Company Quick10K Filing
Quick10K
Centurylink
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$10.86 1,090 $11,840
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-12 Shareholder Vote, Other Events, Exhibits
8-K 2019-05-29 Enter Agreement, Shareholder Vote, Other Events, Exhibits
8-K 2019-05-22 Shareholder Vote, Exhibits
8-K 2019-05-15 Other Events, Exhibits
8-K 2019-05-09 Other Events, Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-05-01 Regulation FD, Exhibits
8-K 2019-02-13 Earnings, Exhibits
8-K 2019-02-13 Enter Agreement, Shareholder Rights, Amend Bylaw, Other Events, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-11-06 Officers
8-K 2018-09-21 Officers, Exhibits
8-K 2018-08-20 Other Events, Exhibits
8-K 2018-08-08 Earnings, Regulation FD, Exhibits
8-K 2018-07-26 Other Events, Exhibits
8-K 2018-07-01 Officers
8-K 2018-06-01 Officers
8-K 2018-05-23 Officers, Shareholder Vote, Exhibits
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-03-27 Officers
8-K 2018-03-05 Officers, Exhibits
8-K 2018-02-14 Earnings, Exhibits
DGX Quest Diagnostics 13,270
LOGM Logmein 4,000
GCP GCP Applied Technologies 2,010
CROX Crocs 1,710
TSBK Timberland Bancorp 248
AIPT Precision Therapeutics 21
PRTO Proteon Therapeutics 7
OBMP OncBioMune 0
LBUY Leafbuyer 0
TECR Techcare 0
CTL 2019-03-31
Part I-Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 ctl2019033110qex311.htm
EX-31.2 ctl2019033110qex312.htm
EX-32 ctl2019033110qex32.htm

Centurylink Earnings 2019-03-31

CTL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ctl2019033110q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File No. 001-7784
 
ctllogo1a03.jpg
CENTURYLINK, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Louisiana
 (State or other jurisdiction of
incorporation or organization)
72-0651161
(I.R.S. Employer
Identification No.)
100 CenturyLink Drive,
Monroe, Louisiana
 (Address of principal executive offices)
71203
 (Zip Code)
(318) 388-9000
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý   No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $1.00 per share
CTL
New York Stock Exchange
On May 3, 2019, there were 1,090,313,414 shares of common stock outstanding.
 

1


TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
* All references to "Notes" in this quarterly report refer to these Notes to Consolidated Financial Statements.

2


Special Note Regarding Forward-Looking Statements

This report and other documents filed by us under the federal securities law include, and future oral or written statements or press releases by us and our management may include, forward-looking statements about our business, financial condition, operating results and prospects. These "forward-looking" statements are defined by, and are subject to the "safe harbor" protections under, the federal securities laws. These statements include, among others:

forecasts of our anticipated future results of operations, cash flows or financial position;

statements concerning the anticipated impact of our transactions, investments, product development and other initiatives, including synergies or costs associated with our November 2017 combination with Level 3, the impact of our other acquisitions or dispositions, and the impact of our participation in government programs;

statements about our liquidity, profit margins, tax position, tax assets, tax rates, asset values, contingent liabilities, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, dividend and stock repurchase plans, capital allocation plans, financing alternatives and sources, and pricing plans; and

other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts, many of which are highlighted by words such as “may,” “will,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “likely,” “seeks,” “hopes,” or variations or similar expressions with respect to the future.

These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are based, (i) are not guarantees of future results, (ii) are inherently speculative and (iii) are subject to a number of risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward looking statements. Factors that could affect actual results include but are not limited to:

the effects of competition from a wide variety of competitive providers, including decreased demand for our traditional wireline service offerings and increased pricing pressures;

the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete;

our ability to attain our key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems, strengthening our relationships with customers and attaining projected cost savings;

our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakage, or similar events impacting our network or the availability and quality of our services;

the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, special access, universal service, broadband deployment, data protection and net neutrality;

our ability to effectively adjust to changes in the communications industry, and changes in the composition of our markets and product mix;


3


possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed data transmission services;

our ability to successfully maintain the quality and profitability of our existing product and service offerings and to introduce profitable new offerings on a timely and cost-effective basis;

our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments, dividends, pension contributions and other benefits payments;

changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;

our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;

the negative impact of increases in the costs of our pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations;

adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise;

our ability to meet the terms and conditions of our debt obligations, including our ability to make transfers of cash in compliance therewith;

our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords and financial institutions;

our ability to collect our receivables from financially troubled customers;

our ability to use our net operating loss carryforwards in the amounts projected;

any adverse developments in legal or regulatory proceedings involving us;

changes in tax, communications, pension, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels;

the effects of changes in accounting policies, practices or assumptions, including changes that could potentially require future impairment charges;

the effects of adverse weather, terrorism or other natural or man-made disasters;

adverse effects of material weaknesses or any other significant deficiencies identified in our internal controls over financial reporting;

the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geo-political conditions; and

other risks referenced in this report or other of our filings with the SEC.


4


Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.


5


PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars in millions, except per share amounts
and shares in thousands)
OPERATING REVENUE
$
5,647

 
5,945

OPERATING EXPENSES
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
2,520

 
2,803

Selling, general and administrative
932

 
1,109

Depreciation and amortization
1,188

 
1,283

Goodwill impairment
6,506

 

Total operating expenses
11,146

 
5,195

OPERATING (LOSS) INCOME
(5,499
)
 
750

OTHER (EXPENSE) INCOME
 
 
 
Interest expense
(523
)
 
(535
)
Other (expense) income, net
(5
)
 
21

Total other expense, net
(528
)
 
(514
)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(6,027
)
 
236

Income tax expense
138

 
121

NET (LOSS) INCOME
$
(6,165
)
 
115

BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE
 
 
 
BASIC
$
(5.77
)
 
0.11

DILUTED
$
(5.77
)
 
0.11

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
 
 
 
BASIC
1,068,878

 
1,065,796

DILUTED
1,068,878

 
1,069,183

See accompanying notes to consolidated financial statements.

