% 0.25% -5.00% -5.50% -6.00% -6.50% -7.00% Fios Internet subscribers 6,072 6,616 7,034 7,464 7,904 8,353 8,811 9,275 Y/Y Growth 11.95% 8.96% 6.32% 6.11% 5.90% 5.69% 5.48% 5.27% Fios video subscribers 5,262 5,649 5,827 5,995 6,168 6,345 6,526 6,712 Y/Y Growth 11.34% 7.35% 3.15% 2.89% 2.88% 2.87% 2.86% 2.85% Other Revenue Corporate, eliminations and other 903 1,004 2,220 2,442 2,729 3,049 3,407 3,807 Y/Y Growth 356.06% 11.18% 121.12% 10.00% 11.74% 11.74% 11.74% 11.74% Consolidated Revenues 120,550 127,079 131,620 126,754 127,093 126,989 127,096 128,328 Consolidated Revenues Growth 4.06% 5.42% 3.57% -3.70% 0.27% -0.08% 0.08% 0.97%

Income Statement Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV(2020) Operating Revenues Sales Revenues 120,550 127,079 131,620 126,754 127,093 126,989 127,096 128,328 Operating Expenses Cost of services 44,887 49,931 52,557 50,701 50,837 50,796 50,838 51,331 Gross Margin 75,663 77,148 79,063 76,052 76,256 76,193 76,257 76,997 Selling, general and administrative expense 27,089 41,016 29,986 28,680 28,757 28,733 28,758 29,036 Depreciation expense 15,019 14,966 14,323 14,121 14,161 14,154 14,155 14,155 Amortization expense of intangible assets 1,587 1,567 1,694 1,393 1,393 1,393 1,393 1,393 Operating Income 31,968 19,599 33,060 31,857 31,945 31,913 31,951 32,412 Equity in (losses) earnings of unconsolidated businesses 142 1,780 (86) (86) (86) (86) (86) (86) Other income and (expense), net (166) (1,194) 186 (391) (391) (391) (391) (391) Interest expense (2,667) (4,915) (4,920) (6,222) (5,967) (5,739) (5,363) (5,021) Income Before Provision For Income Taxes 29,277 15,270 28,240 25,158 25,500 25,696 26,111 26,914 Provision for income taxes (5,730) (3,314) (9,865) (8,780) (8,900) (8,968) (9,113) (9,393) Net Income 23,547 11,956 18,375 16,378 16,601 16,728 16,998 17,521 Net income attributable to noncontrolling interests 12,050 2,331 496 496 496 496 496 496 Net income attributable to Verizon 11,497 9,625 17,879 15,882 16,105 16,232 16,502 17,025 Net Income 23,547 11,956 18,375 16,378 16,601 16,728 16,998 17,521 EPS-Basic 4.01 2.42 4.38 3.86 3.91 3.94 4.01 4.13 Weighted-Average Shares Outstanding (in miliions) 2,866 3,974 4,085 4,242 4,242 4,242 4,242 4,242 Total Share Outstanding 2,968 4,242 4,242 4,242 4,242 4,242 4,242 4,242 Dividends per Share 2.09 2.16 2.23 2.29 2.35 2.40 2.47 2.50 Dividend Payout Ratio 52.12% 89.26% 50.91% 59.31% 60.05% 60.86% 61.64% 60.53%

Balance Sheet Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV(2020) Assets Current assets Cash and cash equivalents 13362 10598 4470 11,527 16,618 22,078 25,095 29,182 Short-term investments 592 555 350 283 369 435 506 545 Accounts receivable, Net 11,776 13,993 13,457 13,100 13,135 13,124 13,135 13,262 Inventories 940 1,153 1,252 1,115 1,118 1,117 1,118 1,129 Assets held for sale 0 552 792 0 0 0 0 0 Prepaid expenses and other 4,269 2,648 1,959 3,005 3,014 3,011 3,014 3,043 Total current assets 30,939 29,499 22,280 29,030 34,253 39,766 42,867 47,161 Plant, property and equipment 215,626 230,508 220,163 234,517 248,638 262,799 276,953 291,108 Less accumulated depreciation 127,192 140,561 136,622 150,743 164,904 179,058 193,213 207,368 Plant, property and equipment, net 88,434 89,947 83,541 83,773 83,734 83,741 83,740 83,740 Investments in unconsolidated businesses 3,448 802 796 796 796 796 796 796 