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 andor 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:
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:
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.
ITEM 1. FINANCIAL STATEMENTS
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
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 loss,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 income (loss) for any period.
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired.
We assess our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of any of our reporting units exceeds its fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assess our reporting units. Our annual impairment assessment date for indefinite-lived intangible assets other than goodwill is December 31.
Total amortization expense for intangible assets for the three months ended March 31, 2021 and 2020 and 2019 totaled $431$425 million and $429$431 million, respectively. As of March 31, 2020,2021, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $43.9$41.6 billion.
We estimate that total amortization expense for intangible assets for the years ending December 31, 20202021 through 20242025 will be as follows:
The following table provides balances of customer receivables, contract assets and contract liabilities as of March 31, 20202021 and December 31, 2019:2020:
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 approximately 30 months for consumer customersmass markets and 12 to 60 months for business customers and amortizedcustomers. 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 twelve12 months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next twelve12 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.
If there is a deterioration of a customer's financial condition or if future default rates in general including impacts of COVID-19, differ from those currently anticipated default rates (including changes caused by COVID-19), we may haveneed to adjust the allowance for credit losses, which would affect earnings in the period that adjustments are made.
The assessment of the correlation between historical observed default rates, current conditions and forecastforecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customer’scustomers' actual default experience in the future.
The following table presents the activity of our allowance for credit losses by accounts receivable portfolio:
______________________________________________________________________ (1)As ofMarch 31, 2021.
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(1) | As ofMarch 31, 2020.(2)See Note 6—Long-Term Debt and Credit Facilities in our Annual Report on Form 10-K for the year ended December 31, 2020 for a description of certain parent or subsidiary guarantees and liens securing this debt. (3)Term Loans A and A-1 had interest rates of 2.109% and 2.147% as of March 31, 2021 and December 31, 2020, respectively. (4)Term Loan B had interest rates of 2.359% and 2.397% as of March 31, 2021 and December 31, 2020, respectively. (5)The Tranche B 2027 Term Loan had interest rates of 1.859% and 1.897% as of March 31, 2021 and December 31, 2020, respectively. |
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(2) | See Note 7—Long-Term Debt and Credit Facilities in our Annual Report on Form 10-K for the year ended December 31, 2019 for a description of certain parent or subsidiary guarantees and liens securing this debt. |
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(3) | CenturyLink's credit agreement was amended as noted below, extending the maturity date of its (a) Term Loan A, Term Loan A-1 and Revolving Credit Facilities from 2022 to 2025 and (b) Term Loan B from 2025 to 2027. |
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(4) | Term Loans A and A-1 had interest rates of 2.989% and 4.549% as of March 31, 2020 and December 31, 2019, respectively. |
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(5) | Term Loan B had interest rates of 3.239% and 4.549% as of March 31, 2020 and December 31, 2019, respectively. |
(6)Qwest Corporation Term Loan had interest rates of 2.110% and 2.150% as of March 31, 2021 and December 31, 2020, respectively.
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(6) | The Tranche B 2027 Term Loan had an interest rate of 2.739% as of March 31, 2020 and 3.549% as of December 31, 2019, respectively. |
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(7) | Qwest Corporation Term Loan had an interest rate of 2.990% as of March 31, 2020 and 3.800% as of December 31, 2019, respectively. |
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(8) | See "Subsequent Event" for further details on the April 1, 2020 redemption of $973 million of senior unsecured notes. |
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt as of March 31, 2021 (excluding unamortized discounts, net, and unamortized debt issuance costs), maturing during the following years as of March 31, 2020:years:
|
| | | |
| (Dollars in millions) |
2020 (remaining nine months) (1) | $ | 1,094 |
|
2021 | 2,419 |
|
2022 | 2,377 |
|
2023 | 2,160 |
|
2024 | 2,037 |
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2024 and thereafter | 24,838 |
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Total long-term debt | $ | 34,925 |
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______________________________________________________________________
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(1) | See "—Subsequent Events" below. |
| | | | | |
| (Dollars in millions) |
2021 (remaining nine months) | $ | 2,410 | |
2022 | 1,541 | |
2023 | 966 | |
2024 | 1,143 | |
2025 | 2,907 | |
2026 and thereafter | 22,802 | |
Total long-term debt | $ | 31,769 | |
Amended and Restated Credit Agreement
On January 31, 2020, CenturyLink, Inc. amended and restated its credit agreement dated June 19, 2017 (as so amended and restated, the “Amended Credit Agreement”). Coupled with CenturyLink’s prepayment on January 24, 2020 of $1.25 billion of indebtedness outstanding under its Term Loan B facility (using principally the net proceeds from its below-described sale the same day of $1.25 billion of its 4.000% Senior Secured Notes due 2027), the Amended Credit Agreement currently provides for approximately $8.699 billion in senior secured credit facilities, consisting of an approximately $1.166 billion Term Loan A credit facility, a $333 million Term Loan A-1 credit facility, a $5.0 billion Term Loan B credit facility and a $2.2 billion revolving credit facility (collectively, the “Amended Senior Secured Credit Facilities”).
The Amended Credit Agreement, among other things, (i) extended the maturity date of (a) the Term Loan A, Term Loan A-1 and Revolving Credit facilities from November 1, 2022 to January 31, 2025 and (b) the Term Loan B facility from January 31, 2025 to March 15, 2027, and (ii) lowered the interest rate applicable to loans made under each of the Amended Senior Secured Credit Facilities. As so amended, (i) loans under the Term Loan A, Term Loan A-1 and Revolving Credit facilities will bear interest at a rate equal to, at CenturyLink’s option, the Eurodollar rate or the alternative base rate (each as defined in the Amended Credit Agreement) plus an applicable margin between 1.50% to 2.25% per annum for Eurodollar loans and 0.50% to 1.25% per annum for alternative base rate loans, depending on CenturyLink’s then current total leverage ratio, and (ii) loans under the Term Loan B facility will bear interest at the rate equal to, at CenturyLink’s option, the Eurodollar rate plus 2.25% per annum or the alternative base rate plus 1.25% per annum. The subsidiary guarantor and collateral provisions and the financial covenants contained in the Amended Credit Agreement are unchanged from the credit agreement dated June 19, 2017.
These January 2020 transactions resulted in an aggregate net loss of $67 million from modification and extinguishment of the debt.
Repayments
During the three months ended March 31, 2020, CenturyLink2021, Lumen Technologies and its affiliates repurchasedrepaid or redeemed approximately $2.4$1.3 billion of their respective debt securities,obligations, which primarily included $1.25 billion$150 million of CenturyLink,payments on our revolving credit facility, $900 million redemption of Level 3 Financing, Inc. credit agreement debt, $1.1 billionsenior notes and $235 million redemption of Qwest Corporation senior notes and $78 million of CenturyLink, Inc. senior notes, whichnotes. These redemptions resulted in a lossnet gain of $79 million, including the modification of the Amended Credit Agreement discussed above. Additionally, during the period CenturyLink paid $31 million of amortization payments under its term loans.$8 million.
New IssuanceIssuances
On January 24, 2020, CenturyLink13, 2021, Level 3 Financing, Inc. issued $1.25 billion$900 million aggregate principal amount of its 4.000%3.750% Sustainability-Linked Senior Secured Notes due 20272029 (the “2027 Notes”"Sustainability-Linked Notes"). As noted above, CenturyLink used theThe net proceeds from this offeringwere used, together with cash on hand, to repay a portionredeem certain of theits outstanding indebtedness under its Term Loan B facility.senior note indebtedness. See "—Repayments" above. The 2027Sustainability-Linked Notes are unconditionally(i) guaranteed by each of CenturyLink's domestic subsidiaries that guarantee CenturyLink's Amended Credit Agreement, subjectLevel 3 Parent, LLC and (ii) expected to be guaranteed by Level 3 Communications, LLC, upon the receipt of certain regulatory approvals and various exceptions and limitations. While the 2027 Notes are not secured by any of the assets of CenturyLink, certain of the note guarantees are secured by a first priority security interest in substantially all of the assets of such guarantors (including the stock of certain of their respective subsidiaries), which assets also secure obligations under the Amended Credit Agreement on a pari passu basis.requisite material governmental authorizations.
Covenants
Certain of our debt instruments contain affirmative and negative covenants. Debt at CenturyLink,Lumen Technologies, Inc. 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,Lumen Technologies, 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 accelerationcross-payment default or cross-acceleration provisions.
Compliance
As of March 31, 2020, CenturyLink,2021, Lumen Technologies, 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.
Subsequent Event
On April 1, 2020, we paid at maturity $973 million aggregate principal amount of CenturyLink's outstanding senior notes, utilizing cash borrowed late in the first quarter of 2020 under our revolving credit facility.
(6) Severance
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.
Changes in our accrued liabilities for severance expenses were as follows:
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| | | |
| Severance |
| (Dollars in millions) |
Balance at December 31, 2019 | $ | 89 |
|
Accrued to expense | — |
|
Payments, net | (34 | ) |
Balance at March 31, 2020 | $ | 55 |
|
| | | | | |
| Severance |
| (Dollars in millions) |
Balance at December 31, 2020 | $ | 103 | |
Accrued to expense | 0 | |
Payments, net | (25) | |
Balance at March 31, 2021 | $ | 78 | |
(7) Employee Benefits
For detailed description of the various defined benefit pension plans (qualified and non-qualified) and post-retirement benefits plans we sponsor, see Note 10—Employee Benefits to the consolidated financial statements and accompanying notes in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020.
Net periodic benefit expense (income)income for our combined pension planthe Lumen Combined Pension Plan ("Combined Pension Plan") includes the following components:
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| | | | | | |
| Combined Pension Plan |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| (Dollars in millions) |
Service cost | $ | 16 |
| | 14 |
|
Interest cost | 82 |
| | 110 |
|
Expected return on plan assets | (149 | ) | | (156 | ) |
Recognition of prior service credit | (3 | ) | | (2 | ) |
Recognition of actuarial loss | 50 |
| | 57 |
|
Net periodic pension benefit (income) expense | $ | (4 | ) | | 23 |
|
| | | | | | | | | | | |
| Combined Pension Plan |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
Service cost | $ | 13 | | | 16 | |
Interest cost | 50 | | | 82 | |
Expected return on plan assets | (138) | | | (149) | |
Recognition of prior service credit | (2) | | | (3) | |
Recognition of actuarial loss | 49 | | | 50 | |
Net periodic pension benefit income | $ | (28) | | | (4) | |
Net periodic benefit expense for our post-retirement benefit plans includes the following components:
| | | Post-Retirement Benefit Plans | | Post-Retirement Benefit Plans |
| Three Months Ended March 31, | | Three Months Ended March 31, |
| 2020 | | 2019 | | 2021 | | 2020 |
| (Dollars in millions) | | (Dollars in millions) |
Service cost | $ | 4 |
| | 4 |
| Service cost | $ | 4 | | | 4 | |
Interest cost | 20 |
| | 27 |
| Interest cost | 12 | | | 20 | |
Recognition of prior service cost | 4 |
| | 4 |
| Recognition of prior service cost | 4 | | | 4 | |
Recognition of actuarial loss | | Recognition of actuarial loss | 1 | | | 0 | |
Net periodic post-retirement benefit expense | $ | 28 |
| | 35 |
| Net periodic post-retirement benefit expense | $ | 21 | | | 28 | |
Service costs are included in the cost of services and products and selling, general and administrative line items on the consolidated statements of operations and all other costs listed above are included in the other income (expense), net line item on the consolidated statements of operations.
Benefits paid by our qualified pension planthe Combined Pension Plan are paid through a trust that holds all of the plan'sPlan's assets. Based on current laws and circumstances, we do not expect any contributions to be required for our qualified pension planthe Combined Pension Plan during 2020.2021. The amount of required contributions to our qualified pension planthe Combined Pension Plan in 20212022 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 laws and circumstances, we do not anticipate making abelieve we are required to make any contributions to the Combined Pension Plan in 2021, but we could make voluntary contributioncontributions to the trust for our qualified pension planthe Combined Pension Plan in 2020.2021.
(8) Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per common share were calculated as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| (Dollars in millions, except per share amounts, shares in thousands) |
Income (Numerator): | | | |
Net income | $ | 475 | | | 314 | |
Net income applicable to common stock for computing basic earnings per common share | 475 | | | 314 | |
Net income as adjusted for purposes of computing diluted earnings per common share | $ | 475 | | | 314 | |
Shares (Denominator): | | | |
Weighted-average number of shares: | | | |
Outstanding during period | 1,100,350 | | | 1,092,970 | |
Non-vested restricted stock | (17,876) | | | (17,511) | |
Weighted-average shares outstanding for computing basic earnings per common share | 1,082,474 | | | 1,075,459 | |
Incremental common shares attributable to dilutive securities: | | | |
Shares issuable under convertible securities | 10 | | | 10 | |
Shares issuable under incentive compensation plans | 9,102 | | | 6,285 | |
Number of shares as adjusted for purposes of computing diluted earnings per common share | 1,091,586 | | | 1,081,754 | |
Basic earnings per common share | $ | 0.44 | | | 0.29 | |
Diluted earnings per common share | $ | 0.44 | | | 0.29 | |
|
| | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| (Dollars in millions, except per share amounts, shares in thousands) |
Income (Loss) (Numerator): | | | |
Net income (loss) | $ | 314 |
| | (6,165 | ) |
Net income (loss) applicable to common stock for computing basic earnings per common share | 314 |
| | (6,165 | ) |
Net income (loss) as adjusted for purposes of computing diluted earnings per common share | $ | 314 |
| | (6,165 | ) |
Shares (Denominator): | | | |
Weighted-average number of shares: | | | |
Outstanding during period | 1,092,970 |
| | 1,083,588 |
|
Non-vested restricted stock | (17,511 | ) | | (14,710 | ) |
Weighted-average shares outstanding for computing basic earnings per common share | 1,075,459 |
| | 1,068,878 |
|
Incremental common shares attributable to dilutive securities: | | | |
Shares issuable under convertible securities | 10 |
| | — |
|
Shares issuable under incentive compensation plans | 6,285 |
| | — |
|
Number of shares as adjusted for purposes of computing diluted earnings (loss) per common share | 1,081,754 |
| | 1,068,878 |
|
Basic earnings (loss) per common share | $ | 0.29 |
| | (5.77 | ) |
Diluted earnings (loss) per common share (1) | $ | 0.29 |
| | (5.77 | ) |
______________________________________________________________________
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(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 earnings (loss) 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 2.7 million and 5.4were less than 1 million for the three months ended March 31, 20202021 and 2019, respectively.2.7 million for the three months ended March 31, 2020.
