Lumen Technologies, Inc. - Quarter Report: 2014 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-7784
![](https://www.sec.gov/Archives/edgar/data/0000018926/000001892614000019/copyofcenturylinklogoa01a01.jpg)
CENTURYLINK, INC.
(Exact name of registrant as specified in its charter)
Louisiana (State or other jurisdiction of incorporation or organization) | 72-0651161 (I.R.S. Employer Identification No.) |
100 CenturyLink Drive, Monroe, Louisiana (Address of principal executive offices) | 71203 (Zip Code) |
(318) 388-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
On October 31, 2014, there were 570,705,291 shares of common stock outstanding.
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TABLE OF CONTENTS
* All references to "Notes" in this quarterly report refer to these Notes to Consolidated Financial Statements. |
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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions except per share amounts and shares in thousands) | ||||||||||||
OPERATING REVENUES | $ | 4,514 | 4,515 | 13,593 | 13,553 | |||||||
OPERATING EXPENSES | ||||||||||||
Cost of services and products (exclusive of depreciation and amortization) | 1,975 | 1,918 | 5,872 | 5,587 | ||||||||
Selling, general and administrative | 823 | 1,047 | 2,497 | 2,679 | ||||||||
Depreciation and amortization | 1,097 | 1,135 | 3,297 | 3,375 | ||||||||
Impairment of goodwill | — | 1,100 | — | 1,100 | ||||||||
Total operating expenses | 3,895 | 5,200 | 11,666 | 12,741 | ||||||||
OPERATING INCOME (LOSS) | 619 | (685 | ) | 1,927 | 812 | |||||||
OTHER INCOME (EXPENSE) | ||||||||||||
Interest expense | (325 | ) | (329 | ) | (981 | ) | (970 | ) | ||||
Other income, net | 5 | 9 | 7 | 52 | ||||||||
Total other income (expense) | (320 | ) | (320 | ) | (974 | ) | (918 | ) | ||||
INCOME (LOSS) BEFORE INCOME TAX EXPENSE | 299 | (1,005 | ) | 953 | (106 | ) | ||||||
Income tax expense | 111 | 40 | 369 | 372 | ||||||||
NET INCOME (LOSS) | $ | 188 | (1,045 | ) | 584 | (478 | ) | |||||
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE | ||||||||||||
BASIC | $ | 0.33 | (1.76 | ) | 1.03 | (0.79 | ) | |||||
DILUTED | $ | 0.33 | (1.76 | ) | 1.02 | (0.79 | ) | |||||
DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.54 | 0.54 | 1.62 | 1.62 | |||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||
BASIC | 565,965 | 594,587 | 569,472 | 606,104 | ||||||||
DILUTED | 567,432 | 594,587 | 570,640 | 606,104 |
See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions) | ||||||||||||
NET INCOME (LOSS) | $ | 188 | (1,045 | ) | 584 | (478 | ) | |||||
OTHER COMPREHENSIVE (LOSS) INCOME: | ||||||||||||
Items related to employee benefit plans: | ||||||||||||
Change in net actuarial loss, net of $(2), $(8), $(6) and $(25) tax | 3 | 13 | 9 | 40 | ||||||||
Change in net prior service credit, net of $(2), $—, $(7) and $(1) tax | 3 | 1 | 11 | 2 | ||||||||
Foreign currency translation adjustment and other, net of $—, $—, $— and $— tax | (16 | ) | 13 | (7 | ) | (1 | ) | |||||
Other comprehensive (loss) income | (10 | ) | 27 | 13 | 41 | |||||||
COMPREHENSIVE INCOME (LOSS) | $ | 178 | (1,018 | ) | 597 | (437 | ) |
See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2014 | December 31, 2013 | |||||
(Dollars in millions and shares in thousands) | ||||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 734 | 168 | |||
Accounts receivable, less allowance of $155 and $155 | 1,978 | 1,977 | ||||
Deferred income taxes, net | 715 | 1,165 | ||||
Other | 591 | 597 | ||||
Total current assets | 4,018 | 3,907 | ||||
NET PROPERTY, PLANT AND EQUIPMENT | ||||||
Property, plant and equipment | 35,970 | 34,307 | ||||
Accumulated depreciation | (17,647 | ) | (15,661 | ) | ||
Net property, plant and equipment | 18,323 | 18,646 | ||||
GOODWILL AND OTHER ASSETS | ||||||
Goodwill | 20,664 | 20,674 | ||||
Customer relationships, less accumulated amortization of $4,430 and $3,641 | 5,146 | 5,935 | ||||
Other intangible assets, less accumulated amortization of $1,632 and $1,401 | 1,664 | 1,802 | ||||
Other | 831 | 823 | ||||
Total goodwill and other assets | 28,305 | 29,234 | ||||
TOTAL ASSETS | $ | 50,646 | 51,787 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Current maturities of long-term debt | $ | 1,169 | 785 | |||
Accounts payable | 1,069 | 1,111 | ||||
Accrued expenses and other liabilities | ||||||
Salaries and benefits | 699 | 650 | ||||
Income and other taxes | 372 | 339 | ||||
Interest | 330 | 273 | ||||
Other | 224 | 514 | ||||
Advance billings and customer deposits | 714 | 737 | ||||
Total current liabilities | 4,577 | 4,409 | ||||
LONG-TERM DEBT | 19,982 | 20,181 | ||||
DEFERRED CREDITS AND OTHER LIABILITIES | ||||||
Deferred income taxes, net | 4,629 | 4,753 | ||||
Benefit plan obligations, net | 3,761 | 4,049 | ||||
Other | 1,252 | 1,204 | ||||
Total deferred credits and other liabilities | 9,642 | 10,006 | ||||
COMMITMENTS AND CONTINGENCIES (Note 8) | ||||||
STOCKHOLDERS' EQUITY | ||||||
Preferred stock—non-redeemable, $25.00 par value, authorized 2,000 shares, issued and outstanding 7 and 7 shares | — | — | ||||
Common stock, $1.00 par value, authorized 1,600,000 and 1,600,000 shares, issued and outstanding 570,678 and 583,637 shares | 571 | 584 | ||||
Additional paid-in capital | 16,532 | 17,343 | ||||
Accumulated other comprehensive loss | (789 | ) | (802 | ) | ||
Retained earnings | 131 | 66 | ||||
Total stockholders' equity | 16,445 | 17,191 | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 50,646 | 51,787 |
See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, | ||||||
2014 | 2013 | |||||
(Dollars in millions) | ||||||
OPERATING ACTIVITIES | ||||||
Net income (loss) | $ | 584 | (478 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 3,297 | 3,375 | ||||
Impairment of goodwill | — | 1,100 | ||||
Impairment of assets | 32 | — | ||||
Deferred income taxes | 301 | 349 | ||||
Provision for uncollectible accounts | 110 | 111 | ||||
Gain on sale of intangible assets | — | (32 | ) | |||
Net long-term debt premium amortization | (30 | ) | (45 | ) | ||
Changes in current assets and current liabilities: | ||||||
Accounts receivable | (111 | ) | (105 | ) | ||
Accounts payable | (21 | ) | — | |||
Accrued income and other taxes | 38 | 30 | ||||
Other current assets and liabilities, net | (130 | ) | 303 | |||
Retirement benefits | (255 | ) | (288 | ) | ||
Changes in other noncurrent assets and liabilities, net | 66 | 61 | ||||
Other, net | 56 | 27 | ||||
Net cash provided by operating activities | 3,937 | 4,408 | ||||
INVESTING ACTIVITIES | ||||||
Payments for property, plant and equipment and capitalized software | (2,113 | ) | (2,211 | ) | ||
Proceeds from sale of intangible assets or property | — | 75 | ||||
Other, net | — | 19 | ||||
Net cash used in investing activities | (2,113 | ) | (2,117 | ) | ||
FINANCING ACTIVITIES | ||||||
Net proceeds from issuance of long-term debt | 483 | 1,740 | ||||
Payments of long-term debt | (162 | ) | (1,169 | ) | ||
Net payments on credit facility | (140 | ) | (620 | ) | ||
Dividends paid | (924 | ) | (986 | ) | ||
Net proceeds from issuance of common stock | 45 | 54 | ||||
Repurchase of common stock | (558 | ) | (1,252 | ) | ||
Other, net | (2 | ) | (3 | ) | ||
Net cash used in financing activities | (1,258 | ) | (2,236 | ) | ||
Net increase in cash and cash equivalents | 566 | 55 | ||||
Cash and cash equivalents at beginning of period | 168 | 211 | ||||
Cash and cash equivalents at end of period | $ | 734 | 266 | |||
Supplemental cash flow information: | ||||||
Income taxes (paid), net | $ | (21 | ) | (45 | ) | |
Interest (paid) (net of capitalized interest of $34 and $30) | $ | (934 | ) | (915 | ) |
See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended September 30, | ||||||
2014 | 2013 | |||||
(Dollars in millions) | ||||||
COMMON STOCK | ||||||
Balance at beginning of period | $ | 584 | 626 | |||
Issuance of common stock through dividend reinvestment, incentive and benefit plans | 4 | 2 | ||||
Repurchase of common stock | (17 | ) | (35 | ) | ||
Balance at end of period | 571 | 593 | ||||
ADDITIONAL PAID-IN CAPITAL | ||||||
Balance at beginning of period | 17,343 | 19,079 | ||||
Issuance of common stock through dividend reinvestment, incentive and benefit plans | 43 | 50 | ||||
Repurchase of common stock | (497 | ) | (1,219 | ) | ||
Shares withheld to satisfy tax withholdings | (15 | ) | (16 | ) | ||
Share-based compensation and other, net | 63 | 60 | ||||
Dividends declared | (405 | ) | — | |||
Balance at end of period | 16,532 | 17,954 | ||||
ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||
Balance at beginning of period | (802 | ) | (1,701 | ) | ||
Other comprehensive income | 13 | 41 | ||||
Balance at end of period | (789 | ) | (1,660 | ) | ||
RETAINED EARNINGS | ||||||
Balance at beginning of period | 66 | 1,285 | ||||
Net income (loss) | 584 | (478 | ) | |||
Dividends declared | (519 | ) | (980 | ) | ||
Balance at end of period | 131 | (173 | ) | |||
TOTAL STOCKHOLDERS' EQUITY | $ | 16,445 | 16,714 |
See accompanying notes to consolidated financial statements.
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CENTURYLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries.
(1) Basis of Presentation
General
We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local and long-distance, broadband, private line (including special access), Multi-Protocol Label Switching ("MPLS"), data integration, managed hosting (including cloud hosting), colocation, Ethernet, network access, public access, wireless, video and other ancillary services.
Our consolidated balance sheet as of December 31, 2013, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations for the first nine months of the year are not necessarily indicative of the consolidated results of operations that might be expected for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise control. All intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.
In the second quarter of 2014, we recorded an impairment charge of $16 million in connection with negotiating a sale-leaseback transaction involving an office building. This impairment charge is included in selling, general and administrative expense in our consolidated statements of operations for the nine months ended September 30, 2014. In October 2014, we entered into an agreement to sell the above noted office building and no additional impairment charge is expected to be recorded upon completion of the sale, which is expected to close in the fourth quarter of 2014.
To simplify the overall presentation of our consolidated financial statements, we report immaterial amounts attributable to noncontrolling interests in certain of our subsidiaries as follows: (i) income attributable to noncontrolling interests in other income (expense), (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other, net financing activities.
We pay dividends out of retained earnings to the extent we have retained earnings on the date the dividend is declared. If the dividend is in excess of our retained earnings on the declaration date, then the excess is drawn from our additional paid-in capital.
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenues and our segment expense reporting. See Note 7—Segment Information for additional information. These changes had no impact on total revenues, total operating expenses or net income for any period.
Change in Estimates
As a result of our annual reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment, effective January 2014, we changed the estimates of the remaining economic lives of certain switch and circuit network equipment. These changes resulted in a net increase in depreciation expense of approximately $19 million and $58 million for the three and nine months ended September 30, 2014, respectively, and are expected to result in a net increase in depreciation expense of approximately $78 million for the year ending December 31, 2014. This net increase in depreciation expense, net of tax, reduced consolidated net income by approximately $12 million, or $0.02 per basic and diluted common share, and $36 million, or $0.06 per basic and diluted common share, for the three and nine months ended September 30, 2014, respectively, and is expected to reduce consolidated net income by approximately $48 million, or $0.08 per basic and diluted common share, for the year ending December 31, 2014.
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During the fourth quarter 2013, we changed the estimates of the remaining economic lives of certain intangible assets, specifically, the Savvis trade name, which is no longer being utilized and certain Savvis cloud software, which has been replaced by cloud software acquired through our more recent acquisitions. These changes resulted in a net increase in amortization expense of approximately $23 million for the nine months ended September 30, 2014. This net increase in amortization expense, net of tax, reduced consolidated net income by approximately $14 million, or $0.02 per basic and diluted common share for the nine months ended September 30, 2014. As of September 30, 2014, the Savvis trade name and the Savvis cloud software have been fully amortized.
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09” or “new standard”). The new standard is effective for annual and interim periods beginning January 1, 2017, and early adoption is prohibited. ASU 2014-09 may be adopted by applying the provisions of the new standard on a retrospective basis to the periods included in the financial statements or on a modified retrospective basis which would result in the recognition of a cumulative effect of adopting ASU 2014-09 in the first quarter of 2017. We have not yet decided which implementation method we will adopt.
The new standard replaces virtually all existing generally accepted accounting principles (“GAAP”) on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. We currently do not defer any contract acquisition costs and defer contract fulfillment costs only up to the extent of any revenue deferred.
We are studying the new standard and are in the early stages of assessing the impact the new standard will have on us and our consolidated financial statements. We cannot, however, provide any estimate of the impact of adopting the new standard at this time.
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(2) Long-Term Debt and Credit Facilities
As of the dates indicated below, our long-term debt, including unamortized discounts and premiums, was as follows:
______________________________________________________________________
Interest Rates | Maturities | September 30, 2014 | December 31, 2013 | |||||||
(Dollars in millions) | ||||||||||
CenturyLink, Inc. | ||||||||||
Senior notes | 5.000% - 7.650% | 2015 - 2042 | $ | 7,825 | 7,825 | |||||
Credit facility (1) | 2.160% - 4.250% | 2017 | 585 | 725 | ||||||
Term loan | 2.410% | 2019 | 385 | 402 | ||||||
Subsidiaries | ||||||||||
Qwest Corporation | ||||||||||
Senior notes | 6.125% - 8.375% | 2014 - 2054 | 7,911 | 7,411 | ||||||
Qwest Capital Funding, Inc. | ||||||||||
Senior notes | 6.500% - 7.750% | 2018 - 2031 | 981 | 981 | ||||||
Embarq Corporation | ||||||||||
Senior notes | 7.082% - 7.995% | 2016 - 2036 | 2,669 | 2,669 | ||||||
First mortgage bonds | 7.125% - 8.770% | 2017 - 2025 | 232 | 262 | ||||||
Other | 9.000% | 2019 | 150 | 150 | ||||||
Capital lease and other obligations | Various | Various | 521 | 619 | ||||||
Unamortized discounts, net | (108 | ) | (78 | ) | ||||||
Total long-term debt | 21,151 | 20,966 | ||||||||
Less current maturities | (1,169 | ) | (785 | ) | ||||||
Long-term debt, excluding current maturities | $ | 19,982 | 20,181 |
(1) | The outstanding amounts of our credit facility ("Credit Facility") borrowings at September 30, 2014 and December 31, 2013 were $585 million and $725 million, respectively, with weighted average interest rates of 2.160% and 2.176%, respectively. These amounts change on a regular basis. |
New Issuances
On September 29, 2014, QC issued $500 million aggregate principal amount of 6.875% Notes due 2054, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $483 million. The Notes are senior unsecured obligations and may be redeemed, in whole or in part, on or after October 1, 2019, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
Repayments
On April 1, 2014, a subsidiary of Embarq Corporation ("Embarq") paid at maturity the $30 million principal amount of its 7.46% first mortgage bonds.
Covenants
As of September 30, 2014, we believe we were in compliance with the provisions and covenants contained in our Credit Facility and other material debt agreements.
Subsequent Event
On October 1, 2014, QC paid at maturity the $600 million principal amount of its 7.50% Notes.
(3) Severance and Leased Real Estate
Periodically, we have reductions in our workforce and have accrued liabilities for the related severance costs. These workforce reductions resulted primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives and reduced workload demands due to the loss of customers purchasing certain legacy services.
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We report severance liabilities within accrued expenses and other liabilities-salaries and benefits in our consolidated balance sheets and report severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations. As noted in Note 7—Segment Information, we do not allocate these severance expenses to our segments.
We have recognized liabilities to reflect our estimates of the fair values of the existing lease obligations for real estate which we have ceased using, net of estimated sublease rentals. Our fair value estimates were determined using discounted cash flow methods. We recognize expense to reflect accretion of the discounted liabilities and periodically we adjust the expense when our actual subleasing experience differs from our initial estimates. We report the current portion of liabilities for ceased-use real estate leases in accrued expenses and other liabilities-other and report the noncurrent portion in deferred credits and other liabilities in our consolidated balance sheets. We report the related expenses in selling, general and administrative expenses in our consolidated statements of operations. At September 30, 2014, the current and noncurrent portions of our leased real estate accrual were $15 million and $85 million, respectively. The remaining lease terms range from 0.3 to 11.2 years, with a weighted average of 8.5 years.
Changes in our accrued liabilities for severance expenses and leased real estate during the first nine months of 2014 were as follows:
Severance | Real Estate | |||||
(Dollars in millions) | ||||||
Balance at December 31, 2013 | $ | 17 | 113 | |||
Accrued to expense | 65 | 1 | ||||
Payments, net | (63 | ) | (12 | ) | ||
Reversals and adjustments | — | (2 | ) | |||
Balance at September 30, 2014 | $ | 19 | 100 |
(4) Employee Benefits
Net periodic (income) expense for our qualified and non-qualified pension plans included the following components:
Pension Plans | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions) | ||||||||||||
Service cost | $ | 19 | 22 | 58 | 70 | |||||||
Interest cost | 151 | 137 | 453 | 407 | ||||||||
Expected return on plan assets | (223 | ) | (224 | ) | (669 | ) | (672 | ) | ||||
Recognition of prior service cost | 1 | 1 | 5 | 4 | ||||||||
Recognition of actuarial loss | 5 | 20 | 15 | 61 | ||||||||
Net periodic pension benefit income | $ | (47 | ) | (44 | ) | (138 | ) | (130 | ) |
Net periodic expense (income) for our post-retirement benefit plans included the following components:
Post-Retirement Benefit Plans | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions) | ||||||||||||
Service cost | $ | 5 | 6 | 16 | 18 | |||||||
Interest cost | 40 | 35 | 119 | 105 | ||||||||
Expected return on plan assets | (8 | ) | (10 | ) | (24 | ) | (30 | ) | ||||
Recognition of prior service cost | 4 | — | 13 | — | ||||||||
Recognition of actuarial loss | — | 1 | — | 3 | ||||||||
Net periodic post-retirement benefit expense | $ | 41 | 32 | 124 | 96 |
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We report net periodic benefit (income) expense for our qualified pension, non-qualified pension and post-retirement benefit plans in cost of services and products and selling, general and administrative expenses on our consolidated statements of operations.
(5) Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2014 and 2013 were calculated as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions, except per share amounts, shares in thousands) | ||||||||||||
Income (Loss) (Numerator): | ||||||||||||
Net income (loss) | $ | 188 | (1,045 | ) | 584 | (478 | ) | |||||
Earnings applicable to non-vested restricted stock | — | — | — | — | ||||||||
Net income (loss) applicable to common stock for computing basic earnings (loss) per common share | 188 | (1,045 | ) | 584 | (478 | ) | ||||||
Net income (loss) as adjusted for purposes of computing diluted earnings (loss) per common share | $ | 188 | (1,045 | ) | 584 | (478 | ) | |||||
Shares (Denominator): | ||||||||||||
Weighted average number of shares: | ||||||||||||
Outstanding during period | 570,545 | 598,350 | 573,661 | 609,542 | ||||||||
Non-vested restricted stock | (4,580 | ) | (3,763 | ) | (4,189 | ) | (3,438 | ) | ||||
Weighted average shares outstanding for computing basic earnings (loss) per common share | 565,965 | 594,587 | 569,472 | 606,104 | ||||||||
Incremental common shares attributable to dilutive securities: | ||||||||||||
Shares issuable under convertible securities | 10 | — | 10 | — | ||||||||
Shares issuable under incentive compensation plans | 1,457 | — | 1,158 | — | ||||||||
Number of shares as adjusted for purposes of computing diluted earnings (loss) per common share | 567,432 | 594,587 | 570,640 | 606,104 | ||||||||
Basic earnings (loss) per common share | $ | 0.33 | (1.76 | ) | 1.03 | (0.79 | ) | |||||
Diluted earnings (loss) per common share | $ | 0.33 | (1.76 | ) | 1.02 | (0.79 | ) |
Our calculation of diluted earnings (loss) per common share excludes shares of common stock that are issuable upon exercise of stock options when the exercise price is greater than the average market price of our common stock during the periods reflected in the table above. Such potentially issuable shares averaged 2.1 million and 2.7 million for the three months ended September 30, 2014 and 2013, respectively and 2.5 million for both the nine months ended September 30, 2014 and 2013. For the three and nine months ended September 30, 2013, due to the net loss position, we excluded from the calculation of diluted loss per share 1.16 million and 1.37 million shares, respectively, which were potentially issuable under incentive compensation plans or convertible securities, as their effect, if included, would have been anti-dilutive.
(6) Fair Value Disclosure
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt, excluding capital lease obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB.
We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.
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The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
Input Level | Description of Input | |
Level 1 | Observable inputs such as quoted market prices in active markets. | |
Level 2 | Inputs other than quoted prices in active markets that are either directly or indirectly observable. | |
Level 3 | Unobservable inputs in which little or no market data exists. |
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values as of the dates indicated below:
September 30, 2014 | December 31, 2013 | |||||||||||||
Input Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||
(Dollars in millions) | ||||||||||||||
Liabilities—Long-term debt, excluding capital lease and other obligations | 2 | $ | 20,630 | 21,673 | 20,347 | 20,413 |
(7) Segment Information
Segment Data
We currently report the following four segments in our consolidated financial statements: consumer, business, wholesale and hosting. Each of the segments is described further below:
• | Consumer. Consists generally of providing strategic and legacy products and services to residential consumers. Our strategic products and services offered to these customers include our broadband, wireless and video services, including our PrismTM TV services. Our legacy services offered to these customers include local and long-distance services. |
• | Business. Consists generally of providing strategic and legacy products and services to commercial, enterprise, global and governmental customers. Our strategic products and services offered to these customers include our private line, broadband, Ethernet, MPLS, data integration, Voice over Internet Protocol ("VoIP") and network management services. Our legacy services offered to these customers include local and long-distance services. |
• | Wholesale. Consists generally of providing strategic and legacy products and services to other communications providers. Our strategic products and services offered to these customers are mainly private line (including special access), dedicated internet access, digital subscriber line ("DSL") and MPLS. Our legacy services offered to these customers include resale of our local access services, the sale of unbundled network elements ("UNEs") which allow our wholesale customers the use of our network or a combination of our network and their own networks to provide voice and data services to their customers, long-distance and switched access services and other services, including billing and collection services, pole and floor space rentals, public access services and database services. |
• | Hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to commercial, enterprise, global, governmental and wholesale customers. |
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Our segment results are summarized below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions) | ||||||||||||
Total segment revenues | $ | 4,264 | 4,267 | 12,836 | 12,799 | |||||||
Total segment expenses | 2,161 | 2,089 | 6,378 | 6,056 | ||||||||
Total segment income | $ | 2,103 | 2,178 | 6,458 | 6,743 | |||||||
Total margin percentage | 49 | % | 51 | % | 50 | % | 53 | % | ||||
Consumer: | ||||||||||||
Revenues | $ | 1,491 | 1,503 | 4,500 | 4,508 | |||||||
Expenses | 611 | 605 | 1,793 | 1,728 | ||||||||
Income | $ | 880 | 898 | 2,707 | 2,780 | |||||||
Margin percentage | 59 | % | 60 | % | 60 | % | 62 | % | ||||
Business: | ||||||||||||
Revenues | $ | 1,569 | 1,544 | 4,692 | 4,574 | |||||||
Expenses | 997 | 932 | 2,935 | 2,701 | ||||||||
Income | $ | 572 | 612 | 1,757 | 1,873 | |||||||
Margin percentage | 36 | % | 40 | % | 37 | % | 41 | % | ||||
Wholesale: | ||||||||||||
Revenues | $ | 843 | 878 | 2,571 | 2,694 | |||||||
Expenses | 285 | 293 | 844 | 868 | ||||||||
Income | $ | 558 | 585 | 1,727 | 1,826 | |||||||
Margin percentage | 66 | % | 67 | % | 67 | % | 68 | % | ||||
Hosting: | ||||||||||||
Revenues | $ | 361 | 342 | 1,073 | 1,023 | |||||||
Expenses | 268 | 259 | 806 | 759 | ||||||||
Income | $ | 93 | 83 | 267 | 264 | |||||||
Margin percentage | 26 | % | 24 | % | 25 | % | 26 | % |
Effective November 1, 2014, we implemented a new organizational structure designed to strengthen our ability to attain our operational, strategic and financial goals. The change in our organizational structure will likely result in some modifications of our segment reporting, which we expect to finalize in the fourth quarter of 2014 and report in our consolidated financial statements for the year ending December 31, 2014.