6


CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)

 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions)
NET (LOSS) INCOME
$
(6,165
)
 
115

OTHER COMPREHENSIVE (LOSS) INCOME:
 
 
 
Items related to employee benefit plans:
 
 
 
Change in net actuarial loss, net of ($14) and ($11) tax
43

 
33

Change in net prior service credit, net of ($1) and ($1) tax
1

 
2

Unrealized holding loss on interest rate swaps, net of $6 and $— tax
(17
)
 

Foreign currency translation adjustment and other net of ($1) and ($14) tax
5

 
79

Other comprehensive income
32

 
114

COMPREHENSIVE (LOSS) INCOME
$
(6,133
)
 
229

See accompanying notes to consolidated financial statements.

7


CENTURYLINK, INC.
CONSOLIDATED BALANCE SHEETS
 
March 31, 2019 (Unaudited)
 
December 31, 2018
 
(Dollars in millions
and shares in thousands)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 

Cash and cash equivalents
$
441

 
488

Restricted cash
3

 
4

Accounts receivable, less allowance of $156 and $142
2,347

 
2,398

Assets held for sale
3

 
12

Other
1,026

 
918

Total current assets
3,820

 
3,820

Property, plant and equipment, net of accumulated depreciation of $27,385 and $26,859
25,793

 
26,408

GOODWILL AND OTHER ASSETS
 
 
 
Goodwill
21,526

 
28,031

Operating lease assets
1,952

 

Restricted cash
30

 
26

Customer relationships, net
8,580

 
8,911

Other intangibles, net
1,929

 
1,868

Other, net
1,158

 
1,192

Total goodwill and other assets
35,175

 
40,028

TOTAL ASSETS
$
64,788

 
70,256

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
632

 
652

Accounts payable
1,481

 
1,933

Accrued expenses and other liabilities
 
 
 
Salaries and benefits
823

 
1,104

Income and other taxes
386

 
337

Current operating lease liabilities
561

 

Interest
352

 
316

Other
297

 
357

Current portion of deferred revenue
841

 
832

Total current liabilities
5,373

 
5,531

LONG-TERM DEBT
34,858

 
35,409

DEFERRED CREDITS AND OTHER LIABILITIES
 
 
 
Deferred income taxes, net
2,701

 
2,527

Benefit plan obligations, net
4,265

 
4,319

Noncurrent operating lease liabilities
1,501

 

Other
2,547

 
2,642

Total deferred credits and other liabilities
11,014

 
9,488

COMMITMENTS AND CONTINGENCIES (Note 12)

 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
Preferred stock—non-redeemable, $25.00 par value, authorized 2,000 and 2,000 shares, issued and outstanding 7 and 7 shares

 

Common stock, $1.00 par value, authorized 1,600,000 and 1,600,000 shares, issued and outstanding 1,090,445 and 1,080,167 shares
1,090

 
1,080

Additional paid-in capital
22,575

 
22,852

Accumulated other comprehensive loss
(2,429
)
 
(2,461
)
Accumulated deficit
(7,693
)
 
(1,643
)
Total stockholders' equity
13,543

 
19,828

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
64,788

 
70,256

See accompanying notes to consolidated financial statements.

8


CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions)
OPERATING ACTIVITIES
 
 
 
Net (loss) income
$
(6,165
)
 
115

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,188

 
1,283

Impairment of goodwill and other assets
6,508

 
27

Deferred income taxes
126

 
123

Provision for uncollectible accounts
46

 
47

Net (gain) loss on early retirement of debt
(9
)
 
1

Share-based compensation
33

 
41

Changes in current assets and liabilities:
 
 
 
Accounts receivable
5

 
117

Accounts payable
(239
)
 
(14
)
Accrued income and other taxes
45

 
20

Other current assets and liabilities, net
(336
)
 
(262
)
   Retirement benefits
(14
)
 
(49
)
   Changes in other noncurrent assets and liabilities, net
(4
)
 
145

   Other, net
(2
)
 
73

Net cash provided by operating activities
1,182

 
1,667

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(931
)
 
(805
)
Proceeds from sale of property, plant and equipment
25

 
3

Other, net

 
34

Net cash used in investing activities
(906
)
 
(768
)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of long-term debt

 
130

Payments of long-term debt
(153
)
 
(68
)
Net proceeds (payments) on revolving line of credit
145

 
(405
)
Dividends paid
(285
)
 
(580
)
Other, net
(27
)
 
(26
)
Net cash used in financing activities
(320
)
 
(949
)
Net decrease in cash, cash equivalents and restricted cash
(44
)
 
(50
)
Cash, cash equivalents and restricted cash at beginning of period
518

 
587

Cash, cash equivalents and restricted cash at end of period
$
474

 
537

Supplemental cash flow information:
 
 
 
Income taxes paid, net
$
(7
)
 
(2
)
Interest paid (net of capitalized interest of $15 and $15)
$
(480
)
 
(491
)

See accompanying notes to consolidated financial statements.

9


CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)

 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions except per share amounts)
COMMON STOCK
 
 
 
Balance at beginning of period
$
1,080

 
1,069

Issuance of common stock through dividend reinvestment, incentive and benefit plans
10

 
10

Balance at end of period
1,090

 
1,079

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance at beginning of period
22,852

 
23,314

Change in common stock through dividend reinvestment, incentive and benefit plans
(13
)
 
(6
)
Shares withheld to satisfy tax withholdings
(26
)
 
(25
)
Share-based compensation and other, net
34

 
33

Dividends declared
(272
)
 

Balance at end of period
22,575

 
23,316

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
Balance at beginning of period
(2,461
)
 
(1,995
)
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 
(407
)
Other comprehensive income
32

 
114

Balance at end of period
(2,429
)
 
(2,288
)
RETAINED EARNINGS (ACCUMULATED DEFICIT)
 
 
 
Balance at beginning of period
(1,643
)
 
1,103

Net (loss) income
(6,165
)
 
115

Cumulative effect of adoption of ASU 2016-02, Leases, net of $37 tax
115

 

Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 
407

Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $101 tax

 
297

Dividends declared

 
(586
)
Balance at end of period
(7,693
)
 
1,336

TOTAL STOCKHOLDERS' EQUITY
$
13,543

 
23,443

DIVIDENDS DECLARED PER COMMON SHARE
$
0.25

 
0.54


See accompanying notes to consolidated financial statements.

10


CENTURYLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

References in the Notes to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries, unless the context otherwise requires and except in Note 5—Long-Term Debt and Credit Facilities, where such references refer solely to CenturyLink, Inc. References in the Notes to "Level 3" refer to Level 3 Communications, Inc. prior to our acquisition thereof and to its successor-in-interest Level 3 Parent, LLC after such acquisition, unless the context otherwise requires.

