UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31,June 30, 2018
or
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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 number 001-35134
LEVEL 3 PARENT, LLC
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 47-0210602 |
(State of Incorporation) | | (I.R.S. Employer |
| | Identification No.) |
| | |
1025 Eldorado Blvd., Broomfield, CO | | 80021-8869 |
(Address of principal executive offices) | | (Zip Code) |
(720) 888-1000
(Registrant’s telephone number,
including area code)
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF CENTURYLINK, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): |
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Large accelerated filerx | | Accelerated filero |
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Non-accelerated filer o | | Smaller reporting companyo |
(Do not check if a smaller reporting company) | | |
| | Emerging growth companyo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.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 x
All of the limited liability company interest in the registrant is held by an affiliate of the registrant. None of the interest is publicly traded.
TABLE OF CONTENTS
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* All references to "Notes" in this quarterly report refer to these notesNotes to consolidated financial statements.Consolidated Financial Statements.
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PART I-FINANCIAL INFORMATION
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc.’s name changed to Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries. The Level 3 logo and Level 3 are registered service marks of our wholly owned subsidiary, Level 3 Communications, LLC, in the United States and other countries. All rights are reserved. This Form 10-Q refers to trade names and trademarks of other companies. The mention of these trade names and trademarks in this Form 10-Q is made with due recognition of the rights of these companies and without any intent to misappropriate those names or marks. All other trade names and trademarks appearing in this Form 10-Q are the property of their respective owners.
Special Note Regarding Forward-Looking Statements
All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are “forward-looking” statements, as defined by (and subject to the “safe harbor” protections under) the federal securities laws. When used herein, the words “anticipates,” “expects,” “believes,” “seeks,” “hopes,” “intends,” “plans,” “projects,” “will” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of judgments and assumptions as of the date such statements are made about future events, many of which are beyond our control. These forward-looking statements, and the assumptions on which they are based, (i) are not guarantees of future events, (ii) are inherently speculative and (iii) are subject to significant risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of certain important factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-looking statements. Factors that could cause our results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following:
the effects of competition from a wide variety of competitive providers, including decreased demand for our traditional wireline service offerings and increased pricing pressures;
the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete;
the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, universal service, broadband deployment, data protection and net neutrality;
the ability of our abilityparent company, CenturyLink, Inc. ("CenturyLink") to timely realize the anticipated benefits of ourits recently-completed combination with Level 3,us, including ourits ability to attain anticipated cost savings, to use Level 3'sour net operating loss carryforwards in the amounts projected, to retain key personnel and to avoid unanticipated integration disruptions;
our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakage, or similar events impacting our network or the availability and quality of our services;
our ability to effectively adjust to changes in the communications industry, and changes in the composition of our markets and product mix;
possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed broadband service;
our ability to successfully maintain the quality and profitability of our existing product and service offerings, to provision them successfully to our customers and to introduce profitable new offerings on a timely and cost-effective basis;
our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments, periodic share repurchases, dividends, pension contributions and other benefits payments;
changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;
our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;
increases in the costs of our pension,CenturyLink's health post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations;regulations, which may in turn impact our business and liquidity;
adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise;
our ability to meet the terms and conditions of our debt obligations;
our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords and financial institutions;
our ability to effectively manage our network buildout project and our other expansion opportunities;
our ability to collect our receivables from financially troubled customers;
any adverse developments in legal or regulatory proceedings involving us;us or our affiliates (including CenturyLink);
changes in tax, communications, pension, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels;
the effects of changes in accounting policies or practices, including potential future impairment charges;
the effects of adverse weather, terrorism or other natural or man-made disasters;
the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in general market, labor, economic or geo-political conditions, or in public policy; and
other risks identified in our "Risk Factors" disclosures included in our annual report on Form 10-K for the year ended December 31, 2017.
Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
PART I-FINANCIAL INFORMATION
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc.’s name changed to Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries. The Level 3 logo and Level 3 are registered service marks of our wholly owned subsidiary, Level 3 Communications, LLC, in the United States and other countries. All rights are reserved. This Form 10-Q refers to trade names and trademarks of other companies. The mention of these trade names and trademarks in this Form 10-Q is made with due recognition of the rights of these companies and without any intent to misappropriate those names or marks. All other trade names and trademarks appearing in this Form 10-Q are the property of their respective owners.
ITEM 1. FINANCIAL STATEMENTS
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | Successor | | | Predecessor | Successor | | | Predecessor |
| Three Months Ended | | | Three Months Ended | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| March 31, 2018 | | | March 31, 2017 | June 30, 2018 | | June 30, 2018 | | | June 30, 2017 | | June 30, 2017 |
| (Dollars in millions) | (Dollars in millions) |
OPERATING REVENUES | | | | | | | | | | | | |
Operating revenues | $ | 2,062 |
| | | 2,048 |
| $ | 2,025 |
| | 4,087 |
| | | 2,062 |
| | 4,110 |
|
Operating revenues - affiliate | 25 |
| | | — |
| |
Operating revenues - affiliates | | 27 |
| | 52 |
| | | — |
| | — |
|
Total operating revenues | 2,087 |
| | | 2,048 |
| 2,052 |
| | 4,139 |
| | | 2,062 |
| | 4,110 |
|
OPERATING EXPENSES | | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | 998 |
| | | 1,051 |
| 980 |
| | 1,978 |
| | | 1,035 |
| | 2,086 |
|
Selling, general and administrative expenses | 344 |
| | | 364 |
| |
Operating expenses - affiliate | 53 |
| | | — |
| |
Selling, general and administrative | | 388 |
| | 732 |
| | | 367 |
| | 731 |
|
Operating expenses - affiliates | | 55 |
| | 108 |
| | | — |
| | — |
|
Depreciation and amortization | 431 |
| | | 296 |
| 433 |
| | 864 |
| | | 307 |
| | 603 |
|
Total costs and expenses | 1,826 |
| | | 1,711 |
| |
Total operating expenses | | 1,856 |
|
| 3,682 |
| | | 1,709 |
| | 3,420 |
|
OPERATING INCOME | 261 |
| | | 337 |
| 196 |
| | 457 |
| | | 353 |
| | 690 |
|
OTHER INCOME (EXPENSE) | | | | | | | | | | | | |
Interest income | 1 |
| | | 2 |
| — |
| | 1 |
| | | 3 |
| | 5 |
|
Interest income - affiliate | 16 |
| | | — |
| 16 |
| | 32 |
| | | — |
| | — |
|
Interest expense | (120 | ) | | | (134 | ) | (124 | ) | | (244 | ) | | | (131 | ) | | (265 | ) |
Loss on modification and extinguishment of debt | — |
| | | (44 | ) | — |
| | — |
| | | — |
| | (44 | ) |
Other income, net | 6 |
| | | 4 |
| |
Total other income (expense), net | (97 | ) | | | (172 | ) | |
Other (expense) income, net | | (4 | ) | | 2 |
| | | (2 | ) | | 2 |
|
Total other expense, net | | (112 | ) | | (209 | ) | | | (130 | ) | | (302 | ) |
INCOME BEFORE INCOME TAX EXPENSE | 164 |
| | | 165 |
| 84 |
| | 248 |
| | | 223 |
| | 388 |
|
Income tax expense | (102 | ) | | | (70 | ) | (44 | ) | | (146 | ) | | | (69 | ) | | (139 | ) |
NET INCOME | $ | 62 |
| | | 95 |
| $ | 40 |
| | 102 |
| | | 154 |
| | 249 |
|
See accompanying notes to unaudited consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
