Company Quick10K Filing
Level 3 Communications
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 0 $0
10-Q 2019-11-08 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-13 Quarter: 2019-03-31
10-K 2019-03-19 Annual: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-10 Quarter: 2018-03-31
10-K 2018-03-01 Annual: 2017-12-31
10-Q 2017-11-09 Quarter: 2017-09-30
10-Q 2017-08-04 Quarter: 2017-06-30
10-Q 2017-05-05 Quarter: 2017-03-31
10-K 2017-02-24 Annual: 2016-12-31
10-Q 2016-11-07 Quarter: 2016-09-30
10-Q 2016-08-05 Quarter: 2016-06-30
10-Q 2016-05-06 Quarter: 2016-03-31
10-K 2016-02-26 Annual: 2015-12-31
10-Q 2015-11-06 Quarter: 2015-09-30
10-Q 2015-08-06 Quarter: 2015-06-30
10-Q 2015-05-08 Quarter: 2015-03-31
10-K 2015-02-27 Annual: 2014-12-31
10-Q 2014-11-07 Quarter: 2014-09-30
10-Q 2014-08-08 Quarter: 2014-06-30
10-Q 2014-05-08 Quarter: 2014-03-31
10-K 2014-02-27 Annual: 2013-12-31
10-Q 2013-11-05 Quarter: 2013-09-30
10-Q 2013-08-06 Quarter: 2013-06-30
10-Q 2013-05-07 Quarter: 2013-03-31
10-K 2013-02-26 Annual: 2012-12-31
10-Q 2012-11-08 Quarter: 2012-09-30
10-Q 2012-08-06 Quarter: 2012-06-30
10-Q 2012-05-08 Quarter: 2012-03-31
10-K 2012-02-28 Annual: 2011-12-31
10-Q 2011-11-08 Quarter: 2011-09-30
10-Q 2011-08-04 Quarter: 2011-06-30
10-Q 2011-05-06 Quarter: 2011-03-31
10-K 2011-02-25 Annual: 2010-12-31
10-Q 2010-11-05 Quarter: 2010-09-30
10-Q 2010-08-03 Quarter: 2010-06-30
10-Q 2010-05-07 Quarter: 2010-03-31
10-K 2010-02-26 Annual: 2009-12-31
8-K 2019-11-29 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-11-22 Other Events, Exhibits
8-K 2019-11-15 Other Events, Exhibits
8-K 2019-11-12 Other Events, Exhibits
8-K 2019-09-25 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-09-11 Other Events, Exhibits
8-K 2018-11-06 Officers, Exhibits
8-K 2018-11-06 Officers
8-K 2018-09-21 Officers, Exhibits
LVLT 2019-09-30
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 6. Exhibits
EX-31.1 lvltexhibit311-093019.htm
EX-31.2 lvltexhibit312-093019.htm
EX-32.1 lvltexhibit321-093019.htm
EX-32.2 lvltexhibit322-093019.htm

Level 3 Communications Earnings 2019-09-30

LVLT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
TRWH
UGRO
VERY
QPAG 0 1 5 9 0 -3 -0 -0 1% 0.2 -259%
VIE
VIR
WORK
XTEG
IGMB 0 2 1 0 -0 -6 -5 -0 -278% 0.0 -235%
SBFM 0 0 1 0 0 -2 -2 -0 23% 0.0 -1,974%

Document
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Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35134
 

LEVEL 3 PARENT, LLC
(Exact name of registrant as specified in its charter)
 
Delaware
 
47-0210602
(State of Incorporation)
 
(I.R.S. Employer
 
 
 
 
Identification No.)
 
 
 
 
 
1025 Eldorado Blvd.,
Broomfield,
CO
 
80021-8869
(Address of principal executive offices)
 
(Zip Code)
(720) 888-1000
(Registrant’s telephone number,
including area code)
 

THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF CENTURYLINK, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE PURSUANT TO GENERAL INSTRUCTION H(2).

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

All of the limited liability company interest in the registrant is held by an affiliate of the registrant. None of the interest is publicly traded.