Wireless licenses 73,250 75,341 86,575 86,584 86,592 86,601 86,610 86,618 Goodwill 23,357 24,639 25,331 25,331 25,331 25,331 25,331 25,331 Other intangible assets, net 5,878 5,728 8,338 6,945 5,551 4,158 2,764 1,371 Non-current assets held for sale 0 0 10,267 0 0 0 0 0 Deposit for wireless licenses 0 921 0 0 0 0 0 0 Other assets 5,155 5,739 7,512 6,126 6,143 6,138 6,143 6,202 Total assets 230461 232616 244640 238,585 242,400 246,530 248,251 251,219 Liabilities and Equity Current liabilities Debt maturing within one year 4849 2735 6489 4,250 3,800 6,270 5,700 7,304 Accounts payable and accrued liabilities 14,689 16,680 19,362 16,928 16,973 16,959 16,974 17,138 Liabilities related to assets held for sale 0 0 463 0 0 0 0 0 Other 11,223 8,572 8,738 9,165 9,189 9,182 9,189 9,279 Total current liabilities 30,761 27,987 35,052 30,343 29,963 32,411 31,863 33,721 Long-term debt 50,303 110,536 103,705 99,455 95,655 89,385 83,685 76,381 Employee benefit obligations 32,957 33,280 29,957 29,957 29,957 29,957 29,957 29,957 Deferred income taxes 25,060 41,563 45,484 46,849 48,254 49,702 51,193 52,728 Non-current liabilities related to assets held for sale 0 0 959 0 0 0 0 0 Other liabilities 5,472 5,574 11,641 7,476 7,434 7,391 7,348 7,311 Shareholders' Equity Common Stock& Contributed capital 38,216 11,579 11,620 11,620 11,620 11,620 11,620 11,620 Reinvested earnings 1,179 2,447 11,246 17,909 24,541 31,089 37,609 44,525 Accumulated other comprehensive income 1,269 1,111 550 550 550 550 550 550 Common stock in treasury, at cost (5,002) (3,263) (7,416) (7,416) (7,416) (7,416) (7,416) (7,416) Deferred compensation - employee stock ownership plans and other 308 424 428 428 428 428 428 428 Noncontrolling interests 49,938 1,378 1,414 1,414 1,414 1,414 1,414 1,414 Total equity 85,908 13,676 17,842 24,505 31,137 37,685 44,205 51,121 Total liabilities and equity 230461 232616 244640 238,585 242,400 246,530 248,251 251,219

Cash Flow Statement Fiscal Years Ending Dec. 31 2013 2014 2015 Cash Flows from Operating Activities Net Income 23,547 11,956 18,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 16,606 16,533 16,017 Employee retirement benefits (5,052) 8,130 (1,747) Deferred income taxes 5,785 (92) 3,516 Provision for uncollectible accounts 993 1,095 1,610 Equity in losses (earnings) of unconsolidated businesses, net of dividends received (102) (1,743) 127 Extraordinary item, net of tax Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses Accounts receivable (843) (2,745) (945) Inventories 56 (132) (99) Other assets (143) (695) 942 Accounts payable and accrued liabilities 925 1,412 2,545 Other, net (2,954) (3,088) (1,411) Net cash provided by operating activities 38,818 30,631 38,930 Cash Flows from Investing Activities Capital expenditures (including capitalized software) (16,604) (17,191) (17,775) Acquisitions of investments and businesses, net of cash acquired (494) (182) (3,545) Acquisitions of wireless licenses (580) (354) (9,942) Proceeds from dispositions of wireless licenses 2,111 2,367 0 Proceeds from dispositions of businesses 0 120 48 Other, net 734 (616) 1,171 Net cash used in investing activities (14,833) (15,856) (30,043) Cash Flows from Financing Activities Proceeds from long-term borrowings 49,166 30,967 6,667 Repayments of long-term borrowings and capital lease obligations (8,163) (17,669) (9,340) Increase (decrease) in short-term obligations, excluding current maturities (142) (475) (344) Dividends paid (5,936) (7,803) (8,538) Proceeds from sale of common stock 85 34 40 Purchase of common stock for treasury (153) 0 (5,134) Proceeds from access line spin-off Special distribution to noncontrolling interest (3,150) 0 0 Acquisition of noncontrolling interest 0 (58,886) 0 Other, net (5,257) (3,873) 1,634 Net cash provided by (used in) financing activities 26,450 (57,705) (15,015) Increase (decrease) in cash and cash equivalents 50,435 (42,930) (6,128) Cash and cash equivalents, beginning of period 3,093 53,528 10,598 Cash and cash equivalents, end of period 53,528 10,598 4,470

Cash Flow Statement Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E CV(2020) Cash Flows from Operating Activities Net Income 16,378 16,601 16,728 16,998 17,521 Adjustments to reconcile net income to net cash provided by operating activities: Add: Depreciation Expense 14,121 14,161 14,154 14,155 14,155 Add: Amortization Expense 1,393 1,393 1,393 1,393 1,393 Changesin Working Capital Accounts: Changes in accounts receivable, net 357 (35) 11 (11) (127) Changes in inventories 137 (3) 1 (1) (11) Changes in prepaid expenses and other (1,046) (8) 2 (3) (29) Changes in Wireless Liscenses (9) (9) (9) (9) (9) Changes in other assets 1,386 (16) 5 (5) (60) Changes in Accounts payanle and accrued liabilities (2,434) 45 (14) 14 165 Changes in other current liabilty 427 25 (8) 8 89 Changes in deferred income tax liability 1,365 1,405 1,448 1,491 1,536 Net Cash Provided by Operating Activities 32,075 33,559 33,712 34,031 34,623 Cash Flows From Investing Activities Purchase of short-term investments (66) (70) (39) Proceeds of disposition of short-term investment 67 (86) Proceeds from disposition of current asset held for sale 792 0 0 0 0 Changes in Liabilities related to assets held for sales (463) 0 0 0 0 Purchase of PP&E (14,354) (14,121) (14,161) (14,154) (14,155) Proceeds from disposition of non-current assets held for sale 10,267 0 0 0 0 Decrease in debt maturing within one year (2,239) (450) 2,470 (570) 1,604 Changes in other long-term liability (4,165) (42) (44) (43) (37) Decrease in non-current liabilities related to assets held for sal (959) 0 0 0 0 Net Cash Used for Investing Activities (11,054) (14,699) (11,801) (14,837) (12,627) Cash Flows From Financing Activities Payments of long-term debt (4,250) (3,800) (6,270) (5,700) (7,304) Payments of dividends (9,714) (9,969) (10,181) (10,478) (10,605) Net Cash Used for Financing Activities (13,964) (13,769) (16,451) (16,178) (17,909) Net Increase (Decrease) in Cash 7,057 5,091 5,461 3,017 4,087 Cash, Beginning of Year 4470 11527 16618 22078 25095 Cash, End of Year 11527 16618 22078 25095 29182

Common Size Income Statement Fiscal Years Ending Dec. 31 2012 2013 2014 2015 2016E 2017E 2018E 2019E CV(2020) Operating Revenues Sales Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Operating Expenses Cost of services 39.95% 37.24% 39.29% 39.93% 40.00% 40.00% 40.00% 40.00% 40.00% Gross Margin 60.05% 62.76% 60.71% 60.07% 60.00% 60.00% 60.00% 60.00% 60.00% Selling, general and administrative expense 34.49% 22.47% 32.28% 22.78% 22.63% 22.63% 22.63% 22.63% 22.63% Depreciation expense 12.88% 12.46% 11.78% 10.88% 11.14% 11.14% 11.15% 11.14% 11.03% Amortization expense