NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
References in the Notes to "CenturyLink," "we," "us", the "Company", and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries, unless the content otherwise requires and except in Note 6, where such references refer solely to CenturyLink, Inc. References in the Notes to "Level 3" refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc., which we acquired on November 1, 2017.
(1) Background and Summary of Significant Accounting Policies
General
We are an international facilities-based communications company engaged primarily in providing a broad array of integrated services to our business and residential customers.
On November 1, 2017, we acquired Level 3 in a cash and stock transaction. See Note 2—Acquisition of Level 3 for additional information. On May 1, 2017, we sold a portion of our data centers and colocation business to a consortium of private equity purchasers for a combination of cash and equity. See Note 3—Sale of Data Centers and Colocation Business for additional information.
Basis of Presentation
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. These subsidiaries include Level 3 on and after November 1, 2017. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. In connection with our acquisition of Level 3, we acquired its deconsolidated Venezuela subsidiary and due to exchange restrictions and other conditions we have assigned no value to this subsidiary's assets. Additionally, we have excluded this subsidiary from our consolidated financial statements.
To simplify the overall presentation of our consolidated financial statements, we report immaterial amounts attributable to noncontrolling interests in certain of our subsidiaries as follows: (i) income attributable to noncontrolling interests in other income, net, (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other, net financing activities.
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenue and our segment reporting for 2019, 2018 and 2017. See Note 17—Segment Information for additional information. These changes had no impact on total operating revenue, total operating expenses or net (loss) income for any period.
Operating Expenses
Our current definitions of operating expenses are as follows:
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Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which include third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as data integration and modem expenses); costs owed to universal service funds (which are federal and state funds that are established to promote the availability of communications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our operations; and
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Selling, general and administrative expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; property and other operating taxes and fees; external commissions; litigation expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses.
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These expense classifications may not be comparable to those of other companies.
Summary of Significant Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for specific items and matters, including, but not limited to, revenue recognition, revenue reserves, network access costs, network access cost dispute reserves, pension plan assets, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and contingencies, are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can materially affect the reported amounts of assets, liabilities and components of stockholders' equity as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our other consolidated financial statements. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 16—Income Taxes and Note 19—Commitments, Contingencies and Other Items for additional information.
For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.
For all of these and other matters, actual results could differ materially from our estimates.
Revenue Recognition
We earn most of our consolidated revenue from contracts with customers, primarily through the provision of communications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606. We also earn revenue from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606.
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:
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Identification of the contract with a customer;
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Identification of the performance obligations in the contract;
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Determination of the transaction price;
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Allocation of the transaction price to the performance obligations in the contract; and
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Recognition of revenue when, or as, we satisfy a performance obligation.
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We provide an array of communications services to business and residential customers, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.
We recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred. These advance payments include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one year to five years depending on the service. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.
For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs.
In certain cases, customers may be permitted to modify their contracts. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract.
Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned.
We periodically sell optical capacity on our network. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 to 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue which is adjusted for the time value of money and is recognized ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other non-owned optical capacity assets.
In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction.
We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.
We defer (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life. Our deferred contract costs for our customers have average amortization periods of approximately 30 months for consumer and up to 49 months for business. These deferred costs are monitored every period to reflect any significant change in assumptions.
See Note 5—Revenue Recognition for additional information.
USF Surcharges, Gross Receipts Taxes and Other Surcharges
In determining whether to include in our revenue and expenses the taxes and surcharges collected from customers and remitted to government authorities, including USF surcharges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we are the principal taxpayer, we record the surcharges on a gross basis and include them in our revenue and costs of services and products. In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenue and costs of services and products.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Our advertising expense was $62 million, $98 million and $218 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.
Income Taxes
We file a consolidated federal income tax return with our eligible subsidiaries. The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods and adjustments to our liabilities for uncertain tax positions. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax net operating loss carryforwards ("NOLs"), tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. See Note 16—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. In evaluating investments for classification as cash equivalents, we require that individual securities have original maturities of ninety days or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.
Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet. This activity is included in the operating activities section in our consolidated statements of cash flows.
Restricted Cash
Restricted cash consists primarily of cash and investments that serve to collateralize our outstanding letters of credit and certain performance and operating obligations. Restricted cash and securities are recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists. Restricted securities are stated at cost which approximates fair value as of December 31, 2019 and 2018.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer's credit risk. Our past due accounts are written off against our allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful accounts approximates fair value. Accounts receivable balances acquired in a business combination are recorded at fair value for all balances receivable at the acquisition date and at the invoiced amount for those amounts invoiced after the acquisition date.
Property, Plant and Equipment
We record property, plant and equipment acquired in connection with our acquisitions based on its estimated fair value as of its acquisition date plus the estimated value of any associated legally or contractually required retirement obligations. We record purchased and constructed property, plant and equipment at cost, plus the estimated value of any associated legally or contractually required retirement obligations. The majority of our property, plant and equipment is depreciated using the straight-line group method, but certain of our assets are depreciated using the straight-line method over their estimated useful lives of the specific asset. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. The equal life group procedure is used to establish each pool's average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments assess the possible loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers reduce their use of the asset. However, the asset is not retired until all customers no longer utilize the asset and we determine there is no alternative use for the asset.
We have asset retirement obligations associated with the legally or contractually required removal of a limited group of property, plant and equipment assets from leased properties and the disposal of certain hazardous materials present in our owned properties. When an asset retirement obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period in which the costs are actually incurred.
We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its estimated fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and trade names, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 7 to 15 years, using either the sum-of-years-digits or the straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method primarily over estimated lives ranging up to 7 years. We amortize our other intangible assets using the sum-of-years-digits or straight-line method over an estimated life of 4 to 20 years. Other intangible assets not arising from business combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite-lived and such intangible assets are not amortized.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
Our long-lived intangible assets, other than goodwill, with indefinite lives are assessed for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be an impairment. These assets are carried at the estimated fair value at the time of acquisition and assets not acquired in acquisitions are recorded at historical cost. However, if their estimated fair value is less than the carrying amount, we recognize an impairment charge for the amount by which the carrying amount of these assets exceeds their estimated fair value.
We are required to assess goodwill for impairment at least annually, or more frequently, if an event occurs or circumstances change that would indicate an impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded carrying value of equity exceeds the fair value of equity. Our reporting units are not discrete legal entities with discrete full financial statements. Therefore, the equity carrying value and future cash flows are assessed each time a goodwill impairment assessment is performed on a reporting unit. To do so, we assign our assets, liabilities and cash flows to reporting units using reasonable and consistent allocation methodologies, which entail various estimates, judgments and assumptions. We believe these estimates, judgments and assumptions to be reasonable, but changes in any of these can significantly affect each reporting unit's equity carrying value and future cash flows utilized for our goodwill impairment assessment.
We are required to reassign goodwill to reporting units whenever reorganizations of our internal reporting structure changes the composition of our reporting units. Goodwill is reassigned to the reporting units using a relative fair value approach. When the fair value of a reporting unit is available, we allocate goodwill based on the relative fair value of the reporting units. When fair value is not available, we utilize an alternative allocation methodology that represents a reasonable proxy for the fair value of the operations being reorganized.
For more information, see Note 4—Goodwill, Customer Relationships and Other Intangible Assets.
Derivatives and Hedging
We may use derivative instruments to hedge exposure to interest rate risks arising from fluctuation in interest rates. We account for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments. We do not use derivative financial instruments for speculative purposes.
Derivatives are recognized in the consolidated balance sheets at their fair values. When we become a party to a derivative instrument and intend to apply hedge accounting, we formally document the hedge relationship and the risk management objective for undertaking the hedge which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge.
We entered into five variable-to-fixed interest rate swap agreements during the first quarter 2019 and six variable-to-fixed interest rate swap agreements during the second quarter 2019, which we designated as cash-flow hedges. We evaluate the effectiveness of these hedges qualitatively on a quarterly basis. The change in the fair value of the interest rate swaps is reflected in Accumulated Other Comprehensive Loss (“AOCI”) and is subsequently reclassified into earnings in the period the hedged transaction affects earnings, by virtue of qualifying as effective cash flow hedges. For more information see Note 15—Derivative Financial Instruments.
Pension and Post-Retirement Benefits
We recognize the funded status of our defined benefit and post-retirement plans as an asset or a liability on our consolidated balance sheet. Each year's actuarial gains or losses are a component of our other comprehensive income (loss), which is then included in our accumulated other comprehensive loss. Pension and post-retirement benefit expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits. We make significant assumptions (including the discount rate, expected rate of return on plan assets, mortality and health care trend rates) in computing the pension and post-retirement benefits expense and obligations. Note 11—Employee Benefits for additional information.
Foreign Currency
Local currencies of foreign subsidiaries are the functional currencies for financial reporting purposes except for certain foreign subsidiaries, primarily in Latin America. For operations outside the United States that have functional currencies other than the U.S. dollar, assets and liabilities are translated to U.S. dollars at period-end exchange rates, and revenue, expenses and cash flows are translated using average monthly exchange rates. A significant portion of our non-United States subsidiaries use either the British pound, the Euro or the Brazilian Real as their functional currency, each of which experienced significant fluctuations against the U.S. dollar during the years ended December 31, 2019, 2018 and 2017. Foreign currency translation gains and losses are recognized as a component of accumulated other comprehensive loss in stockholders' equity and in the consolidated statements of comprehensive income (loss) in accordance with accounting guidance for foreign currency translation. We consider the majority of our investments in our foreign subsidiaries to be long-term in nature. Our foreign currency transaction gains (losses), including where transactions with our non-United States subsidiaries are not considered to be long-term in nature, are included within other income, net on the consolidated statements of operations.
Common Stock
At December 31, 2019, we had 17 million shares authorized for future issuance under our equity incentive plans.
Preferred Stock
Holders of outstanding CenturyLink, Inc. preferred stock are entitled to receive cumulative dividends, receive preferential distributions equal to $25 per share plus unpaid dividends upon CenturyLink, Inc.'s liquidation and vote as a single class with the holders of common stock.
Section 382 Rights Plan
During the first half of 2019, we adopted and subsequently restated a Section 382 Rights Plan to protect our U.S. federal net operating loss carryforwards from certain Internal Revenue Code Section 382 limitations. Under the plan, one preferred stock purchase right was distributed for each share of our outstanding common stock as of the close of business on February 25, 2019, and those rights currently trade in tandem with the common stock until they expire or detach under the plan. This plan was designed to deter trading that would result in a change of control (as defined in Code Section 382), and therefore protect our ability to use our historical federal net operating losses in the future.
Dividends
The declaration and payment of dividends is at the discretion of our Board of Directors.
Recently Adopted Accounting Pronouncements
During 2019, we adopted Accounting Standards Update ("ASU") 2016-02, "Leases (ASC 842"). During 2018, we adopted ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans", ASU 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” and ASU 2014-09, “Revenue from Contracts with Customers”. During 2017, we adopted ASU 2017-04, "Simplifying the Test for Goodwill Impairment."
Each of these is described further below.
Leases
We adopted Accounting Standards Update ("ASU") 2016-02, "Leases (ASC 842)", as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11. Therefore, we have not restated comparative period financial information for the effects of ASC 842, and we will not make the new required lease disclosures for comparative periods beginning before January 1, 2019. Instead, we recognized ASC 842's cumulative effect transition adjustment (discussed below) as of January 1, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things (i) allowed us to carry forward the historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases under the new definition of a lease; and (iii) did not require us to reassess whether previously capitalized initial direct costs for any existing leases would qualify for capitalization under ASC 842. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment of right-of-use assets for existing leases.
On March 5, 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-01, "Leases (ASC 842): Codification Improvements", effective for public companies for fiscal years beginning after December 15, 2019. The new ASU aligns the guidance in ASC 842 for determining fair value of the underlying asset by lessors that are not manufacturers or dealers, with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, "Fair Value Measurement") should be applied. More importantly, the ASU also exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. Early adoption permits public companies to adopt concurrent with the transition to ASC 842 on leases. We adopted ASU 2019-01 as of January 1, 2019.
Adoption of the new standards resulted in the recording of operating lease assets and operating lease liabilities of approximately $2.1 billion and $2.2 billion, respectively, as of January 1, 2019. The difference is driven principally by the netting of our existing real estate restructure reserve against the corresponding operating lease right of use asset. In addition, we recorded a $96 million cumulative adjustment (net of tax) to accumulated deficit as of January 1, 2019, for the impact of the new accounting standards. The adjustment to accumulated deficit was driven by the derecognition of our prior failed sale leaseback transaction discussed in Note 3—Sale of Data Centers and Colocation Business. Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. The standards did not materially impact our consolidated net earnings or our cash flows in the year ended December 31, 2019.
Retirement Benefits
In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans" (“ASU 2018-14“). ASU 2018-14 eliminates requirements for certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures under defined benefit pension plans and other postretirement plans. We adopted this guidance during the fourth quarter 2018. The adoption of ASU 2018-14 did not have a material impact to our consolidated financial statements.
Comprehensive Loss
In February 2018, the FASB issued ASU 2018-02 which provides an option to reclassify stranded tax effects within accumulated other comprehensive loss to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (the "Act") (or portion thereof) is recorded. If an entity elects to reclassify the income tax effects of the Act, the amount of that reclassification shall include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Act related to items remaining in accumulated other comprehensive loss. The effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included. ASU 2018-02 is effective January 1, 2019, but early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. We early adopted and applied ASU 2018-02 in the first quarter of 2018. The adoption of ASU 2018-02 resulted in a $407 million increase to retained earnings and in accumulated other comprehensive loss. See Note 22—Accumulated Other Comprehensive Loss for additional information.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.
We adopted the new revenue recognition standard under the modified retrospective transition method. During the year ended December 31, 2018, we recorded a cumulative catch-up adjustment that increased our retained earnings by $338 million, net of $119 million of income taxes.
See Note 5—Revenue Recognition for additional information.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the impairment testing for goodwill by changing the measurement for goodwill impairment. Under prior rules, we were required to compute the fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value. Under ASU 2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned to the reporting unit.
We elected to early adopt the provisions of ASU 2017-04 as of October 1, 2018. We applied ASU 2017-04 to determine the impairment of $6.5 billion recorded during the first quarter of 2019 and $2.7 billion recorded during the fourth quarter of 2018. See Note 4 - Goodwill, Customer Relationships and Other Intangible Assets for additional information.
Recently Issued Accounting Pronouncements
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments". The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments.
We are in the process of implementing the model for the recognition of credit losses related to our financial instruments, new processes and internal controls to assist us in the application of the new standard. The cumulative effect of initially applying the new standard on January 1, 2020 will not be material.
(2) Acquisition of Level 3
On November 1, 2017, CenturyLink acquired Level 3 through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as our indirect wholly-owned subsidiary under the name of Level 3 Parent, LLC. We entered into this acquisition to, among other things, realize certain strategic benefits, including enhanced financial and operational scale, market diversification and an enhanced combined network. As a result of the acquisition, Level 3 shareholders received $26.50 per share in cash and 1.4286 shares of CenturyLink common stock, with cash paid in lieu of fractional shares, for each outstanding share of Level 3 common stock they owned at closing, subject to certain limited exceptions. We issued this consideration with respect to all of the outstanding common stock of Level 3, except for a limited number of shares held by dissenting common shareholders. Upon closing, CenturyLink shareholders owned approximately 51% and former Level 3 shareholders owned approximately 49% of the combined company.
In addition, each outstanding Level 3 restricted stock unit award granted prior to April 1, 2014 or granted to an outside director of Level 3 was converted into $26.50 in cash and 1.4286 shares of CenturyLink common stock (and cash in lieu of fractional shares) with respect to each Level 3 share covered by such award (the "Converted RSU Awards"). Each outstanding Level 3 restricted stock unit award granted on or after April 1, 2014 (other than those granted to outside directors of Level 3) was converted into a CenturyLink restricted stock unit award using a conversion ratio of 2.8386 to 1 as determined in accordance with a formula set forth in the merger agreement (“the Continuing RSU Awards”). See Note 12—Share-based Compensation for further details on these share-based compensation awards.
The aggregate consideration of $19.6 billion is based on:
|
|
•
|
the 517.3 million shares of CenturyLink’s common stock (including those issued in connection with the Converted RSU Awards) issued to consummate the acquisition and the closing stock price of CenturyLink common stock at October 31, 2017 of $18.99;
|
|
|
•
|
a combination of (i) the cash consideration of $26.50 per share on the 362.1 million common shares of Level 3 issued and outstanding as of October 31, 2017, (ii) the cash consideration of $1 million paid on the Converted RSUs awards; and (iii) the estimated value of $136 million the Continuing RSU Awards,
|
which represents the pre-combination portion of Level 3’s share-based compensation awards replaced by CenturyLink;
|
|
•
|
$60 million for the dissenting common shares issued and outstanding as of October 31, 2017; and
|
|
|
•
|
our assumption at closing of approximately $10.6 billion of Level 3's long-term debt.
|
The aggregate cash payments required to be paid on or about the closing date were funded with the proceeds of $7.945 billion of term loans and $400 million of funds borrowed under our revolving credit facility together with other available funds, which included $1.825 billion borrowed from Level 3 Parent, LLC. For additional information regarding CenturyLink’s financing of the Level 3 acquisition see Note 7—Long-Term Debt and Credit Facilities.
We recognized the assets and liabilities of Level 3 based on the fair value of the acquired tangible and intangible assets and assumed liabilities of Level 3 as of November 1, 2017, the consummation date of the acquisition, with the excess aggregate consideration recorded as goodwill. The estimation of such fair values and the estimation of lives of depreciable tangible assets and amortizable intangible assets required significant judgment. We completed our final fair value determination during the fourth quarter of 2018, which differed from those reflected in our consolidated financial statements at December 31, 2017.
In connection with receiving approval from the U.S. Department of Justice to complete the Level 3 acquisition we agreed to divest certain Level 3 network assets. All of those assets were sold by December 31, 2018. The proceeds from these sales were included in the proceeds from sale of property, plant and equipment in our consolidated statements of cash flows. No gain or loss was recognized with these transactions.
As of October 31, 2018, the aggregate consideration exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities by $11.2 billion, which we have recognized as goodwill. The goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.
The following is our assignment of the aggregate consideration:
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted November 1, 2017
Balance as of
December 31, 2017
|
|
Purchase Price Adjustments
|
|
Adjusted November 1, 2017
Balance as of
October 31, 2018
|
|
(Dollars in millions)
|
Cash, accounts receivable and other current assets (1)
|
$
|
3,317
|
|
|
(26
|
)
|
|
3,291
|
|
Property, plant and equipment
|
9,311
|
|
|
157
|
|
|
9,468
|
|
Identifiable intangible assets (2)
|
|
|
|
|
|
|
Customer relationships
|
8,964
|
|
|
(533
|
)
|
|
8,431
|
|
Other
|
391
|
|
|
(13
|
)
|
|
378
|
|
Other noncurrent assets
|
782
|
|
|
216
|
|
|
998
|
|
Current liabilities, excluding current maturities of long-term debt
|
(1,461
|
)
|
|
(32
|
)
|
|
(1,493
|
)
|
Current maturities of long-term debt
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
Long-term debt
|
(10,888
|
)
|
|
—
|
|
|
(10,888
|
)
|
Deferred revenue and other liabilities
|
(1,629
|
)
|
|
(114
|
)
|
|
(1,743
|
)
|
Goodwill
|
10,837
|
|
|
340
|
|
|
11,177
|
|
Total estimated aggregate consideration
|
$
|
19,617
|
|
|
(5
|
)
|
|
19,612
|
|
____________________________________________________________________________________________________________
|
|
(1)
|
Includes accounts receivable, which had a gross contractual value of $884 million on November 1, 2017 and October 31, 2018.
|
|
|
(2)
|
The weighted-average amortization period for the acquired intangible assets is approximately 12.0 years.
|
On the acquisition date, we assumed Level 3’s contingencies. For more information on our contingencies, see Note 19—Commitments, Contingencies and Other Items.
