Other Consolidated Results
The following tables summarize our total other expense, net and income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
|
% Change
|
|
2018
|
|
2017
|
|
|
|
(Dollars in millions)
|
|
|
Interest expense
|
$
|
(557
|
)
|
|
(362
|
)
|
|
195
|
|
|
54
|
%
|
Net loss on early retirement of debt
|
(33
|
)
|
|
—
|
|
|
33
|
|
|
nm
|
|
Other income, net
|
25
|
|
|
14
|
|
|
11
|
|
|
nm
|
|
Total other expense, net
|
$
|
(565
|
)
|
|
(348
|
)
|
|
217
|
|
|
62
|
%
|
Income tax expense
|
$
|
57
|
|
|
47
|
|
|
10
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
% Change
|
|
2018
|
|
2017
|
|
|
|
(Dollars in millions)
|
|
|
Interest expense
|
$
|
(1,638
|
)
|
|
(1,000
|
)
|
|
638
|
|
|
64
|
%
|
Net loss on early retirement of debt
|
(34
|
)
|
|
(5
|
)
|
|
29
|
|
|
nm
|
|
Other income, net
|
63
|
|
|
6
|
|
|
57
|
|
|
nm
|
|
Total other expense, net
|
$
|
(1,609
|
)
|
|
(999
|
)
|
|
610
|
|
|
61
|
%
|
Income tax expense
|
$
|
123
|
|
|
214
|
|
|
(91
|
)
|
|
(43
|
)%
|
____________________________________________________________________________
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 increased by
$195 million
, or
54%
, for the three months ended
September 30, 2018
as compared to the three months ended
September 30, 2017
. Interest expense increased by
$638 million
, or
64%
, for the
nine
months ended
September 30, 2018
as compared to the
nine
months ended
September 30, 2017
. The increase in interest expense for both periods was primarily due to our issuance and assumption of debt in conjunction with the acquisition of Level 3 and an increase in the LIBOR rate.
Net Loss on Early Retirement of Debt
During the three months ended September 2018, we retired approximately $1.3 billion in debt securities which resulted in a loss of $
33 million
.
Other Income, Net
Other income, net reflects certain items not directly related to our core operations, including our share of income from partnerships we do not control, interest income, gains and losses from non-operating asset dispositions, foreign currency gains and losses and components of net periodic pension and postretirement benefit costs. Other income, net increased by
$11 million
for the three months ended
September 30, 2018
as compared to the three months ended
September 30, 2017
and increased by
$57 million
for the nine months ended
September 30, 2018
as compared to the nine months ended
September 30, 2017
. Changes for the three and nine month periods were due to a decrease in pension and post retirement charges and favorable foreign exchange rates in 2017. In addition, the
three and nine months ended
September 30, 2018
included other income attributable to Level 3.
Income Tax Expense
For the
three months ended
September 30, 2018
and
2017
, our effective income tax rate was
17.3%
and
33.8%
, respectively. For the
nine months ended
September 30, 2018
and
2017
, our effective income tax rate was
15.3%
and
44.0%
, respectively. The effective tax rate for the nine months ended
September 30, 2018
was significantly impacted by the tax reform impact of filing tax accounting method changes relating to our 2017 Federal income tax return that significantly accelerated tax deductions into 2017, allowing a carryback claim to 2016 resulting in a tax benefit, net of uncertain positions, of $142 million, which was partially offset by $83 million of purchase price accounting adjustments resulting from the Level 3 acquisition and the tax reform impact on those adjustments. The rate was further impacted by the expiration of the statute of limitations for certain reserves for uncertain tax positions and the enactment of the Tax Cuts and Jobs Act legislation in December 2017. The effective tax rate for the
nine
months ended
September 30, 2017
was significantly impacted by the sale and related restructure actions we had taken with respect to the data centers and colocation business, the tax impact of certain employee stock-based compensation transactions, the release of a reserve related to a prior acquisition and the effects of changes in state apportionment factors.
Segment Results
General
For financial reporting purposes, we have determined that as of
September 30, 2018
we had
two
reportable segments, business and consumer.
