From time to time, we may change the categorization of our products and services.
Our operating revenue for our products and services consisted of the following categories:
We recognize revenue in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenue aggregated $109$101 million and $107$98 million for
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding finance lease and other obligations, as well as the input level used to determine the fair values indicated below: |
| | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Input Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | (Dollars in millions) |
Liabilities-Long-term debt, excluding finance lease and other obligations | 2 | | $ | 10,665 |
| | 10,583 |
| | 10,681 |
| | 10,089 |
|
|
| | | | | | | | | | | | | | |
| | | March 31, 2019 | | December 31, 2018 |
| Input Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | (Dollars in millions) |
Liabilities-Long-term debt, excluding finance lease and other obligations | 2 | | $ | 10,673 |
| | 10,503 |
| | 10,681 |
| | 10,089 |
|
(9) Commitments, Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation contingencies at March 31,June 30, 2019 aggregated to approximately $70$68 million and are included in “Other” current liabilities and “Other Liabilities” in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.
In this Note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter.
Peruvian Tax Litigation
In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one of our Peruvian subsidiaries asserting $26 million of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, we believe the total amount of exposure is $10was $9 million at March 31,June 30, 2019.
We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the "Tribunal") decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed
an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.
In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In
June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. That appealOral arguments were held before the Supreme Court of Justice in June 2019. A decision on this case is pending.
Brazilian Tax Claims
In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authorities issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues.
We have filed objections to these assessments, arguing that the lease of assets and the provision of Internet access are not communication services subject to ICMS. The objections to the September 2002, December 2004 and March 2009 assessments were rejected by the respective state administrative courts, and we have appealed those decisions to the judicial courts. In October 2012 and June 2014, we received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014 at the first administrative level, and we appealed this decision to the second administrative level.
We are vigorously contesting all such assessments in both states and, in particular, view the assessment of ICMS on revenue from equipment leasing to be without merit. These assessments, if upheld, could result in a loss of up to $37$38 million at March 31,June 30, 2019 in excess of the accruals established for these matters.
Qui Tam Action
We were notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc. and others in the United States District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint was filed under seal on November 26, 2013, and an amended complaint was filed under seal on June 16, 2014. The court unsealed the complaints on October 26, 2017.
The amended complaint alleges that we, principally through two former employees, submitted false claims and made false statements to the government in connection with two government contracts. The relator seeks damages in this lawsuit of approximately $50 million, subject to trebling, plus statutory penalties, pre-and-post judgment interest, and attorney’s fees. The case is currently stayed.
We are evaluating our defenses to the claims. At this time, we do not believe it is probable we will incur a material loss. If, contrary to our expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
Several people, including two former Level 3 employees, were indicted in the United States District Court for the Eastern District of Virginia on October 3, 2017, and charged with, among other things, accepting kickbacks from a subcontractor, who was also indicted, for work to be performed under a prime government contract. Of the two former employees, one entered a plea agreement, and the other is deceased. We are fully cooperating in the government’s investigations in this matter.
Letters of Credit
It is customary for us to use various financial instruments in the normal course of business. These instruments include letters of credit which are conditional commitments issued on our behalf in accordance with specified terms and conditions. As of both March 31,June 30, 2019 and December 31, 2018, we had outstanding letters of credit or other similar obligations of approximately $30$27 million and $30 million, respectively, of which $24$21 million and $24 million are collateralized by cash that is reflected on the consolidated balance sheets as restricted cash and securities.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings or proceedings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial in the coming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various foreign, federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none individually is reasonably expected to exceed $100,000 in fines and penalties.
The outcome of these other proceedings is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us.
The matters listed above in this Note do not reflect all of our contingencies. For additional information on our contingencies, see Note 16 - Commitments, Contingencies and Other Items to the financial statements included in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2018. 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.
(10) Accumulated Other Comprehensive Loss
The tables below summarize changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the threesix months ended March 31,June 30, 2019:
|
| | | | | | | | | |
| Pension Plans | Foreign Currency Translation Adjustment and Other | | Total |
| (Dollars in millions) |
Balance at December 31, 2018 | $ | 5 |
| $ | (176 | ) | | (171 | ) |
Other comprehensive income before reclassifications, net of tax | — |
| 3 |
| | 3 |
|
Net other comprehensive income | — |
| 3 |
| | 3 |
|
Balance at March 31, 2019 | $ | 5 |
| $ | (173 | ) | | (168 | ) |
|
| | | | | | | | | |
| Pension Plans | | Foreign Currency Translation Adjustment and Other | | Total |
| (Dollars in millions) |
Balance at December 31, 2018 | $ | 5 |
| | (176 | ) | | (171 | ) |
Other comprehensive loss, net of tax | — |
| | (5 | ) | | (5 | ) |
Net other comprehensive loss | — |
| | (5 | ) | | (5 | ) |
Balance at June 30, 2019 | $ | 5 |
| | (181 | ) | | (176 | ) |
The table below summarizes changes in accumulated other comprehensive income recorded on our consolidated balance sheets by component for the threesix months ended March 31,June 30, 2018:
|
| | | | | | |
| Foreign Currency Translation Adjustment and Other | | Total |
| (Dollars in millions) |
Balance at December 31, 2017 | $ | 18 |
| | 18 |
|
Other comprehensive loss before reclassifications, net of tax | (163 | ) | | (163 | ) |
Amounts reclassified from accumulated other comprehensive loss | 6 |
| | 6 |
|
Net other comprehensive loss | (157 | ) | | (157 | ) |
Balance at June 30, 2018 | $ | (139 | ) | | (139 | ) |
|
| | | | | | |
| Foreign Currency Translation Adjustment and Other | | Total |
| (Dollars in millions) |
Balance at December 31, 2017 | $ | 18 |
| | 18 |
|
Other comprehensive income before reclassifications, net of tax | 72 |
| | 72 |
|
Amounts reclassified from accumulated other comprehensive income | 6 |
| | 6 |
|
Net other comprehensive income | 78 |
| | 78 |
|
Balance at March 31, 2018 | $ | 96 |
| | 96 |
|
(11) Condensed Consolidating Financial Information
Level 3 Financing, Inc., a wholly owned subsidiary, has issued Senior Notes that are unsecured obligations of Level 3 Financing, Inc.; however, they are also fully and unconditionally and jointly and severally guaranteed on an unsecured senior basis by Level 3 Parent, LLC and Level 3 Communications, LLC.
In conjunction with the registration of the Level 3 Financing, Inc. Senior Notes, the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered."
The operating activities of the separate legal entities included in our consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the statements of comprehensive income (loss), balance sheets and statements of cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities and is not intended to present the operating results of those legal entities on a stand-alone basis. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Parent, LLC. These transactions are eliminated in our consolidated results.
Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended March 31,June 30, 2019
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUE | | | | | | | | | | | |
Operating revenue | $ | — |
| | — |
| | 953 |
| | 1,023 |
| | — |
| | 1,976 |
|
Operating revenue - affiliates | — |
| | — |
| | 54 |
| | 215 |
| | (231 | ) | | 38 |
|
Total operating revenue | — |
| | — |
| | 1,007 |
| | 1,238 |
| | (231 | ) | | 2,014 |
|
OPERATING EXPENSES | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 464 |
| | 455 |
| | — |
| | 919 |
|
Selling, general and administrative | — |
| | 2 |
| | 393 |
| | 183 |
| | (231 | ) | | 347 |
|
Operating expenses - affiliates | — |
| | — |
| | 65 |
| | 22 |
| | — |
| | 87 |
|
Depreciation and amortization | — |
| | — |
| | 163 |
| | 226 |
| | — |
| | 389 |
|
Goodwill Impairment |
| |
| | — |
| | — |
| |
| | — |
|
Total operating expenses | — |
| | 2 |
| | 1,085 |
| | 886 |
| | (231 | ) | | 1,742 |
|
OPERATING (LOSS) INCOME | — |
| | (2 | ) | | (78 | ) | | 352 |
| | — |
| | 272 |
|
OTHER INCOME (EXPENSE) | | | | | | | | | | | |
Interest income - affiliate | 16 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Interest (expense) income | (8 | ) | | (120 | ) | | 3 |
| | (5 | ) | | — |
| | (130 | ) |
Interest income (expense) - intercompany, net | 948 |
| | 162 |
| | (1,786 | ) | | 675 |
| | 1 |
| | — |
|
Equity in net (losses) earnings of subsidiaries | (848 | ) | | (918 | ) | | 561 |
| | — |
| | 1,205 |
| | — |
|
Other income (expense), net | 6 |
| | — |
| | (5 | ) | | 2 |
| | — |
| | 3 |
|
Total other income (expense), net | 114 |
| | (876 | ) | | (1,227 | ) | | 672 |
| | 1,206 |
| | (111 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 114 |
| | (878 | ) | | (1,305 | ) | | 1,024 |
| | 1,206 |
| | 161 |
|
Income tax expense (benefit) | 3 |
| | (30 | ) | | (18 | ) | | 96 |
| | — |
| | 51 |
|
NET INCOME (LOSS) | 111 |
| | (848 | ) | | (1,287 | ) | | 928 |
| | 1,206 |
| | 110 |
|
Other comprehensive (loss), net of income taxes | (8 | ) | | — |
| | — |
| | (8 | ) | | 8 |
| | (8 | ) |
COMPREHENSIVE INCOME (LOSS) | $ | 103 |
| | (848 | ) | | (1,287 | ) | | 920 |
| | 1,214 |
| | 102 |
|
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUE | | | | | | | | | | | |
Operating revenue | $ | — |
| | — |
| | 955 |
| | 1,036 |
| | — |
| | 1,991 |
|
Operating revenue - affiliates | — |
| | — |
| | 55 |
| | 202 |
| | (202 | ) | | 55 |
|
Total operating revenue | — |
| | — |
| | 1,010 |
| | 1,238 |
| | (202 | ) | | 2,046 |
|
OPERATING EXPENSES | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 504 |
| | 463 |
| | — |
| | 967 |
|
Selling, general and administrative | — |
| | 1 |
| | 369 |
| | 160 |
| | (202 | ) | | 328 |
|
Operating expenses - affiliates | — |
| | — |
| | 22 |
| | 24 |
| | — |
| | 46 |
|
Depreciation and amortization | — |
| | — |
| | 145 |
| | 245 |
| | — |
| | 390 |
|
Goodwill Impairment | — |
| | — |
| | 1,369 |
| | 2,339 |
| | — |
| | 3,708 |
|
Total operating expenses | — |
| | 1 |
| | 2,409 |
| | 3,231 |
| | (202 | ) | | 5,439 |
|
OPERATING (LOSS) INCOME | — |
| | (1 | ) | | (1,399 | ) | | (1,993 | ) | | — |
| | (3,393 | ) |
OTHER (EXPENSE) INCOME | | | | | | | | | | | |
Interest income - affiliate | 16 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Interest expense | (8 | ) | | (119 | ) | | — |
| | (4 | ) | | — |
| | (131 | ) |
Interest income (expense) - intercompany, net | 933 |
| | 164 |
| | (1,760 | ) | | 663 |
| | — |
| | — |
|
Equity in net (losses) earnings of subsidiaries | (4,519 | ) | | (4,593 | ) | | (1,797 | ) | | — |
| | 10,909 |
| | — |
|
Other (expense) income, net | (8 | ) | | — |
| | 13 |
| | 7 |
| | — |
| | 12 |
|
Total other (expense) income, net | (3,586 | ) | | (4,548 | ) | | (3,544 | ) | | 666 |
| | 10,909 |
| | (103 | ) |
(LOSS) INCOME BEFORE INCOME TAXES | (3,586 | ) | | (4,549 | ) | | (4,943 | ) | | (1,327 | ) | | 10,909 |
| | (3,496 | ) |
Income tax (benefit) expense | — |
| | (30 | ) | | 18 |
| | 101 |
| | — |
| | 89 |
|
NET (LOSS) INCOME | (3,586 | ) | | (4,519 | ) | | (4,961 | ) | | (1,428 | ) | | 10,909 |
| | (3,585 | ) |
Other comprehensive income (loss), net of income taxes | 3 |
| | — |
| | — |
| | 3 |
| | (3 | ) | | 3 |
|
COMPREHENSIVE (LOSS) INCOME | $ | (3,583 | ) | | (4,519 | ) | | (4,961 | ) | | (1,425 | ) | | 10,906 |
| | (3,582 | ) |
Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended March 31,June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUE | | | | | | | | | | | |
Operating revenue | $ | — |
| | — |
| | 977 |
| | 1,048 |
| | — |
| | 2,025 |
|
Operating revenue - affiliates | — |
| | — |
| | 6 |
| | 64 |
| | (43 | ) | | 27 |
|
Total operating revenue | — |
| | — |
| | 983 |
| | 1,112 |
| | (43 | ) | | 2,052 |
|
OPERATING EXPENSES |
| | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 600 |
| | 380 |
| | — |
| | 980 |
|
Selling, general and administrative expenses | — |
| | 2 |
| | 286 |
| | 143 |
| | (43 | ) | | 388 |
|
Operating expenses - affiliates | — |
| | — |
| | 37 |
| | 18 |
| | — |
| | 55 |
|
Depreciation and amortization | — |
| | — |
| | 174 |
| | 259 |
| | — |
| | 433 |
|
Total operating expenses | — |
| | 2 |
| | 1,097 |
| | 800 |
| | (43 | ) | | 1,856 |
|
OPERATING (LOSS) INCOME | — |
| | (2 | ) | | (114 | ) | | 312 |
| | — |
| | 196 |
|
OTHER INCOME (EXPENSE) |
| | | | | | | | | | |
Interest income - affiliate | 16 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Interest expense | (8 | ) | | (113 | ) | | — |
| | (4 | ) | | 1 |
| | (124 | ) |
Interest income (expense) - intercompany, net | 348 |
| | 604 |
| | (878 | ) | | (74 | ) | | — |
| | — |
|
Equity in net losses of subsidiaries | (316 | ) | | (832 | ) | | — |
| | — |
| | 1,148 |
| | — |
|
Other income (expense), net | — |
| | — |
| | 3 |
| | (6 | ) | | (1 | ) | | (4 | ) |
Total other income (expense), net | 40 |
| | (341 | ) | | (875 | ) | | (84 | ) | | 1,148 |
| | (112 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 40 |
| | (343 | ) | | (989 | ) | | 228 |
| | 1,148 |
| | 84 |
|
Income tax (benefit) expense | — |
| | (27 | ) | | (13 | ) | | 84 |
| | — |
| | 44 |
|
NET INCOME (LOSS) | 40 |
| | (316 | ) | | (976 | ) | | 144 |
| | 1,148 |
| | 40 |
|
Other comprehensive loss, net of income taxes | (235 | ) | | — |
| | — |
| | (235 | ) | | 235 |
| | (235 | ) |
COMPREHENSIVE LOSS | $ | (195 | ) | | (316 | ) | | (976 | ) | | (91 | ) | | 1,383 |
| | (195 | ) |
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUE | | | | | | | | | | | |
Operating revenue | $ | — |
| | — |
| | 956 |
| | 1,106 |
| | — |
| | 2,062 |
|
Operating revenue - affiliates | — |
| | — |
| | 25 |
| | 40 |
| | (40 | ) | | 25 |
|
Total operating revenue | — |
| | — |
| | 981 |
| | 1,146 |
| | (40 | ) | | 2,087 |
|
OPERATING EXPENSES |
| | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 589 |
| | 409 |
| | — |
| | 998 |
|
Selling, general and administrative expenses | — |
| | 1 |
| | 259 |
| | 124 |
| | (40 | ) | | 344 |
|
Operating expenses - affiliates | — |
| | — |
| | 53 |
| | — |
| | — |
| | 53 |
|
Depreciation and amortization | — |
| | — |
| | 170 |
| | 261 |
| | — |
| | 431 |
|
Total operating expenses | — |
| | 1 |
| | 1,071 |
| | 794 |
| | (40 | ) | | 1,826 |
|
OPERATING INCOME (LOSS) | — |
| | (1 | ) | | (90 | ) | | 352 |
| | — |
| | 261 |
|
OTHER INCOME (EXPENSE) |
| | | | | | | | | | |
Interest income - affiliate | 16 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Interest expense | (8 | ) | | (108 | ) | | (1 | ) | | (3 | ) | | — |
| | (120 | ) |
Interest income (expense) - intercompany, net | 355 |
| | 608 |
| | (881 | ) | | (82 | ) | | — |
| | — |
|
Equity in net earnings (losses) of subsidiaries | (315 | ) | | (839 | ) | | (1 | ) | | — |
| | 1,155 |
| | — |
|
Other income, net | — |
| | — |
| | 1 |
| | 6 |
| | — |
| | 7 |
|
Total other income (expense), net | 48 |
| | (339 | ) | | (882 | ) | | (79 | ) | | 1,155 |