Acquisition-Related Expenses
We have incurred acquisition-related expenses related to our acquisition of Level 3. The table below summarizes our acquisition-related expenses, which consist of integration and transformation-related expenses, including severance and retention compensation expenses, and transaction-related expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Transaction-related expenses
|
$
|
—
|
|
|
2
|
|
|
174
|
|
Integration and transformation-related expenses
|
234
|
|
|
391
|
|
|
97
|
|
Total acquisition-related expenses
|
$
|
234
|
|
|
393
|
|
|
271
|
|
At December 31, 2019, we had incurred cumulative acquisition-related expenses of $950 million for Level 3. The total amounts of these expenses are included in our selling, general and administrative expenses.
Level 3 incurred transaction-related expenses of $47 million on the date of acquisition. This amount is not included in our results of operations.
(3) Sale of Data Centers and Colocation Business
On May 1, 2017, we sold a portion of our data centers and colocation business to a consortium led by BC Partners, Inc. and Medina Capital in exchange for cash and a minority stake in the limited partnership that owns the consortium's newly-formed global secure infrastructure company, Cyxtera Technologies ("Cyxtera").
At the closing of this sale, we received pre-tax cash proceeds of $1.8 billion, and we valued our minority stake at $150 million, which was based upon the total amount of equity contributions to the limited partnership on the date made. We classified our investment in the limited partnership in other assets on our consolidated balance sheets as of December 31, 2019 and December 31, 2018. Due to the sale and related restructuring actions we have taken regarding certain subsidiaries involved in the data centers and colocation business, we estimated a cumulative current tax impact relating to the sale totaling $65 million, $18 million of which was accrued in 2016 and $47 million of which was accrued in 2017.
In connection with our sale of the data centers and colocation business to Cyxtera, we agreed to lease back from Cyxtera a portion of the data center space to provide data hosting services to our customers. Because we have continuing involvement in the business through our minority stake in Cyxtera's parent, we did not meet the requirements for a sale-leaseback transaction as described in ASC 840-40, Leases - Sale-Leaseback Transactions. Under the failed-sale-leaseback accounting model, we were deemed under GAAP to still own certain real estate assets sold to Cyxtera, which we continued, through December 31, 2018 to reflect on our consolidated balance sheet and depreciate over the assets' remaining useful life. Through such date, we also treated a certain amount of the pre-tax cash proceeds from the sale of the assets as though it were the result of a financing obligation on our consolidated balance sheet, and our consolidated results of operations included imputed revenue associated with the portion of the real estate assets that we did not lease back and imputed interest expense on the financing obligation. A portion of the rent payments under our leaseback arrangement with Cyxtera were recognized as a reduction of the financing obligation, resulting in lower recognized rent expense than the amounts actually paid each period.
The failed-sale-leaseback accounting treatment had the following effects on our consolidated results of operations for the years ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
Positive (Negative) Impact to Net Income
|
|
December 31,
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Increase in revenue
|
$
|
74
|
|
|
49
|
|
Decrease in cost of sales
|
22
|
|
|
15
|
|
Increase in loss on sale of business included in selling, general and administrative expense
|
—
|
|
|
(102
|
)
|
Increase in depreciation expense (one-time)
|
—
|
|
|
(44
|
)
|
Increase in depreciation expense (ongoing)
|
(69
|
)
|
|
(47
|
)
|
Increase in interest expense
|
(55
|
)
|
|
(39
|
)
|
Decrease in income tax expense
|
7
|
|
|
65
|
|
Decrease in net income
|
$
|
(21
|
)
|
|
(103
|
)
|
After factoring in the costs to sell the data centers and colocation business, excluding the impact from the failed-sale-leaseback accounting treatment, the sale resulted in a $20 million gain as a result of the aggregate value of the proceeds we received exceeding the carrying value of the assets sold and liabilities assumed. Based on the fair market values of the failed-sale-leaseback assets, the failed-sale-leaseback accounting treatment resulted in a loss of $102 million as a result of the requirement to treat a certain amount of the pre-tax cash proceeds from the sale of the assets as though it were the result of a financing obligation. The combined net loss of $82 million was included in selling, general and administrative expenses in our consolidated statement of operations for the year ended December 31, 2017.
Effective November 3, 2016, which is the date we entered into the agreement to sell a portion of our data centers and colocation business, we ceased recording depreciation of the property, plant and equipment to be sold and amortization of the business's intangible assets in accordance with applicable accounting rules. Otherwise, we estimate that we would have recorded additional depreciation and amortization expense of $67 million from January 1, 2017 through May 1, 2017.
Upon adopting ASU 2016-02, accounting for the failed sale leaseback is no longer applicable based on our facts and circumstances, and the real estate assets and corresponding financing obligation were derecognized from our consolidated financial statements. Please see "Leases" (ASU 2016-02) in Note 1— Background and Summary of Significant Accounting Policies for additional information on the impact the new lease standard will have on the accounting for the failed-sale-leaseback.
(4) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Goodwill
|
$
|
21,534
|
|
|
28,031
|
|
Customer relationships, less accumulated amortization of $9,809 and $8,492
|
$
|
7,596
|
|
|
8,911
|
|
Indefinite-life intangible assets
|
$
|
269
|
|
|
269
|
|
Other intangible assets subject to amortization:
|
|
|
|
Capitalized software, less accumulated amortization of $2,957 and $2,616
|
$
|
1,599
|
|
|
1,468
|
|
Trade names, less accumulated amortization of $91 and $61
|
103
|
|
|
131
|
|
Total other intangible assets, net
|
$
|
1,971
|
|
|
1,868
|
|
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired (including the acquisition described in Note 2—Acquisition of Level 3). As of December 31, 2019, the weighted average remaining useful lives of the intangible assets were approximately 8 years in total, approximately 9 years for customer relationships, 4 years for capitalized software and 3 years for trade names.
Total amortization expense for intangible assets for the years ended December 31, 2019, 2018 and 2017 was $1.7 billion, $1.8 billion and $1.2 billion, respectively. As of December 31, 2019, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $44.0 billion.
We estimate that total amortization expense for intangible assets for the years ending December 31, 2020 through 2024 will be as follows:
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
$
|
1,674
|
|
2021
|
1,258
|
|
2022
|
1,037
|
|
2023
|
886
|
|
2024
|
828
|
|
We assess our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of any of our reporting units exceeds its fair value. At October 31, 2019, our international and global accounts segment was comprised of our North America global accounts ("NA GAM"), Europe, Middle East and Africa region ("EMEA"), Latin America region ("LATAM") and Asia Pacific region ("APAC") reporting units. Our annual impairment assessment date for goodwill is October 31, at which date we assess our reporting units. At October 31, 2019 our reporting units were consumer, small and medium business, enterprise, wholesale, NA GAM, EMEA, LATAM and APAC. Our annual impairment assessment date for indefinite-lived intangible assets other than goodwill is December 31.
Our reporting units are not discrete legal entities with discrete full financial statements. Our assets and liabilities are employed in and relate to the operations of multiple reporting units. For each reporting unit, we compare its estimated fair value of equity to its carrying value of equity that we assign to the reporting unit. If the estimated fair value of the reporting unit is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, we record an impairment equal to the excess amount. Depending on the facts and circumstances, we typically estimate the fair value of our reporting units by considering either or both of (i) a market approach, which includes the use of multiples of publicly-traded companies whose services are comparable to ours, and (ii) a discounted cash flow method, which is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period.
At October 31, 2019, we estimated the fair value of our eight above-mentioned reporting units by considering both a market approach and a discounted cash flow method. We reconciled the estimated fair values of the reporting units to our market capitalization as of October 31, 2019 and concluded that the indicated control premium of approximately 44.7% was reasonable based on recent market transactions. As of October 31, 2019, based on our assessment performed with respect to our eight reporting units, the estimated fair value of our equity exceeded our carrying value of equity for our consumer, small and medium business, enterprise, wholesale, NA GAM, EMEA, LATAM, and APAC reporting units by 44%, 41%, 53%, 46%, 55%, 5%, 63% and 38%, respectively. Based on our assessments performed, we concluded that the goodwill for our eight reporting units was not impaired as of October 31, 2019.
Both our January 2019 internal reorganization and the decline in our stock price triggered impairment testing in the first quarter of 2019. Because our low stock price was a key trigger for impairment testing during the first quarter of 2019, we estimated the fair value of our operations in such quarter using only the market approach. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which have historically supported a range of fair values derived from annualized revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples between 2.1x and 4.9x and 4.9x and 9.8x, respectively. We selected a revenue and EBITDA multiple for each of our reporting units within this range. We reconciled the estimated fair values of the reporting units to our market capitalization as of the date of each of our triggering events during the first quarter of 2019 and concluded that the indicated control premium of approximately 4.5% and 4.1% was reasonable based on recent market transactions. In the quarter ended March 31, 2019, based on our assessments performed with respect to the reporting units as described above, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of the date of each of our triggering events during the first quarter. As a result, we recorded non-cash, non-tax-deductible goodwill impairment charges aggregating to $6.5 billion in the quarter ended March 31, 2019. See the table below for the impairment charges by segment.
The market multiples approach that we used in the quarter ended March 31, 2019 incorporated significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain cost synergies. In developing the market multiple, we also considered observed trends of our industry participants. Our assessment included many qualitative factors that required significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the size of our impairments.
At October 31, 2018, we estimated the fair value of our then five reporting units which were consumer, medium and small business, enterprise, international and global accounts, and wholesale and indirect by considering both a market approach and a discounted cash flow method. We reconciled the estimated fair values of the reporting units to our market capitalization as of October 31, 2018 and concluded that the indicated control premium of approximately 0.1% was reasonable based on recent market transactions. As of October 31, 2018, based on our assessment performed with respect to these reporting units as described above, we concluded that the estimated fair value of our consumer reporting unit was less than our carrying value of equity by approximately $2.7 billion. As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $2.7 billion for goodwill assigned to our consumer reporting unit during the fourth quarter of 2018. In addition, based on our assessments performed, we concluded that the goodwill for our four remaining reporting units was not impaired as of October 31, 2018.
We completed our qualitative assessment of our indefinite-lived intangible assets other than goodwill as of December 31, 2019 and 2018 and concluded it is more likely than not that our indefinite-lived intangible assets are not impaired; thus, no impairment charge for these assets was recorded in 2019 or 2018.
The following tables show the rollforward of goodwill assigned to our reportable segments from December 31, 2017 through December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
Consumer
|
|
Total
|
|
(Dollars in millions)
|
As of December 31, 2017(1)
|
$
|
20,197
|
|
|
10,278
|
|
|
30,475
|
|
Purchase accounting and other adjustments(2)(3)
|
250
|
|
|
32
|
|
|
282
|
|
Impairment
|
—
|
|
|
(2,726
|
)
|
|
(2,726
|
)
|
As of December 31, 2018
|
$
|
20,447
|
|
|
7,584
|
|
|
28,031
|
|
_____________________________________________________________________________
|
|
(1)
|
Goodwill is net of accumulated impairment losses of $1.1 billion that related to our former hosting segment now included in our business segment.
|
|
|
(2)
|
We allocated $32 million of Level 3 goodwill to consumer as we expect the consumer segment to benefit from synergies resulting from the business combination.
|
|
|
(3)
|
Includes $58 million decrease due to effect of foreign currency exchange rate change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total
|
|
(Dollars in millions)
|
As of January 1, 2019
|
$
|
3,595
|
|
5,222
|
|
5,193
|
|
6,437
|
|
7,584
|
|
28,031
|
|
January 2019 reorganization
|
—
|
|
987
|
|
(1,038
|
)
|
395
|
|
(344
|
)
|
—
|
|
Effect of foreign currency rate change and other
|
9
|
|
—
|
|
—
|
|
—
|
|
—
|
|
9
|
|
Impairments
|
(934
|
)
|
(1,471
|
)
|
(896
|
)
|
(3,019
|
)
|
(186
|
)
|
(6,506
|
)
|
As of December 31, 2019
|
$
|
2,670
|
|
4,738
|
|
3,259
|
|
3,813
|
|
7,054
|
|
21,534
|
|
For additional information on our segments, see Note 17—Segment Information.
(5) Revenue Recognition
The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Reported Balances
|
|
Impact of ASC 606
|
|
ASC 605
Historical Adjusted Balances
|
|
(Dollars in millions, except per share amounts
and shares in thousands)
|
Operating revenue
|
$
|
23,443
|
|
|
39
|
|
|
23,482
|
|
Cost of services and products (exclusive of depreciation and amortization)
|
10,862
|
|
|
22
|
|
|
10,884
|
|
Selling, general and administrative
|
4,165
|
|
|
71
|
|
|
4,236
|
|
Interest expense
|
2,177
|
|
|
(9
|
)
|
|
2,168
|
|
Income tax expense
|
170
|
|
|
(12
|
)
|
|
158
|
|
Net loss
|
(1,733
|
)
|
|
(33
|
)
|
|
(1,766
|
)
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER COMMON SHARE
|
|
|
|
|
|
BASIC
|
$
|
(1.63
|
)
|
|
(0.03
|
)
|
|
(1.66
|
)
|
DILUTED
|
$
|
(1.63
|
)
|
|
(0.03
|
)
|
|
(1.66
|
)
|
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
BASIC
|
1,065,866
|
|
|
—
|
|
|
1,065,866
|
|
DILUTED
|
1,065,866
|
|
|
—
|
|
|
1,065,866
|
|
Reconciliation of Total Revenue to Revenue from Contracts with Customers
The following tables provide disaggregation of revenue from contracts with customers based on reporting segments and service offerings for the years ended December 31, 2019 and 2018. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Total Revenue
|
|
Adjustments for Non-ASC 606 Revenue(9)
|
|
Total Revenue from Contracts with Customers
|
|
(Dollars in millions)
|
International and Global Accounts
|
|
|
|
|
|
|
IP and Data Services (1)
|
$
|
1,676
|
|
|
—
|
|
|
1,676
|
|
Transport and Infrastructure (2)
|
1,318
|
|
|
(365
|
)
|
|
953
|
|
Voice and Collaboration (3)
|
377
|
|
|
—
|
|
|
377
|
|
IT and Managed Services (4)
|
225
|
|
|
—
|
|
|
225
|
|
Total International and Global Accounts Segment Revenue
|
3,596
|
|
|
(365
|
)
|
|
3,231
|
|
|
|
|
|
|
|
Enterprise
|
|
|
|
|
|
IP and Data Services (1)
|
2,763
|
|
|
—
|
|
|
2,763
|
|
Transport and Infrastructure (2)
|
1,545
|
|
|
(134
|
)
|
|
1,411
|
|
Voice and Collaboration (3)
|
1,567
|
|
|
—
|
|
|
1,567
|
|
IT and Managed Services (4)
|
258
|
|
|
—
|
|
|
258
|
|
Total Enterprise Segment Revenue
|
6,133
|
|
|
(134
|
)
|
|
5,999
|
|
|
|
|
|
|
|
Small and Medium Business
|
|
|
|
|
|
IP and Data Services (1)
|
1,184
|
|
|
—
|
|
|
1,184
|
|
Transport and Infrastructure (2)
|
420
|
|
|
(36
|
)
|
|
384
|
|
Voice and Collaboration (3)
|
1,306
|
|
|
—
|
|
|
1,306
|
|
IT and Managed Services (4)
|
46
|
|
|
—
|
|
|
46
|
|
Total Small and Medium Business Segment Revenue
|
2,956
|
|
|
(36
|
)
|
|
2,920
|
|
|
|
|
|
|
|
Wholesale
|
|
|
|
|
|
IP and Data Services (1)
|
1,377
|
|
|
—
|
|
|
1,377
|
|
Transport and Infrastructure (2)
|
1,920
|
|
|
(545
|
)
|
|
1,375
|
|
Voice and Collaboration (3)
|
771
|
|
|
—
|
|
|
771
|
|
IT and Managed Services (4)
|
6
|
|
|
—
|
|
|
6
|
|
Total Wholesale Business Segment Revenue
|
4,074
|
|
|
(545
|
)
|
|
3,529
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
Broadband (5)
|
2,876
|
|
|
(215
|
)
|
|
2,661
|
|
Voice (6)
|
1,881
|
|
|
—
|
|
|
1,881
|
|
Regulatory (7)
|
634
|
|
|
(634
|
)
|
|
—
|
|
Other (8)
|
251
|
|
|
(24
|
)
|
|
227
|
|
Total Consumer Segment Revenue
|
5,642
|
|
|
(873
|
)
|
|
4,769
|
|
|
|
|
|
|
|
Total revenue
|
$
|
22,401
|
|
|
(1,953
|
)
|
|
20,448
|
|
|
|
|
|
|
|
Timing of revenue
|
|
|
|
|
|
Goods and services transferred at a point in time
|
|
|
|
|
$
|
221
|
|
Services performed over time
|
|
|
|
|
20,227
|
|
Total revenue from contracts with customers
|
|
|
|
|
$
|
20,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Total Revenue
|
|
Adjustments for Non-ASC 606 Revenue(9)
|
|
Total Revenue from Contracts with Customers
|
|
(Dollars in millions)
|
International and Global Accounts
|
|
|
|
|
|
IP and Data Services (1)
|
$
|
1,728
|
|
|
—
|
|
|
1,728
|
|
Transport and Infrastructure (2)
|
1,276
|
|
|
(83
|
)
|
|
1,193
|
|
Voice and Collaboration (3)
|
387
|
|
|
—
|
|
|
387
|
|
IT and Managed Services (4)
|
262
|
|
|
—
|
|
|
262
|
|
Total International and Global Accounts Segment Revenue
|
3,653
|
|
|
(83
|
)
|
|
3,570
|
|
|
|
|
|
|
|
Enterprise
|
|
|
|
|
|
IP and Data Services (1)
|
2,673
|
|
|
—
|
|
|
2,673
|
|
Transport and Infrastructure (2)
|
1,550
|
|
|
(43
|
)
|
|
1,507
|
|
Voice and Collaboration (3)
|
1,607
|
|
|
—
|
|
|
1,607
|
|
IT and Managed Services (4)
|
303
|
|
|
—
|
|
|
303
|
|
Total Enterprise Segment Revenue
|
6,133
|
|
|
(43
|
)
|
|
6,090
|
|
|
|
|
|
|
|
Small and Medium Business
|
|
|
|
|
|
IP and Data Services (1)
|
1,178
|
|
|
—
|
|
|
1,178
|
|
Transport and Infrastructure (2)
|
471
|
|
|
(40
|
)
|
|
431
|
|
Voice and Collaboration (3)
|
1,443
|
|
|
—
|
|
|
1,443
|
|
IT and Managed Services (4)
|
52
|
|
|
—
|
|
|
52
|
|
Total Small and Medium Business Segment Revenue
|
3,144
|
|
|
(40
|
)
|
|
3,104
|
|
|
|
|
|
|
|
Wholesale
|
|
|
|
|
|
IP and Data Services (1)
|
1,382
|
|
|
—
|
|
|
1,382
|
|
Transport and Infrastructure (2)
|
2,136
|
|
|
(397
|
)
|
|
1,739
|
|
Voice and Collaboration (3)
|
872
|
|
|
—
|
|
|
872
|
|
IT and Managed Services (4)
|
7
|
|
|
—
|
|
|
7
|
|
Total Wholesale Business Segment Revenue
|
4,397
|
|
|
(397
|
)
|
|
4,000
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
Broadband (5)
|
2,822
|
|
|
(213
|
)
|
|
2,609
|
|
Voice (6)
|
2,173
|
|
|
—
|
|
|
2,173
|
|
Regulatory (7)
|
729
|
|
|
(729
|
)
|
|
—
|
|
Other (8)
|
392
|
|
|
(33
|
)
|
|
359
|
|
Total Consumer Segment Revenue
|
6,116
|
|
|
(975
|
)
|
|
5,141
|
|
|
|
|
|
|
|
Total revenue
|
$
|
23,443
|
|
|
(1,538
|
)
|
|
21,905
|
|
|
|
|
|
|
|
Timing of revenue
|
|
|
|
|
|
Goods and services transferred at a point in time
|
|
|
|
|
$
|
230
|
|
Services performed over time
|
|
|
|
|
21,675
|
|
Total revenue from contracts with customers
|
|
|
|
|
$
|
21,905
|
|
______________________________________________________________________
|
|
|
|
(1
|
)
|
Includes primarily VPN data network, Ethernet, IP, content delivery and other ancillary services.
|
(2
|
)
|
Includes wavelengths, private line, dark fiber services, colocation and data center services, including cloud, hosting and application management solutions, professional services and other ancillary services.
|
(3
|
)
|
Includes local, long-distance voice, including wholesale voice, and other ancillary services, as well as VoIP services.
|
(4
|
)
|
Includes information technology services and managed services, which may be purchased in conjunction with our other network services.
|
(5
|
)
|
Includes high speed, fiber-based and lower speed DSL broadband services.
|
(6
|
)
|
Includes local and long-distance services.
|
(7
|
)
|
Includes (i) CAF, USF and other support payments designed to reimburse us for various costs related to certain telecommunications services and (ii) other operating revenue from the leasing and subleasing of space.
|
(8
|
)
|
Includes retail video services (including our linear TV services), professional services and other ancillary services.
|
(9
|
)
|
Includes regulatory revenue, lease revenue, sublease rental income, revenue from fiber capacity lease arrangements and failed sale leaseback income in 2018, which are not within the scope of ASC 606.
|
Customer Receivables and Contract Balances
The following table provides balances of customer receivables, contract assets and contract liabilities as of December 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
(Dollars in millions)
|
Customer receivables(1)
|
$
|
2,194
|
|
|
2,346
|
|
Contract liabilities
|
1,028
|
|
|
860
|
|
Contract assets
|
130
|
|
|
140
|
|
|
|
|
|
(1
|
)
|
Gross customer receivables of $2.3 billion and $2.5 billion, net of allowance for doubtful accounts of $94 million and $132 million, at December 31, 2019 and December 31, 2018, respectively.
|
Contract liabilities are consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheet. During the years ended December 31, 2019 and December 31, 2018, we recognized $630 million and $295 million, respectively, of revenue that was included in contract liabilities as of January 1, 2019 and January 1, 2018, respectively.