The results of our reportable segments, business and consumer, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(Dollars in millions)
|
Business segment:
|
|
|
|
|
|
|
|
Revenues
|
$
|
4,285
|
|
|
2,425
|
|
|
13,033
|
|
|
7,485
|
|
Expenses
|
2,446
|
|
|
1,537
|
|
|
7,540
|
|
|
4,641
|
|
Adjusted EBITDA
|
$
|
1,839
|
|
|
888
|
|
|
5,493
|
|
|
2,844
|
|
Margin percentage
|
43
|
%
|
|
37
|
%
|
|
42
|
%
|
|
38
|
%
|
Consumer segment:
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,355
|
|
|
1,420
|
|
|
4,086
|
|
|
4,304
|
|
Expenses
|
523
|
|
|
660
|
|
|
1,704
|
|
|
1,931
|
|
Adjusted EBITDA
|
$
|
832
|
|
|
760
|
|
|
2,382
|
|
|
2,373
|
|
Margin percentage
|
61
|
%
|
|
54
|
%
|
|
58
|
%
|
|
55
|
%
|
For additional information on our reportable segments, see Note 11—Segment Information.
Products and Services
In connection with our acquisition of Level 3 on November 1, 2017, we revised the way we categorize our products and services and now report our related revenues under the following categories: IP and data services, transport and infrastructure, voice and collaboration, IT and managed services and regulatory revenues. From time to time, we change the categorization of our products and services, and we may make similar changes in the future.
We offer our customers the ability to bundle together several products and services. We believe our customers value the convenience and price discounts associated with receiving multiple services through a single company.
Business Segment
The operations of our business segment have been, and are expected to continue to be, impacted by several significant trends, including those described below:
Revenues
. Our mix of total business segment revenues continues to migrate from traditional wireline voice services to newer, lower cost more technologically advanced products and services as our small, medium and enterprise business, wholesale and government customers increasingly demand integrated data, broadband, hosting and voice services. Our Ethernet-based services in the wholesale market face competition from cable companies and competitive fiber-based telecommunications providers. Demand for our private lines services (including business data services) continues to decline due to our customers' optimization of their networks, industry consolidation and technology migration to higher-speed services. We anticipate continued pricing pressure for our colocation services as our competitors continue to expand their enterprise colocation operations. Sustained expansion in competitive cloud computing offerings by technology companies and other competitors has led to other increased pricing pressure, a migration towards lower-priced cloud-based services and enhanced competition for contracts, and we expect these trends to continue. Customers' demand for new technology has also increased the number of competitors offering services similar to ours. Price compression from each of these above-mentioned competitive pressures has negatively impacted the operating margins of certain business product and service offerings, and we expect this trend to continue. Our traditional wireline revenues have been, and we expect they will continue to be, adversely affected by access line losses and price compression. In particular, our access, local services and long-distance revenues have been, and we expect will continue to be, adversely affected by customer migration to more technologically advanced services, a substantial increase in the use of non-voice communications, industry consolidation and price compression caused by various factors. For example, many of our business segment customers are substituting cable, wireless and Voice over Internet Protocol ("VoIP") services for traditional voice telecommunications services, resulting in continued access revenue loss. Although our traditional wireline services generally face fewer direct competitors than certain of our newer, lower cost more advanced products and services, customer migration and, to a lesser degree, price compression from competitive pressures have negatively impacted our traditional wireline revenues and the operating margins of these services. We expect this trend to continue. We expect both equipment sales and professional services revenue and the related costs will fluctuate from year to year as this offering tends to be more sensitive than others to changes in the economy and in spending trends of our federal, state and local government customers, many of whom have experienced substantial budget cuts over the past several years, with the possibility of additional future budget cuts.
Expenses.
Our operating costs also impact the operating margins of all of our above-mentioned services, but to a lesser extent than price compression and customer disconnects. These operating costs include employee costs, sales commissions, software costs on selected services, installation costs and third-party facility costs. We believe increases in operating costs have generally had a greater impact on the operating margins of some of our newer, more technologically advanced services as compared to our traditional wireline services, principally because those newer services rely more heavily upon the above-listed support functions. Operating costs, such as installation costs and third-party facility costs, have also negatively impacted the operating margins of our traditional wireline products and services, but to a lesser extent than customer migration and price compression.