| | (97 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 48 |
| | (340 | ) | | (972 | ) | | 273 |
| | 1,155 |
| | 164 |
|
Income tax (benefit) expense | (14 | ) | | (25 | ) | | 47 |
| | 94 |
| | — |
| | 102 |
|
NET INCOME (LOSS) | 62 |
| | (315 | ) | | (1,019 | ) | | 179 |
| | 1,155 |
| | 62 |
|
Other comprehensive income (loss), net of income taxes | 72 |
| | — |
| | — |
| | 72 |
| | (72 | ) | | 72 |
|
COMPREHENSIVE INCOME (LOSS) | $ | 134 |
| | (315 | ) | | (1,019 | ) | | 251 |
| | 1,083 |
| | 134 |
|
Condensed Consolidating Statements of Comprehensive Income (Loss)
Six Months Ended June 30, 2019
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUE | | | | | | | | | | | |
Operating revenue | $ | — |
| | — |
| | 1,908 |
| | 2,059 |
| | — |
| | 3,967 |
|
Operating revenue - affiliates | — |
| | — |
| | 109 |
| | 417 |
| | (433 | ) | | 93 |
|
Total operating revenue | — |
| | — |
| | 2,017 |
| | 2,476 |
| | (433 | ) | | 4,060 |
|
OPERATING EXPENSES | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 968 |
| | 918 |
| | — |
| | 1,886 |
|
Selling, general and administrative | — |
| | 3 |
| | 762 |
| | 343 |
| | (433 | ) | | 675 |
|
Operating expenses - affiliates | — |
| | — |
| | 87 |
| | 46 |
| | — |
| | 133 |
|
Depreciation and amortization | — |
| | — |
| | 308 |
| | 471 |
| | — |
| | 779 |
|
Goodwill Impairment | — |
| | — |
| | 1,369 |
| | 2,339 |
| | — |
| | 3,708 |
|
Total operating expenses | — |
| | 3 |
| | 3,494 |
| | 4,117 |
| | (433 | ) | | 7,181 |
|
OPERATING (LOSS) INCOME | — |
| | (3 | ) | | (1,477 | ) | | (1,641 | ) | | — |
| | (3,121 | ) |
OTHER (EXPENSE) INCOME | | | | | | | | | | | |
Interest income - affiliate | 32 |
| | — |
| | — |
| | — |
| | — |
| | 32 |
|
Interest expense (income) | (16 | ) | | (239 | ) | | 3 |
| | (9 | ) | | — |
| | (261 | ) |
Interest income (expense) - intercompany, net | 1,881 |
| | 326 |
| | (3,546 | ) | | 1,338 |
| | 1 |
| | — |
|
Equity in net losses of subsidiaries | (5,367 | ) | | (5,511 | ) | | (1,236 | ) | | — |
| | 12,114 |
| | — |
|
Other (expense) income, net | (2 | ) | | — |
| | 8 |
| | 9 |
| | — |
| | 15 |
|
Total other (expense) income, net | (3,472 | ) | | (5,424 | ) | | (4,771 | ) | | 1,338 |
| | 12,115 |
| | (214 | ) |
(LOSS) INCOME BEFORE INCOME TAXES | (3,472 | ) | | (5,427 | ) | | (6,248 | ) | | (303 | ) | | 12,115 |
| | (3,335 | ) |
Income tax expense (benefit) | 3 |
| | (60 | ) | | — |
| | 197 |
| | — |
| | 140 |
|
NET (LOSS) INCOME | (3,475 | ) | | (5,367 | ) | | (6,248 | ) | | (500 | ) | | 12,115 |
| | (3,475 | ) |
Other comprehensive (loss) income, net of income taxes | (5 | ) | | — |
| | — |
| | (5 | ) | | 5 |
| | (5 | ) |
COMPREHENSIVE (LOSS) INCOME | $ | (3,480 | ) | | (5,367 | ) | | (6,248 | ) | | (505 | ) | | 12,120 |
| | (3,480 | ) |
Condensed Consolidating Statements of Comprehensive Income (Loss)
Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUE | | | | | | | | | | | |
Operating revenue | $ | — |
| | — |
| | 1,933 |
| | 2,154 |
| | — |
| | 4,087 |
|
Operating revenue - affiliates | — |
| | — |
| | 31 |
| | 104 |
| | (83 | ) | | 52 |
|
Total operating revenue | — |
| | — |
| | 1,964 |
| | 2,258 |
| | (83 | ) | | 4,139 |
|
OPERATING EXPENSES | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 1,189 |
| | 789 |
| | — |
| | 1,978 |
|
Selling, general and administrative | — |
| | 3 |
| | 545 |
| | 267 |
| | (83 | ) | | 732 |
|
Operating expenses - affiliates | — |
| | — |
| | 90 |
| | 18 |
| | — |
| | 108 |
|
Depreciation and amortization | — |
| | — |
| | 344 |
| | 520 |
| | — |
| | 864 |
|
Total operating expenses | — |
| | 3 |
| | 2,168 |
| | 1,594 |
| | (83 | ) | | 3,682 |
|
OPERATING (LOSS) INCOME | — |
| | (3 | ) | | (204 | ) | | 664 |
| | — |
| | 457 |
|
OTHER (EXPENSE) INCOME | | | | | | | | | | | |
Interest income - affiliate | 32 |
| | — |
| | — |
| | — |
| | — |
| | 32 |
|
Interest expense | (16 | ) | | (221 | ) | | (1 | ) | | (7 | ) | | 1 |
| | (244 | ) |
Interest income (expense) - intercompany, net | 703 |
| | 1,212 |
| | (1,759 | ) | | (156 | ) | | — |
| | — |
|
Equity in net (losses) earnings of subsidiaries | (631 | ) | | (1,671 | ) | | (1 | ) | | — |
| | 2,303 |
| | — |
|
Other income (expense), net | — |
| | — |
| | 4 |
| | — |
| | (1 | ) | | 3 |
|
Total other income (expense), net | 88 |
| | (680 | ) | | (1,757 | ) | | (163 | ) | | 2,303 |
| | (209 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 88 |
| | (683 | ) | | (1,961 | ) | | 501 |
| | 2,303 |
| | 248 |
|
Income tax (benefit) expense | (14 | ) | | (52 | ) | | 34 |
| | 178 |
| | — |
| | 146 |
|
NET INCOME (LOSS) | 102 |
| | (631 | ) | | (1,995 | ) | | 323 |
| | 2,303 |
| | 102 |
|
Other comprehensive loss, net of income taxes | (163 | ) | | — |
| | — |
| | (163 | ) | | 163 |
| | (163 | ) |
COMPREHENSIVE (LOSS) INCOME | $ | (61 | ) | | (631 | ) | | (1,995 | ) | | 160 |
| | 2,466 |
| | (61 | ) |
Condensed Consolidating Balance Sheets
March 31,June 30, 2019
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | |
Cash and cash equivalents | $ | 3 |
| | — |
| | 157 |
| | 68 |
| | — |
| | 228 |
|
Restricted cash | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Accounts receivable | — |
| | — |
| | 103 |
| | 668 |
| | — |
| | 771 |
|
Intercompany advances | 18,195 |
| | 24,063 |
| | 7,783 |
| | 2,940 |
| | (52,981 | ) | | — |
|
Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
Other | — |
| | — |
| | 137 |
| | 174 |
| | — |
| | 311 |
|
Total current assets | 20,023 |
| | 24,063 |
| | 8,180 |
| | 3,853 |
| | (52,981 | ) | | 3,138 |
|
Property, plant, and equipment, net | — |
| | — |
| | 3,384 |
| | 6,270 |
| | — |
| | 9,654 |
|
GOODWILL AND OTHER ASSETS | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 423 |
| | 6,985 |
| | — |
| | 7,408 |
|
Operating lease assets | — |
| | — |
| | 1,302 |
| | 414 |
| | (533 | ) | | 1,183 |
|
Restricted cash | 12 |
| | — |
| | 8 |
| | 2 |
| | — |
| | 22 |
|
Customer relationships, net | — |
| | — |
| | 3,546 |
| | 3,673 |
| | — |
| | 7,219 |
|
Other intangible assets, net | — |
| | — |
| | 429 |
| | 3 |
| | — |
| | 432 |
|
Investment in subsidiaries | 10,175 |
| | 12,404 |
| | 2,625 |
| | — |
| | (25,204 | ) | | — |
|
Other, net | 271 |
| | 1,482 |
| | 118 |
| | 146 |
| | (1,390 | ) | | 627 |
|
Total goodwill and other assets | 10,458 |
| | 13,886 |
| | 8,451 |
| | 11,223 |
| | (27,127 | ) | | 16,891 |
|
TOTAL ASSETS | $ | 30,481 |
| | 37,949 |
| | 20,015 |
| | 21,346 |
| | (80,108 | ) | | 29,683 |
|
| | | | | | | | | | | |
LIABILITIES AND MEMBER'S EQUITY | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | |
Current maturities of long-term debt | $ | — |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Accounts payable | — |
| | 31 |
| | 387 |
| | 359 |
| | — |
| | 777 |
|
Accounts payable - affiliates | 80 |
| | 16 |
| | 371 |
| | (9 | ) | | — |
| | 458 |
|
Accrued expenses and other liabilities | | | | | | | | | | | |
Salaries and benefits | — |
| | — |
| | 160 |
| | 37 |
| | — |
| | 197 |
|
Income and other taxes | — |
| | 6 |
| | 39 |
| | 72 |
| | — |
| | 117 |
|
Current operating lease liabilities | — |
| | — |
| | 272 |
| | 90 |
| | (93 | ) | | 269 |
|
Interest | 12 |
| | 75 |
| | 1 |
| | 3 |
| | — |
| | 91 |
|
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | |
Cash and cash equivalents | $ | 18 |
| | — |
| | 140 |
| | 59 |
| | — |
| | 217 |
|
Restricted cash | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Accounts receivable | — |
| | — |
| | 45 |
| | 654 |
| | — |
| | 699 |
|
Intercompany advances | 17,556 |
| | 24,004 |
| | 7,829 |
| | 2,887 |
| | (52,276 | ) | | — |
|
Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
Other | — |
| | 9 |
| | 138 |
| | 135 |
| | — |
| | 282 |
|
Total current assets | 19,399 |
| | 24,013 |
| | 8,152 |
| | 3,737 |
| | (52,276 | ) | | 3,025 |
|
Property, plant, and equipment, net | — |
| | — |
| | 3,225 |
| | 6,262 |
| | — |
| | 9,487 |