 



Table of Contents


TABLE OF CONTENTS

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


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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, transformation projects and other initiatives;

statements about our liquidity, profit margins, tax position, tax assets, tax rates, asset values, contingent liabilities, growth opportunities and growth rates, business prospects, regulatory and competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, 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:

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

the effects of new, emerging or competing technologies, including those that could make our products and services 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 and 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 avoid unanticipated integration disruptions;

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

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 payments and distributions;

our ability to implement our operating plans, corporate strategies and capital allocation plans, or changes to such 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 maintain satisfactory relations with our workforce;
the negative impact of increases in the costs of CenturyLink’s pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations, which could affect our business and liquidity;
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 lenders;

our ability to collect our receivables from financially troubled customers;

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

any adverse developments in legal or regulatory proceedings involving us or our affiliates, including CenturyLink;

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changes in tax, communications, healthcare or other laws or regulations;

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

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

adverse effects of material weakness 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 "Risk Factors" in Item 1A or elsewhere in our annual report on Form 10-K or other of our filings with the SEC.

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 distribution or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.


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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
OPERATING REVENUE
 
 
 
 
 
 
 
Operating revenue
$
2,023

 
1,984

 
5,990

 
6,071

Operating revenue - affiliates
41

 
26

 
134

 
78

Total operating revenue
2,064

 
2,010

 
6,124

 
6,149

OPERATING EXPENSES
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
960

 
976

 
2,846

 
2,954

Selling, general and administrative
289

 
311

 
964

 
1,043

Operating expenses - affiliates
76

 
65

 
209

 
173

Depreciation and amortization
430

 
431

 
1,209

 
1,295

Goodwill impairment

 

 
3,708

 

Total operating expenses
1,755


1,783

 
8,936

 
5,465

OPERATING INCOME (LOSS)
309

 
227

 
(2,812
)
 
684

OTHER (EXPENSE) INCOME
 
 
 
 
 
 
 
Interest income - affiliate
15

 
18

 
47

 
50

Interest expense
(123
)
 
(137
)
 
(384
)
 
(381
)
Other (expense) income, net
(13
)
 
18

 
2

 
21

Total other expense, net
(121
)
 
(101
)
 
(335
)
 
(310
)
INCOME (LOSS) BEFORE INCOME TAXES
188

 
126

 
(3,147
)
 
374

   Income tax expense
74

 
38

 
214

 
184

NET INCOME (LOSS)
$
114

 
88

 
(3,361
)
 
190


See accompanying notes to consolidated financial statements.



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LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
NET INCOME (LOSS)
$
114

 
88

 
(3,361
)
 
190

OTHER COMPREHENSIVE LOSS:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of $22, $(1), $24 and $29 tax
(110
)
 
(1
)
 
(115
)
 
(164
)
Other comprehensive loss, net of tax
(110
)
 
(1
)
 
(115
)
 
(164
)
COMPREHENSIVE INCOME (LOSS)
$
4

 
87

 
(3,476
)
 
26


See accompanying notes to consolidated financial statements.


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LEVEL 3 PARENT, LLC
CONSOLIDATED BALANCE SHEETS

 
September 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
 
(Dollars in millions)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
1,224

 
243

Restricted cash
3

 
4

Accounts receivable, less allowance of $14 and $11
718

 
712

Note receivable - affiliate
1,590

 
1,825

Other
294

 
234

Total current assets
3,829

 
3,018

Property, plant and equipment, net of accumulated depreciation of $1,610 and $1,021
9,719

 
9,453

GOODWILL AND OTHER ASSETS
 
 
 
Goodwill
7,389

 
11,119

Operating lease assets
1,102

 

Restricted cash
19

 
25

Customer relationships, net
7,026

 
7,567

Other intangible assets, net
458

 
410

Other, net
550

 
699

Total goodwill and other assets
16,544

 
19,820

TOTAL ASSETS
$
30,092

 
32,291

LIABILITIES AND MEMBER'S EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
407

 
6

Accounts payable
753

 
726

Accounts payable - affiliates
552

 
246

Accrued expenses and other liabilities
 
 
 
Salaries and benefits
216

 
233

Income and other taxes
113

 
130

Current operating lease liabilities
244

 

Interest
78

 
95

Other
71

 
78

Current portion of deferred revenue
296

 
310

Total current liabilities
2,730

 
1,824

LONG-TERM DEBT
10,995

 
10,838

DEFERRED REVENUE AND OTHER LIABILITIES
 
 
 
Deferred revenue
1,264

 
1,181

Deferred income taxes, net
225

 
202

Noncurrent operating lease liabilities
900

 

Other
286

 
369

Total deferred revenue and other liabilities
2,675

 
1,752

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 9)


 


MEMBER'S EQUITY
 
 
 
Member's equity
13,978

 
18,048

Accumulated other comprehensive loss
(286
)
 
(171
)
Total member's equity
13,692

 
17,877

TOTAL LIABILITIES AND MEMBER'S EQUITY
$
30,092

 
32,291


See accompanying notes to consolidated financial statements.