Performance Obligations
As of December 31, 2019, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially satisfied) is approximately $6.0 billion. We expect to recognize approximately 92% of this revenue through 2022, with the balance recognized thereafter.
We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606.
Contract Costs
The following table provides changes in our contract acquisition costs and fulfillment costs:
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
(Dollars in millions)
|
Beginning of period balance
|
$
|
322
|
|
|
187
|
|
Costs incurred
|
208
|
|
|
158
|
|
Amortization
|
(204
|
)
|
|
(124
|
)
|
End of period balance
|
$
|
326
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Acquisition Costs
|
|
Fulfillment Costs
|
|
(Dollars in millions)
|
Beginning of period balance
|
$
|
268
|
|
|
133
|
|
Costs incurred
|
226
|
|
|
146
|
|
Amortization
|
(172
|
)
|
|
(92
|
)
|
End of period balance
|
$
|
322
|
|
|
187
|
|
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of telecommunications services to customers, including labor and materials consumed for these activities.
Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average customer life of 30 months for consumer customers and 12 to 60 months for business customers and amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next twelve months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.
(6) Leases
Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new accounting guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance, as discussed in Note 1— Background and Summary of Significant Accounting Policies.
We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.
Some of our lease arrangements contain lease components (including fixed payments, such as rent, real estate taxes and insurance costs) and non-lease components (including common-area maintenance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component.
Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease expense consisted of the following:
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
(Dollars in millions)
|
Operating and short-term lease cost
|
$
|
677
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
44
|
|
Interest on lease liability
|
12
|
|
Total finance lease cost
|
56
|
|
Total lease cost
|
$
|
733
|
|
CenturyLink leases various equipment, office facilities, retail outlets, switching facilities and other network sites. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2019, 2018 and 2017, our gross rental expense was $733 million, $875 million and $550 million, respectively. We also received sublease rental income for the years ended December 31, 2019, 2018 and 2017 of $24 million, $21 million and $13 million, respectively.
Supplemental consolidated balance sheet information and other information related to leases:
|
|
|
|
|
|
|
|
December 31
|
Leases (Dollars in millions)
|
Classification on the Balance Sheet
|
2019
|
Assets
|
|
|
Operating lease assets
|
Operating lease assets
|
$
|
1,686
|
|
Finance lease assets
|
Property, plant and equipment, net of accumulated depreciation
|
252
|
|
Total leased assets
|
$
|
1,938
|
|
|
|
|
Liabilities
|
|
|
Current
|
|
|
Operating
|
Current operating lease liabilities
|
$
|
416
|
|
Finance
|
Current portion of long-term debt
|
35
|
|
Noncurrent
|
|
|
Operating
|
Noncurrent operating lease liabilities
|
1,342
|
|
Finance
|
Long-term debt
|
185
|
|
Total lease liabilities
|
$
|
1,978
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
Operating leases
|
7.2
|
|
Finance leases
|
11.3
|
|
Weighted-average discount rate
|
|
|
Operating leases
|
6.46
|
%
|
Finance leases
|
5.47
|
%
|
Supplemental consolidated cash flow statement information related to leases:
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
(Dollars in millions)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
665
|
|
Operating cash flows from finance leases
|
14
|
|
Financing cash flows from finance leases
|
32
|
|
Supplemental lease cash flow disclosures
|
|
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
358
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
$
|
14
|
|
As of December 31, 2019, maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
(Dollars in millions)
|
2020
|
$
|
460
|
|
|
47
|
|
2021
|
361
|
|
|
28
|
|
2022
|
308
|
|
|
22
|
|
2023
|
265
|
|
|
22
|
|
2024
|
194
|
|
|
21
|
|
Thereafter
|
686
|
|
|
170
|
|
Total lease payments
|
2,274
|
|
|
310
|
|
Less: interest
|
(516
|
)
|
|
(90
|
)
|
Total
|
$
|
1,758
|
|
|
220
|
|
Less: current portion
|
(416
|
)
|
|
(35
|
)
|
Long-term portion
|
$
|
1,342
|
|
|
185
|
|
As of December 31, 2019, we had no material operating or finance leases that had not yet commenced.
Operating Lease Income
CenturyLink leases various IRUs, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations.
For the years ended December 31, 2019, 2018 and 2017, our gross rental income was $1.4 billion, $882 million and $766 million, respectively, which represents 6%, 4% and 4% respectively, of our operating revenue for the years ended December 31, 2019, 2018 and 2017.
Disclosures under ASC 840
We adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption.
The future annual minimum payments under capital lease agreements as of December 31, 2018 were as follows:
|
|
|
|
|
|
Capital Lease Obligations
|
|
(Dollars in millions)
|
2019
|
$
|
51
|
|
2020
|
36
|
|
2021
|
23
|
|
2022
|
21
|
|
2023
|
20
|
|
2024 and thereafter
|
183
|
|
Total minimum payments
|
334
|
|
Less: amount representing interest and executory costs
|
(100
|
)
|
Present value of minimum payments
|
234
|
|
Less: current portion
|
(38
|
)
|
Long-term portion
|
$
|
196
|
|
At December 31, 2018, our future rental commitments for operating leases were as follows:
|
|
|
|
|
|
Operating Leases
|
|
(Dollars in millions)
|
2019
|
$
|
675
|
|
2020
|
443
|
|
2021
|
355
|
|
2022
|
279
|
|
2023
|
241
|
|
2024 and thereafter
|
969
|
|
Total future minimum payments (1)
|
$
|
2,962
|
|
_______________________________________________________________________________
|
|
(1)
|
Minimum payments have not been reduced by minimum sublease rentals of $101 million due in the future under non-cancelable subleases.
|
(7) Long-Term Debt and Credit Facilities
The following chart reflects the consolidated long-term debt of CenturyLink, Inc. and its subsidiaries as of the dates indicated below, including unamortized discounts and premiums and unamortized debt issuance costs, but excluding intercompany debt and the impact of the debt refinancing transactions described under "Subsequent Events":
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Interest Rates(1)
|
|
Maturities
|
|
2019
|
|
2018
|
|
|
|
|
|
(Dollars in millions)
|
Senior Secured Debt: (2)
|
|
|
|
|
|
|
|
CenturyLink, Inc.
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
4.495%
|
|
2022
|
|
$
|
250
|
|
|
550
|
|
Term Loan A (3)
|
LIBOR + 2.75%
|
|
2022
|
|
1,536
|
|
|
1,622
|
|
Term Loan A-1 (3)
|
LIBOR + 2.75%
|
|
2022
|
|
333
|
|
|
351
|
|
Term Loan B (3)
|
LIBOR + 2.75%
|
|
2025
|
|
5,880
|
|
|
5,940
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
Level 3 Financing, Inc.
|
|
|
|
|
|
|
|
Tranche B 2024 Term Loan (4)
|
LIBOR + 2.25%
|
|
2024
|
|
—
|
|
|
4,611
|
|
Tranche B 2027 Term Loan (5)
|
LIBOR + 1.75%
|
|
2027
|
|
3,111
|
|
|
—
|
|
Senior notes
|
3.400% - 3.875%
|
|
2027 - 2029
|
|
1,500
|
|
|
—
|
|
Embarq Corporation subsidiaries
|
|
|
|
|
|
|
|
First mortgage bonds
|
7.125% - 8.375%
|
|
2023 - 2025
|
|
138
|
|
|
138
|
|
Senior Notes and Other Debt:
|
|
|
|
|
|
|
|
CenturyLink, Inc.
|
|
|
|
|
|
|
|
Senior notes
|
5.125% - 7.65%
|
|
2019 - 2042
|
|
8,696
|
|
|
8,036
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
Level 3 Financing, Inc.
|
|
|
|
|
|
|
|
Senior notes
|
4.625% - 6.125%
|
|
2021 - 2027
|
|
5,515
|
|
|
5,315
|
|
Level 3 Parent, LLC
|
|
|
|
|
|
|
|
Senior notes
|
5.750%
|
|
2022
|
|
—
|
|
|
600
|
|
Qwest Corporation
|
|
|
|
|
|
|
|
Senior notes
|
6.125% - 7.750%
|
|
2021 - 2057
|
|
5,956
|
|
|
5,956
|
|
Term loan (6)
|
LIBOR + 2.00%
|
|
2025
|
|
100
|
|
|
100
|
|
Qwest Capital Funding, Inc.
|
|
|
|
|
|
|
|
Senior notes
|
6.875% - 7.750%
|
|
2021 - 2031
|
|
352
|
|
|
697
|
|
Embarq Corporation and subsidiary
|
|
|
|
|
|
|
|
Senior note
|
7.995%
|
|
2036
|
|
1,450
|
|
|
1,485
|
|
Other
|
9.000%
|
|
2019
|
|
—
|
|
|
150
|
|
Finance lease and other obligations
|
Various
|
|
Various
|
|
222
|
|
|
801
|
|
Unamortized (discounts) premiums and other, net
|
|
|
|
|
(52
|
)
|
|
(8
|
)
|
Unamortized debt issuance costs
|
|
|
|
|
(293
|
)
|
|
(283
|
)
|
Total long-term debt
|
|
|
|
|
34,694
|
|
|
36,061
|
|
Less current maturities
|
|
|
|
|
(2,300
|
)
|
|
(652
|
)
|
Long-term debt, excluding current maturities
|
|
|
|
|
$
|
32,394
|
|
|
35,409
|
|
_______________________________________________________________________________
|
|
(1)
|
As of December 31, 2019. See "Subsequent Events" for a discussion of certain changes to CenturyLink's senior secured debt in early 2020.
|
|
|
(2)
|
See the remainder of this Note for a description of certain parent or subsidiary guarantees and liens securing this debt.
|
|
|
(3)
|
CenturyLink, Inc.'s Term Loans A, A-1, and B had interest rates of 4.549% and 5.272% as of December 31, 2019 and December 31, 2018, respectively.
|
|
|
(4)
|
The Tranche B 2024 Term Loan had an interest rate of 4.754% as of December 31, 2018.
|
|
|
(5)
|
The Tranche B 2027 Term Loan had an interest rate of 3.549% as of December 31, 2019.
|
|
|
(6)
|
Qwest Corporation's Term Loan had an interest rate of 3.800% as of December 31, 2019 and 4.530% as of December 31, 2018.
|
Debt of CenturyLink, Inc. and its Subsidiaries
At December 31, 2019, most of our outstanding consolidated debt had been incurred by CenturyLink, Inc. or one of the following four other primary borrowers or “borrowing groups,” each of which has borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries:
|
|
•
|
Qwest Capital Funding, Inc. (including its parent guarantor, Qwest Communications International Inc.);
|
|
|
•
|
Embarq Corporation; and
|
|
|
•
|
Level 3 Financing, Inc. (including its parent guarantor Level 3 Parent, LLC).
|
Each of these borrowers or borrowing groups has entered into one or more credit agreements with certain financial institutions or other institutional lenders, or issued senior notes. Certain of these debt instruments are described further below.
CenturyLink Credit Agreement
In connection with financing its acquisition of Level 3 on November 1, 2017, CenturyLink, Inc. caused its wholly-owned subsidiary, CenturyLink Escrow, LLC, to enter into a credit agreement on June 19, 2017 (the "2017 CenturyLink Credit Agreement") with, among others, Bank of America, N.A., as administrative agent and collateral agent, providing for $10.245 billion in senior secured credit facilities (the "2017 Senior Secured Credit Facilities") at December 31, 2019. As amended in early 2018, these facilities consisted of the following:
|
|
•
|
a $2.168 billion revolving credit facility (“2017 Revolving Credit Facility”), with 18 lenders;
|
|
|
•
|
a $1.707 billion senior secured Term Loan A credit facility, with 18 lenders;
|
|
|
•
|
a $370 million senior secured Term Loan A-1 credit facility with CoBank, ACB; and
|
|
|
•
|
a $6.0 billion senior secured Term Loan “B” credit facility.
|
At December 31, 2019, loans under the Term Loan A and A-1 facilities and the 2017 Revolving Credit Facility bore interest at a rate equal to, at our option, the London Interbank Offered Rate (“LIBOR”) or the alternative base rate (each as defined in the 2017 CenturyLink Credit Agreement) plus an applicable margin between 2.25% to 3.00% per annum for LIBOR loans and 1.25% to 2.00% per annum for alternative base rate loans, depending on our then current total leverage ratio. Since November 1, 2017, borrowings under the Term Loan B facility have borne interest at LIBOR plus 2.75% per annum. Loans under each of the term loan facilities require certain specified quarterly amortization payments and certain specified mandatory prepayments in connection with certain asset sales and debt issuances and out of excess cash flow, among other things, subject in each case to certain significant exceptions.
At December 31, 2019, the 2017 Revolving Credit Facility and borrowings under the Term Loan A and A-1 facilities were scheduled to mature on November 1, 2022, and borrowings under the Term Loan B facility were scheduled to mature on January 31, 2025.
All of CenturyLink, Inc.'s obligations under the 2017 Senior Secured Credit Facilities are guaranteed by certain of its subsidiaries. The guarantees by certain of those guarantors are secured by a first priority security interest in substantially all assets (including certain subsidiaries stock) directly owned by them, subject to certain exceptions and limitations.
A portion of the 2017 Revolving Credit Facility in an amount not to exceed $100 million is available for swingline loans, and a portion in an amount not to exceed $400 million is available for the issuance of letters of credit.
CenturyLink, Inc. is permitted under the 2017 CenturyLink Credit Agreement to request certain incremental borrowings subject to the satisfaction of various conditions and to certain other limitations. Any incremental borrowings would be subject to the same terms and conditions under the 2017 CenturyLink Credit Agreement.
Changes to Agreement, as described further under "Subsequent Events," in January 2020 we effected certain refinancing transactions that among other things, changed the maturity dates of the 2017 Senior Secured Credit Facilities, lowered the interest rates payable thereunder, and changed the allocations of amounts owed under each of the facilities.
Term Loans and Certain Other Debt of Subsidiaries
Qwest Corporation
In 2015, Qwest Corporation entered into a variable rate term loan in the amount of $100 million with CoBank, ACB. The outstanding unpaid principal amount of this term loan plus any accrued and unpaid interest is due on February 20, 2025. Interest is paid at least quarterly based upon either the London Interbank Offered Rate (“LIBOR”) or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for base rate loans depending on Qwest Corporation's then current senior unsecured long-term debt rating. At both December 31, 2019 and 2018, the outstanding principal balance on this term loan was $100 million.
Level 3 Financing, Inc.
At December 31, 2019, Level 3 Financing, Inc. owed $3.111 billion, under the Tranche B 2027 Term Loan, which matures on March 1, 2027. The Tranche B 2027 Term Loan carries an interest rate, in the case of base rate borrowings, equal to (i) the greater of the Prime Rate, the Federal Funds Effective Rate plus 50 basis points, or LIBOR plus 100 basis points (with all such terms and calculations as defined or further specified in the credit agreement) plus (ii) 0.75% per annum. Any Eurodollar borrowings under the Tranche B 2027 Term Loan bear interest at LIBOR plus 1.75% per annum.
The Tranche B 2027 Term Loan requires certain specified mandatory prepayments in connection with certain asset sales and other transactions, subject to certain significant exceptions. The obligations of Level 3 Financing, Inc. under the Tranche B 2027 Term Loan are, subject to certain exceptions, secured by certain assets of Level 3 Parent, LLC and certain of its material domestic telecommunication subsidiaries. Also, Level 3 Parent, LLC and certain of its subsidiaries have guaranteed the obligations of Level 3 Financing, Inc. under the Tranche B 2027 Term Loan.
The net proceeds from the Tranche B 2027 Term Loan, together with the net proceeds from a concurrent offering of senior secured notes of Level 3 Financing, Inc., were used to pre-pay in full Level 3 Financing's predecessor Tranche B 2024 Term Loan.
Embarq Subsidiaries
At December 31, 2019 and 2018, one of our Embarq subsidiaries had outstanding first mortgage bonds. These first mortgage bonds are secured by substantially all of the property, plant and equipment of the issuing subsidiary.
Revolving Letters of Credit
We use various financial instruments in the normal course of business. These instruments include letters of credit, which are conditional commitments issued on our behalf in accordance with specified terms and conditions. CenturyLink, Inc. maintains an uncommitted $225 million revolving letter of credit facility separate from the letter of credit facility included in the 2017 Revolving Credit Facility noted above. Letters of credit issued under this facility are backed by credit enhancements in the form of secured guarantees issued by certain of our subsidiaries. As of December 31, 2019 and 2018, our outstanding letters of credit under this credit facility totaled $82 million and $97 million, respectively.
As of December 31, 2019, Level 3 Parent, LLC had outstanding letters of credit or other similar obligations of approximately $23 million, of which $18 million was collateralized by cash that is reflected on the consolidated balance sheets as restricted cash. As of December 31, 2018, Level 3 Parent, LLC had outstanding letters of credit or other similar obligations of approximately $30 million of which $24 million was collateralized by cash that is reflected on the consolidated balance sheets as restricted cash.