| | | | | | | | |
| Successor | | | Predecessor |
| Three Months Ended | | | Three Months Ended |
| March 31, 2018 | | | March 31, 2017 |
| (Dollars in millions) |
NET INCOME | $ | 62 |
| | | $ | 95 |
|
OTHER COMPREHENSIVE INCOME: | | | | |
Foreign currency translation adjustments, net of tax effect of ($14) and ($8) | 72 |
| | | 20 |
|
Defined benefit pension plan adjustments, net of tax effect of $0 and $0 | — |
| | | 1 |
|
Other Comprehensive Income, net of tax | 72 |
| | | 21 |
|
COMPREHENSIVE INCOME | $ | 134 |
| | | $ | 116 |
|
|
| | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
| (Dollars in millions) |
NET INCOME | $ | 40 |
| | 102 |
| | | 154 |
| | 249 |
|
OTHER COMPREHENSIVE (LOSS) INCOME | | | | | | | | |
Foreign currency translation adjustments, net of $44, $30, ($29) and ($37) tax | (235 | ) | | (163 | ) | | | 42 |
| | 62 |
|
Defined benefit pension plan adjustments, net of $0, $0, $0 and $0 tax | — |
| | — |
| | | (1 | ) | | — |
|
Other comprehensive (loss) income, net of tax | (235 | ) | | (163 | ) | | | 41 |
| | 62 |
|
COMPREHENSIVE (LOSS) INCOME | $ | (195 | ) | | (61 | ) | | | 195 |
| | 311 |
|
See accompanying notes to unaudited consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | Successor | | Successor | Successor | | Successor |
| March 31, | | December 31, | June 30, 2018 | | December 31, 2017 |
| 2018 | | 2017 | (Unaudited) | | |
| (Dollars in millions) | (Dollars in millions) |
ASSETS | | | | | | |
CURRENT ASSETS | | | | | | |
Cash and cash equivalents | $ | 259 |
| | 297 |
| $ | 282 |
| | 297 |
|
Restricted cash and securities | 5 |
| | 5 |
| 5 |
| | 5 |
|
Assets held for sale | 140 |
| | 140 |
| 15 |
| | 140 |
|
Accounts receivable, less allowance of $4 and $3, respectively | 726 |
| | 748 |
| |
Accounts receivable, less allowance of $9 and $3 | | 744 |
| | 748 |
|
Accounts receivable - affiliate | 3 |
| | 13 |
| 4 |
| | 13 |
|
Note receivable - affiliate | 1,825 |
| | 1,825 |
| 1,825 |
| | 1,825 |
|
Other | 183 |
| | 117 |
| 201 |
| | 117 |
|
Total current assets | 3,141 |
| | 3,145 |
| 3,076 |
| | 3,145 |
|
Property, plant and equipment, net of accumulated depreciation of $380 and $143, respectively | 9,542 |
| | 9,412 |
| |
Property, plant and equipment, net of accumulated depreciation of $609 and $143 | | 9,396 |
| | 9,412 |
|
Restricted cash and securities | 29 |
| | 29 |
| 25 |
| | 29 |
|
GOODWILL AND OTHER ASSETS | | | | | | |
Goodwill | 11,141 |
| | 10,837 |
| 11,078 |
| | 10,837 |
|
Customer relationships, net | 8,206 |
| | 8,845 |
| 7,990 |
| | 8,845 |
|
Other intangibles, net | 390 |
| | 378 |
| 396 |
| | 378 |
|
Deferred tax assets | 458 |
| | 426 |
| 483 |
| | 426 |
|
Other, net | 96 |
| | 63 |
| 108 |
| | 63 |
|
Total goodwill and other assets | 20,291 |
| | 20,549 |
| 20,055 |
| | 20,549 |
|
TOTAL ASSETS | $ | 33,003 |
| | 33,135 |
| $ | 32,552 |
| | 33,135 |
|
LIABILITIES AND MEMBER'S EQUITY | | | | | | |
CURRENT LIABILITIES | | | | | | |
Current maturities of long-term debt | $ | 9 |
| | 8 |
| $ | 13 |
| | 8 |
|
Accounts payable | 678 |
| | 695 |
| 581 |
| | 695 |
|
Accounts payable - affiliate | 95 |
| | 41 |
| 106 |
| | 41 |
|
Accrued expenses and other liabilities | | | | | | |
Income and other taxes | 87 |
| | 100 |
| 81 |
| | 100 |