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LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended September 30,
 
2019
 
2018
 
(Dollars in millions)
OPERATING ACTIVITIES
 
 
 
Net (loss) income
$
(3,361
)
 
190

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,209

 
1,295

Goodwill impairment
3,708

 

Deferred income taxes
165

 
175

Changes in current assets and liabilities:
 
 
 
Accounts receivable
(28
)
 
51

Accounts payable
(72
)
 
(64
)
Other assets and liabilities, net
(126
)
 
(118
)
Other assets and liabilities, affiliate
306

 
55

Changes in other noncurrent assets and liabilities, net
57

 
37

Other, net
(14
)
 
6

Net cash provided by operating activities
1,844

 
1,627

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(982
)
 
(726
)
Payments of notes receivable - affiliates
235

 

Proceeds from sale of property, plant and equipment and other assets
27

 
119

Other, net
(25
)
 

Net cash used in investing activities
(745
)
 
(607
)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of long-term debt
988

 

Payments of long-term debt
(404
)
 
(5
)
Distributions
(709
)
 
(1,130
)
Net cash used in financing activities
(125
)
 
(1,135
)
Net increase (decrease) in cash, cash equivalents and restricted cash
974

 
(115
)
Cash, cash equivalents and restricted cash at beginning of period
272

 
331

Cash, cash equivalents and restricted cash at end of period
$
1,246

 
216

Supplemental cash flow information:
 
 
 
Income taxes paid, net
$
(17
)
 
(24
)
Interest paid (net of capitalized interest of $9 and $—)
$
(416
)
 
(404
)
 
 
 
 
Cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
1,224

 
188

Restricted cash - current
3

 
3

Restricted cash - noncurrent
19

 
25

Total
$
1,246

 
216

See accompanying notes to consolidated financial statements.

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LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF MEMBER'S EQUITY
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
MEMBER'S EQUITY
 
 
 
 
 
 
 
Balance at beginning of period
$
14,008

 
18,749

 
18,048

 
19,254

Net income (loss)
114

 
88

 
(3,361
)
 
190

Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $3 tax

 

 

 
9

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

 

 

 
(6
)
Purchase price accounting adjustments

 

 

 
(5
)
Distributions
(144
)
 
(525
)
 
(709
)
 
(1,130
)
Balance at end of period
13,978

 
18,312

 
13,978

 
18,312

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
Balance at beginning of period
(176
)
 
(139
)
 
(171
)
 
18

Other comprehensive loss
(110
)
 
(1
)
 
(115
)
 
(164
)
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

 

 
6

Balance at end of period
(286
)
 
(140
)
 
(286
)
 
(140
)
TOTAL MEMBER'S EQUITY
$
13,692

 
18,172

 
13,692

 
18,172

    

See accompanying notes to consolidated financial statements.


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LEVEL 3 PARENT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

References in the Notes to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the “Company” and “our”, unless the context otherwise requires, refer to Level 3 Parent, LLC and its consolidated subsidiaries.

(1) Background

General

We are an international facilities-based communications provider of a broad range of integrated communications services. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

Effective November 1, 2017, we were acquired by CenturyLink in a cash and stock transaction, including the assumption of our debt (the "CenturyLink Merger").

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 nine 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. Transactions with our non-consolidated affiliates (CenturyLink and its other subsidiaries, referred to herein as affiliates) have not been eliminated. Due to exchange restrictions and other conditions, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiary and began accounting for our investment in our Venezuelan subsidiary using the cost method of accounting. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the third quarter of 2019.

We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenue for three and nine months ended September 30, 2019 and 2018.

Segments

Our operations are integrated into and reported as part of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one reportable segment.