(1)     Background

General

We are an international facilities-based communications company engaged primarily in providing an integrated array of services to our residential and business customers.

Basis of Presentation

Our consolidated balance sheet as of December 31, 2018, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations and cash flows for the first three months of the year are not necessarily indicative of the consolidated results of operations and cash flows that might be expected for the entire year. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2018.

The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.

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 (expense), 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 expenses in our segment reporting. See Note 11—Segment Information for additional information. These changes had no impact on total operating revenue, total operating expenses or net (loss) income for any period.

Included in accounts payable at March 31, 2019 and December 31, 2018, were $2 million and $86 million, respectively, representing book overdrafts.


11



Recently Adopted Accounting Pronouncements

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 will recognize 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 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 for fair value of the underlying asset by lessors that are not manufacturers or dealers in ASC 842, 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 standard 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 $115 million cumulative adjustment to accumulated deficit as of January 1, 2019, for the impact of the new accounting standard. The adjustment to accumulated deficit was driven by the derecognition of our prior failed sale leaseback transaction discussed in our prior periodic reports. The standard did not materially impact our consolidated net earnings or our cash flows in the first quarter of 2019.
Effective January 1, 2019, we adopted ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends current guidance on accounting for hedges mainly to align more closely an entity’s risk management activities and financial reporting relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. In addition, amendments in ASU 2017-12 simplify the application of hedge accounting by allowing more time to prepare hedge documentation and perform effectiveness assessments on a qualitative basis after hedges are implemented.  The adoption of this standard will be applied prospectively and did not have an impact on us. See Note 10—Derivative Financial Instruments to our consolidated financial statements in Item 1 of Part I of this report for additional disclosure regarding our hedging arrangements.

Recently Issued Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). 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 currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.


12


We are required to adopt the provisions of ASU 2016-13 no later than January 1, 2020. We expect to adopt ASU 2016-13 on January 1, 2020 and recognize the impacts through a cumulative adjustment to accumulated deficit as of the date of adoption.

(2)    Goodwill, Customer Relationships and Other Intangible Assets

Goodwill, customer relationships and other intangible assets consisted of the following:
 
March 31, 2019
 
December 31, 2018
 
(Dollars in millions)
Goodwill
$
21,526

 
28,031

Customer relationships, less accumulated amortization of $8,825 and $8,492
$
8,580

 
8,911

Indefinite-life intangible assets
$
269

 
269

Other intangible assets subject to amortization:
 
 
 
Capitalized software, less accumulated amortization of $2,687 and $2,616
$
1,536

 
1,468

Trade names and patents, less accumulated amortization of $69 and $61
124

 
131

Total other intangible assets, net
$
1,929

 
1,868


We are required to perform impairment tests related to our goodwill annually, which we perform as of October 31, or sooner if an indicator of impairment occurs. Due to our January 2019 internal reorganization and the decline in our stock price, we incurred two events in the first quarter of 2019 that triggered impairment testing. Due to the impairment indicators noted as a result of these triggering events, we evaluated our goodwill for the internal reorganization in January, and again as of March 31, 2019 as a result of the decline in our stock price.

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.

When we performed our October 31, 2018 annual impairment test, we estimated the fair value of our reporting units by considering both a market approach and a discounted cash flow method. The market approach method includes the use of multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method 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. Because our low stock price was a trigger for impairment testing, we estimated the fair value of our operations 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 of annualized revenue and EBITDA 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 and concluded that the indicated control premium of approximately 4.1% was reasonable based on recent transactions in the market place. For the three months 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 for the three months ended March 31, 2019. 


13


The following table shows the March 31, 2019 impairments at each of our reportable segments:

 
Impairments
 
(Dollars in millions)
International and Global Accounts                     
$
934

Enterprise
1,471

Small and Medium Business
896

Wholesale                                                        
3,019

Consumer
186

Total
$
6,506


The market multiples approach that we used incorporates significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of other cost synergies. In developing the market multiple, we also considered observed trends of our industry participants. Our failure to attain these forecasted results or changes in trends could result in future impairments. 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. Continued declines in our profitability, cash flows or the sustained, historically low trading prices of our common stock, may result in further impairment. 

Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired.

Amortization expense for intangible assets for the three months ended March 31, 2019 and 2018 totaled $429 million and $444 million, respectively. As of March 31, 2019, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $43.6 billion.

We estimate that total amortization expense for intangible assets for the years ending December 31, 2019 through 2023 will be as follows:
 
(Dollars in millions)
2019 (remaining nine months)
$
1,260

2020
1,600

2021
1,158

2022
978

2023
900


In January 2019, Jeff Storey, our Chief Operating Decision Maker ("CODM"), announced a new organization structure and began managing our operations in the following five segments: international and global accounts, enterprise, small and medium business, wholesale and consumer. As a result of this decision, we reclassified certain prior period amounts to conform to the current period presentation.

14


The following table shows the rollforward of goodwill assigned to our reportable segments from December 31, 2018 through March 31, 2019:
 
International and Global Accounts
Enterprise
Small and Medium Business
Wholesale
Consumer
Total
 
(Dollars in millions)
As of December 31, 2018
$
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
1





1

Impairments
(934
)
(1,471
)
(896
)
(3,019
)
(186
)
(6,506
)
As of March 31, 2019
$
2,662

4,738

3,259

3,813

7,054

21,526

(3)     Revenue Recognition

Refer to the Revenue Recognition section of Note 1—Background and Summary of Significant Accounting Policies and Note 5—Revenue Recognition in our annual report on Form 10-K for the year ended December 31, 2018 for further information regarding our application of ASC 606, “Revenue from Contracts with Customers”, including practical expedients and judgments applied in determining the amounts and timing of revenue from contracts with customers.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following table provides the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards:
 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
 
(Dollars in millions)
Total revenue
$
5,647

 
5,945

Adjustments for non-ASC 606 revenue (1)
(358
)
 
(312
)
Total revenue from contracts with customers
$
5,289

 
5,633

______________________________________________________________________

(1) Includes regulatory revenue, lease revenue, sublease rental income, revenue from fiber capacity lease arrangements and failed sale leaseback income, 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 March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
December 31, 2018
 
(Dollars in millions)
Customer receivables(1)
$
2,286

 
2,346

Contract assets
134

 
140

Contract liabilities
869

 
860

(1) Gross customer receivables of $2.4 billion and $2.5 billion, net of allowance for doubtful accounts of $145 million and $132 million, at March 31, 2019 and December 31, 2018, respectively.