Operating Efficiencies
. We continue to evaluate our segment operating structure and focus. This involves balancing our workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions, while achieving operational efficiencies and improving our processes through automation. However, our ongoing efforts to increase revenue will continue to require that we incur higher costs in some areas. We also expect our business segment to benefit indirectly from any enhanced efficiencies in our company-wide network operations.
The following tables summarize the results of operations from our business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment
|
|
Three Months Ended September 30,
|
|
Increase /
(Decrease)
|
|
%Change
|
|
2018
|
|
2017
|
|
|
(Dollars in millions)
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
IP and data services
(1)
|
$
|
1,726
|
|
|
755
|
|
|
971
|
|
|
129
|
%
|
Transport and infrastructure
(2)
|
1,331
|
|
|
735
|
|
|
596
|
|
|
81
|
%
|
Voice and collaboration
(3)
|
1,075
|
|
|
765
|
|
|
310
|
|
|
41
|
%
|
IT and managed services
(4)
|
153
|
|
|
170
|
|
|
(17
|
)
|
|
(10
|
)%
|
Total segment revenues
|
4,285
|
|
|
2,425
|
|
|
1,860
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
Segment expenses:
|
|
|
|
|
|
|
|
Total expenses
|
2,446
|
|
|
1,537
|
|
|
909
|
|
|
59
|
%
|
Segment adjusted EBITDA
|
$
|
1,839
|
|
|
888
|
|
|
951
|
|
|
107
|
%
|
Segment margin percentage
|
43
|
%
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment
|
|
Nine Months Ended September 30,
|
|
Increase /
(Decrease)
|
|
%Change
|
|
2018
|
|
2017
|
|
|
(Dollars in millions)
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
IP and data services
(1)
|
$
|
5,212
|
|
|
2,256
|
|
|
2,956
|
|
|
131
|
%
|
Transport and infrastructure
(2)
|
4,021
|
|
|
2,426
|
|
|
1,595
|
|
|
66
|
%
|
Voice and collaboration
(3)
|
3,324
|
|
|
2,319
|
|
|
1,005
|
|
|
43
|
%
|
IT and managed services
(4)
|
476
|
|
|
484
|
|
|
(8
|
)
|
|
(2
|
)%
|
Total segment revenues
|
13,033
|
|
|
7,485
|
|
|
5,548
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
Segment expenses:
|
|
|
|
|
|
|
|
Total expenses
|
7,540
|
|
|
4,641
|
|
|
2,899
|
|
|
62
|
%
|
Segment adjusted EBITDA
|
$
|
5,493
|
|
|
2,844
|
|
|
2,649
|
|
|
93
|
%
|
Segment margin percentage
|
42
|
%
|
|
38
|
%
|
|
|
|
|
|
|
_________________________________________________________________
|
|
|
(1)
|
Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
|
(2)
|
Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.
|
(3)
|
Includes local, long-distance and other ancillary revenues.
|
(4)
|
Includes IT services and managed services revenues.
|
Segment Revenues
Business segment revenues increased by
$1.9 billion
, or
77%
, for the
three months ended
September 30, 2018
as compared to the
three months ended
September 30, 2017
and increased by
$5.5 billion
, or
74%
for the
nine months ended September 30, 2018
as compared to the
nine months ended September 30,
2017
. The increase in our total operating revenues was largely attributable to the acquisition of Level 3, which contributed operating revenues (net of intercompany eliminations) of
$2.0 billion
and
$6.1 billion
for the
three and nine months ended
September 30, 2018
. This was partially offset by a decrease in Legacy CenturyLink transport and infrastructure and voice and collaboration revenue. The transport and infrastructure decrease was primarily due to decreased equipment and broadband revenues while the decrease in voice and collaboration was due to continued decreases in revenue from our traditional voice telecommunications services.