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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 have recognized ASC 842's cumulative effect transition adjustment (discussed below) as of January 1, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things (i) allowed us to carry forward the historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases under the new definition of a lease; and (iii) did not require us to reassess whether previously capitalized initial direct costs for any existing leases would qualify for capitalization under ASC 842. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment of right-of-use assets for existing leases.
On March 5, 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-01, "Leases (ASC 842): Codification Improvements", effective for public companies for fiscal years beginning after December 15, 2019. The new ASU aligns the guidance in ASC 842 for determining fair value of the underlying asset by lessors that are not manufacturers or dealers, with that of existing guidance.  As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, "Fair Value Measurement") should be applied. More importantly, the ASU also exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. Early adoption permits public companies to adopt concurrent with the transition to ASC 842 on leases. We adopted ASU 2019-01 as of January 1, 2019.
Adoption of the new standards resulted in the recording of operating lease assets and operating lease liabilities of approximately $1.3 billion and $1.4 billion, respectively, as of January 1, 2019. The standards did not materially impact our consolidated net earnings and had no impact on cash flows. Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Recently Issued Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments". The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are evaluating the potential impact ASU 2016-13 will have on our financial assets measured at amortized cost including, but not limited to, customer receivables and contract asset balances.

Over the fourth quarter we will complete our evaluation of the impact to our accounting and internal controls over financial reporting as a result of ASU 2016-13. 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.

Subsequent Event

As of the date of this report, $250 million of distributions were declared and $225 million were paid to our parent in the fourth quarter of 2019.


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(2) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in millions)
Goodwill
$
7,389

 
11,119

Customer relationships, less accumulated amortization of $1,355 and $833
$
7,026

 
7,567

Other intangible assets subject to amortization:
 
 
 
  Trade names, less accumulated amortization of $50 and $30
80

 
100

  Developed technology, less accumulated amortization of $121 and $67
378

 
310

Total other intangible assets, net
$
458

 
410



Our goodwill was derived from CenturyLink's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.

We are required to perform an impairment test related to our goodwill annually, which we perform as of October 31, or sooner if an indicator of impairment occurs. The decline in CenturyLink's stock price triggered impairment testing in the first quarter of 2019. Due to this impairment indicator, we evaluated our goodwill as of March 31, 2019. There was not an additional triggering event during the third quarter of 2019.

When we performed our October 31, 2018 annual impairment test, we estimated the fair value of equity 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 beyond the cash flows from the discrete projection period. Because CenturyLink's low stock price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach in the quarter ended March 31, 2019. 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 within this range. For the three months ended March 31, 2019, based on our assessments performed as described above, we concluded that the estimated fair value was less than our carrying value of equity as of the date of our triggering event during the first quarter. As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge aggregating to $3.7 billion in the first quarter of 2019.

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 or cash flows or the continued sustained low trading prices of CenturyLink's common stock may result in further impairment.

Total amortization expense for intangible assets for the three months ended September 30, 2019 and 2018, was $206 million and $204 million, respectively, and for the nine months ended September 30, 2019 and 2018, was $604 million and $595 million, respectively. As of September 30, 2019, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $16.4 billion.

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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 three months)
$
205

2020
825

2021
825

2022
764

2023
743



The following table shows the rollforward of goodwill from December 31, 2018 through September 30, 2019:
 
(Dollars in millions)
As of December 31, 2018
$
11,119

Effect of foreign currency rate change and other
(22
)
Impairment
(3,708
)
As of September 30, 2019
$
7,389




14


(3) Revenue Recognition

Refer to the Revenue Recognition section of Note 1—Background and Summary of Significant Accounting Policies and Note 4—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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
Total revenue
$
2,064

 
2,010

 
6,124

 
6,149

Adjustments for non-ASC 606 revenue (1)
(94
)
 
(72
)
 
(288
)
 
(221
)
Total revenue from contracts with customers
$
1,970

 
1,938

 
5,836

 
5,928

_____________________________________________________________________ 
(1) 
Includes sublease rental income and revenue from fiber capacity lease arrangements 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 September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in millions)
Customer receivables (1)
$
737

 
712

Contract assets
31

 
19

Contract liabilities
412

 
393

(1)
Gross customer receivables of $751 million and $723 million, net of allowance for doubtful accounts of $14 million and $11 million, at September 30, 2019 and December 31, 2018, respectively.
Contract liabilities are consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which 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 and nine months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
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)
$
27

 
22

 
146

 
135

Performance obligations satisfied in previous periods

 