15


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 ranges from one to seven years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets.

The following table provides information about revenue recognized for the three months ended March 31, 2019 and 2018:
 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
 
(Dollars in millions)
Revenue recognized in the period from:
 
 
 
Amounts included in contract liability at the beginning of the period (January 1, 2019 and 2018, respectively)
$
490

 
523

Performance obligations satisfied in previous periods

 


Performance Obligations

As of March 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 $6.4 billion. We expect to recognize approximately 77% of this revenue through 2021, 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:
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
(Dollars in millions)
 
Acquisition Costs
 
Fulfillment Costs
 
Acquisition Costs
 
Fulfillment Costs
Beginning of period balance
$
322

 
187

 
268

 
133

Costs incurred
57

 
34

 
52

 
29

Amortization
(50
)
 
(23
)
 
(39
)
 
(12
)
End of period balance
$
329

 
198

 
281

 
150


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. 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.

16



(4) Leases
 
Effective January 1, 2019, we adopted ASC 842 using the non-comparative transition option of applying the new standard at the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard. This allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional operating lease right of use 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 $115 million cumulative adjustment, net of deferred taxes, to accumulated deficit as of January 1, 2019, for the impact of the new accounting standard. The adjustment to accumulated deficit was driven by the derecognition of our prior failed sales leaseback transaction discussed in our prior periodic reports. The standard did not materially impact our consolidated net earnings or our cash flows in the first quarter of 2019. Financial position for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance.

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. 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 including 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.


17


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:
 
Three Month Ended March 31, 2019
 
(Dollars in millions)
Operating and short-term lease cost
$
169

Finance lease cost:
 
   Amortization of right-of-use assets
12

   Interest on lease liability
4

Total finance lease cost
16

Total lease cost
$
185

Supplemental unaudited consolidated balance sheet information and other information related to leases:
 
 
March 31,
Leases (millions)
Classification on the Balance Sheet
2019
Assets
 
 
Operating lease assets
Operating lease assets
$
1,952

Finance lease assets
Property, plant and equipment, net of accumulated depreciation
$
271

Total leased assets
 
$
2,223

 
 
 
Liabilities
 
 
Current
 
 
   Operating
Other current liabilities
$
561

   Finance
Current portion of long-term debt
$
36

Noncurrent
 
 
   Operating
Noncurrent operating lease liabilities
$
1,501

   Finance
Long-term debt
$
190

Total lease liabilities
 
$
2,288

 
 
 
Weighted-average remaining lease term (years)
 
   Operating leases
 
8.1

   Finance leases
 
11.1

Weighted-average discount rate
 
 
   Operating leases
 
6.73
%
   Finance leases
 
5.45
%
Supplemental unaudited consolidated cash flow statement information related to leases:

18


 
Three Month Ended March 31, 2019
 
(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
 
   Operating cash flows from operating leases
$
182

   Operating cash flows from finance leases
3

   Finance cash flows from finance leases
8


As of March 31, 2019, maturities of lease liabilities were as follows:
 
Operating Leases
 
Finance Leases
 
(Dollars in millions)
2019 (remaining nine months)
$
463

 
38

2020
462

 
35

2021
381

 
22

2022
301

 
20

2023
260

 
19

Thereafter
878

 
179

Total lease payments
2,745

 
313

   Less: interest
(683
)
 
(87
)
Total
$
2,062

 
226

Less: current portion
(561
)
 
(36
)
Long-term portion
$
1,501

 
190


As of March 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 is included in operating revenue in the consolidated statements of operations.

For the three months ended March 31, 2019 and 2018, our gross rental income was $199 million and $219 million, respectively.

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.


19


The future annual minimum payments under capital lease agreements as of December 31, 2018 were as follows:
 
(Dollars in millions)
Capital lease obligations:
 
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 Right-of-Way agreements and operating leases were as follows:
 
Right-of-Way Agreements
 
Operating Leases
 
Total
 
(Dollars in millions)
2019
$
157

 
675

 
832

2020
134

 
443

 
577

2021
112

 
355

 
467

2022
120

 
279

 
399

2023
115

 
241

 
356

2024 and thereafter
755

 
969

 
1,724

Total future minimum payments (1)
$
1,393

 
2,962

 
4,355

_______________________________________________________________________________
(1)
Minimum payments have not been reduced by minimum sublease rentals of $101 million due in the future under non-cancelable subleases.


20


(5) Long-Term Debt and Credit Facilities

The following chart reflects the consolidated long-term debt of CenturyLink, Inc. and its subsidiaries, including unamortized discounts and premiums and unamortized debt issuance costs, but excluding intercompany debt:
 
Interest Rates(1)
 
Maturities
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
(Dollars in millions)
Senior Secured Debt: (2)
 
 
 
 
 
 
 
CenturyLink, Inc.
 
 
 
 
 
 
 
2017 Revolving Credit Facility
5.234% - 5.237%
 
2022
 
$
695

 
550

Term Loan A (3)
LIBOR + 2.75%
 
2022
 
1,600

 
1,622

Term Loan A-1 (3)
LIBOR + 2.75%
 
2022
 
347

 
351

Term Loan B (3)
LIBOR + 2.75%
 
2025
 
5,925

 
5,940

Subsidiaries:
 
 
 
 
 
 
 
Level 3 Financing, Inc.
 
 
 
 
 
 
 
Tranche B 2024 Term Loan (4)
LIBOR + 2.25%
 
2024
 
4,611

 
4,611

Embarq Corporation subsidiaries
 
 
 
 
 
 
 
First mortgage bonds
7.125% - 8.375%
 
2023 - 2025
 
138

 
138

Senior Notes and Other Debt:
 
 
 
 
 
 
 
CenturyLink, Inc.
 
 
 
 
 
 
 
Senior notes
5.625% - 7.650%
 
2019 - 2042
 
8,010

 
8,036

Subsidiaries:
 
 
 
 
 
 
 
Level 3 Financing, Inc.
 
 
 
 
 
 
 
Senior notes
5.125% - 6.125%
 
2021 - 2026
 
5,315

 
5,315

Level 3 Parent, LLC
 
 
 
 
 
 
 
Senior notes
5.750%
 
2022
 
600

 
600

Qwest Corporation
 
 
 
 
 
 
 
Senior notes
6.125% - 7.750%
 
2021 - 2057
 
5,956

 
5,956

Term loan
4.500%
 
2025
 
100

 
100

Qwest Capital Funding, Inc.
 