(9) Fair Value of Financial Instruments
Our financial instruments consist of cash, cash equivalents and restricted cash, accounts receivable, accounts payable, long-term debt, excluding finance lease and other obligations, and interest rate swap contracts. Due to their short-term nature, the carrying amounts of our cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximate their fair values.
The three input levels in the hierarchy of fair value measurements defined by the Fair Value Measurement and Disclosure framework areFASB generally as follows:
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Input Level | | Description of Input |
Level 1 | | Observable inputs such as quoted market prices in active markets. |
Level 2 | | Inputs other than quoted prices in active markets that are either directly or indirectly observable. |
Level 3 | | Unobservable inputs in which little or no market data exists. |
The following table presents the carrying amounts and estimated fair values of our financial liabilities as of March 31, 20202021 and December 31, 2019:2020:
|
| | | | | | | | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
| Input Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | (Dollars in millions) |
Long-term debt, excluding finance lease and other obligations | 2 | | $ | 34,405 |
| | 33,117 |
| | 34,472 |
| | 35,737 |
|
Interest rate swap contracts (see Note 10) | 2 | | 152 |
| | 152 |
| | 51 |
| | 51 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2021 | | December 31, 2020 |
| Input Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | (Dollars in millions) |
Long-term debt, excluding finance lease and other obligations | 2 | | $ | 31,113 | | | 32,441 | | | 31,542 | | | 33,217 | |
Interest rate swap contracts (see Note 10) | 2 | | $ | 87 | | | 87 | | | 107 | | | 107 | |
(10) Derivative Financial Instruments
From time to time, CenturyLink, Inc. useswe use 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 currently outstanding interest rate swap agreements as cash flow hedges. As described further below, under these hedges, we receive variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the lives of the agreements without exchange of the underlying notional amount. The change in the fair value of the interest rate swap agreements is reflected in accumulated other comprehensive income ("AOCI") and, as described below, is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.earnings by virtue of qualifying as effective cash flow hedges. We do not use derivative financial instruments for speculative purposes.
In February 2019, we entered into 5 variable-to-fixed interest rate swap agreements to hedge the interest payments on $2.5 billion notional amount of floating rate debt. The 5 interest rate swap agreements are with different counterparties; one for $700 million and the other four for $450 million each. The transactions were effective beginning March 31, 2019 and mature March 31, 2022. Under the terms of these interest rate swap transactions, we receive interest payments based on one-month floating LIBOR terms and pay interest at the fixed rate of 2.48%.
In June 2019, we entered into 6 variable-to-fixed interest rate swap agreements to hedge the interest payments on $1.5 billion notional amount of floating rate debt. The 6 interest rate swap agreements are with different counterparties for $250 million each. The transactions were effective beginning June 30, 2019 and mature June 30, 2022. Under the terms of these interest rate swap transactions, we receive interest payments based on one-month floating LIBOR terms and pay interest at the fixed rate of 1.58%.
As of March 31, 20202021 and MarchDecember 31, 20192020, we evaluated the effectiveness of our hedges qualitativelyquantitatively and any hedges we had entered into at the time qualified as effective hedge relationships.
CenturyLink, Inc. isWe may be exposed to credit-related losses in the event of non-performance by counterparties. The counterparties to any of the financial derivatives we enter into are major institutions with investment grade credit ratings. We evaluate counterparty credit risk before entering into any hedge transaction and continue to closely monitor the financial market and the risk that our counterparties will default on their obligations as part of our quarterly qualitative effectiveness evaluation.
Amounts accumulated in AOCI related to derivatives are indirectly recognized in earnings as periodic settlement payments are made throughout the term of the swaps.
The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheet at March 31, 20202021 and December 31, 20192020, as follows (in millions):
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| | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
Derivatives designated as | Balance Sheet Location | | Fair Value |
Cash flow hedging contracts | Other current and noncurrent liabilities | | $ | 152 |
| | 51 |
|
| | | | | | | | | | | | | | | | | |
| | | March 31, 2021 | | December 31, 2020 |
Derivatives designated as | Balance Sheet Location | | Fair Value |
Cash flow hedging contracts | Other current and noncurrent liabilities | | $ | 87 | | | 107 | |
The amount of unrealized (gains) losses recognized in AOCI consists of the following (in millions):
|
| | | | | | | |
Derivatives designated as hedging instruments | | 2020 | | 2019 |
Cash flow hedging contracts | | | | |
Three Months Ended March 31, | | $ | 106 |
| | 23 |
|
| | | | | | | | | | | | | | |
Derivatives designated as hedging instruments | | 2021 | | 2020 |
Cash flow hedging contracts | | | | |
Three Months Ended March 31, | | $ | 0 | | | 106 | |
The amount of realized losses reclassified from AOCI to the statement of operations consists of the following (in
(in millions):
|
| | | | | | | |
Derivatives designated as hedging instruments | | 2020 | | 2019 |
Cash flow hedging contracts | | | | |
Three Months Ended March 31, | | $ | 5 |
| | — |
|
| | | | | | | | | | | | | | |
Derivatives designated as hedging instruments | | 2021 | | 2020 |
Cash flow hedging contracts | | | | |
Three Months Ended March 31, | | $ | 20 | | | 5 | |
Amounts currently included in AOCI will be reflected asreclassified into earnings prior to the settlementongoing settlements of these cash flow hedging contracts inuntil 2022. We estimate that $73$81 million of net losses on the interest rate swaps (based on the estimated LIBOR curve as of March 31, 2020)2021) will be reflected as earningsin our statements of operations within the next twelve12 months.
(11) Segment Information
Jeff Storey, our chief operating decision maker ("CODM"), made changes to our segment and customer-facing sales channel reporting categories beginning in 2021 to align with operational changes designed to better support our customers. Following these changes, we now report 2 segments: Business and Mass Markets. The Business segment includes 4 sales channels: International and Global Accounts, Large Enterprise, Mid-Market Enterprise and Wholesale. These changes also include both the creation of new product categories and the realignment of products and services within previously reported product categories to better reflect product life cycles and our go-to-market approach. For Business segment revenue, we report the following product categories: Compute and Application Services, IP and Data Services, Fiber Infrastructure Services and Voice and Other, by the sales channels outlined above. For Mass Markets segment revenue, we report the following product categories: Consumer Broadband, SBG Broadband, Voice and Other and CAF II. See detailed descriptions of these product and service categories in Note 3—Revenue Recognition.
As described in more detail below, our segments are managed based on the direct costs of providing services to their customers and the associated selling, general and administrative costs (primarily salaries and commissions). Shared costs that were previously reported in segments are managed separately and included in "Operations and Other", in the tables below. WeAs referenced above, we reclassified certain prior period amounts to conform to the current period presentation,presentation. See Note 1— Background for furtheradditional detail on these changes.
At March 31, 2020,2021, we had the following 52 reportable segments:
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• | International and Global Accounts Management ("IGAM") Segment. Under our IGAM•Business Segment: Under our Business segment, we provide our products and services to approximately 200 global enterprise customers and to enterprises and carriers in 3 operating regions: Europe Middle East and Africa, Latin America and Asia Pacific; |
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• | Enterprise Segment. Under our enterprise segment, we provide our products and services to large and regional domestic and global enterprises, as well as public sector, which includes the U.S. Federal government, state and local governments and research and education institutions;
|
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• | 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;
|
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• | Wholesale Segment. Under our wholesale segment, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors. Our wholesale customers range from large global telecom providers to small regional providers; and
|
| |
• | Consumer Segment. Under our consumer segment, we provide our products and services to residential customers. Additionally, Connect America Fund ("CAF") federal support revenue and other revenue from leasing and subleasing are reported in our consumer segment as regulatory revenue.
|
Product and Service Categories
We categorize our products and services revenue amongunder four distinct sales channels to meet the following 4 categories for the IGAM, Enterprise, SMBneeds of our enterprise and Wholesale segments:commercial customers; and
| |
• | IP and Data Services, which includes primarily VPN data networks, Ethernet, IP, content delivery and other ancillary services;
|
| |
• | Transport and Infrastructure, which includes wavelengths, dark fiber, private line, colocation and data center services, including cloud, hosting and application management solutions, professional services and other ancillary services;
|
| |
• | Voice and Collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services, as well as VoIP services; and
|
| |
• | IT and Managed Services, which includes information technology services and managed services, which may be purchased in conjunction with our other network services.
|
We categorize•Mass Markets Segment: Under our Mass Markets segment, we provide products and services revenue among the following 4 categories for the Consumer segment:
| |
• | Broadband, which includes high-speed, fiber based and lower speed DSL broadband services;to consumer and small business customers.
|
| |
• | Voice, which includes local and long-distance services;
|
| |
• | Regulatory Revenue, which consists of (i) 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 includes retail video services (including our linear and TV services), professional services and other ancillary services.
|
The following tables summarize our segment results for the three months ended March 31, 20202021 and 20192020, based on the segment categorization we were operating under at March 31, 2020.2021.
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| 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 | $ | 400 |
| 628 |
| 269 |
| 327 |
| — |
| 1,624 |
| — |
| 1,624 |
|
Transport and Infrastructure | 316 |
| 380 |
| 89 |
| 447 |
| — |
| 1,232 |
| — |
| 1,232 |
|
Voice and Collaboration | 91 |
| 356 |
| 290 |
| 183 |
| — |
| 920 |
| — |
| 920 |
|
IT and Managed Services | 58 |
| 56 |
| 10 |
| 1 |
| — |
| 125 |
| — |
| 125 |
|
Broadband | — |
| — |
| — |
| — |
| 722 |
| 722 |
| — |
| 722 |
|
Voice | — |
| — |
| — |
| — |
| 421 |
| 421 |
| — |
| 421 |
|
Regulatory | — |
| — |
| — |
| — |
| 156 |
| 156 |
| — |
| 156 |
|
Other | — |
| — |
| — |
| — |
| 28 |
| 28 |
| — |
| 28 |
|
Total revenue | 865 |
| 1,420 |
| 658 |
| 958 |
| 1,327 |
| 5,228 |
| — |
| 5,228 |
|
Expenses: | | | | | | | | |
Cost of services and products | 233 |
| 447 |
| 104 |
| 131 |
| 42 |
| 957 |
| 1,278 |
| 2,235 |
|
Selling, general and administrative | 65 |
| 136 |
| 110 |
| 17 |
| 115 |
| 443 |
| 410 |
| 853 |
|
Less: share-based compensation | — |
| — |
| — |
| — |
| — |
| — |
| (69 | ) | (69 | ) |
Total expense | 298 |
| 583 |
| 214 |
| 148 |
| 157 |
| 1,400 |
| 1,619 |
| 3,019 |
|
Total adjusted EBITDA | $ | 567 |
| 837 |
| 444 |
| 810 |
| 1,170 |
| 3,828 |
| (1,619 | ) | 2,209 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Business | Mass Markets | Total Segments | Operations and Other | Total |
| (Dollars in millions) |
Revenue | $ | 3,595 | | 1,434 | | 5,029 | | 0 | | 5,029 | |
Expenses: | | | | | |
Cost of services and products | 881 | | 43 | | 924 | | 1,212 | | 2,136 | |
Selling, general and administrative | 306 | | 133 | | 439 | | 317 | | 756 | |
Less: share-based compensation | 0 | | 0 | | 0 | | (20) | | (20) | |
Total expense | 1,187 | | 176 | | 1,363 | | 1,509 | | 2,872 | |
Total adjusted EBITDA | $ | 2,408 | | 1,258 | | 3,666 | | (1,509) | | 2,157 | |
|
| | | | | | | | | | | | | | | | | |
| 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 (1): | |
|
|
|
|
|
|
|
| | |
|
|
IP and Data Services | $ | 408 |
| 638 |
| 276 |
| 338 |
| — |
| 1,660 |
| — |
| 1,660 |
|
Transport and Infrastructure | 309 |
| 347 |
| 95 |
| 495 |
| — |
| 1,246 |
| — |
| 1,246 |
|
Voice and Collaboration | 89 |
| 366 |
| 317 |
| 195 |
| — |
| 967 |
| — |
| 967 |
|
IT and Managed Services | 57 |
| 74 |
| 12 |
| 2 |
| — |
| 145 |
| — |
| 145 |
|
Broadband | — |
| — |
| — |
| — |
| 722 |
| 722 |
| — |
| 722 |
|
Voice | — |
| — |
| — |
| — |
| 477 |
| 477 |
| — |
| 477 |
|
Regulatory | — |
| — |
| — |
| — |
| 157 |
| 157 |
| — |
| 157 |
|
Other | — |
| — |
| — |
| — |
| 53 |
| 53 |
| — |
| 53 |
|
Total revenue | 863 |
| 1,425 |
| 700 |
| 1,030 |
| 1,409 |
| 5,427 |
| — |
| 5,427 |
|
Expenses: | | | | | | | | |
Cost of services and products (1) | 231 |
| 428 |
| 105 |
| 134 |
| 58 |
| 956 |
| 1,344 |
| 2,300 |
|
Selling, general and administrative (1) | 67 |
| 148 |
| 124 |
| 14 |
| 144 |
| 497 |
| 435 |
| 932 |
|
Less: share-based compensation | — |
| — |
| — |
| — |
| — |
| — |
| (33 | ) | (33 | ) |
Total expense (1) | 298 |
| 576 |
| 229 |
| 148 |
| 202 |
| 1,453 |
| 1,746 |
| 3,199 |
|
Total adjusted EBITDA (1) | $ | 565 |
| 849 |
| 471 |
| 882 |
| 1,207 |
| 3,974 |
| (1,746 | ) | 2,228 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Business | Mass Markets | Total Segments | Operations and Other | Total |
| (Dollars in millions) |
Revenue | $ | 3,737 | | 1,491 | | 5,228 | | 0 | | 5,228 | |
Expenses: | | | | | |
Cost of services and products | 907 | | 49 | | 956 | | 1,279 | | 2,235 | |
Selling, general and administrative | 342 | | 140 | | 482 | | 371 | | 853 | |
Less: share-based compensation | 0 | | 0 | | 0 | | (69) | | (69) | |
Total expense | 1,249 | | 189 | | 1,438 | | 1,581 | | 3,019 | |
Total adjusted EBITDA | $ | 2,488 | | 1,302 | | 3,790 | | (1,581) | | 2,209 | |
(1)
Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020, in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
Revenue and Expenses
Our segment revenue includes all revenue from our 52 segments as described in more detail above. Our segment revenue is based upon each customer's classification. We report our segment revenue based upon all services provided to that segment's customers. Our segment expenses include specific cost of service expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities.