 

 



15


Performance Obligations

As of September 30, 2019, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts (including affiliates) that are unsatisfied (or partially satisfied) is approximately $5.2 billion. We expect to recognize approximately 69% 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 are contractually entitled to bill pre-determined amounts for future services (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 tables provide changes in our contract acquisition costs and fulfillment costs:
 
Three Months Ended September 30,
 
2019
 
2018
 
(Dollars in millions)
 
Acquisition Costs
 
Fulfillment Costs
 
Acquisition Costs
 
Fulfillment Costs
Beginning of period balance
$
73

 
106

 
34

 
52

Costs incurred
13

 
26

 
16

 
22

Amortization
(12
)
 
(17
)
 
(5
)
 
(8
)
End of period balance
$
74

 
115

 
45

 
66


 
Nine Months Ended September 30,
 
2019
 
2018
 
(Dollars in millions)
 
Acquisition Costs
 
Fulfillment Costs
 
Acquisition Costs
 
Fulfillment Costs
Beginning of period balance
$
64

 
84

 
13

 
14

Costs incurred
42

 
77

 
42

 
69

Amortization
(32
)
 
(46
)
 
(10
)
 
(17
)
End of period balance
$
74

 
115

 
45

 
66




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 an expected contract term between 12 and 60 months for our business customers and amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are expected 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.


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(4) Leases

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, as discussed in Note 1—Background and Summary of Significant Accounting Policies.

We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Some of our lease arrangements contain lease components (including fixed payments, such as, rent, real estate taxes and insurance costs) and non-lease components (including common-area maintenance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component.

Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease expense consisted of the following:

 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
(Dollars in millions)
Operating and short-term lease cost
$
92

 
288

Finance lease cost:
 
 
 
   Amortization of right-of-use assets
3

 
10

   Interest on lease liability
2

 
8

Total finance lease cost
5

 
18

Total lease cost
$
97

 
306




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Supplemental unaudited consolidated balance sheet information and other information related to leases:
 
 
September 30,
Leases (millions)
Classification on the Balance Sheet
2019
Assets
 
 
Operating lease assets
Operating lease assets
$
1,102

Finance lease assets
Property, plant and equipment, net of accumulated depreciation
147

Total leased assets
 
$
1,249

 
 
 
Liabilities
 
 
Current
 
 
   Operating
Current operating lease liabilities
$
244

   Finance
Current portion of long-term debt
7

Noncurrent
 
 
   Operating
Noncurrent operating lease liabilities
900

   Finance
Long-term debt
153

Total lease liabilities
 
$
1,304

 
 
 
Weighted-average remaining lease term (years)
 
   Operating leases
 
11.1

   Finance leases
 
13.4

Weighted-average discount rate
 

   Operating leases
 
6.59
%
   Finance leases
 
5.68
%
Supplemental unaudited consolidated cash flow statement information related to leases:
 
Nine Months Ended September 30, 2019
 
(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
 
   Operating cash flows from operating leases
296

   Operating cash flows from finance leases
8

   Financing cash flows from finance leases
3



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Table of Contents


As of September 30, 2019, maturities of lease liabilities were as follows:
 
Operating Leases
 
Finance Leases
 
(Dollars in millions)
2019 (remaining three months)
$
75

 
6

2020
277

 
15

2021
231

 
16

2022
199

 
16

2023
169

 
16

Thereafter
701

 
165

Total lease payments
1,652

 
234

   Less: interest
(508
)
 
(74
)
Total
1,144

 
160

Less: current portion
(244
)
 
(7
)
Long-term portion
$
900

 
153



As of September 30, 2019, we had no material operating or finance leases that had not yet commenced.

Operating Lease Income

We lease various IRUs, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations.

For the three and nine months ended September 30, 2019, our gross rental income was $52 million and $153 million, respectively, which represents 2.5% of our operating revenue for both periods. For the three and nine months ended September 30, 2018, our gross rental income was $47 million and $143 million, respectively, which represents 2.3% of our operating revenue for both periods.

Disclosures under ASC 840

We adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption.