Recent Changes in Segment Reporting
During the first quarter of 2014, we adopted several changes with respect to the assignment of certain expenses to our segments. We have restated our previously reported segment results for the three and nine months ended September 30, 2013, to conform to the current presentation. The nature of the most significant changes and the related effect on segment expenses for the three and nine months ended September 30, 2013, are as follows:
• | The method for allocating certain shared costs of consumer sales and care, including bad debt expense and credit card fees, was revised, which resulted in an increase in consumer segment expenses of $25 million and $67 million with a corresponding decrease in business segment expenses for the three and nine months ended September 30, 2013, respectively; and |
• | Hosting segment expenses have been conformed to the reporting of our other segments’ expenses. Specifically, the progress of our integration efforts and centralization of certain administrative functions enabled us to discontinue including certain finance, information technology, legal and human resources expenses in the hosting segment, which resulted in a decrease of $16 million and $55 million in hosting segment expenses for the three and nine months ended September 30, 2013, respectively. |
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Product and Service Categories
We categorize our products, services and revenues among the following four categories:
• | Strategic services, which include primarily broadband, private line (including special access which we market to wholesale and business customers), MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video service), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including resold satellite and our facilities-based video services), VoIP and Verizon Wireless services; |
• | Legacy services, which include primarily local, long-distance, switched access, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications) and traditional wide area network ("WAN") services (which allow a local communications network to link to networks in remote locations); |
• | Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers; and |
• | Other revenues, which consist primarily of Universal Service Fund ("USF") revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues. |
Our operating revenues for our products and services consisted of the following categories:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions) | ||||||||||||
Strategic services | $ | 2,310 | 2,212 | 6,889 | 6,562 | |||||||
Legacy services | 1,769 | 1,892 | 5,401 | 5,767 | ||||||||
Data integration | 185 | 163 | 546 | 470 | ||||||||
Other | 250 | 248 | 757 | 754 | ||||||||
Total operating revenues | $ | 4,514 | 4,515 | 13,593 | 13,553 |
During 2013, operating revenues attributable to portions of certain bundled services were revised from legacy services to strategic services. Specifically, the revision resulted in a reduction of legacy services revenues of $32 million and $96 million and a corresponding increase in strategic services revenues for the three and nine months ended September 30, 2013, respectively. The revision was in response to over-allocating a percentage of the discounts to broadband services revenues and under-allocating a percentage of the discounts to local and long-distance services revenues under bundled services arrangements, which resulted in strategic services revenues being understated and legacy services revenues being overstated.
During 2013, operating revenues attributable to certain Competitive Local Exchange Carrier ("CLEC") retail services were revised from strategic services to legacy services. Specifically, the revision resulted in a reduction of strategic services revenues of $10 million and $29 million and a corresponding increase in legacy services revenues for the three and nine months ended September 30, 2013, respectively. The revision was in response to recording certain legacy services revenues generated through CLEC services arrangements as strategic services revenues, which resulted in strategic services revenues being overstated and legacy services revenues being understated.
Other operating revenues include revenues from universal service funds, which allow us to recover a portion of our costs under federal and state cost recovery mechanisms, and certain surcharges to our customers, including billings for our required contributions to several USF programs. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other properties. Because we centrally manage the activities that generate these other operating revenues, we do not allocate these revenues to any of our four segments presented above.
We recognize revenues 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 reflects the related expense for the amounts we remit to the government agencies. The total amount of such surcharges that we included in revenues aggregated approximately $128 million and $119 million for the three months ended September 30, 2014 and 2013, respectively, and approximately $395 million and $368 million for the nine months ended September 30, 2014 and 2013, respectively. Those USF surcharges, where we record revenue, are included in the "other" operating revenues and transaction tax surcharges are included in "legacy services" revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to include in our bills to customers, for which we do not record any revenue or expense because we only act as a pass-through agent.
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Allocations of Revenues and Expenses
Our segment revenues include all revenues from our strategic, legacy and data integration operations as described in more detail above. We assign each of our customers to a single segment and report all of the revenues we derive from that customer to that segment, with the exception of hosting revenue generated from business and wholesale customers, which is currently reported as hosting segment revenues. We report our segment expenses for our four segments as follows:
• | Direct expenses, which primarily are specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities; and |
• | Allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses. |
We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the chief operating decision maker ("CODM") by segment. Similarly, we do not assign to our segments severance expenses, restructuring expenses and certain centrally managed administrative functions (such as finance, information technology, legal and human resources). Interest expense is also excluded from segment results because we manage our financing on a total company basis and have not allocated assets or debt to specific segments. Similarly, we exclude other income (expense) from our segment results.
The following table reconciles segment income to net income:
`
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions) | ||||||||||||
Total segment income | $ | 2,103 | 2,178 | 6,458 | 6,743 | |||||||
Other operating revenues | 250 | 248 | 757 | 754 | ||||||||
Depreciation and amortization | (1,097 | ) | (1,135 | ) | (3,297 | ) | (3,375 | ) | ||||
Impairment of goodwill | — | (1,100 | ) | — | (1,100 | ) | ||||||
Other unassigned operating expenses | (637 | ) | (876 | ) | (1,991 | ) | (2,210 | ) | ||||
Other income (expense) | (320 | ) | (320 | ) | (974 | ) | (918 | ) | ||||
Income tax expense | (111 | ) | (40 | ) | (369 | ) | (372 | ) | ||||
Net income (loss) | $ | 188 | (1,045 | ) | 584 | (478 | ) |
We do not have any single customer that provides more than 10% of our total consolidated operating revenues. Substantially all of our consolidated revenues come from customers located in the United States.
(8) Commitments and Contingencies
We are vigorously defending against all of the matters described below. As a matter of course, we are prepared both to litigate the matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities. 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. We have established accrued liabilities for the matters described below where losses are deemed probable and reasonably estimable.
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Pending Matters
In William Douglas Fulghum, et al. v. Embarq Corporation, et al., filed on December 28, 2007 in the United States District Court for the District of Kansas, a group of retirees filed a putative class action lawsuit challenging the decision to make certain modifications in retiree benefits programs relating to life insurance, medical insurance and prescription drug benefits, generally effective January 1, 2006 and January 1, 2008 (which, at the time of the modifications, was expected to reduce estimated future expenses for the subject benefits by more than $300 million). Defendants include Embarq, certain of its benefit plans, its Employee Benefits Committee and the individual plan administrator of certain of its benefits plans. Additional defendants include Sprint Nextel and certain of its benefit plans. The Court certified a class on certain of plaintiffs' claims, but rejected class certification as to other claims. On October 14, 2011, the Fulghum lawyers filed a new, related lawsuit, Abbott et al. v. Sprint Nextel et al. In Abbott, approximately 1,500 plaintiffs allege breach of fiduciary duty in connection with the changes in retiree benefits that also are at issue in the Fulghum case. The Abbott plaintiffs are all members of the class that was certified in Fulghum on claims for allegedly vested benefits (Counts I and III), and the Abbott claims are similar to the Fulghum breach of fiduciary duty claim (Count II), on which the Fulghum court denied class certification. The Court has stayed proceedings in Abbott indefinitely, except for limited discovery and motion practice as to approximately 80 of the plaintiffs. On February 14, 2013, the Fulghum court dismissed the majority of the plaintiffs' claims in that case. On July 16, 2013, the Fulghum court granted plaintiffs' request to seek interlocutory review by the United States Court of Appeals for the Tenth Circuit. Embarq and the other defendants are defending the appeal, continue to vigorously contest any remaining claims in Fulghum and seek to have the claims in the Abbott case dismissed on similar grounds. We have not accrued a liability for these matters because we believe it is premature (i) to determine whether an accrual is warranted and (ii) if so, to determine a reasonable estimate of probable liability.
In December 2009, subsidiaries of CenturyLink filed two lawsuits against subsidiaries of Sprint Nextel to recover terminating access charges for VoIP traffic owed under various interconnection agreements and tariffs which originally approximated $34 million in the aggregate. In connection with the first lawsuit, a federal court in Virginia issued a ruling in our favor, which resulted in Sprint paying us approximately $24 million. The other lawsuit is pending in federal court in Louisiana. In that case, in early 2011 the Court dismissed certain of CenturyLink's claims, referred other claims to the Federal Communications Commission ("FCC"), and stayed the litigation. In April 2012, Sprint Nextel filed a petition with the FCC, seeking a declaratory ruling that CenturyLink's access charges do not apply to VoIP originated calls, and earlier this year, CenturyLink filed a complaint with the Missouri Public Service Commission to collect the portion of the remaining unpaid charges arising in that state. We have not deferred any revenue recognition related to these matters.
On July 16, 2013, Comcast MO Group, Inc. ("Comcast") filed a lawsuit in Colorado state court against Qwest Communications International, Inc. ("Qwest"). Comcast alleges Qwest breached the parties' 1998 tax sharing agreement ("TSA") when it refused to partially indemnify Comcast for a tax liability settlement Comcast reached with the Commonwealth of Massachusetts in a dispute to which we were not a party. Comcast seeks approximately $80 million in damages, excluding interest. Qwest and Comcast are parties to the TSA in their capacities as successors to the TSA's original parties, U S WEST, Inc., a telecommunications company, and MediaOne Group, Inc., a cable television company, respectively. In October 2014, the state court granted summary judgment in Qwest's favor. An appeal is possible. We have not accrued a liability for this matter because we do not believe that liability is probable.
On September 13, 2006, Cargill Financial Markets, Plc ("Cargill") and Citibank, N.A. ("Citibank") filed a lawsuit in the District Court of Amsterdam, the Netherlands, against Qwest, Koninklijke KPN N.V., KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest N.V. ("KPNQwest"), some of whom were formerly affiliated with Qwest. The lawsuit alleges that defendants misrepresented KPNQwest's financial and business condition in connection with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately €219 million (or approximately $278 million based on the exchange rate on September 30, 2014). The value of this claim will be reduced to the degree plaintiffs receive recovery from a distribution of assets from the bankruptcy estate of KPNQwest. The extent of such expected recovery is not yet known. On April 25, 2012, the court issued its judgment denying the claims asserted by Cargill and Citibank in their lawsuit. Cargill and Citibank are appealing that decision. We do not believe that liability is probable in this matter.
The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate Qwest to indemnify its former directors, officers or employees with respect to the Cargill matter described above, and Qwest has been advancing legal fees and costs to certain former directors, officers or employees in connection with that matter.
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Several putative class actions relating to the installation of fiber optic cable in certain rights-of-way were filed against Qwest on behalf of landowners on various dates and in courts located in 34 states in which Qwest has such cable (Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, and Wisconsin.) For the most part, the complaints challenge our right to install our fiber optic cable in railroad rights-of-way. The complaints allege that the railroads own the right-of-way as an easement that did not include the right to permit us to install our cable in the right-of-way without the plaintiffs' consent. In general, the complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. After previous attempts to enter into a single nationwide settlement in a single court proved unsuccessful, the parties proceeded to seek court approval of settlements on a state-by-state basis. To date, the parties have received final approval of such settlements in 30 states. The settlement administration process, including claim submission and evaluation, is continuing in relation to a number of these settlements. The parties have not yet received final approval in one state (Texas), and have not yet received either preliminary or final approval in two states where an action is pending (Massachusetts and New Mexico) and one state where an action was at one time, but is not currently, pending (Arizona). We have accrued an amount that we believe is probable for resolving these matters; however, the amount is not material to our consolidated financial statements.
CenturyLink and certain of its affiliates are defendants in one consolidated securities and four shareholder derivative actions. The actions are pending in federal court in the Western District of Louisiana. Plaintiffs in these actions have variously alleged, among other things, that CenturyLink and certain of its current and former officers and directors violated federal securities laws and/or breached fiduciary duties owed to the Company and its shareholders. Plaintiffs' complaints focus on alleged material misstatements or omissions concerning CenturyLink's financial condition and changes in CenturyLink's capital allocation strategy in early 2013. These matters are in preliminary phases and the Company intends to defend against the filed actions vigorously. We have not accrued a liability for these matters as it is premature (i) to determine whether an accrual is warranted and (ii) if so, to determine a reasonable estimate of probable liability.
Other Proceedings and Disputes
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies, and miscellaneous third party tort actions. 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 our financial position, results of operations or cash flows.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities. 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 both to litigate the matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are aware of disputes and litigation within the industry, including litigation against us, regarding the proper charges to be applied between interexchange and local exchange carriers for certain calls between mobile and wireline devices that are routed through an interexchange carrier. Some carriers are refusing to pay these access charges and some are seeking refunds of past charges paid. As both an interexchange carrier and a local exchange carrier, we both pay and assess substantial amounts of the charges in question. The outcome of these disputes and litigation are currently not predictable. If we are required to stop assessing these charges or to pay refunds of any such charges, our financial results could be negatively affected.
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(9) Other Financial Information
Other Current Assets
The following table presents details of other current assets in our consolidated balance sheets as of the dates indicated below:
September 30, 2014 | December 31, 2013 | |||||
(Dollars in millions) | ||||||
Prepaid expenses | $ | 260 | 266 | |||
Materials, supplies and inventory | 134 | 167 | ||||
Assets held for sale | 54 | 26 | ||||
Deferred activation and installation charges | 105 | 94 | ||||
Other | 38 | 44 | ||||
Total other current assets | $ | 591 | 597 |
Assets held for sale includes several properties that we expect to sell within the next twelve months. During the second quarter of 2014, we began discussions to sell our remaining 700 MHz A-Block wireless spectrum licenses, which we purchased in 2008 but never placed into service. As a result of changes in market conditions and prevailing spectrum prices, we recorded a second quarter 2014 impairment charge of $14 million, which is included in other income, net in our consolidated statements of operations for the nine months ended September 30, 2014. During the second quarter of 2014, we reclassified the remaining $39 million of wireless spectrum assets from other intangible assets to assets held for sale, as we anticipate completing the sale of such assets within one year. We evaluated spectrum prices using market conditions to determine a Level 3 estimate of the fair value of the wireless spectrum licenses. In July 2014, we entered into a definitive agreement to sell and assign our remaining 700 MHz A-Block wireless spectrum licenses for $39 million in cash in the aggregate. The sale closed on November 3, 2014, and we received $39 million in cash in the aggregate.
Selected Current Liabilities
Current liabilities reflected in our consolidated balance sheets include accounts payable and other current liabilities as of the dates indicated below:
September 30, 2014 | December 31, 2013 | |||||
(Dollars in millions) | ||||||
Accounts payable | $ | 1,069 | 1,111 | |||
Other current liabilities: | ||||||
Accrued rent | $ | 33 | 52 | |||
Legal reserves | 18 | 273 | ||||
Other | 173 | 189 | ||||
Total other current liabilities | $ | 224 | 514 |
Included in accounts payable at September 30, 2014 and December 31, 2013, were $77 million and $88 million, respectively, representing book overdrafts and $120 million and $140 million, respectively, associated with capital expenditures. Included in legal reserves at December 31, 2013, was $235 million related to the then tentative settlement agreement with the trustees in the KPNQwest Dutch bankruptcy proceeding. In February 2014, we paid approximately €171 million (or approximately $235 million) to settle this proceeding.
(10) Repurchase of CenturyLink Common Stock
In February 2013, our Board of Directors authorized us to repurchase up to $2 billion of our outstanding common stock. On May 29, 2014, we completed the 2013 stock repurchase program, repurchasing over the course of the program a total of 59.5 million shares in the open market at an average purchase price of $33.63 per share. Of those aggregate amounts, we repurchased 13.7 million shares in the open market during the first half of 2014 for an aggregate market price of $433 million, or an average purchase price of $31.54 per share. All shares of common stock repurchased under our 2013 program have been retired.
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In February 2014, our Board of Directors authorized a new 24-month program to repurchase up to an aggregate of $1 billion of our outstanding common stock. This new program took effect on May 29, 2014, immediately upon the completion of our predecessor 2013 stock repurchase program. During the nine months ended September 30, 2014, we repurchased 2.9 million shares of our outstanding common stock in the open market under our 2014 stock repurchase program. These shares were repurchased for an aggregate market price of $109 million, or an average purchase price of $37.29 per share. The repurchased common stock has been retired. As of September 30, 2014, we had approximately $891 million remaining available for stock repurchases under the 2014 stock repurchase program.
(11) Accumulated Other Comprehensive Loss
The tables below summarize changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the three and nine months ended September 30, 2014:
Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Total | |||||||||
(Dollars in millions) | ||||||||||||
Balance at June 30, 2014 | $ | (661 | ) | (116 | ) | (2 | ) | (779 | ) | |||
Other comprehensive income before reclassifications | — | — | (16 | ) | (16 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income | 4 | 2 | — | 6 | ||||||||
Net current-period other comprehensive income | 4 | 2 | (16 | ) | (10 | ) | ||||||
Balance at September 30, 2014 | $ | (657 | ) | (114 | ) | (18 | ) | (789 | ) |
Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Total | |||||||||
(Dollars in millions) | ||||||||||||
Balance at December 31, 2013 | $ | (669 | ) | (122 | ) | (11 | ) | (802 | ) | |||
Other comprehensive income before reclassifications | — | — | (7 | ) | (7 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income | 12 | 8 | — | 20 | ||||||||
Net current-period other comprehensive income (loss) | 12 | 8 | (7 | ) | 13 | |||||||
Balance at September 30, 2014 | $ | (657 | ) | (114 | ) | (18 | ) | (789 | ) |
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The tables below present further information about our reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended September 30, 2014:
Three Months Ended September 30, 2014 | (Decrease) Increase in Net Income | Affected Line Item in Consolidated Statement of Operations or Footnote Where Additional Information is Presented If The Amount is not Recognized in Net Income in Total | ||||
(Dollars in millions) | ||||||
Amortization of pension & post-retirement plans | ||||||
Net actuarial loss | $ | (5 | ) | See Note 4-Employee Benefits | ||
Prior service cost | (5 | ) | See Note 4-Employee Benefits | |||
Total before tax | (10 | ) | ||||
Income tax expense | 4 | Income tax expense | ||||
Net of tax | $ | (6 | ) |
Nine Months Ended September 30, 2014 | (Decrease) Increase in Net Income | Affected Line Item in Consolidated Statement of Operations or Footnote Where Additional Information is Presented If The Amount is not Recognized in Net Income in Total | ||||
(Dollars in millions) | ||||||
Amortization of pension & post-retirement plans | ||||||
Net actuarial loss | $ | (15 | ) | See Note 4-Employee Benefits | ||
Prior service cost | (18 | ) | See Note 4-Employee Benefits | |||
Total before tax | (33 | ) | ||||
Income tax expense | 13 | Income tax expense | ||||
Net of tax | $ | (20 | ) |
The tables below summarize changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the three and nine months ended September 30, 2013:
Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Total | |||||||||
(Dollars in millions) | ||||||||||||
Balance at June 30, 2013 | $ | (1,372 | ) | (288 | ) | (27 | ) | (1,687 | ) | |||
Other comprehensive income before reclassifications | — | — | 13 | 13 | ||||||||
Amounts reclassified from accumulated other comprehensive income | 13 | 1 | — | 14 | ||||||||
Net current-period other comprehensive income | 13 | 1 | 13 | 27 | ||||||||
Balance at September 30, 2013 | $ | (1,359 | ) | (287 | ) | (14 | ) | (1,660 | ) |
Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Total | |||||||||
(Dollars in millions) | ||||||||||||
Balance at December 31, 2012 | $ | (1,399 | ) | (289 | ) | (13 | ) | (1,701 | ) | |||
Other comprehensive income before reclassifications | — | — | (1 | ) | (1 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income | 40 | 2 | — | 42 | ||||||||
Net current-period other comprehensive income (loss) | 40 | 2 | (1 | ) | 41 | |||||||
Balance at September 30, 2013 | $ | (1,359 | ) | (287 | ) | (14 | ) | (1,660 | ) |
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The tables below present further information about our reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended September 30, 2013:
Three Months Ended September 30, 2013 | (Decrease) Increase in Net Income | Affected Line Item in Consolidated Statement of Operations or Footnote Where Additional Information is Presented If The Amount is not Recognized in Net Income in Total | ||||
(Dollars in millions) | ||||||
Amortization of pension & post-retirement plans | ||||||
Net actuarial loss | $ | (21 | ) | See Note 4-Employee Benefits | ||
Prior service cost | (1 | ) | See Note 4-Employee Benefits | |||
Total before tax | (22 | ) | ||||
Income tax expense | 8 | Income tax expense | ||||
Net of tax | $ | (14 | ) |
Nine Months Ended September 30, 2013 | (Decrease) Increase in Net Income | Affected Line Item in Consolidated Statement of Operations or Footnote Where Additional Information is Presented If The Amount is not Recognized in Net Income in Total | ||||
(Dollars in millions) | ||||||
Amortization of pension & post-retirement plans | ||||||
Net actuarial loss | $ | (64 | ) | See Note 4-Employee Benefits | ||
Prior service cost | (4 | ) | See Note 4-Employee Benefits | |||
Total before tax | (68 | ) | ||||
Income tax expense | 26 | Income tax expense | ||||
Net of tax | $ | (42 | ) |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries.
All references to "Notes" in this Item 2 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 the last paragraph of this Item 2 and "Risk Factors" in Item 1A of Part II of this report 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, 2013, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year.
We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local and long-distance, broadband, private line (including special access), Multi-Protocol Label Switching ("MPLS"), data integration, managed hosting (including cloud hosting), colocation, Ethernet, network access, public access, wireless, video and other ancillary services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.