The following tables summarize the results of operations from our business segment by customer sales channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment
|
|
Three Months Ended September 30,
|
|
Increase /
(Decrease)
|
|
%Change
|
|
2018
|
|
2017
|
|
|
(Dollars in millions)
|
|
|
Segment revenues by customer sales channel:
|
|
|
|
|
|
|
|
Medium and small business
|
$
|
860
|
|
|
764
|
|
|
96
|
|
|
13
|
%
|
Enterprise
|
1,278
|
|
|
718
|
|
|
560
|
|
|
78
|
%
|
International and global accounts
|
892
|
|
|
222
|
|
|
670
|
|
|
302
|
%
|
Wholesale and indirect
|
1,255
|
|
|
721
|
|
|
534
|
|
|
74
|
%
|
Total segment revenues by customer sales channel:
|
$
|
4,285
|
|
|
2,425
|
|
|
1,860
|
|
|
77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment
|
|
Nine Months Ended September 30,
|
|
Increase /
(Decrease)
|
|
%Change
|
|
2018
|
|
2017
|
|
|
(Dollars in millions)
|
|
|
Segment revenues by customer sales channel:
|
|
|
|
|
|
|
|
Medium and small business
|
$
|
2,605
|
|
|
2,282
|
|
|
323
|
|
|
14
|
%
|
Enterprise
|
3,888
|
|
|
2,147
|
|
|
1,741
|
|
|
81
|
%
|
International and global accounts
|
2,732
|
|
|
849
|
|
|
1,883
|
|
|
222
|
%
|
Wholesale and indirect
|
3,808
|
|
|
2,207
|
|
|
1,601
|
|
|
73
|
%
|
Total segment revenues by customer sales channel:
|
$
|
13,033
|
|
|
7,485
|
|
|
5,548
|
|
|
74
|
%
|
Segment Expenses
Business segment expenses increased by
$909 million
, or
59%
, for the
three months ended
September 30, 2018
as compared to the
three months ended
September 30, 2017
and increased by
$2.9 billion
, or
62%
, for the
nine months ended September 30, 2018
as compared to the
nine months ended September 30,
2017
. The increase in our business segment expenses was primarily due to the inclusion of Level 3 expenses for the first
nine
months of
2018
.
Segment Adjusted EBITDA
Business segment adjusted EBITDA increased by
$951 million
, or
107%
, for the
three months ended
September 30, 2018
as compared to the
three months ended
September 30, 2017
and increased by
$2.6 billion
, or
93%
, for the
nine months ended September 30, 2018
as compared to the
nine months ended September 30,
2017
. The increase in our business segment adjusted EBITDA was due predominantly to items mentioned above.
Consumer Segment
The operations of our consumer segment have been, and are expected to continue to be, impacted by several significant trends, including those described below:
Revenues.
In order to remain competitive and attract additional residential broadband subscribers, we believe it is important to continually increase our broadband network's scope and transmission speeds. As a result, we continue to invest in our broadband network, which allows for the delivery of higher-speed broadband services to a greater number of customers. We compete in a maturing broadband market in which most consumers already have broadband services and growth rates in new subscribers have slowed or declined. Moreover, as described further in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2017, certain of our competitors continue to provide broadband services at higher average transmission speeds than ours or through advanced wireless data service offerings, both of which we believe have impacted the competitiveness of certain of our broadband offerings in certain of our markets. Our voice revenues have been, and we expect they will continue to be, adversely affected by access line losses and lower long-distance voice service volumes. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are substituting cable and wireless voice services and electronic mail, texting and social networking non-voice services for traditional voice telecommunications services. We expect our video revenues to continue to decline, particularly due to our decision to discontinue active marketing of our facilities-based video services in light of competitive pressures and escalating content costs. The demand for new technology has increased the number of competitors offering services similar to ours. Price compression and new technology from our competitors have negatively impacted the operating margins of our newer, more technologically advanced products and services. We expect that these factors and trends will continue to negatively impact our consumer business. Customer migration and price compression from competitive pressures have not only negatively impacted our traditional wireline services revenues, but they have also negatively impacted the operating margins of these services and we expect this trend to continue.
Expenses.
Operating costs also impact the operating margins of these services. These operating costs include employee costs, marketing and advertising expenses, sales commissions, TV content costs and installation costs. We believe increases in operating costs have generally had a greater impact on our operating margins of our newer, more technologically advanced products and services as compared to our traditional wireline services, principally because our newer, more technologically advanced products and services rely more heavily upon the above-listed operating expenses. Operating costs, such as installation costs and facility costs, have also negatively impacted the operating margins of our traditional wireline products and services, but to a lesser extent than customer migration and price compression. Operating costs also tend to impact our traditional wireline products and services margins to a lesser extent than our newer, more technologically advanced products and services as noted above.