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Table of Contents


The future annual minimum payments under capital lease agreements as of December 31, 2018 were as follows:

 
Future Minimum Payments
 
(Dollars in millions)
Capital lease obligations:
 
2019
$
16

2020
15

2021
16

2022
16

2023
17

2024 and thereafter
164

Total minimum payments
244

Less: amount representing interest and executory costs
(81
)
Present value of minimum payments
163

Less: current portion
(6
)
Long-term portion
$
157



At December 31, 2018, our future rental commitments for operating leases were as follows:

 
Operating Leases
 
(Dollars in millions)
2019
$
396

2020
259

2021
219

2022
164

2023
137

2024 and thereafter
613

Total future minimum payments (1)
$
1,788

_______________________________________________________________________________
(1)
Minimum payments have not been reduced by minimum sublease rentals of $29 million due in the future under non-cancelable subleases.


20


(5) Long-Term Debt

The following table summarizes our long-term debt:
 
Interest Rates
 
Maturities
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
(Dollars in millions)
Level 3 Parent, LLC
 
 
 
 
 
 
 
Senior notes (1)
5.750%
 
2022
 
$
600

 
600

Subsidiaries

 
 
 
 
 
 
Level 3 Financing, Inc.

 
 
 
 
 
 
Senior notes (2)
4.625%-6.125%
 
2021 - 2027
 
5,915

 
5,315

Term loan (3)
LIBOR + 2.25%
 
2024
 
4,611

 
4,611

Finance leases
Various
 
Various
 
160

 
163

Total long-term debt, excluding unamortized premiums
 
 
 
 
11,286

 
10,689

Unamortized premiums, net
 
 
 
 
129

 
155

Unamortized debt issuance costs
 
 
 
 
(13
)
 

Total long-term debt
 
 
 
 
11,402

 
10,844

Less current maturities
 
 
 
 
(407
)
 
(6
)
Long-term debt, excluding current maturities
 
 
 
 
$
10,995

 
10,838


(1) The notes are not guaranteed by any of Level 3 Parent, LLC's subsidiaries. See "Additional Information" within this Note for redemption
details.
(2) The notes are fully and unconditionally guaranteed on an unsubordinated unsecured basis by Level 3 Parent, LLC and Level 3
Communications, LLC. See "Subsequent Events" within this Note for redemption details.    
(3) The Tranche B 2024 Term Loan is a secured obligation and is guaranteed by Level 3 Parent, LLC and certain of its subsidiaries. The Tranche
B 2024 Term Loan had an interest rate of 4.294% as of September 30, 2019 and 4.754% as of December 31, 2018. The interest rate on the
Tranche B 2024 Term Loan is set with a minimum London Interbank Offered Rate ("LIBOR") of zero percent.

Aggregate Maturities of Long-Term Debt

Set forth below is the aggregate principal amount of our long-term debt and finance leases (excluding unamortized premiums) maturing during the following years as of September 30, 2019:
 
(Dollars in millions)
2019 (remaining three months)
$
403

2020
6

2021
7

2022
1,449

2023
1,210

2024 and thereafter
8,211

Total long-term debt
$
11,286



Repayments

During the nine months ended September 30, 2019, Level 3 Financing, Inc. repurchased approximately $400 million of its 6.125% Senior Notes due 2021.

New Issuance


21


On September 25, 2019, Level 3 Financing, Inc. issued $1.0 billion of 4.625% Senior Notes due 2027. The proceeds from the offering together with cash on hand will be used for general corporate purposes, including, without limitation, to redeem all of Level 3 Financing, Inc.'s $240 million outstanding principal amount of 6.125% Senior Notes due 2021, all of Level 3 Parent, LLC's $600 million outstanding principal amount of 5.75% Senior Notes due 2022 and $160 million of Level 3 Financing, Inc.'s $1 billion in outstanding principal amount of 5.375% Senior Notes due 2022. See "Subsequent Event" below.

Covenants

The term loan and senior notes of Level 3 Parent, LLC and Level 3 Financing, Inc. contain extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates including CenturyLink and its other subsidiaries, dispose of assets and merge or consolidate with any other person. Also, Level 3 Parent, LLC, as well as Level 3 Financing, Inc., will be required to offer to purchase certain of its long-term debt securities under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC.

Certain of CenturyLink's and our debt instruments contain cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.

Compliance

As of September 30, 2019, Level 3 Parent, LLC (as successor in interest to Level 3 Communications, 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.

Additional Information

For additional information on our long-term debt, see Note 5—Long-Term Debt 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.