|
Salary and benefits | 163 |
| | 136 |
| |
Salaries and benefits | | 199 |
| | 136 |
|
Interest | 95 |
| | 109 |
| 94 |
| | 109 |
|
Current portion of deferred revenue | 273 |
| | 258 |
| 285 |
| | 260 |
|
Current portion of deferred revenue - affiliate | 2 |
| | 2 |
| |
Other | 67 |
| | 57 |
| 45 |
| | 57 |
|
Total current liabilities | 1,469 |
| | 1,406 |
| 1,404 |
| | 1,406 |
|
LONG-TERM DEBT | 10,872 |
| | 10,882 |
| 10,857 |
| | 10,882 |
|
DEFERRED CREDITS AND OTHER LIABILITIES | | | | |
DEFERRED REVENUE AND OTHER LIABILITIES | | | | |
Deferred revenue | 1,106 |
| | 1,093 |
| 1,138 |
| | 1,099 |
|
Deferred revenue - affiliate | 6 |
| | 6 |
| |
Deferred tax liability | 209 |
| | 212 |
| |
Deferred income taxes | | 202 |
| | 212 |
|
Other | 321 |
| | 264 |
| 341 |
| | 264 |
|
Total deferred credits and other liabilities | 1,642 |
| | 1,575 |
| |
COMMITMENTS AND CONTINGENCIES |
|
| |
|
| |
Total deferred revenue and other liabilities | | 1,681 |
| | 1,575 |
|
COMMITMENTS AND CONTINGENCIES (Note 9) | |
|
| |
|
|
MEMBER'S EQUITY | | | | | | |
Member's equity | 18,924 |
| | 19,254 |
| 18,749 |
| | 19,254 |
|
Accumulated other comprehensive income | 96 |
| | 18 |
| |
Accumulated other comprehensive (loss) income | | (139 | ) | | 18 |
|
Total member's equity | 19,020 |
| | 19,272 |
| 18,610 |
| | 19,272 |
|
Total liabilities and member's equity | 33,003 |
| | 33,135 |
| |
TOTAL LIABILITIES AND MEMBER'S EQUITY | | $ | 32,552 |
| | 33,135 |
|
See accompanying notes to unaudited consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | |
| Successor | | | Predecessor |
| Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 |
| (Dollars in millions) |
OPERATING ACTIVITITES | | | | |
Net income | $ | 102 |
| | | 249 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | 864 |
| | | 603 |
|
Deferred income taxes | 140 |
| | | 119 |
|
Share-based compensation | 57 |
| | | 87 |
|
Loss on modification and extinguishment of debt | — |
| | | 44 |
|
Net long-term debt issuance costs and premium amortization | (22 | ) | | | 9 |
|
Accrued interest on long-term debt, net | (15 | ) | | | (32 | ) |
Other, net | 6 |
| | | (7 | ) |
Changes in current assets and liabilities: | | | | |
Accounts receivable | (5 | ) | | | 16 |
|
Accounts payable | (100 | ) | | | (17 | ) |
Deferred revenue | 27 |
| | | 50 |
|
Other assets and liabilities | (53 | ) | | | (21 | ) |
Other assets and liabilities, affiliate | 17 |
| | | — |
|
Net cash provided by operating activities | 1,018 |
| | | 1,100 |
|
INVESTING ACTIVITIES | | | | |
Capital expenditures | (546 | ) | | | (696 | ) |
Proceeds from sale of property, plant and equipment and other assets | 119 |
| | | — |
|
Purchase of marketable securities | — |
| �� | | (1,127 | ) |
Net cash used in investing activities | (427 | ) | | | (1,823 | ) |
FINANCING ACTIVITIES | | | | |
Net proceeds from issuance of long-term debt | — |
| | | 4,569 |
|
Payments of long-term debt | (3 | ) | | | (4,615 | ) |
Distributions | (605 | ) | | | — |
|
Net cash used in financing activities | (608 | ) | | | (46 | ) |
Effect of exchange rates on cash, cash equivalents and restricted cash and securities | (2 | ) | | | 2 |
|
Net decrease in cash, cash equivalents and restricted cash and securities | (19 | ) | | | (767 | ) |