Service bundling and product promotions.
We offer our customers the ability to bundle multiple products and services. These customers can bundle broadband services with other services such as local voice, video and long-distance. While we believe our bundled service offerings can help retain customers, they also tend to lower our profit margins in the consumer segment due to the related discounts.
Operating efficiencies.
We continue to evaluate our segment operating structure and focus. This involves balancing our workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions. Following a review of our retail customers’ order provisioning preferences, we have elected to close during the fourth quarter of 2018 substantially all of our remaining retail stores, which we believe will enable us to reduce operating costs and to redeploy capital to higher growth initiatives. We also expect our consumer segment to benefit indirectly from any enhanced efficiencies in our company-wide network operations.
The following tables summarize the results of operations from our consumer segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Segment
|
|
Three Months Ended September 30,
|
|
Increase /
(Decrease)
|
|
% Change
|
|
2018
|
|
2017
|
|
|
(Dollars in millions)
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
IP and data services
(1)
|
$
|
70
|
|
|
98
|
|
|
(28
|
)
|
|
(29
|
)%
|
Transport and infrastructure
(2)
|
720
|
|
|
697
|
|
|
23
|
|
|
3
|
%
|
Voice and collaboration
(3)
|
565
|
|
|
625
|
|
|
(60
|
)
|
|
(10
|
)%
|
Total segment revenues
|
1,355
|
|
|
1,420
|
|
|
(65
|
)
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
Segment expenses:
|
|
|
|
|
|
|
|
Total expenses
|
523
|
|
|
660
|
|
|
(137
|
)
|
|
(21
|
)%
|
Segment adjusted EBITDA
|
$
|
832
|
|
|
760
|
|
|
72
|
|
|
9
|
%
|
Segment margin percentage
|
61
|
%
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Segment
|
|
Nine Months Ended September 30,
|
|
Increase /
(Decrease)
|
|
% Change
|
|
2018
|
|
2017
|
|
|
(Dollars in millions)
|
|
|
Segment revenues:
|
|
|
|
|
|
|
|
IP and data services
(1)
|
$
|
249
|
|
|
308
|
|
|
(59
|
)
|
|
(19
|
)%
|
Transport and infrastructure
(2)
|
2,171
|
|
|
2,063
|
|
|
108
|
|
|
5
|
%
|
Voice and collaboration
(3)
|
1,666
|
|
|
1,933
|
|
|
(267
|
)
|
|
(14
|
)%
|
Total segment revenues
|
4,086
|
|
|
4,304
|
|
|
(218
|
)
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
Segment expenses:
|
|
|
|
|
|
|
|
Total expenses
|
1,704
|
|
|
1,931
|
|
|
(227
|
)
|
|
(12
|
)%
|
Segment adjusted EBITDA
|
$
|
2,382
|
|
|
2,373
|
|
|
9
|
|
|
—
|
%
|
Segment margin percentage
|
58
|
%
|
|
55
|
%
|
|
|
|
|
|
|
__________________________________________________________________
|
|
|
|
(1
|
)
|
Includes retail video revenues (including our facilities-based video revenues).
|
(2
|
)
|
Includes primarily broadband and equipment sales and professional services revenues.
|
(3
|
)
|
Includes local, long-distance and other ancillary revenues.
|
Segment Revenues
Consumer segment revenues decreased by
$65 million
, or
5%
, and by $
218 million
, or
5%
, for the
three and nine months ended
September 30, 2018
, as compared to the
three and nine months ended
September 30, 2017
. The decrease in our consumer segment revenues was primarily due to a decrease in our voice revenue due to the continued decline in usage of our traditional voice telecommunications services.
Segment Expenses
Consumer segment expenses decreased by
$137 million
, or
21%
, for the
three months ended
September 30, 2018
as compared to the
three months ended
September 30, 2017
and decreased by
$227 million
, or
12%
for the
nine months ended September 30, 2018
as compared to the
nine months ended September 30,
2017
. The decrease in our consumer segment expenses was primarily due to a reduction in headcount, decreases in marketing expenses and lower network expense in response to a smaller customer base.