At September 30, 2014, we operated 12.5 million access lines in 37 states, served approximately 6.1 million broadband subscribers, and operated 58 data centers throughout North America, Europe and Asia. Access lines are telephone lines reaching from the customers' premises to a connection with the public switched telephone network and broadband subscribers are customers who purchase high-speed internet connection services through their existing telephone lines, stand-alone telephone lines, or fiber-optic cables. Our methodology for counting access lines, subscriber lines and data centers, which is described further in the operational metrics table below under "Results of Operations", may not be comparable to those of other companies.
We currently report the following four segments in our consolidated financial statements:
• | Consumer. Consists generally of providing strategic and legacy products and services to residential consumers. Our strategic products and services offered to these customers include our broadband, wireless and video services, including our Prism TV services. Our legacy services offered to these customers include local and long-distance services. |
• | Business. Consists generally of providing strategic and legacy products and services to commercial, enterprise, global and governmental customers. Our strategic products and services offered to these customers include our private line, broadband, Ethernet, MPLS, data integration, Voice over Internet Protocol ("VoIP") and network management services. Our legacy services offered to these customers include local and long-distance services. |
• | Wholesale. Consists generally of providing strategic and legacy products and services to other communications providers. Our strategic products and services offered to these customers are mainly private line (including special access), dedicated internet access, digital subscriber line ("DSL") and MPLS. Our legacy services offered to these customers include the resale of our local access services, the sale of unbundled network elements ("UNEs") which allow our wholesale customers to use our network or a combination of our network and their own networks to provide voice and data services to their customers, long-distance and switched access services and other services, including billing and collection services, pole and floor space rentals, public access services and database services. |
• | Hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to commercial, enterprise, global, governmental and wholesale customers. |
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Our segment information does not include capital expenditures, total assets, or certain revenues and expenses that we manage on a centralized basis and are reviewed by our chief operating decision maker ("CODM") only on a consolidated basis. Our segment results are not necessarily indicative of the results of operations that our segments would have achieved had they operated as stand-alone entities during the periods presented. For additional information about our segments, see Note 7—Segment Information to our consolidated financial statements in Item 1 of Part I of this report and "Results of Operations—Segment Results" below.
Effective November 1, 2014, we implemented a new organizational structure designed to strengthen our ability to attain our operational, strategic and financial goals. The change in our organizational structure will likely result in some modification of our segment reporting, which we expect to finalize in the fourth quarter of 2014 and report in our consolidated financial statements for the year ending December 31, 2014.
Results of Operations
The following table summarizes the results of our consolidated operations for the three and nine months ended September 30, 2014 and 2013:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions except per share amounts) | ||||||||||||
Operating revenues | $ | 4,514 | 4,515 | 13,593 | 13,553 | |||||||
Operating expenses | 3,895 | 5,200 | 11,666 | 12,741 | ||||||||
Operating income (loss) | 619 | (685 | ) | 1,927 | 812 | |||||||
Other income (expense) | (320 | ) | (320 | ) | (974 | ) | (918 | ) | ||||
Income tax expense | 111 | 40 | 369 | 372 | ||||||||
Net income (loss) | $ | 188 | (1,045 | ) | 584 | (478 | ) | |||||
Basic earnings (loss) per common share | $ | 0.33 | (1.76 | ) | 1.03 | (0.79 | ) | |||||
Diluted earnings (loss) per common share | $ | 0.33 | (1.76 | ) | 1.02 | (0.79 | ) |
The following table summarizes our broadband subscribers, access lines, data centers and number of employees as of September 30, 2014 and 2013:
______________________________________________________________________
As of September 30, | Increase / (Decrease) | % Change | |||||||||
2014 | 2013 | ||||||||||
(in thousands except for data centers, which are actual amounts) | |||||||||||
Operational metrics: | |||||||||||
Total broadband subscribers (1) | 6,063 | 5,942 | 121 | 2.0 | % | ||||||
Total access lines (1) | 12,537 | 13,150 | (613 | ) | (4.7 | )% | |||||
Total data centers (2) | 58 | 55 | 3 | 5.5 | % | ||||||
Total employees | 45.1 | 46.7 | (1.6 | ) | (3.4 | )% |
(1) | Broadband subscribers are customers that purchase high-speed Internet connection service through their existing telephone lines, stand-alone telephone lines, or fiber-optic cables, and access lines are lines reaching from the customers' premises to a connection with the public network. Our methodology for counting our broadband subscribers and access lines includes only those lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. It also excludes unbundled loops and includes stand-alone broadband subscribers. We count lines when we install the service. |
(2) | Data centers are located throughout North America, Europe and Asia. |
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During the last several years, we have experienced revenue decline (excluding the impact of acquisitions) primarily due to declines in access lines, access rates and minutes of use. To mitigate these declines, we remain focused on efforts to, among other things:
• | promote long-term relationships with our customers through bundling of integrated services; |
• | provide a wide array of diverse services, including additional services that may become available in the future due to, among other things, advances in technology or improvements in our infrastructure; |
• | provide our broadband and premium services to a higher percentage of our customers; |
• | pursue acquisitions of additional assets if available at attractive prices; |
• | increase prices on our products and services if and when practicable; |
• | increase usage of our networks; and |
• | market our products and services to new customers. |
Operating Revenues
We categorize our products, services and revenues among the following four categories:
• | Strategic services, which include primarily broadband, private line (including special access, which we market to wholesale and business customers), MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video service), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including our facilities-based video services, which we now offer in twelve markets, and our resold satellite service), VoIP and Verizon Wireless services; |
• | Legacy services, which include primarily local, long-distance, switched access, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), and traditional wide area network ("WAN") services (which allow a local communications network to link to networks in remote locations); |
• | Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our governmental and business customers; and |
• | Other revenues, which consists primarily of USF revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues. |
The following tables summarize the amount of our operating revenues recorded under our four revenue categories:
Three Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Strategic services | $ | 2,310 | 2,212 | 98 | 4 | % | ||||||
Legacy services | 1,769 | 1,892 | (123 | ) | (7 | )% | ||||||
Data integration | 185 | 163 | 22 | 13 | % | |||||||
Other | 250 | 248 | 2 | 1 | % | |||||||
Total operating revenues | $ | 4,514 | 4,515 | (1 | ) | — | % |
Nine Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Strategic services | $ | 6,889 | 6,562 | 327 | 5 | % | ||||||
Legacy services | 5,401 | 5,767 | (366 | ) | (6 | )% | ||||||
Data integration | 546 | 470 | 76 | 16 | % | |||||||
Other | 757 | 754 | 3 | — | % | |||||||
Total operating revenues | $ | 13,593 | 13,553 | 40 | — | % |
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Our total operating revenues decreased by $1 million, or less than 1%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to the continued decline in our legacy services revenues, which were substantially offset by the increases in strategic services revenues and data integration. Our total operating revenues increased by $40 million, or less than 1%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to strong growth in both strategic services revenues and data integration, which were partially offset by a decline in legacy services revenues. The growth in our strategic services revenues is primarily due to increases in broadband, Ethernet, MPLS, facilities-based video, managed hosting and colocation services, which were slightly offset by declines in private line (including special access) services. The increase in data integration revenues, which are typically more volatile than several of our other sources of revenue, is primarily due to higher sales of customer premise equipment to governmental and business customers during the periods noted above. The decrease in legacy services revenues is attributable to declining local, long-distance and access services which reflect the continuing loss of access lines and loss of associated access revenues. At September 30, 2014, we had approximately 12.5 million access lines, or approximately 4.7% less than the number of access lines we operated at September 30, 2013. We believe the decline in the number of access lines was primarily due to the displacement of traditional wireline telephone services by other competitive products and services, including internet and wireless communication services. We estimate that the rate of our access lines losses will be between 4.4% and 5.0% over the full year of 2014. Other operating revenues increased for the three and nine months ended September 30, 2014 as compared to the three and nine months ended September 30, 2013 primarily due to higher revenues related to an increased universal service fund contribution factor, which were substantially offset by lower revenues from intrastate universal service funds.
During 2013, operating revenues attributable to certain bundled and Competitive Local Exchange Carrier ("CLEC") retail services were revised, which resulted in a net increase to strategic service revenues of $22 million and $67 million, and a corresponding net reduction to legacy services revenues of $22 million and $67 million for the three and nine months ended September 30, 2013, respectively. For additional information on the revisions to certain bundled and CLEC services, see Note 7—Segment Information to our consolidated financial statements in Item 1 of Part I of this report.
Further analysis of our operating revenues by segment is provided below in "Segment Results."
Operating Expenses
Total operating expenses decreased by $1.3 billion, or 25%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and operating expenses decreased by $1.1 billion, or 8%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.
The following tables summarize our operating expenses:
Three Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Cost of services and products (exclusive of depreciation and amortization) | $ | 1,975 | 1,918 | 57 | 3 | % | ||||||
Selling, general and administrative | 823 | 1,047 | (224 | ) | (21 | )% | ||||||
Depreciation and amortization | 1,097 | 1,135 | (38 | ) | (3 | )% | ||||||
Impairment of goodwill | — | 1,100 | (1,100 | ) | (100 | )% | ||||||
Total operating expenses | $ | 3,895 | 5,200 | (1,305 | ) | (25 | )% |
Nine Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Cost of services and products (exclusive of depreciation and amortization) | $ | 5,872 | 5,587 | 285 | 5 | % | ||||||
Selling, general and administrative | 2,497 | 2,679 | (182 | ) | (7 | )% | ||||||
Depreciation and amortization | 3,297 | 3,375 | (78 | ) | (2 | )% | ||||||
Impairment of goodwill | — | 1,100 | (1,100 | ) | (100 | )% | ||||||
Total operating expenses | $ | 11,666 | 12,741 | (1,075 | ) | (8 | )% |
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Cost of services and products (exclusive of depreciation and amortization) increased by $57 million, or 3%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to increases in customer premise equipment installation expenses related to the increase in data integration revenues, facility and network costs and Prism TV programming expenses. Cost of services and products (exclusive of depreciation and amortization) increased by $285 million, or 5%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to increases in employee-related costs, customer premise equipment installation expenses related to the increase in data integration revenues, facility and network costs, real estate and power costs and Prism TV programming expenses.
Selling, general and administrative expenses decreased by $224 million, or 21%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to a decrease in legal costs associated with the establishment of a legal reserve of $233 million during the third quarter of 2013 in connection with settling a litigation matter. The decrease was partially offset by an increase in employee-related costs (including severance costs). Selling, general and administrative expenses decreased by $182 million, or 7%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to the above-mentioned $233 million decrease in legal reserves from the prior year's litigation settlement. The decrease was partially offset by increases in employee-related costs (including severance costs), marketing and advertising expenses and impairment charges related to office buildings currently being marketed and classified as assets held for sale.
Depreciation and amortization expenses decreased by $38 million, or 3%, and by $78 million, or 2%, for the three and nine months ended September 30, 2014 as compared to the three and nine months ended September 30, 2013.
Depreciation expense was $736 million for the three months ended September 30, 2014 as compared to $747 million for the three months ended September 30, 2013. Depreciation expense was $2.2 billion for both the nine months ended September 30, 2014 and 2013. Annual depreciation expense is impacted by several factors, including changes in our depreciable cost basis, changes in our estimates of the remaining economic life of certain assets and the addition of new plant. The 2014 depreciation expense related to our plant placed in service prior to 2014 is expected to be lower than the 2013 depreciation expense due to our plant aging and becoming fully depreciated or retired. This decrease is expected to be partially offset by new plant additions in 2014 and changes in the estimated lives of certain property, plant and equipment. During January 2014, we implemented changes in estimates that reduced the remaining economic lives of certain switch and circuit network equipment which we expect to result in increased 2014 annual depreciation expense. Additionally, we recently developed a plan to migrate customers from one of our networks to another between the fourth quarter of 2014 and the fourth quarter of 2015. As a result, we implemented changes in estimates that reduced the remaining economic lives of certain network assets. These changes will result in an increase in depreciation expense of approximately $12 million for the three months ending December 31, 2014 and approximately $48 million for 2015. We further expect depreciation expense will increase in the fourth quarter of 2014 compared to the third quarter of 2014 due to the timing of net additions of plant during 2014 and the additional depreciation related to anticipated changes in estimates to be implemented during the fourth quarter of 2014. For more information about the changes in our estimates of the remaining economic lives of these assets, see Note 1—Basis of Presentation to our consolidated financial statements in Item 1 of Part I of this report.
Amortization expense decreased by $27 million from $388 million in the three months ended September 30, 2013 to $361 million in the three months ended September 30, 2014 and decreased by $67 million from approximately $1.2 billion in the nine months ended September 30, 2013 to approximately $1.1 billion in the nine months ended September 30, 2014 primarily due to the use of accelerated amortization methods for a portion of the customer relationship assets acquired in connection with the acquisitions of Embarq in 2009 and Qwest in 2011. These quarterly declines are expected to continue. Amortization of our software investments declined due to software becoming fully amortized faster than new software is acquired, which was partially offset by a change in the estimate of the remaining economic lives of the Savvis trade name and certain cloud software. For more information about the changes in our estimates of the remaining economic lives of these assets, see Note 1—Basis of Presentation to our consolidated financial statements in Item 1 of Part I of this report.
Goodwill Impairment
As of September 30, 2013, we tested our reporting units, which were our four current operating segments (consumer, business, wholesale and hosting), for goodwill impairment. As explained in greater detail in Note 3—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 8 of Part II of our Annual Report Form 10-K for the year ended December 31, 2013, we concluded that our goodwill for the hosting segment was impaired as of September 30, 2013, and we recorded, during the third quarter of 2013, our best estimate of a non-cash, non-tax deductible goodwill impairment charge of $1.1 billion for goodwill attributable to our hosting segment. Upon the completion of our analysis during the following quarter, we reduced the charge to $1.092 billion as we recorded goodwill at its implied fair value.
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During the fourth quarter of 2013, we elected to change the date or our annual assessment of goodwill impairment from September 30 to October 31, commencing October 31, 2014. Management believes this change more closely aligns the new assessment date with our strategic planning process. On October 31, 2014, we began our annual goodwill impairment assessment on our four current operating segments. As of this report date, we have not completed our goodwill impairment assessment and are unable to conclude whether or not the goodwill assigned to our operating segments is impaired. You should be aware that, as of the date of our prior quantitative assessment (September 30, 2013), the estimated fair value of our consumer segment equity exceeded its carrying value of equity by only 8%, and, after recording an impairment charge to the hosting segment, the estimated fair value of its equity equaled the carrying value of its equity. Please see the above-referenced Note 3 for additional information. We will finalize our assessment in the fourth quarter of 2014.
Further analysis of our operating expenses by segment is provided below in "Segment Results."
Other Consolidated Results
The following tables summarize our total other income (expense) and income tax expense:
Three Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Interest expense | $ | (325 | ) | (329 | ) | (4 | ) | (1 | )% | |||
Other income, net | 5 | 9 | (4 | ) | (44 | )% | ||||||
Total other income (expense) | $ | (320 | ) | (320 | ) | — | — | % | ||||
Income tax expense | $ | 111 | 40 | 71 | 178 | % |
Nine Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Interest expense | $ | (981 | ) | (970 | ) | 11 | 1 | % | ||||
Other income, net | 7 | 52 | (45 | ) | (87 | )% | ||||||
Total other income (expense) | $ | (974 | ) | (918 | ) | 56 | 6 | % | ||||
Income tax expense | $ | 369 | 372 | (3 | ) | (1 | )% |
Interest Expense
Interest expense decreased by $4 million, or 1%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to a reversal of an interest expense reserve as a result of a settlement of an operating tax liability. Interest expense increased by $11 million, or 1%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to a higher average outstanding debt balance in 2014 and a reduction in the amortization of debt premiums, which were partially offset by a slightly lower weighted average interest rate, the reversal of certain tax interest reserves and increased capitalized interest.
Other Income, Net
Other income, net reflects certain items not directly related to our core operations, including our share of income from our 49% interest in a cellular partnership, interest income, gains and losses from non-operating asset dispositions and foreign currency gains and losses. Other income, net decreased by $4 million, or 44%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to greater losses on foreign currency transactions in the current period as compared to the same 2013 period. Other income, net decreased by $45 million, or 87%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to a second quarter of 2014 impairment charge of $14 million recorded in connection with the pending sale of our 700 MHz A-Block wireless spectrum licenses and a $32 million gain on the sale of wireless spectrum in the first quarter of 2013. The sale of our 700 MHz A-Block wireless spectrum licenses closed on November 3, 2014, and we received $39 million in cash in the aggregate.
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Income Tax Expense
For the three months ended September 30, 2014 and 2013, our effective income tax rate was 37.1% and (4.0)%, respectively, and for the nine months ended September 30, 2014 and 2013, our effective income tax rate was 38.7% and (350.9)%, respectively. The effective tax rate for the three months ended September 30, 2014, includes a year-to-date adjustment related to our forecast of taxes on foreign income and the effects of discontinuance of the Employee Stock Purchase Plan. The effective tax rate for the nine months ended September 30, 2014, reflects the absence of tax benefits from the impairment of our 700 MHz A-Block wireless spectrum licenses, because we are not likely to generate income of a character required to realize a tax benefit from the loss on ultimate disposition. The effective tax rates for the three and nine months ended September 30, 2013, reflects the net impact of the $1.1 billion non-deductible goodwill impairment recorded in the third quarter of 2013, a favorable settlement with the Internal Revenue Service of $33 million recorded in the second quarter of 2013 and an unfavorable accounting adjustment for nondeductible life insurance costs recorded in the first quarter of 2013.
Segment Results
General
Our segment results are summarized below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||
(Dollars in millions) | ||||||||||||
Total segment revenues | $ | 4,264 | 4,267 | 12,836 | 12,799 | |||||||
Total segment expenses | 2,161 | 2,089 | 6,378 | 6,056 | ||||||||
Total segment income | $ | 2,103 | 2,178 | 6,458 | 6,743 | |||||||
Total margin percentage | 49 | % | 51 | % | 50 | % | 53 | % | ||||
Consumer: | ||||||||||||
Revenues | $ | 1,491 | 1,503 | 4,500 | 4,508 | |||||||
Expenses | 611 | 605 | 1,793 | 1,728 | ||||||||
Income | $ | 880 | 898 | 2,707 | 2,780 | |||||||
Margin percentage | 59 | % | 60 | % | 60 | % | 62 | % | ||||
Business: | ||||||||||||
Revenues | $ | 1,569 | 1,544 | 4,692 | 4,574 | |||||||
Expenses | 997 | 932 | 2,935 | 2,701 | ||||||||
Income | $ | 572 | 612 | 1,757 | 1,873 | |||||||
Margin percentage | 36 | % | 40 | % | 37 | % | 41 | % | ||||
Wholesale: | ||||||||||||
Revenues | $ | 843 | 878 | 2,571 | 2,694 | |||||||
Expenses | 285 | 293 | 844 | 868 | ||||||||
Income | $ | 558 | 585 | 1,727 | 1,826 | |||||||
Margin percentage | 66 | % | 67 | % | 67 | % | 68 | % | ||||
Hosting: | ||||||||||||
Revenues | $ | 361 | 342 | 1,073 | 1,023 | |||||||
Expenses | 268 | 259 | 806 | 759 | ||||||||
Income | $ | 93 | 83 | 267 | 264 | |||||||
Margin percentage | 26 | % | 24 | % | 25 | % | 26 | % |
During the first quarter of 2014, we adopted several changes with respect to the assignment of certain expenses to our segments. We have restated the previously reported segment results for the three and nine months ended September 30, 2013 to conform to the current presentation. For additional information on these changes, see Note 7—Segment Information to our consolidated financial statements in Item 1 of Part I of this report.
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Our segment revenues include all revenues from our strategic and legacy services and data integration as described in more detail above. We assign each of our customers to a single segment and report all of the revenues we derive from that customer to that segment, with the exception of hosting revenue generated from business and wholesale customers, which is reported in hosting segment revenues. We report our segment expenses for our four segments as follows:
• | Direct expenses, which primarily are specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities; and |
• | Allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses. |
We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the chief operating decision maker ("CODM") by segment. Similarly, we do not assign to our segments severance expenses, restructuring expenses and, certain centrally managed administrative functions (such as finance, information technology, legal and human resources). Interest expense is also excluded from segment results because we manage our financing on a total company basis and have not allocated assets or debt to specific segments. Similarly, we exclude other income (expense) from our segment results.
Consumer
The operations of our consumer segment have been impacted by several significant trends, including those described below:
• | Strategic services. 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 connection 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. Moreover, as described further in Item 1A of Part II of this report, demand for our broadband services could be adversely affected by competitors continuing to provide services at higher broadband speed than ours or expanding their advanced wireless data service offerings. We also continue to expand our other strategic product offerings, including facilities-based video services. The expansion of our facilities-based video service infrastructure requires us to incur start-up expenses in advance of the revenue that this service is expected to generate. Although, over time, we expect that our revenue for facilities-based video services will offset the expenses incurred, the timing of this revenue growth is uncertain and the video business is growing increasingly competitive. We believe these efforts to expand our strategic products will improve our ability to compete and increase our strategic revenues; |
• | Legacy services. Our voice revenues have been, and we expect they will continue to be, adversely affected by access line losses. 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 that these factors will continue to negatively impact our business. As a result of the expected loss of high margin services associated with access lines, we continue to offer our customers service bundling and other product promotions to help mitigate this trend, as described below; |
• | Service bundling and product promotions. We offer our customers the ability to bundle multiple products and services. These customers can bundle local services with other services such as broadband, video, long-distance and wireless. While we believe our bundled service offerings can help retain customers, they also tend to lower our profit margins in the consumer segment; and |
• | Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions. We also expect our consumer segment to benefit indirectly from enhanced efficiencies in our company-wide network operations. |
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The following tables summarize the results of operations from our consumer segment:
Consumer Segment | ||||||||||||
Three Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues: | ||||||||||||
Strategic services | $ | 712 | 669 | 43 | 6 | % | ||||||
Legacy services | 778 | 833 | (55 | ) | (7 | )% | ||||||
Data integration | 1 | 1 | — | — | % | |||||||
Total revenues | 1,491 | 1,503 | (12 | ) | (1 | )% | ||||||
Segment expenses: | ||||||||||||
Direct | 486 | 481 | 5 | 1 | % | |||||||
Allocated | 125 | 124 | 1 | 1 | % | |||||||
Total expenses | 611 | 605 | 6 | 1 | % | |||||||
Segment income | $ | 880 | 898 | (18 | ) | (2 | )% | |||||
Segment margin percentage | 59 | % | 60 | % |
Consumer Segment | ||||||||||||
Nine Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues: | ||||||||||||
Strategic services | $ | 2,123 | 1,967 | 156 | 8 | % | ||||||
Legacy services | 2,374 | 2,537 | (163 | ) | (6 | )% | ||||||
Data integration | 3 | 4 | (1 | ) | (25 | )% | ||||||
Total revenues | 4,500 | 4,508 | (8 | ) | — | % | ||||||
Segment expenses: | ||||||||||||
Direct | 1,430 | 1,375 | 55 | 4 | % | |||||||
Allocated | 363 | 353 | 10 | 3 | % | |||||||
Total expenses | 1,793 | 1,728 | 65 | 4 | % | |||||||
Segment income | $ | 2,707 | 2,780 | (73 | ) | (3 | )% | |||||
Segment margin percentage | 60 | % | 62 | % |
Segment Revenues
Consumer revenues decreased by $12 million, or 1%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and decreased by $8 million, or less than 1%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The increase in strategic services revenues for both periods was due primarily to increases in the number of our facilities-based video customers and increases in the number of broadband subscribers, as well as from price increases on various services. The decline in legacy services revenues for both periods was primarily due to declines in local and long-distance service volumes associated with access line losses resulting from the competitive and technological changes described above.