 
 
 
 
 
 
Senior notes
6.875% - 7.750%
 
2021 - 2031
 
637

 
697

Embarq Corporation and subsidiary
 
 
 
 
 
 
 
Senior note
7.995%
 
2036
 
1,460

 
1,485

Other
9.000%
 
2019
 
150

 
150

Finance lease and other obligations
Various
 
Various
 
231

 
801

Unamortized discounts and other, net
 
 
 
 
(11
)
 
(8
)
Unamortized debt issuance costs
 
 
 
 
(274
)
 
(283
)
Total long-term debt
 
 
 
 
35,490

 
36,061

Less current maturities
 
 
 
 
(632
)
 
(652
)
Long-term debt, excluding current maturities
 
 
 
 
$
34,858

 
35,409

______________________________________________________________________ 
(1)
As of March 31, 2019.
(2)
For information on certain parent or subsidiary guarantees and liens securing this debt, see "Other" below.
(3)
Term Loans A, A-1 and B have interest rates of 5.249% and 5.272% as of March 31, 2019 and December 31, 2018, respectively.
(4)
The Tranche B 2024 Term Loan had an interest rate of 4.736% as of March 31, 2019 and 4.754% as of December 31, 2018.

21


Long-Term Debt Maturities

Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized discounts, net and unamortized debt issuance costs) maturing during the following years:
 
(Dollars in millions)(1)
2019 (remaining nine months)
$
556

2020
1,189

2021
3,115

2022
5,428

2023
2,095

2024 and thereafter
23,392

Total long-term debt
$
35,775

______________________________________________________________________
(1) Actual principal paid in any year may differ due to the possible future refinancing of outstanding debt or the issuance of new debt. The projected amounts in the table also exclude any impacts from any further acquisitions.
Repayments

During the three months ended March 31, 2019, CenturyLink and its affiliates repurchased approximately $111 million of their respective debt securities. 

Covenants

Certain of our debt instruments contain affirmative and negative covenants. Debt at CenturyLink, Inc., Level 3 Parent, LLC, and Level 3 Financing, Inc. contain more extensive covenants including, among other things and subject to certain 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, CenturyLink, Inc. and certain of its affiliates will be required to offer to purchase certain of their respective outstanding debt under certain circumstances in connection with certain specified "change of control" transactions.

Certain of our debt instruments contain cross acceleration provisions.

Compliance

As of March 31, 2019, CenturyLink, Inc. believes it and its subsidiaries were in compliance with the provisions and financial covenants in their respective material debt agreements in all material respects.

Other

 
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, see Note 10Derivative Financial Instruments.

For additional information on our long-term debt and credit facilities, see Note 6Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2018.

(6)  Severance and Leased Real Estate

Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to the loss of customers purchasing certain services.


22


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 4—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, 2018
$
87

Accrued to expense
4

Payments, net
(31
)
Balance at March 31, 2019
$
60


(7)  Employee Benefits

Net periodic benefit (income) expense for our combined pension plan includes the following components:
 
Combined Pension Plan
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions)
Service cost
$
14

 
16

Interest cost
110

 
100

Expected return on plan assets
(156
)
 
(173
)
Recognition of prior service credit
(2
)
 
(2
)
Recognition of actuarial loss
57

 
44

Net periodic pension benefit expense (income)
$
23

 
(15
)
Net periodic benefit expense for our post-retirement benefit plans includes the following components:
 
Post-Retirement Benefit Plans
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions)
Service cost
$
4

 
4

Interest cost
27

 
24

Recognition of prior service cost
4

 
5

Net periodic post-retirement benefit expense
$
35

 
33

Service costs are included in the cost of services and products and selling, general and administrative line items on the Statement of Operations and all other costs listed above are included in the other (expense) income, net line item on the Statement of Operations. Benefits paid by our qualified pension plan are paid through a trust that holds all of the plan's assets. Based on current laws and circumstances, we do not expect any contributions to be required for our qualified pension plan during 2019. The amount of required contributions to our qualified pension plan in 2020 and beyond will depend on a variety of factors, most of which are beyond our control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. We occasionally make voluntary contributions in addition to required contributions. Based on current circumstances, we do not anticipate making a voluntary contribution to the trust for our qualified pension plan in 2019.


23


(8) (Loss) Earnings Per Common Share

Basic and diluted (loss) earnings per common share were calculated as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions, except per share amounts, shares in thousands)
(Loss) Income (Numerator):
 
 
 
Net (loss) income
$
(6,165
)
 
115

Net (loss) income applicable to common stock for computing basic earnings per common share
(6,165
)
 
115

Net (loss) income as adjusted for purposes of computing diluted earnings per common share
$
(6,165
)
 
115

Shares (Denominator):
 
 
 
Weighted-average number of shares:
 
 
 
Outstanding during period
1,083,588

 
1,073,560

Non-vested restricted stock
(14,710
)
 
(7,764
)
Weighted-average shares outstanding for computing basic earnings per common share
1,068,878

 
1,065,796

Incremental common shares attributable to dilutive securities:
 
 
 
Shares issuable under convertible securities

 
10

Shares issuable under incentive compensation plans

 
3,377

Number of shares as adjusted for purposes of computing diluted (loss) earnings per common share
1,068,878

 
1,069,183

Basic (loss) earnings per common share
$
(5.77
)
 
0.11

Diluted (loss) earnings per common share (1)
$
(5.77
)
 
0.11

______________________________________________________________________ 
(1)
For the three months ended March 31, 2019, we excluded from the calculation of diluted loss per share 3.3 million shares 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 averaged 5.4 million and 4.3 million for the three months ended March 31, 2019 and 2018, respectively.

(9)  Fair Value of Financial Instruments

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Input Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Input Level 2 refers to fair values estimated using significant other observable inputs and Input Level 3 includes fair values estimated using significant unobservable inputs.