|
GOODWILL AND OTHER ASSETS | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 362 |
| | 7,050 |
| | — |
| | 7,412 |
|
Operating lease assets | — |
| | — |
| | 1,294 |
| | 500 |
| | (548 | ) | | 1,246 |
|
Restricted cash | 16 |
| | — |
| | 8 |
| | 1 |
| | — |
| | 25 |
|
Customer relationships, net | — |
| | — |
| | 3,627 |
| | 3,771 |
| | — |
| | 7,398 |
|
Other intangible assets, net | — |
| | — |
| | 420 |
| | 2 |
| | — |
| | 422 |
|
Investment in subsidiaries | 11,023 |
| | 13,322 |
| | 2,064 |
| | — |
| | (26,409 | ) | | — |
|
Other, net | 274 |
| | 1,450 |
| | 102 |
| | 221 |
| | (1,390 | ) | | 657 |
|
Total goodwill and other assets | 11,313 |
| | 14,772 |
| | 7,877 |
| | 11,545 |
| | (28,347 | ) | | 17,160 |
|
TOTAL ASSETS | $ | 30,712 |
| | 38,785 |
| | 19,254 |
| | 21,544 |
| | (80,623 | ) | | 29,672 |
|
| | | | | | | | | | | |
LIABILITIES AND MEMBER'S EQUITY | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | |
Current maturities of long-term debt | $ | — |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Accounts payable | — |
| | — |
| | 336 |
| | 318 |
| | — |
| | 654 |
|
Accounts payable - affiliates | 80 |
| | 16 |
| | 283 |
| | (14 | ) | | — |
| | 365 |
|
Accrued expenses and other liabilities | | | | | | | | | | | |
Salaries and benefits | — |
| | — |
| | 120 |
| | 31 |
| | — |
| | 151 |
|
|
| | | | | | | | | | | | | | | | | | |
Intercompany payables | — |
| | — |
| | 49,046 |
| | 3,934 |
| | (52,980 | ) | | — |
|
Other | — |
| | — |
| | 4 |
| | 63 |
| | — |
| | 67 |
|
Current portion of deferred revenue | — |
| | — |
| | 140 |
| | 157 |
| | — |
| | 297 |
|
Total current liabilities | 92 |
| | 128 |
| | 50,420 |
| | 4,713 |
| | (53,073 | ) | | 2,280 |
|
LONG-TERM DEBT | 612 |
| | 10,054 |
| | 6 |
| | 148 |
| | — |
| | 10,820 |
|
| | | | | | | | | | | |
DEFERRED REVENUE AND OTHER LIABILITIES | | | | | | | | | | | |
Deferred revenue | — |
| | — |
| | 1,044 |
| | 192 |
| | — |
| | 1,236 |
|
Deferred income taxes, net | 56 |
| | — |
| | 817 |
| | 774 |
| | (1,390 | ) | | 257 |
|
Noncurrent operating lease liabilities | — |
| | — |
| | 1,077 |
| | 325 |
| | (440 | ) | | 962 |
|
Other | — |
| | — |
| | 152 |
| | 144 |
| | — |
| | 296 |
|
Total deferred revenue and other liabilities | 56 |
| | — |
| | 3,090 |
| | 1,435 |
| | (1,830 | ) | | 2,751 |
|
MEMBER'S EQUITY (DEFICIT) | 29,721 |
| | 27,767 |
| | (33,501 | ) | | 15,050 |
| | (25,205 | ) | | 13,832 |
|
TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 30,481 |
| | 37,949 |
| | 20,015 |
| | 21,346 |
| | (80,108 | ) | | 29,683 |
|
|
| | | | | | | | | | | | | | | | | | |
Income and other taxes | — |
| | 6 |
| | 57 |
| | 42 |
| | — |
| | 105 |
|
Current operating lease liabilities | — |
| | — |
| | 288 |
| | 153 |
| | (117 | ) | | 324 |
|
Interest | 3 |
| | 86 |
| | 1 |
| | 4 |
| | — |
| | 94 |
|
Intercompany payables | — |
| | — |
| | 47,248 |
| | 5,028 |
| | (52,276 | ) | | — |
|
Other | 2 |
| | 1 |
| | 4 |
| | 55 |
| | — |
| | 62 |
|
Current portion of deferred revenue | — |
| | — |
| | 162 |
| | 148 |
| | — |
| | 310 |
|
Total current liabilities | 85 |
| | 109 |
| | 48,499 |
| | 5,772 |
| | (52,393 | ) | | 2,072 |
|
LONG-TERM DEBT | 612 |
| | 10,061 |
| | 6 |
| | 149 |
| | — |
| | 10,828 |
|
| | | | | | | | | | | |
DEFERRED REVENUE AND OTHER LIABILITIES | | | | | | | | | | | |
Deferred revenue | — |
| | — |
| | 964 |
| | 211 |
| | — |
| | 1,175 |
|
Deferred income taxes, net | 56 |
| | — |
| | 817 |
| | 770 |
| | (1,390 | ) | | 253 |
|
Noncurrent operating lease liabilities | — |
| | — |
| | 1,037 |
| | 363 |
| | (431 | ) | | 969 |
|
Other | — |
| | — |
| | 148 |
| | 157 |
| | — |
| | 305 |
|
Total deferred revenue and other liabilities | 56 |
| | — |
| | 2,966 |
| | 1,501 |
| | (1,821 | ) | | 2,702 |
|
MEMBER'S EQUITY (DEFICIT) | 29,959 |
| | 28,615 |
| | (32,217 | ) | | 14,122 |
| | (26,409 | ) | | 14,070 |
|
TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 30,712 |
| | 38,785 |
| | 19,254 |
| | 21,544 |
| | (80,623 | ) | | 29,672 |
|
Condensed Consolidating Balance Sheets
December 31, 2018
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | |
Cash and cash equivalents | $ | 2 |
| | — |
| | 164 |
| | 77 |
| | — |
| | 243 |
|
Restricted cash | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Accounts receivable | — |
| | — |
| | 70 |
| | 642 |
| | — |
| | 712 |
|
Intercompany advances | 16,852 |
| | 23,957 |
| | 7,744 |
| | 2,707 |
| | (51,260 | ) | | — |
|
Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
Other | 1 |
| | 3 |
| | 97 |
| | 133 |
| | — |
| | 234 |
|
Total current assets | 18,680 |
| | 23,960 |
| | 8,075 |
| | 3,563 |
| | (51,260 | ) | | 3,018 |
|
Property, plant, and equipment, net | — |
| | — |
| | 3,136 |
| | 6,317 |
| | — |
| | 9,453 |
|
| | | | | | | | | | | |
GOODWILL AND OTHER ASSETS | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 1,665 |
| | 9,454 |
| | — |
| | 11,119 |
|
Restricted cash | 15 |
| | — |
| | 9 |
| | 1 |
| | — |
| | 25 |
|
Customer relationships, net | — |
| | — |
| | 3,823 |
| | 3,744 |
| | — |
| | 7,567 |
|
Other intangible assets, net | — |
| | — |
| | 409 |
| | 1 |
| | — |
| | 410 |
|
Investment in subsidiaries | 15,541 |
| | 17,915 |
| | 3,861 |
| | — |
| | (37,317 | ) | | — |
|
Other, net | 275 |
| | 1,421 |
| | 110 |
| | 225 |
| | (1,332 | ) | | 699 |
|
Total goodwill and other assets | 15,831 |
| | 19,336 |
| | 9,877 |
| | 13,425 |
| | (38,649 | ) | | 19,820 |
|
TOTAL ASSETS | $ | 34,511 |
| | 43,296 |
| | 21,088 |
| | 23,305 |
| | (89,909 | ) | | 32,291 |
|
| | | | | | | | | | | |
LIABILITIES AND MEMBER'S EQUITY | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | |
Current maturities of long-term debt | $ | — |
| | — |
| | 1 |
| | 5 |
| | — |
| | 6 |
|
Accounts payable | — |
| | — |
| | 380 |
| | 346 |
| | — |
| | 726 |
|
Accounts payable - affiliates | 62 |
| | 11 |
| | 162 |
| | 11 |
| | — |
| | 246 |
|
Accrued expenses and other liabilities | | | | | | | | | | | |
Salaries and benefits | — |
| | — |
| | 189 |
| | 44 |
| | — |
| | 233 |
|
Income and other taxes | — |
| | 4 |
| | 72 |
| | 54 |
| | — |
| | 130 |
|
Interest | 11 |
| | 78 |
| | 1 |
| | 5 |
| | — |
| | 95 |
|
Intercompany payables | — |
| | — |
| | 45,347 |
| | 5,913 |
| | (51,260 | ) | | — |
|
Other | 3 |
| | 1 |
| | 8 |
| | 66 |
| | — |
| | 78 |
|
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | |
Cash and cash equivalents | $ | 2 |
| | — |
| | 164 |
| | 77 |
| | — |
| | 243 |
|
Restricted cash | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Accounts receivable | — |
| | — |
| | 70 |
| | 642 |
| | — |
| | 712 |
|
Intercompany advances | 16,852 |
| | 23,957 |
| | 7,744 |
| | 2,707 |
| | (51,260 | ) | | — |
|
Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
Other | 1 |
| | 3 |
| | 97 |
| | 133 |
| | — |
| | 234 |
|
Total current assets | 18,680 |
| | 23,960 |
| | 8,075 |
| | 3,563 |
| | (51,260 | ) | | 3,018 |
|
Property, plant, and equipment, net | — |
| | — |
| | 3,136 |
| | 6,317 |
| | — |
| | 9,453 |
|
| | | | | | | | | | | |
GOODWILL AND OTHER ASSETS | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 1,665 |
| | 9,454 |
| | — |
| | 11,119 |
|
Restricted cash | 15 |
| | — |
| | 9 |
| | 1 |
| | — |
| | 25 |
|
Customer relationships, net | — |
| | — |
| | 3,823 |
| | 3,744 |
| | — |
| | 7,567 |
|
Other intangible assets, net | — |
| | — |
| | 409 |
| | 1 |
| | — |
| | 410 |
|
Investment in subsidiaries | 15,541 |
| | 17,915 |
| | 3,861 |
| | — |
| | (37,317 | ) | | — |
|
Other, net | 275 |
| | 1,421 |
| | 110 |
| | 225 |
| | (1,332 | ) | | 699 |
|
Total goodwill and other assets | 15,831 |
| | 19,336 |
| | 9,877 |
| | 13,425 |
| | (38,649 | ) | | 19,820 |
|
TOTAL ASSETS | $ | 34,511 |
| | 43,296 |
| | 21,088 |
| | 23,305 |
| | (89,909 | ) | | 32,291 |
|
| | | | | | | | | | | |
LIABILITIES AND MEMBER'S EQUITY | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | |
Current maturities of long-term debt | $ | — |
| | — |
| | 1 |
| | 5 |
| | — |
| | 6 |
|
Accounts payable | — |
| | — |
| | 380 |
| | 346 |
| | — |
| | 726 |
|
Accounts payable - affiliates | 62 |
| | 11 |
| | 162 |
| | 11 |
| | — |
| | 246 |
|
Accrued expenses and other liabilities | | | | | | | | | | | |
Salaries and benefits | — |
| | — |
| | 189 |
| | 44 |
| | — |
| | 233 |
|
Income and other taxes | — |
| | 4 |
| | 72 |
| | 54 |
| | — |
| | 130 |
|
|
| | | | | | | | | | | | | | | | | | |
Current portion of deferred revenue | — |
| | — |
| | 168 |
| | 142 |
| | — |
| | 310 |
|
Total current liabilities | 76 |
| | 94 |
| | 46,328 |
| | 6,586 |
| | (51,260 | ) | | 1,824 |
|
LONG-TERM DEBT | 613 |
| | 10,068 |
| | 7 |
| | 150 |
| | — |
| | 10,838 |
|
DEFERRED REVENUE AND OTHER LIABILITIES | | | | | | | | | | | |
Deferred revenue | — |
| | — |
| | 971 |
| | 210 |
| | — |
| | 1,181 |
|
Deferred income taxes, net | 56 |
| | — |
| | 841 |
| | 637 |
| | (1,332 | ) | | 202 |
|
Other | — |
| | — |
| | 197 |
| | 172 |
| | — |
| | 369 |
|
Total deferred revenue and other liabilities | 56 |
| | — |
| | 2,009 |
| | 1,019 |
| | (1,332 | ) | | 1,752 |
|
MEMBER'S EQUITY (DEFICIT) | 33,766 |
| | 33,134 |
| | (27,256 | ) | | 15,550 |
| | (37,317 | ) | | 17,877 |
|
TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 34,511 |
| | 43,296 |
| | 21,088 |
| | 23,305 |
| | (89,909 | ) | | 32,291 |
|
|
| | | | | | | | | | | | | | | | | | |
Interest | 11 |
| | 78 |
| | 1 |
| | 5 |
| | — |
| | 95 |
|
Intercompany payables | — |
| | — |
| | 45,347 |
| | 5,913 |
| | (51,260 | ) | | — |
|
Other | 3 |
| | 1 |
| | 8 |
| | 66 |
| | — |
| | 78 |
|
Current portion of deferred revenue | — |
| | — |
| | 168 |
| | 142 |
| | — |
| | 310 |
|
Total current liabilities | 76 |
| | 94 |
| | 46,328 |
| | 6,586 |
| | (51,260 | ) | | 1,824 |
|
LONG-TERM DEBT | 613 |
| | 10,068 |
| | 7 |
| | 150 |
| | — |
| | 10,838 |
|
DEFERRED REVENUE AND OTHER LIABILITIES | | | | | | | | | | | |
Deferred revenue | — |
| | — |
| | 971 |
| | 210 |
| | — |
| | 1,181 |
|
Deferred income taxes, net | 56 |
| | — |
| | 841 |
| | 637 |
| | (1,332 | ) | | 202 |
|
Other | — |
| | — |
| | 197 |
| | 172 |
| | — |
| | 369 |
|
Total deferred revenue and other liabilities | 56 |
| | — |
| | 2,009 |
| | 1,019 |
| | (1,332 | ) | | 1,752 |
|
MEMBER'S EQUITY (DEFICIT) | 33,766 |
| | 33,134 |
| | (27,256 | ) | | 15,550 |
| | (37,317 | ) | | 17,877 |
|
TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 34,511 |
| | 43,296 |
| | 21,088 |
| | 23,305 |
| | (89,909 | ) | | 32,291 |
|
Condensed Consolidating Statements of Cash Flows
ThreeSix Months EndedMarch 31,June 30, 2019
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING ACTIVITIES | | | | | | | | | | | |
Net cash provided by operating activities | $ | (2 | ) | | — |
| | 891 |
| | 234 |
| | — |
| | 1,123 |
|
INVESTING ACTIVITIES | | | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (335 | ) | | (241 | ) | | — |
| | (576 | ) |
Proceeds from sale of property, plant and equipment and other assets | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Net cash used in investing activities | — |
| | — |
| | (334 | ) | | (241 | ) | | — |
| | (575 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | |
Distributions | (565 | ) | | — |
| | — |
| | — |
| | — |
| | (565 | ) |
Other | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Increase (decrease) due from affiliate, net | 565 |
| | — |
| | (565 | ) | | — |
| | — |
| | — |
|
Net cash used in financing activities | — |
| | — |
| | (565 | ) | | (2 | ) | | — |
| | (567 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | (2 | ) | | — |
| | (8 | ) | | (9 | ) | | — |
| | (19 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 17 |
| | — |
| | 173 |
| | 82 |
| | — |
| | 272 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 15 |
| | — |
| | 165 |
| | 73 |
| | — |
| | 253 |
|
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING ACTIVITIES | | | | | | | | | | | |
Net cash provided by operating activities | $ | 17 |
| | — |
| | 389 |
| | 77 |
| | — |
| | 483 |
|
INVESTING ACTIVITIES | | | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (189 | ) | | (96 | ) | | — |
| | (285 | ) |
Net cash used in investing activities | — |
| | — |
| | (189 | ) | | (96 | ) | | — |
| | (285 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | |
Distributions | (225 | ) | | — |
| | — |
| | — |
| | — |
| | (225 | ) |
Other | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Increase (decrease) due from affiliate, net | 225 |
| | — |
| | (225 | ) | | — |
| | — |
| | — |
|
Net cash used in financing activities | — |
| | — |
| | (225 | ) | | (1 | ) | | — |
| | (226 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 17 |
| | — |
| | (25 | ) | | (20 | ) | | — |
| | (28 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 17 |
| | — |
| | 173 |
| | 82 |
| | — |
| | 272 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 34 |
| | — |
| | 148 |
| | 62 |
| | — |
| | 244 |
|
Condensed Consolidating Statements of Cash Flows
ThreeSix Months Ended March 31,June 30, 2018
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING ACTIVITIES | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | (85 | ) | | — |
| | 899 |
| | 204 |
| | — |
| | 1,018 |
|
INVESTING ACTIVITIES | | | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (289 | ) | | (257 | ) | | — |
| | (546 | ) |
Proceeds from sale of property, plant and equipment and other assets | 68 |
| | — |
| | — |
| | 51 |
| | — |
| | 119 |
|
Net cash provided by (used in) investing activities | 68 |
| | — |
| | (289 | ) | | (206 | ) | | — |
| | (427 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | |
Distributions | (605 | ) | | — |
| | — |
| | — |
| | — |
| | (605 | ) |
Other | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Increase (decrease) due from/to affiliates, net | 605 |
| | — |
| | (605 | ) | | — |
| | — |
| | — |
|
Net cash used in financing activities | — |
| | — |
| | (605 | ) | | (5 | ) | | — |
| | (610 | ) |
Net (decrease) increase in cash, cash equivalents and restricted cash | (17 | ) | | — |
| | 5 |
| | (7 | ) | | — |
| | (19 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 32 |
| | — |
| | 186 |
| | 113 |
| | — |
| | 331 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 15 |
| | — |
| | 191 |
| | 106 |
| | — |
| | 312 |
|
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING ACTIVITIES | | | | | | | | | | | |
Net cash (used in) provided by operating activities | $ | (8 | ) | | — |
| | 490 |
| | 89 |
| | — |
| | 571 |
|
INVESTING ACTIVITIES | | | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (142 | ) | | (110 | ) | | — |
| | (252 | ) |
Proceeds from sale of property, plant and equipment and other assets | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Deposits received on assets held for sale | 34 |
| | — |
| | — |
| | — |
| | — |
| | 34 |
|
Net cash provided by (used in) investing activities | 34 |
| | — |
| | (142 | ) | | (109 | ) | | — |
| | (217 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | |
Distributions | (390 | ) | | — |
| | — |
| | — |
| | — |
| | (390 | ) |
Other | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Increase (decrease) due from/to affiliates, net | 390 |
| | — |
| | (390 | ) | | — |
| | — |
| | — |
|
Net cash used in financing activities | — |
| | — |
| | (390 | ) | | (2 | ) | | — |
| | (392 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | 26 |
| | — |
| | (42 | ) | | (22 | ) | | — |
| | (38 | ) |
Cash, cash equivalents and restricted cash at beginning of period | 32 |
| | — |
| | 186 |
| | 113 |
| | — |
| | 331 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 58 |
| | — |
| | 144 |
| | 91 |
| | — |
| | 293 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effective November 1, 2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.