Senior Notes
CenturyLink, Inc., Level 3 Financing, Inc., Qwest Corporation, Qwest Capital Funding, Inc. and Embarq Corporation have each issued unsecured senior notes, and Level 3 Financing has issued secured senior notes, that were outstanding as of December 31, 2019. All of these notes carry fixed interest rates and all principal is due on the notes’ respective maturity dates, which rates and maturity dates are summarized in the table above. None of the senior notes issued by CenturyLink that were outstanding as of December 31, 2019 are guaranteed by any of its subsidiaries. The senior notes issued by Level 3 Financing, Inc. are guaranteed by its parent, Level 3 Parent, LLC and one or more of its affiliates. The senior notes issued by Qwest Capital Funding, Inc. are guaranteed by its parent, Qwest Communications International Inc. Except for a limited number of senior notes issued by Qwest Corporation, the issuer generally can redeem the notes, at its option, in whole or in part, (i) pursuant to a fixed schedule of pre-established redemption prices, (ii) pursuant to a “make whole” redemption price or (iii) under certain other specified limited conditions. Under certain circumstances in connection with a “change of control” of CenturyLink, Inc., it will be required to make an offer to repurchase each series of these senior notes (other than two of its older series of notes) at a price of 101% of the principal amount redeemed, plus accrued and unpaid interest. Also, under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC or Level 3 Financing, Inc., Level 3 Financing will be required to make an offer to repurchase each series of its outstanding senior notes at a price of 101% of the principal amount redeemed, plus accrued and unpaid interest.
New Issuances
On December 16, 2019, CenturyLink, Inc. issued $1.250 billion of 5.125% Senior Notes due 2026. The proceeds from the offering were primarily used to fully redeem on January 15, 2020 the $1.1 billion of senior notes of Qwest Corporation described under "Subsequent Events—Redemption."
On November 29, 2019, Level 3 Financing, Inc. issued $750 million of 3.400% Senior Secured Notes due 2027 and $750 million of 3.875% Senior Secured Notes due 2029. The proceeds from the offering together with cash on hand were primarily used to redeem a portion of the $4.611 billion Tranche B 2024 Term Loan that was repaid on November 29, 2019. On November 29, 2019, Level 3 Financing, Inc. entered into an amendment to its credit agreement to incur $3.111 billion in aggregate borrowings under the agreement through the Tranche B 2027 Term Loan discussed above.
On September 25, 2019, Level 3 Financing, Inc. issued $1.0 billion of 4.625% Senior Notes due 2027. The proceeds from the offering together with cash on hand were used to redeem, during the fourth quarter of 2019, all $240 million outstanding principal amount of Level 3 Financing, Inc.'s 6.125% Senior Notes due 2021, all $600 million outstanding principal amount of Level 3 Parent, LLC's 5.75% Senior Notes due 2022 and $160 million of Level 3 Financing, Inc.'s $1 billion outstanding principal amount of 5.375% Senior Notes due 2022.
Repayments
2019
Including the redemptions noted above under "New Issuances", during 2019, CenturyLink and its affiliates repurchased approximately $3.6 billion of their respective debt securities, which primarily included approximately $2.3 billion of Level 3 Financing, Inc. senior notes and term loan, $600 million of Level 3 Parent, LLC senior notes, $345 million of Qwest Capital Funding senior notes, $340 million of CenturyLink, Inc. senior notes, which resulted in an aggregate net gain of $72 million. Additionally, during the period CenturyLink paid $398 million of its maturing senior notes and $164 million of amortization payments under its term loans.
2018
During 2018, CenturyLink and its affiliates redeemed approximately $1.7 billion in debt securities, which primarily included approximately $1.3 billion of Qwest Corporation senior notes and $174 million of Qwest Capital Financing senior notes.
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized discounts and premiums, net and unamortized debt issuance costs) maturing during the following years as of December 31, 2019:
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
$
|
2,300
|
|
2021
|
2,478
|
|
2022
|
4,224
|
|
2023
|
2,096
|
|
2024
|
1,973
|
|
2025 and thereafter
|
21,968
|
|
Total long-term debt
|
$
|
35,039
|
|
Interest Expense
Interest expense includes interest on total long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Interest expense:
|
|
|
|
|
|
Gross interest expense
|
$
|
2,093
|
|
|
2,230
|
|
|
1,559
|
|
Capitalized interest
|
(72
|
)
|
|
(53
|
)
|
|
(78
|
)
|
Total interest expense
|
$
|
2,021
|
|
|
2,177
|
|
|
1,481
|
|
Covenants
CenturyLink, Inc.
With respect to the Term Loan A and A-1 facilities and the 2017 Revolving Credit Facility, the 2017 CenturyLink Credit Agreement requires us to maintain (i) a maximum total leverage ratio of not more than 4.75 to 1.00 and (ii) a minimum consolidated interest coverage ratio of at least 2.00 to 1.00, with such ratios being determined and calculated in the manner described in the 2017 CenturyLink Credit Agreement.
The 2017 Senior Secured Credit Facilities contain various representations and warranties and extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on our ability to declare or pay dividends, repurchase stock, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with its affiliates, dispose of assets and merge or consolidate with any other person.
The senior notes of CenturyLink, Inc. were issued under base indentures dated March 31, 1994 or December 16, 2019. These indentures restrict our ability to (i) incur, issue or create liens upon the property of CenturyLink, Inc. and (ii) consolidate with or merge into, or transfer or lease all or substantially all of our assets to any other party. The indentures do not contain any provisions that restrict the issuance of new securities in the event of a material adverse change to us. However, as indicated above under "Senior Notes", CenturyLink, Inc. will be required to offer to purchase certain of its long-term debt securities issued under this indenture under certain circumstances in connection with a "change of control" of CenturyLink, Inc.
Level 3 Companies
The term loan, senior secured notes and senior unsecured notes of Level 3 Financing, Inc. contain various representations and extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates, dispose of assets and merge or consolidate with any other person. Also, as indicated above under "Senior Notes", Level 3 Financing, Inc. will be required to offer to repurchase or repay certain of its long-term debt under certain circumstances in connection with a "change of control" of Level 3 Financing or Level 3 Parent, LLC.
Qwest Companies
Under its term loan, Qwest Corporation must maintain a debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in such term loan documentation) ratio of not more than 2.85:1.0, as of the last day of each fiscal quarter for the four quarters then ended. The term loan also contains a negative pledge covenant, which generally requires Qwest Corporation to secure equally and ratably any advances under the term loan if it pledges assets or permit liens on its property for the benefit of other debtholders.
The senior notes of Qwest Corporation were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures contain restrictions on the incurrence of liens and the consummation of certain transactions substantially similar to the above-described covenants in CenturyLink's 1994 and 2019 indentures (but contain no mandatory repurchase provisions). The senior notes of Qwest Capital Funding, Inc. were issued under an indenture dated June 29, 1998 containing terms substantially similar to those set forth in Qwest Corporation's indentures.
Embarq
Embarq's senior note was issued pursuant to an indenture dated as of May 17, 2006. While Embarq is generally prohibited from creating liens on its property unless its senior notes are secured equally and ratably, Embarq can create liens on its property without equally and ratably securing its senior notes so long as the sum of all indebtedness so secured does not exceed 15% of Embarq's consolidated net tangible assets. The indenture also contains restrictions on the consummation of certain transactions substantially similar to CenturyLink, Inc.’s above-described covenants (but without mandatory repurchase provision), as well as certain customary covenants to maintain properties and pay all taxes and lawful claims.
Impact of Covenants
The debt covenants applicable to CenturyLink, Inc. and its subsidiaries could materially adversely affect their ability to operate or expand their respective businesses, to pursue strategic transactions, or to otherwise pursue their plans and strategies. The covenants of the Level 3 companies may significantly restrict the ability of CenturyLink, Inc. to receive cash from the Level 3 companies, to distribute cash from the Level 3 companies to other of CenturyLink, Inc.’s affiliated entities, or to enter into other transactions among CenturyLink, Inc.’s wholly-owned entities.
Certain of the debt instruments of CenturyLink, Inc. and its subsidiaries contain cross payment default or cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.
The ability of CenturyLink, Inc. and its subsidiaries to comply with the financial covenants in their respective debt instruments could be adversely impacted by a wide variety of events, including unforeseen contingencies, many of which are beyond their control.
Compliance
At December 31, 2019, CenturyLink, Inc. believes it and its subsidiaries were in compliance with the provisions and financial covenants contained in their respective material debt agreements in all material respects.
Guarantees
CenturyLink, Inc. does not guarantee the debt of any unaffiliated parties, but, as noted above, as of December 31, 2019 certain of its largest subsidiaries guaranteed (i) its debt and letters of credit outstanding under its 2017 CenturyLink Credit Agreement and its $225 million revolving letter of credit facility and (ii) the outstanding term loans or senior notes issued by certain other subsidiaries. As further noted above, several of the subsidiaries guaranteeing these obligations have pledged substantially all of their assets to secure their respective guarantees.
Subsequent Events
Amended and Restated Credit Agreement
On January 31, 2020, CenturyLink, Inc. amended and restated its 2017 CenturyLink Credit Agreement (as so amended and restated, the “Amended Credit Agreement”). Coupled with CenturyLink’s prepayment on January 24, 2020 of $1.25 billion of indebtedness outstanding under its Term Loan B facility (using principally the net proceeds from its below-described sale the same day of $1.25 billion of its 4.000% Senior Secured Notes due 2027), the Amended Credit Agreement currently provides for approximately $8.699 billion in senior secured credit facilities, consisting of an approximately $1.166 billion Term Loan A credit facility, a $333 million Term Loan A-1 credit facility, a $5.0 billion Term Loan B credit facility and a $2.2 billion revolving credit facility (collectively, the “Amended Senior Secured Credit Facilities”).
The Amended Credit Agreement, among other things, (i) extended the maturity date of (a) the Term Loan A, Term Loan A-1 and Revolving Credit facilities from November 1, 2022 to January 31, 2025 and (b) the Term Loan B facility from January 31, 2025 to March 15, 2027, and (ii) lowered the interest rate applicable to loans made under each of the Amended Senior Secured Credit Facilities. As so amended, (i) loans under the Term Loan A, Term Loan A-1 and Revolving Credit facilities will bear interest at a rate equal to, at CenturyLink’s option, the Eurodollar rate or the alternative base rate (each as defined in the Amended Credit Agreement) plus an applicable margin between 1.50% to 2.25% per annum for Eurodollar loans and 0.50% to 1.25% per annum for alternative base rate loans, depending on CenturyLink’s then current total leverage ratio, and (ii) loans under the Term Loan B facility will bear interest at the rate equal to, at CenturyLink’s option, the Eurodollar rate plus 2.25% per annum or the alternative base rate plus 1.25% per annum. The subsidiary guarantor and collateral provisions and the financial covenants contained in the Amended Credit Agreement are unchanged from the 2017 CenturyLink Credit Agreement.
New Bond Issuance
On January 24, 2020, CenturyLink issued $1.25 billion aggregate principal amount of its 4.000% Senior Secured Notes due 2027 (the “2027 Notes”). CenturyLink used the net proceeds from this offering to repay a portion of the outstanding indebtedness under its Term Loan B facility. The 2027 Notes are unconditionally guaranteed by each of CenturyLink’s domestic subsidiaries that guarantees CenturyLink’s Amended Credit Agreement, subject to the receipt of certain regulatory approvals and various exceptions and limitations. While the 2027 Notes are not secured by any of the assets of CenturyLink, certain of the note guarantees are secured by a first priority security interest in substantially all of the assets of such guarantors (including the stock of certain of their respective subsidiaries), which assets also secure obligations under the Amended Credit Agreement on a pari passu basis.
Redemption
On January 15, 2020, Qwest Corporation fully redeemed all $850 million aggregate principal amount of its outstanding 6.875% senior notes due 2033 and all $250 million aggregate principal amount of its outstanding 7.125% senior notes due 2043.
(8) Accounts Receivable
The following table presents details of our accounts receivable balances:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Trade and purchased receivables
|
$
|
1,971
|
|
|
2,094
|
|
Earned and unbilled receivables
|
374
|
|
|
425
|
|
Other
|
20
|
|
|
21
|
|
Total accounts receivable
|
2,365
|
|
|
2,540
|
|
Less: allowance for doubtful accounts
|
(106
|
)
|
|
(142
|
)
|
Accounts receivable, less allowance
|
$
|
2,259
|
|
|
2,398
|
|
We are exposed to concentrations of credit risk from residential and business customers. We generally do not require collateral to secure our receivable balances. We have agreements with other communications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other communications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Additions
|
|
Deductions
|
|
Ending
Balance
|
|
(Dollars in millions)
|
2019
|
$
|
142
|
|
|
145
|
|
|
(181
|
)
|
|
106
|
|
2018
|
164
|
|
|
153
|
|
|
(175
|
)
|
|
142
|
|
2017
|
178
|
|
|
176
|
|
|
(190
|
)
|
|
164
|
|
(9) Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
|
|
|
|
|
|
|
|
|
|
|
Depreciable
Lives
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
|
(Dollars in millions)
|
Land
|
N/A
|
|
$
|
867
|
|
|
871
|
|
Fiber, conduit and other outside plant(1)
|
15-45 years
|
|
24,666
|
|
|
23,936
|
|
Central office and other network electronics(2)
|
3-10 years
|
|
19,608
|
|
|
18,736
|
|
Support assets(3)
|
3-30 years
|
|
7,984
|
|
|
8,020
|
|
Construction in progress(4)
|
N/A
|
|
2,300
|
|
|
1,704
|
|
Gross property, plant and equipment
|
|
|
55,425
|
|
|
53,267
|
|
Accumulated depreciation
|
|
|
(29,346
|
)
|
|
(26,859
|
)
|
Net property, plant and equipment
|
|
|
$
|
26,079
|
|
|
26,408
|
|
_______________________________________________________________________________
(1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.
(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics
providing service to customers.
(3)Support assets consist of buildings, cable landing stations, data centers, computers and other administrative and support equipment.
(4)Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been
placed in service as it is still under construction.
We recorded depreciation expense of $3.1 billion, $3.3 billion and $2.7 billion for the years ended December 31, 2019, 2018 and 2017, respectively.
Asset Retirement Obligations
At December 31, 2019, our asset retirement obligations balance was primarily related to estimated future costs of removing equipment from leased properties and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing buildings. Asset retirement obligations are included in other long-term liabilities on our consolidated balance sheets.
As of the Level 3 acquisition date, we recorded liabilities to reflect our fair values of Level 3's asset retirement obligations. Our fair value estimates were determined using the discounted cash flow method.
The following table provides asset retirement obligation activity:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Balance at beginning of year
|
$
|
190
|
|
|
115
|
|
|
95
|
|
Accretion expense
|
11
|
|
|
10
|
|
|
6
|
|
Liabilities assumed in acquisition of Level 3(1)
|
—
|
|
|
58
|
|
|
45
|
|
Liabilities settled
|
(14
|
)
|
|
(14
|
)
|
|
(3
|
)
|
Liabilities transferred to Cyxtera
|
—
|
|
|
—
|
|
|
(20
|
)
|
Change in estimate
|
10
|
|
|
21
|
|
|
(8
|
)
|
Balance at end of year
|
$
|
197
|
|
|
190
|
|
|
115
|
|
|
|
|
(1)
|
The liabilities assumed during 2018 relate to purchase price adjustments during the year.
|
The 2019, 2018 and 2017 change in estimates are offset against gross property, plant and equipment.
(10) Severance and Leased Real Estate
Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from increased competitive pressures, cost reduction initiatives, automation and other process improvements and reduced workload demands due to reduced demand for certain services.
We report severance liabilities within accrued expenses and other liabilities - salaries and benefits in our consolidated balance sheets and report severance expenses in selling, general and administrative expenses in our consolidated statements of operations. As described in Note 17—Segment Information, we do not allocate these severance expenses to our segments.
Under prior GAAP, we had previously recognized liabilities to reflect our estimates of the fair values of the existing lease obligations for real estate which we have ceased using, net of estimated sublease rentals. In accordance with transitional guidance under the new lease standard (ASC 842), the existing lease obligation of $110 million as of January 1, 2019 has been netted against the operating lease right of use assets at adoption. For additional information, see Note 6—Leases to our consolidated financial statements in Item 1 of Part I of this report.
Changes in our accrued liabilities for severance expenses were as follows:
|
|
|
|
|
|
Severance
|
|
(Dollars in millions)
|
Balance at December 31, 2017
|
$
|
33
|
|
Accrued to expense
|
205
|
|
Payments, net
|
(151
|
)
|
Balance at December 31, 2018
|
87
|
|
Accrued to expense
|
89
|
|
Payments, net
|
(87
|
)
|
Balance at December 31, 2019
|
$
|
89
|
|
(11) Employee Benefits
Pension, Post-Retirement and Other Post-Employment Benefits
We sponsor various defined benefit pension plans (qualified and non-qualified) which, in the aggregate, cover a substantial portion of our employees including legacy CenturyLink, legacy Qwest Communications International Inc. ("Qwest") and legacy Embarq employees. Pension benefits for participants of the CenturyLink Combined Pension Plan ("Combined Pension Plan") who are represented by a collective bargaining agreement are based on negotiated schedules. All other participants' pension benefits are based on each individual participant's years of service and compensation. We also maintain non-qualified pension plans for certain current and former highly compensated employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for certain eligible former employees. We use a December 31 measurement date for all our plans.
Pension Benefits
In connection with the acquisition of Level 3 Communications, Inc. on November 1, 2017, we assumed defined benefit pension plans sponsored by various Level 3 companies for their employees. Based on a valuation analysis, we recognized a $20 million liability on November 1, 2017 for the unfunded status of the Level 3 pension plans. The net unfunded status recognized on our balance sheets at December 31, 2019 and 2018 was $18 million and $11 million, respectively, representing liabilities of $140 million and $144 million, and assets of $122 million and $133 million, respectively. Due to the insignificant impact of these pension plans on our consolidated financial statements, we have predominantly excluded them from the remaining employee benefit disclosures in this Note.
United States funding laws require a company with a pension shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Our funding policy for our Combined Pension Plan is to make contributions with the objective of accumulating ample assets to pay all qualified pension benefits when due under the terms of the plan. The accounting unfunded status of the Combined Pension Plan was $1.7 billion and $1.6 billion as of December 31, 2019 and 2018, respectively.
We made no voluntary cash contributions to the Combined Pension Plan in 2019 and $500 million in 2018 and paid $5 million of benefits directly to participants of our non-qualified pension plans in both 2019 and 2018. Based on current laws and circumstances, we do not believe we are required to make any contributions to the Combined Pension Plan in 2020, nor do we currently expect to make a voluntary contribution to the trust for the Combined Pension Plan in 2020. We estimate that in 2020 we will pay $5 million of benefits directly to participants of our non-qualified pension plans.
As previously mentioned, we sponsor unfunded non-qualified pension plans for certain current and former highly-compensated employees. The net unfunded status of our non-qualified pension plans was $51 million and $52 million for the years ended December 31, 2019 and 2018, respectively. Due to the insignificant impact of these pension plans on our consolidated financial statements, we have predominantly excluded them from the remaining employee benefit disclosures in this Note.
Post-Retirement Benefits
In connection with our acquisition of Level 3 Communications, Inc. on November 1, 2017, we assumed post-retirement benefit plans sponsored by Level 3 Communications, L.L.C. and Continental Level 3, Inc. for certain of its current and former employees. Based on a valuation analysis, we recognized less than $1 million in liability for the unfunded status of Level 3’s post-retirement benefit plans. Though largely unfunded, these post-retirement plans, in the aggregate, are immaterial to our consolidated financial statements. Due to the insignificant amount of these post-retirement plans, we have predominantly excluded them from the remaining employee benefit disclosures in this Note.
Our post-retirement benefit plans provide post-retirement benefits to qualified retirees and allow (i) eligible employees retiring before certain dates to receive benefits at no or reduced cost and (ii) eligible employees retiring after certain dates to receive benefits on a shared cost basis. The post-retirement benefits not paid by the trusts are funded by us and we expect to continue funding these post-retirement obligations as benefits are paid. The accounting unfunded status of our qualified post-retirement benefit plan was $3.0 billion as of December 31, 2019 and 2018.