of intangible assets 1.33% 1.32% 1.23% 1.29% 1.10% 1.10% 1.10% 1.10% 1.09% Operating Income 11.36% 26.52% 15.42% 25.12% 25.13% 25.13% 25.13% 25.14% 25.26% Equity in (losses) earnings of unconsolidated businesses 0.28% 0.12% 1.40% -0.07% -0.07% -0.07% -0.07% -0.07% -0.07% Other income and (expense), net -0.88% -0.14% -0.94% 0.14% -0.31% -0.31% -0.31% -0.31% -0.30% Interest expense -2.22% -2.21% -3.87% -3.74% -4.91% -4.70% -4.52% -4.22% -3.91% Income Before Provision For Income Taxes 8.54% 24.29% 12.02% 21.46% 19.85% 20.06% 20.23% 20.54% 20.97% Provision for income taxes 0.57% -4.75% -2.61% -7.50% -6.93% -7.00% -7.06% -7.17% -7.32% Net Income 9.11% 19.53% 9.41% 13.96% 12.92% 13.06% 13.17% 13.37% 13.65% Net income attributable to noncontrolling interests 8.36% 10.00% 1.83% 0.38% 0.39% 0.39% 0.39% 0.39% 0.39% Net income attributable to Verizon 0.76% 9.54% 7.57% 13.58% 12.53% 12.67% 12.78% 12.98% 13.27% Net Income 9.11% 19.53% 9.41% 13.96% 12.92% 13.06% 13.17% 13.37% 13.65%

Common Size Balance Sheet Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV(2020) Assets Current assets Cash and cash equivalents 11.08% 8.34% 3.40% 9.09% 13.08% 17.39% 19.75% 22.74% Short-term investments 0.49% 0.44% 0.27% 0.22% 0.29% 0.34% 0.40% 0.42% Accounts receivable, Net 9.77% 11.01% 10.22% 10.33% 10.33% 10.33% 10.33% 10.33% Inventories 0.78% 0.91% 0.95% 0.88% 0.88% 0.88% 0.88% 0.88% Assets held for sale 0.00% 0.43% 0.60% 0.00% 0.00% 0.00% 0.00% 0.00% Prepaid expenses and other 3.54% 2.08% 1.49% 2.37% 2.37% 2.37% 2.37% 2.37% Total current assets 25.66% 23.21% 16.93% 22.90% 26.95% 31.31% 33.73% 36.75% Plant, property and equipment 178.87% 181.39% 167.27% 185.02% 195.64% 206.95% 217.91% 226.85% Less accumulated depreciation 105.51% 110.61% 103.80% 118.93% 129.75% 141.00% 152.02% 161.59% Plant, property and equipment, net 73.36% 70.78% 63.47% 66.09% 65.88% 65.94% 65.89% 65.25% Investments in unconsolidated businesses 2.86% 0.63% 0.60% 0.63% 0.63% 0.63% 0.63% 0.62% Wireless licenses 60.76% 59.29% 65.78% 61.94% 61.94% 61.94% 61.94% 61.94% Goodwill 19.38% 19.39% 19.25% 19.98% 19.93% 19.95% 19.93% 19.74% Other intangible assets, net 4.88% 4.51% 6.33% 5.48% 4.37% 3.27% 2.18% 1.07% Non-current assets held for sale 0.00% 0.00% 7.80% 0.00% 0.00% 0.00% 0.00% 0.00% Deposit for wireless licenses 0.00% 0.72% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other assets 4.28% 4.52% 5.71% 4.83% 4.83% 4.83% 4.83% 4.83% Total assets 191.17% 183.05% 185.87% 188.23% 190.73% 194.13% 195.33% 195.76% Liabilities and Equity Current liabilities Debt maturing within one year 4.02% 2.15% 4.93% 3.35% 2.99% 4.94% 4.48% 5.69% Accounts payable and accrued liabilities 12.18% 13.13% 14.71% 13.36% 13.36% 13.36% 13.36% 13.36% Liabilities related to assets held for sale 0.00% 0.00% 0.35% 0.00% 0.00% 0.00% 0.00% 0.00% Other 9.31% 6.75% 6.64% 7.23% 7.23% 7.23% 7.23% 7.23% Total current liabilities 25.52% 22.02% 26.63% 23.94% 23.58% 25.52% 25.07% 26.28% Long-term debt 41.73% 86.98% 78.79% 78.46% 75.26% 70.39% 65.84% 59.52% Employee benefit obligations 27.34% 26.19% 22.76% 23.63% 23.57% 23.59% 23.57% 23.34% Deferred income taxes 20.79% 32.71% 34.56% 36.96% 37.97% 39.14% 40.28% 41.09% Non-current liabilities related to assets held for sale 0.00% 0.00% 0.73% 0.00% 0.00% 0.00% 0.00% 0.00% Other liabilities 4.54% 4.39% 8.84% 5.90% 5.85% 5.82% 5.78% 