All references to "Notes" in this Item 2 of Part I refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report.
Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report and "Risk Factors" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018 for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects.
Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our annual report on Form 10-K for the year ended December 31, 2018, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations and cash flows for the first threesix months of the year are not necessarily indicative of the results of operations and cash flows that might be expected for the entire year.
We are an international facilities-based communications company engaged in providing a broad array of integrated communication services to our business customers. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.
Results of Operations
The following table summarizes the results of our consolidated operations for the three and six months ended March 31,June 30, 2019 and March 31,June 30, 2018:
| | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | 2019 | | 2018 | | 2019 | | 2018 |
| (Dollars in millions) | (Dollars in millions) |
Operating revenue | $ | 2,046 |
| | 2,087 |
| $ | 2,014 |
| | 2,052 |
| | 4,060 |
| | 4,139 |
|
Operating expenses | 5,439 |
| | 1,826 |
| 1,742 |
| | 1,856 |
| | 7,181 |
| | 3,682 |
|
OPERATING (LOSS) INCOME | (3,393 | ) | | 261 |
| |
OPERATING INCOME | | 272 |
| | 196 |
| | (3,121 | ) | | 457 |
|
Other expense, net | (103 | ) | | (97 | ) | (111 | ) | | (112 | ) | | (214 | ) | | (209 | ) |
INCOME BEFORE INCOME TAX EXPENSE | (3,496 | ) | | 164 |
| |
INCOME (LOSS) BEFORE INCOME TAXES | | 161 |
| | 84 |
| | (3,335 | ) | | 248 |
|
Income tax expense | 89 |
| | 102 |
| 51 |
| | 44 |
| | 140 |
| | 146 |
|
NET (LOSS) INCOME | $ | (3,585 | ) | | 62 |
| |
NET INCOME (LOSS) | | $ | 110 |
| | 40 |
| | (3,475 | ) | | 102 |
|
Operating Revenue
We categorize our products, services and revenue among the following five categories:
| |
• | IP and Data Services, which include primarily VPN data networks, Ethernet, IP, video (including our CDN services and Vyvx broadcast services) and other ancillary services; |
| |
• | Transport and Infrastructure, which includes private line (including business data services), wavelength, colocation and data center facilities and services, including cloud, hosting and application management solutions professional services, dark fiber services and other ancillary services; |
IP and Data Services, which include primarily VPN data networks, Ethernet, IP, video (including our CDN services and Vyvx broadcast services) and other ancillary services;
| |
• | Voice and Collaboration, which includes primarily TDM voice services, VoIP and other ancillary services; |
Transport and Infrastructure, which includes private line (including business data services), wavelength, colocation and data center facilities and services, including cloud, hosting and application management solutions professional services, dark fiber services and other ancillary services;
| |
• | Other, which includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other network services; and |
| |
• | Affiliate Services, we provide our affiliates with telecommunication services that we also provide to external customers. |
Voice and Collaboration, which includes primarily TDM voice services, VoIP and other ancillary services;
Other, which includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other network services; and
Affiliate Services, we provide our affiliates with telecommunication services that we also provide to external customers.
From time to time, we may change the categorization of our products and services.
The following tables summarize our consolidated operating revenue recorded under our five revenue categories:
| | | | | | | | | | | Three Months Ended June 30, | | | | |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | | Increase/(Decrease) | | % Change | 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | (Dollars in millions) | | |
IP and Data Services | $ | 979 |
| | 1,003 |
| | (24 | ) | | (2 | )% | $ | 965 |
| | 988 |
| | (23 | ) | | (2 | )% |
Transport and Infrastructure | 658 |
| | 676 |
| | (18 | ) | | (3 | )% | 655 |
| | 673 |
| | (18 | ) | | (3 | )% |
Voice and Collaboration | 352 |
| | 382 |
| | (30 | ) | | (8 | )% | 355 |
| | 363 |
| | (8 | ) | | (2 | )% |
Other | 2 |
| | 1 |
| | 1 |
| | 100 | % | 1 |
| | 1 |
| | — |
| | — | % |
Affiliate Services | 55 |
| | 25 |
| | 30 |
| | 120 | % | 38 |
| | 27 |
| | 11 |
| | 41 | % |
Total operating revenue | $ | 2,046 |
| | 2,087 |
| | (41 | ) | | (2 | )% | $ | 2,014 |
| | 2,052 |
| | (38 | ) | | (2 | )% |
|
| | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | |
IP and Data Services | $ | 1,945 |
| | 1,991 |
| | (46 | ) | | (2 | )% |
Transport and Infrastructure | 1,313 |
| | 1,349 |
| | (36 | ) | | (3 | )% |
Voice and Collaboration | 706 |
| | 745 |
| | (39 | ) | | (5 | )% |
Other | 3 |
| | 2 |
| | 1 |
| | 50 | % |
Affiliate Services | 93 |
| | 52 |
| | 41 |
| | 79 | % |
Total operating revenue | $ | 4,060 |
| | 4,139 |
| | (79 | ) | | (2 | )% |
Our total operating revenue decreased by $41$38 million, or 2%, for the three months ended March 31,June 30, 2019, as compared to the three months ended March 31,June 30, 2018. Total operating revenue decreased by $79 million, or 2%, for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018. The decrease in our total operating revenue was primarily due to the declines in IP and data services, primarily VPN data networks and CDN services, voice and collaboration, IP and dataprimarily voice services, and transport and infrastructure, primarily private line services. These declines were partially offset by an increase in affiliate services due to an increase in the level of services we provide to our affiliates.