Segment Adjusted EBITDA
Consumer segment adjusted EBITDA increased by
$72 million
, or
9%
, for the
three months ended
September 30, 2018
as compared to the
three months ended
September 30, 2017
and increased by
$9 million
, or less than 1% for the
nine months ended September 30, 2018
as compared to the
nine months ended September 30,
2017
. The increase in our consumer segment adjusted EBITDA was due predominantly to items mentioned above.
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 their respective 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.
Our acquisition of Level 3 on November 1, 2017, resulted in significant changes in our consolidated financial position, our debt structure and our future cash requirements.
Our executive officers and our Board of Directors periodically review our sources and potential uses of cash, particularly in connection with our budgeting processes. 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 pension contributions and other benefits payments. We currently expect our cash income tax payments will be lower in 2018 due to lower income tax rates and the utilization of NOLs acquired in the Level 3 acquisition.
Based on our current capital allocation objectives, we project expending approximately $3.15 billion to $3.25 billion in cash during fiscal year
2018
for capital investment in property, plant and equipment and approximately
$577 million
of cash for dividends per quarter on our common stock (based on the assumptions described below under "Dividends"). At
September 30, 2018
, we had debt maturities of
$518 million
, scheduled debt principal payments of
$164 million
and capital lease and other fixed payments of
$96 million
, each due during the next twelve months. Each of the expenditures is described further below.
At
September 30, 2018
, we held cash and cash equivalents of
$390 million
, and we had approximately
$1.6 billion
of borrowing capacity available under our revolving credit facility. We had approximately
$120 million
of cash and cash equivalents outside the United States at September 30, 2018. We currently believe we have the ability to repatriate cash and cash equivalents into the United States without paying or accruing U.S. taxes (subject to complying with applicable currency, repatriation or similar laws or limitations).
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" in Item 1A of Part I of our annual report on Form 10-K for the year ended
December 31, 2017
.
Capital Expenditures
We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand and improve our service offerings. 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, 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 2 infrastructure buildout requirements). Based on current circumstances, we estimate that our total capital expenditures for 2018 will be approximately $3.15 billion to $3.25 billion, inclusive of CAF Phase 2 related capital expenditures and integration capital.
Our capital expenditures continue to be focused on keeping our network operating efficiently and supporting new service developments. For more information on our capital spending, see "Historical Information—Investing Activities" below and Item 1 of Part I of our annual report on Form 10-K for the year ended
December 31, 2017
.
Debt and Other Financing Arrangements
Subject to market conditions, we expect to continue to issue debt instruments from time to time in the future to refinance a substantial portion of our maturing debt, including issuing Qwest Corporation and Level 3 Financing, Inc. debt instruments to refinance their maturing debt to the extent we deem appropriate and 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. Also subject to market conditions, we expect from time to time to retire debt securities prior to their maturity.
Following the closing of our acquisition of Level 3 in late 2017, the rating agencies took action on the ratings of the debt in the table below. Generally, the agencies downgraded ratings of the CenturyLink, Inc. debt from previous levels. Additionally, Standard and Poor's and Moody's Investors Service, Inc. placed such ratings on negative outlook while Fitch Ratings placed them on stable outlook. As for the Level 3 debt, Moody's Investors Service, Inc. upgraded the unsecured debt and affirmed the rating of the secured debt, with all ratings placed on negative outlook. Standard and Poor's affirmed all previous Level 3 ratings with negative outlook, and Fitch Ratings affirmed all previous Level 3 ratings with stable outlook.
As of the date of this report, the credit ratings for the senior unsecured debt and senior secured debt of CenturyLink, Inc. and Level 3 Financing, Inc., as well as the senior unsecured debt of Qwest Corporation and Level 3 Parent, LLC were as follows:
|
|
|
|
|
|
|
|
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 Parent, LLC:
|
|
|
|
|
|
|
Unsecured
|
|
B1
|
|
B+
|
|
BB-
|
|
|
|
|
|
|
|
Level 3 Financing, Inc.
|
|
|
|
|
|
|
Unsecured
|
|
Ba3
|
|
BB
|
|
BB
|
Secured
|
|
Ba1
|
|
BBB-
|
|
BBB-
|
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" in Item 1A of Part I of our annual report on Form 10-K for the year ended
December 31, 2017
.