5.70% Shareholders' Equity Common stock 31.70% 9.11% 8.83% 9.17% 9.14% 9.15% 9.14% 9.05% Contributed capital 31.70% 9.11% 8.83% 9.17% 9.14% 9.15% 9.14% 9.05% Reinvested earnings 0.98% 1.93% 8.54% 14.13% 19.31% 24.48% 29.59% 34.70% Accumulated other comprehensive income 1.05% 0.87% 0.42% 0.43% 0.43% 0.43% 0.43% 0.43% Common stock in treasury, at cost -4.15% -2.57% -5.63% -5.85% -5.84% -5.84% -5.83% -5.78% Deferred compensation - employee stock ownership plans and other 0.26% 0.33% 0.33% 0.34% 0.34% 0.34% 0.34% 0.33% Noncontrolling interests 41.43% 1.08% 1.07% 1.12% 1.11% 1.11% 1.11% 1.10% Total equity 71.26% 10.76% 13.56% 19.33% 24.50% 29.68% 34.78% 39.84% Total liabilities and equity 191.17% 183.05% 185.87% 188.23% 190.73% 194.13% 195.33% 195.76%

2015 2016E 2017E 2018E 2019E 2020(CV) Risk Free 0.0256 0.0256 0.0256 0.0256 0.0256 0.0256 Risk Premium 0.0616 0.0616 0.0616 0.0616 0.0616 0.0616 Beta 0.79 0.787 0.787 0.787 0.787 0.787 Cost of Equity 7.41% 7.41% 7.41% 7.41% 7.41% 7.41% Debt Rating BBB+ BBB+ BBB+ A- A- A- Default Spread 2.25% 2.25% 2.25% 1.75% 1.75% 1.75% Pre-Tax Cost of Debt 4.81% 4.81% 4.81% 4.31% 4.31% 4.31% Tax Rate 37% 37% 37% 37% 37% 37% After-Tax Cost of Debt 3.03% 3.03% 3.03% 2.71% 2.71% 2.71% MV Weight of Equity 60% 60% 60% 65% 65% 70% MV Weight of Debt 40% 40% 40% 35% 35% 30% Forward WACC 5.65% 5.65% 5.65% 5.76% 5.76% 6.00% Discount Factor 1.06 1.12 1.18 1.25 1.32 Implied Constant WACC 5.65% 5.65% 5.69% 5.71% 5.77% 1 2 3 4 5

Value Driver Estimation Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E CV(2020) Marginal Tax Rate 37.1% 37.7% 37.1% 37.1% 37.1% 37.1% 37.1% 37.1% NOPLAT Sales 120,550 127,079 131,620 126,754 127,093 126,989 127,096 128,328 COGS 44,887 49,931 52,557 50,701 50,837 50,796 50,838 51,331 Selling, General, and administration Exp. 27,089 41,016 29,986 28,680 28,757 28,733 28,758 29,036 Depreciation & Amortization 15,019 14,966 14,323 14,121 14,161 14,154 14,155 14,155 Implied interest on op. Leases 582 685 838 962 1,105 1,269 1,456 1,672 EBITA 32,973 20,481 33,916 32,288 32,233 32,037 31,888 32,133 Less: Adjusted Taxes Income Tax Provision 5,730 3,314 9,865 8,780 8,900 8,968 9,113 9,393 Plus: Tax shield on Interest Expense 989 1,853 1,825 2,308 2,214 2,129 1,990 1,863 Plus: Tax shield on lease interest 216 258 311 357 410 471 540 620 Less: Tax non-operating income -62-450 69-145 -145-145 -145-145 Less: Tax on equity in earnings of unconsolidated businesses 53 671-32 -32-32 -32-32 -32 Adjusted Taxes 6,944 5,204 11,964 11,623 11,700 11,745 11,820 12,053 Change in Deferred Taxes Deferred Tax Liability End Period 25,060 41,563 45,484 46,849 48,254 49,702 51,193 52,728 Deferred Tax Liability Previous Period 28,639 25,060 41,563 45,484 46,849 48,254 49,702 51,193 Net Change in Deferred Tax Liabilities -3,579 16,503 3,921 1,365 1,405 1,448 1,491 1,536 NOPLAT 22,450 31,780 25,873 22,030 21,938 21,740 21,559 21,616 Invested Capital Current Operating Assets Normal Cash 2,411 2,542 2,632 8,992 2,542 2,540 2,542 2,567 Accounts Receivable 11,776 13,993 13,457 13,100 13,135 13,124 13,135 13,262 Inventory 940 1,153 1,252 1,115 1,118 1,117 1,118 1,129 Prepaid Expenses & Other Current Assets 4,269 2,648 1,959 3,005 3,014 3,011 3,014 3,043 Current Operating Assets 19,396 20,336 19,300 26,212 19,808 19,792 19,808 20,000 Current Operating Liabilities Accounts Payable & Accrued Liabilities 14,689 16,680 19,362 16,928 16,973 16,959 16,974 17,138 Other Current Liabilities 11,223 8,572 8,738 9,165 9,189 9,182 9,189 9,279 Current Operating Liabilities 25,912 25,252 28,100 26,093 26,163 26,141 26,163 26,417 Net Operating Working Capital -6,516-4,916-8,800 119-6,355-6,350-6,355-6,417 Plus: Net PPE 88,434 89,947 83,541 83,773 83,734 83,741 83,740 83,740 Other Operating Assets PV of Operating Leases 9,693 11,413 13,967 16,037 18,413 21,142 24,275 27,872 Net Intangible Assets (non Goodwill) 23,357 24,639 25,331 25,331 25,331 25,331 25,331 25,331 Other Assets 78,405 82,001 94,087 92,710 92,735 92,739 92,752 92,821 Plus: Other Operating Assets 111,455 118,053 133,385 134,078 136,479 139,211 142,358 146,024 Other Operating Liabilities Less: Other Operating Liabilities 5,472 5,574 11,641 7,476 7,434 7,391 7,348 7,311 Invested Capital 99,467 107,562 112,944 126,720 122,690 125,471 128,655 132,296 ROIC NOPLAT 22,450 31,780 25,873 22,030 21,938 21,740 21,559 21,616 Beginning Invested Capital 121,071 99,467 107,562 112,944 126,720 122,690 125,471 128,655 ROIC 18.54% 31.95% 24.05% 19.51% 17.31% 17.72% 17.18% 16.80% FCF NOPLAT 22,450 31,780 25,873 22,030 21,938 21,740 21,559 21,616 Ending Invested Capital 99,467 107,562 112,944 126,720 122,690 125,471 128,655 132,296 Beginning Invested Capital 121,071 99,467 107,562 112,944 126,720 122,690 125,471 128,655 FCF 44,054 23,685 20,491 8,254 25,969 18,959 18,375 17,975 EP Beginning Invested Capital 121,071 99,467 107,562 112,944 126,720 122,690 125,471 128,655 ROIC 18.54% 31.95% 24.05% 19.51% 17.31% 17.72% 17.18% 16.80% WACC 5.52% 5.52% 5.52% 5.65% 5.65% 5.76% 5.76% 6.00% EP 15,767 26,289 19,935 15,643 14,772 14,668 14,327 13,898

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth 1.74% CV ROIC 16.80% Fiscal Years Ending 2016E 2017E 2018E 2019E 2020E WACC 5.65% 5.65% 5.76% 5.76% 6.00% Cost of Equity 7.41% 7.41% 7.41% 7.41% 7.41% Beta 0.79 Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E DCF Model NOPLAT 22030 21938 21740 21559 21616 Change in Invested Capital 13776-4030 2781 3184 3641 FCF 8254 25969 18959 18375 17975 CV 481539 Discount Factor 1.06 1.12 1.18 1.25 1.25 Present Value of Cash Flows 7813 23263 16058 14716 385635 Value of Operation 447485 Non-Operating Asset Excess cash 2535 Short-term Investment 283 Investments in unconsolidated businesses 796 Value of non-operating asset 3614 Non-Equity Claims PV of short-term and long-term Debt 118216 PV of Operating lease 13967 PV of ESOP 0 Underfunded Pension Plan 99455 Value of Debt 231638 Value of Equity 219461 Outstanding Shares 4242 Intrinsic Value 51.74 Price Today 52.92 EP Model Invested Capital 112944 Econimic Profit 15643 14772 14668 14327 13898 CV 347642 Discount Factor 1.06 1.12 1.18 1.25 1.25 PV 14806 13233 12437 11498 278980 Value of Operation 443898 Non-Operating Asset Excess cash 2535 Short-term Investment 283 Investments in unconsolidated businesses 796 Value of non-operating asset 3614 Non-Equity Claims PV of short-term and long-term Debt 118216 PV of Operating lease 13967 PV of ESOP 0 Underfunded Pension Plan 99455 Value of Debt 231638 Value of Equity 215875 Outstanding Shares 4242 Intrinsic Value 50.89 Price Today 52.05 Number of Periods 2 3 4 5 Today 12/5/2016 Next FYE 12/31/2016 Last FYE 12/31/2015 Days in FY 366 Days to FYE 340 Elapsed Fraction 0.929