Assets in the post-retirement trusts were substantially depleted as of December 31, 2016; as of December 31, 2019 the Company ceased to pay certain post-retirement benefits through the trusts. No contributions were made to the post-retirement trusts in 2019 nor 2018. Starting in 2020, benefits will be paid directly by us with available cash. In 2019, we paid $245 million of post-retirement benefits, net of participant contributions and direct subsidies. In 2020, we currently expect to pay directly $236 million of post-retirement benefits, net of participant contributions and direct subsidies. The decrease in anticipated post-retirement benefit payments is the result of a 3% decrease in plan participants receiving benefits as of December 31, 2019.
We expect our health care cost trend rate to range from 5.0% to 6.5% in 2020 and grading to 4.50% by 2025. Our post-retirement benefit cost, for certain eligible legacy Qwest retirees and certain eligible legacy CenturyLink retirees, is capped at a set dollar amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.
Expected Cash Flows
The Combined Pension Plan payments, post-retirement health care benefit payments and premiums, and life insurance premium payments are either distributed from plan assets or paid by us. The estimated benefit payments provided below are based on actuarial assumptions using the demographics of the employee and retiree populations and have been reduced by estimated participant contributions.
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
|
|
Post-Retirement
Benefit Plans
|
|
Medicare Part D
Subsidy Receipts
|
|
(Dollars in millions)
|
Estimated future benefit payments:
|
|
|
|
|
|
2020
|
$
|
971
|
|
|
242
|
|
|
(6
|
)
|
2021
|
921
|
|
|
238
|
|
|
(6
|
)
|
2022
|
893
|
|
|
232
|
|
|
(6
|
)
|
2023
|
868
|
|
|
226
|
|
|
(5
|
)
|
2024
|
842
|
|
|
219
|
|
|
(5
|
)
|
2025 - 2029
|
3,813
|
|
|
986
|
|
|
(20
|
)
|
Net Periodic Benefit Expense
We utilize a full yield curve approach in connection with estimating the service and interest components of net periodic benefit expense by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flow.
The actuarial assumptions used to compute the net periodic benefit expense for our Combined Pension Plan and post-retirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
|
|
Post-Retirement Benefit Plans
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Actuarial assumptions at beginning of year:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.94% - 4.44%
|
|
|
3.14% - 3.69%
|
|
|
3.25% - 4.14%
|
|
|
3.84%- 4.38%
|
|
|
4.26
|
%
|
|
3.90
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
3.25
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets (1)
|
6.50
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
5.00
|
%
|
Initial health care cost trend rate
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
6.50% / 5.00%
|
|
|
7.00% / 5.00%
|
|
|
7.00% / 5.00%
|
|
Ultimate health care cost trend rate
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
Year ultimate trend rate is reached
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
2025
|
|
|
2025
|
|
|
2025
|
|
_______________________________________________________________________________
N/A - Not applicable
(1) Rates are presented net of projected fees and administrative costs.
Net periodic benefit (income) expense for our combined pension plan includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Service cost
|
$
|
56
|
|
|
66
|
|
|
63
|
|
Interest cost
|
436
|
|
|
392
|
|
|
409
|
|
Expected return on plan assets
|
(618
|
)
|
|
(685
|
)
|
|
(666
|
)
|
Special termination benefits charge
|
6
|
|
|
15
|
|
|
—
|
|
Recognition of prior service credit
|
(8
|
)
|
|
(8
|
)
|
|
(8
|
)
|
Recognition of actuarial loss
|
223
|
|
|
178
|
|
|
204
|
|
Net periodic pension benefit (income) expense
|
$
|
95
|
|
|
(42
|
)
|
|
2
|
|
Net periodic benefit expense for our post-retirement benefit plans includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement Plans
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Service cost
|
$
|
15
|
|
|
18
|
|
|
18
|
|
Interest cost
|
110
|
|
|
97
|
|
|
100
|
|
Expected return on plan assets
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Recognition of prior service cost
|
16
|
|
|
20
|
|
|
20
|
|
Net periodic post-retirement benefit expense
|
$
|
140
|
|
|
134
|
|
|
136
|
|
We report service costs for our Combined Pension Plan and post-retirement benefit plans in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017. Additionally, a portion of the service cost is also allocated to certain assets under construction, which are capitalized and reflected as part of property, plant and equipment in our consolidated balance sheets. The remaining components of net periodic benefit expense (income) are reported in other income, net in our consolidated statements of operations. As a result of ongoing efforts to reduce our workforce, we recognized a one-time charge in 2019 of $6 million and in 2018 of $15 million for special termination benefit enhancements paid to certain eligible employees upon voluntary retirement.
Benefit Obligations
The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2019 and 2018 and are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
|
|
Post-Retirement Benefit Plans
|
|
December 31,
|
|
December 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Actuarial assumptions at end of year:
|
|
|
|
|
|
|
|
Discount rate
|
3.25
|
%
|
|
4.29
|
%
|
|
3.22
|
%
|
|
4.26
|
%
|
Rate of compensation increase
|
3.25
|
%
|
|
3.25
|
%
|
|
N/A
|
|
|
N/A
|
|
Initial health care cost trend rate
|
N/A
|
|
|
N/A
|
|
|
6.50% / 5.00%
|
|
|
7.00% / 5.00%
|
|
Ultimate health care cost trend rate
|
N/A
|
|
|
N/A
|
|
|
4.50
|
%
|
|
4.50
|
%
|
Year ultimate trend rate is reached
|
N/A
|
|
|
N/A
|
|
|
2025
|
|
|
2025
|
|
_______________________________________________________________________________
N/A - Not applicable
In 2019, 2018 and 2017, we adopted the revised mortality tables and projection scales released by the Society of Actuaries, which decreased the projected benefit obligation of our benefit plans by $4 million, $38 million and $113 million, respectively. The change in the projected benefit obligation of our benefit plans was recognized as part of the net actuarial (gain) loss and is included in accumulated other comprehensive loss, a portion of which is subject to amortization over the remaining estimated life of plan participants, which was approximately 16 years as of December 31, 2019.
The following tables summarize the change in the benefit obligations for the Combined Pension Plan and post-retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Change in benefit obligation
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
11,594
|
|
|
13,064
|
|
|
13,244
|
|
Service cost
|
56
|
|
|
66
|
|
|
63
|
|
Interest cost
|
436
|
|
|
392
|
|
|
409
|
|
Plan amendments
|
(9
|
)
|
|
—
|
|
|
—
|
|
Special termination benefits charge
|
6
|
|
|
15
|
|
|
—
|
|
Actuarial (gain) loss
|
1,249
|
|
|
(765
|
)
|
|
586
|
|
Benefits paid from plan assets
|
(1,115
|
)
|
|
(1,178
|
)
|
|
(1,238
|
)
|
Benefit obligation at end of year
|
$
|
12,217
|
|
|
11,594
|
|
|
13,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement Benefit Plans
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Change in benefit obligation
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
2,977
|
|
|
3,375
|
|
|
3,413
|
|
Service cost
|
15
|
|
|
18
|
|
|
18
|
|
Interest cost
|
110
|
|
|
97
|
|
|
100
|
|
Participant contributions
|
52
|
|
|
54
|
|
|
54
|
|
Direct subsidy receipts
|
7
|
|
|
8
|
|
|
7
|
|
Plan Amendment
|
—
|
|
|
(36
|
)
|
|
—
|
|
Actuarial (gain) loss
|
180
|
|
|
(224
|
)
|
|
112
|
|
Benefits paid by company
|
(300
|
)
|
|
(311
|
)
|
|
(298
|
)
|
Benefits paid from plan assets
|
(4
|
)
|
|
(4
|
)
|
|
(31
|
)
|
Benefit obligation at end of year
|
$
|
3,037
|
|
|
2,977
|
|
|
3,375
|
|
Our aggregate benefit obligation as of December 31, 2019, 2018 and 2017 was $15.3 billion, $14.8 billion and $16.5 billion, respectively.
Plan Assets
We maintain plan assets for our Combined Pension Plan and certain post-retirement benefit plans. The following tables summarize the change in the fair value of plan assets for the Combined Pension Plan and post-retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Change in plan assets
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
10,033
|
|
|
11,060
|
|
|
10,892
|
|
Return on plan assets
|
1,575
|
|
|
(349
|
)
|
|
1,306
|
|
Employer contributions
|
—
|
|
|
500
|
|
|
100
|
|
Benefits paid from plan assets
|
(1,115
|
)
|
|
(1,178
|
)
|
|
(1,238
|
)
|
Fair value of plan assets at end of year
|
$
|
10,493
|
|
|
10,033
|
|
|
11,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-Retirement Benefit Plans
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Change in plan assets
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
18
|
|
|
23
|
|
|
53
|
|
Return on plan assets
|
(1
|
)
|
|
(1
|
)
|
|
1
|
|
Benefits paid from plan assets
|
(4
|
)
|
|
(4
|
)
|
|
(31
|
)
|
Fair value of plan assets at end of year
|
$
|
13
|
|
|
18
|
|
|
23
|
|
The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans' assets, net of administrative expenses paid from plan assets. It is determined annually based on the strategic asset allocation and the long-term risk and return forecast for each asset class.
Combined Pension Plan: Our investment objective for the qualified pension plan assets is to achieve an attractive risk-adjusted return over time that will provide for the payment of benefits and minimize the risk of large losses. We employ a liability-aware investment strategy designed to reduce the volatility of pension assets relative to pension liabilities. This strategy is evaluated frequently and is expected to evolve over time with changes in the funded status and other factors. Approximately 50% of plan assets is targeted to long-duration investment grade bonds and interest rate sensitive derivatives and 50% is targeted to diversified equity, fixed income and private market investments that are expected to outperform the liability with moderate funded status risk. At the beginning of 2020, our expected annual long-term rate of return on pension assets before consideration of administrative expenses is assumed to be 6.5%. Administrative expenses, including projected PBGC (Pension Benefit Guaranty Corporation) premiums reduce the annual long-term expected return net of administrative expenses to 6.0%.
The short term and long-term interest crediting rates during 2019 for cash balance components of the Combined Pension Plan were 2.25% and 4.00%, respectively.
Post-Retirement Benefit Plans: At the beginning of 2020, our expected annual long-term rate of return on post-retirement benefit plan assets is assumed to be 4.0%.
Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act of 1974, as amended.
Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For additional information on the fair value hierarchy, see Note 14—Fair Value of Financial Instruments.
At December 31, 2019, we used the following valuation techniques to measure fair value for assets. There were no changes to these methodologies during 2019:
|
|
•
|
Level 1—Assets were valued using the closing price reported in the active market in which the individual security was traded.
|
|
|
•
|
Level 2—Assets were valued using quoted prices in markets that are not active, broker dealer quotations, and other methods by which all significant inputs were observable at the measurement date.
|
|
|
•
|
Level 3—Assets were valued using unobservable inputs in which little or no market data exists as reported by the respective institutions at the measurement date.
|
The plans' assets are invested in various asset categories utilizing multiple strategies and investment managers. Interests in commingled funds are fair valued using a practical expedient to the net asset value ("NAV") per unit (or its equivalent) of each fund. The NAV reported by the fund manager is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. Commingled funds can be redeemed at NAV, with a frequency that includes, daily, monthly, quarterly, semi-annually and annually. These commingled funds include redemption notice periods between same day and 270 days. Investments in private funds, primarily limited partnerships, represent long-term commitments with a fixed maturity date and are also valued at NAV. The plan has unfunded commitments related to certain private fund investments, which in aggregate are not material to the plan. Valuation inputs for these private fund interests are generally based on assumptions and other information not observable in the market. The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers and partnerships are monitored and evaluated for reasonableness. Underlying investments held in funds are aggregated and are classified based on the fund mandate. Investments held in separate accounts are individually classified.
The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2019. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivables, pending trades and accrued expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Combined Pension Plan Assets at December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(Dollars in millions)
|
Assets
|
|
|
|
|
|
|
|
Investment grade bonds (a)
|
$
|
828
|
|
|
3,197
|
|
|
—
|
|
|
$
|
4,025
|
|
High yield bonds (b)
|
—
|
|
|
232
|
|
|
5
|
|
|
237
|
|
Emerging market bonds (c)
|
203
|
|
|
84
|
|
|
—
|
|
|
287
|
|
U.S. stocks (d)
|
756
|
|
|
3
|
|
|
1
|
|
|
760
|
|
Non-U.S. stocks (e)
|
592
|
|
|
—
|
|
|
—
|
|
|
592
|
|
Private debt (h)
|
—
|
|
|
—
|
|
|
16
|
|
|
16
|
|
Multi-asset strategies (l)
|
257
|
|
|
—
|
|
|
—
|
|
|
257
|
|
Repurchase agreements (n)
|
—
|
|
|
39
|
|
|
—
|
|
|
39
|
|
Cash equivalents and short-term investments (o)
|
—
|
|
|
433
|
|
|
—
|
|
|
433
|
|
Total investments, excluding investments valued at NAV
|
$
|
2,636
|
|
|
3,988
|
|
|
22
|
|
|
6,646
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives (m)
|
$
|
1
|
|
|
(18
|
)
|
|
—
|
|
|
(17
|
)
|
Investments valued at NAV
|
|
|
|
|
|
|
3,864
|
|
Total pension plan assets
|
|
|
|
|
|
|
$
|
10,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Post-Retirement Plan Assets at December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(Dollars in millions)
|
Total investments, excluding investments valued at NAV
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investments valued at NAV
|
|
|
|
|
|
|
13
|
|
Total post-retirement plan assets
|
|
|
|
|
|
|
$
|
13
|
|
The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2018. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivable, pending trades and accrued expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Combined Pension Plan Assets at December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(Dollars in millions)
|
Investment grade bonds (a)
|
$
|
458
|
|
|
1,393
|
|
|
—
|
|
|
$
|
1,851
|
|
High yield bonds (b)
|
—
|
|
|
277
|
|
|
7
|
|
|
284
|
|
Emerging market bonds (c)
|
151
|
|
|
181
|
|
|
—
|
|
|
332
|
|
U.S. stocks (d)
|
764
|
|
|
2
|
|
|
2
|
|
|
768
|
|
Non-U.S. stocks (e)
|
601
|
|
|
—
|
|
|
—
|
|
|
601
|
|
Private debt (h)
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
Multi-asset strategies (l)
|
342
|
|
|
—
|
|
|
—
|
|
|
342
|
|
Derivatives (m)
|
7
|
|
|
(2
|
)
|
|
—
|
|
|
5
|
|
Cash equivalents and short-term investments (o)
|
3
|
|
|
907
|
|
|
—
|
|
|
910
|
|
Total investments, excluding investments valued at NAV
|
$
|
2,326
|
|
|
2,758
|
|
|
24
|
|
|
5,108
|
|
Investments valued at NAV
|
|
|
|
|
|
|
4,925
|
|
Total pension plan assets
|
|
|
|
|
|
|
|
|
|
$
|
10,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Post-Retirement Plan Assets
at December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(Dollars in millions)
|
Total investments, excluding investments valued at NAV
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investments valued at NAV
|
|
|
|
|
|
|
18
|
|
Total post-retirement plan assets
|
|
|
|
|
|
|
$
|
18
|
|
The table below presents the fair value of plan assets valued at NAV by category for our pension and post-retirement plans at December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets Valued at NAV
|
|
Combined Pension Plan at
December 31,
|
|
Post-Retirement Benefit Plans at
December 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Investment grade bonds (a)
|
$
|
211
|
|
|
109
|
|
|
—
|
|
|
—
|
|
High yield bonds (b)
|
39
|
|
|
388
|
|
|
—
|
|
|
—
|
|
U.S. stocks (d)
|
169
|
|
|
150
|
|
|
—
|
|
|
—
|
|
Non-U.S. stocks (e)
|
467
|
|
|
500
|
|
|
—
|
|
|
—
|
|
Emerging market stocks (f)
|
92
|
|
|
75
|
|
|
—
|
|
|
—
|
|
Private equity (g)
|
322
|
|
|
347
|
|
|
4
|
|
|
6
|
|
Private debt (h)
|
483
|
|
|
452
|
|
|
—
|
|
|
1
|
|
Market neutral hedge funds (i)
|
433
|
|
|
746
|
|
|
—
|
|
|
—
|
|
Directional hedge funds (j)
|
443
|
|
|
512
|
|
|
—
|
|
|
—
|
|
Real estate (k)
|
635
|
|
|
821
|
|
|
—
|
|
|
—
|
|
Multi-asset strategies (l)
|
449
|
|
|
763
|
|
|
—
|
|
|
—
|
|
Cash equivalents and short-term investments (o)
|
121
|
|
|
62
|
|
|
9
|
|
|
11
|
|
Total investments valued at NAV
|
$
|
3,864
|
|
|
4,925
|
|
|
13
|
|
|
18
|
|
Below is an overview of the asset categories, the underlying strategies and valuation inputs used to value the assets in the preceding tables:
(a) Investment grade bonds represent investments in fixed income securities as well as commingled bond funds comprised of U.S. Treasury securities, agencies, corporate bonds, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. Treasury securities are valued at the bid price reported in the active market in which the security is traded and are classified as Level 1. The valuation inputs of other investment grade bonds primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. The primary observable inputs include references to the new issue market for similar securities, the secondary trading markets and dealer quotes. Option adjusted spread models are utilized to evaluate securities such as asset backed securities that have early redemption features. These securities are classified as Level 2. NAV funds' underlying investments in this category are valued using the same inputs.
(b) High yield bonds represent investments in below investment grade fixed income securities as well as commingled high yield bond funds. The valuation inputs for the securities primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. These securities are primarily classified as Level 2. Securities whose valuation inputs are not based on observable market information are classified as Level 3. NAV funds' underlying investments in this category are valued using the same inputs.
(c) Emerging market bonds represent investments in securities issued by governments and other entities located in developing countries as well as registered mutual funds and commingled emerging market bond funds. The valuation inputs for the securities utilize observable market information and are primarily based on dealer quotes or a spread relative to the local government bonds. The registered mutual fund is classified as Level 1 while individual securities are primarily classified as Level 2.
(d) U.S. stocks represent investments in stocks of U.S. based companies as well as commingled U.S. stock funds. The valuation inputs for U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are primarily classified as Level 1. Securities that are not actively traded but can be directly or indirectly observable are classified as Level 2. Securities whose valuation inputs are not based on observable market information are classified as Level 3. NAV funds' underlying investments in this category are valued using the same inputs.
(e) Non-U.S. stocks represent investments in stocks of companies based in developed countries outside the U.S. as well as commingled funds. The valuation inputs for non-U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are primarily classified as Level 1. NAV funds' underlying investments in this category are valued using the same inputs.
(f) Emerging market stocks represent investments in commingled funds comprised of stocks of companies located in developing markets. NAV funds' underlying investments in this category are valued using the same inputs.
(g) Private equity represents non-public investments in domestic and foreign buy out and venture capital funds. Private equity funds are primarily structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The partnerships are valued at NAV using valuation methodologies that consider a range of factors, including but not limited to the price at which investments were acquired, the nature of the investments, market conditions, trading values on comparable public securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investments. These valuation methodologies involve a significant degree of judgment.
(h) Private debt represents non-public investments in distressed or mezzanine debt funds and pension group insurance contracts. Pension group insurance contracts are valued based on actuarial assumptions and are classified as Level 3. Mezzanine debt instruments are debt instruments that are subordinated to other debt issues and may include embedded equity instruments such as warrants. Private debt funds are primarily structured as limited partnerships and are valued at NAV according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The valuation of underlying fund investments is based on factors including the issuer's current and projected credit worthiness, the security's terms, reference to the securities of comparable companies, and other market factors. These valuation methodologies involve a significant degree of judgment.
(i) Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low correlations to market fluctuations. These investments are typically combined with futures to achieve uncorrelated excess returns over various markets. Hedge funds are valued at NAV based on the market value of the underlying investments which include publicly traded equity and fixed income securities and privately negotiated debt securities.