Segment Expenses
Consumer expenses increased by $6 million, or 1%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to an increase in programming expenses for Prism TV content resulting from subscriber growth in our Prism TV markets, which were partially offset by decreases in employee-related costs. Consumer expenses increased by $65 million, or 4%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to increases in marketing and advertising expenses, Prism TV content resulting from subscriber growth in our Prism TV markets and the number of modems shipped for Prism customer premise equipment, which were partially offset by reductions in employee-related costs.
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Segment Income
Consumer income decreased by $18 million, or 2%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and decreased by $73 million, or 3%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decline in consumer segment income for both periods was primarily due to customers migrating from legacy services to lower margin strategic services, which caused our segment expenses to increase at a faster pace than segment revenues.
Business
The operations of our business segment have been impacted by several significant trends, including those described below:
• | Strategic services. Our mix of total segment revenues continues to migrate from legacy services to strategic services as our commercial, enterprise, global and governmental customers increasingly demand customized and integrated data, Internet and voice services. We offer diverse combinations of emerging technology products and services such as private line, MPLS, and VoIP services. We believe these services afford our customers more flexibility in managing their communications needs and improve the effectiveness and efficiency of their operations. Although we are experiencing price compression on our strategic services due to competition, we expect strategic revenues from these services to continue to grow during 2014; |
• | Legacy services. We face intense competition with respect to our high margin legacy services and continue to see customers migrating away from these services and into lower margin strategic services. In addition, our legacy services revenues have been, and we expect they will continue to be, adversely affected by access line losses and price compression; |
• | Data integration. We expect both data integration revenue and the related costs will fluctuate from quarter to quarter 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 governmental customers, many of whom have recently experienced substantial budget cuts with the possibility of additional future budget cuts; and |
• | Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment 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, including the hiring of additional sales employees. We also expect our business segment to benefit indirectly from enhanced efficiencies in our company-wide network operations. |
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The following tables summarize the results of operations from our business segment:
Business Segment | ||||||||||||
Three Months Ended September 30, | Increase / (Decrease) | %Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues: | ||||||||||||
Strategic services | $ | 677 | 638 | 39 | 6 | % | ||||||
Legacy services | 708 | 744 | (36 | ) | (5 | )% | ||||||
Data integration | 184 | 162 | 22 | 14 | % | |||||||
Total revenues | 1,569 | 1,544 | 25 | 2 | % | |||||||
Segment expenses: | ||||||||||||
Direct | 885 | 816 | 69 | 8 | % | |||||||
Allocated | 112 | 116 | (4 | ) | (3 | )% | ||||||
Total expenses | 997 | 932 | 65 | 7 | % | |||||||
Segment income | $ | 572 | 612 | (40 | ) | (7 | )% | |||||
Segment margin percentage | 36 | % | 40 | % |
Business Segment | ||||||||||||
Nine Months Ended September 30, | Increase / (Decrease) | %Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues: | ||||||||||||
Strategic services | $ | 1,995 | 1,867 | 128 | 7 | % | ||||||
Legacy services | 2,154 | 2,241 | (87 | ) | (4 | )% | ||||||
Data integration | 543 | 466 | 77 | 17 | % | |||||||
Total revenues | 4,692 | 4,574 | 118 | 3 | % | |||||||
Segment expenses: | ||||||||||||
Direct | 2,605 | 2,373 | 232 | 10 | % | |||||||
Allocated | 330 | 328 | 2 | 1 | % | |||||||
Total expenses | 2,935 | 2,701 | 234 | 9 | % | |||||||
Segment income | $ | 1,757 | 1,873 | (116 | ) | (6 | )% | |||||
Segment margin percentage | 37 | % | 41 | % |
Segment Revenues
Business segment revenues increased by $25 million, or 2%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and increased by $118 million, or 3%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The increase in business segment revenues for both periods was primarily due to growth in our strategic services revenues and data integration revenues, which were partially offset by a decline in legacy services revenues. The growth in our strategic services revenues for both periods was primarily due to strong MPLS unit growth and higher Ethernet volume, which were slightly offset by a decline in private line (including special access) services. The increase in data integration revenues for both periods was primarily due to higher sales of customer premise equipment to governmental and business customers during the period. The decline in legacy services revenues for both periods was attributable to lower volumes of local and traditional WAN services.
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Segment Expenses
Business expenses increased by $65 million, or 7%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to increases in employee-related expenses attributable to higher wages and benefits, customer premise equipment costs resulting from the higher governmental and business sales noted above and facility costs driven by MPLS unit growth. Business expenses increased by $234 million, or 9%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to increases in employee-related expenses attributable to higher wages, benefits and internal commissions, professional fees, customer premise equipment costs resulting from higher governmental and business sales noted above and facility costs driven by MPLS unit growth.
Segment Income
Business income decreased by $40 million, or 7%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and decreased by $116 million, or 6%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease in business segment income for both periods was primarily due to customers migrating from legacy services to lower margin strategic services, which caused our segment expenses to increase at a faster pace than segment revenues.
Wholesale
The operations of our wholesale segment have been impacted by several significant trends, including those described below:
• | Strategic services. Demand for our private line services (including special access) continues to decline due to our customers' optimization of their networks, industry consolidation and technological migration. While we expect that these factors will continue to negatively impact our wholesale segment, we believe the demand for our fiber-based special access services provided to wireline and wireless carriers for backhaul will partially offset the decline in copper-based special access services provided to wireline and wireless carriers as they migrate to Ethernet services, although the timing and magnitude of this technological migration remains uncertain; |
• | Legacy services. 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, declining demand for traditional voice services, industry consolidation and price compression caused by regulation and rate reductions. For example, many wholesale consumers are substituting cable, wireless and VoIP services for traditional voice telecommunications services, resulting in continued access revenue loss. Our switched access revenues have been and will continue to be impacted by changes related to the Connect America and Intercarrier Compensation Reform order ("CAF order") adopted by the Federal Communications Commission ("FCC") on October 27, 2011, which we believe has increased the pace of reductions in the amount of switched access revenues we receive in our wholesale segment. Conversely, the FCC instituted an access recovery charge that we believe will allow us to recover the majority of these lost revenues directly from end users in our consumer and business segments. We expect the net effect of these factors will continue to adversely impact our wholesale segment; and |
• | Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions. We also expect our wholesale segment to benefit indirectly from enhanced efficiencies in our company-wide network operations. |
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The following tables summarize the results of operations from our wholesale segment:
Wholesale Segment | ||||||||||||
Three Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues: | ||||||||||||
Strategic services | $ | 560 | 563 | (3 | ) | (1 | )% | |||||
Legacy services | 283 | 315 | (32 | ) | (10 | )% | ||||||
Total revenues | 843 | 878 | (35 | ) | (4 | )% | ||||||
Segment expenses: | ||||||||||||
Direct | 47 | 46 | 1 | 2 | % | |||||||
Allocated | 238 | 247 | (9 | ) | (4 | )% | ||||||
Total expenses | 285 | 293 | (8 | ) | (3 | )% | ||||||
Segment income | $ | 558 | 585 | (27 | ) | (5 | )% | |||||
Segment margin percentage | 66 | % | 67 | % |
Wholesale Segment | ||||||||||||
Nine Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues: | ||||||||||||
Strategic services | $ | 1,698 | 1,705 | (7 | ) | — | % | |||||
Legacy services | 873 | 989 | (116 | ) | (12 | )% | ||||||
Total revenues | 2,571 | 2,694 | (123 | ) | (5 | )% | ||||||
Segment expenses: | ||||||||||||
Direct | 134 | 126 | 8 | 6 | % | |||||||
Allocated | 710 | 742 | (32 | ) | (4 | )% | ||||||
Total expenses | 844 | 868 | (24 | ) | (3 | )% | ||||||
Segment income | $ | 1,727 | 1,826 | (99 | ) | (5 | )% | |||||
Segment margin percentage | 67 | % | 68 | % |
Segment Revenues
Wholesale revenues decreased by $35 million, or 4%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and decreased by $123 million, or 5%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decline in legacy services revenues for both periods reflects continuing declines in the volume of our access and long-distance services due to the substitution of cable, wireless and VoIP services for traditional voice telecommunications services. The decline in strategic services revenues for both periods was due to lower private line and special access services revenues, which were substantially offset by an increase in the volume of our Ethernet services.
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Segment Expenses
Wholesale expenses decreased by $8 million, or 3%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Total direct expenses remained flat for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Allocated expenses for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 decreased primarily due to a reduction in allocated facility costs and employee salaries. Wholesale expenses decreased by $24 million, or 3%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Total direct expenses increased for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to increases in access expense and amortization of deferred costs for new circuit installations. Allocated expenses for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 decreased primarily due to lower allocated facility costs and employee related expenses.
Segment Income
The decline in segment expenses was more than offset by declines in both strategic and legacy services revenues, which largely contributed to the lower wholesale segment income of $27 million, or 5%, and $99 million, or 5%, for the three and nine months ended September 30, 2014 as compared to the three and nine months ended September 30, 2013.
Hosting
The operations of our hosting segment have been impacted by several significant trends, including those described below:
• | Colocation. Colocation services are designed for customers seeking data center space and power for their server and networking equipment needs. Our data centers provide our customers around the world with a secure, high-powered, purpose-built location for their IT equipment. We anticipate continued pricing pressure for these services as wholesale vendors continue to expand their enterprise colocation operations. We believe, however, that our hybrid data centers, which offer multiple products and services (including colocation, managed hosting, cloud and network services), will help differentiate our products and services from those offered by competitors with a narrower range of products and services; |
• | Managed hosting. Managed hosting services provide a fully managed solution for customers' IT infrastructure and network needs, and include dedicated and cloud hosting services, computing capacity, consulting and managed security services. We have remained focused on expanding our managed hosting business, specifically our cloud services offering, by endeavoring to add differentiating features to our cloud products and acquiring additional companies that we believe have strengthened our cloud products. In recent years, our competitors, as well as several large diversified technology companies, have made substantial investments in cloud computing, which has intensified competitive pressures. We believe that this expansion in competitive cloud computing offerings has led to increased pricing pressure and competition for enterprise customers, and expect those trends to continue; |
• | Network services. Network services are comprised of our hosting area network products supporting colocation and managed hosting service offerings. Network services also include managed VPN and bandwidth services. Segment income for these services has been relatively flat due to pricing pressures on VPN and bandwidth services, and a decrease in the volume of our hosting area network services; and |
• | Operating efficiencies. We continue to evaluate our operating structure and focus. Our ongoing efforts to increase revenue will continue to require that we incur higher costs in some areas, including the hiring of additional sales employees. |
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The following tables summarize the results of operations from our hosting segment, which are all categorized as strategic services:
Hosting Segment | ||||||||||||
Three Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues | $ | 361 | 342 | 19 | 6 | % | ||||||
Segment expenses | 268 | 259 | 9 | 3 | % | |||||||
Segment income | $ | 93 | 83 | 10 | 12 | % | ||||||
Segment margin percentage | 26 | % | 24 | % |
Hosting Segment | ||||||||||||
Nine Months Ended September 30, | Increase / (Decrease) | % Change | ||||||||||
2014 | 2013 | |||||||||||
(Dollars in millions) | ||||||||||||
Segment revenues | $ | 1,073 | 1,023 | 50 | 5 | % | ||||||
Segment expenses | 806 | 759 | 47 | 6 | % | |||||||
Segment income | $ | 267 | 264 | 3 | 1 | % | ||||||
Segment margin percentage | 25 | % | 26 | % |
Segment Revenues
Hosting revenues increased by $19 million, or 6%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and increased by $50 million, or 5%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The increase in segment revenues for both periods was primarily due to growth in managed hosting and colocation services, which were slightly offset by a decline in MPLS services. The increase in revenues for both periods was driven by customer growth and the impact of revenues contributed from recent acquisitions.
Segment Expenses
Hosting expenses increased by $9 million, or 3%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to increases in employee related costs, network expenses and real estate and power costs, which were partially offset by a decrease in facility costs. Hosting expenses increased by $47 million, or 6%, for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to increases in employee related costs, professional fees, network expenses, external commissions and real estate and power costs, which were partially offset by a reduction in facility costs.
Segment Income
Hosting income increased by $10 million, or 12%, for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to the increase in segment revenues out pacing segment expenses. Hosting income remained largely flat for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.
Liquidity and Capital Resources
Overview
At September 30, 2014, we held cash and cash equivalents of $734 million and we had approximately $1.4 billion of borrowing capacity available under our $2.0 billion revolving credit facility (referred to as our "Credit Facility", which is described further below). At September 30, 2014, cash and cash equivalents of $79 million were held in foreign bank accounts for the purpose of funding our foreign operations. Due to various factors, our access to foreign cash is generally much more restricted than our access to domestic cash.
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We and our Board of Directors monitor our use of cash throughout the year, but with enhanced scrutiny early each year in connection with the review of annual budgets. In connection with our budgeting process in early 2014, our executive officers and our Board of Directors reviewed our sources and potential uses of cash over the next several years, including among other things the previously-disclosed effect of the anticipated depletion of our federal net operating loss carryforwards by the end of 2015 and the implementation of a new 2014 share repurchase program.
Based on our current capital allocation objectives, during the last three months of 2014 we anticipate expending approximately $930 million of cash for capital investment in property, plant and equipment and up to $308 million for dividends on our common stock, based on the current quarterly common stock dividend rate of $0.54 and the current number of outstanding common shares. Following our payment of $600 million aggregate principal amount to retire QC's notes due on October 1, 2014, we expect to pay, during the remainder of the fourth quarter of 2014, scheduled debt principal payments of $6 million and scheduled capital lease and other obligation payments of approximately $35 million. We also anticipate expending cash for repurchasing common stock, but the amount will largely depend on market conditions.
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 use our revolving credit facility as a source of liquidity for operating activities and to give us additional flexibility to finance, among other things, our capital investments, repayments of debt, pension contributions, dividends or stock repurchases.
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 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. Based on our current objectives, we estimate our total capital expenditures to be approximately $930 million for the remaining three months of 2014.
Our capital expenditures continue to be focused on our strategic services such as video, broadband and managed hosting services. In particular, we expect to continue to focus on (i) expanding our fiber infrastructure, including installations of "fiber to the tower," which is a type of telecommunications network consisting of fiber-optic cables that run from a wireless carrier's mobile telephone switching office to cellular towers to enable the delivery of higher bandwidth services supporting mobile technologies than would otherwise generally be available through a more traditional copper-based telecommunications network and (ii) software development. For more information on capital spending, see Items 1 and 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
Debt and Other Financing Arrangements
Subject to market conditions, we expect to continue to issue debt securities from time to time in the future to refinance a substantial portion of our maturing debt, including issuing Qwest Corporation debt securities to refinance its maturing debt to the extent feasible. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned to us and Qwest Corporation by credit rating agencies, among other factors.
As of the date of this report, the credit ratings for the senior unsecured debt of CenturyLink, Inc. and Qwest Corporation were as follows:
Agency | CenturyLink, Inc. | Qwest Corporation | ||
Standard & Poor's | BB | BBB- | ||
Moody's Investors Service, Inc. | Ba2 | Baa3 | ||
Fitch Ratings | BB+ | BBB- |
Our credit ratings are reviewed and adjusted from time to time by the rating agencies, and downgrades of CenturyLink's senior unsecured debt ratings could, under certain circumstances, incrementally increase the cost of our borrowing under the Credit Facility. Moreover, any downgrades of CenturyLink's or Qwest Corporation's senior unsecured debt ratings 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 II of this report.
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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. In early 2013, our Board of Directors approved a 25.5% reduction in our quarterly common stock dividend rate to $0.54 per share, which we believe resulted in a dividend payout rate that is more sustainable over the long-term, and thereby increased our flexibility to balance our multiple objectives of managing our business, paying our fixed commitments and returning cash to our shareholders. Assuming continued payment at this rate of $0.54 per share, our total dividends paid each quarter would be approximately $308 million based on our current number of outstanding shares (which does not reflect shares that we might repurchase or issue in future periods). See "Risk Factors—Risks Affecting Our Business" in Item 1A of Part II of this report and the discussion of our stock repurchase program below.
Stock Repurchase Programs
In February 2014, our Board of Directors authorized a new 24-month program to repurchase up to an aggregate of $1 billion of our outstanding common stock. This new 2014 stock repurchase program took effect on May 29, 2014, immediately upon the completion of our predecessor 2013 stock repurchase program. As of September 30, 2014, we had approximately $891 million remaining available for stock repurchases under this 2014 stock repurchase program. For the nine months ended September 30, 2014, we had repurchased 2.9 million shares for $109 million or an average purchase price of $37.29 per share under this 2014 stock repurchase program. The repurchased common stock has been retired. From October 1, 2014 through November 4, 2014, no additional shares were repurchased. We expect to continue executing this 2014 share repurchase program in open market transactions, subject to market conditions and other factors. For additional information on repurchases made during the three months ended September 30, 2014, see Item 2 of Part II of this report.
Credit Facilities
We have access to up to $2 billion aggregate principal amount of revolving credit under an amended and restated revolving credit facility that matures in April 2017. The credit facility (the "Credit Facility") has 18 lenders, with commitments ranging from $2.5 million to $181 million and allows us to obtain revolving loans and to issue up to $400 million of letters of credit, which upon issuance reduce the amount available for other extensions of credit. Interest is assessed on borrowings using either the LIBOR or the base rate (each as defined in the Credit Facility) plus an applicable margin between 1.25% and 2.25% per annum for LIBOR loans and 0.25% and 1.25% per annum for base rate loans depending on our then current senior unsecured long-term debt rating. Our obligations under the Credit Facility are currently guaranteed by three of our wholly-owned subsidiaries, Embarq, QCII and Savvis, Inc., one of QCII's wholly-owned subsidiaries and one of Savvis, Inc.'s wholly-owned subsidiaries. At September 30, 2014, we had $585 million in borrowings and no amounts of letters of credit outstanding under the Credit Facility.
Under the Credit Facility, we, and our indirect subsidiary, Qwest Corporation, must maintain a debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in our Credit Facility) ratio of not more than 4.0:1.0 and 2.85:1.0, respectively, as of the last day of each fiscal quarter for the four quarters then ended. The Credit Facility also contains a negative pledge covenant, which generally requires us to secure equally and ratably any advances under the Credit Facility if we pledge assets or permit liens on our property for the benefit of other debtholders. The Credit Facility also has a cross payment default provision, and the Credit Facility and certain of our debt securities also have cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. To the extent that our EBITDA (as defined in our Credit Facility) declines for any reason, our debt to EBITDA ratios under certain debt agreements will be adversely affected. This could reduce our financing flexibility due to potential restrictions on incurring additional debt under certain provisions of our debt agreements or, in certain circumstances, could result in a default under certain provisions of such agreements.
At September 30, 2014, we owed $385 million under a term loan maturing in 2019, which includes covenants substantially the same as those set forth in the Credit Facility.
We have a $160 million uncommitted revolving letter of credit facility which enables us to provide letters of credit under terms that may be more favorable than those under the Credit Facility. At September 30, 2014, our outstanding letters of credit totaled $124 million under this facility.
Future Contractual Obligations
For information regarding our estimated future contractual obligations, see the MD&A discussion included in our Annual Report on Form 10-K for the year ended December 31, 2013.
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Pension and Post-retirement Benefit Obligations
We are subject to material obligations under our existing defined benefit pension plans and post-retirement benefit plans. The accounting unfunded status or benefit obligations as of December 31, 2013 of our defined benefit pension plans and post-retirement plans were $1.055 billion and $3.153 billion, respectively. See Note 8—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, 2013 for additional information about our pension and post-retirement benefit arrangements.
Benefits paid by our qualified pension plans are paid through a trust that holds all plan assets. In the first nine months of 2014, we made cash contributions to the trust totaling $157 million. Based on current laws and circumstances, we expect to be required to make approximately $26 million in contributions to the plans in 2015. The amount of required contributions to our plans in 2016 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.
Certain of our post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that are used to help cover the health care costs of certain retirees. As of December 31, 2013, the fair value of these trust assets was $535 million; however, a portion of these assets is comprised of investments with restricted liquidity. We estimate that the more liquid assets in the trust will be adequate to provide continuing reimbursements for covered post-retirement health care costs for approximately three years. Thereafter, covered benefits will be paid either directly by us or from the trusts as the remaining assets become liquid. This projected three year period could be substantially shorter or longer depending on changes in healthcare cost trends, our actual returns on plan assets, the timing of maturities of illiquid plan assets, the actual timing of reimbursement payments and future changes in benefits.
For 2014, our estimated annual long-term rate of return is 7.5% and 7.3%, respectively, for the pension plan trust assets and post-retirement plans assets, in each case based on the assets currently held. However, actual returns could be substantially different.
For additional information on factors that could influence our funding commitments under these and other plans, see "Critical Accounting Policies and Estimates—Pension and Post-Retirement Benefits" in this Item 7 of Part II of our Annual Report Form 10-K for the year ended December 31, 2013 and "Risk Factors—Risks Affecting our Liquidity and Capital Resources—Increases in costs for pension and healthcare benefits for our active and retired employee may reduce our profitability and increase our funding commitments" in Item 1A of Part II of this report.
Net Operating Loss Carryforwards
We are currently using NOLs to offset a portion of our federal taxable income. Based on current laws and circumstances, we expect to deplete most of these NOLs and certain other deferred tax attributes by the end of 2014, and substantially all of these tax benefits by the end of 2015. Once our NOLs are fully utilized, we expect that the amounts of our cash flows dedicated to the payment of federal taxes will increase substantially. The amounts of those payments will depend upon many factors, including future earnings, tax law changes and future tax circumstances. For additional information, see "Risk Factors—Risks Affecting our Liquidity and Capital Resources" appearing in Item 1A of Part II of this report.
Connect America Fund
On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order (“CAF order”) intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies. Among other changes, this initial ruling established the framework for a multi-year transition of federal universal service funding to a new system where such funding is explicitly targeted to the deployment and provisioning of broadband services in high cost areas. We expect the FCC to adopt detailed rules relating to this transition in late 2014 or early 2015.
Although we anticipate that the FCC’s CAF rules will materially increase the federal support funding available to us, we also expect that to the extent we choose to accept these funds, we will incur significant incremental costs to provide the requisite broadband services. To the extent that we choose not to accept CAF funds in any state, we expect that those funds will be awarded at auction, and that our federal universal service support for that state will be ended, or significantly reduced.
For additional information, see "Risk Factors—Risks Relating to Legal and Regulatory Matters" in Item 1A of Part II of this report.
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Historical Information
The following table summarizes our consolidated cash flow activities:
Nine Months Ended September 30, | Increase / (Decrease) | ||||||||
2014 | 2013 | ||||||||
(Dollars in millions) | |||||||||
Net cash provided by operating activities | $ | 3,937 | 4,408 | (471 | ) | ||||
Net cash used in investing activities | (2,113 | ) | (2,117 | ) | (4 | ) | |||
Net cash used in financing activities | (1,258 | ) | (2,236 | ) | (978 | ) |
Net cash provided by operating activities decreased by $471 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to a decrease in the change in other current assets and liabilities, net, which includes a payment of approximately $235 million in the first quarter of 2014 to settle certain litigation and a positive variance in net income adjusted for non-cash items. These decreases were substantially offset by positive variances in the changes in retirement benefits and other noncurrent assets and liabilities, net. For additional information about our operating results, see "Results of Operations" above. For additional information about the settlement payment, see Note 9—Other Financial Information to our consolidated financial statements in Item 1 of Part I of this report.
Net cash used in investing activities decreased by $4 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to a decrease in payments for property, plant and equipment, which was substantially offset by the change in proceeds received from the sale of intangible assets.
Net cash used in financing activities decreased by $978 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to reductions in net debt paydowns, common stock repurchases and dividend payments.