The following items are excluded from our segment results, because they are centrally managed and not monitored by or reported to our chief operating decision makerCODM by segment:
Network
•network expenses not incurred as a direct result of providing services and products to segment customers;
•centrally managed expenses such as Operations, Finance, Human Resources, Legal, Marketing, Product Management and IT, which are reported as "Operations and Other";
•depreciation and amortization expense or impairments;
•interest expense, because we manage our financing on a consolidated basis and have not allocated assets or debt to specific segments;
•stock-based compensation; and
stock-based compensation; and
•other income and expense items are not monitored as a part of our segment operations.
The following table reconciles total segment adjusted EBITDA to net income (loss):
|
| | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| (Dollars in millions) |
Total segment adjusted EBITDA (1) | $ | 3,828 |
| | 3,974 |
|
Depreciation and amortization | (1,160 | ) | | (1,188 | ) |
Impairment of goodwill | — |
| | (6,506 | ) |
Other operating expenses (1) | (1,619 | ) | | (1,746 | ) |
Stock-based compensation | (69 | ) | | (33 | ) |
Operating income (loss) | 980 |
| | (5,499 | ) |
Total other expense, net | (547 | ) | | (528 | ) |
Income (loss) before income taxes | 433 |
| | (6,027 | ) |
Income tax expense | 119 |
| | 138 |
|
Net income (loss) | $ | 314 |
| | (6,165 | ) |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
Total segment adjusted EBITDA | $ | 3,666 | | | 3,790 | |
Depreciation and amortization | (1,150) | | | (1,160) | |
Other operating expenses | (1,509) | | | (1,581) | |
Stock-based compensation | (20) | | | (69) | |
Operating income | 987 | | | 980 | |
Total other expense, net | (355) | | | (547) | |
Income before income taxes | 632 | | | 433 | |
Income tax expense | 157 | | | 119 | |
Net income | $ | 475 | | | 314 | |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020, in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
(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, 20202021 aggregated to approximately $143$119 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.
Principal Proceedings
Shareholder Class Action Suit
CenturyLinkLumen and certain CenturyLink boardLumen Board of Directors 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, Inc. shareholders as a result of our acquisition of Level 3. It alleges that the proxy statement provided to the Level 3 shareholders failed to disclose various material information of several kinds, including information about strategic revenue, customer loss rates, and customer account issues, among other items. The complaint seeks damages, costs and fees, rescission, rescissory damages, and other equitable relief.
Switched Access Disputes
Subsidiaries of CenturyLink, Inc. are among hundreds of companies involved in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) In May 2020, the court dismissed the complaint. Plaintiffs appealed that have been consolidated in the United States District Court for the Northern District of Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services. In the lawsuits, IXCs, including Sprint Communications Company L.P. ("Sprint") and various affiliates of Verizon Communications Inc. ("Verizon"), assert that federal and state laws bar LECs from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices that are routed through an IXC. Some of these IXCs have asserted claims seeking refunds of payments for access charges previously paid and relief from future access charges.
In November 2015, the federal court agreed with the LECs and rejected the IXCs' contention that federal law prohibits these particular access charges. Final judgments have been entered in the consolidated lawsuitsdecision, and the IXCs are pursuing an appeal. Separately, some of the defendants, including CenturyLink's LECs, have petitioned the FCC to address these issues on an industry-wide basis.appeal is pending.
Our subsidiaries include both IXCs and LECs which respectively pay and assess significant amounts of the charges in question. The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, are currently not predictable.
State Tax Suits
Since 2012, a number of Missouri municipalities have asserted claims in the Circuit Court of St. Louis County, Missouri, alleging that we and several of our subsidiaries have underpaid taxes. These municipalities are seeking, among other things, declaratory relief regarding the application of business license and gross receipts taxes and back taxes from 2007 to the present, plus penalties and interest. In a February 2017 ruling in connection with 1 of these pending cases, the court entered an order awarding plaintiffs $4 million and broadening the tax base on a going-forward basis. We appealed that decision to the Missouri Supreme Court. In December 2019, it affirmed the circuit court's order in some respects and reversed it in others, remanding the case to the circuit court for further proceedings. The Missouri Supreme Court's decision will reducereduced our exposure in the case. In a June 2017 ruling in connection with another one of these pending cases, the circuit court made findings in a non-final ruling which, if not overturned or modified in light of the Missouri Supreme Court's decision, will result in a tax liability to us well in excess of the contingent liability we have established. We plan to appeal anyThe circuit court has indicated it does not intend to alter its 2017 ruling when it issues its final ruling that substantially incorporatesdecision. Once a final decision is issued, we will have the June 2017 findings.right to pursue an appeal. 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 andThereafter, based in part on the allegations made by the former employee, several legal proceedings have been filed.
In June 2017, McLeod v. CenturyLink, a putativewere filed, including consumer class action, was filed against usactions 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. Other complaints asserting similar claims were filed in other federal and state courts. The lawsuits assert claims including fraud, unfair competition, and unjust enrichment. Also in June 2017, Craig. v. CenturyLink, Inc., et al.,courts, a putativeseries of securities investor class action, was filedactions in U.S. District Court for the Southern District of New York, alleging that we failed to disclose material information regarding improper sales practices,federal courts 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 containedactions in the shareholder derivative demands. In April 2018, the special litigation committee concluded its review of the derivative demandsfederal and declined to take further action. Since then,Louisiana state courts. The derivative cases were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita and in federal court in Louisiana and Minnesota. These cases have been brought on behalf of CenturyLink, Inc. 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 beenwere transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation. Subject to confirmatory discovery and court approval, weWe have agreed to settlesettled the consumer putativeand securities investor class actions for payments of $15.5 million to compensateactions. The consumer class settlement was approved by the Court and is final. Approximately 12,000 potential class members and of up to $3.5 million for administrative costs. In the second quarter of 2019, we accrued for these obligations, and a portion of the administrative costs has been expended in 2020. Certain class members may electelected to opt out of the consumer class settlement, and pursuewe have settled the resolutionclaims of their individual claims against us on these issues through various dispute resolution processes, including individual arbitration. Oneapproximately 11,000 such class members asserted by one law firm claimssubject to represent more than 22,000 potentialcertain conditions. The securities investors class members. Tosettlement entails a payment of $55 million, which we expect to be paid by our insurers. That settlement has received preliminary court approval and is subject to certain conditions including final approval by the extent that a substantial number of class members, including many of the law firm’s alleged clients, meet the contractual requirements to arbitrate, elect to opt out of the settlement (or otherwise successfully exclude their individual claims), and actually pursue arbitrations, the Company could incur a material amount of filing and other arbitrations fees in relation to the administration of those claims.Court. The derivative actions remain pending.
In July 2017, the Minnesota state attorney general filed State of Minnesota v. CenturyTel Broadband Services LLC, et al. in the Anoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices.
We have engaged in discussions regarding potential resolutions of theserelated claims with a number of state attorneys general, and have entered into agreements settling the Minnesota suit and certain of the consumer practices claims asserted by state attorneys general. While we do not agree with allegations raised in these matters, we have been willing to consider reasonable settlements where appropriate.
In the fourth quarter of 2019, we recorded an accrual with respect to the above-described settlements and other consumer litigation related matters.
Peruvian Tax Litigation
In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one1 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 was $6is $1 million at March 31, 2020.2021.
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, theThe São Paulo and Rio de Janeiro state tax authorities have issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”), mainly 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 in both states, arguing, among other things that neither the lease of assets andnor the provision of Internet access are not communication servicesqualifies as “communication services” subject to ICMS. The objections
We have appealed to the September 2002, December 2004 and March 2009 assessments were rejectedrespective state judicial courts the decisions by the respective state administrative courts and we havethat rejected our objections to these assessments. In cases in which state lower courts ruled partially in our favor finding that the lease assets are not subject to ICMS, the State appealed those decisions torulings. In other cases, 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 2014affirmed at the first administrative level and we have appealed this decision to the second administrative level. Other assessments are still pending state judicial decisions.
We are vigorously contesting all such assessments in both states and in particular, view the assessment of ICMS on revenue from equipment leasing and Internet access to be without merit. These assessments, if upheld, could result in a loss of $37$12 million up to $42as high as $49 million atas of March 31, 20202021, in excess of the reserved 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 StatesU.S. District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint and an amended complaint
were filed under seal on November 26, 2013 and June 16, 2014, respectively. The court unsealed the complaints on October 26, 2017.
The amended complaint alleges that Level 3, principally through two2 former employees, submitted false claims and made false statements to the government in connection with two2 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 itsour expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled,obtains an award of the approximate magnitude he has claimed, the award would significantly exceed the reserve we have accrued for the matter. Such an outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
Several people, including two2 former Level 3 employees, were indicted in the United StatesU.S. 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 two2 former employees, one1 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, administrativeregulatory 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 partythird-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 1 or more may go to trial during 20202021 if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various foreign, federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $100,000$300,000 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 matters listed above in this Note do not reflect all of our contingencies. For additional information on our contingencies, see Note 19 - 17—Commitments, Contingencies and Other Items - to the consolidated financial statements includedand accompanying notes in Part II, Item 8 of part II of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019.2020. 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.
(13) Other Financial Information
Other Current Assets
The following table presents details of other current assets reflected in our consolidated balance sheets:
|
| | | | | | |
| March 31, 2020 | | December 31, 2019 |
| (Dollars in millions) |
Prepaid expenses | $ | 333 |
| | 274 |
|
Income tax receivable | 73 |
| | 35 |
|
Materials, supplies and inventory | 119 |
| | 105 |
|
Contract assets | 33 |
| | 42 |
|
Contract acquisition costs | 180 |
| | 178 |
|
Contract fulfillment costs | 118 |
| | 115 |
|
Other | 85 |
| | 59 |
|
Total other current assets | $ | 941 |
| | 808 |
|
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (Dollars in millions) |
Prepaid expenses | $ | 403 | | | 290 | |
Income tax receivable | 6 | | | 7 | |
Materials, supplies and inventory | 100 | | | 105 | |
Contract assets | 64 | | | 66 | |
Contract acquisition costs | 170 | | | 173 | |
Contract fulfillment costs | 115 | | | 114 | |
Other | 66 | | | 53 | |
Total other current assets | $ | 924 | | | 808 | |
(14) Accumulated Other Comprehensive Loss
Information Relating to 2020
2021
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, 2020:2021:
|
| | | | | | | | | | | | | | | |
| Pension Plans | | Post-Retirement Benefit Plans | | Foreign Currency Translation Adjustment and Other | | Interest Rate Swap | | Total |
| (Dollars in millions) |
Balance at December 31, 2019 | $ | (2,229 | ) | | (184 | ) | | (228 | ) | | (39 | ) | | (2,680 | ) |
Other comprehensive loss before reclassifications | — |
| | — |
| | (239 | ) | | (80 | ) | | (319 | ) |
Amounts reclassified from accumulated other comprehensive loss | 36 |
| | 3 |
| | — |
| | 5 |
| | 44 |
|
Net current-period other comprehensive income (loss) | 36 |
| | 3 |
| | (239 | ) | | (75 | ) | | (275 | ) |
Balance at March 31, 2020 | $ | (2,193 | ) | | (181 | ) | | (467 | ) | | (114 | ) | | (2,955 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Post-Retirement Benefit Plans | | Foreign Currency Translation Adjustment and Other | | Interest Rate Swap | | Total |
| (Dollars in millions) |
Balance at December 31, 2020 | $ | (2,197) | | | (272) | | | (265) | | | (79) | | | (2,813) | |
Other comprehensive loss before reclassifications | 0 | | | 0 | | | (86) | | | 0 | | | (86) | |
Amounts reclassified from accumulated other comprehensive loss | 35 | | | 4 | | | 0 | | | 15 | | | 54 | |
Net current-period other comprehensive income (loss) | 35 | | | 4 | | | (86) | | | 15 | | | (32) | |
Balance at March 31, 2021 | $ | (2,162) | | | (268) | | | (351) | | | (64) | | | (2,845) | |
The tables below present further information about our reclassifications out of accumulated other comprehensive loss by component for the three months ended March 31, 2021:
| | | | | | | | | | | | | | |
Three Months Ended March 31, 2021 | | Decrease (Increase) in Net Income | | Affected Line Item in Consolidated Statement of Operations |
| | (Dollars in millions) | | |
Interest rate swaps | | $ | 20 | | | Interest expense |
Income tax benefit | | (5) | | | Income tax expense |
Net of tax | | $ | 15 | | | |
| | | | |
Amortization of pension & post-retirement plans(1) | | | | |
Net actuarial loss | | $ | 50 | | | Other income (expense), net |
Prior service cost | | 2 | | | Other income (expense), net |
Total before tax | | 52 | | | |
Income tax benefit | | (13) | | | Income tax expense |
Net of tax | | $ | 39 | | | |
(1)See Note 7—Employee Benefits for additional information on our net periodic benefit (income) expense related to our pension and post-retirement plans.