(j) Directional hedge funds—This asset category represents investments that may exhibit somewhat higher correlations to market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in diversified funds of funds. Hedge funds are valued at NAV based on the market value of the underlying investments which include publicly traded equity and fixed income securities and privately negotiated debt securities.
(k) Real estate represents investments in commingled funds and limited partnerships that invest in a diversified portfolio of real estate properties. These investments are valued at NAV according to the valuation policy of each fund or partnership, subject to prevailing accounting and other regulatory guidelines. The valuation inputs of the underlying properties are generally based on third-party appraisals that use comparable sales or a projection of future cash flows to determine fair value.
(l) Multi-asset strategies represent broadly diversified strategies that have the flexibility to tactically adjust exposures to different asset classes through time. This asset category includes investments in a registered mutual fund which is classified as Level 1 and may include commingled funds which are valued at NAV based on the market value of the underlying investments.
(m) Derivatives include exchange traded futures contracts which are classified as Level 1, as well as privately negotiated over the counter swaps and options that are valued based on the change in interest rates or a specific market index and are classified as Level 2. The market values represent gains or losses that occur due to fluctuations in interest rates, foreign currency exchange rates, security prices, or other factors.
(n) Repurchase Agreements includes contracts where the security owner sells a security with the agreement to buy it back at a future date and price. Agreements are valued based on expected settlement terms and are classified as Level 2.
(o) Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are used to provide liquidity for the payment of benefits or other purposes. The valuation inputs of securities are based on a spread to U.S. Treasury Bills, the Federal Funds Rate, or London Interbank Offered Rate and consider yields available on comparable securities of issuers with similar credit ratings and are primarily classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described above.
Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The gross notional exposure of the derivative instruments directly held by the pension benefit plan is shown below. The notional amount of the derivatives corresponds to market exposure but does not represent an actual cash investment. Our post-retirement plans were not invested in derivative instruments for the years ended December 31, 2019 or 2018.
|
|
|
|
|
|
|
|
|
Gross Notional Exposure
|
|
Combined Pension Plan
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Derivative instruments:
|
|
|
|
Exchange-traded U.S. equity futures
|
$
|
184
|
|
|
300
|
|
Exchange-traded Treasury and other interest rate futures
|
1,253
|
|
|
3,901
|
|
Exchange-traded EURO futures
|
10
|
|
|
—
|
|
Interest rate swaps
|
44
|
|
|
83
|
|
Credit default swaps
|
205
|
|
|
66
|
|
Index swaps
|
2,058
|
|
|
—
|
|
Foreign exchange forwards
|
508
|
|
|
295
|
|
Options
|
146
|
|
|
192
|
|
Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign currency and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies with differing expected returns, volatilities and correlations. Risk is also broadly diversified across numerous market sectors and individual companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed, limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan assets could change materially depending upon the overall market volatility, which could affect the funded status of the plans.
The table below presents a rollforward of the pension plan assets valued using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan Assets Valued Using Level 3 Inputs
|
|
High
Yield
Bonds
|
|
Emerging Market Bonds
|
|
U.S. Stocks
|
|
Private Debt
|
|
Cash
|
|
Total
|
|
(Dollars in millions)
|
Balance at December 31, 2017
|
$
|
7
|
|
|
1
|
|
|
3
|
|
|
15
|
|
|
1
|
|
|
27
|
|
Acquisitions (dispositions)
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(1
|
)
|
|
(3
|
)
|
Actual return on plan assets
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31, 2018
|
7
|
|
|
—
|
|
|
2
|
|
|
15
|
|
|
—
|
|
|
24
|
|
Acquisitions (dispositions)
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
Actual return on plan assets
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Balance at December 31, 2019
|
$
|
5
|
|
|
—
|
|
|
1
|
|
|
16
|
|
|
—
|
|
|
22
|
|
Certain gains and losses are allocated between assets sold during the year and assets still held at year-end based on transactions and changes in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.
For the year ended December 31, 2019, the investment program produced actual gains on qualified pension and post-retirement plan assets of $1.6 billion as compared to expected returns of $619 million for a difference of $1.0 billion. For the year ended December 31, 2018, the investment program produced actual loses on qualified pension and post-retirement plan assets of $350 million as compared to the expected returns of $686 million for a difference of $1.0 billion. The short-term annual returns on plan assets will almost always be different from the expected long-term returns and the plans could experience net gains or losses, due primarily to the volatility occurring in the financial markets during any given year.
Unfunded Status
The following table presents the unfunded status of the Combined Pension Plan and post-retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Pension Plan
|
|
Post-Retirement
Benefit Plans
|
|
Years Ended December 31,
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Benefit obligation
|
$
|
(12,217
|
)
|
|
(11,594
|
)
|
|
(3,037
|
)
|
|
(2,977
|
)
|
Fair value of plan assets
|
10,493
|
|
|
10,033
|
|
|
13
|
|
|
18
|
|
Unfunded status
|
(1,724
|
)
|
|
(1,561
|
)
|
|
(3,024
|
)
|
|
(2,959
|
)
|
Current portion of unfunded status
|
—
|
|
|
—
|
|
|
(224
|
)
|
|
(252
|
)
|
Non-current portion of unfunded status
|
$
|
(1,724
|
)
|
|
(1,561
|
)
|
|
(2,800
|
)
|
|
(2,707
|
)
|
The current portion of our post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other current liabilities-salaries and benefits.
Accumulated Other Comprehensive Loss-Recognition and Deferrals
The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2018, items recognized as a component of net periodic benefits expense in 2019, additional items deferred during 2019 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2019. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
2018
|
|
Recognition
of Net
Periodic
Benefits
Expense
|
|
Deferrals
|
|
Net
Change in
AOCL
|
|
2019
|
|
(Dollars in millions)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Pension plans:
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
$
|
(2,973
|
)
|
|
224
|
|
|
(297
|
)
|
|
(73
|
)
|
|
(3,046
|
)
|
Prior service benefit (cost)
|
46
|
|
|
(8
|
)
|
|
9
|
|
|
1
|
|
|
47
|
|
Deferred income tax benefit (expense)
|
754
|
|
|
(53
|
)
|
|
69
|
|
|
16
|
|
|
770
|
|
Total pension plans
|
(2,173
|
)
|
|
163
|
|
|
(219
|
)
|
|
(56
|
)
|
|
(2,229
|
)
|
Post-retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
7
|
|
|
—
|
|
|
(182
|
)
|
|
(182
|
)
|
|
(175
|
)
|
Prior service (cost) benefit
|
(87
|
)
|
|
16
|
|
|
—
|
|
|
16
|
|
|
(71
|
)
|
Deferred income tax benefit (expense)
|
22
|
|
|
(4
|
)
|
|
44
|
|
|
40
|
|
|
62
|
|
Total post-retirement benefit plans
|
(58
|
)
|
|
12
|
|
|
(138
|
)
|
|
(126
|
)
|
|
(184
|
)
|
Total accumulated other comprehensive loss
|
$
|
(2,231
|
)
|
|
175
|
|
|
(357
|
)
|
|
(182
|
)
|
|
(2,413
|
)
|
The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2017, items recognized as a component of net periodic benefits expense in 2018, additional items deferred during 2018 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2017. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
2017
|
|
Recognition
of Net
Periodic
Benefits
Expense
|
|
Deferrals
|
|
Net
Change in
AOCL
|
|
2018
|
|
(Dollars in millions)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Pension plans:
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
$
|
(2,892
|
)
|
|
179
|
|
|
(260
|
)
|
|
(81
|
)
|
|
(2,973
|
)
|
Prior service benefit (cost)
|
54
|
|
|
(8
|
)
|
|
—
|
|
|
(8
|
)
|
|
46
|
|
Deferred income tax benefit (expense)(1)
|
1,107
|
|
|
(418
|
)
|
|
65
|
|
|
(353
|
)
|
|
754
|
|
Total pension plans
|
(1,731
|
)
|
|
(247
|
)
|
|
(195
|
)
|
|
(442
|
)
|
|
(2,173
|
)
|
Post-retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
(250
|
)
|
|
—
|
|
|
257
|
|
|
257
|
|
|
7
|
|
Prior service (cost) benefit
|
(107
|
)
|
|
20
|
|
|
—
|
|
|
20
|
|
|
(87
|
)
|
Deferred income tax benefit (expense)(2)
|
122
|
|
|
(37
|
)
|
|
(63
|
)
|
|
(100
|
)
|
|
22
|
|
Total post-retirement benefit plans
|
(235
|
)
|
|
(17
|
)
|
|
194
|
|
|
177
|
|
|
(58
|
)
|
Total accumulated other comprehensive loss
|
$
|
(1,966
|
)
|
|
(264
|
)
|
|
(1
|
)
|
|
(265
|
)
|
|
(2,231
|
)
|
_______________________________________________________________________________
(1) Amounts currently recognized in net periodic benefits expense include $375 million of benefit arising from the adoption of ASU 2018-02. See Note 1— Background and Summary of Significant Accounting Policies for further detail.
(2) Amounts currently recognized in net periodic benefits expense include $32 million arising from the adoption of ASU 2018-02. See Note 1— Background and Summary of Significant Accounting Policies for further detail.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit expense.
Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expense for current employees was $381 million, $434 million and $341 million for the years ended December 31, 2019, 2018 and 2017, respectively. Union-represented employee benefits are based on negotiated collective bargaining agreements. Employees contributed $148 million, $142 million, $128 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our group basic life insurance plans are fully insured and the premiums are paid by us.
401(k) Plans
We sponsor qualified defined contribution plans covering substantially all of our employees. Under these plans, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plans and by the Internal Revenue Service ("IRS"). Currently, we match a percentage of employee contributions in cash. At December 31, 2019 and 2018, the assets of the plans included approximately 11 million shares and 12 million shares, respectively, of our common stock all of which were the result of the combination of previous employer match and participant directed contributions. We recognized expenses related to these plans of $113 million, $93 million and $77 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Upon the November 1, 2017 closing of our acquisition of Level 3, we assumed various defined contribution plans covering substantially all eligible employees of Level 3. On December 31, 2017, we merged the Level 3 Communications, Inc. 401(k) Plan into the CenturyLink Dollar & Sense 401(k) Plan. The resulting plan covers substantially all eligible non-represented employees of the combined company in the US.
Deferred Compensation Plans
We sponsored non-qualified deferred compensation plans for various groups that included certain of our current and former highly compensated employees. The value of liabilities related to these plans was not significant.
(12) Share-based Compensation
We maintain an equity incentive program that allows our Board of Directors (through its Compensation Committee or our Chief Executive Officer as its delegate) to grant incentives to certain employees and outside directors in one or more forms, including: incentive and non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and market and performance shares. Stock options generally expire ten years from the date of grant.
Acquisition of Level 3
As discussed in Note 2—Acquisition of Level 3, upon the November 1, 2017 acquisition of Level 3, and pursuant to the terms of the merger agreement, we assumed certain of Level 3's share-based compensation awards, which were converted to settle in shares of CenturyLink common stock. Specifically:
|
|
•
|
each outstanding Level 3 restricted stock unit award granted prior to April 1, 2014 or granted to an outside director of Level 3 was converted into $26.50 in cash and 1.4286 shares of our common stock (and cash in lieu of fractional shares) with respect to each Level 3 share covered by such award (the "Converted RSU Awards"); and
|
|
|
•
|
each outstanding Level 3 restricted stock unit award granted on or after April 1, 2014 (other than these granted to outside directors of Level 3) was converted into a CenturyLink restricted stock unit award using a conversion ratio of 2.8386 to 1 as determined in accordance with a formula set forth in the merger agreement (the "Continuing RSU Awards").
|
The aggregate fair value of the replaced Level 3 awards was $239 million, of which $103 million was attributable to service performed prior to the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares was determined based on the $18.99 closing price of our common stock on November 1, 2017. The remaining $136 million of the preliminary aggregate fair value of the replaced Level 3 awards was attributable to post-acquisition period and was recognized as compensation expense, net of estimated forfeitures, over the remaining 1 to 2 year vesting period.
Stock Options
The following table summarizes activity involving stock option awards for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
(in thousands)
|
|
|
Outstanding and Exercisable at December 31, 2018
|
543
|
|
|
$
|
27.46
|
|
Exercised
|
(6
|
)
|
|
11.38
|
|
Forfeited/Expired
|
(68
|
)
|
|
24.78
|
|
Outstanding and Exercisable at December 31, 2019
|
469
|
|
|
28.04
|
|
The aggregate intrinsic value of our options outstanding and exercisable at December 31, 2019 was less than $1 million. The weighted-average remaining contractual term for such options was 0.18 years.
During 2019, we received net cash proceeds of less than $1 million in connection with our option exercises. The tax benefit realized from these exercises was less than $1 million. The total intrinsic value of options exercised for the years ended December 31, 2019, 2018 and 2017, was less than $1 million each year.
Restricted Stock Awards and Restricted Stock Unit Awards
For equity based restricted stock and restricted stock unit awards that contain only service conditions for vesting (time-based awards), we calculate the award fair value based on the closing price of CenturyLink common stock on the accounting grant date. We also grant equity-based awards that contain service conditions as well as additional market or performance conditions. For awards having both service and market conditions, the award fair value is calculated using Monte-Carlo simulations. Awards with service as well as market or performance conditions specify a target number of shares for the award, although each recipient ultimately has the opportunity to receive between 0% and 200% of the target number of shares. For awards with service and market conditions, the percentage received is based on our total shareholder return over the three-year service period versus that of selected peer companies. For awards with service and performance conditions, the percentage received depends upon the attainment of one or more financial performance targets during the two- or three-year service period.
The following table summarizes activity involving restricted stock and restricted stock unit awards for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
(in thousands)
|
|
|
Non-vested at December 31, 2018
|
17,059
|
|
|
$
|
19.65
|
|
Granted (1)
|
9,780
|
|
|
12.41
|
|
Vested
|
(9,038
|
)
|
|
19.54
|
|
Forfeited
|
(1,757
|
)
|
|
18.62
|
|
Non-vested at December 31, 2019
|
16,044
|
|
|
15.42
|
|
_____________________________________________________________________________
(1) Shares granted whose related performance conditions were not finalized at December 31, 2019, were excluded from this figure.
During 2018, we granted 9.7 million shares of restricted stock and restricted stock unit awards at a weighted-average price of $17.02. During 2017, we granted 5.2 million shares of restricted stock and restricted stock unit awards at a weighted-average price of $22.02. The total fair value of restricted stock that vested during 2019, 2018 and 2017, was $118 million, $169 million and $60 million, respectively.
Compensation Expense and Tax Benefit
We recognize compensation expense related to our market and performance share-based awards with graded vesting that only have a service condition on a straight-line basis over the requisite service period for the entire award. Total compensation expense for all share-based payment arrangements for the years ended December 31, 2019, 2018 and 2017, was $162 million, $186 million and $111 million, respectively. Our tax benefit recognized in the consolidated statements of operations for our share-based payment arrangements for the years ended December 31, 2019, 2018 and 2017, was $39 million, $46 million and $28 million, respectively. At December 31, 2019, there was $190 million of total unrecognized compensation expense related to our share-based payment arrangements, which we expect to recognize over a weighted-average period of 1.6 years.
(13) (Loss) Earnings Per Common Share
Basic and diluted (loss) earnings per common share for the years ended December 31, 2019, 2018 and 2017 were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions, except per share amounts, shares in thousands)
|
Loss income (Numerator):
|
|
|
|
|
|
Net (loss) income
|
$
|
(5,269
|
)
|
|
(1,733
|
)
|
|
1,389
|
|
Net (loss) income applicable to common stock for computing basic earnings per common share
|
(5,269
|
)
|
|
(1,733
|
)
|
|
1,389
|
|
Net (loss) income as adjusted for purposes of computing diluted earnings per common share
|
$
|
(5,269
|
)
|
|
(1,733
|
)
|
|
1,389
|
|
Shares (Denominator):
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
Outstanding during period
|
1,088,730
|
|
|
1,078,409
|
|
|
635,576
|
|
Non-vested restricted stock
|
(17,289
|
)
|
|
(12,543
|
)
|
|
(7,768
|
)
|
Weighted average shares outstanding for computing basic earnings per common share
|
1,071,441
|
|
|
1,065,866
|
|
|
627,808
|
|
Incremental common shares attributable to dilutive securities:
|
|
|
|
|
|
Shares issuable under convertible securities
|
—
|
|
|
—
|
|
|
10
|
|
Shares issuable under incentive compensation plans
|
—
|
|
|
—
|
|
|
875
|
|
Number of shares as adjusted for purposes of computing diluted (loss) earnings per common share
|
1,071,441
|
|
|
1,065,866
|
|
|
628,693
|
|
Basic (loss) earnings per common share
|
$
|
(4.92
|
)
|
|
(1.63
|
)
|
|
2.21
|
|
Diluted (loss) earnings per common share (1)
|
$
|
(4.92
|
)
|
|
(1.63
|
)
|
|
2.21
|
|
_______________________________________________________________________________
(1) For the year ended December 31, 2019 and December 31, 2018, we excluded from the calculation of diluted loss per share 3.0 million shares and 4.6 million shares, respectively, potentially issuable under incentive compensation plans or convertible securities, as their effect, if included, would have been anti-dilutive.
Our calculation of diluted (loss) earnings per common share excludes shares of common stock that are issuable upon exercise of stock options when the exercise price is greater than the average market price of our common stock. We also exclude unvested restricted stock awards that are antidilutive as a result of unrecognized compensation cost. Such shares were 6.8 million, 2.7 million and 4.7 million for 2019, 2018 and 2017, respectively.
(14) Fair Value of Financial Instruments
Our financial instruments consist of cash, cash equivalents and restricted cash, accounts receivable, accounts payable and long-term debt, excluding finance lease and other obligations. Due to their short-term nature, the carrying amounts of our cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB.
We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
|
|
|
|
Input Level
|
|
Description of Input
|
Level 1
|
|
Observable inputs such as quoted market prices in active markets.
|
Level 2
|
|
Inputs other than quoted prices in active markets that are either directly or indirectly observable.
|
Level 3
|
|
Unobservable inputs in which little or no market data exists.
|
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding finance lease and other obligations, as well as the input level used to determine the fair values indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2018
|
|
|
Input
Level
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
|
|
|
|
(Dollars in millions)
|
Liabilities-Long-term debt, excluding finance lease and other obligations
|
|
2
|
|
$
|
34,472
|
|
|
35,737
|
|
|
35,260
|
|
|
32,915
|
|
Interest rate swap contracts (see Note 15)
|
|
2
|
|
51
|
|
|
51
|
|
|
—
|
|
|
—
|
|
(15) Derivative Financial Instruments
From time to time, CenturyLink, Inc. uses derivative financial instruments, primarily interest rate swaps, to manage our exposure to fluctuations in interest rates. Our primary objective in managing interest rate risk is to decrease the volatility of our earnings and cash flows affected by changes in the underlying rates. We have floating rate long-term debt (see Note 7—Long-Term Debt and Credit Facilities of this report). These obligations expose us to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. We have designated our currently outstanding interest rate swap agreements as cash flow hedges. As described further below, under these hedges, we receive variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the lives of the agreements without exchange of the underlying notional amount. The change in the fair value of the interest rate swap agreements is reflected in AOCI and, as described below, is subsequently reclassified into earnings in the period that the hedged transaction affects earnings by virtue of qualifying as effective cash flow hedges. We do not use derivative financial instruments for speculative purposes.
In February 2019, we entered into five variable-to-fixed interest rate swap agreements to hedge the interest payments on $2.5 billion notional amount of floating rate debt. The five interest rate swap agreements are with different counterparties; one for $700 million and the other four for $450 million each. The transactions were effective beginning March 31, 2019 and mature March 31, 2022. Under the terms of these interest rate swap transactions, we receive interest payments based on one month floating LIBOR terms and pay interest at the fixed rate of 2.48%.