Cash, cash equivalents and restricted cash and securities at beginning of period | 331 |
| | | 1,857 |
|
Cash, cash equivalents and restricted cash and securities at end of period | $ | 312 |
| | | 1,090 |
|
|
| | | | | | | |
| Successor | | | Predecessor |
| Three Months Ended | | | Three Months Ended |
| March 31, 2018 | | | March 31, 2017 |
| (Dollars in millions) |
OPERATING ACTIVITITES | | | | |
Net income | $ | 62 |
| | | 95 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | 431 |
| | | 296 |
|
Share-based compensation | 27 |
| | | 48 |
|
Loss on modification and extinguishment of debt | — |
| | | 44 |
|
Net long-term debt issuance costs and premium amortization | (9 | ) | | | 5 |
|
Accrued interest on long-term debt, net | (14 | ) | | | (28 | ) |
Deferred income taxes | 104 |
| | | 62 |
|
Other, net | 5 |
| | | (5 | ) |
Changes in current assets and liabilities | | | | |
Accounts receivable | 21 |
| | | 6 |
|
Accounts payable | (18 | ) | | | 42 |
|
Deferred revenue | 15 |
| | | 50 |
|
Other current assets and liabilities | (90 | ) | | | (76 | ) |
Other current assets and liabilities, affiliate | 37 |
| | | — |
|
Net cash provided by operating activities | 571 |
| | | 539 |
|
INVESTING ACTIVITIES | | | | |
Capital expenditures | (252 | ) | | | (368 | ) |
Deposits received on assets held for sale | 34 |
| | | — |
|
Proceeds from sale of property, plant and equipment and other assets | 1 |
| | | — |
|
Net cash used in investing activities | (217 | ) | | | (368 | ) |
FINANCING ACTIVITIES | | | | |
Net proceeds from issuance of long-term debt | — |
| | | 4,569 |
|
Payments of long-term debt | (1 | ) | | | (4,613 | ) |
Distributions | (390 | ) | | | — |
|
Net cash used in financing activities | (391 | ) | | | (44 | ) |
Effect of exchange rates on cash, cash equivalents and restricted cash and securities | (1 | ) | | | 1 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash and securities | (38 | ) | | | 128 |
|
Cash, cash equivalents and restricted cash and securities and beginning of period | 331 |
| | | 1,857 |
|
Cash, cash equivalents and restricted cash and securities and end of period | $ | 293 |
| | | 1,985 |
|
| | Supplemental cash flow information: | | | | | |
Supplemental cash flow information | | | | | |
Interest paid | $ | 129 |
| | | 153 |
| $ | 270 |
| | | 282 |
|
Income taxes paid, net | 8 |
| | | 10 |
| $ | 19 |
| | | 32 |
|
See accompanying notes to unaudited consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF MEMBER'S/STOCKHOLDERS' EQUITY
(UNAUDITED)
| | | Successor | | | Predecessor | | | | | |
| Three Months Ended | | | Three Months Ended | Successor | | | Predecessor |
| March 31, 2018 | | | March 31, 2017 | Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 |
| (Dollars in millions) | (Dollars in millions) |
MEMBER'S EQUITY | | | | | | | | |
Balance at beginning of period | $ | 19,254 |
| | | — |
| $ | 19,254 |
| | | — |
|
Distributions | (390 | ) | | | — |
| |
Adoption of ASU 2014-09, Revenue from Contracts with Customers | 9 |
| | | — |
| |
Adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | (6 | ) | | | — |
| |
Net income | | 102 |
| | | — |
|
Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers | | 9 |
| | | — |
|