Information Relating to 2020
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, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Post-Retirement Benefit Plans | | Foreign Currency Translation Adjustment and Other | | Interest Rate Swap | | Total |
| (Dollars in millions) |
Balance at December 31, 2019 | $ | (2,229) | | | (184) | | | (228) | | | (39) | | | (2,680) | |
Other comprehensive loss before reclassifications | 0 | | | 0 | | | (239) | | | (80) | | | (319) | |
Amounts reclassified from accumulated other comprehensive loss | 36 | | | 3 | | | 0 | | | 5 | | | 44 | |
Net current-period other comprehensive income (loss) | 36 | | | 3 | | | (239) | | | (75) | | | (275) | |
Balance at March 31, 2020 | $ | (2,193) | | | (181) | | | (467) | | | (114) | | | (2,955) | |
The tables below present further information about our reclassifications out of accumulated other comprehensive loss by component for the three months ended March 31, 2020:
|
| | | | | | |
Three Months Ended March 31, 2020 | | Decrease (Increase) in Net Income | | Affected Line Item in Consolidated Statement of Operations |
| | (Dollars in millions) | | |
Interest rate swap | | $ | 5 |
| | Interest Expense |
Amortization of pension & post-retirement plans(1) | | | | |
Net actuarial loss | | 50 |
| | Other income, net |
Prior service cost | | 1 |
| | Other income, net |
Total before tax | | 56 |
| | |
Income tax expense | | (12 | ) | | Income tax expense |
Net of tax | | $ | 44 |
| | |
______________________________________________________________________
| | | | | | | | | | | | | | |
(1)Three Months Ended March 31, 2020 | See Note 7—Employee Benefits for additional information on our net periodic benefit | Decrease (Increase) in Net Income | | Affected Line Item in Consolidated Statement of Operations |
| | (Dollars in millions) | | |
Interest rate swaps | | $ | 5 | | | Interest expense (income) related to our pension and post-retirement plans. |
Information Relating to 2019
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, 2019:
|
| | | | | | | | | | | | | | | |
| Pension Plans | | Post-Retirement Benefit Plans | | Foreign Currency Translation Adjustment and Other | | Interest Rate Swap | | Total |
| (Dollars in millions) |
Balance at December 31, 2018 | $ | (2,173 | ) | | (58 | ) | | (230 | ) | | — |
| | (2,461 | ) |
Other comprehensive income before reclassifications | — |
| | — |
| | 5 |
| | (17 | ) | | (12 | ) |
Amounts reclassified from accumulated other comprehensive loss | 41 |
| | 3 |
| | — |
| | — |
| | 44 |
|
Net current-period other comprehensive income | 41 |
| | 3 |
| | 5 |
| | (17 | ) | | 32 |
|
Balance at March 31, 2019 | $ | (2,132 | ) | | (55 | ) | | (225 | ) | | (17 | ) | | (2,429 | ) |
The tables below present 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 Income | | Affected Line Item in Consolidated Statement of Operations |
| | (Dollars in millions) | | |
Amortization of pension & post-retirement plans(1) | | | | |
Net actuarial loss | | $ | 57 |
| | Other income, net |
Prior service cost | | 2 |
| | Other income, net |
Total before tax | | 59 |
| | |
Income tax benefit | | (15 | ) | | Income tax expense |
Net of tax | | $ | 44 |
| | |
Income tax expense | | 0 | | | Income tax expense |
Net of tax | | $ | 5 | | | |
Amortization of pension & post-retirement plans(1) | See Note 7—Employee Benefits for additional information on our | | | |
Net actuarial loss | | $ | 50 | | | Other income (expense), net periodic |
Prior service cost | | 1 | | | Other income (expense), net |
Total before tax | | 51 | | | |
Income tax benefit | | (12) | | | Income tax expense (income) related to our pension and post-retirement plans. |
Net of tax | | $ | 39 | | | |
(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, 2020,2021, approximately, 24%23% of our employees arewere represented by the Communication Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). Approximately 4% of our union-represented employees were subject to collective bargaining agreements that expired as of March 31, 20202021 and are currently being renegotiated. Approximately 9%10% of our represented employees are subject to collective bargaining agreements that are scheduled to expire over the next 12 months.
month period ending March 31, 2022.
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,"Lumen Technologies" or "Lumen," "we," "us" and "our" refer to CenturyLink,Lumen Technologies, Inc. and its consolidated subsidiaries and (ii) references in this report to "Level 3" refer to Level 3 Parent, LLC and its predecessor Level 3 Communications, Inc., which we acquired on November 1, 2017.
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" set forth or referenced in Item 1A of Part II of this report or other of our filings with the SEC 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 reportAnnual Report on Form 10-K for the year ended December 31, 20192020 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 technology and communications company engaged primarily infocused on providing our business and mass markets customers with a broad array of integrated services and solutions necessary to fully participate in our business and residential customers.rapidly evolving digital world. We believe we are the world's most inter-connected network and our platform empowers our customers to rapidly adjust digital programs to meet immediate demands, create efficiencies, accelerate market access, and reduce costs - allowing customers to rapidly evolve their IT programs to address dynamic changes without distraction from their core competencies. With approximately 450,000 route miles of fiber optic cable globally, we are among the largest providers of communications services to domestic and global enterprise customerscustomers. Our terrestrial and the second largest enterprise wireline telecommunications company in the United States, based on revenues.subsea fiber optic long-haul network throughout North America, Europe, Latin America and Asia Pacific connects to metropolitan fiber networks that we operate. We provide services in over 60 countries, with most of our revenue being derived in the United States. As of March 31, 2021, we had approximately 38,000 employees.
Impact of COVID-19 Pandemic
In response to the safety and economic challenges arising out of the COVID-19 pandemic and in a continued attempt to mitigate the negative impact on our stakeholders, we have taken a variety of steps to ensure the availability of our network infrastructure, to promote the safety of our employees and customers, to enable us to continue to adapt and provide our products and services worldwide to our customers, and to strengthen our communities. TheseIn addition to other actions described in our other reports, these steps include:
taking the FCC's "Keep Americans Connected Pledge," which obligates us in certain circumstances to waive late fees and to forego certain service terminations;
•establishing new protocols for the safety of our on-site technicians and customers, including our "Safe Connections" program;
•adopting a rigorous employee work-from-home policy and substantially restricting non-essential business travel;
•continuously monitoring our network to enhance its ability to respond to changes in usage patterns;
•donating products or services in several of our communities to enhance their abilities to provide necessary support services; and
•taking steps to maintain our internal controls and the security of our systems and data in a remote work environment.
As the crisispandemic continues and vaccination rates increase, we mayexpect to revise our responses or take additional steps to adjust to changed circumstances.
By the end of the first quarter of 2020, socialSocial distancing, travel restrictions, business and school closures, travel restrictions, and other actions taken in response to the pandemic had begun to impacthave impacted us, our customers and our business.business since March 2020. In particular, theas discussed further elsewhere herein, we have tracked pandemic has reduced ourimpacts, including: (i) increases in certain revenue streams and decreases in others (including late fee revenue), (ii) increases in allowances for credit losses through the end of 2020, (iii) increases in overtime expenses, (iv) delays in our cost transformation initiatives and Vyvx revenues, as noted further below(v) an acceleration of our real estate rationalization efforts and the incurrence of related costs. Thus far, these changes have not materially impacted our financial performance or financial position, and, barring any unforeseen changes in this Item. However, most of thoseconditions, we do not expect these changes impacted only the latter portions of the first quarter of 2020. We expect that pandemic-
related changes will have a more pronouncedto materially impact on our second quarter 2020 operating results, especially if the economic slowdown adversely impacts our customers' ability and willingness to order and pay for our products and services.us during 2021. The impact of those changes after the second quarter of 2020pandemic during 2021 will materially depend on additional steps that we may take in response to the pandemic and various events outside of our control, including the durationpace of the health crisis,vaccinations worldwide, the length and severity of the health crisis and economic slowdown, actions taken by central banks, governmental agencies or legislative bodies, and the impact of those events on our employees, suppliers and customers. For additional information, see the risk factor disclosures set forth or referenced in Item 1A of Part II of this report.
For additional information on the impacts of the pandemic, see the remainder of this item, including "—Liquidity and Capital Resources — Overview of Sources and Uses of Cash," and "—Pension and Post-retirement Benefit Obligations" and "Connect America Fund.Obligations."
Reporting Segments
As previously announced, we completed an internal reorganization of our reporting segments in January 2021. Our reporting segments are currently organized as follows, by customer focus:
| |
• | International and Global Accounts Management ("IGAM") Segment. Under our IGAM segment, we provide our products and services to approximately 200 global enterprise customers and to enterprises and carriers in three operating regions: Europe Middle East and Africa, Latin America and Asia Pacific. IGAM work with large multinational organizations in support of their business and IT transformation strategies. With our extensive fiber network, and our ability to provide global networking solutions and a differentiated customer experience spanning the globe, we believe we are well-positioned to serve customers within this segment. This segment contains some of our largest customers which could result in revenue fluctuations driven by contract renegotiations or churn. We remain focused on investing globally to expand our reach, scale and technology to grow services that we can offer to our global and international customers;
•Business Segment: Under our Business segment, we provide our products and services under four sales channels:
◦International and Global Accounts ("IGAM"): Our IGAM sales channel includes multinational and enterprise customers. We provide our products and services to approximately 350 of our highest potential enterprise customers and to enterprises and carriers in three operating regions: Europe Middle East and Africa, Latin America and Asia Pacific.
◦Large Enterprise: Under our large enterprise sales channel, we provide our products and services to large enterprises and the public sector, including the U.S. Federal government, state and local governments and research and education institutions.
◦Mid-Market Enterprise: Under our mid-market enterprise sales channel, we provide our products and services to medium-sized enterprises directly and through our indirect channel partners.
◦Wholesale: Under our wholesale sales channel, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors.
•Mass Markets Segment: Under our Mass Markets segment, we provide products and services to consumer and small business customers. At March 31, 2021, we served 4.7 million broadband subscribers under our Mass Markets segment.
|
| |
• | Enterprise Segment. Under our enterprise segment, we provide our products and services to large and regional domestic and global enterprises, as well as the public sector, which includes the U.S. Federal government, state and local governments and research and education institutions. Our ability to meet our enterprise customers' increasing needs for integrated data, broadband and voice services with our extensive product portfolio and our local approach to the market are differentiators. We seek revenue growth within our Enterprise segment by leveraging our extensive enterprise-focused fiber network to deliver dynamic solutions our customers require to meet their growing and evolving needs;
|
| |
• | 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 generally designate businesses as small or medium if they have fewer than 500 employees. With traditional voice services representing a significant portion of SMB segment revenues, we currently do not anticipate revenue growth for this segment. We believe by bringing products specific to meet the needs of this segment, adding fiber-fed on-net buildings and collaborating with our indirect channel partners, we will be better positioned to meet our SMB customers’ needs; and
|
| |
• | Wholesale Segment. Under our wholesale segment, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors. Our wholesale segment contributes scale that we leverage in connection with serving our Enterprise customers. We plan to continue to partner with 5G wireless providers to support their growing needs for transmission capacity, which in turn will place our network closer to our customers. Nonetheless, we expect the relative contributions of our wholesale segment will decline over the longer term due to competitive pressures. In the meantime, we expect our wholesale segment will remain volatile from quarter to quarter given the relatively large size of wholesale customer contracts.
|
| |
• | Consumer Segment. Under our consumer segment, we provide our products and services to residential customers. For this segment, we expect continued declines in revenues from our traditional voice services, as consumers continue their long-term migration towards alternative products and services, and from our video business, which we are no longer actively marketing to consumers. We are aggressively investing in fiber to drive higher average revenue per broadband customer to partially offset legacy voice and video declines. Additionally, we continue to invest in our own digital transformation to improve our service delivery and reduce our costs. At March 31, 2020, we served approximately 4.7 million consumer broadband subscribers. Our methodology for counting consumer broadband subscribers may not be comparable to those of other companies.
|
See Note 11—Segment Information to our consolidated financial statements in Item 1 of Part I of this report for additional information.
We categorize our Business segment revenue among the following four productproducts and services categories thatcategories:
•Compute and Application Services, which include our Edge Cloud services, IT solutions, Unified Communications and Collaboration ("UC&C"), data center, content delivery network ("CDN") and Managed Security services;
•IP and Data Services, which includes Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;
•Fiber Infrastructure Services, which includes dark fiber, optical services and equipment; and
•Voice and Other, which includes Time Division Multiplexing ("TDM") voice, private line and other legacy services.
Under our Mass Markets segment, we sell to business customers:
| |
• | IP and Data Services, which include primarily VPN data networks, Ethernet, IP, content delivery and other ancillary services;
|
| |
• | Transport and Infrastructure, which includes wavelengths, dark fiber, private line, colocation and data center services, including cloud, hosting and application management solutions, professional services and other ancillary services;
|
| |
• | Voice and Collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services, as well as VoIP services; and
|
| |
• | IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services.
|
We categorize revenue amongprovide the following four categories that we sellproducts and services:
•Consumer Broadband, which includes high speed fiber-based and lower speed DSL-based broadband services to residential customers:customers;
| |
• |
•SBG Broadband, which includes high speed fiber-based and lower speed DSL-based broadband services to small businesses;
•Voice and Other, which include local and long-distance services, retail video services (including our linear TV services), state support and other ancillary services; and
•CAF II, which consists of Connect America Fund II support payments designed to reimburse us for various costs related to certain telecommunications services.
, which includes high speed, fiber-based and lower speed DSL broadband services;
|
| |
• | Voice, which include local and long-distance services;
|
| |
• | Regulatory Revenue, which consist of (i) 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 retail video services (including our linear TV services), professional services and other ancillary services.
|
Trends Impacting Our Operations
OurIn addition to the above-described impact of the pandemic, our consolidated operations have been, and are expected to continue to be, impacted by the following company-wide trends:
•Customers’ demand for automated products and services and competitive pressures will require that we continue to invest in new technologies and automated processes to improve the customer experience and reduce our operating expenses.
•The increasingly digital environment and the growth in online video require robust, scalable network services. We are continuing to enhance our product capabilities and simplify our product portfolio based on demand and profitability to enable customers to have access to greater bandwidth.
•Businesses continue to adopt distributed, global operating models. We are expanding and densifyingenhancing our fiber network, connecting more buildings to our network to generate revenue opportunities and reducereducing our costs associated with leasing networks fromreliance upon other carriers.
•Industry consolidation, coupled with changes in regulation, technology and customer preferences, are significantly reducing demand for our traditional voice services and are pressuring some other revenue streams through volume or rate reductions, while other advances, such as the need for lower latency provided by Edge computing or the implementation of 5G networks, are expected to create opportunities.