In June 2019, we entered into six variable-to-fixed interest rate swap agreements to hedge the interest payments on $1.5 billion notional amount of floating rate debt. The six interest rate swap agreements are with different counterparties for $250 million each. The transactions were effective beginning June 30, 2019 and mature June 30, 2022. Under the terms of these interest rate swap transactions, we receive interest payments based on one month floating LIBOR terms and pay interest at the fixed rate of 1.58%.
We evaluate the effectiveness of all of our February 2019 and June 2019 hedges qualitatively on a quarterly basis and both qualified as effective hedge relationships at December 31, 2019.
CenturyLink, Inc. is exposed to credit related losses in the event of non-performance by counterparties. The counterparties to any of the financial derivatives we enter into are major institutions with investment grade credit ratings. We evaluate counterparty credit risk before entering into any hedge transaction and continue to closely monitor the financial market and the risk that our counterparties will default on their obligations as part of our quarterly qualitative effectiveness evaluation.
Amounts accumulated in AOCI related to derivatives are indirectly recognized in earnings as periodic settlement payments are made throughout the term of the swaps.
The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheet at December 31, 2019 as follows (in millions):
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
December 31, 2019
|
Derivatives designated as
|
Balance Sheet Location
|
|
Fair Value
|
Cash flow hedging contracts
|
Other current and noncurrent liabilities
|
|
$
|
51
|
|
The amount of losses recognized in AOCI consists of the following (in millions):
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
2019
|
Cash flow hedging contracts
|
|
|
Year Ended December 31, 2019
|
|
$
|
51
|
|
Amounts currently included in AOCI will be reflected as earnings prior to the settlement of these cash flow hedging contracts in 2022. We estimate that $22 million of net losses on the interest rate swaps (based on the estimated LIBOR curve as of December 31, 2019) will be reflected as earnings within the next twelve months.
(16) Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. The Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.
As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we re-measured our net deferred tax liabilities at December 31, 2017 and recognized a provisional tax benefit of approximately $1.1 billion in our consolidated statement of operations for the year ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded a reduction to this amount for purchase price accounting adjustments resulting from the Level 3 acquisition and the tax reform impact on those adjustments of $92 million in 2018.
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Income tax expense (benefit) was as follows:
|
|
|
|
|
|
Federal
|
|
|
|
|
|
Current
|
$
|
7
|
|
|
(576
|
)
|
|
82
|
|
Deferred
|
376
|
|
|
734
|
|
|
(988
|
)
|
State
|
|
|
|
|
|
Current
|
15
|
|
|
(22
|
)
|
|
21
|
|
Deferred
|
81
|
|
|
52
|
|
|
16
|
|
Foreign
|
|
|
|
|
|
Current
|
35
|
|
|
36
|
|
|
22
|
|
Deferred
|
(11
|
)
|
|
(54
|
)
|
|
(2
|
)
|
Total income tax expense (benefit)
|
$
|
503
|
|
|
170
|
|
|
(849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Income tax (benefit) expense was allocated as follows:
|
|
|
|
|
|
Income tax (benefit) expense in the consolidated statements of operations:
|
|
|
|
|
|
Attributable to income
|
$
|
503
|
|
|
170
|
|
|
(849
|
)
|
Stockholders' equity:
|
|
|
|
|
|
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes
|
—
|
|
|
—
|
|
|
—
|
|
Tax effect of the change in accumulated other comprehensive loss
|
(62
|
)
|
|
(2
|
)
|
|
81
|
|
The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Percentage of pre-tax income)
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
(1.6
|
)%
|
|
(1.5
|
)%
|
|
3.9
|
%
|
Impairment of goodwill
|
(28.6
|
)%
|
|
(36.6
|
)%
|
|
—
|
%
|
Change in liability for unrecognized tax position
|
(0.2
|
)%
|
|
1.3
|
%
|
|
1.0
|
%
|
Tax reform
|
—
|
%
|
|
(5.9
|
)%
|
|
(209.8
|
)%
|
Net foreign income taxes
|
(0.5
|
)%
|
|
1.8
|
%
|
|
(0.7
|
)%
|
Foreign dividend paid to a domestic parent company
|
—
|
%
|
|
—
|
%
|
|
0.2
|
%
|
Research and development credits
|
0.1
|
%
|
|
0.9
|
%
|
|
(1.4
|
)%
|
Tax impact on sale of data centers and colocation business
|
—
|
%
|
|
—
|
%
|
|
5.0
|
%
|
Tax benefit of net operating loss carryback
|
—
|
%
|
|
9.1
|
%
|
|
—
|
%
|
Level 3 acquisition transaction costs
|
—
|
%
|
|
—
|
%
|
|
6.0
|
%
|
Other, net
|
(0.8
|
)%
|
|
(1.0
|
)%
|
|
3.6
|
%
|
Effective income tax rate
|
(10.6
|
)%
|
|
(10.9
|
)%
|
|
(157.2
|
)%
|
The effective tax rates for the years ended December 31, 2019 and December 31, 2018 include a $1.4 billion and a $572 million unfavorable impact of non-deductible goodwill impairments, respectively. Additionally, the effective tax rate for the year ended December 31, 2018 reflects a $92 million unfavorable impact due to finalizing the impacts of tax reform. Partially offsetting these amounts is a $142 million benefit generated by a loss carryback to 2016. The effective tax rate for the year ended December 31, 2017 reflects the benefit of approximately $1.1 billion from the re-measurement of deferred taxes as noted above, a $27 million tax expense related to the sale of our colocation business and $32 million tax impact of non-deductible transaction costs related to the Level 3 acquisition.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Deferred tax assets
|
|
|
|
Post-retirement and pension benefit costs
|
$
|
1,169
|
|
|
1,111
|
|
Net operating loss carryforwards
|
3,167
|
|
|
3,445
|
|
Other employee benefits
|
134
|
|
|
162
|
|
Other
|
577
|
|
|
553
|
|
Gross deferred tax assets
|
5,047
|
|
|
5,271
|
|
Less valuation allowance
|
(1,319
|
)
|
|
(1,331
|
)
|
Net deferred tax assets
|
3,728
|
|
|
3,940
|
|
Deferred tax liabilities
|
|
|
|
Property, plant and equipment, primarily due to depreciation differences
|
(3,489
|
)
|
|
(3,011
|
)
|
Goodwill and other intangible assets
|
(3,019
|
)
|
|
(3,303
|
)
|
Other
|
—
|
|
|
(23
|
)
|
Gross deferred tax liabilities
|
(6,508
|
)
|
|
(6,337
|
)
|
Net deferred tax liability
|
$
|
(2,780
|
)
|
|
(2,397
|
)
|
Of the $2.8 billion and $2.4 billion net deferred tax liability at December 31, 2019 and 2018, respectively, $2.9 billion and $2.5 billion is reflected as a long-term liability and $118 million and $131 million is reflected as a net noncurrent deferred tax asset at December 31, 2019 and 2018, respectively.
At December 31, 2019, we had federal NOLs of $6.2 billion, net of limitations of Section 382 of the Internal Revenue Code ("Section 382") and uncertain tax positions, for U.S. federal income tax purposes. If unused, the NOLs will expire between 2022 and 2037. The U.S. federal net operating loss carryforwards expire as follows:
|
|
|
|
|
Expiring
|
Amount
|
December 31,
|
(Dollars in millions)
|
2022
|
$
|
177
|
|
2023
|
614
|
|
2024
|
1,403
|
|
2025
|
1,042
|
|
2026
|
1,525
|
|
2027
|
375
|
|
2028
|
637
|
|
2029
|
645
|
|
2030
|
668
|
|
2031
|
733
|
|
2032
|
348
|
|
2033
|
238
|
|
2037
|
2,973
|
|
NOLs per return
|
11,378
|
|
Uncertain tax positions
|
(5,183
|
)
|
Financial NOLs
|
$
|
6,195
|
|
At December 31, 2019 we had state net operating loss carryforwards of $18 billion (net of uncertain tax positions). We also had foreign NOL carryforwards of $6 billion. Our acquisitions of Level 3, Qwest and SAVVIS, Inc. caused "ownership changes" within the meaning of Section 382 for the acquired companies. As a result, our ability to use these NOLs and tax credits are subject to annual limits imposed by Section 382. Despite this, we expect to use substantially all of these tax attributes to reduce our future federal tax liabilities, although the timing of that use will depend upon our future earnings and future tax circumstances.
We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2019, a valuation allowance of $1.3 billion was established as it is more likely than not that this amount of net operating loss, capital loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2019 and 2018 is primarily related to foreign and state NOL carryforwards. This valuation allowance decreased by $12 million during 2019, primarily due to the impact of foreign exchange rate adjustments and state law changes.
A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Unrecognized tax benefits at beginning of year
|
$
|
1,587
|
|
|
40
|
|
Increase in tax positions of the current year netted against deferred tax assets
|
11
|
|
|
—
|
|
Increase in tax positions of prior periods netted against deferred tax assets
|
6
|
|
|
1,353
|
|
Decrease in tax positions of the current year netted against deferred tax assets
|
(49
|
)
|
|
(15
|
)
|
Decrease in tax positions of prior periods netted against deferred tax assets
|
(19
|
)
|
|
—
|
|
Increase in tax positions taken in the current year
|
5
|
|
|
4
|
|
Increase in tax positions taken in the prior year
|
10
|
|
|
211
|
|
Decrease due to payments/settlements
|
(8
|
)
|
|
(1
|
)
|
Decrease from the lapse of statute of limitations
|
—
|
|
|
(2
|
)
|
Decrease due to the reversal of tax positions taken in a prior year
|
(5
|
)
|
|
(3
|
)
|
Unrecognized tax benefits at end of year
|
$
|
1,538
|
|
|
1,587
|
|
The total amount (including both interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $259 million and $256 million at December 31, 2019 and 2018, respectively.
Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $15 million and $17 million at December 31, 2019 and 2018, respectively.
We, or at least one of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.
Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $3 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.
(17) Segment Information
As described in more detail below, our segments are managed based on the direct costs of providing services to their customers and the associated selling, general and administrative costs (primarily salaries and commissions). Shared costs that were previously reported in segments are managed separately and included in "Operations and Other", in the tables below. We reclassified certain prior period amounts to conform to the current period presentation.
At December 31, 2019, we had the following five reportable segments:
|
|
•
|
International and Global Accounts Management ("IGAM") Segment. Under our IGAM segment, we provide our products and services to approximately 200 global enterprise customers and to enterprises and carriers in three operating regions: Europe Middle East and Africa, Latin America and Asia Pacific;
|
|
|
•
|
Enterprise Segment. Under our enterprise segment, we provide our products and services to large and regional domestic and global enterprises, as well as public sector, which includes the U.S. Federal government, state and local governments and research and education institutions;
|
|
|
•
|
Small and Medium Business ("SMB") Segment. Under our SMB segment, we provide our products and services to small and medium businesses directly and through our indirect channel partners; and
|
|
|
•
|
Wholesale Segment. Under our wholesale segment, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors. Our wholesale customers range from large global telecom providers to small regional providers; and
|
|
|
•
|
Consumer Segment. Under our consumer segment, we provide our products and services to residential customers. Additionally, Universal Service Fund ("USF") federal and state support payments, Connect America Fund ("CAF") federal support revenue, and other revenue from leasing and subleasing including prior year rental income associated with the 2017 failed-sale-leaseback are reported in our consumer segment as regulatory revenue.
|
Product and Service Categories
We categorize our products and services revenue among the following four categories for our International and Global Accounts Management, Enterprise, Small and Medium Business and Wholesale segments:
|
|
•
|
IP and Data Services, which includes primarily VPN data networks, Ethernet, IP, content delivery and other ancillary services;
|
|
|
•
|
Transport and Infrastructure, which includes wavelengths, dark fiber, private line, colocation and data center services, including cloud, hosting and application management solutions, professional services and other ancillary services;
|
|
|
•
|
Voice and Collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services, as well as VoIP services; and
|
|
|
•
|
IT and Managed Services, which includes information technology services and managed services, which may be purchased in conjunction with our other network services.
|
We categorize our products and services revenue among the following four categories for our Consumer segment:
|
|
•
|
Broadband, which includes high-speed, fiber based and lower speed DSL broadband services;
|
|
|
•
|
Voice, which includes local and long-distance services;
|
|
|
•
|
Regulatory Revenue, which consists of (i) CAF, USF and other support payments designed to reimburse us for various costs related to certain telecommunications services and (ii) other operating revenue from the leasing and subleasing of space; and
|
|
|
•
|
Other, which includes retail video services (including our linear and TV services), professional services and other ancillary services.
|
The following tables summarize our segment results for 2019, 2018 and 2017 based on the segment categorization we were operating under at December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total Segments
|
Operations and Other
|
Total
|
|
(Dollars in millions)
|
Revenue:
|
|
|
|
|
|
|
|
|
IP and Data Services
|
$
|
1,676
|
|
2,763
|
|
1,184
|
|
1,377
|
|
—
|
|
7,000
|
|
—
|
|
7,000
|
|
Transport and Infrastructure
|
1,318
|
|
1,545
|
|
420
|
|
1,920
|
|
—
|
|
5,203
|
|
—
|
|
5,203
|
|
Voice and Collaboration
|
377
|
|
1,567
|
|
1,306
|
|
771
|
|
—
|
|
4,021
|
|
—
|
|
4,021
|
|
IT and Managed Services
|
225
|
|
258
|
|
46
|
|
6
|
|
—
|
|
535
|
|
—
|
|
535
|
|
Broadband
|
—
|
|
—
|
|
—
|
|
—
|
|
2,876
|
|
2,876
|
|
—
|
|
2,876
|
|
Voice
|
—
|
|
—
|
|
—
|
|
—
|
|
1,881
|
|
1,881
|
|
—
|
|
1,881
|
|
Regulatory
|
—
|
|
—
|
|
—
|
|
—
|
|
634
|
|
634
|
|
—
|
|
634
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
251
|
|
251
|
|
—
|
|
251
|
|
Total Revenue
|
3,596
|
|
6,133
|
|
2,956
|
|
4,074
|
|
5,642
|
|
22,401
|
|
—
|
|
22,401
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of services and products
|
1,044
|
|
2,088
|
|
606
|
|
567
|
|
313
|
|
4,618
|
|
5,459
|
|
10,077
|
|
Selling, general and administrative
|
266
|
|
555
|
|
480
|
|
80
|
|
415
|
|
1,796
|
|
1,919
|
|
3,715
|
|
Less: share-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(162
|
)
|
(162
|
)
|
Total expense
|
1,310
|
|
2,643
|
|
1,086
|
|
647
|
|
728
|
|
6,414
|
|
7,216
|
|
13,630
|
|
Total adjusted EBITDA
|
$
|
2,286
|
|
3,490
|
|
1,870
|
|
3,427
|
|
4,914
|
|
15,987
|
|
(7,216
|
)
|
8,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total Segments
|
Operations and Other
|
Total
|
|
(Dollars in millions)
|
Revenue:
|
|
|
|
|
|
|
|
|
IP and Data Services
|
$
|
1,728
|
|
2,673
|
|
1,178
|
|
1,382
|
|
—
|
|
6,961
|
|
—
|
|
6,961
|
|
Transport and Infrastructure
|
1,276
|
|
1,550
|
|
471
|
|
2,136
|
|
—
|
|
5,433
|
|
—
|
|
5,433
|
|
Voice and Collaboration
|
387
|
|
1,607
|
|
1,443
|
|
872
|
|
—
|
|
4,309
|
|
—
|
|
4,309
|
|
IT and Managed Services
|
262
|
|
303
|
|
52
|
|
7
|
|
—
|
|
624
|
|
—
|
|
624
|
|
Broadband
|
—
|
|
—
|
|
—
|
|
—
|
|
2,822
|
|
2,822
|
|
—
|
|
2,822
|
|
Voice
|
—
|
|
—
|
|
—
|
|
—
|
|
2,173
|
|
2,173
|
|
—
|
|
2,173
|
|
Regulatory
|
—
|
|
—
|
|
—
|
|
—
|
|
729
|
|
729
|
|
—
|
|
729
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
392
|
|
392
|
|
—
|
|
392
|
|
Total Revenue
|
3,653
|
|
6,133
|
|
3,144
|
|
4,397
|
|
6,116
|
|
23,443
|
|
—
|
|
23,443
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of services and products
|
1,056
|
|
2,038
|
|
614
|
|
645
|
|
500
|
|
4,853
|
|
6,009
|
|
10,862
|
|
Selling, general and administrative
|
256
|
|
573
|
|
517
|
|
86
|
|
511
|
|
1,943
|
|
2,222
|
|
4,165
|
|
Less: share-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(186
|
)
|
(186
|
)
|
Total expense
|
1,312
|
|
2,611
|
|
1,131
|
|
731
|
|
1,011
|
|
6,796
|
|
8,045
|
|
14,841
|
|
Total adjusted EBITDA
|
$
|
2,341
|
|
3,522
|
|
2,013
|
|
3,666
|
|
5,105
|
|
16,647
|
|
(8,045
|
)
|
8,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
International and Global Accounts
|
Enterprise
|
Small and Medium Business
|
Wholesale
|
Consumer
|
Total Segments
|
Operations and Other
|
Total
|
|
(Dollars in millions)
|
Revenue:
|
|
|
|
|
|
|
|
|
IP and Data Services
|
$
|
528
|
|
1,515
|
|
634
|
|
916
|
|
—
|
|
3,593
|
|
1
|
|
3,594
|
|
Transport and Infrastructure
|
406
|
|
1,116
|
|
419
|
|
1,530
|
|
—
|
|
3,471
|
|
192
|
|
3,663
|
|
Voice and Collaboration
|
176
|
|
1,245
|
|
1,314
|
|
569
|
|
—
|
|
3,304
|
|
—
|
|
3,304
|
|
IT and Managed Services
|
272
|
|
310
|
|
51
|
|
11
|
|
—
|
|
644
|
|
—
|
|
644
|
|
Broadband
|
—
|
|
—
|
|
—
|
|
—
|
|
2,698
|
|
2,698
|
|
—
|
|
2,698
|
|
Voice
|
—
|
|
—
|
|
—
|
|
—
|
|
2,531
|
|
2,531
|
|
—
|
|
2,531
|
|
Regulatory
|
—
|
|
—
|
|
—
|
|
—
|
|
731
|
|
731
|
|
—
|
|
731
|
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
|
491
|
|
491
|
|
—
|
|
491
|
|
Total Revenue
|
1,382
|
|
4,186
|
|
2,418
|
|
3,026
|
|
6,451
|
|
17,463
|
|
193
|
|
17,656
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of services and products
|
457
|
|
1,365
|
|
389
|
|
413
|
|
620
|
|
3,244
|
|
4,959
|
|
8,203
|
|
Selling, general and administrative
|
104
|
|
365
|
|
448
|
|
47
|
|
695
|
|
1,659
|
|
1,849
|
|
3,508
|
|
Less: share-based compensation
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(111
|
)
|
(111
|
)
|
Total expense
|
561
|
|
1,730
|
|
837
|
|
460
|
|
1,315
|
|
4,903
|
|
6,697
|
|
11,600
|
|
Total adjusted EBITDA
|
$
|
821
|
|
2,456
|
|
1,581
|
|
2,566
|
|
5,136
|
|
12,560
|
|
(6,504
|
)
|
6,056
|
|
We recognize revenue in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The USF surcharges are assigned to the products and services categories based on the underlying revenue. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.
The following table provides the amount of USF surcharges and transaction taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
USF surcharges and transaction taxes
|
$
|
1,002
|
|
|
952
|
|
|
601
|
|
Revenue and Expenses
Our segment revenue includes all revenue from our five segments as described in more detail above. Our segment revenue is based upon each customer's classification. We report our segment revenue based upon all services provided to that segment's customers. Our segment expenses include specific cost of service expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities.