24


The following table presents the carrying amounts and estimated fair values of CenturyLink, Inc.'s financial liabilities as of March 31, 2019 and December 31, 2018:
 
 
 
March 31, 2019
 
December 31, 2018
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(Dollars in millions)
Long-term debt, excluding finance lease and other obligations
2
 
$
35,259

 
35,069

 
35,260

 
32,915

Interest rate swap contracts (see Note 10)
2
 
$
23

 
23

 

 


(10) 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 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I 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 interest rate swap agreements as cash flow hedges. Swaps designated as cash flow hedges involve the receipt of 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 Accumulated Other Comprehensive Income (Loss) (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings, due to the fact that the interest rate swap agreements qualify 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 the 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%. We evaluate the effectiveness of the hedges qualitatively on a quarterly basis.
  
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. This credit risk is generally limited to the unrealized losses in such contracts, should any of these counterparties fail to perform as contracted.
 
Amounts accumulated in AOCI related to derivatives are indirectly recognized in earnings as periodic settlements occur throughout the term of the swaps, when the related interest payments are made on our variable-rate debt.

The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheets as follows (in millions):
 
Liability Derivatives
 
March 31, 2019
 
Derivatives designated as
Balance Sheet Location
 
Fair Value
 
Cash flow hedging contracts
Other current and noncurrent liabilities
 
$
23

 


25


The amount of losses recognized in AOCI consists of the following (in millions):
Derivatives designated as hedging instruments
 
2019
  Cash flow hedging contracts
 
 
     Three months ended March 31,
 
$
23


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 $2.3 million of net losses on the interest rate swaps (based on the estimated LIBOR curve as of March 31, 2019) will be reflected as earnings within the next twelve months. Our interest rate swap agreements designated as cash flow hedging contracts qualify as effective hedge relationships.
 
(11)  Segment Information

In January 2019, Jeff Storey, our CODM, announced a new organization structure and began managing our operations in the following five segments: International and Global Accounts Management, Enterprise, Small and Medium Business, Wholesale and Consumer. In addition, 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. We reclassified certain prior period amounts to conform to the current period presentation.

At March 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: Asia Pacific, Latin America, Europe Middle East and Africa. IGAM is responsible for working with large multinational organizations in support of their business and IT transformation strategies.  We provide a portfolio of services inclusive of dark fiber; content delivery; private and public networking; hybrid IT solutions including private and public cloud services as well as consulting and professional services; and security services; all of which are described further under "Products and Services Categories"; and
Enterprise Segment. Under our enterprise segment, we provide our products and services to large and medium domestic and global enterprises, federal, state and local governments. Our products and services offered to these customers include our IP and Data Services suite of products, which includes VPN and hybrid networking, Ethernet and IP services; Transport and Infrastructure, which includes wavelengths and private line, dark fiber, colocation and data center services, and professional services; Voice Services, which includes local, long-distance, toll-free and unified communications services; and IT and Managed services, all of which are described further under "Products and Services Categories"; and
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. We designate businesses as small or medium based on company employee count. Our products and services offered to these customers include our IP and Data Services suite of products, primarily VPN, IP and Ethernet services; Transport and Infrastructure, which includes broadband, wavelengths and private line services; Voice Services, which includes local, long-distance, national public access, VoIP and toll-free services; and IT and Managed services, all of which are described further under "Products and Services Categories"; 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. Customers range from large global telecom providers to small regional providers. Our products and services offered to these customers include our IP and Data Services suite of products, primarily Ethernet, VPN and IP services; Transport and Infrastructure, which includes private line, wavelengths, UNE, dark fiber, colocation and data center, and wholesale broadband services; and Voice Services, which includes long-distance, local, toll-free and contact center, and intercarrier tandem services, all of which are described further under "Products and Services Categories"; and
Consumer Segment. Under our consumer segment, we provide our products and services to residential customers. Our products and services offered to these customers include our broadband, local and long-distance voice, and other ancillary services. 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 is reported in our consumer segment as regulatory revenue in 2018.
Product and Service Categories
We categorize our products and services revenue among the following four categories for the 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, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;

26


Transport and Infrastructure, which includes broadband, private line (including business data services), data center facilities and services, including cloud, hosting and application management solutions, wavelength, equipment sales and professional services, network security services, dark fiber services and other ancillary services;
Voice and Collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services;
IT and Managed Services, which includes information technology services and managed services, which may be purchased in conjunction with our other network services; and
We categorize our products and services revenue among the following four categories for the consumer segment:
Broadband, which includes consumer broadband revenue; and
Voice, which includes consumer local and long-distance revenue; and
Regulatory Revenue, which consists of (i) Universal Service Fund, Connect America Fund 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 consumer retail video revenue (including our facilities-based video revenue), professional services and other ancillary services.
The following table summarizes our segment results and operating revenue detail for our product and services for the three months ended March 31, 2019.

Three Months Ended March 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
$
420

688

300

341


1,749


1,749

Transport and Infrastructure
320

364

107

499


1,290


1,290

Voice and Collaboration
94

397

336

196


1,023


1,023

IT and Managed Services
57

74

12

1


144


144

Broadband




722

722


722

Voice




489

489


489

Regulatory




159

159


159

Other




71

71


71

Total Revenue
$
891

1,523

755

1,037

1,441

5,647


5,647

Expenses:





 


Cost of Services and Products
259

496

153

141

87

1,136

1,384

2,520

Selling, general and administrative
68

149

132

20

109

478

454

932

Less: Share-based compensation






(33
)
(33
)
Total expense
327

645

285

161

196

1,614

1,805

3,419

Total adjusted EBITDA
$
564

878

470

876

1,245

4,033

(1,805
)
2,228



27


The following table summarizes our segment results and operating revenue detail for our product and services for the three months ended March 31, 2018.
 
Three Months Ended March 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
$
440

665

291

339


1,735


1,735

Transport and Infrastructure
321

399

110

538


1,368


1,368

Voice and Collaboration
101

410

369

231


1,111


1,111

IT and Managed Services
73

73

14

2


162


162

Broadband




712

712


712

Voice




557

557


557

Regulatory




183

183


183

Other




117

117


117

Total Revenue
$
935

1,547

784

1,110

1,569

5,945


5,945

Expenses:





 
 
 
Cost of Services and Products
272

514

153

176

158

1,273

1,530

2,803

Selling, general and administrative
68

152

127

24

135

506

603

1,109

Less: Share-based compensation






(41
)
(41
)
Total expense
340

666

280

200

293

1,779

2,092

3,871

Total adjusted EBITDA
$
595

881

504

910

1,276

4,166

(2,092
)
2,074


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 total amount of such surcharges and transaction taxes that we included in revenues aggregated to $248 million and $246 million for the three months ended March 31, 2019 and 2018, respectively. These USF surcharges, where we record revenue and transaction taxes, are assigned to the product and service categories of each segment 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.