On September 29, 2014, QC issued $500 million aggregate principal amount of 6.875% Notes due 2054, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $483 million. The Notes are senior unsecured obligations and may be redeemed, in whole or in part, on or after October 1, 2019, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
On April 1, 2014, a subsidiary of Embarq paid at maturity the $30 million principal amount of its 7.46% first mortgage bonds.
During the nine months ended September 30, 2014, we repurchased 16.7 million shares of the company's outstanding common stock in the open market. These shares were repurchased for an aggregate market price of $542 million, or an average purchase price of $32.55 per share. The repurchased common stock has been retired. For additional information, see "Liquidity and Capital Resources—Stock Repurchase Programs" above.
On October 1, 2014, QC paid at maturity the $600 million principal amount of its 7.50% Notes, which is not reflected in the table above as it occurred subsequent to the nine months ended September 30, 2014.
Certain Matters Related to Acquisitions
Qwest's pre-acquisition debt obligations consisted primarily of debt securities issued by QCII and two of its subsidiaries while Savvis' remaining long-term debt obligations consist primarily of capital leases, the remaining outstanding portions of which are all now included in our consolidated debt balances. The indentures governing Qwest's debt securities contain customary covenants that restrict the ability of Qwest or its subsidiaries from making certain payments and investments, granting liens and selling or transferring assets. Based on current circumstances, we do not anticipate that these covenants will significantly restrict our ability to manage cash balances or transfer cash between entities within our consolidated group of companies as needed.
In accounting for the Qwest acquisition, we recorded Qwest's debt securities at their estimated fair values, which totaled $12.292 billion as of April 1, 2011. Our acquisition date fair value estimates were based primarily on quoted market prices in active markets and other observable inputs where quoted market prices were not available. The fair value of Qwest's debt securities exceeded their stated principal balances on the acquisition date by $693 million, which we recorded as a premium.
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The table below summarizes the portions of this premium recognized as a reduction to interest expense or extinguished during the periods indicated:
______________________________________________________________________
Nine Months Ended September 30, 2014 | From April 1, 2011 through December 31, 2013 | Total Since Acquisition | |||||||
(Dollars in millions) | |||||||||
Amortized | $ | 36 | 302 | 338 | |||||
Extinguished (1) | — | 276 | 276 | ||||||
Total | $ | 36 | 578 | 614 |
(1) | Extinguished in connection with the payment of Qwest debt securities prior to maturity. |
The remaining premium of $79 million as of September 30, 2014, will reduce interest expense in future periods, unless otherwise extinguished.
Other Matters
CenturyLink has cash management arrangements with certain of its principal subsidiaries, in which substantial portions of the subsidiaries' cash is regularly advanced to CenturyLink. Although CenturyLink periodically repays these advances to fund the subsidiaries' cash requirements throughout the year, at any given point in time CenturyLink may owe a substantial sum to our subsidiaries under these advances, which, in accordance with generally accepted accounting principles, are eliminated in consolidation and therefore not recognized on our consolidated balance sheets.
In July 2014, we entered into a definitive agreement to sell and assign our remaining 700 MHz wireless spectrum licenses for $39 million in cash in the aggregate. The sale closed on November 3, 2014, and we received $39 million in cash in the aggregate. Additionally, in July 2014, we entered into a definitive agreement to sell a building for $14 million. This agreement was terminated in September 2014 and we continue to market it for sale. Also, in October of 2014, we entered into a separate definitive agreement to sell an office buildings for $13 million, which we expect to close in the fourth quarter of 2014, subject to customary closing conditions.
We also are involved in various legal proceedings that could have a material adverse effect on our financial position. See Note 8—Commitments and Contingencies to our consolidated financial statements in Item 1 of Part I of this report for the current status of such legal proceedings.
Market Risk
We are exposed to market risk from changes in interest rates on our variable rate long-term debt obligations and fluctuations in certain foreign currencies. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.
Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure. From time to time, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. As of September 30, 2014, 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. We do not hold or issue derivative financial instruments for trading or speculative purposes.
We do not believe that there were any material changes to market risks arising from changes in interest rates for the nine months ended September 30, 2014, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2013.
Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do 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 15—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, 2013 or (iii) discussed under the heading "Market Risk" above.
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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.
Certain of the industry and market data (such as the size of certain markets and our position within these markets) used throughout this report are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some market data and statistical information are also based on our good faith estimates, which are derived from our review of internal surveys, as well as the independent sources listed above. This information may prove to be inaccurate because of the method by which we obtain some of the data for our estimates or because this information cannot always be verified with certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.
In addition to historical information, this MD&A includes certain forward-looking statements that are based upon our judgment and assumptions as of the date of this report concerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are based, are inherently speculative and are subject to a number of risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the timing, success and overall effects of competition from a wide variety of competitive providers; the risks inherent in rapid technological change, including product displacement; the effects of ongoing changes in the regulation of the communications industry (including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, access charges, universal service, broadband deployment, data protection and net neutrality); our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix caused by our recent acquisitions; our ability to successfully integrate recently-acquired operations into our incumbent operations, including the possibility that the anticipated benefits from our recent acquisitions cannot be fully realized in a timely manner or at all; our ability to effectively manage our expansion opportunities, including retaining and hiring key personnel; possible changes in the demand for, or pricing of, our products and services, including our ability to effectively respond to increased demand for high-speed broadband services; our ability to successfully introduce new product or service offerings on a timely and cost-effective basis; the adverse impact on our business and network from possible equipment failures, security breaches or similar attacks on our network; our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; our ability to use our net operating loss carryforwards in projected amounts; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled communications companies; our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords and financial institutions;any adverse developments in legal or regulatory proceedings involving us; changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation plans, including those caused by changes in our cash requirements, capital expenditure needs, debt obligations, pension funding requirements, cash flows, or financial position, or other similar changes; the effects of adverse weather; other risks referenced in this report (including in "Risk Factors" in Item 1A of Part II of this report) or from time to time in other of our filings with the SEC; and the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating, medical, pension or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. These and other uncertainties related to our business and our recent acquisitions are described in greater detail in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated and supplemented by our subsequent SEC reports, including this report. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We undertake no obligation to update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of this report, and is based upon, among other things, the existing regulatory and technological environment, industry and competitive conditions, and economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or stock repurchase plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Liquidity and Capital Resources—Market Risk" in Item 2 of Part I above for quantitative and qualitative disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
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.
Our Chief Executive Officer, Glen F. Post, III, and our Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the "Exchange Act") at September 30, 2014. Based on that evaluation, Messrs. Post and Ewing concluded that our disclosure controls and procedures are designed, and are effective, to provide reasonable assurance that the information required to be disclosed by us in the reports that we file under the Exchange Act is timely recorded, processed, summarized and reported and to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including Messrs. Post and Ewing, in a manner that allows timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the third quarter of 2014 that materially affected, or that we believe are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 8—Commitments and Contingencies included in Item 1 of Part I of this report is incorporated herein by reference.
ITEM 1A. RISK FACTORS
The following discussion of “risk factors” identifies the most significant risks or uncertainties that could (i) materially and adversely affect our business, financial condition, results of operations, liquidity or prospects or (ii) cause our actual results to differ materially from our anticipated results or other expectations. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this report. Please note that the following discussion is not intended to comprehensively list all risks or uncertainties faced by us. Our operations or actual results could also be similarly impacted by additional risks and uncertainties that are not currently known to us, that we currently deem to be immaterial or that are not specific to us, such as general economic conditions.
Risks Affecting Our Business
Increasing competition, including product substitution, continues to cause us to lose access lines, which has adversely affected and is expected to continue to adversely affect our operating results and financial condition.
Various developments over the past several years have caused us to continue to lose access lines and to experience increased competitive pressures impacting each of our business segments, and we expect these trends will continue. In addition to competition from larger national telecommunications providers, we are facing increasing competition from a variety of other sources, including cable and satellite companies, wireless providers, technology companies, broadband providers, device providers, resellers, sales agents and facilities-based providers using their own networks as well as those leasing parts of our network.
Some of our current and potential competitors (i) offer products or services that are substitutes for our traditional voice services, including wireless voice and non-voice communication services, (ii) offer a more comprehensive range of communications products and services, (iii) have market presence, engineering and technical capabilities, and financial and other resources greater than ours, (iv) own larger or more diverse networks with greater transmission capacity or other advantages, (v) conduct operations or raise capital at a lower cost than us, (vi) are subject to less regulation, (vii) offer services nationally or internationally to a larger geographic area or larger base of customers, (viii) offer greater online content or (ix) have substantially stronger brand names. Consequently, these competitors may be better equipped to provide more attractive offerings, to charge lower prices for their products and services, to develop and expand their communications and network infrastructures more quickly, to adapt more swiftly to new or emerging technologies and changes in customer requirements, to devote greater resources to the marketing and sale of their products and services, or to provide more comprehensive customer service.
Competition could adversely impact us in several ways, including (i) the loss of customers and market share, (ii) the possibility of customers reducing their usage of our services or shifting to less profitable services, (iii) reduced traffic on our networks, (iv) our need to expend substantial time or money on new capital improvement projects, (v) our need to lower prices or increase marketing expenses to remain competitive and (vi) our inability to diversify by successfully offering new products or services.
We are continually taking steps to respond to these competitive pressures, but these efforts may not be successful. Our operating results and financial condition would be adversely affected if these initiatives are unsuccessful or insufficient and if we otherwise are unable to sufficiently stem or offset our continuing access line losses and our revenue declines without corresponding cost reductions. If this occurred, our ability to service debt and pay other obligations would also be adversely affected.
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Rapid technological changes could require substantial expenditure of financial and other resources in excess of contemplated levels, and any inability to respond to those changes could reduce our market share and adversely affect our operating results and financial condition.
The communications industry is experiencing significant technological changes, which in general are enhancing non-voice communications and enabling a broader array of companies to offer services competitive with ours. Many of those technological changes are (i) displacing or reducing demand for our traditional voice services, (ii) enabling the development of competitive products or services, or (iii) enabling our current customers to reduce or bypass use of our networks. Similarly, demand for our broadband services could be adversely affected by advanced wireless data transmission technologies being deployed by wireless providers, including "long-term evolution" or "LTE" technologies, and by certain technologies permitting cable companies and other competitors to deliver faster broadband speeds than ours. Rapid changes in technology are also increasing the competitiveness of the information technology services industry.
We may not be able to accurately predict technological trends or the success of newly-offered services. Further technological change could require us to expend capital or other resources in excess of currently contemplated levels, or to forego the development or provision of products or services that others can provide more efficiently. If we are not able to develop new products and services to keep pace with technological advances, or if those products and services are not widely accepted by customers, our ability to compete could be adversely affected and our market share could decline. Any inability to effectively respond to technological changes could also adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.
In addition to introducing new technologies and offerings, we may need, from time to time, to phase out outdated and unprofitable technologies and services. If we are unable to do so on a cost-effective basis, we could experience reduced profits.
For additional information on the risks of increased expenditures, see “Risk Factors—Risks Affecting our Liquidity and Capital Resources—Our business requires us to incur substantial capital and operating expenses, which reduces our available free cash flow.”
Our legacy services continue to experience declining revenues, and our efforts to offset these declines may not be successful.
In recent years, the telephone industry has experienced a decline in access lines, long distance revenues and network access revenues, which, coupled with the other changes resulting from competitive, technological and regulatory developments, continue to place downward pressure on the revenues we generate from our legacy services.
We have taken a variety of steps to counter these declines, including:
• | an increased focus on selling a broader range of higher-growth strategic services, which are described in detail elsewhere in this report; |
• | an increased focus on serving a broader range of business, governmental and wholesale customers; |
• | greater use of service bundles; and |
• | acquisitions to increase our scale and strengthen our product offerings, including new products and services provided by our hosting segment. |
However, some of these strategic services generate lower profit margins than our traditional services, and some can be expected to experience slowing growth as increasing numbers of our existing or potential customers subscribe to these newer products. Moreover, we cannot assure you that the revenues generated from our new offerings will offset revenue losses associated from reduced sales of our legacy products. Similarly, we cannot assure you that our new service offerings will be as successful as anticipated, or that we will be able to continue to grow through acquisitions. In addition, our reliance on third parties to provide certain of these strategic services could constrain our flexibility, as described further below.
Our future results will suffer if we do not effectively adjust to changes in our business, and will further suffer if we do not effectively manage our expanded operations.
The above-described changes in our industry have placed a higher premium on technological, engineering, product development, marketing and provisioning skills. Our recent acquisitions also significantly changed the composition of our markets and product mix. Our future success depends, in part, on our ability to retrain our staff to acquire or strengthen skills necessary to address these changes, and, where necessary, to attract and retain new personnel that possess these skills. Given the current competitive market for personnel with these skills, we cannot assure you that these recruitment efforts will be successful.
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Unfavorable general economic conditions could negatively impact our operating results and financial condition.
Unfavorable general economic conditions, including the unstable economy and credit market, could negatively affect our business. Worldwide economic growth has been sluggish since 2008, and many experts believe that a confluence of factors in Europe, Asia and developing countries may result in a prolonged period of economic stagnation, slow growth or economic uncertainty. While it is difficult to predict the ultimate impact of these general economic conditions, they could adversely affect demand for some of our products and services and could cause customers to shift to lower priced products and services or to delay or forego purchases of our products and services. These conditions impact, in particular, our ability to sell discretionary products or services to business customers that are under pressure to reduce costs or to governmental customers that have recently suffered substantial budget cuts with the prospect of additional future budget cuts. Any one or more of these circumstances could continue to depress our revenues. Also, our customers may encounter financial hardships or may not be able to obtain adequate access to credit, which could negatively impact their ability to make timely payments to us. In addition, as discussed further below, unstable economic and credit markets may preclude us from refinancing maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us, or at all. For these reasons, among others, if current economic conditions persist or decline, our operating results, financial condition, and liquidity could be adversely affected.
We could be harmed by security breaches, damages or other significant disruptions or failures of our networks, information technology infrastructure or related systems, or of those we operate for certain of our customers.
To be successful, we will need to continue providing our customers with high-capacity, reliable and secure networks and data hosting centers. We face the risk, as does any company, of a security breach or significant disruption of our information technology infrastructure and related systems (including our billing systems). As a communications and information technology company, we face an added risk that a security breach or other significant disruption of our public networks or information technology infrastructure and related systems that we develop, install, operate and maintain for certain of our business and governmental customers could lead to material interruptions or curtailments of service. Moreover, due to the nature of our customers and services, we face a heightened risk that a security breach or disruption could result in unauthorized access to our customers’ proprietary or classified information on our public networks or internal systems or the systems that we operate and maintain for certain of our customers.
We make significant efforts to maintain the security and integrity of these types of information and systems and maintain contingency plans in the event of security breaches or other system disruptions. Nonetheless, we cannot assure you that our security efforts and measures will prevent unauthorized access to our systems, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service, computer viruses, malware, distributed denial-of-service attacks, or other forms of cyber attacks or similar events. These threats may derive from human error, fraud, malice or sabotage on the part of employees, third parties or other nations, or could result from accidental technological failure. These threats may also arise from failure or breaches of systems owned, operated or controlled by other operators to the extent we rely on such other operations to deliver services to our customers. Similar to other large telecommunications companies, we are a target of cyber-attacks of varying degrees on a regular basis. Although some of these attacks have resulted in security breaches, to date none of these breaches have resulted in a material adverse effect on our operating results or financial condition. We cannot assure you, however, that future security breaches or disruptions would not be successful or damaging, especially in light of the growing frequency, scope and sophistication of cyber attacks and intrusions. We may be unable to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures, and any resulting damages could be material.
Although we maintain insurance coverage that may, subject to policy terms and conditions (including self-insured deductibles, coverage restrictions and monetary coverage caps) cover certain aspects of our cyber risks, such insurance coverage may be unavailable or insufficient to cover our losses.
Additional risks to our network and infrastructure include:
• | power losses or physical damage, whether caused by fire, adverse weather conditions, terrorism or otherwise; |
• | capacity or system configuration limitations; |
• | software and hardware obsolescence, defects or malfunctions; |
• | programming, processing and other human error; and |
• | other disruptions that are beyond our control. |
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Network disruptions, security breaches and other significant failures of the above-described systems could:
• | disrupt the proper functioning of these networks and systems and therefore our operations or those of certain of our customers; |
• | result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours, our customers or our customers’ end users, including trade secrets, which others could use for competitive, disruptive, destructive or otherwise harmful purposes and outcomes; |
• | require significant management attention or financial resources to remedy the damages that result or to change our systems, including expenses to repair systems, add new personnel, notify customers of breaches or develop additional protective systems; |
• | require us to offer expensive incentives to retain existing customers or subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies, particularly with respect to service standards set by state regulatory commissions; or |
• | result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional regulatory scrutiny or expose us to litigation. |
Likewise, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives. Our failure to expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new service offerings, decreased competitiveness of existing service offerings, increased acquisition integration costs, service or billing interruptions, and the diversion of development resources.
Any or all of the foregoing developments could have a negative impact on our results of operations, financial condition and cash flows.
Increases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for our customers.
Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional Internet activity such as web browsing and email. As use of these newer services continues to grow, our high-speed Internet customers will likely use much more bandwidth than in the past. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions, service degradation or slower transmission speeds for our customers. Alternatively, we could choose to implement network management practices to reduce the network capacity available to bandwidth-intensive activities during certain times in market areas experiencing congestion, which could negatively affect our ability to retain and attract customers in affected markets. While we believe demand for these services may drive high-speed Internet customers to pay for faster broadband speeds, we may not be able to recover the costs of the necessary network investments. This could result in an adverse impact to our operating margins, results of operations and financial condition.
We may need to defend ourselves against claims that we infringe upon others’ intellectual property rights, or we may need to seek third-party licenses to expand our product offerings.
From time to time, we receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or are infringing upon their intellectual property rights. We are currently responding to several of these notices and claims. Like other communications companies, we have received an increasing number of these notices and claims in the past several years, and expect this industry-wide trend will continue. Responding to these claims may require us to expend significant time and money defending our use of the applicable technology, and divert management’s time and resources away from other business. In certain instances, we may be required to enter into licensing agreements requiring royalty payments or, in the case of litigation, to pay damages. If we are required to take one or more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign one or more of our products or services, which could significantly and adversely affect our business practices, results of operations, and financial condition.
Similarly, from time to time, we may need to obtain the right to use certain patents or other intellectual property from third parties to be able to offer new products and services. If we cannot license or otherwise obtain rights to use any required technology from a third party on reasonable terms, our ability to offer new products and services may be prohibited, restricted, made more costly or delayed.
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Our operations, financial performance and liquidity are materially reliant on various third parties.
Reliance on other communications providers. We rely on reseller and sales agency arrangements with other communications companies to provide some of the services that we sell to our customers, including video services and wireless products and services. If we fail to extend or renegotiate these arrangements as they expire from time to time or if these other companies fail to fulfill their contractual obligations to us or our customers, we may have difficulty finding alternative arrangements and our customers may experience disruptions to their services. In addition, as a reseller or sales agent, we do not control the availability, retail price, design, function, quality, reliability, customer service or branding of these products and services, nor do we directly control all of the marketing and promotion of these products and services. To the extent that these other companies make decisions that negatively impact our ability to market and sell their products and services, our business plans and goals and our reputation could be negatively impacted. If these reseller and sales agency arrangements are unsuccessful due to one or more of these risks, our business and operating results may be adversely affected.
To offer voice or data services in certain of our markets, we must either lease network capacity from, or interconnect our network with the infrastructure of, other communications companies who typically compete against us in those markets. Similar to the risks summarized in the prior paragraph, our reliance on these lease or interconnection arrangements limits our control over the quality of our services and exposes us to the risk that the other carrier may be unwilling to continue or renew these arrangements in the future on terms favorable to us, or at all.
Conversely, certain of our operations carry a significant amount of voice or data traffic for other communications providers. Their reliance on our services exposes us to the risk that they may transfer all or a portion of this traffic from our network to networks built, owned or leased by them, thereby reducing our revenues. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Segment Results—Wholesale" included in Item 2 of Part I of this report.
Our operations and financial performance could be adversely affected if our relationships with any of these other communications companies are disrupted or terminated for any other reason, including if such other companies:
• | go bankrupt or experience substantial financial difficulties; |
• | suffer work stoppages or other labor strife; |
• | challenge our right to receive payments or services under applicable regulations or the terms of our existing contract arrangements; or |
• | are otherwise unable or unwilling to make payments or provide services to us. |
Reliance on other key suppliers, vendors and landlords. We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. Our local exchange carrier networks consist of central office and remote sites, all with advanced digital switches. If any of these suppliers experience interruptions or other problems delivering or servicing these network components on a timely basis, our operations could suffer significantly. To the extent that proprietary technology of a supplier is an integral component of our network, we may have limited flexibility to purchase key network components from alternative suppliers and may be adversely affected if third parties assert patent infringement claims against our suppliers or us. Similarly, our data center operations are materially reliant on leasing significant amounts of space from landlords and substantial amounts of power from utility companies, and being able to renew these arrangements from time to time on favorable terms. In addition, we rely on a limited number of software vendors to support our business management systems. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, space or utilities on economically attractive terms, on a timely basis, or at all, which could increase costs or cause disruptions in our services.
Reliance on governmental payments. We receive a material amount of revenue or government subsidies under various government programs or our service contracts with federal, state and local agencies. Governmental agencies frequently reserve the right to terminate their contracts for convenience, or to suspend or debar companies from receiving future subsidies or contracts under certain circumstances. If our governmental contracts are terminated for any reason, or if we are suspended or debarred from governmental programs or contracts, our results of operations and financial condition could be materially adversely affected.
Reliance on financial institutions. We rely on 18 financial institutions to provide us with short-term liquidity under our credit facility. If one or more of these lenders default on their funding commitments, our access to revolving credit could be adversely affected.
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Rising costs and other industry changes may adversely impact our video business
The costs of purchasing video programming has risen significantly in recent years and continues to rise. Moreover, an increasing number of consumers are receiving video streaming or other services pursuant to new technologies in lieu of purchasing more traditional video products, such as the satellite TV services that we resell and our Prism TV services. These changes, coupled with changing consumer preferences and other related developments, could reduce the profitability or demand for our video products and services.
Consolidation among other participants in the communications industry may allow our competitors to compete more effectively against us, which could adversely affect our operating results and financial condition.
The telecommunications, video and cable industries have recently experienced, and continue to experience, substantial consolidation, and some of our competitors have combined with other communications providers, resulting in larger competitors that have greater financial and business resources and broader service offerings. Further consolidation could increase competitive pressures, and could adversely affect our operating results and financial condition, as well as our ability to service debt and pay other obligations.
If we fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.
As of September 30, 2014, approximately 38% of our employees are members of various bargaining units represented by the Communications Workers of America or the International Brotherhood of Electrical Workers. From time to time, our labor agreements with unions expire and we typically negotiate the terms of new bargaining agreements. We may be unable to reach new agreements, and union employees may engage in strikes, work slowdowns or other labor actions, which could materially disrupt our ability to provide services and result in increased cost to us. In addition, new labor agreements may impose significant new costs on us, which could impair our financial condition or results of operations in the future. To the extent they contain benefit provisions, these agreements may also limit our flexibility to change benefits in response to industry or competitive changes. In particular, the post-employment benefits provided under these agreements could cause us to incur costs not faced by many of our competitors, which could ultimately hinder our competitive position.
We have a significant amount of goodwill and other intangible assets on our balance sheet. If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings and reduce our stockholders’ equity.