The operating margins of several of our newer, more technologically advanced services, some of which may connect to customers through other carriers, are lower than the operating margins on our traditional, on-net wireline services.
•Declines in our traditional wireline services have necessitated right-sizing our cost structures to remain competitive.
Additional trends impacting our segments are discussed elsewhere in this Item 2.
Results of Operations
In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In "Segment Results of Operations" we review the performance of our fivetwo reporting segments in more detail.
The following table summarizes the results of our consolidated operations for the three months ended March 31,
20202021 and March 31,
2019:2020: |
| | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| (Dollars in millions, except per share amounts) |
Operating revenue (1) | $ | 5,228 |
| | 5,427 |
|
Operating expenses (1) | 4,248 |
| | 10,926 |
|
Operating income (loss) | 980 |
|
| (5,499 | ) |
Total other expense, net | (547 | ) | | (528 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 433 |
| | (6,027 | ) |
Income tax expense | 119 |
| | 138 |
|
Net income (loss) | $ | 314 |
|
| (6,165 | ) |
Basic earnings (loss) per common share | $ | 0.29 |
| | (5.77 | ) |
Diluted earnings (loss) per common share | $ | 0.29 |
| | (5.77 | ) |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| (Dollars in millions, except per share amounts) |
Operating revenue | $ | 5,029 | | | 5,228 | |
Operating expenses | 4,042 | | | 4,248 | |
Operating income | 987 | | | 980 | |
Total other expense, net | (355) | | | (547) | |
Income before income taxes | 632 | | | 433 | |
Income tax expense | 157 | | | 119 | |
Net income | $ | 475 | | | 314 | |
Basic earnings per common share | $ | 0.44 | | | 0.29 | |
Diluted earnings per common share | $ | 0.44 | | | 0.29 | |
For over a decade,years, 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 other 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 size, 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 or divestitures of non-strategic assets, in each case if available at attractive prices;
•increase prices on our products and services if and when practicable; and
•market our products and services to new customers.
Consolidated Revenue
The following table summarizes our consolidated operating revenue recorded under each of our eight above describedtwo segments and in our four above-described revenue categories:sales channels within the Business segment:
|
| | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2020 | | 2019 (1) | |
| (Dollars in millions) | |
IP and Data Services | $ | 1,624 |
| | 1,660 |
| | (2 | )% |
Transport and Infrastructure | 1,232 |
| | 1,246 |
| | (1 | )% |
Voice and Collaboration | 920 |
| | 967 |
| | (5 | )% |
IT and Managed Services | 125 |
| | 145 |
| | (14 | )% |
Broadband | 722 |
| | 722 |
| | — | % |
Voice | 421 |
| | 477 |
| | (12 | )% |
Regulatory | 156 |
| | 157 |
| | (1 | )% |
Other | 28 |
| | 53 |
| | (47 | )% |
Total operating revenue | $ | 5,228 |
| | 5,427 |
| | (4 | )% |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2021 | | 2020 | |
| (Dollars in millions) | |
Business Segment: | | | | | |
International & Global Accounts | $ | 1,013 | | | 1,041 | | | (3) | % |
Large Enterprise | 937 | | | 966 | | | (3) | % |
Mid-Market Enterprise | 716 | | | 761 | | | (6) | % |
Wholesale | 929 | | | 969 | | | (4) | % |
Business Segment Revenue | 3,595 | | | 3,737 | | | (4) | % |
Mass Markets Segment Revenue | 1,434 | | | 1,491 | | | (4) | % |
Total operating revenue | $ | 5,029 | | | 5,228 | | | (4) | % |
(1)
Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
Our total operating revenue decreased by $199 million or 4%, for the three months ended March 31, 20202021 as compared to the three months ended March 31, 20192020 primarily due to decreasesrevenue declines in all of our above-listed revenue categories. Voice and other revenue under our Consumer segment, transport and infrastructure revenue under our Wholesale segment and voice and collaboration revenue under our Small and Medium Business segment experienced our largest decreases. See our segment results below for additional information.
Operating Expenses
The following table summarizestables summarize our consolidated operating expenses: |
| | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2020 | | 2019 | |
| (Dollars in millions) | |
Cost of services and products (exclusive of depreciation and amortization) (1) | $ | 2,235 |
| | 2,300 |
| | (3 | )% |
Selling, general and administrative | 853 |
| | 932 |
| | (8 | )% |
Depreciation and amortization | 1,160 |
| | 1,188 |
| | (2 | )% |
Goodwill impairment | — |
| | 6,506 |
| | nm |
|
Total operating expenses (1) | $ | 4,248 |
| | 10,926 |
| | (61 | )% |
|
| |
nm | Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2021 | | 2020 | |
| (Dollars in millions) | |
Cost of services and products (exclusive of depreciation and amortization) | $ | 2,136 | | | 2,235 | | | (4) | % |
Selling, general and administrative | 756 | | | 853 | | | (11) | % |
Depreciation and amortization | 1,150 | | | 1,160 | | | (1) | % |
| | | | | |
Total operating expenses | $ | 4,042 | | | 4,248 | | | (5) | % |
Cost of Services and Products (exclusive of depreciation and amortization)
Cost of services and products (exclusive of depreciation and amortization) decreased by $65$99 million or 3%, for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019.2020. The decrease
in costs of services and products (exclusive of depreciation and amortization) was primarily due to reductions in salaries and wages and employee-related expensesexpense from lower headcount network expenses, customer premises equipment costs from lower sales, in content costs for Prism TV and lower right of way and dark fiber expenses. These reductions werefacility costs partially offset by higher professional services expenses, voice usage costs, customer installation costs and space and power costs.network expenses.
Selling, General and Administrative
Selling, general and administrative expenses decreased by $79$97 million or 8%, for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019. The2020. This decrease in selling, general and administrative expenses was primarily due to reductions in salaries and wages and employee-related expensesexpense from lower headcount, contract labor, insurancelower bad debt expense, and fees, property and other taxes and gain on a salelower marketing costs.
Depreciation and Amortization
The following table providestables provide detail of our depreciation and amortization expense:
| | | Three Months Ended March 31, | | % Change | | Three Months Ended March 31, | | % Change |
| 2020 | | 2019 | | | 2021 | | 2020 | |
| (Dollars in millions) | | | (Dollars in millions) | |
Depreciation | $ | 729 |
| | 759 |
| | (4 | )% | Depreciation | $ | 725 | | | 729 | | | (1) | % |
Amortization | 431 |
| | 429 |
| | — | % | Amortization | 425 | | | 431 | | | (1) | % |
Total depreciation and amortization | $ | 1,160 |
| | 1,188 |
| | (2 | )% | Total depreciation and amortization | $ | 1,150 | | | 1,160 | | | (1) | % |
Depreciation expense decreased by $30$4 million or 4%, for the three months ended March 31, 20202021, as compared to the three months ended March 31, 20192020 primarily due to the impact of annual rate depreciable life changes of $60$38 million, which was partially offset by $31 million of higher depreciation expense associated with net growth in depreciable assets of $39 million.assets.
Amortization expense increaseddecreased by $2$6 million or less than 1%, for the three months ended March 31, 20202021 as compared to the three months ended March 31, 20192020, primarily due to increases associated with the net growth in amortizable assetsdriven by decreases of $25$17 million partially offset by decreases from the use of accelerated amortization methods for a portion of the customer intangibles of $19and $2 million andfrom the impact of annual rate amortizable life changes on certain software, which were partially offset by $7 million additional amortization expense recognized as a result of softwarereclassification of $5certain right-of-way assets, as discussed in Note 2—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 1 of Part I of this report. The decrease in amortization expense was additionally offset by accelerated amortization for decommissioned applications of $4 million.
Further analysis of our segment operating expenses by segment is provided below in "Segment Results."
Goodwill Impairments
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. Both
The January 2021 completion of our January 2019previously announced internal reorganization and the declinewas considered a change in our stock price triggered impairment testing in the first quarterevent or circumstance which required an assessment of 2019. Consequently, we evaluated our goodwill in January 2019for impairment. We performed a qualitative impairment assessment and again as of March 31, 2019.
When we performed our impairment tests during the first quarter of 2019, 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 of 2019. As a result, we recorded non-cash, non-tax-deductible goodwill impairment charges aggregating to $6.5 billion in the quarter ended March 31, 2019.
During the first quarter of 2020, we observed a decline in our stock price as a result of events occurring after the end of 2019, including the COVID-19 pandemic. We evaluated whether such events would indicate the fair value of our reporting units were below their carrying values. We believe these events have impacted the global economy more directly than us, and when considered with other factors, we have concluded it is not more likely than not that our fair values of our reporting units were less than their carrying values as of the quarter ended March 31, 2020. In light of the negative impacts of COVID-19 on the global economy, we will continue to evaluate the general economic trends which could have an impact on our assessment of whether it is more likely than not that the fair value of one or moreeach of our reporting units is less than its carrying amount. Future changes could cause our
reporting unit fair values to be less than ourexceeds the carrying value resulting in potential impairmentsof equity of our goodwill which could have a material effect onreporting units at January 31, 2021. Therefore, no impairment exists as of our results of operations and financial condition. The extent of the impact, if any, will depend on future developments including actions taken to contain the coronavirus and its long-term impacts on the overall economy.assessment date.
See Note 2—Goodwill, Customer Relationships and Other Intangible Assets for further details on these tests and impairment charges.
Other Consolidated Results
The following tables summarize our total other expense, net and income tax expense:
| | | Three Months Ended March 31, | | % Change | | Three Months Ended March 31, | | % Change |
| 2020 | | 2019 | | | 2021 | | 2020 | |
| (Dollars in millions) | | | (Dollars in millions) | |
Interest expense | $ | (449 | ) | | (523 | ) | | (14 | )% | Interest expense | $ | (389) | | | (449) | | | (13) | % |
Other loss, net | (98 | ) | | (5 | ) | | nm |
| |
Other income (expense), net | | Other income (expense), net | 34 | | | (98) | | | nm |
Total other expense, net | $ | (547 | ) | | (528 | ) | | 4 | % | Total other expense, net | $ | (355) | | | (547) | | | (35) | % |
Income tax expense | $ | 119 |
| | 138 |
| | (14 | )% | Income tax expense | $ | 157 | | | 119 | | | 32 | % |
_____________________________________________________________________________nmPercentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
|
| |
nm | Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. |
Interest Expense
Interest expense decreased by $74$60 million or 14% for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019.2020. The decrease in interest expense was primarily due to the decrease in average long-term debt from $35.8$34.7 billion forto $31.6 billion and the three months ended March 31, 2019decrease in the average interest rate of 5.34% to $34.7 billion4.88% for the three months ended March 31, 2020 andcompared to the refinancing of approximately $17 billion of long-term debt during 2019 to reduce our interest rates.three months ended March 31, 2021.
Other Loss,Income (Expense), Net
Other loss,income (expense), net reflects certain items not directly related to our core operations, including (i) gains and losses on extinguishments of debt, (ii) components of net periodic pension and postretirement benefit costs, (iii) foreign currency gains and losses, and (iv) our share of income from partnerships we do not control, interest income, gains and losses from debt modifications or extinguishments or non-operating asset dispositions foreign currency gains and lossesother non-core items.
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2021 | | 2020 | |
| (Dollars in millions) | | |
Gain (loss) on extinguishment of debt | $ | 8 | | | (79) | | | nm |
Pension and postretirement net periodic income (expense) | 24 | | | (4) | | | nm |
Foreign currency loss | (16) | | | (20) | | | (20) | % |
Other | 18 | | | 5 | | | nm |
Total other income (expense), net | $ | 34 | | | (98) | | | nm |
nmPercentages greater than 200% and components ofcomparisons between positive and negative values or to/from zero values are considered not meaningful.
The significant change in pension and post retirement net periodic pension and postretirement benefit costs. Other loss, net increased by $93 millionexpense for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019. The increase2020 was driven by a decline in other loss, net was primarilyinterest cost due to a loss on modification and extinguishment of debt of $79 million forlower discount rates.
Income Tax Expense
For the three months ended March 31, 2020 compared to a gain on extinguishment of debt of $9 million for the three months ended March 31, 2019.
Income Tax Expense
For the three months ended2021 and March 31, 2020, our effective income tax rate was 27.5%24.8% and for the three months ended March 31, 2019, our effective income tax rate was (2.3)%. The effective tax rate for the three months ended March 31, 2019 was primarily impacted by the goodwill impairment that is not deductible for tax purposes. Without the goodwill impairment, the rate would have been 28.8%.27.5%, respectively.
Segment Results
General
Reconciliation of segment revenue to total operating revenue is below:
|
| | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 (1) |
| (Dollars in millions) |
Operating revenue | | | |
International and Global Accounts | $ | 865 |
| | 863 |
|
Enterprise | 1,420 |
| | 1,425 |
|
Small and Medium Business | 658 |
| | 700 |
|
Wholesale | 958 |
| | 1,030 |
|
Consumer | 1,327 |
| | 1,409 |
|
Total operating revenue | $ | 5,228 |
| | 5,427 |
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
Operating revenue | | | |
Business | $ | 3,595 | | | 3,737 | |
Mass Markets | 1,434 | | | 1,491 | |
Total operating revenue | $ | 5,029 | | | 5,228 | |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
Reconciliation of segment EBITDA to total adjusted EBITDA is below:
|
| | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 (1) |
| (Dollars in millions) |
Adjusted EBITDA | | | |
International and Global Accounts | $ | 567 |
| | 565 |
|
Enterprise | 837 |
| | 849 |
|
Small and Medium Business | 444 |
| | 471 |
|
Wholesale | 810 |
| | 882 |
|
Consumer | 1,170 |
| | 1,207 |
|
Total segment EBITDA | 3,828 |
| | 3,974 |
|
Operations and Other EBITDA | (1,619 | ) | | (1,746 | ) |
Total adjusted EBITDA | $ | 2,209 |
| | 2,228 |
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
Adjusted EBITDA | |
Business | $ | 2,408 | | | 2,488 | |
Mass Markets | 1,258 | | | 1,302 | |
Total segment EBITDA | 3,666 | | | 3,790 | |
Operations and Other EBITDA | (1,509) | | | (1,581) | |
Total adjusted EBITDA | $ | 2,157 | | | 2,209 | |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020, in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
For additional information on our reportable segments and product and services categories, see Note 3—Revenue Recognition and Note 11—Segment Information to our consolidated financial statements in Item 1 of Part I of this report.