Subsequent Event

On October 25, 2019, Level 3 Financing, Inc. redeemed all of the $240 million outstanding aggregate principal amount of its 6.125% Senior Notes due 2021 and $160 million of the $1.0 billion outstanding principal amount of its 5.375% Senior Notes due 2022.

On October 17, 2019, Level 3 Parent, LLC. issued a notice of redemption on all $600 million outstanding principal amount of Level 3 Parent, LLC's 5.75% Senior Notes due 2022 on December 1, 2019.

(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 improvement and transformation initiatives, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to the loss of customers purchasing certain services.

We have 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 $47 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.

22



Changes in our accrued liabilities for severance expenses were as follows:
 
Severance
 
(Dollars in millions)
Balance at January 1, 2019
$
19

Accrued to expense
(1
)
Payments, net
(10
)
Balance at September 30, 2019
$
8



(7) Products and Services Revenue

We categorize our products, services and revenue among the following five categories:
IP and Data Services, which include primarily VPN data networks, Ethernet, IP, video (including our CDN services and Vyvx broadcast services) and other ancillary services;
Transport and Infrastructure, which includes private line (including business data services), wavelength, colocation and data center services, including cloud, hosting and application management solutions, professional services, network security services, dark fiber services and other ancillary services;
Voice and Collaboration, which includes primarily TDM voice services, VOIP and other ancillary services;
Other, which includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other network services; and
Affiliate Services, we provide our non-consolidated affiliates with telecommunication services that we also provide to external customers.
From time to time, we may change the categorization of our products and services.

Our operating revenue for our products and services consisted of the following categories:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
IP and Data Services
$
972

 
970

 
2,917

 
2,961

Transport and Infrastructure
668

 
664

 
1,981

 
2,013

Voice and Collaboration
379

 
349

 
1,085

 
1,094

Other
4

 
1

 
7

 
3

Affiliate Services
41

 
26

 
134

 
78

Total operating revenue
$
2,064

 
2,010

 
6,124

 
6,149



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. These USF surcharges, where we record revenue and transaction taxes, are assigned to the products and services categories based on the underlying revenue. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.


23


The following table provides the amount of USF surcharges and transaction taxes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in millions)
USF surcharges and transaction taxes
$
116

 
96

 
326

 
301




(8) 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.

The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding finance leases, as well as the input level used to determine the fair values indicated below:
 
 
 
September 30, 2019
 
December 31, 2018
 
Input Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
 
(Dollars in millions)
Liabilities-Long-term debt, excluding finance lease
2
 
$
11,242

 
11,225

 
10,681

 
10,089


(9) Commitments, Contingencies and Other Items

We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.

Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation contingencies at September 30, 2019 aggregated to approximately $66 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.

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 exposure was $8 million at September 30, 2019.


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Table of Contents


We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the "Tribunal") decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.

In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. Oral argument was held before the Supreme Court of Justice in June 2019. A decision on this case is pending. 

Brazilian Tax Claims

In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authorities issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues.

We have filed objections to these assessments, arguing that the lease of assets and the provision of Internet access are not communication services subject to ICMS. The objections to the September 2002, December 2004 and March 2009 assessments were rejected by the respective state administrative courts, and we have appealed those decisions to the judicial courts. In October 2012 and June 2014, we received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014 at the first administrative level, and we appealed this decision to the second administrative level.

We are vigorously contesting all such assessments in both states and, in particular, view the assessment of ICMS on revenue from equipment leasing to be without merit. These assessments, if upheld, could result in a loss of up to $37 million at September 30, 2019 in excess of the accruals established for these matters.

Qui Tam Action

We were 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 we, 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.

We are evaluating our defenses to the claims. At this time, we do not believe it is probable we will incur a material loss. If, contrary to our 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.


25


Table of Contents


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 a plea agreement, and the other is deceased. We are fully cooperating in the government’s investigations in this matter.

Letters of Credit

It is customary for us to use various financial instruments in the normal course of business. These instruments include letters of credit which are conditional commitments issued on our behalf in accordance with specified terms and conditions. As of both September 30, 2019 and December 31, 2018, we had outstanding letters of credit or other similar obligations of approximately $24 million and $30 million, respectively, of which $18 million and $24 million are collateralized by cash that is reflected on the consolidated balance sheets as restricted cash and securities.

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 or proceedings 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 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.