As of September 30, 2014, approximately 54% of our total consolidated assets reflected on the consolidated balance sheet included in this report consist of goodwill or other intangible assets. Under generally accepted accounting principles, most of these intangible assets must be tested for impairment on an annual basis or more frequently whenever events or circumstances indicate that their carrying value may not be recoverable. From time to time (most recently for the third quarter of 2013), we or our predecessors have recorded large non-cash charges to earnings in connection with required reductions of the value of our intangible assets. If our intangible assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined.
We cannot assure you that we will be able to continue paying dividends at the current rate.
Decisions on whether, when and in which amounts to make any future dividend distributions will remain at all times entirely at the discretion of our Board of Directors, which reserves the right to change or terminate our dividend practices at any time and for any reason. Based on current circumstances, we plan to continue our current dividend practices. However, you should be aware that these practices are reviewed periodically and are subject to change for reasons that may include any of the following factors:
• | we may not have enough cash to pay such dividends due to changes in our cash requirements, capital spending plans, stock repurchase plans, cash flows or financial position; |
• | the effects of regulatory reform, including any changes to intercarrier compensation, Universal Service Fund or special access rules; |
• | our desire to maintain or improve the credit ratings on our debt; |
• | the amount of dividends that we may distribute to our shareholders is subject to restrictions under Louisiana law and is limited by restricted payment and leverage covenants in our credit facilities and, potentially, the terms of any future indebtedness that we may incur; and |
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• | the amount of dividends that our subsidiaries may distribute to us is subject to restrictions imposed by state law, restrictions that have been or may be imposed by state regulators in connection with obtaining necessary approvals for our acquisitions, and restrictions imposed by the terms of credit facilities applicable to certain subsidiaries and, potentially, the terms of any future indebtedness that these subsidiaries may incur. |
Our Board of Directors is free to modify or terminate our dividend practices at any time and for any reason. Our common shareholders should be aware that they have no contractual or other legal right to dividends.
Our current dividend practices could limit our ability to deploy cash for other beneficial purposes.
The current practice of our Board of Directors to pay common share dividends reflects a current intention to distribute to our shareholders a substantial portion of our cash flow. As a result, we may not retain a sufficient amount of cash to apply to other transactions that could be beneficial to our shareholders or debtholders, including stock buybacks, debt prepayments or capital expenditures that strengthen our business. In addition, our ability to pursue any material expansion of our business through acquisitions or increased capital spending will depend more than it otherwise would on our ability to obtain third party financing. We cannot assure you that such financing will be available to us at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us, or at all.
Portions of our property, plant and equipment are located on property owned by third parties.
Over the past few years, certain utilities, cooperatives and municipalities in certain of the states in which we operate have requested significant rate increases for attaching our plant to their facilities. To the extent that these entities are successful in increasing the amount we pay for these attachments, our future operating costs will increase.
In addition, we rely on rights-of-way, colocation agreements and other authorizations granted by governmental bodies and other third parties to locate our cable, conduit and other network equipment on their respective properties. If any of these authorizations terminate or lapse, our operations could be adversely affected.
We depend on key members of our senior management team.
Our success depends largely on the skills, experience and performance of a limited number of senior officers. Competition for senior management in our industry is intense and we may have difficulty retaining our current senior officers or attracting new ones in the event of terminations or resignations. For a discussion of similar retention concerns relating to our recent acquisitions, please see the risks described below under the heading “Risk Factors—Risks Relating to our Recent Acquisitions.”
As a holding company, we rely on payments from our operating companies to meet our obligations.
As a holding company, substantially all of our income and operating cash flow is dependent upon the earnings of our subsidiaries and their distribution of those earnings to us in the form of dividends, loans or other payments. As a result, we rely upon our subsidiaries to generate the funds necessary to meet our obligations, including the payment of amounts owed under our long-term debt. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts owed by us or, subject to limited exceptions for tax-sharing or cash management purposes, to make any funds available to us to repay our obligations, whether by dividends, loans or other payments. State law applicable to each of our subsidiaries restricts the amount of dividends that they may pay. Restrictions that have been or may be imposed by state regulators (either in connection with obtaining necessary approvals for our acquisitions or in connection with our regulated operations), and restrictions imposed by credit agreements applicable to certain of our subsidiaries may limit the amount of funds that our subsidiaries are permitted to transfer to us, including the amount of dividends that may be paid to us. Moreover, our rights to receive assets of any subsidiary upon its liquidation or reorganization will be effectively subordinated to the claims of creditors of that subsidiary, including trade creditors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included elsewhere in this report for further discussion of these matters.
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Risks Relating to our Recent Acquisitions
We may be unable to integrate successfully our recently-acquired operations and realize the anticipated benefits of our recent acquisitions.
We acquired Embarq, Qwest and Savvis during a roughly 24-month period between mid-2009 to mid-2011. These acquisitions involved the combination of companies which previously operated as independent public companies. We have devoted, and will continue to devote, significant management attention and resources to integrating the business practices and operations of CenturyLink and the acquired companies. We may encounter difficulties in the integration process, including the following:
• | the inability to successfully combine our businesses in a manner that permits the combined company to achieve the cost savings and operating synergies anticipated to result from the acquisitions, either due to technological challenges, personnel shortages, strikes or otherwise, any of which would result in the anticipated benefits of the acquisitions not being realized partly or wholly in the time frame anticipated or at all; |
• | delays or limitations in connection with offering new products or providing current ones arising out of the multiplicity of different legacy systems, networks and processes used by each of the companies; |
• | the complexities associated with managing the combined businesses out of several different locations and integrating personnel from multiple companies, while at the same time attempting to provide consistent, high-quality products and services under a unified culture; |
• | the difficulties of producing combined financial information using dispersed personnel with different past practices, including the attendant risk of errors; |
• | the complexities of combining companies with different histories, regulatory restrictions, cost structures, products, sales forces, markets, marketing strategies, and customer bases; |
• | the failure to retain key employees, some of whom could be critical to integrating, operating or expanding the companies; |
• | potential unknown liabilities and unforeseen increased expenses or regulatory conditions associated with the acquisitions; and |
• | performance shortfalls at one or all of the companies as a result of the diversion of management’s attention caused by integrating the companies’ operations. |
In the last couple of years we have purchased several other businesses to augment our hosting segment. Integrating these newly-acquired businesses into our hosting operations will give rise to similar challenges and risks.
As discussed further under “Business—Network Architecture” in Item 1 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013, we are currently undertaking several complex, costly and time-consuming projects to simplify and modernize our network, which is an amalgam of our legacy network and the networks of companies we have acquired in the past.
For all these reasons, you should be aware that our remaining efforts to integrate these companies and businesses could distract our management, disrupt our ongoing business or create inconsistencies in our products, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of our recent acquisitions, or could otherwise adversely affect our business and financial results.
We may be unable to successfully adjust to the substantial change in our markets and operations caused by our recent acquisitions.
Prior to our acquisition of Embarq, we provided principally voice and internet services to consumers in predominantly rural areas and small to mid-sized cities in 25 states. As a result of our recent acquisitions, we now provide a diversified array of communications services to residential, business, governmental and wholesale customers in a wide range of markets throughout the United States and internationally. While we believe we have adequately adjusted our strategies, management, operating models and organizational structures to address these changes, we cannot assure you that further adjustments will not be required in the future.
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Our acquisitions of Qwest and Savvis have increased our exposure to the risks of operating internationally.
Prior to 2011, substantially all of our operations were historically conducted within the continental United States. Our acquisitions of Qwest and Savvis in 2011 increased the importance of international operations to our future operations, growth and prospects.
Our foreign operations are subject to varying degrees of regulation in each of the foreign jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions, and can change significantly over time. Future regulatory, judicial and legislative changes or interpretations may have a material adverse effect on our ability to deliver services within various foreign jurisdictions. Many of these foreign laws and regulations relating to communications services are more restrictive than U.S. laws and regulations, particularly those relating to content distributed over the Internet. For example, the European Union has enacted a data retention system that, once implemented by individual member states, will involve requirements to retain certain Internet protocol, or IP, data that could have an impact on our operations in Europe. Moreover, national regulatory frameworks that are consistent with the policies and requirements of the World Trade Organization have only recently been, or are still being, enacted in many countries. Accordingly, many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market. As a result, in these markets we may encounter more protracted and difficult procedures to obtain licenses necessary to provide the full set of products we offer.
In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include:
• | tax, licensing, currency, political or other business restrictions or requirements; |
• | import and export restrictions; |
• | longer payment cycles and problems collecting accounts receivable; |
• | additional U.S. and other regulation of non-domestic operations, including regulation under the Foreign Corrupt Practices Act, or FCPA, as well as other anti-corruption laws; |
• | economic, social and political instability, with the attendant risks of terrorism, kidnapping, extortion, civic unrest and potential seizure or nationalization of assets; |
• | fluctuations in currency exchange rates; |
• | the ability to secure and maintain the necessary physical and telecommunications infrastructure; |
• | the inability to enforce contract rights either due to underdeveloped legal systems or government actions that result in a deprivation of contract rights; |
• | laws, policies or practices that limit the scope of operations that can legally or practicably be conducted within any particular country; and |
• | challenges in staffing and managing foreign operations. |
Any one or more of these factors could adversely affect our international operations.
Moreover, in order to effectively compete in certain foreign jurisdictions, it is frequently necessary or required to establish joint ventures, strategic alliances or marketing arrangements with local operators, partners or agents. Reliance on local operators, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products, or being held liable under the FCPA or other anti-corruption laws for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be subject to the FCPA or other applicable anti-corruption laws. Any determination that we have violated the FCPA or other anti-corruption laws could have a material adverse effect on our business, results of operations, reputation or prospects.
We expect to incur significant expenses related to the completion of the integration of Qwest.
We have incurred, and expect to continue to incur, significant expenses in connection with the integration of Qwest’s business, operations, networks, systems, technologies, policies and procedures with our own. We have integrated a number of our systems, and we continue to work towards completing the planned integration of our remaining systems. Until this integration is completed, we cannot accurately predict the total amount or the timing of our integration expenses.
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Our acquisitions have increased our exposure to the risks of fluctuations in energy costs, power outages and availability of electrical resources.
Through the acquisitions of Qwest and Savvis, we have added a significant number of data center facilities, which are susceptible to regional costs and supply of power and electrical power outages. In addition, our energy costs can fluctuate significantly or increase for a variety of reasons, including changes in legislation and regulation. Several pending proposals designed to reduce greenhouse emissions could substantially increase our energy costs. As energy costs increase, we may not always be able to pass on the increased costs of energy to our customers, which could harm our business. Our customers’ demand for power may also exceed the power capacity in older data centers, which may limit our ability to fully utilize these data centers. Moreover, the increasing power demands of today’s servers may cause our demand for power in certain of our data centers to exceed the supply available from third parties. Any one or more of these developments could adversely affect our relationships with our customers and hinder our ability to run our data centers, which could harm our business.
Our inability to renew data center leases, on favorable terms or at all, could have a negative impact on our financial results.
A significant majority of the data centers we acquired in the Qwest and Savvis acquisitions are leased and have lease terms that expire between 2014 and 2031. The majority of these leases provide us with the opportunity to renew the lease at our option for periods generally ranging from five to ten years. Many of these renewal options, however, provide that rent for the renewal period will be equal to the fair market rental rate at the time of renewal. If the fair market rental rates are significantly higher than our current rental rates, we may be unable to offset these costs by charging more for our services, which could have a negative impact on our financial results. Also, it is possible that a landlord may insist on other financially unfavorable renewal terms or, where no further option to renew exists, elect not to renew altogether.
Any additional future acquisitions by us would subject us to additional business, operating and financial risks, the impact of which cannot presently be evaluated, and could adversely impact our capital structure or financial position.
From time to time in the future we may pursue other acquisition opportunities. To the extent we acquire a business that is highly leveraged or is otherwise subject to a high level of risk, we may be affected by the currently unascertainable risks of that business. In addition, the financing of any future acquisition completed by us could adversely impact our capital structure or financial position, as any such financing would likely include the issuance of additional securities or the borrowing of additional funds. Except as required by law or applicable securities exchange listing standards, we do not expect to ask our shareholders to vote on any proposed acquisition. Moreover, we generally do not announce our acquisitions until we have entered into a preliminary or definitive agreement.
Risks Relating to Legal and Regulatory Matters
Any adverse outcome in any of our pending key 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.
As described in Note 8—Commitments and Contingencies to our consolidated financial statements included in Item 1 of Part I of this report, the KPNQwest lawsuit brought against us by Cargill Financial Markets, Plc and Citibank, N.A. presents significant risk to us. The plaintiffs seek hundreds of millions of dollars in damages. We continue to vigorously defend ourselves in that lawsuit.
We are currently unable to provide an estimate as to the timing of the resolution of this matter. We can give no assurance as to the impacts on our financial results or financial condition that may ultimately result from the Cargill/Citibank lawsuit. The ultimate outcome remains uncertain, and a substantial settlement or judgment in this matter could have a significant impact on us. The magnitude of such a settlement or judgment could materially and adversely affect our financial condition and ability to meet our debt obligations, potentially impacting our credit ratings, our ability to access capital markets and our compliance with debt covenants. In addition, the magnitude of a settlement or judgment may cause us to draw down significantly on our cash balances, which might force us to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional debt securities or selling assets.
There are other material proceedings pending against us, as described in the above-referenced Note 8. Depending on their outcome, any of these matters could have a material adverse effect on our financial position or operating results. We can give you no assurances as to the impact of these matters on our operating results or financial condition.
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We operate in a highly regulated industry and are therefore exposed to restrictions on our operations and a variety of claims relating to such regulation.
General. We are subject to significant regulation by (i) the Federal Communications Commission (“FCC”), which regulates interstate communications, (ii) state utility commissions, which regulate intrastate communications, and (iii) various foreign governments and international bodies, which regulate our international operations. Generally, we must obtain and maintain certificates of authority or licenses from these bodies in most territories where we offer regulated services. We cannot assure you that we will be successful in obtaining or retaining all licenses necessary to carry out our business plan, and, even if we are, the prescribed service standards and conditions imposed on us in connection with obtaining or acquiring control of these licenses may impose on us substantial costs and limitations. We are also subject to numerous requirements and interpretations under various international, federal, state and local laws, rules and regulations, which are often quite detailed and occasionally in conflict with each other. Accordingly, we cannot ensure that we are always considered to be in compliance with all these requirements at any single point in time. The agencies responsible for the enforcement of these laws, rules and regulations may initiate inquiries or actions based on customer complaints or on their own initiative.
Regulation of the telecommunications industry continues to change rapidly, and the regulatory environment varies substantially from jurisdiction to jurisdiction. Notwithstanding a recent movement towards alternative regulation, a substantial portion of our local voice services revenue remains subject to FCC and state utility commission pricing regulation, which periodically exposes us to pricing or earnings disputes and could expose us to unanticipated price declines. Interexchange carriers have filed complaints in various forums requesting reductions in our access rates. In addition, several long distance providers are disputing or refusing to pay amounts owed to us for carrying Voice over Internet Protocol (“VoIP”) traffic, or traffic they claim to be VoIP traffic. Similarly, some carriers are refusing to pay access charges for certain calls between mobile and wireline devices routed through an interexchange carrier. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse effect on our operations, or that regulators or third parties will not raise material issues with regard to our compliance or noncompliance with applicable regulations.
Risks associated with recent changes in federal regulation. On October 27, 2011, the FCC adopted the Connect America and Intercarrier Compensation Reform order (“CAF order”) intended to reform the existing regulatory regime to recognize ongoing shifts to new technologies, including VoIP, and gradually re-direct federal universal service funding to foster nationwide broadband coverage. This initial ruling provides for a multi-year transition over the next decade as intercarrier compensation charges are reduced, federal universal service funding is explicitly targeted to broadband deployment, and subscriber line charges paid by end-user customers are gradually increased. We expect these changes will substantially increase the pace of reductions in the amount of switched access revenues we receive in our wholesale business. Although we anticipate that the FCC’s CAF rules will materially increase the federal support funding available to us, we also expect that to the extent we choose to accept these funds, we will incur significant incremental costs to provide the requisite broadband services. We expect that we will be granted 120 days from the effective date of the FCC’s upcoming release of implementation rules (which we anticipate will be issued in late 2014 or early 2015) to declare whether we will accept or reject the specified CAF support, on a state-by-state basis. To the extent that we choose not to accept CAF funds in any state, we expect that those funds will be awarded at auction, and that our federal universal service support for that state will be ended, or significantly reduced.
Several judicial challenges to the CAF order are pending and additional future challenges are possible, any of which could alter or delay the FCC’s proposed changes. In addition, based on the outcome of the FCC proceedings, various state commissions may consider changes to their universal service funds or intrastate access rates. Moreover, FCC proceedings relating to implementation of the Order remain pending. For these and other reasons, we cannot predict the ultimate impact of these proceedings at this time.
In addition, during the last few years Congress or the FCC has initiated various other changes, including (i) broadband stimulus projects, support funds and similar plans and (ii) various “network neutrality” proposals. The FCC is also considering changes in the regulation of special access services. Any of these recent or pending initiatives could adversely affect our operations or financial results. Moreover, many of the FCC’s regulations adopted in recent years remain subject to judicial review and additional rulemakings, thus increasing the difficulty of determining the ultimate impact of these changes on us and our competitors.
Risks of higher costs. Regulations continue to create significant costs for us. Challenges to our tariffs by regulators or third parties or delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, such challenges could adversely affect the rates that we are able to charge our customers.
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Our business also may be impacted by legislation and regulation imposing new or greater obligations related to regulations or laws related to broadband deployment, bolstering homeland security or cyber security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, protecting intellectual property rights of third parties, or addressing other issues that impact our business, including the Communications Assistance for Law Enforcement Act (which requires communications carriers to ensure that their equipment, facilities, and services are able to facilitate authorized electronic surveillance), and laws governing local number portability and customer proprietary network information requirements. We expect our compliance costs to increase if future laws or regulations continue to increase our obligations to assist other governmental agencies.
In addition, increased regulation of our suppliers could increase our costs. For instance, if enhanced regulation of greenhouse gas emissions increase our energy costs, the profitability of our hosting and other operations could be adversely affected.
Risks of reduced flexibility. As a diversified full service incumbent local exchange carrier in most of our key markets, we have traditionally been subject to significant regulation that does not apply to many of our competitors. This regulation in many instances restricts our ability to change rates, to compete and to respond rapidly to changing industry conditions. As our business becomes increasingly competitive, regulatory disparities between us and our competitors could impede our ability to compete.
Risks posed by other regulations. All of our operations are also subject to a variety of environmental, safety, health and other governmental regulations. We monitor our compliance with federal, state and local regulations governing the management, discharge and disposal of hazardous and environmentally sensitive materials. Although we believe that we are in compliance with these regulations, our management, discharge or disposal of hazardous and environmentally sensitive materials might expose us to claims or actions that could have a material adverse effect on our business, financial condition and operating results.
“Open Internet” regulation could limit our ability to operate our high-speed data business profitably and to manage our broadband facilities efficiently.
In order to continue to provide quality high-speed data service at attractive prices, we believe we need the continued flexibility to respond to changing consumer demands, to manage bandwidth usage efficiently for the benefit of all customers and to invest in our networks. In the past, the FCC adopted “net neutrality” regulations that we believe provided manageable operating guidelines to ensure an Open Internet. Because the FCC has recently proposed new regulations that could either afford greater flexibility or more regulations, we cannot assure you of the final terms of any such regulations or their impact on us. Moreover, we cannot assure you that Congress will not pass legislation to further address Open Internet issues that could hamper our ability to operate our data networks profitably, that restrict our ability to implement upgrades or network management practices necessary to ensure quality service, or that could otherwise negatively impact our ability to compete effectively.
We may be liable for the material that content providers distribute over our network.
Although we believe our liability for third party information stored on or transmitted through our networks is limited, the liability of private network operators is impacted both by changing technology and evolving legal principles. As a private network provider, we could be exposed to legal claims relating to third party content stored or transmitted on our networks. Such claims could involve allegations of defamation, invasion of privacy or copyright infringement, among other things. If we decide to implement additional measures to reduce our exposure to these risks or if we are required to defend ourselves against these kinds of claims, our financial results could be negatively affected.
We are subject to franchising requirements that could impede our expansion opportunities.
We may be required to obtain from municipal authorities operating franchises to install or expand facilities. Some of these franchises may require us to pay franchise fees. These franchising requirements generally apply to our fiber transport and competitive local exchange carrier operations, and to our facilities-based video services. These requirements could delay us in expanding our operations or increase the costs of providing these services.
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We are exposed to risks arising out of recent legislation affecting U.S. public companies.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, and related regulations implemented thereunder, are increasing legal and financial compliance costs and making some activities more time consuming. Any failure to successfully or timely complete annual assessments of our internal controls required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results or our reputation with investors, lenders or others.
For a more thorough discussion of the regulatory issues that may affect our business, see “Regulation” in Item 1 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013.
Risks Affecting our Liquidity and Capital Resources
Our high debt levels pose risks to our viability and may make us more vulnerable to adverse economic and competitive conditions, as well as other adverse developments.
We continue to carry significant debt. As of September 30, 2014, our consolidated long-term debt was approximately $21.2 billion. Approximately $4.5 billion of our consolidated debt, excluding capital lease and other obligations, matures over the 36 months ending September 30, 2017, which includes our $585 million of credit facility debt at September 30, 2014.
Our significant levels of debt can adversely affect us in several other respects, including:
• | limiting the ability of CenturyLink and its subsidiaries to access the capital markets; |
• | exposing CenturyLink and its subsidiaries to the risk of credit rating downgrades, as described further below; |
• | hindering our flexibility to plan for or react to changing market, industry or economic conditions; |
• | limiting the amount of cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses; |
• | making us more vulnerable to economic or industry downturns, including interest rate increases; |
• | placing us at a competitive disadvantage compared to less leveraged competitors; |
• | increasing the risk that we will need to sell securities or assets, possibly on unfavorable terms, or reduce or terminate our dividend payments, to meet payment obligations; or |
• | increasing the risk that we may not meet the financial covenants contained in our debt agreements or timely make all required debt payments. |
The effects of each of these factors could be intensified if we increase our borrowings.
Any failure to make required debt payments could, among other things, adversely affect our ability to conduct operations or raise capital.
We expect to periodically require financing, and we cannot assure you that we will be able to obtain such financing on terms that are acceptable to us, or at all.
We have a significant amount of indebtedness that we intend to refinance over the next several years, principally through the issuance of debt securities of CenturyLink, Qwest Corporation or both. Our ability to arrange additional financing will depend on, among other factors, our financial position, performance, and credit ratings, as well as prevailing market conditions and other factors beyond our control. Prevailing market conditions could be adversely affected by disruptions in domestic or overseas sovereign or corporate debt markets, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad. Instability in the global financial markets has from time to time resulted in periodic volatility in the capital markets. This volatility could limit our access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain financing on terms that are as favorable as those from which we previously benefitted, on terms that are acceptable to us, or at all. Any such failure to obtain additional financing could jeopardize our ability to repay, refinance or reduce our debt obligations.
We may also need to obtain additional financing under a variety of other circumstances, including if:
• | revenues and cash provided by operations decline; |
• | economic conditions weaken, competitive pressures increase or regulatory requirements change; |
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• | we engage in any acquisitions or undertake substantial capital projects or other initiatives that increase our cash requirements; |
• | we are required to contribute a material amount of cash to our pension plans; |
• | we are required to begin to pay other post-retirement benefits earlier than anticipated; |
• | our payments of federal taxes increase faster or in greater amounts than currently anticipated; or |
• | we become subject to significant judgments or settlements in one or more of the matters discussed in Note 8—Commitments and Contingencies to our consolidated financial statements included elsewhere in this report. |
For all the reasons mentioned above, we can give no assurance that additional financing for any of these purposes will be available on terms that are acceptable to us or at all.
In addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities and other debt agreements. If we are unable to satisfy the financial covenants contained in those agreements, or are unable to generate cash sufficient to make required debt payments, the parties to whom we are indebted could accelerate the maturity of some or all of our outstanding indebtedness. Certain of our debt instruments have cross payment default or cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” elsewhere in this report for additional information about our indebtedness.
If we are unable to make required debt payments or refinance our debt, we would likely have to consider other options, such as selling assets, issuing additional securities, reducing or terminating our dividend payments, cutting costs or otherwise reducing our cash requirements, or negotiating with our lenders to restructure the applicable debt. Our credit agreement, term loan and the indentures governing our senior notes may restrict, or market or business conditions may limit, our ability to do some of these things on favorable terms or at all.
Any downgrade in the credit ratings of us or our affiliates could limit our ability to obtain future financing, increase our borrowing costs and adversely affect the market price of our existing debt securities or otherwise impair our business, financial condition and results of operations.
Nationally recognized credit rating organizations have issued credit ratings relating to our long-term debt and the long-term debt of several of our subsidiaries, most of which are below “investment grade.” There can be no assurance that any rating assigned to any of these debt securities will remain in effect for any given period of time or that any such ratings will not be lowered, suspended or withdrawn entirely by a rating agency if, in that rating agency’s judgment, circumstances so warrant.
A downgrade of any of these credit ratings could:
• | adversely affect the market price of some or all of our outstanding debt or equity securities; |
• | limit our access to the capital markets or otherwise adversely affect the availability of other new financing on favorable terms, if at all; |
• | trigger the application of restrictive covenants in certain of our debt agreements or result in new or more restrictive covenants in agreements governing the terms of any future indebtedness that we may incur; |
• | increase our cost of borrowing; and |
• | impair our business, financial condition and results of operations. |
Under certain circumstances upon a change of control, we will be obligated to offer to repurchase certain of our outstanding debt securities, which could have certain adverse ramifications.
If the credit ratings relating to certain of our long-term debt securities are downgraded in the manner specified thereunder in connection with a “change of control” of CenturyLink, then we will be required to offer to repurchase such debt securities. If, due to lack of cash, legal or contractual impediments, or otherwise, we fail to offer to repurchase such debt securities, such failure could constitute an event of default under such debt securities, which could in turn constitute a default under other of our agreements relating to our indebtedness outstanding at that time. Moreover, the existence of these repurchase covenants may in certain circumstances render it more difficult or discourage a sale or takeover of us, or the removal of our incumbent directors.
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Our debt agreements and the debt agreements of our subsidiaries allow us to incur significantly more debt, which could exacerbate the other risks described in this report.
The terms of our debt instruments and the debt instruments of our subsidiaries permit additional indebtedness. Additional debt may be necessary for many reasons, including those discussed above. Incremental borrowings that impose additional financial risks could exacerbate the other risks described in this report.
Our business requires us to incur substantial capital and operating expenses, which reduce our available free cash flow.
Our business is capital intensive, and we anticipate that our capital requirements will continue to be significant in the coming years. As discussed further under “Risk Factors—Risks Affecting Our Business—Increases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for our customers,” increased bandwidth consumption by consumers and businesses have placed increased demands on the transmission capacity of our networks. If we determine that our networks must be expanded to handle these increased demands, we may be required to make substantial capital expenditures, even though there is no assurance that the return on our investment will be satisfactory. In addition, many of our growth and modernization initiatives are capital intensive and changes in technology could require further spending. In addition to investing in expanded networks, new products or new technologies, we must from time to time replace some of the equipment that supports our traditional services as that equipment ages, even though the revenue base from those services is not growing. While we believe that our planned level of capital expenditures will meet both our maintenance and core growth requirements, this may not be the case if demands on our network continue to accelerate or other circumstances underlying our expectations change. Increased spending could, among other things, adversely affect our operating margins, cash flows, results of operations and financial position.
Similarly, we continue to anticipate incurring substantial operating expenses to support our incumbent services and growth initiatives. Although we have successfully reduced certain of our operating expenses over the past few years, we may be unable to further reduce these costs, even if revenues in some of our lines of business are decreasing. If so, our operating margins will be adversely impacted.
We cannot assure you whether, when or in what amounts we will be able to use our net operating losses, or when they will be depleted.
At December 31, 2013, we had approximately $2.9 billion of federal net operating losses, or NOLs, which relate primarily to pre-acquisition losses of Qwest. Under certain circumstances, these NOLs can be used to offset our future federal and certain taxable income.
The acquisitions of Qwest and Savvis caused “ownership changes” under federal tax laws relating to the use of NOLs. As a result, these laws could limit our ability to use these NOLs and certain other deferred tax attributes. Further limitations could apply if we are deemed to undergo an ownership change in the future. Despite this, we expect, based on current laws and circumstances, to use substantially all of these NOLs and certain other deferred tax attributes as an offset to our federal future taxable income by the end of 2015, although the timing of that use will depend upon the consolidated group’s future earnings. If and when our NOLs are fully utilized, we expect that the amount of our cash flow dedicated to the payment of federal taxes will increase substantially.
Increases in costs for pension and healthcare benefits for our active and retired employees may reduce our profitability and increase our funding commitments.
With approximately 47,000 employees, and approximately 66,000 pension retirees and approximately 35,000 former employees with vested benefits as of December 31, 2013 participating in our benefit plans, the costs of pension and healthcare benefits for our active and retired employees have a significant impact on our profitability. Our costs of maintaining our pension and healthcare plans, and the future funding requirements for these plans, are affected by several factors, most of which are outside our control, including:
• | decreases in investment returns on funds held by our pension and other benefit plan trusts; |
• | changes in prevailing interest rates and the discount rate used to calculate pension and other post-retirement expenses; |
• | increases in healthcare costs generally or claims submitted under our healthcare plans specifically; |
• | the continuing implementation of the Patient Protection and Affordable Care Act, and the related reconciliation act and regulations promulgated thereunder; |
• | increases in the number of retirees who elect to receive lump sum benefit payments; |
• | changes in plan benefits; and |
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• | changes in funding laws or regulations. |
Increased costs under these plans could reduce our profitability and increase our funding commitments to our pension plans. Any future material cash contributions could have a negative impact on our liquidity by reducing our cash flows.
As of December 31, 2013, our pension plans and our other post-retirement benefit plans were substantially underfunded from an accounting standpoint. See Note 8—Employee Benefits to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. For more information on our obligations under our defined benefit pension plans and other post-retirement benefit plans, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Pension and Post-retirement Benefit Obligations” included in our Annual Report Form 10-K for the year ended December 31, 2013.
Other Risks
If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, our consolidated financial statements and related disclosures could be materially affected.
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2013, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that are considered “critical” because they require judgments, assumptions and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events or assumptions differ significantly from the judgments, assumptions and estimates in our critical accounting policies, these events or assumptions could have a material impact on our consolidated financial statements and related disclosures.
We face hurricane and other natural disaster risks, which can disrupt our operations and cause us to incur substantial additional capital and operating costs.
A substantial number of our facilities are located in Florida, Alabama, Louisiana, Texas, North Carolina, South Carolina and other coastal states, which subjects them to the risks associated with severe tropical storms, hurricanes and tornadoes, including downed telephone lines, flooded facilities, power outages, fuel shortages, damaged or destroyed property and equipment, and work interruptions. Although we maintain property and casualty insurance on our plant (excluding our outside plant) and may under certain circumstances be able to seek recovery of some additional costs through increased rates, only a portion of our additional costs directly related to such hurricanes and natural disasters have historically been recoverable. We cannot predict whether we will continue to be able to obtain insurance for hazard-related damages or, if obtainable and carried, whether this insurance will be adequate to cover our losses. In addition, we expect any insurance of this nature to be subject to substantial deductibles and to provide for premium adjustments based on claims. Any future hazard-related costs and work interruptions could adversely affect our operations and our financial condition.
Tax audits or changes in tax laws could adversely affect us.
Like all large businesses, we are subject to frequent and regular audits by the Internal Revenue Service as well as state and local tax authorities. These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.
We believe that we have adequately provided for tax contingencies. However, our tax audits and examinations may result in tax liabilities that differ materially from those that we have recognized in our consolidated financial statements. Because the ultimate outcomes of all of these matters are uncertain, we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results.
Our agreements and organizational documents and applicable law could limit another party’s ability to acquire us.
A number of provisions in our agreements and organizational documents and various provisions of applicable law may delay, defer or prevent a future takeover of CenturyLink unless the takeover is approved by our Board of Directors. For additional information, please see our Registration Statement on Form 8-A/A filed with the SEC July 1, 2009. This could deprive our shareholders of any related takeover premium.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
In February 2014, our Board of Directors authorized a new 24-month program to repurchase up to an aggregate of $1 billion of our outstanding common shares. This program took effect on May 29, 2014, immediately upon the completion of our predecessor 2013 repurchase program. During the three months ended September 30, 2014, we repurchased approximately 1.7 million shares of our outstanding common stock in the open market under our new stock repurchase programs. These shares were repurchased for an aggregate market price of $64 million or an average purchase price of $37.44 per share. The common stock repurchased has been retired.
The following table contains information about shares of our previously-issued common stock that were repurchased under our 2014 stock repurchase program.
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||
Period | |||||||||||||
July 2014 | 1,254,245 | $ | 36.73 | 1,254,245 | $ | 908,697,871 | |||||||
August 2014 | 456,068 | 39.41 | 456,068 | 890,725,201 | |||||||||
September 2014 | — | — | — | 890,725,201 | |||||||||
Total | 1,710,313 | 37.44 | 1,710,313 |
The following table contains information about shares of our previously-issued common stock that we withheld from delivering during the third quarter of 2014 to employees to satisfy their tax obligations related to stock-based awards:
Total Number of Shares Withheld for Taxes | Average Price Paid Per Share | |||||
Period | ||||||
July 2014 | 6,992 | $ | 36.36 | |||
August 2014 | 1,851 | 38.23 | ||||
September 2014 | 3,299 | 39.97 | ||||
Total | 12,142 |
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ITEM 6. EXHIBITS
Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.
Exhibit Number | Description | ||
2.1 | Agreement and Plan of Merger, dated as of October 26, 2008, by and among CenturyLink, Inc., Embarq Corporation and Cajun Acquisition Company (incorporated by reference to Exhibit 99.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on October 30, 2008). | ||
2.2 | Agreement and Plan of Merger, dated as of April 21, 2010, by and among CenturyLink, Inc., its subsidiary SB44 Acquisition Company, and Qwest Communications International Inc. (incorporated by reference to Exhibit 2.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on April 27, 2010). | ||
2.3 | Agreement and Plan of Merger, dated as of April 26, 2011, by and among CenturyLink, Inc., SAVVIS, Inc. and Mimi Acquisition Company (incorporated by reference to Exhibit 2.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on April 27, 2011). | ||
3.1 | Amended and Restated Articles of Incorporation of CenturyLink, Inc., as amended through May 23, 2012 (incorporated by reference to Exhibit 3.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on May 30, 2012). | ||
3.2 | Bylaws of CenturyLink, Inc., as amended and restated through May 28, 2014 (incorporated by reference to Exhibit 3.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on June 2, 2014). | ||
4.1 | Form of common stock certificate (incorporated by reference to Exhibit 4.10 of CenturyLink, Inc.'s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on March 2, 2012 (Registration No. 333-179888)). | ||
4.2 | Instruments relating to CenturyLink, Inc.'s Revolving Credit Facility. | ||
a. | Amended and Restated Credit Agreement, dated as of April 6, 2012, by and among CenturyLink, Inc. and the lenders and agents named therein (incorporated by reference to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on April 11, 2012). | ||
b. | Guarantee Agreement, dated as of April 6, 2012, by and among the original guarantors named therein (incorporated by reference to Exhibit 4.2 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on April 11, 2012), as assumed by two additional guarantors under an assumption agreement, dated as of May 23, 2013 (incorporated by reference to Exhibit 4.2(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2013 (File No. 001-07784) filed with the Securities and Exchange Commission on August 8, 2013). | ||
4.3 | Instruments relating to CenturyLink, Inc.'s Term Loan. | ||
a. | Credit Agreement, dated as of April 18, 2012, by and among CenturyLink, Inc., the several banks and other financial institutions or entities from time to time parties thereto, and CoBank, ACB, as administrative agent (incorporated by reference to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on April 20, 2012). | ||
b. | Guarantee Agreement, dated as of April 18, 2012, by and among the original guarantors named therein (incorporated by reference to Exhibit 4.2 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on April 20, 2012), as assumed by two additional guarantors under an assumption agreement, dated as of May 23, 2013 (incorporated by reference to Exhibit 4.3(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2013 (File No. 001-07784) filed with the Securities and Exchange Commission on August 8, 2013). | ||
4.4 | Instruments relating to CenturyLink, Inc.'s public senior debt. (1) | ||
a. | Form of Indenture, by and between Century Telephone Enterprises, Inc. (currently named CenturyLink, Inc.) and First American Bank & Trust of Louisiana, as Trustee (incorporated by reference to Exhibit 4.1 of CenturyLink, Inc.'s Registration Statement on Form S-3 (File No. No. 33-52915) filed with the Securities and Exchange Commission on March 31, 1994). | ||
(i). | Form of 7.2% Senior Notes, Series D, due 2025 (incorporated by reference to Exhibit 4.27 of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 001-07784) filed with the Securities and Exchange Commission on March 18, 1996). |
_______________________________________________________________________________
(1) | Certain of the items in Sections 4.4, 4.5 and 4.6 (i) omit supplemental indentures or other instruments governing debt that has been retired, or (ii) refer to trustees who may have been replaced, acquired or affected by similar changes. In accordance with Item 601(b) (4) (iii) (A) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request. |
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Exhibit Number | Description | ||
(ii). | Form of 6.875% Debentures, Series G, due 2028, (incorporated by reference to Exhibit 4.9 of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 001-07784) filed with the Securities and Exchange Commission on March 16, 1998). | ||
b. | Third Supplemental Indenture, dated as of February 14, 2005, by and between CenturyTel, Inc. (currently named CenturyLink, Inc.) and Regions Bank, as Trustee, designating and outlining the terms and conditions of CenturyLink's 5% Senior Notes, Series M, due 2015 (incorporated by reference to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 000-50260) filed with the Securities and Exchange Commission on February 15, 2005). | ||
(i). | Form of 5% Senior Notes, Series M, due 2015 (incorporated by reference to Exhibit A to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 000-50260) filed with the Securities and Exchange Commission on February 15, 2005). | ||
c. | Fourth Supplemental Indenture, dated as of March 26, 2007, by and between CenturyTel, Inc. (currently named CenturyLink, Inc.) and Regions Bank, as Trustee, designating and outlining the terms and conditions of CenturyLink's 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes, Series O, due 2013 (incorporated by reference to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on March 29, 2007). | ||
(i). | Form of 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes, Series O, due 2013 (incorporated by reference to Exhibit A to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on March 29, 2007). | ||
d. | Fifth Supplemental Indenture, dated as of September 21, 2009, by and between CenturyTel, Inc. (currently named CenturyLink, Inc.) and Regions Bank, as Trustee, designating and outlining the terms and conditions of CenturyLink's 7.60% Senior Notes, Series P, due 2039 and 6.15% Senior Notes, Series Q, due 2019 (incorporated by reference to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on September 22, 2009). | ||
(i). | Form of 7.60% Senior Notes, Series P, due 2039 and 6.15% Senior Notes, Series Q, due 2019 (incorporated by reference to Exhibit A to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on September 22, 2009). | ||
e. | Sixth Supplemental Indenture, dated as of June 16, 2011, by and between CenturyLink, Inc. and Regions Bank, as Trustee, designating and outlining the terms and conditions of CenturyLink's 5.15% Senior Notes, Series R, due 2017 and 6.45% Senior Notes, Series S, due 2021 (incorporated by reference to Exhibit 4.2 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on June 16, 2011). | ||
(i). | Form of 5.15% Senior Notes, Series R, due 2017 and 6.45% Senior Notes, Series S, due 2021 (incorporated by reference to Exhibit A to Exhibit 4.2 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on June 16, 2011). | ||
f. | Seventh Supplemental Indenture, dated as of March 12, 2012, by and between CenturyLink, Inc. and Regions Bank, as Trustee, designating and outlining the terms and conditions of CenturyLink's 5.80% Senior Notes, Series T, due 2022 and 7.65% Senior Notes, Series U, due 2042 (incorporated by reference to Exhibit 4.1 of CenturyLink's Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on March 12, 2012). | ||
(i). | Form of 5.80% Senior Notes, Series T, due 2022 and 7.65% Senior Notes, Series U, due 2042 (incorporated by reference to Exhibit A to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on March 12, 2012). | ||
g. | Eighth Supplemental Indenture, dated as of March 21, 2013, by and between CenturyLink, Inc. and Regions Bank, as Trustee, designating and outlining the terms and conditions of CenturyLink's 5.625% Senior Notes, Series V, due 2020 (incorporated by reference to Exhibit 4.1 of CenturyLink's Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on March 21, 2013). | ||
(i). | Form of 5.625% Senior Notes, Series V, due 2020 (incorporated by reference to Exhibit A to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on March 21, 2013). | ||
h. | Ninth Supplemental Indenture, dated as of November 27, 2013, by and between CenturyLink, Inc. and Regions Bank, as Trustee, designating and outlining the terms and conditions of CenturyLink's 6.75% Senior Notes, Series W, due 2023 (incorporated by reference to Exhibit 4.1 of CenturyLink's Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on November 27, 2013). |
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Exhibit Number | Description | ||
(i) | Form of 6.75% Senior Notes, Series W, due 2023 (incorporated by reference to Exhibit A to Exhibit 4.1 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) filed with the Securities and Exchange Commission on November 27, 2013). | ||
4.5 | Instruments relating to indebtedness of affiliates of Qwest Communications International, Inc. | ||
a. | Indenture, dated as of April 15, 1990, by and between The Mountain States Telephone and Telegraph Company (currently named Qwest Corporation) and The First National Bank of Chicago (incorporated by reference to Exhibit 4.2 of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004). | ||
(i). | First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. (currently named Qwest Corporation) and The First National Bank of Chicago (incorporated by reference to Exhibit 4.3 of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004). | ||
b. | Indenture, dated as of April 15, 1990, by and between Northwestern Bell Telephone Company (predecessor to Qwest Corporation) and The First National Bank of Chicago (incorporated by reference to Exhibit 4.5(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (File No. 001-07784) filed with the Securities and Exchange Commission on May 10, 2012). | ||
(i). | First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. (currently named Qwest Corporation) and The First National Bank of Chicago (incorporated by reference to Exhibit 4.3 of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-03040) filed with the Securities and Exchange Commission on January 13, 2004). | ||
c. | Indenture, dated as of June 29, 1998, by and among U S WEST Capital Funding, Inc. (currently named Qwest Capital Funding, Inc.), U S WEST, Inc. (predecessor to Qwest Communications International Inc.) and The First National Bank of Chicago, as trustee (incorporated by reference to Exhibit 4(a) of U S WEST, Inc.'s Current Report on Form 8-K (File No. 001-14087) filed with the Securities and Exchange Commission on November 18, 1998). | ||
(i). | First Supplemental Indenture, dated as of June 30, 2000, by and among U S WEST Capital Funding, Inc. (currently named Qwest Capital Funding, Inc.), U S WEST, Inc. (predecessor to Qwest Communications International Inc.) and Bank One Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.10 of Qwest Communications International Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File No. 001-15577) filed with the Securities and Exchange Commission on August 11, 2000). | ||
d. | Indenture, dated as of October 15, 1999, by and between US West Communications, Inc. (currently named Qwest Corporation) and Bank One Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4(b) of Qwest Corporation's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-03040) filed with the Securities and Exchange Commission on March 3, 2000). | ||
(i). | First Supplemental Indenture, dated as of August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.22 of Qwest Communications International Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2004 (File No. 001-15577) filed with the Securities and Exchange Commission on November 5, 2004). | ||
(ii). | Third Supplemental Indenture, dated as of June 17, 2005, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.2 of Qwest Communications International Inc.'s Current Report on Form 8-K (File No. 001-15577) filed with the Securities and Exchange Commission on June 23, 2005). | ||
(iii). | Fourth Supplemental Indenture, dated as of August 8, 2006, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Communications International Inc.'s Current Report on Form 8-K (File No. 001-15577) filed with the Securities and Exchange Commission on August 8, 2006). | ||
(iv). | Fifth Supplemental Indenture, dated as of May 16, 2007, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Communications International Inc.'s Current Report on Form 8-K (File No. 001-15577) filed with the Securities and Exchange Commission on May 18, 2007). | ||
(v). | Sixth Supplemental Indenture, dated as of April 13, 2009, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Communications International Inc.'s Current Report on Form 8-K (File No. 001-15577) filed with the Securities and Exchange Commission on April 13, 2009). |
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Exhibit Number | Description | ||
(vi). | Seventh Supplemental Indenture, dated as of June 8, 2011, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.8 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on June 7, 2011). | ||
(vii). | Eighth Supplemental Indenture, dated as of September 21, 2011, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.9 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on September 20, 2011). | ||
(viii). | Ninth Supplemental Indenture, dated as of October 4, 2011, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.1 of Qwest Corporation's Current Report on Form 8-K (File No. 001-03040) filed with the Securities and Exchange Commission on October 4, 2011). | ||
(ix) | Tenth Supplemental Indenture, dated as of April 2, 2012, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.11 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on March 30, 2012). | ||
(x) | Eleventh Supplemental Indenture, dated as of June 25, 2012, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.12 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on June 22, 2012). | ||
(xi) | Twelfth Supplemental Indenture, dated as of May 23, 2013, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.13 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on May 22, 2013). | ||
(xii) | Thirteenth Supplemental Indenture, dated as of September 29, 2014, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.14 of Qwest Corporation's Form 8-A (File No. 001-03040) filed with the Securities and Exchange Commission on September 26, 2014). | ||
4.6 | Instruments relating to indebtedness of Embarq Corporation. | ||
a. | Indenture, dated as of May 17, 2006, by and between Embarq Corporation and J.P. Morgan Trust Company, National Association, a national banking association, as trustee (incorporated by reference to Exhibit 4.1 of Embarq Corporation's Current Report on Form 8-K (File No. 001-32732) filed with the Securities and Exchange Commission on May 18, 2006). | ||
b. | 7.082% Global Note due 2016 of Embarq Corporation (incorporated by reference to Exhibit 4.3 to Embarq Corporation's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-32372) filed with the Securities and Exchange Commission on March 9, 2007). | ||
c. | 7.995% Global Note due 2036 of Embarq Corporation (incorporated by reference to Exhibit 4.4 to Embarq Corporation's Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-32372) filed with the Securities and Exchange Commission on March 9, 2007). | ||
4.7 | Intercompany debt instruments. | ||
a. | Revolving Promissory Note, dated as of April 2, 2012 pursuant to which Embarq Corporation may borrow from an affiliate of CenturyLink, Inc. up to $2.5 billion on a revolving basis (incorporated by reference to Exhibit 4.7(a) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2012 (File No. 001-07784) filed with the Securities and Exchange Commission on November 8, 2012). | ||
b. | Revolving Promissory Note, dated as of April 18, 2012, pursuant to which Qwest Corporation may borrow from an affiliate of CenturyLink, Inc. up to $1.0 billion on a revolving basis (incorporated by reference to Exhibit 4.7(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2012 (File No. 001-07784) filed with the Securities and Exchange Commission on November 8, 2012). | ||
c. | Revolving Promissory Note, dated as of September 27, 2012, pursuant to which Qwest Communications International, Inc. may borrow from an affiliate of CenturyLink, Inc. up to $3.0 billion on a revolving basis (incorporated by reference to Exhibit 4.7(c) of CenturyLink Inc.'s Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 001-07844) filed with the Securities and Exchange Commission on March 1, 2013). | ||