International and Global Accounts ManagementBusiness Segment
|
| | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2020 | | 2019 (1) | |
| (Dollars in millions) | |
Revenue: | | | | |
|
|
IP and Data Services | $ | 400 |
| | 408 |
| | (2 | )% |
Transport and Infrastructure | 316 |
| | 309 |
| | 2 | % |
Voice and Collaboration | 91 |
| | 89 |
| | 2 | % |
IT and Managed Services | 58 |
| | 57 |
| | 2 | % |
Total revenue | 865 |
| | 863 |
| | — | % |
Expenses: | | | | |
|
|
Total expense | 298 |
| | 298 |
| | — | % |
Total adjusted EBITDA | $ | 567 |
| | 565 |
| | — | % |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020, in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
Three Months Ended March 31, 2020 Compared to the same period Ended March 31, 2019 | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2021 | | 2020 | |
| (Dollars in millions) | |
Business Segment Product Categories: | | | | | |
Compute and Application Services | $ | 428 | | | 435 | | | (2) | % |
IP and Data Services | 1,580 | | | 1,622 | | | (3) | % |
Fiber Infrastructure Services | 554 | | | 547 | | | 1 | % |
Voice and Other | 1,033 | | | 1,133 | | | (9) | % |
Total Business Segment Revenue | 3,595 | | | 3,737 | | | (4) | % |
Expenses: | | | | | |
Total expense | 1,187 | | | 1,249 | | | (5) | % |
Total adjusted EBITDA | $ | 2,408 | | | 2,488 | | | (3) | % |
Segment revenue increased $2decreased $142 million or less than 1% for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019. Excluding2020, primarily due to the impactfollowing factors:
•Compute and Application Services declined primarily due to declines in Cloud Services within Large Enterprise and IGAM sales channels, lower rates for CDN and a large customer disconnect for IT Solutions within the IGAM sales channel, partially offset by growth in Managed Security and IT Solutions within the Large Enterprise sales channel;
•IP and Data Services declined due to lengthening sales cycles in the current environment for hybrid networks and SD-WAN, declines in traditional VPN networks in the Enterprise and IGAM sales channels and continued declines in Ethernet sales, partially offset by an increase in IP services;
•Fiber Infrastructure Services grew due to growth in dark fiber and wavelengths demand, primarily from our large IGAM customers, which was partially offset by lower equipment revenue increased $11in the Large Enterprise sales channel;
•Voice and Other decreased due to continued decline of legacy voice, private line and other services to customers across all sales channels.
Segment expense decreased $62 million or 1% for the three months ended March 31, 2020 compared to March 31, 2019, primarily due to the following factors:
Transport and Infrastructure increased due to strength in dark fiber driven by our large global customers;
Voice and Collaboration increased due to higher usage primarily attributed to COVID-19 impacts;
IT and Managed Services increased due to our continued focus on profitable growth partially offset by legacy contract disconnects; and
IP and Data Services declined mostly due to reduced rates and lower Vyvx traffic due to less live events.
Segment expenses remained unchanged for the three months ended March 31, 20202021 as compared to the three months ended March 31, 20192020, primarily due to lower cost of revenue offset by higher headcount relatedemployee-related costs such as employee compensation and commissions.
Segment adjusted EBITDA as a percentage of revenue was 66% for the three months ended March 31, 2020 and 65% for the three months ended March 31, 2019.
Enterprise Segment
|
| | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2020 | | 2019 (1) | |
| (Dollars in millions) | |
Revenue: | | | | | |
IP and Data Services | $ | 628 |
| | 638 |
| | (2 | )% |
Transport and Infrastructure | 380 |
| | 347 |
| | 10 | % |
Voice and Collaboration | 356 |
| | 366 |
| | (3 | )% |
IT and Managed Services | 56 |
| | 74 |
| | (24 | )% |
Total revenue | 1,420 |
| | 1,425 |
| | — | % |
Expenses: | | | | |
|
|
Total expense | 583 |
| | 576 |
| | 1 | % |
Total adjusted EBITDA | $ | 837 |
| | 849 |
| | (1 | )% |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020, in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
Three Months Ended March 31, 2020 Compared to the same period Ended March 31, 2019
Segment revenue decreased $5 million or less than 1% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, due to the following factors:
IT and Managed Services declined due to churn in legacy managed service contracts;
IP and Data Services declined primarily driven by customers migration off of traditional wireline services to more technologically advanced services.
Voice and Collaboration decreased as customers continue to disconnect traditional voice time division multiplexing ("TDM") service and transition to newer (low cost) products such as VoIP; and
Transport and Infrastructure increased primarily due to strength in our Federal business. The first quarter 2019 had been negatively impacted by the Federal Government shutdown.
Segment expenses increased by $7 million or 1% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to higher costs of revenue partially offset by lower salaries and wages expenses driven byfrom lower headcount and lower commissions expenses.
Segment adjusted EBITDA as a percentagecost of revenue was 59% for the three months ended March 31, 2020 and 60% for the three months ended March 31, 2019.
Small and Medium Business Segment
|
| | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2020 | | 2019 (1) | |
| (Dollars in millions) | |
Revenue: | | | | | |
IP and Data Services | $ | 269 |
| | 276 |
| | (3 | )% |
Transport and Infrastructure | 89 |
| | 95 |
| | (6 | )% |
Voice and Collaboration | 290 |
| | 317 |
| | (9 | )% |
IT and Managed Services | 10 |
| | 12 |
| | (17 | )% |
Total revenue | 658 |
| | 700 |
| | (6 | )% |
Expenses: | | | | |
|
|
Total expense | 214 |
| | 229 |
| | (7 | )% |
Total adjusted EBITDA | $ | 444 |
| | 471 |
| | (6 | )% |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020, in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.sales.
Three Months Ended March 31, 2020 Compared to the same period Ended March 31, 2019
Segment revenue decreased $42 million or 6% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to the following factors:
Voice and Collaboration decreased due to continued declines in demand for traditional voice TDM services;
IP and Data Services revenue declined primarily due to lower rates;
Transport and Infrastructure declined due to continued pressure in low-speed broadband units combined with a certain one-time benefit in first quarter 2019; and
IT and Managed Services declined mainly due to lower equipment sales.
Segment expenses decreased by $15 million or 7% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to lower employee related costs due to lower headcount and lower external commissions expense paid to partners.
Segment adjusted EBITDA as a percentage of revenue was 67% for both the three months ended March 31, 20202021 and 67%2020.
Mass Markets Segment
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2021 | | 2020 | |
| (Dollars in millions) | |
Mass Markets Product Categories: | | | | | |
Consumer Broadband | $ | 731 | | | 722 | | | 1 | % |
SBG Broadband | 39 | | | 39 | | | — | % |
Voice and Other | 541 | | | 607 | | | (11) | % |
CAF II | 123 | | | 123 | | | — | % |
Total Mass Markets Segment Revenue | 1,434 | | | 1,491 | | | (4) | % |
Expenses: | | | | | |
Total expense | 176 | | | 189 | | | (7) | % |
Total adjusted EBITDA | $ | 1,258 | | | 1,302 | | | (3) | % |
Segment revenue decreased $57 million for the three months ended March 31, 2019.
Wholesale Segment
|
| | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2020 | | 2019 (1) | |
| (Dollars in millions) | |
Revenue: | | | | | |
IP and Data Services | $ | 327 |
| | 338 |
| | (3 | )% |
Transport and Infrastructure | 447 |
| | 495 |
| | (10 | )% |
Voice and Collaboration | 183 |
| | 195 |
| | (6 | )% |
IT and Managed Services | 1 |
| | 2 |
| | (50 | )% |
Total revenue | 958 |
| | 1,030 |
| | (7 | )% |
Expenses: | | | | |
|
|
Total expense | 148 |
| | 148 |
| | — | % |
Total adjusted EBITDA | $ | 810 |
| | 882 |
| | (8 | )% |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020, in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
Three Months Ended March 31, 2020 Compared to the same period Ended March 31, 2019
Segment revenue decreased $72 million or 7% for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019, primarily due to the following factors:2020:
Transport
•Consumer Broadband revenue increases were driven by demand for higher-speed services and Infrastructure decreasedhigher rates; and
•Voice and Other declined due to continued declines in legacy private line servicesvoice customer losses and customer network consolidation and grooming efforts;
Voice and Collaboration declined due to market rate compression combined with lower customer volumes;
IP and Data Services declined primarily due to lower rates. Additionally, year-over-year results were impacted by a carrier re-rate that occurred in first quarter 2019; and
IT and Managed Services decreased due to customer churn.our de-emphasis of the Prism video product.
Segment expenses remained unchangedexpense decreased $13 million for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019,2020, primarily due to lower directemployee-related costs from lower headcount and lower cost of revenue, continued network grooming efforts offsetsales driven by higher headcount costs.
Segment adjusted EBITDA as a percentage of revenue was 85% for the three months ended March 31, 2020 and 86% for the three months ended March 31, 2019.
Consumer Segment
|
| | | | | | | | | |
| Three Months Ended March 31, | | % Change |
| 2020 | | 2019 (1) | |
| (Dollars in millions) | |
Revenue: | | | | | |
Broadband | $ | 722 |
| | 722 |
| | — | % |
Voice | 421 |
| | 477 |
| | (12 | )% |
Regulatory | 156 |
| | 157 |
| | (1 | )% |
Other | 28 |
| | 53 |
| | (47 | )% |
Total revenue | 1,327 |
| | 1,409 |
| | (6 | )% |
Expenses: | | | | |
|
|
Total expense | 157 |
| | 202 |
| | (22 | )% |
Total adjusted EBITDA | $ | 1,170 |
| | 1,207 |
| | (3 | )% |
(1)Reclassifications were made within certain 2019 comparative figures due to the retrospective application of an accounting policy election during the first quarter of 2020,decrease in addition to customer and cost assignment reporting changes. Refer to Note 1 - Background and our Form 8-K filing dated April 30, 2020 for further information.
Three Months Ended March 31, 2020 Compared to the same period Ended March 31, 2019
Segment revenue decreased $82 million or 6% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to the following factors:
Voice and Other decreased primarily due to continued decline in our legacy voice customers and the deemphasis of our Prism video product;
Regulatory revenue was lower in part due to lower state support revenue; and
Broadband was flat year-over-year. This quarter performance was impacted higher rates which were offset by customer churn.
Segment expenses decreased by $45 million or 22% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to lower Prism content costs, lower headcount costs and decreased marketing expenses.costs.
Segment adjusted EBITDA as a percentage of revenue was 88% and 87% for the three months ended March 31, 2021 and 2020, and 86% for three months ended March 31, 2019.respectively.
Liquidity and Capital Resources
Overview of Sources and Uses of Cash
We are a holding company that is dependent on the capital resources of our subsidiaries to satisfy our parent company liquidity requirements. Several of our significant operating subsidiaries have borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries or affiliates. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries may be limited by tax, and legal considerations and other factors.considerations.
At March 31, 2020,2021, we held cash and cash equivalents of $1.6 billion (including cash held to discharge $973$486 million, aggregate principal amount of CenturyLink senior notes that matured on April 1, 2020), and we also had $825 million$2.2 billion of borrowing capacity available under our revolving credit facility. We typically use our revolving credit facility as a source of liquidity for operating activities and our other cash requirements. We had approximately $69$119 million of cash and cash equivalents outside the United States at March 31, 2020.2021. We currently believe that there are no material restrictions on our ability to repatriate cash and cash equivalents into the United States, and that we may do so
without paying or accruing U.S. taxes. We do not currently intend to repatriate to the United States any of our foreign cash and cash equivalents from operating entities outside of Latin America.
In response to COVID-19 the U.S. Congress passed the CARES Act on March 27, 2020. The CARES Act favorably impactedOur executive officers and our liquidity by $41 million as a resultBoard of allowing full refundDirectors periodically review our sources and potential uses of the alternative minimum tax credit carryforwardcash in 2020, as compared to the refund being allowed in phases over the next few years in accordanceconnection with the Tax Cuts and Jobs Act. Additionally, under the CARES Act we can defer our payroll tax payments estimated at $135 million for the full year of 2020.
annual budgeting process. Generally speaking, our principal funding source is cash from operating activities, and our principal cash requirements include operating expenses, capital expenditures, income taxes, debt repayments, dividends, periodic stocksecurities repurchases, periodic pension contributions and other benefits payments.
Based on our current capital allocation objectives, for the full year 2021 we project approximately $3.5 billion to $3.8 billion of capital expenditures and approximately $1.1 billion of cash dividends on our common stock (based on the assumptions described below under "Dividends").
For the twelve-month12 month period endedending March 31, 2021,2022, we project that our fixed commitments will include (i) $125 million of scheduled debtterm loan amortization payments, (ii) $31$42 million of finance lease and other fixed payments and (iii) no$3.7 billion of debt maturities (after giving effect to our payment on April 1, 2020 of a $973 million aggregate principal amount debt maturity described further in Note 5). We do not anticipate that the COVID-19 pandemic will interfere with our ability to discharge these obligations over the next year.maturities.
In connection with our annual budgeting process for fiscal year 2020, our executive officers and our Board of Directors reviewed our sources and potential uses of cash and budgeted spending for the year approximating $1.1 billion for dividends (based on the assumptions noted below) and between $3.6 to $3.9 billion (excluding integration and transformation capital) on capital spending. These determinations were made before the effects of the COVID-19 pandemic became widespread. In light of the economic uncertainties associated with the COVID-19 pandemic, our executive officers and Board have continued to carefully monitor our liquidity and cash requirements. Based on current circumstances, we plan to continue our current dividend policy. Given uncertainties regarding the duration of the pandemic and timing for economic recovery, we will continue to monitor our capital spending. As we do each year, we will continue to monitor our future sources and uses of cash, and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors. We typically use our revolving credit facility as a source of liquidity for operating activities and our other cash requirements.