Operating Expenses
The following tables summarize our consolidated operating expenses: | | | | | | | | | | | Three Months Ended June 30, | | | | |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | | Increase/(Decrease) | | % Change | 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | (Dollars in millions) | | |
Cost of services and products (exclusive of depreciation and amortization) | $ | 967 |
| | 998 |
| | (31 | ) | | (3 | )% | $ | 919 |
| | 980 |
| | (61 | ) | | (6 | )% |
Selling, general and administrative | 328 |
| | 344 |
| | (16 | ) | | (5 | )% | 347 |
| | 388 |
| | (41 | ) | | (11 | )% |
Operating expenses - affiliates | 46 |
| | 53 |
| | (7 | ) | | (13 | )% | 87 |
| | 55 |
| | 32 |
| | 58 | % |
Depreciation and amortization | 390 |
| | 431 |
| | (41 | ) | | (10 | )% | 389 |
| | 433 |
| | (44 | ) | | (10 | )% |
Goodwill Impairment | 3,708 |
| | — |
| | 3,708 |
| | nm |
| |
Total operating expenses | $ | 5,439 |
| | 1,826 |
| | 3,613 |
| | 198 | % | $ | 1,742 |
| | 1,856 |
| | (114 | ) | | (6 | )% |
|
| | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | |
Cost of services and products (exclusive of depreciation and amortization) | $ | 1,886 |
| | 1,978 |
| | (92 | ) | | (5 | )% |
Selling, general and administrative | 675 |
| | 732 |
| | (57 | ) | | (8 | )% |
Operating expenses - affiliates | 133 |
| | 108 |
| | 25 |
| | 23 | % |
Depreciation and amortization | 779 |
| | 864 |
| | (85 | ) | | (10 | )% |
Goodwill Impairment | 3,708 |
| | — |
| | 3,708 |
| | nm |
|
Total operating expenses | $ | 7,181 |
| | 3,682 |
| | 3,499 |
| | 95 | % |
|
| |
nm | Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. |
Cost of Services and Products (Exclusive of depreciation and amortization)
Cost of services and products (exclusive of depreciation and amortization) decreased by $31$61 million, or 3%6%, for the three months ended March 31,June 30, 2019, as compared to the three months ended March 31,June 30, 2018. Cost of services and products (exclusive of depreciation and amortization) decreased by $92 million, or 5%, for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018. The decreasedecreases in our cost of services and products for the period wasboth periods were primarily due to lower salaries and wages and employee related expenses from lower headcount, reductions inreduced network expense and voice usage costs, reduced customer premises equipment costs from lower sales and a decline in professional services,lower space and power costs, which were partially offset by higher customer installation costs, professional services and an increase in right of way and dark fiber expenses.
Selling, General and Administrative
Selling, general and administrative decreased by $16$41 million, or 5%11%, for the three months ended March 31,June 30, 2019, as compared to the three months ended March 31,June 30, 2018. The decreaseSelling, general and administrative decreased by $57 million, or 8%, for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018.The decreases in selling, general and administrative expenses wasfor both periods were primarily due to lower salaries and wages and employee related expenses from lower headcount, lower rent expense in 2019 and from higher exited lease obligations in 2018, lower hardware and software expenses and a decline in property and other taxes, and lower rent costs, which were partially offset by higher internal commissions and bad debt expense.
Operating Expenses - Affiliates
Operating expenses - affiliate decreasedincreased by $7$32 million, or 13%58%, for the three months ended March 31,June 30, 2019, as compared to the three months ended March 31,June 30, 2018. The decreaseOperating expenses - affiliate increased by $25 million, or 23%, for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018.The increase in operating expenses - affiliates was primarily due to the declineincrease in the level of services provided to us by our affiliates.
Depreciation and Amortization
The following table provides detail regarding depreciation and amortization expense:
| | | | | | | | | | | Three Months Ended June 30, | | | | |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | | Increase/(Decrease) | | % Change | 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | (Dollars in millions) | | |
Depreciation | $ | 197 |
| | 237 |
| | (40 | ) | | (17 | )% | $ | 184 |
| | 231 |
| | (47 | ) | | (20 | )% |
Amortization | 193 |
| | 194 |
| | (1 | ) | | (1 | )% | 205 |
| | 202 |
| | 3 |
| | 1 | % |
Total depreciation and amortization | $ | 390 |
| | 431 |
| | (41 | ) | | (10 | )% | $ | 389 |
| | 433 |
| | (44 | ) | | (10 | )% |
|
| | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | |
Depreciation | $ | 381 |
| | 468 |
| | (87 | ) | | (19 | )% |
Amortization | 398 |
| | 396 |
| | 2 |
| | 1 | % |
Total depreciation and amortization | $ | 779 |
| | 864 |
| | (85 | ) | | (10 | )% |
Depreciation expense decreased by $40$47 million, or 17%20%, for the three months ended March 31,June 30, 2019, as compared to the three months ended March 31, 2018. The decrease wasJune 30, 2018 primarily due to a net decline in depreciable assets of $54$37 million and the impact of the runoff of plant, property and equipment assigned a one year life at the time CenturyLink acquired us, of approximately $15 million. Depreciation expense decreased by $87 million, or 19%, for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018 primarily due to a net decline in depreciable assets of $69 million and the impact of the runoff of plant, property and equipment assigned a one year life at the time CenturyLink acquired us, of approximately $30 million, partially offset by increases associated with purchase price depreciation adjustments of $13 million in 2018.$15 million.
Amortization expense changed by an immaterial amountincreased slightly for the three months ended March 31,June 30, 2019, as compared to the three months ended March 31, 2018.June 30, 2018 and for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, primarily due to the amortization of software development assets.
Goodwill Impairment
Our goodwill was derived from CenturyLink's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.
We are required to perform an impairment test related to our goodwill annually, which we perform as of October 31, or sooner if an indicator of impairment occurs. Due to the decline in CenturyLink's stock price, we incurred an event in the first quarter of 2019 that triggered impairment testing. Due to this impairment indicator, we evaluated our goodwill as of March 31, 2019, which led to the first quarter 2019 impairment charge described below. There were no additional indicators of impairment during the second quarter of 2019.
When we performed our October 31, 2018 annual impairment test, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. The market approach method includes the use of multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow
method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows beyond the cash flows from the discrete projection period. Because CenturyLink's low stock price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach as of March 31, 2019. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which have historically supported a range of fair values of annualized revenue and EBITDA multiples between 2.1x and 4.9x and 4.9x and 9.8x, respectively. We selected a revenue and EBITDA multiple within this range. For the three months ended March 31, 2019, based on our assessments performed as described above, we concluded that the estimated fair value was less than our carrying value of equity as of the date of our triggering event during the first quarter. As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge aggregating to $3.7 billion for the three months ended March 31, 2019.
Other Consolidated Results
The following tables summarize our total other expense, net:
| | | | | | | | | | | Three Months Ended June 30, | | | | |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | | Increase/(Decrease) | | % Change | 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | (Dollars in millions) | | |
Interest income - affiliate | $ | 16 |
| | 16 |
| | — |
| | — | % | $ | 16 |
| | 16 |
| | — |
| | — | % |
Interest expense | (131 | ) | | (120 | ) | | 11 |
| | 9 | % | (130 | ) | | (124 | ) | | 6 |
| | 5 | % |
Other income, net | 12 |
| | 7 |
| | 5 |
| | 71 | % | |
Other income (expense), net | | 3 |
| | (4 | ) | | 7 |
| | nm |
|
Total Other Expense | $ | (103 | ) | | (97 | ) | | 6 |
| | 6 | % | $ | (111 | ) | | (112 | ) | | (1 | ) | | (1 | )% |
Income tax expense | $ | 89 |
| | 102 |
| | 13 |
| | (13 | )% | $ | 51 |
| | 44 |
| | 7 |
| | 16 | % |
|
| | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2019 | | 2018 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | |
Interest income - affiliate | $ | 32 |
| | 32 |
| | — |
| | — | % |
Interest expense | (261 | ) | | (244 | ) | | 17 |
| | 7 | % |
Other income (expense), net | 15 |
| | 3 |
| | 12 |
| | nm |
|
Total Other Expense | $ | (214 | ) | | (209 | ) | | 5 |
| | 2 | % |
Income tax expense | $ | 140 |
| | 146 |
| | (6 | ) | | (4 | )% |
|
| |
nm | Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. |
Interest Income - Affiliate
Interest income - affiliate did not change for the three and six months ended March 31,June 30, 2019, as compared to the three and six months ended June 30, 2018.
Interest Expense
Interest expense increased by $6 million, or 5%, for thethree months ended June 30, 2019, as compared to the three months ended March 31,June 30, 2018.
Interest Expense
Interest expense increased by $11$17 million, or 9%7%, for thethreesix months ended March 31,June 30, 2019, as compared to the threesix months ended March 31,June 30, 2018. The increase was primarily driven by a 1% LIBOR rate increase on Level 3 Financing Inc.'s term loan.
Other Income, net
Other income, net increased by $5$7 million or 71%, for thethree months ended March 31,June 30, 2019, as compared to the three months ended March 31,June 30, 2018. Other income, net increased by $12 million for thesix months ended June 30, 2019, as compared to the six months ended June 30, 2018. The increase was primarily due to an increase in foreign currency gains.
Income Tax Expense
For the three months ended March 31,June 30, 2019 and the three months ended March 31,June 30, 2018, our effective income tax rate was (2.5%)31.7% and 62.2%52.4%, respectively. For the six months ended June 30, 2019 and the six months ended June 30, 2018, our effective income tax rate was (4.2)% and 58.9%, respectively. The effective tax rate for the threesix months ended March 31,June 30, 2019 was significantly impacted by the goodwill impairment and the new base erosion and anti-abuse provisions of the Tax Cuts and Jobs Act. Without the goodwill impairment, the rate would be 42.0%37.5%. The effective tax rate for the threesix months ended March 31,June 30, 2018 was significantly impacted by the enactment of the Tax Cuts and Jobs Act legislation in December 2017 which resulted in a re-measurement of our deferred tax assets and liabilities at the new federal corporate tax rate.