10.1 | Qualified Employee Benefit Plans of CenturyLink, Inc. (excluding several narrow-based qualified plans that cover union employees or other limited groups of employees). |
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Exhibit Number | Description | ||
a. | CenturyLink Dollars & Sense 401(k) Plan and Trust, as amended and restated through December 31, 2006 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2007), as amended by the First Amendment and the Second Amendment thereto, each dated as of December 31, 2007 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-07784) filed with the Securities and Exchange Commission on February 29, 2008), as amended by the Third Amendment thereto dated as of November 20, 2008 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on February 27, 2009), as amended by the Fourth Amendment thereto dated as of June 30, 2009 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009), as amended by the Fifth Amendment thereto dated as of September 15, 2009 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010), as amended by the Sixth Amendment thereto, dated as of December 30, 2009 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010), as amended by the Seventh Amendment thereto, effective May 20, 2010 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on November 5, 2010) and as amended by the Eighth Amendment thereto, effective January 1, 2011 (incorporated by reference to Exhibit 10.1(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2011). | ||
b. | CenturyLink Union 401(k) Plan and Trust, as amended and restated through December 31, 2006 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2007), as amended by the First Amendment thereto dated as of May 29, 2007 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on May 7, 2008), as amended by the Second Amendment thereto dated as of December 31, 2007 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-07784) filed with the Securities and Exchange Commission on February 29, 2008), as amended by the Third Amendment thereto dated as of November 20, 2008 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on February 27, 2009), as amended by the Fourth Amendment thereto dated as of June 30, 2009 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009), as amended by the Fifth Amendment thereto dated as of September 15, 2009 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010), as amended by the Sixth Amendment thereto, dated as of December 30, 2009 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010), as amended by the Seventh Amendment thereto, effective May 20, 2010 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on November 5, 2010) and as amended by the Eighth Amendment thereto, effective January 1, 2011 (incorporated by reference to Exhibit 10.1(b) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2011). |
66
Exhibit Number | Description | ||
c. | CenturyLink Retirement Plan, as amended and restated through December 31, 2006 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2007), as amended by Amendment No. 1 thereto dated as of April 2, 2007 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on May 7, 2008), as amended by Amendment No. 2 thereto dated as of December 31, 2007 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-07784) filed with the Securities and Exchange Commission on February 29, 2008), as amended by Amendment No. 3 thereto dated as of October 24, 2008 (incorporated by reference to Exhibit 10.1(c) CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on February 27, 2009), as amended by Amendment No. 4 dated as of June 30, 2009 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009), as amended by Amendment No. 5 thereto dated as of September 15, 2009 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010), as amended by Amendment No. 6 thereto, dated as of December 30, 2009 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010), as amended by Amendment No. 7 thereto, effective at various dates during 2010 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on November 5, 2010) and as amended by Amendment No. 8 thereto, effective January 1, 2011 (incorporated by reference to Exhibit 10.1(c) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2011). | ||
10.2 | Stock-based Incentive Plans and Agreements of CenturyLink | ||
a. | Amended and Restated 1983 Restricted Stock Plan, as amended and restated through February 23, 2010 (incorporated by reference to Exhibit 10.2(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010). | ||
b. | Amended and Restated 2000 Incentive Compensation Plan, as amended through May 23, 2000 (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File No. 001-07784) filed with the Securities and Exchange Commission on August 11, 2000) and amendment thereto dated as of May 29, 2003 (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2003 (File No. 001-7784) filed with the Securities and Exchange Commission on August 14, 2003). | ||
(i) | Form of Stock Option Agreement, pursuant to the 2000 Incentive Compensation Plan and dated as of May 21, 2001, entered into between CenturyLink, Inc. and its officers (incorporated by reference to Exhibit 10.2(e) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-07784) filed with the Securities and Exchange Commission on March 15, 2002). | ||
(ii) | Form of Stock Option Agreement, pursuant to the 2000 Incentive Compensation Plan and dated as of February 25, 2002, entered into between CenturyLink, Inc. and its officers (incorporated by reference to Exhibit 10.2(d) (ii) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-07784) filed with the Securities and Exchange Commission on March 27, 2003). | ||
c. | Amended and Restated 2002 Directors Stock Option Plan, dated as of February 25, 2004 (incorporated by reference to Exhibit 10.2(e) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-07784) filed with the Securities and Exchange Commission on March 12, 2004) and amendment thereto dated as of October 24, 2008 (incorporated by reference to Exhibit 10.2(d) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on February 27, 2009). | ||
(i) | Form of Stock Option Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. in connection with options granted to the outside directors as of May 10, 2002 (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2002 (File No. 001-07784) filed with the Securities and Exchange Commission on November 14, 2002). |
67
Exhibit Number | Description | ||
(ii) | Form of Stock Option Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. in connection with options granted to the outside directors as of May 9, 2003 (incorporated by reference to Exhibit 10.2(e) (ii) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-07784) filed with the Securities and Exchange Commission on March 12, 2004). | ||
(iii) | Form of Stock Option Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. in connection with options granted to the outside directors as of May 7, 2004 (incorporated by reference to Exhibit 10.2(d) (iii) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-07784) filed with the Securities and Exchange Commission on March 16, 2006). | ||
d. | Amended and Restated 2002 Management Incentive Compensation Plan, dated as of February 25, 2004 (incorporated by reference to Exhibit 10.2(f) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-07784) filed with the Securities and Exchange Commission on March 12, 2004) and amendment thereto dated as of October 24, 2008 (incorporated by reference to Exhibit 10.2(e) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on February 27, 2009). | ||
(i) | Form of Stock Option Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. and certain of its officers and key employees at various dates during 2002 following May 9, 2002 (incorporated by reference to Exhibit 10.4 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2002 (File No. 001-07784) filed with the Securities and Exchange Commission on November 14, 2002). | ||
(ii) | Form of Stock Option Agreement, pursuant to foregoing plan and dated as of February 24, 2003, entered into between CenturyLink, Inc. and its officers (incorporated by reference to Exhibit 10.2(f) (ii) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-07784) filed with the Securities and Exchange Commission on March 27, 2003). | ||
(iii) | Form of Stock Option Agreement, pursuant to foregoing plan and dated as of February 25, 2004, entered into between CenturyLink, Inc. and its officers (incorporated by reference to Exhibit 10.2(f) (iii) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-07784) filed with the Securities and Exchange Commission on March 12, 2004). | ||
(iv) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 24, 2003, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.1 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 001-07784) filed with the Securities and Exchange Commission on May 14, 2003). | ||
(v) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 25, 2004, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.2(f) (v) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2004 (File No. 000-50260) filed with the Securities and Exchange Commission on May 7, 2004). | ||
(vi) | Form of Stock Option Agreement, pursuant to foregoing plan and dated as of February 17, 2005, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.2(e) (v) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-50260) filed with the Securities and Exchange Commission on March 16, 2005). | ||
(vii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 17, 2005, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.2(e) (vi) of CenturyLink, Inc.'s Annual Report on Form 10-K for the period ended December 31, 2004 (File No. 000-50260) filed with the Securities and Exchange Commission on March 16, 2005). | ||
e. | Amended and Restated 2005 Directors Stock Plan, as amended and restated through February 23, 2010 (incorporated by reference to Exhibit 10.2(f) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010). | ||
(i) | Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. and each of its outside directors as of May 13, 2005 (incorporated by reference to Exhibit 10.4 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 000-50260) filed with the Securities and Exchange Commission on May 13, 2005). |
68
Exhibit Number | Description | ||
(ii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. and each of its outside directors as of May 12, 2006 (incorporated by reference to Exhibit 10.1 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2006 (File No. 001-07784) filed with the Securities and Exchange Commission on August 3, 2006). | ||
(iii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. and each of its outside directors as of May 11, 2007 (incorporated by reference to Exhibit 10.2(f) (iii) of CenturyLink, Inc.'s Annual Report on Form 10-K for the period ended December 31, 2008 (File No. 001-07784) | ||
(iv) | Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. and each of its outside directors as of May 9, 2008 (incorporated by reference to Exhibit 10.2 (f) (iv) of CenturyLink, Inc.'s Annual Report on Form 10-K for the period ended December 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on February 27, 2009). | ||
(v) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 8, 2009, entered into between CenturyLink, Inc. and each of its outside directors on such date who remained on the Board following July 1, 2009 (incorporated by reference to Exhibit 10.2(b) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009). | ||
(vi) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 8, 2009, entered into between CenturyLink, Inc. and each of its outside directors who retired on July 1, 2009 (incorporated by reference to Exhibit 10.2(c) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009). | ||
(vii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of July 2, 2009, entered into between CenturyLink, Inc. and each of its outside directors named to the Board on July 1, 2009 (incorporated by reference to Exhibit 10.1(d) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009). | ||
(viii) | Restricted Stock Agreement, pursuant to the foregoing plan and dated as of July 2, 2009, entered into between CenturyLink, Inc. and William A. Owens in payment of Mr. Owens' 2009 supplemental chairman's fees (incorporated by reference to Exhibit 10.2(e) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009). | ||
(ix) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 21, 2010, entered into between CenturyLink, Inc. and seven of its outside directors on such date (incorporated by reference to Exhibit 10.1 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on August 6, 2010). | ||
f. | Amended and Restated 2005 Management Incentive Compensation Plan, as amended and restated through February 23, 2010 (incorporated by reference to Exhibit 10.2(g) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010). | ||
(i) | Form of Stock Option Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. and certain officers and key employees at various dates since May 12, 2005 (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2005 (File No. 001-07784) filed with the Securities and Exchange Commission on November 9, 2005). | ||
(ii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan, entered into between CenturyLink, Inc. and certain officers and key employees at various dates since May 12, 2005 (incorporated by reference to Exhibit 10.3 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2005 (File No. 001-07784) filed with the Securities and Exchange Commission on November 9, 2005). | ||
(iii) | Form of Stock Option Agreement, pursuant to the foregoing plan and dated as of February 21, 2006, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.2(g) (iii) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-07784) filed with the Securities and Exchange Commission on March 16, 2006). |
69
Exhibit Number | Description | ||
(iv) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 21, 2006, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.2(g) (iv) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-07784) filed with the Securities and Exchange Commission on March 16, 2006). | ||
(v) | Form of Stock Option Agreement, pursuant to the foregoing plan and dated as of February 26, 2007, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.1 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2007 (File No. 001-07784) filed with the Securities and Exchange Commission on May 9, 2007). | ||
(vi) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 26, 2007, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2007 (File No. 001-07784) filed with the Securities and Exchange Commission on May 9, 2007). | ||
(vii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 21, 2008, entered into between CenturyLink, Inc. and its executive officers (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on May 7, 2008). | ||
(viii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of February 26, 2009 (incorporated by reference to Exhibit 10.2(g) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on May 1, 2009). | ||
(ix) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of March 8, 2010 (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on May 7, 2010). | ||
g. | Amended and Restated CenturyLink Legacy Embarq 2008 Equity Incentive Plan, as amended and restated through February 23, 2010 (incorporated by reference to Exhibit 10.2(h) of CenturyLink, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2010). | ||
(i) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 21, 2010, entered into between CenturyLink, Inc. and four of its outside directors as of such date (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on August 6, 2010). | ||
(ii) | Form of Restricted Stock Agreement, pursuant to the foregoing plan and dated as of May 21, 2010, entered into between CenturyLink, Inc. and William A. Owens in payment of Mr. Owens' 2010 supplemental chairman's fees (incorporated by reference to Exhibit 10.3 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on August 6, 2010). | ||
(iii) | Form of Restricted Stock Agreement, dated as of September 7, 2010, entered into between CenturyLink, Inc. and Dennis G. Huber (incorporated by reference to Exhibit 10.16 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on November 5, 2010). | ||
h. | Form of Retention Award Agreement, pursuant to the equity incentive plans of CenturyLink or Embarq and dated as of August 23, 2010, entered into between CenturyLink, Inc. and certain officers and key employees as of such date (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on November 5, 2010). | ||
i. | CenturyLink 2011 Equity Incentive Plan (incorporated by reference to Appendix B of CenturyLink, Inc.'s Proxy Statement for its 2011 Annual Meeting of Shareholders (File No. 001-07784) filed with the Securities and Exchange Commission on April 6, 2011). | ||
(i) | Form of Restricted Stock Agreement for executive officers used in 2011 and 2012 (incorporated by reference to Exhibit 10.2(a) (i) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2011 (File No. 001-07784) filed with the Securities and Exchange Commission on August 9, 2011). |
70
Exhibit Number | Description | ||
(ii) | Form of Restricted Stock Agreement for non-management directors used since 2011 (incorporated by reference to Exhibit 10.2(a) (ii) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2011 (File No. 001-07784) filed with the Securities and Exchange Commission on August 9, 2011). | ||
(iii) | Form of Restricted Stock Agreement for executive officers used since May 2013. | ||
10.3 | Key Employee Incentive Compensation Plan, dated as of January 1, 1984, as amended and restated as of November 16, 1995 (incorporated by reference to Exhibit 10.1(f) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 001-07784) filed with the Securities and Exchange Commission on March 18, 1996) and amendment thereto dated as of November 21, 1996 (incorporated by reference to Exhibit 10.1(f) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 001-07784) filed with the Securities and Exchange Commission on March 17, 1997), amendment thereto dated as of February 25, 1997 (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 001-07784) filed with the Securities and Exchange Commission on May 8, 1997), amendment thereto dated as of April 25, 2001 (incorporated by reference to Exhibit 10.2 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2001 (File No. 001-07784) filed with the Securities and Exchange Commission on May 15, 2001), amendment thereto dated as of April 17, 2000 (incorporated by reference to Exhibit 10.3(a) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-07784) filed with the Securities and Exchange Commission on March 15, 2002) and amendment thereto dated as of February 27, 2007 (incorporated by reference to Exhibit 10.1 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2007 (File No. 001-07784) filed with the Securities and Exchange Commission on August 8, 2007). | ||
10.4 | Supplemental Dollars & Sense Plan, 2008 Restatement, effective January 1, 2008, (incorporated by reference to Exhibit 10.3(c) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-07784) filed with the Securities and Exchange Commission on February 29, 2009) and amendment thereto dated as of October 24, 2008 (incorporated by reference to Exhibit 10.3(c) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on March 27, 2009) and amendment thereto dated as of December 27, 2010 (incorporated by reference to Exhibit 10.4 of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2011). | ||
10.5 | Supplemental Defined Benefit Pension Plan, effective as of January 1, 2012 (incorporated by reference to Exhibit 10.5 of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-07784) filed with the Securities and Exchange Commission on February 28, 2012). | ||
10.6 | Amended and Restated Salary Continuation (Disability) Plan for Officers, dated as of November 26, 1991 (incorporated by reference to Exhibit 10.16 of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991). | ||
10.7 | 2010 Executive Officer Short-Term Incentive Program (incorporated by reference to Appendix B of CenturyLink, Inc.'s 2010 Proxy Statement on Form 14A (File No. 001-07784) filed with the Securities and Exchange Commission on April 7, 2010). | ||
10.9 | Form of Indemnification Agreement entered into between CenturyLink, Inc. and each of its directors as of July 1, 2009 (incorporated by reference to Exhibit 99.3 of CenturyLink, Inc.'s Current Report on Form 8-K (File No. 001-07784) with the Securities and Exchange Commission on July 1, 2009). | ||
10.10 | Form of Indemnification Agreement entered into between CenturyLink, Inc. and each of its officers as of July 1, 2009 (incorporated by reference to Exhibit 10.5 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009). | ||
10.11 | Change of Control Agreement, effective January 1, 2011, by and between Glen F. Post, III and CenturyLink, Inc. (incorporated by reference to Exhibit 10.11 of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2011). | ||
10.12 | Form of Change of Control Agreement, effective January 1, 2011 between CenturyLink, Inc. and each of its other executive officers (incorporated by reference to Exhibit 10.12 of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2011). | ||
10.13 | Amended and Restated CenturyLink, Inc. Bonus Life Insurance Plan for Executive Officers, dated as of April 3, 2008 (incorporated by reference to Exhibit 10.4 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2008 (File No. 001-07784) filed with the Securities and Exchange Commission on May 7, 2008) and First Amendment thereto (incorporated by reference to Exhibit 10.13 of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on November 5, 2010). |
71
Exhibit Number | Description | ||
10.14 | Certain Material Agreements and Plans of Embarq Corporation. | ||
a. | Embarq Corporation 2006 Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 99.1 of the Registration Statement on Form S-8 filed by CenturyLink, Inc. (File No. 001-07784) with the Securities and Exchange Commission on July 1, 2009). | ||
b. | Form of 2007 Award Agreement for executive officers of Embarq Corporation (incorporated by reference to Exhibit 10.1 of Embarq Corporation's Current Report on Form 8-K (File No. 001-32372) filed with the Securities and Exchange Commission on February 27, 2007). | ||
c. | Form of 2008 Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 of Embarq Corporation's Current Report on Form 8-K (File No. 001-32372) filed with the Securities and Exchange Commission on March 4, 2008). | ||
d. | Form of 2009 Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 of Embarq Corporation's Current Report on Form 8-K (File No. 001-32732) filed with the Securities and Exchange Commission on March 5, 2009). | ||
e. | Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.3 of Embarq Corporation's Current Report on Form 8-K (File No. 001-32372) filed with the Securities and Exchange Commission on March 4, 2008). | ||
f. | Amendment to Outstanding RSUs granted in 2007 and 2008 under the Embarq Corporation 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 of Embarq Corporation's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-32372) filed with the Securities and Exchange Commission on February 13, 2009). | ||
g. | Form of 2006 Award Agreement, entered into between Embarq Corporation and Richard A. Gephardt (incorporated by reference to Exhibit 10.3 of Embarq Corporation's Current Report on Form 8-K (File No. 001-32372) filed with the Securities and Exchange Commission on August 1, 2006), as amended by the amendment thereto dated as of June 26, 2009 (incorporated by reference to Exhibit 10.6 (m) of CenturyLink, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (File No. 001-07784) filed with the Securities and Exchange Commission on August 7, 2009). | ||
h. | Amended and Restated Executive Severance Plan, including Form of Participation Agreement entered into between Embarq Corporation and William E. Cheek (incorporated by reference to Exhibit 10.4 of Embarq Corporation's Quarterly Report on Form 10-Q for the period ended September 30, 2008 (File No. 001-32372) filed with the Securities and Exchange Commission on October 30, 2008). | ||
i. | Embarq Supplemental Executive Retirement Plan, as amended and restated as of January 1, 2009 (incorporated by reference to Exhibit 10.27 of Embarq Corporation's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-32372) filed with the Securities and Exchange Commission on February 13, 2009), amendment thereto dated as of December 27, 2010 (incorporated by reference to Exhibit 10.14(o) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-07784) filed with the Securities and Exchange Commission on March 1, 2011) and second amendment thereto as of dated as of November 15, 2011 (incorporated by reference to Exhibit 10.14(k) of CenturyLink, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 001-07784) filed with the Securities and Exchange Commission on February 28, 2012). | ||
10.15 | Certain Material Agreements and Plans of Qwest Communications International Inc. or Savvis, Inc. | ||
a. | Equity Incentive Plan, as amended and restated (incorporated by reference to Annex A of Qwest Communications International Inc.'s Proxy Statement for the 2007 Annual Meeting of Stockholders (File No. 001-15577) filed with the Securities and Exchange Commission on March 29, 2007). |
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Exhibit Number | Description | ||
b. | Forms of restricted stock, performance share and option agreements used under Equity Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.2 of Qwest Communications International Inc.'s Current Report on Form 8-K (File No. 001-15577) filed with the Securities and Exchange Commission on October 24, 2005; Exhibit 10.2 of Qwest Communication International Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 001-15577) filed with the Securities and Exchange Commission on February 16, 2006; Exhibit 10.2 of Qwest Communication International Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2006 (File No. 001-15577) filed with the Securities and Exchange Commission on May 3, 2006; Exhibit 10.2 of Qwest Communication International Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-15577) filed with the Securities and Exchange Commission on February 8, 2007; Exhibit 10.3 of Qwest Communication International Inc.'s Current Report on Form 8-K (File No. 001-15577) filed with the Securities and Exchange Commission on September 15, 2008; Exhibit 10.2 of Qwest Communication International Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2009 (File No. 001-15577) filed with the Securities and Exchange Commission on April 30, 2009; and Exhibit 10.2 of Qwest Communication International Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-15577) filed with the Securities and Exchange Commission on February 15, 2011). | ||
c. | Deferred Compensation Plan for Nonemployee Directors, as amended and restated, Amendment to Deferred Compensation Plan for Nonemployee Directors (incorporated by reference to Exhibit 10.2 of Qwest Communications International Inc.'s Current Report on Form 8-K (File No. 001-15577) filed with the Securities and Exchange Commission on December 16, 2005 and Exhibit 10.8 to Qwest Communication International Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2008 (File No. 001-15577) filed with the Securities and Exchange Commission on October 29, 2008) and Amendment No. 2011-1 to Deferred Compensation Plan for Nonemployee Directors (incorporated by reference to Exhibit 10.15(c) of CenturyLink, Inc.'s Annual Report for the year ended December 31, 2011 (File No. 001-07784) filed with the Securities and Exchange Commission on February 28, 2012). | ||
d. | Qwest Nonqualified Pension Plan (incorporated by reference to Exhibit 10.9 of Qwest Communications International Inc.'s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-15577) filed with the Securities and Exchange Commission on February 16, 2010). | ||
e. | SAVVIS, Inc. Amended and Restated 2003 Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 of SAVVIS, Inc.'s Quarterly Report on Form 10-Q for the period ended March 31, 2006 (File No. 000-29375) filed with the Securities and Exchange Commission on May 5, 2006), as amended by Amendment No. 1 (incorporated by reference to Exhibit 10.6 of SAVVIS, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-29375) filed with the Securities and Exchange Commission on February 26, 2007); Amendment No. 2 (incorporated by reference to Exhibit 10.1 of SAVVIS, Inc.'s Current Report on Form 8-K (File No. 000-29375) filed with the Securities and Exchange Commission on May 15, 2007); Amendment No. 3 (incorporated by reference to Exhibit 10.3 of SAVVIS, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2007 (File No. 000-29375) filed with the Securities and Exchange Commission on July 31, | ||
2007); Amendment No. 4 (incorporated by reference to Exhibit 10.2 of SAVVIS, Inc.'s Current Report on Form 8-K (File No. 000-29375) filed with the Securities and Exchange Commission on May 22, 2009); and Amendment No. 5 (incorporated by reference to Exhibit 10.2 of SAVVIS, Inc.'s Current Report on Form 8-K (File No. 000-29375) filed with the Securities and Exchange Commission on May 22, 2009). | |||
12* | Ratio of Earnings to Fixed Charges | ||
31.1* | Certification of the Chief Executive Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2* | Certification of the Chief Financial Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32* | Certification of the Chief Executive Officer and Chief Financial Officer of CenturyLink, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101* | Financial statements from the Quarterly Report on Form 10-Q of CenturyLink, Inc. for the period ended September 30, 2014, formatted in XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders' Equity and (vi) the Notes to Consolidated Financial Statements. |
_______________________________________________________________________________
* | Exhibit filed herewith. |
Note: | Our Corporate Governance Guidelines and Charters of our Board of Director Committees are located on our website at www.centurylink.com. |
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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 November 6, 2014.
CENTURYLINK, INC. | ||
By: | /s/ DAVID D. COLE | |
David D. Cole Executive Vice President, Controller and Operations Support (Chief Accounting Officer) |
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