For additional information, see "Risk Factors—Risks Affecting Our Liquidity and Capital Resources"Financial Risks" in Item 1A of Part I of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019 and Item 1A of Part II of this report.2020.
Capital Expenditures
We incur capital expenditures on an ongoing basis to expand and improve our service offerings, enhance and modernize our networks and compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as our CAF Phase II or Rural Digital Opportunity Fund ("RDOF") infrastructure buildout requirements).
Our capital expenditures continue to be focused on enhancing network operating efficiencies and supporting new service developments. For more information on our capital spending, see (i) "—Overview of Sources and UseUses of Cash" above, (ii) "Historical Information—Investing Activities" below and (iii) Item 1 of Part I of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019.2020.
Debt and Other Financing Arrangements
Subject to market conditions, we expect to continue to issue debt securities from time to time in the future primarily to refinance a substantial portion of our maturing debt, including issuing debt securities of certain of our subsidiaries to refinance their maturing debt to the extent feasible. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned by credit rating agencies, among other factors.
As of March 31, 2020,2021, the credit ratings for the senior secured and unsecured debt of CenturyLink,Lumen Technologies, Inc., Qwest Corporation and Level 3 Financing, Inc. and Qwest Corporation were as follows:
| | | | | | | | | | | | | | | | | | | | |
Borrower | | Moody's Investors Service, Inc. | | Standard & Poor's | | Fitch Ratings |
Lumen Technologies, Inc.: | | | | | | |
Unsecured | | B2 | | BB- | | BB |
Secured | | Ba3 | | BBB- | | BB+ |
| | | | | | |
Borrower | | Moody's Investors Service, Inc. | | Standard & Poor's | | Fitch Ratings |
CenturyLink, Inc.: | | | | | | |
Unsecured | | B2 | | B+ | | BB |
Secured | | Ba3 | | BBB- | | BB+ |
| | | | | | |
Qwest Corporation: | | | | | | |
Unsecured | | Ba2 | | BBB- | | BB+ |
| | | | | | |
Level 3 Financing, Inc. | | | | | | |
Unsecured | | Ba3 | | BB | | BB |
Secured | | Ba1 | | BBB- | | BBB- |
| | | | | | |
Qwest Corporation: | | | | | | |
Unsecured | | Ba2 | | BBB- | | BB+ |
Our credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future downgrades of the senior unsecured or secured debt ratings of us or our subsidiaries could impact our access to debt capital or further raise our borrowing costs. See "Risk Factors—Risks Affecting our Liquidity and Capital Resources"Financial Risks" in Item 1A of Part I of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019 and Item 1A of Part II of this report.2020.
Net Operating Loss Carryforwards
As of December 31, 2019, CenturyLink2020, Lumen Technologies had approximately $6.2$5.1 billion of federal net operating loss carryforwards ("NOLs"), which for U.S. federal income tax purposes can be used to offset future taxable income. These NOLs are primarily related to federal NOLs we acquired through the Level 3 acquisition on November 1, 2017 and are subject to limitations under Section 382 of the Internal Revenue Code ("Code") and related U.S. Treasury Department regulations. In the first half of 2019, we entered into and subsequently restatedWe maintain a Section 382 rights agreement designed to safeguard through late 2023 our ability to use those NOLs. Assuming that we can continue using these NOLs in the amounts projected, we expect to significantly reduce our federal cash taxes for the next several years. The amounts of our near-term future tax payments will depend upon many factors, including our future earnings and tax circumstances and results of any corporate tax reform. Based on current laws and our current estimates of 2020 earnings,assumptions and projections, we estimate our cash income tax liability related to 20202021 will be approximately $100 million.
We cannot assure you that we will be able to use these NOL carryforwards fully. See "Risk Factors—Risks Affecting Our Liquidity and Capital Resources—We cannot assure you, whether, when or in what amounts we will be able to use our net operating lossNOL carryforwards or when they willfully. See "Risk Factors—Financial Risks—We may not be depleted"able to fully utilize our NOLs" in Item 1A of Part I of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019 and Item 1A of Part II of this report.2020.
Dividends
We currently expect to continue our current practice of paying quarterly cash dividends in respect of our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.25 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing our business, investing in the business, de-leveragingdeleveraging our balance sheet and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 20202021 at this rate of $0.25 per share, our average total dividend paid each quarter would be approximately $272$273 million based on the number of our current outstanding shares (which figure (i) assumes no increases or decreasedecreases in the number of shares exceptand (ii) includes dividend payments in connection with the anticipated vesting of currently outstanding equity awards and (ii) excludes one-time dividend costs we periodically incur in connection with releasing escrowed dividendawards). Dividend payments upon the vesting of performance-based equity incentive awards which was $17$23 million during the first quarter of 2020).three months ended March 31, 2021. See Risk Factors—"Risks Affecting Our Liquidity and Capital Resources"Business Risks" in Item 1A of Part I of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019 and Item 1A of Part II of this report.2020.
Revolving Facilities and Other Debt Instruments
On June 19, 2017, to substantially fund our acquisition of Level 3, one of our affiliates entered into a credit agreement (the "2017 CenturyLink Credit Agreement") providing initially for $10.2 billion in senior secured credit facilities, consisting initially of a $2.0 billion revolving credit facility and approximately $7.9 billion of term loan facilities. On November 1, 2017, CenturyLink, Inc., among other things, assumed all rights and obligations under the 2017 CenturyLink Credit Agreement. On January 29, 2018, the 2017 CenturyLink Credit Agreement was amended to increase the borrowing capacity of the new revolving credit facility from $2.0 billion to $2.2 billion, and to increase the borrowing capacity under one of the term loan tranches by $132 million. On January 31, 2020, the 2017 CenturyLink Credit Agreement waswe amended and restated our credit agreement dated June 19, 2017 to, among other things, extend the debt maturities of the revolving credit and term loan facilities established thereunder, to lower interest rates payable thereunder, and to amend the amounts owed under each of the facilities. For additional information, see (i) "—Overview of Sources and Uses of Cash," (ii) Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report and (ii)(iii) Note 7—6—Long-Term Debt and Credit Facilities in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
At March 31, 2020,2021, we had $82$64 million of letters of credit outstanding under our $225 million uncommitted letter of credit facility.
Additionally, as of March 31, 2020,under a separate facility, we had outstanding letters of credit, or other similar obligations, of approximately $23$30 million as of March 31, 2021, of which $17$10 million iswas collateralized by cash that is reflected on our consolidated balance sheets as restricted cash.
In addition to its indebtedness under the 2017 CenturyLinkAmended Credit Agreement, CenturyLinkLumen Technologies is indebted under its outstanding senior notes, and several of its subsidiaries are indebted under separate credit facilities or senior notes. For information on the terms and conditions of other debt instruments of ours and our subsidiaries, including financial and operating covenants, see (i) Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report.report and (ii) "—Other Matters" below.
Pension and Post-retirement Benefit Obligations
We are subject to material obligations under our existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2019,2020, the accounting unfunded status of our qualified and non-qualified defined benefit pension plans and our qualified post-retirement benefit plans was $1.8$1.7 billion and $3.0 billion, respectively. For additional information about our pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates - Pensions and Post-Retirement Benefits" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20192020 and see Note 11—10—Employee Benefits to our consolidated financial statements in Item 8 of Part II of the same report.
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 2020.2021. The amount of required contributions to our qualified pension plan in 20212022 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. We last made a voluntary contribution to the trust for our qualified pension plan during 2018. Based on current circumstances, we do not anticipate makingWe may make a voluntary contribution to the trust for our qualified pension plan in 2020.2021.
Substantially all of our post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that have been used to help cover the health care costs of certain retirees. As of December 31, 2019, assets in the post-retirement trusts had been substantially depletedunfunded and had a fair value of only $13 million (a portion of which was comprised of investments with restricted liquidity), which has significantly limited our ability to continue paying benefits from the trusts. Benefits notare paid from the trusts are expected to be paid directly by us with available cash. As described further in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of our most recent annual report on Form 10-K, aggregateAggregate benefits paid by us under these plans (net of participant contributions and direct subsidy receipts) were $211 million, $241 million $249 million and $237$249 million for the years ended December 31, 2020, 2019 2018 and 2017, respectively, while the amounts paid from the trust were $4 million, $4 million and $31 million,2018, respectively. For additional information on our expected future benefits payments for our
post-retirement benefit plans, please see Note 11—10—Employee Benefits to our consolidated financial statements in Item 8 of Part II of our annual reportAnnual Report Form 10-K for the year ended December 31, 2019.2020.
The capital markets have been volatile duringsince early 2020, partiallyprimarily as a result of uncertainties related to the COVID-19 outbreak. FederalU.S. federal governmental actions to stimulate the economy have significantly impacted interest rates. These events could ultimately affect the funding levels of our pension plans and calculations of our liabilities under our pension and other post-employment benefit plans.
For 2020,2021, our expected annual long-term ratesrate of return on the pension plan and post-retirement health care and life insurance benefit plan assets are 6% and 4%, respectively.is 5.5%. However, actual returns could be substantially different.
Our pension plan contains provisions that allow us, from time to time, to offer lump sum payment options to certain former employees in settlement of their future retirement benefits. We record an accounting settlement charge, consisting of the recognition of certain deferred costs of the pension plan, associated with these lump sum payments only if, in the aggregate, they exceed the sum of the annual service and interest costs for the plan’s net periodic pension benefit cost, which represents the settlement accounting threshold. During 2020 and as of March 31, 2021, the settlement threshold was not reached.
Future Contractual Obligations
For information regarding our estimated future contractual obligations, see the MD&A discussion included in Item 7 of Part II of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019.2020.
Connect America FundFederal Broadband Support Programs
As a result of accepting CAFSince 2015, we have been receiving over $500 million annually through Phase II support payments, we are receiving substantial support payments underof the CAF, a program that will soon lapse. Moreover,end this year. In connection with the CAF funding, we must meet certain specified infrastructure buildout requirements in 33 states. In order to meet these specified infrastructure buildout requirements, we may be obligated to makestates by the end of 2021, which requires substantial capital expenditures. DueWhile we are on track to governmental restrictions and potential supply delays related tomeet the COVID-19 pandemic,requirements this year, we cannot provide any assurances that we will be able to timely meet all of our mandated buildout requirements. In accordance with the Federal Communications Commission's ("FCC") January 2020 order, we elected to receive an additional year of CAF Phase II funding in 2021.
On January 30,In early 2020, the FCC approved an order creatingcreated the Rural Digital Opportunity Fund (the “RDOF”), which is a new federal support program designed to followreplace the CAF Phase II program. Through the RDOF,On December 7, 2020, the FCC plans to award up to $20.4allocated in its RDOF Phase I auction $9.2 billion in support payments over 10 years to bringdeploy high speed broadband to over 5.2 million unserved areas through multi-round reverse auctions conducted in two phases, the first of which is scheduledlocations. We won bids for October 2020. For CAFRDOF Phase II participants like CenturyLink,I support payments awarded in the initial phase of $26 million, annually. These RDOF wouldPhase I support payments are expected to begin January 1, 2022. CenturyLink is currently analyzing the opportunity to participate in the initial RDOF auction. In its January order, the FCC also clarified that CAF II recipients, like CenturyLink, would receive an additional year of CAF Phase II funding in 2021. We cannot assure you that the final terms of the RDOF will match those described above.
For additional information on these programs, see (i) "Business—Regulation" in Item 1 of Part I of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019,2020 and (ii) "Risk Factors—Risks Affecting Our Liquidity and Capital Resources" in Item 1A of Part I of the same annual report and (iii) Item 1AAnnual Report.
As part of Part IIits proposed infrastructure plan, the Biden Administration has proposed investing $100 billion to expand internet access in the United States. The plan seeks several other changes that could impact us, including proposals to increase competition among broadband providers. Currently, we believe it is premature to speculate on the potential impact of this report.these proposals on us.
Historical Information
The following table summarizes our consolidated cash flow activities: |
| | | | | | | | | |
| Three Months Ended March 31, | | Change |
| 2020 | | 2019 | |
| (Dollars in millions) |
Net cash provided by operating activities | $ | 1,299 |
| | 1,182 |
| | 117 |
|
Net cash used in investing activities | (939 | ) | | (906 | ) | | (33 | ) |
Net cash used in financing activities | (486 | ) | | (320 | ) | | (166 | ) |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | $ Change |
| 2021 | | 2020 | |
| (Dollars in millions) |
Net cash provided by operating activities | $ | 1,525 | | | 1,299 | | | 226 | |
Net cash used in investing activities | $ | (675) | | | (939) | | | (264) | |
Net cash used in financing activities | $ | (774) | | | (486) | | | 288 | |
Operating Activities
Net cash provided by operating activities increased by $117$226 million for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019,2020, primarily due to an decrease inhigher net income, higher accrued payroll and accrued interest, and lower payments ofon accounts payable, and an increase in receipts from accounts receivable, partially offset by an increase in other tax payments.decreased collections on accounts receivable and increased cash payments for post-retirement benefits. Cash provided by operating activities is subject to variability period over period as a result of timing ofdifferences, including with respect to the collection of receivables and payments related toof interest expense, accounts payable and bonuses.
Investing Activities
Net cash used in our investing activities increaseddecreased by $33$264 million for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019 substantially2020 primarily due to an increasea decrease in capital expenditures.
Financing Activities
Net cash used in financing activities increased $166by $288 million for the three months ended March 31, 20202021 as compared to the three months ended March 31, 2019,2020, primarily due to higher proceeds from debt issuances in the increasefirst quarter of 2020 and the change in net activity of our revolving line of credit agreement, partially offset by a decrease in payments of long-term debt partially offset by increases in net proceeds from issuance of long-term debt and net proceeds from our revolving line of credit.year-over-year.
See Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report for additional information on our outstanding debt securities.
Other Matters
We have cash management and loan arrangements with certaina majority of our principalincome-generating subsidiaries, in which a substantial portionsportion of the aggregate cash of those subsidiaries' cash is regularlyperiodically advanced or loaned to us or our service company affiliate. Although we periodically repay these advances to fund the subsidiaries' cash requirements throughout the year, at any given point in time we may owe a substantial sum to our subsidiaries under these advances, which, inarrangements. In accordance with generally accepted accounting principles, these arrangements are reflected in the balance sheets of our subsidiaries but are eliminated in consolidation and therefore not recognized on our consolidated balance sheets.