28


Revenue and Expenses

Our segment revenue includes all revenue from our International and Global Accounts Management, Enterprise, Small and Medium Business, Wholesale and Consumer 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. Network expenses not incurred as a direct result of providing services and products to segment customers and centrally managed expenses such as Operations, Finance, Human Resources, Legal, Marketing, Product Management and IT are not assigned to segments as they are managed separately; they are reported as "Operations and Other". We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the CODM by segment. Interest expense is also excluded from segment results 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 and are therefore excluded from our segment results.

The following table reconciles total segment adjusted EBITDA to net (loss) income:
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions)
Total segment adjusted EBITDA
$
4,033

 
4,166

Depreciation and amortization
(1,188
)
 
(1,283
)
Impairment of goodwill
(6,506
)
 

Other operating expenses
(1,805
)
 
(2,092
)
Stock-based compensation
(33
)
 
(41
)
Operating (loss) income
(5,499
)
 
750

Total other expense, net
(528
)
 
(514
)
Income (loss) before income tax expense
(6,027
)
 
236

Income tax expense
(138
)
 
(121
)
Net (loss) income
$
(6,165
)
 
115


(12) Commitments and 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 March 31, 2019 aggregated to approximately $121 million 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.


29


Principal Proceedings

Shareholder Class Action Suits

CenturyLink and certain members of the CenturyLink Board of Directors have been named as defendants in a putative shareholder class action lawsuit filed on January 11, 2017 in the 4th Judicial District Court of the State of Louisiana, Ouachita Parish, captioned Jeffery Tomasulo v. CenturyLink, Inc., et al. The complaint asserts, among other things, that the members of CenturyLink’s Board allegedly breached their fiduciary duties to the CenturyLink shareholders in approving the Level 3 merger agreement and, more particularly, that: the consideration that CenturyLink agreed to pay to Level 3 stockholders in the transaction is allegedly unfairly high; the CenturyLink directors allegedly had conflicts of interest in negotiating and approving the transaction; and the disclosures set forth in our preliminary joint proxy statement/prospectus filed in December 2016 are insufficient in that they allegedly fail to contain material information concerning the transaction. The complaint seeks, among other things, a declaration that the members of the CenturyLink Board have breached their fiduciary duties, corrective disclosure, rescissory or other damages and equitable relief, including rescission of the transaction. On February 13, 2017, the parties entered into a memorandum of understanding providing for the settlement of the lawsuit. In January 2019,
the court approved the settlement and entered final judgment. An objector filed an appeal, and that appeal is
pending. The costs of the settlement are not material to our consolidated financial statements.

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 of the transaction. It alleges that the proxy statement provided to the Level 3 shareholders failed to disclose 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, and also allowed the IXCs to refile state-law claims. Since then, many of
the LECs and IXCs have filed revised pleadings and additional motions, which remain pending. Separately, some of
the defendants, including CenturyLink, Inc.'s LECs, have petitioned the FCC to address these issues on an
industry-wide basis.


30


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

Several Missouri municipalities have, beginning in May 2012, asserted claims alleging underpayment of taxes against CenturyLink, Inc. and several of its subsidiaries in a number of proceedings filed in the Circuit Court of St. Louis County, Missouri. 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 have appealed that ruling. In a June 2017 ruling in connection with another one of these pending cases, the court made findings which, if not overturned, 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 have been filed in other federal and state courts, as well. 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.

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. The suit seeks an order of restitution on behalf of all CenturyLink customers, civil penalties, injunctive relief, and costs and fees. Additionally, we have received and responded to information requests and inquiries from other states.

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 $10 million at March 31, 2019.


31


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. That appeal 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 March 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 was filed under seal on November 26, 2013, and an amended complaint was filed under seal on June 16, 2014. 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.


32


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 in the coming 24 months 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 individually 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.


33


(13)  Other Financial Information

Other Current Assets

The following table presents details of other current assets reflected in our consolidated balance sheets:
 
March 31, 2019
 
December 31, 2018
 
(Dollars in millions)
Prepaid expenses
$
386

 
307

Income tax receivable
69

 
82

Materials, supplies and inventory
154

 
120

Contract assets
58

 
52

Contract acquisition costs
173

 
167

Contract fulfillment costs
88

 
82

Other
98

 
108

Total other current assets
$
1,026

 
918


(14)  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 three months ended March 31, 2019:
 
Pension Plans
 
Post-Retirement
Benefit Plans
 
Foreign Currency
Translation
Adjustment
and Other
 
Interest Rate Hedges
 
Total
 
(Dollars in millions)
Balance at December 31, 2018
$
(2,173
)
 
(58
)
 
(230
)
 

 
(2,461
)
Other comprehensive income (loss) before reclassifications

 

 
5

 
(17
)
 
(12
)
Amounts reclassified from accumulated other comprehensive income
41

 
3

 

 

 
44

Net current-period other comprehensive income (loss)
41

 
3

 
5

 
(17
)
 
32

Balance at March 31, 2019
$
(2,132
)
 
(55
)
 
(225
)
 
(17
)
 
(2,429
)

The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the three months ended March 31, 2019:
Three Months Ended March 31, 2019
 
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
 
$
57

 
Other income (expense), net
Prior service cost
 
2

 
Other income (expense), net
Total before tax
 
59

 
 
Income tax benefit
 
(15
)
 
Income tax expense
Net of tax
 
$
44

 
 
________________________________________________________________________
(1)
See Note 7—Employee Benefits for additional information on our net periodic benefit (expense) income related to our pension and post-retirement plans.

34


Information Relating to 2018

The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the three months ended March 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 before reclassifications

 

 
79

 
79

Amounts reclassified from accumulated other comprehensive income
31

 
4

 

 
35

Net current-period other comprehensive income
31

 
4

 
79

 
114

Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(375
)
 
(32
)
 

 
(407
)
Balance at March 31, 2018
$
(2,075
)
 
$
(263
)
 
$
50

 
(2,288
)

The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the three months ended March 31, 2018:
Three Months Ended March 31, 2018
 
Decrease (Increase)
in Net Income
 
Affected Line Item in Consolidated Statement of Operations
 
 
(Dollars in millions)
 
 
Amortization of pension & post-retirement plans(1)
 
 
 
 
Net actuarial loss
 
$
44

 
Other income (expense), net
Prior service cost
 
3

 
Other income (expense), net
Total before tax
 
47

 
 
Income tax benefit
 
(12
)
 
Income tax expense
Net of tax
 
$
35

 
 
________________________________________________________________________
(1)
See Note 7—Employee Benefits for additional information on our net periodic benefit (expense) income related to our pension and post-retirement plans.
(15)  Labor Union Contracts

As of March 31, 2019, approximately 26% 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. Approximately 80 of our employees were subject to collective bargaining agreements that expired on or prior to March 31, 2019 and are currently being renegotiated. Approximately 6% of our union employees are subject to collective bargaining agreements that are scheduled to expire in 2019.