Liquidity and Capital Resources
Overview
At March 31,June 30, 2019, we held cash and cash equivalents of $217$228 million. At March 31,June 30, 2019, cash and cash equivalents of $61$49 million were held in foreign bank accounts for funding our foreign operations. Due to various factors, our access to foreign cash is generally more restricted than our access to domestic cash.
Capital Expenditures
We incur capital expenditures on an ongoing basis to enhance and modernize our networks, compete effectively in our markets and expand our service offerings. CenturyLink and 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 the expected return on investment. The amount of CenturyLink's consolidated capital investment is influenced by, among other things, demand for CenturyLink's services and products, cash flow generated by operating activities and cash required for other purposes.
Debt and Other Financing Arrangements
As of March 31,June 30, 2019, our long-term debt (including current maturities and capitalfinance leases) totaled $10.8 billion, which was flat when compared to $10.8 billion outstanding as of December 31, 2018.
Subject to market conditions, from time to time, we expect to continue to issue term debt or senior notes to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned us by the three major credit rating agencies, among other factors. As of the date of this report, the credit ratings for the senior unsecured debt of Level 3 Parent, LLC and Level 3 Financing, Inc. were as follows:
|
| | | | | | |
Borrower | | Moody's Investor Services, Inc. | | Standard & Poor's | | Fitch Ratings |
Level 3 Parent, LLC | | | | | | |
Unsecured | | B1 | | B+ | | BB |
| | | | | | |
Level 3 Financing, Inc. | | | | | | |
Unsecured | | Ba3 | | BB | | BB |
Secured | | Ba1 | | BBB- | | BBB- |
Historical Information
The following table summarizes our consolidated cash flow activities:
| | | | | | | | | Six Months Ended June 30, | | |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | | Change | 2019 | | 2018 | | Change |
| (Dollars in millions) | (Dollars in millions) |
Net cash provided by operating activities | $ | 483 |
| | 571 |
| | (88 | ) | $ | 1,123 |
| | 1,018 |
| | 105 |
|
Net cash used in investing activities | $ | (285 | ) | | (217 | ) | | 68 |
| $ | (575 | ) | | (427 | ) | | 148 |
|
Net cash used in financing activities | $ | (226 | ) | | (392 | ) | | (166 | ) | $ | (567 | ) | | (610 | ) | | (43 | ) |
Operating Activities
Net cash provided by operating activities decreased $88increased $105 million for thethreesix months ended March 31,June 30, 2019, as compared to the threesix months ended March 31,June 30, 2018, primarily due to a decreasean increase in accounts payable and accounts payable - affiliates, partially offset by increases in accounts receivable and other current assets and liabilities, net and accounts payable partially offset by the increase in other current assets and liabilities, affiliate.net. Cash provided by operating activities is subject to variability period over period as a result of the timing of the collection of receivables and payments related to interest expense, accounts payable, and bonuses.
Investing Activities
Net cash used in investing activities increased $68$148 million for the threesix months ended March 31,June 30, 2019, as compared to the threesix months ended March 31,June 30, 2018 primarily due to an increase in capital expenditures and a decrease in deposits received on assets held for sale.proceeds from the sale of property, plant and equipment and other assets.
Financing Activities
Net cash used in financing activities decreased $166$43 million for the threesix months ended March 31,June 30, 2019, as compared to the threesix months ended March 31,June 30, 2018 primarily due to a decrease in distributions.
Other Matters
We are subject to various legal proceedings and other contingent liabilities that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. See Note 9 - Commitments, Contingencies and Other Items for additional information.
CenturyLink is involved in several legal proceedings to which we are not a party that, if resolved against it, could have a material adverse effect on its business and financial condition. As a wholly owned subsidiary of CenturyLink, our business and financial condition could be similarly affected. You can find descriptions of these
legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for these matters.
Market Risk
At March 31,June 30, 2019, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations. 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.
As of the date of March 31,June 30, 2019, we have approximately $10.5 billion (excluding unamortized premiums and finance lease and other obligations) of long-term debt outstanding, 56% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also heldhave $4.6 billion of floating rate debt exposed to changes in the London InterBank Offered Rate ("LIBOR"). A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $46 million.
By operating internationally, we are exposed to the risk of fluctuations in the foreign currencies used by our international subsidiaries, including the British Pound, the Euro, the Brazilian Real and the Argentinian Peso. Although the percentages of our consolidated revenue and costs that are denominated in these currencies are immaterial, our consolidated results of operations could be adversely impacted by volatility in exchange rates or an increase in the number of foreign currency transactions.
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 presented above if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at March 31,June 30, 2019.
Off-Balance Sheet Arrangements
As of March 31,June 30, 2019, we have 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 leasing, 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 16 - Commitments and Contingencies to our consolidated financial statements in Item 8 of Part II of our annual report on
Form 10-K for the year ended December 31, 2018, 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
CenturyLink's and our website is www.centurylink.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.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, current reports on Form 8-K and all amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.com) under the heading "SEC Filings." These reports are available on our website as soon as reasonably practicable after we electronically file them 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
Omitted pursuant to General Instruction H(2).
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 Company in the reports that it files or submitsfurnishes 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’s management, including its 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’s disclosure controls and procedures as of March 31,June 30, 2019. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective, as of March 31,June 30, 2019, due to the material weaknessesweakness in internal control over financial reporting that werewas disclosed in our Annual Report on Form 10-K for the fiscal year ended in December 31, 2018.2018 related to the existence and accuracy of our revenue transactions.
Remediation Plans
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we began implementing remediation plans to address both of the material weaknesses mentioned above.described in that report. During the second quarter, we remediated our material weakness related to the ineffective design and operation of process level internal controls over the fair value measurement of certain assets acquired and liabilities assumed in CenturyLink's acquisition of us. The weaknessesmeasures taken to remediate this material weakness are described in further detail in the Changes in Internal Control Over Financial Reporting section below.
The remaining material weakness relates to our ineffective design and operation of certain process level internal controls over the existence and accuracy of revenue transactions. This material weakness will not be considered remediated until we have designed and implemented sufficient process level controls and the applicable controls operate for a sufficient period of time andsuch that management has concluded, through testing, that these controls are operating effectively. WeBased on our progress to date, we expect that the remediation of thethis material weaknessesweakness will be completed prior to the end of fiscal 2019.
Changes in Internal Control Over Financial Reporting
During the three monthsquarter ended March 31,June 30, 2019, we implemented adesigned and documented new lease accounting systemprocesses and internal controls, and strengthened existing process level internal controls, in response to the adoption of ASU No. 2016- 02, "Leases (Topic 842)". These implementations resultedmaterial weakness identified in a material change in a component of our internal control over financial reporting. The operating effectiveness of these changes to our internal control over financial reporting will be evaluated as part of our annual assessment of the effectiveness of internal control over financial reportingAnnual Report on Form 10-K for the fiscal year ended December 31, 2018 related to the ineffective design and operation of process level internal controls over the fair value measurement of certain assets acquired and liabilities assumed in CenturyLink's acquisition of us, as described below:
We conducted an effective risk assessment to identify and assess changes needed to financial reporting and process level controls related to the fair value measurements of assets acquired and liabilities assumed in future business combinations. We designed and documented new process level internal controls and strengthened existing process level internal controls resulting from our risk assessment over the fair value measures for business combinations for areas in which we deemed there is a reasonable possibility of material misstatement of financial statement items acquired or assumed in a business combination.
We prepared and adopted a formal policy that assigns responsibilities to personnel within the company for the design, implementation, and operation of controls over business combination fair value measurements.
We disseminated a formal training and information and communication plan that will be utilized in the event of a future business combination to ensure the right information is available to personnel on a timely basis so they can fulfill their control responsibilities related to the fair value measurements.
Management has concluded that these remediation activities have addressed the material weakness related to the fair value measurement of certain assets acquired and liabilities assumed in CenturyLink's acquisition of us and believes that the design of our process level internal controls over the fair value measurements of certain assets and liabilities assumed in a business combination would operate effectively in the event of a future business combination transaction as of June 30, 2019.
Other than with respect to the remediation efforts described above, and changes related to the adoption of ASU 2016-02, there have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Company’s first fiscalsecond quarter ended March 31,of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s 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 9 - 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 9 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 report on Form 10-K for the year ended December 31, 2018.
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. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 6. EXHIBITS |
| |
(a) | Exhibits incorporated by reference are indicated in parentheses. |
10.1* | |
31.1* | |
31.2* | |
32*32.1* | |
32.2* | |
101* | The following materials from the Quarterly Report on Form 10-Q of Level 3 Parent, LLC for the quarter ended March 31,June 30, 2019, formatted in Inline XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss) Income,, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Member's Equity and (vi) Notes to Consolidated Financial Statements. |
_______________________________________________________________________________
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 13,August 9, 2019.
|
| | |
| LEVEL 3 PARENT, LLC |
| By: | /s/ Eric J. Mortensen |
| Eric J. Mortensen Senior Vice President - Controller (Principal Accounting Officer) |