We also are involved in various legal proceedings that could substantially impact our financial position. See Note 12—Commitments, Contingencies and Other Items for additional information.
Market Risk
As of March 31, 2020,2021, we are exposed to market risk from changes in interest rates on our variable rate long-term debt obligations and fluctuations in certain foreign currencies. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.
Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure. From time to time, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. As of March 31, 2020,2021, we did not hold or issue derivative financial instruments for trading or speculative purposes.
In February 2019, we executed swap transactions that reduced our exposure to floating rates with respect to $2.5 billion principal amount of floating rate debt. In June 2019, we executed swap transactions that reduced our exposure to floating rates with respect to $1.5$4.0 billion principal amount of floating rate debt. 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.
As of March 31, 2020,2021, we had approximately $11.1$9.7 billion floating rate debt potentially subject to the London Inter-Bank Offered Rate (LIBOR),LIBOR, $4.0 billion of which was subject to the above-described hedging arrangements. A hypothetical increase of 100 basis points in LIBOR relating to our $7.1$5.7 billion of unhedged floating rate debt would, among other things, decrease our annual pre-tax earnings by approximately $71$57 million.
We conduct a portion of our business in currencies other than the U.S. dollar, the currency in which our consolidated financial statements are reported. Accordingly, our operating results could be adversely affected by foreign currency exchange rate volatility relative to the U.S. dollar. Our European subsidiaries and certain Latin American subsidiaries use the local currency as their functional currency, as the majority of their revenue and purchases are transacted in their local currencies. Certain Latin American countries previously designated as highly inflationary economies use the U.S. dollar as their functional currency. Although we continue to evaluate strategies to mitigate risks related to the effect of fluctuations in currency exchange rates, we will likely recognize gains or losses from international
losses from international transactions. ChangesAccordingly, changes in foreign currency rates relative to the U.S. dollar could adversely affectimpact our operating results.
Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those disclosed by us from time to time if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at March 31, 2020.2021.
Off-Balance Sheet Arrangements
As of March 31, 2020, we had no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we did not engage in hedging or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii) disclosed in Note 19—Commitments and Contingencies and Other Items 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, 2019, or in the Future Contractual Obligations table included in Item 7 of Part II of the same report, or (iii) discussed under the heading "Market Risk" above.
Other Information
Our website is www.centurylink.com.www.lumen.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.comir.lumen.com. The information contained on, or that may be accessed through, our website is not part of this quarterly report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed by us or our affiliates Level 3 Parent, LLC and Qwest Corporation, and all amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.comir.lumen.com) under the headings "FINANCIALS" and "SEC Filings." These reports are available on our website as soon as reasonably practicable after wethey are electronically file themfiled with the SEC. From time to time, we also use our website to webcast our earnings calls and certain of our meetings with investors or other members of the investment community.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital resources—Resources—Market Risk" in Item 2 of Part I above.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by the Companyus in the reports that it files or furnisheswe file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’sour senior management, including itsour Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer, Jeff K. Storey, and our Executive Vice President and Chief Financial Officer, Indraneel Dev, evaluated the effectiveness of the Company’sour disclosure controls and procedures as of March 31, 2020.2021. Based on this evaluation, the Company’sour Chief Executive Officer and Chief Financial Officer concluded that the Company’sour disclosure controls and procedures were effective, as of March 31, 2020,2021, in providing reasonable assurance that the information required to be disclosed by us in this report was accumulated and communicated in the manner provided above.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’sour internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the first quarter of 20202021 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Inherent Limitations of Internal Controls
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management's control objectives.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 12—Commitments, Contingencies and Other Items included in Item 1 of Part I of this quarterly report on Form 10-Q is incorporated herein by reference. The ultimate outcome of the matters described in Note 12 may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing in such Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us. For more information, see “Risk Factors—Risks Relating to Legal and Regulatory Matters—Our pending legal proceedings could have a material adverse impact on our financial condition and operating results, on the trading price of our securities and on our ability to access the capital markets” in Item 1A of Part I of our annual reportAnnual Report on Form 10-K for the year ended December 31, 2019 and Item 1A of Part II of this report.2020.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition or future results. We urge you to carefully consider (i) the other information set forth in this report and (ii) the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the additional risk factors appearing below:2020.
An outbreak of disease or similar public health threat, such as the recent COVID‑19 pandemic, could have a material adverse impact on our operating results and financial conditionAn outbreak of disease or similar public health threat, such as the recent COVID‑19 pandemic and its detrimental impact on the worldwide economy, could have a material adverse impact on our operating results and financial condition.
We are vulnerable to the general economic effects of disease outbreaks and similar public health threats. Since the latter half of the first quarter of 2020, the COVID-19 pandemic has caused a sudden and substantial reduction in worldwide economic activity. COVID-19 poses the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities at expected levels through established processes for an indefinite period of time, including due to shutdowns or related restrictions that may be requested or mandated by governmental authorities (such as the shutdowns of sporting events, which has reduced our Vyvx revenues). We provide services in over 60 countries, including regions significantly impacted by COVID-19. The extent to which COVID-19 will ultimately impact our results, including its impact on demand for our products and services and related impacts upon network usage, the ability of our customers to continue to pay in a timely manner, the impact on other third parties upon which our operations, financial performance and liquidity are materially reliant, impacts on our relationships with unionized employees and related collective bargaining agreements negotiations, impacts upon counterparty risk relative to our major contracts, impacts upon our transformational efforts and impacts on our supply chains or distribution channels for our products and services, is dependent on future developments, which are uncertain and unpredictable, including new information which may emerge concerning the risks and severity of COVID-19 and additional actions which may be taken to contain it or treat its impact. Such future uncertain and unpredictable developments include:
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• | The duration, extent and severity of the pandemic. COVID-19 has rapidly spread worldwide, and it is not yet known (i) when the current pandemic will abate, (ii) whether, when or to what extent additional outbreaks may arise, (iii) the extent to which various populations will experience more severe adverse health consequences, (iv) the effectiveness of current mitigation steps, and (v) whether or when treatments or vaccines will be developed to ameliorate or staunch the pandemic.
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• | The response of governmental and nongovernmental authorities. Many governmental and nongovernmental bodies have taken action to substantially curtail household and business activity to help slow the spread of COVID-19 or to otherwise mitigate its potential adverse effects. In the United States and many other countries, these mandates have been issued by state or local officials, which significantly increases the unpredictability and variability of when and how these mandates will be amended or rescinded. The significant health and economic challenges arising out of the pandemic has led to changes in laws governing the rights of workers and has caused, and may continue to cause, various parties to propose additional changes to laws or regulations, including those governing communications companies.
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The continuing impact of existing or new mandates, restrictions, laws or regulations could have a material adverse impact on our operations and the operations of our suppliers or others with which we do business.
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• | Impacts to economic and market conditions. COVID-19 has created significant disruption to and volatility in global, national, regional and local economies and markets. Uncertainties related to, and perceived or experienced negative effects from, COVID-19 may cause significant volatility or decline in the trading price of our securities, worldwide labor markets and general economic conditions. These changes began to affect us, our customers and our business by the end of the first quarter of 2020. Following the first quarter of 2020, we expect these changes either may or will (i) increase the likelihood of litigation, including derivative shareholder litigation, (ii) limit or restrict our ability to conduct normal business activities with customers, vendors, lenders or others with whom we do business, (iii) continue to result in changes in spending patterns or reduced demand for our products and services, (iv) result in reductions in our labor force, (v) cause us to delay or change our operating, capital spending or transformational plans, (vi) result in future changes in tax rates, (vii) restrict our ability to implement our transformation plans and (vii) otherwise render it more difficult or impossible to implement our operational or strategic plans.
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• | Impacts to Capital Markets. Shortly after COVID-19 began its rapid spread beyond Asia, domestic and worldwide capital markets ceased operating for a short period, and have remained unstable or unpredictable since then, particularly for non-investment grade issuers. Legislative bodies and reserve banks have taken various actions in respond to the pandemic that have impacted the capital markets, and we expect that these efforts could continue. We are materially reliant upon the capital markets to access funding necessary to refinance our outstanding indebtedness. If the economic disruptions caused by COVID-19 continue to interfere with the operations of the capital markets, our access to cash to refinance our debt or to fund our other cash requirements could be materially adversely affected.
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• | Impacts to individuals and companies that may do business with us or be involved in our business. COVID-19 may impact the health of our employees, directors or customers, reduce the availability of our workforce or those of companies with which we do business, create disruptions in our supply chain or otherwise cause human impacts that have a material adverse impact on our business.
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In addition, preparing for and responding to the continuing pandemic could divert management’s attention from our key strategic priorities, increase costs as we prioritize health and safety matters for our employees and customers, cause us to reduce, delay, alter or abandon initiatives that may otherwise increase our long-term value, increase vulnerability to information technology or cybersecurity related risks as more of our employees work remotely and otherwise continue to disrupt our business operations. Moreover, if the pandemic ultimately materially reduces our cash flows, we may need to re-evaluate our capital allocation plans, especially if increased broadband usage increases our need to invest in our network to remain competitive.
While it is not possible at this time to estimate the full impact that COVID-19 could have on our business, the continued spread of COVID-19 and the measures taken by governments to combat it are expected to impact us to a greater degree in the second quarter of 2020 and could have a material adverse impact on our operating results and financial condition.
Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks described under the section entitled “Item 1A. Risk Factors” in our annual report on Form 10‑K for the year ended December 31, 2019, including those relating to the risks of regulatory noncompliance and additional asset impairments. Specifically, pandemic-related constraints could preclude us from meeting our broadband buildout commitments under the FCC's CAF program. In addition, during the first quarter of 2020, we observed a decline in our stock price as a result of events occurring after the end of 2019, including the COVID-19 pandemic. We evaluated whether such events would indicate the fair value of our reporting units were below their carrying values. We believe these events have impacted the global economy more directly than us, and when considered with other factors, we have concluded it is not more likely than not that our fair values of our reporting units were less than their carrying values as of the quarter ended March 31, 2020. In light of the negative impacts of COVID-19 on the global economy, we will continue to evaluate the general economic trends which could have an impact on our assessment of whether it is more likely than not that the fair value of one or more reporting units is less than its carrying amount. Future changes could cause our reporting unit fair values to be less than our carrying value, resulting in potential impairments of our goodwill which could have a material effect on our results of operations and financial condition.
The extent of the impact, if any, will depend on future developments including actions taken to contain the coronavirus and its long-term impacts on the overall economy.
We have taken certain precautions due to the uncertain and evolving situation relating to the spread of COVID-19 that could have a material adverse impact our operating results and financial condition
In light of the uncertain and evolving situation relating to the spread of COVID-19, we have taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, our customers, business partners and the communities in which we participate, which could have a material adverse impact on our operating results and financial condition. To this end, we have, among other things, established safety protocols for the safety of our on-site technicians and customers, adopted an employee work-from-home policy where employees who can work-from-home do so, substantially restricted non-essential business travel and taken the “Keep Americans Connected Pledge,” which obligates us in certain circumstances to waive late fees and to not terminate a residential or small business customer’s service due to financial circumstances associated with COVID-19 for a period of time. In addition to reducing our late fee revenues, these measures could make it more difficult to (i) timely and efficiently furnish products and services to our customers, (ii) devote sufficient resources to our ongoing network and product simplification projects, (iii) efficiently monitor and maintain our network, (iv) maintain effective internal controls, (v) mitigate information technology or cybersecurity related risks and (vi) otherwise operate and administer our affairs. As such, these measures ultimately could have a material adverse impact on our operating results and financial condition. The extent to which COVID-19 may impact our workforce, business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with a reasonable level of certainty at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains information about shares of our previously-issued common stock that we withheld from employees upon vesting of their stock-based awards during the first quarter of 20202021 to satisfy the related tax withholding obligations:
| | | | | | | | | | | |
| Total Number of Shares Withheld for Taxes | | Average Price Paid Per Share |
Period | | | |
Jan-21 | 23,948 | | | $ | 11.04 | |
Feb-21 | 974,377 | | | $ | 11.94 | |
Mar-21 | 2,404,398 | | | $ | 12.52 | |
Total | 3,402,723 | | | |
ITEM 5. OTHER INFORMATION
As we continue to evaluate our disclosure obligations under Section 13(r) of the Exchange Act in connection with the matter outlined below, the following disclosure is being made under Section 13(r) of the Exchange Act out of an abundance of caution:
We are required to engage on a regular basis with the Russian Federal Security Service (“FSB”) in the FSB’s official capacity of regulating our use of technology in Russia in connection with providing commercial services therein through our local subsidiary. On March 2, 2021, the U.S. Secretary of State designated the FSB as a party subject to the provisions of U.S. Executive Order No. 13382 issued in 2005. There are no gross revenues or net profits directly associated with any such dealings by us with the FSB and all such dealings are explicitly authorized by General License 1B issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control. We plan to continue these activities as required to continue to provide commercial services in Russia.
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| Total Number of Shares Withheld for Taxes | | Average Price Paid Per Share |
Period | | | |
Jan-20 | 14,185 |
| | $ | 13.04 |
|
Feb-20 | 1,591,861 |
| | 12.98 |
|
Mar-20 | 1,270,928 |
| | 12.07 |
|
Total | 2,876,974 |
| | |
ITEM 6. EXHIBITS
Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.
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| | | | | | | | | | |
Exhibit Number
| Description |
18.1*31.1* | |
31.1* | |
31.2* | |
32.1* | |
32.2* | |
101* | Financial statements from the Quarterly Report on Form 10-Q of CenturyLink,Lumen Technologies, Inc. for the period ended March 31, 2020,2021, formatted in Inline XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders' Equity and (vi) the Notes to Consolidated Financial Statements. |
104* | Cover page formatted as Inline XBRL and contained in Exhibit 101. |
* Exhibit filed herewith.
_______________________________________________________________________________
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 7, 2020.
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| | | | | | | |
| CENTURYLINK,LUMEN TECHNOLOGIES, INC. |
| By: | /s/ Eric J. Mortensen |
| Eric J. Mortensen Senior Vice President - Controller (Principal Accounting Officer) |