Cash Income Taxes
As of December 31, 2017, CenturyLink had approximately
$9.1 billion
of net operating loss carryforwards ("NOLs") from prior years, 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. Further, we accelerated a significant amount of tax deductions into 2017. The accelerated tax deductions resulted in a 2017 net operating loss for tax purposes, a portion of which was carried back to 2016, with the remainder available for carryforward. Prior to the Level 3 acquisition, the amounts of our cash flows dedicated to or required for the payment of federal taxes increased substantially in 2017. Assuming, as anticipated, that we can utilize all or most of our NOLs, we expect to significantly reduce our federal cash income taxes for the next several years. However, we cannot assure you that we will be able to use these NOL carryforwards fully. The amounts of our near-term future tax payments will depend upon many factors, including our future earnings and tax circumstances and the implementation of the recent federal tax reform.
We requested a $314 million refund of federal estimated income tax payments related to 2017 that was received in the second quarter of 2018. Additionally, due to the 2017 net operating loss carried back to 2016, we requested a cash refund of $392 million, which was received in the third quarter of 2018.
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
$0.54
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, paying our fixed commitments and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2018 at this rate of
$0.54
per share, our average total dividend paid each quarter would be approximately
$577 million
based on the number of our outstanding shares at
September 30, 2018
.
Revolving Facilities and Other Debt Instruments
To substantially fund our recent acquisition of Level 3, on June 19, 2017, one of our affiliates entered into a credit agreement (the "2017 CenturyLink Credit Agreement") providing for
$9.9 billion
in senior secured credit facilities, consisting of a new
$2.0 billion
revolving credit facility (which replaced our 2012 credit facility upon consummation of the Level 3 acquisition) and
$7.9 billion
of term loan facilities, of which approximately
$6.0 billion
were funded into escrow on such date, and
$1.9 billion
of which were funded upon the closing of the acquisition on November 1, 2017. On November 1, 2017, CenturyLink, Inc. also, among other things, (i) assumed all rights and obligations under the 2017 CenturyLink Credit Agreement, (ii) borrowed
$400 million
under the new $2.0 billion revolving credit facility and (iii) received
$6.0 billion
of Term Loan B loan proceeds from escrow. 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
. For additional information, see (i) Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report, (ii) our current report on Form 8-K filed with the SEC on June 20, 2017, including a copy of the 2017 CenturyLink Credit Agreement filed therewith, and (iii) our current report on Form 8-K filed with the SEC on November 1, 2017.
On November 1, 2017, we also amended our uncommitted revolving letter of credit facility to secure the facility and to permit us to draw up to
$225 million
of letters of credit thereunder. At September 30, 2018, we had
$129 million
of letters of credit outstanding under this facility.
For information on the terms and conditions of other debt instruments of ours and our subsidiaries, including financial and operating covenants, see Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report.
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, 2017
, the accounting unfunded status of our qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was
$2.1 billion
and
$3.4 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, 2017 and see Note 9—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 2018. The amount of required contributions to our qualified pension plan in
2019
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 made a voluntary contribution of $100 million to the trust for our qualified pension plan during the second quarter of 2018 and a $400 million voluntary contribution during the third quarter of 2018.
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, 2017, assets in the post-retirement trusts had been substantially depleted and had a fair value of
$23 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; however, we plan to continue to pay certain benefits through the trusts. Benefits not paid from the trusts are expected to be paid directly by us with available cash. As described further in Note 6—Employee Benefits to our consolidated financial statements in Item 8 of Part II of our most recent annual report on Form 10-K, aggregate benefits paid by us under these plans (net of participant contributions and direct subsidy receipts) were
$237 million
,
$129 million
and
$116 million
for the years ended December 31, 2017, 2016 and 2015, respectively, while the amounts paid from the trust were
$31 million
,
$145 million
and
$163 million
, respectively. For additional information on our expected future benefits payments for our post-retirement benefit plans, please see Note 9—Employee Benefits to our consolidated financial statements in Item 8 of Part II of our annual report Form 10-K for the year ended December 31, 2017.
For
2018
, our estimated annual long-term rates of return, net of administrative costs, are
6.5%
and
4.0%
for the pension plan trust assets and post-retirement plans trust assets, respectively, based on the assets currently held. However, actual returns could be substantially different.