35


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, (i) references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries and (ii) references in this report to "Level 3" refer to Level 3 Communications, Inc. prior to our acquisition thereof and to its successor-in-interest Level 3 Parent, LLC after such acquisition.

All references to "Notes" in this Item 2 of Part I refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report.

Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report and "Risk Factors" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018 for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects.

Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our annual report on Form 10-K for the year ended December 31, 2018, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations and cash flows for the first three months of the year are not necessarily indicative of the results of operations and cash flows that might be expected for the entire year.

We are an international facilities-based communications company engaged primarily in providing a broad array of integrated services to our residential and business customers. We believe we are among the largest providers of communications services to domestic and global enterprise customers and the third largest wireline telecommunications company in the United States. We provide services in over 60 countries, with most of our revenue being derived in the United States.
At March 31, 2019, we served 4.8 million consumer broadband subscribers. Our methodology for counting consumer broadband subscribers may not be comparable to those of other companies. We no longer report or discuss access lines as a key operating metric given the significant migration in our industry from legacy services to IP-enabled services.
Segments

At March 31, 2019, we had the following five 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 three operating regions: Asia Pacific, Latin America, Europe Middle East and Africa. Our international network presence spans and connects over 60 countries and conducts business in 25 languages. IGAM is responsible for working with large multinational organizations in support of their business and IT transformation strategies.  We provide a portfolio of services inclusive of dark fiber; content delivery; private and public networking; hybrid IT solutions including private and public cloud services as well as consulting and professional services; and security services; and
Enterprise Segment. Under our enterprise segment, we provide our products and services to large and medium domestic and global enterprises, federal, state and local governments. Our products and services offered to these customers include our IP and Data Services suite of products, which includes VPN and hybrid networking, Ethernet and IP services; Transport and Infrastructure, which includes wavelengths and private line, dark fiber, colocation and data center services, and professional services; Voice Services, which includes local, long-distance, toll-free and unified communications services; and IT and Managed services, all of which are described further under "Products and Services"; and

36


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. Small and medium distinction is based on company employee count. Our products and services offered to these customers include our IP and Data Services suite of products, primarily VPN, IP and Ethernet services; Transport and Infrastructure, which includes broadband, wavelengths and private line services; Voice Services, which includes local, long-distance, national public access, VoIP and toll-free services; and IT and Managed services, all of which are described further under "Products and Services"; 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. Customers range from large global telecom providers to small regional providers. Our products and services offered to these customers include our IP and Data Services suite of products, primarily Ethernet, VPN and IP services; Transport and Infrastructure, which includes private line, wavelengths, UNE, dark fiber, colocation and data center, and wholesale broadband services; and Voice Services, which includes long-distance, local, toll-free and contact center, and intercarrier tandem services, all of which are described further under "Products and Services"; and
Consumer Segment. Under our consumer segment, we provide our products and services to residential customers. Our products and services offered to these customers include our broadband, local and long-distance voice, and other ancillary services. 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 is reported in our consumer segment as regulatory revenue.
Results of Operations

The following table summarizes the results of our consolidated operations for the three months ended March 31, 2019:
 
Three Months Ended March 31,
 
2019
 
2018
 
(Dollars in millions, except per share amounts)
Operating revenue
$
5,647

 
5,945

Operating expenses
11,146

 
5,195

Operating (loss) income
(5,499
)

750

Total other expense, net
(528
)
 
(514
)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(6,027
)
 
236

Income tax expense
138

 
121

Net (loss) income
$
(6,165
)

115

Basic (loss) earnings per common share
$
(5.77
)
 
0.11

Diluted (loss) earnings per common share
$
(5.77
)
 
0.11


For over a decade, we have experienced revenue declines, excluding the impact of acquisitions, primarily due to declines in voice and private line customers, switched access rates and minutes of use. More recently, we have experienced declines in revenue derived from the sale of certain of our business products and services. To partially mitigate these revenue declines, we remain focused on efforts to, among other things:
promote long-term relationships with our customers through bundling of integrated services;
increase the capacity, speed and usage of our networks;
provide a wide array of diverse services, including enhanced or additional services that may become available in the future due to, among other things, advances in technology or improvements in our infrastructure;
provide our premium services to a higher percentage of our customers;
pursue acquisitions of additional assets if available at attractive prices;

37


increase prices on our products and services if and when practicable; and
market our products and services to new customers.
Operating Revenue
We categorize our products and services revenue among the following four categories for the International and Global Accounts Management, Enterprise, Small and Medium Business and Wholesale segments:
IP and Data Services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;
Transport and Infrastructure, which include broadband, private line (including business data services), data center facilities and services, including cloud, hosting and application management solutions, wavelength, equipment sales and professional services, network security services, dark fiber services and other ancillary services;
Voice and Collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services;
IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services; and
We categorize our products and services revenue among the following four categories for the consumer segment:
Broadband, which include consumer broadband revenue; and
Voice, which include consumer local and long-distance revenue; and
Regulatory Revenue, which consist of (i) Universal Service Fund ("USF"), Connect America Fund ("CAF") 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 include consumer retail video revenue (including our facilities-based video revenue), professional services and other ancillary services.
The following table summarizes our consolidated operating revenue recorded under each of our eight above described revenue categories:
 
Three Months Ended March 31,
 
Increase/(Decrease)
 
% Change 
 
2019
 
2018
 
 
 
(Dollars in millions)
 
 
IP and Data Services
$
1,749

 
1,735

 
14

 
1
 %
Transport and Infrastructure
1,290

 
1,368

 
(78
)
 
(6
)%
Voice and Collaboration
1,023

 
1,111

 
(88
)
 
(8
)%
IT and Managed Services
144

 
162

 
(18
)
 
(11
)%
Broadband
722

 
712

 
10