The following items are excluded from our segment results, because they are centrally managed and not monitored by or reported to our CODM by segment:
|
|
•
|
Network expenses not incurred as a direct result of providing services and products to segment customers;
|
|
|
•
|
centrally managed expenses such as Operations, Finance, Human Resources, Legal, Marketing, Product Management and IT, which are reported as "Operations and Other";
|
|
|
•
|
depreciation and amortization expense or impairments;
|
|
|
•
|
interest expense, because we manage our financing on a consolidated basis and have not allocated assets or debt to specific segments;
|
|
|
•
|
stock-based compensation; and
|
|
|
•
|
other income and expense items are not monitored as a part of our segment operations.
|
The following table reconciles total segment adjusted EBITDA to net (loss) income for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Total segment adjusted EBITDA
|
$
|
15,987
|
|
|
16,647
|
|
|
12,560
|
|
Depreciation and amortization
|
(4,829
|
)
|
|
(5,120
|
)
|
|
(3,936
|
)
|
Goodwill impairment
|
(6,506
|
)
|
|
(2,726
|
)
|
|
—
|
|
Other operating expenses
|
(7,216
|
)
|
|
(8,045
|
)
|
|
(6,504
|
)
|
Share-based compensation
|
(162
|
)
|
|
(186
|
)
|
|
(111
|
)
|
Operating (loss) income
|
(2,726
|
)
|
|
570
|
|
|
2,009
|
|
Total other expense, net
|
(2,040
|
)
|
|
(2,133
|
)
|
|
(1,469
|
)
|
(Loss) income before income taxes
|
(4,766
|
)
|
|
(1,563
|
)
|
|
540
|
|
Income tax expense (benefit)
|
503
|
|
|
170
|
|
|
(849
|
)
|
Net (loss) income
|
$
|
(5,269
|
)
|
|
(1,733
|
)
|
|
1,389
|
|
We do not have any single customer that provides more than 10% of our consolidated total operating revenue.
The assets we hold outside of the U.S. represent less than 10% of our total assets. Revenue from sources outside of the U.S. is responsible for less than 10% of our total operating revenue.
(18) Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
|
(Dollars in millions, except per share amounts)
|
2019
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
5,647
|
|
|
5,578
|
|
|
5,606
|
|
|
5,570
|
|
|
22,401
|
|
Operating (loss) income
|
(5,499
|
)
|
|
976
|
|
|
950
|
|
|
847
|
|
|
(2,726
|
)
|
Net (loss) income
|
(6,165
|
)
|
|
371
|
|
|
302
|
|
|
223
|
|
|
(5,269
|
)
|
Basic (loss) earnings per common share
|
(5.77
|
)
|
|
0.35
|
|
|
0.28
|
|
|
0.21
|
|
|
(4.92
|
)
|
Diluted (loss) earnings per common share
|
(5.77
|
)
|
|
0.35
|
|
|
0.28
|
|
|
0.21
|
|
|
(4.92
|
)
|
2018
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
$
|
5,945
|
|
|
5,902
|
|
|
5,818
|
|
|
5,778
|
|
|
23,443
|
|
Operating income (loss)
|
750
|
|
|
767
|
|
|
894
|
|
|
(1,841
|
)
|
|
570
|
|
Net income (loss)
|
115
|
|
|
292
|
|
|
272
|
|
|
(2,412
|
)
|
|
(1,733
|
)
|
Basic earnings (loss) per common share
|
0.11
|
|
|
0.27
|
|
|
0.25
|
|
|
(2.26
|
)
|
|
(1.63
|
)
|
Diluted earnings (loss) per common share
|
0.11
|
|
|
0.27
|
|
|
0.25
|
|
|
(2.26
|
)
|
|
(1.63
|
)
|
During the first quarter of 2019, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $6.5 billion for goodwill, see Note 4—Goodwill, Customer Relationships and Other Intangible Assets for further details.
During the fourth quarter of 2018, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $2.7 billion for goodwill see Note 4—Goodwill, Customer Relationships and Other Intangible Assets for further details.
During the first quarter of 2018, we recognized $71 million of expenses related to our acquisition of Level 3 followed by acquisition-related expenses of $162 million, $43 million and $117 million in the second, third and fourth quarters of 2018, respectively. During 2019, we recognized expenses related to our acquisition of Level 3 of $34 million, $39 million, $38 million and $123 million in the first, second, third and fourth quarters of 2019, respectively.
(19) Commitments, Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation and non-income tax contingencies at December 31, 2019 and December 31, 2018 aggregated to approximately $180 million and $123 million, respectively, and are included in other current liabilities and other liabilities in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.
In this Note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter.
Shareholder Class Action Suit
CenturyLink and certain CenturyLink board members and officers were named as defendants in a putative shareholder class action lawsuit filed on June 12, 2018 in the Boulder County District Court of the state of Colorado, captioned Houser et al. v. CenturyLink, et al. The complaint asserts claims on behalf of a putative class of former Level 3 shareholders who became CenturyLink shareholders as a result our acquisition of Level 3. It alleges that the proxy statement provided to the Level 3 shareholders failed to disclose various material information of several kinds, including information about strategic revenue, customer loss rates, and customer account issues, among other items. The complaint seeks damages, costs and fees, rescission, rescissory damages, and other equitable relief.
Switched Access Disputes
Subsidiaries of CenturyLink, Inc. are among hundreds of companies involved in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated in the United States District Court for the Northern District of Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services. In the lawsuits, IXCs, including Sprint Communications Company L.P. ("Sprint") and various affiliates of Verizon Communications Inc. ("Verizon"), assert that federal and state laws bar LECs from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices that are routed through an IXC. Some of these IXCs have asserted claims seeking refunds of payments for access charges previously paid and relief from future access charges.
In November 2015, the federal court agreed with the LECs and rejected the IXCs' contention that federal law prohibits these particular access charges. Final judgments have been entered in the consolidated lawsuits and the IXCs are pursuing an appeal. Separately, some of the defendants, including CenturyLink's LECs, have petitioned the FCC to address these issues on an industry-wide basis.
Our subsidiaries include both IXCs and LECs which respectively pay and assess significant amounts of the charges in question. The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, are currently not predictable.
State Tax Suits
Since 2012, a number of Missouri municipalities have asserted claims in the Circuit Court of St. Louis County, Missouri, alleging that we and several of our subsidiaries have underpaid taxes. These municipalities are seeking, among other things, declaratory relief regarding the application of business license and gross receipts taxes and back taxes from 2007 to the present, plus penalties and interest. In a February 2017 ruling in connection with one of these pending cases, the court entered an order awarding plaintiffs $4 million and broadening the tax base on a going-forward basis. We appealed that decision to the Missouri Supreme Court. In December 2019, it affirmed the circuit court's order in some respects and reversed it in others, remanding the case to the circuit court for further proceedings. The Missouri Supreme Court's decision will reduce our exposure in the case. In a June 2017 ruling in connection with another one of these pending cases, the circuit court made findings in a non-final ruling which, if not overturned or modified in light of the Missouri Supreme Court's decision, will result in a tax liability to us well in excess of the contingent liability we have established. In due course, we plan to appeal that decision. We continue to vigorously defend against these claims.
Billing Practices Suits
In June 2017, a former employee filed an employment lawsuit against us claiming that she was wrongfully terminated for alleging that we charged some of our retail customers for products and services they did not authorize. Starting shortly thereafter and continuing since then, and based in part on the allegations made by the former employee, several legal proceedings have been filed.
In June 2017, McLeod v. CenturyLink, a putative consumer class action, was filed against us in the U.S. District Court for the Central District of California alleging that we charged some of our retail customers for products and services they did not authorize. A number of other complaints asserting similar claims were filed in other federal and state courts. The lawsuits assert claims including fraud, unfair competition, and unjust enrichment. Also in June 2017, Craig. v. CenturyLink, Inc., et al., a putative securities investor class action, was filed in U.S. District Court for the Southern District of New York, alleging that we failed to disclose material information regarding improper sales practices, and asserting federal securities law claims. A number of other cases asserting similar claims have also been filed.
Beginning June 2017, we also received several shareholder derivative demands addressing related topics. In August 2017, the Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands. In April 2018, the special litigation committee concluded its review of the derivative demands and declined to take further action. Since then, derivative cases were filed. Two of these cases, Castagna v. Post and Pinsly v. Post, were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita. The remaining derivative cases were filed in federal court in Louisiana and Minnesota. These cases have been brought on behalf of CenturyLink against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.
The consumer putative class actions, the securities investor putative class actions, and the federal derivative actions have been transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation. Subject to confirmatory discovery and court approval, we have agreed to settle the consumer putative class actions for payments of $15.5 million to compensate class members and of up to $3.5 million for administrative costs. We accrued for those amounts during the second quarter of 2019. Certain class members may elect to opt out of the class settlement and pursue the resolution of their individual claims against us on these issues through various dispute resolution processes, including individual arbitration. One law firm claims to represent more than 22,000 potential class members. To the extent that a substantial number of class members, including many of the law firm’s alleged clients, meet the contractual requirements to arbitrate, elect to opt out of the settlement (or otherwise successfully exclude their individual claims), and actually pursue arbitrations, the Company could incur a material amount of filing and other arbitrations fees in relation to the administration of those claims.
In July 2017, the Minnesota state attorney general filed State of Minnesota v. CenturyTel Broadband Services LLC, et al. in the Anoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices.
We have engaged in discussions regarding potential resolutions of these claims with a number of state attorneys general, and have entered into agreements settling the Minnesota suit and certain of the consumer practices claims asserted by state attorneys general. While we do not agree with allegations raised in these matters, we have been willing to consider reasonable settlements where appropriate.
In 2019, we recorded a charge of approximately $71 million with respect to the above-described settlements and other consumer litigation related matters.
Locate Service Investigations
In June 2019, Minnesota and Arizona initiated investigations related to the timeliness of responses by certain of our vendors to requests for marking the location of underground telecommunications facilities. We and our subsidiaries are cooperating with the investigations.
Peruvian Tax Litigation
In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one of our Peruvian subsidiaries asserting $26 million, of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, we believe the total amount of our exposure is $7 million at December 31, 2019.
We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the Tribunal) decided the central issue underlying the 2002 assessments in
SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.
In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. Oral argument was held before the Supreme Court of Justice in June 2019. A decision on this case is pending.
Brazilian Tax Claims
In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authorities issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues.
We have filed objections to these assessments, arguing that the lease of assets and the provision of Internet access are not communication services subject to ICMS. The objections to the September 2002, December, 2004 and March 2009 assessments were rejected by the respective state administrative courts, and we have appealed those decisions to the judicial courts. In October 2012 and June 2014, we received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014 at the first administrative level, and we appealed this decision to the second administrative level.
We are vigorously contesting all such assessments in both states and, in particular, view the assessment of ICMS on revenue from equipment leasing to be without merit. These assessments, if upheld, could result in a loss of up to $37 million at December 31, 2019 in excess of the accruals established for these matters.
Qui Tam Action
Level 3 was notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc. and others in the United States District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint and an amended complaint were filed under seal on November 26, 2013 and June 16, 2014, respectively. The court unsealed the complaints on October 26, 2017.
The amended complaint alleges that Level 3, principally through two former employees, submitted false claims and made false statements to the government in connection with two government contracts. The relator seeks damages in this lawsuit of approximately $50 million, subject to trebling, plus statutory penalties, pre-and-post judgment interest, and attorney’s fees. The case is currently stayed.
Level 3 is evaluating its defenses to the claims. At this time, Level 3 does not believe it is probable Level 3 will incur a material loss. If, contrary to its expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
Several people, including two former Level 3 employees were indicted in the United States District Court for the Eastern District of Virginia on October 3, 2017, and charged with, among other things, accepting kickbacks from a subcontractor, who was also indicted, for work to be performed under a prime government contract. Of the two former employees, one entered into a plea agreement, and the other is deceased. Level 3 is fully cooperating in the government’s investigations in this matter.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third party tort actions.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial during 2020 if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various foreign, federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $100,000 in fines and penalties.
The outcome of these other proceedings described under this heading is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us.
The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us.
Environmental Contingencies
In connection with our largely historical operations, we have responded to or been notified of potential environmental liability at approximately 200 properties. We are engaged in addressing or have liquidated environmental liabilities at many of those properties. We could potentially be held liable, jointly, or severally, and without regard to fault, for the costs of investigation and remediation of these sites. The discovery of additional environmental liabilities or changes in existing environmental requirements could have a material adverse effect on our business.
Right-of-Way
At December 31, 2019, our future rental commitments for Right-of-Way agreements were as follows:
|
|
|
|
|
|
Right-of-Way Agreements
|
|
(Dollars in millions)
|
2020
|
$
|
174
|
|
2021
|
75
|
|
2022
|
72
|
|
2023
|
63
|
|
2024
|
52
|
|
2025 and thereafter
|
464
|
|
Total future minimum payments
|
$
|
900
|
|
Purchase Commitments
We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $766 million at December 31, 2019. Of this amount, we expect to purchase $247 million in 2020, $261 million in 2021 through 2022, $85 million in 2023 through 2024 and $173 million in 2025 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2019.
(20) Other Financial Information
Other Current Assets
The following table presents details of other current assets in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Prepaid expenses
|
$
|
274
|
|
|
307
|
|
Income tax receivable
|
35
|
|
|
82
|
|
Materials, supplies and inventory
|
105
|
|
|
120
|
|
Contract assets
|
42
|
|
|
52
|
|
Contract acquisition costs
|
178
|
|
|
167
|
|
Contract fulfillment costs
|
115
|
|
|
82
|
|
Other
|
59
|
|
|
108
|
|
Total other current assets
|
$
|
808
|
|
|
918
|
|
Selected Current Liabilities
Current liabilities reflected in our consolidated balance sheets include accounts payable and other current liabilities as follows:
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
|
(Dollars in millions)
|
Accounts payable
|
$
|
1,724
|
|
|
1,933
|
|
Other current liabilities:
|
|
|
|
Accrued rent
|
$
|
75
|
|
|
45
|
|
Legal contingencies
|
88
|
|
|
30
|
|
Other
|
223
|
|
|
282
|
|
Total other current liabilities
|
$
|
386
|
|
|
357
|
|
Included in accounts payable at December 31, 2019 and 2018, were (i) $106 million and $86 million, respectively, representing book overdrafts and (ii) $469 million and $434 million, respectively, associated with capital expenditures.
(21) Labor Union Contracts
As of December 31, 2019, approximately 25% of our employees were members of various bargaining units represented by the Communication Workers of America ("CWA") and the International Brotherhood of Electrical Workers ("IBEW"). We believe that relations with our employees continue to be generally good. There were no employees subject to collective bargaining agreements that expired prior to December 31, 2019. Approximately 9% of our represented employees are subject to collective bargaining agreements that are scheduled to expire in 2020.
(22) Accumulated Other Comprehensive Loss
Information Relating to 2019
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheet by component for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Post-Retirement
Benefit Plans
|
|
Foreign Currency
Translation
Adjustment
and Other
|
|
Interest Rate Swap
|
|
Total
|
|
(Dollars in millions)
|
Balance at December 31, 2018
|
$
|
(2,173
|
)
|
|
(58
|
)
|
|
(230
|
)
|
|
—
|
|
|
(2,461
|
)
|
Other comprehensive loss before reclassifications
|
(219
|
)
|
|
(138
|
)
|
|
2
|
|
|
(41
|
)
|
|
(396
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
163
|
|
|
12
|
|
|
—
|
|
|
2
|
|
|
177
|
|
Net current-period other comprehensive (loss) income
|
(56
|
)
|
|
(126
|
)
|
|
2
|
|
|
(39
|
)
|
|
(219
|
)
|
Balance at December 31, 2019
|
$
|
(2,229
|
)
|
|
(184
|
)
|
|
(228
|
)
|
|
(39
|
)
|
|
(2,680
|
)
|
The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
(Decrease) Increase
in Net Loss
|
|
Affected Line Item in Consolidated Statement of
Operations
|
|
|
(Dollars in millions)
|
|
|
Amounts reclassified from accumulated other comprehensive loss(1)
|
|
|
|
|
Interest rate swap
|
|
$
|
2
|
|
|
Interest expense
|
Net actuarial loss
|
|
224
|
|
|
Other income, net
|
Prior service cost
|
|
8
|
|
|
Other income, net
|
Total before tax
|
|
234
|
|
|
|
Income tax benefit
|
|
(57
|
)
|
|
Income tax expense (benefit)
|
Net of tax
|
|
$
|
177
|
|
|
|
________________________________________________________________________
(1)See Note 11—Employee Benefits for additional information on our net periodic benefit (expense) income related to our pension and
post-retirement plans.
Information Relating to 2018
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheet by component for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Post-Retirement
Benefit Plans
|
|
Foreign Currency
Translation
Adjustment
and Other
|
|
Total
|
|
(Dollars in millions)
|
Balance at December 31, 2017
|
$
|
(1,731
|
)
|
|
(235
|
)
|
|
(29
|
)
|
|
(1,995
|
)
|
Other comprehensive income (loss) before reclassifications
|
(195
|
)
|
|
194
|
|
|
(201
|
)
|
|
(202
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
128
|
|
|
15
|
|
|
—
|
|
|
143
|
|
Net current-period other comprehensive income (loss)
|
(67
|
)
|
|
209
|
|
|
(201
|
)
|
|
(59
|
)
|
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
|
$
|
(375
|
)
|
|
(32
|
)
|
|
—
|
|
|
(407
|
)
|
Balance at December 31, 2018
|
$
|
(2,173
|
)
|
|
(58
|
)
|
|
(230
|
)
|
|
(2,461
|
)
|
The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(Decrease) Increase
in Net Loss
|
|
Affected Line Item in Consolidated Statement of
Operations
|
|
|
(Dollars in millions)
|
|
|
Amortization of pension & post-retirement plans(1)
|
|
|
|
|
Net actuarial loss
|
|
$
|
178
|
|
|
Other income, net
|
Prior service cost
|
|
12
|
|
|
Other income, net
|
Total before tax
|
|
190
|
|
|
|
Income tax benefit
|
|
(47
|
)
|
|
Income tax expense (benefit)
|
Net of tax
|
|
$
|
143
|
|
|
|
________________________________________________________________________
(1)See Note 11—Employee Benefits for additional information on our net periodic benefit (expense) income related to our pension and
post-retirement plans.
(23) Dividends
Our Board of Directors declared the following dividends payable in 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
Dividend
Per Share
|
|
Total Amount
|
|
Payment Date
|
|
|
|
|
|
|
(in millions)
|
|
|
November 21, 2019
|
|
12/2/2019
|
|
$
|
0.250
|
|
|
$
|
273
|
|
|
12/13/2019
|
August 22, 2019
|
|
9/2/2019
|
|
0.250
|
|
|
273
|
|
|
9/13/2019
|
May 23, 2019
|
|
6/3/2019
|
|
0.250
|
|
|
274
|
|
|
6/14/2019
|
March 1, 2019
|
|
3/12/2019
|
|
0.250
|
|
|
273
|
|
|
3/22/2019
|
November 14, 2018
|
|
11/26/2018
|
|
0.540
|
|
|
586
|
|
|
12/7/2018
|
August 21, 2018
|
|
8/31/2018
|
|
0.540
|
|
|
584
|
|
|
9/14/2018
|
May 23, 2018
|
|
6/4/2018
|
|
0.540
|
|
|
588
|
|
|
6/15/2018
|
February 21, 2018
|
|
3/5/2018
|
|
0.540
|
|
|
586
|
|
|
3/16/2018
|
The declaration of dividends is solely at the discretion of our Board of Directors, which may change or terminate our dividend practice at any time for any reason without prior notice. On February 27, 2020, our Board of Directors declared a quarterly cash dividend of $0.25 per share.