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 report on Form 10-K for the year ended
December 31, 2017
.
Connect America Fund
As a result of accepting CAF Phase 2 support payments, we must meet certain specified infrastructure buildout requirements in 33 states over the next several years. In order to meet these specified infrastructure buildout requirements, we anticipate making substantial capital expenditures. See "Capital Expenditures" above.
For additional information on the FCC's CAF order and the USF program, see "Business—Regulation" in Item 1 of Part I of our annual report on Form 10-K for the year ended December 31, 2017 and see "Risk Factors—Risks Affecting our Liquidity and Capital Resources" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2017.
Historical Information
The following table summarizes our consolidated cash flow activities:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
2018
|
|
2017
|
|
|
(Dollars in millions)
|
Net cash provided by operating activities
|
$
|
5,036
|
|
|
2,700
|
|
|
2,336
|
|
Net cash used in investing activities
|
(2,196
|
)
|
|
(850
|
)
|
|
(1,346
|
)
|
Net cash (used in) provided by financing activities
|
(3,007
|
)
|
|
4,090
|
|
|
(7,097
|
)
|
Operating Activities
Net cash provided by operating activities increased by
$2.3 billion
for the
nine months ended
September 30, 2018
as compared to the
nine months ended
September 30, 2017
, primarily due to increased net income from the legacy CenturyLink business, cash flows from Level 3 and approximately $700 million of U.S. income tax refunds, partially offset by $500 million of contributions to our pension plans. 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 our investing activities increased by
$1.3 billion
for the
nine months ended
September 30, 2018
as compared to the
nine months ended
September 30, 2017
substantially due to the cash proceeds received from the sale of our data centers and colocation business which occurred in the
nine months ended
September 30, 2017
.
Financing Activities
During the
nine months ended
September 30, 2017
our financing activities resulted in net cash proceeds, but during the
nine months ended
September 30, 2018
our financing activities resulted in a net use of cash. The difference of
$7.1 billion
from comparing the two periods is substantially due to net proceeds received from issuance of long-term debt which occurred in the
nine months ended
September 30, 2017
and an increase in dividends paid. In addition, we redeemed approximately $1.3 billion of notes payable during the three months ended
September 30, 2018
. In the future, we may continue to retire debt, which could potentially result in the recognition of additional losses. These redemptions and repurchases were funded in part with borrowings under our revolving credit facility.
In connection with this amendment, the new lender provided approximately
$132 million
of Term Loan A loan proceeds, which CenturyLink used, together with available cash, to reduce its borrowings under the 2017 Revolving Credit Facility.
On January 21, 2018, a subsidiary of Embarq Corporation redeemed all
$13 million
of its
8.77%
Notes due 2019, which resulted in an immaterial loss.
See Note 6—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 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 12—Commitments, Contingencies and Other Items for additional information.
Market Risk
As of
September 30, 2018
, we were 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. As of
September 30, 2018
, we had no such instruments outstanding. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. As of
September 30, 2018
, we did not hold or issue derivative financial instruments for trading or speculative purposes.
As discussed in Note 6—Long-Term Debt and Credit Facilities, on June 19, 2017, and on November 1, 2017, we borrowed substantial sums under a credit agreement dated June 19, 2017 with various lending institutions to provide a substantial amount of the funding for the Level 3 acquisition. As further noted in Note 6—Long-Term Debt and Credit Facilities, loans under the term loan facilities and new revolving credit facility under the June 19, 2017 credit agreement bear interest at floating rates.
As of September 30, 2018, we had approximately
$13.3 billion
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
$133 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, the Canadian Dollar, the Japanese Yen, the Hong Kong Dollar and the Singapore Dollar, in each case as of
September 30, 2018
. Approximately
5%
of our consolidated revenues are denominated in these currencies, and our consolidated results of operations could be adversely impacted by volatility in exchange rates. Argentina is considered to be hyperinflationary as of
September 30, 2018
. However, the Company already accounts for Argentina in U.S. Dollars, its functional currency.
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
September 30, 2018
.
Off-Balance Sheet Arrangements
As of
September 30, 2018
, 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 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, 2017
, 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. 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.