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | | (6 | ) | | | — |
|
Purchase price accounting adjustments | (5 | ) | | | — |
| (5 | ) | | | — |
|
Net income | 62 |
| | | — |
| |
Distributions to CenturyLink | | (605 | ) | | | — |
|
Balance at end of period | 18,924 |
| | | — |
| 18,749 |
| | | — |
|
COMMON STOCK | | | | | | | | |
Balance at beginning of period | — |
| | | 4 |
| — |
| | | 4 |
|
Balance at end of period | — |
| | | 4 |
| — |
| | | 4 |
|
ADDITIONAL PAID-IN CAPITAL | | | | | | | | |
Balance at beginning of period | — |
| | | 19,800 |
| — |
| | | 19,800 |
|
Common stock issued under employee stock benefit plans and other | — |
| | | 10 |
| — |
| | | 19 |
|
Share-based compensation | — |
| | | 38 |
| — |
| | | 68 |
|
Balance at end of period | — |
| | | 19,848 |
| — |
| | | 19,887 |
|
ACCUMULATED OTHER COMPREHENSIVE (INCOME) LOSS | | | | | | | | |
Balance at beginning of period | 18 |
| | | (387 | ) | 18 |
| | | (387 | ) |
Other comprehensive income | 72 |
| | | 21 |
| |
Adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | 6 |
| | | — |
| |
Other comprehensive (loss) income | | (163 | ) | | | 62 |
|
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | | 6 |
| | | — |
|
Balance at end of period | 96 |
| | | (366 | ) | (139 | ) | | | (325 | ) |
ACCUMULATED DEFICIT | | | | | | | | |
Balance at beginning of period | — |
| | | (8,500 | ) | — |
| | | (8,500 | ) |
Net income | — |
| | | 95 |
| — |
| | | 249 |
|
Balance at end of period | — |
| | | (8,405 | ) | — |
| | | (8,251 | ) |
TOTAL MEMBER'S/STOCKHOLDERS' EQUITY | $ | 19,020 |
| | | 11,081 |
| $ | 18,610 |
| | | 11,315 |
|
See accompanying notes to unaudited consolidated financial statements.
LEVEL 3 PARENT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Background
General
We are aan international facilities-based provider (that is, a provider that owns or leases a substantial portion of the property, plant and equipment necessary to provide our services)communications company engaged in providing of a broad rangearray of integrated communications services.services to our business customers. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. Our network is an international, facilities-based communications network. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.
On October 31, 2016, we entered into an agreement and plan of merger (the "Merger Agreement") with CenturyLink, Inc., a Louisiana corporation ("CenturyLink"), Wildcat Merger Sub 1 LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of CenturyLink ("Merger Sub 1"), and WWG Merger Sub LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of CenturyLink ("Merger Sub 2"), pursuant to which, effective November 1, 2017, we were acquired by CenturyLink in a cash and stock transaction, including the assumption of our debt (the "CenturyLink Merger"). See Note 2 - CenturyLink Merger.
Basis of Presentation
On November 1, 2017, we became a wholly owned subsidiary of CenturyLink. On the date of the acquisition, our assets and liabilities were recognized at CenturyLink's preliminary estimates of fair value. This revaluation has been reflected in our financial statements and, therefore, has resulted in a new basis of accounting for the successor period beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.
The consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. All significant intercompany accounts and transactions have been eliminated. Transactions with our non-consolidated affiliates (CenturyLink and its other subsidiaries, referred to herein as affiliates) have not been eliminated. As part of our consolidation policy, we consider our controlled subsidiaries, investments in businesses in which we are not the primary beneficiary or do not have effective control but have the ability to significantly influence operating and financial policies, and variable interests resulting from economic arrangements that give us rights to economic risks or rewards of a legal entity. We do not have variable interests in a variable interest entity where we are required to consolidate the entity as the primary beneficiary. Due to exchange restrictions and other conditions, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiary and began accounting for our investment in our Venezuelan subsidiary using the cost method of accounting. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the firstsecond quarter of 2018.
In conjunction with our acquisition on November 1, 2017, we changed the definitions we use to classify expenses as cost of services and products and selling, general and administrative, and as a result, we reclassified previously reported amounts to conform to the current period presentation. We revised our definitions so that our expense classifications are more consistent with the expense classifications used by our new ultimate parent company, CenturyLink. These revisions resulted in the reclassification of $24$47 million from depreciation and amortization to cost of services and products for the predecessor threesix months ended March 31,June 30, 2017. Although we continued as a surviving corporation and legal entity after the acquisition, the accompanying consolidated statements of operations, comprehensive income, member's/stockholders' equity and cash flows are presented for two periods: predecessor and successor, which relates to the period preceding the acquisition and the period succeeding the acquisition. Our current definitions are as follows:
Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); taxes (such as property and other taxes); and other expenses directly related to our network.
Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as state and local franchise taxes and sales and use taxes) and fees; external commissions; bad debt expense; and other selling, general and administrative expenses.
Segments
Our operations are integrated into and reported as part of the consolidated segment data of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one reportable segment.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law and in December 2017, the SEC staff issued Staff Accounting Bulletin (SAB) 118 to provide guidance for companies that have not completed their accounting for the income tax effects of the Act. As of March 31,June 30, 2018, we havehad not completed our accounting for the tax effects of the Act.Tax Cuts and Jobs Act (the "Act"). which was signed into law and in late December 2017. In order to complete our accounting for the impact of the Act, we continue to obtain, analyze and interpret additional guidance as such guidance becomes available from the U.S. Treasury Department, the Internal Revenue Service (“IRS”), state taxing jurisdictions, the FASB,Financial Accounting Standards Board ("FASB"), and other standard-setting and regulatory bodies. New guidance or interpretations may materially impact our provision for income taxes in future periods.
Additional information that is needed to complete the analysis but is currently unavailable includes, but is not limited to, the amount of earnings of foreign subsidiaries, the final determination of certain net deferred tax assets subject to remeasurement due to purchase accounting adjustments and other matters and the tax treatment of such provisions of the Act by various state tax authorities. We have provisionally recognized the tax impacts related to the re-measurement of deferred tax assets and liabilities. The ultimate impact may differ from our current provisional amountestimate due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act. The change from our current provisional estimates will be reflected in our future statements of operations and could be material. We expect to complete the accounting in the fourth quarter of 2018, although we cannot assure you of this.2018.
The Act reduced the U.S. corporate income tax rate from a maximum of 35% to 21% for all C corporations, effective January 1, 2018, introduced further limitations on the deductibility of interest expense, made certain changes to capital expenditures and various other items, and imposed a one-time repatriation tax on certain earnings of certain foreign subsidiaries. In addition, the Tax Act introduces additional base-broadening measures, including Global Intangible Low-Taxed Income (“GILTI”) and the Base-Erosion Anti-Abuse Tax (“BEAT”). As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we provisionally re-measured our net deferred tax assets at December 31, 2017 and recognized a tax expense of approximately $195 million in our consolidated statement of operations for the year ended December 31, 2017. During the first threesix months of 2018, we increased the tax expense from tax reform by $64$76 million due to changes in certain purchase accounting adjustments related to CenturyLink’s acquisition of us.
During the second quarter of 2018, we continued to evaluate and analyze the tax on certain earningsimpacts of foreign subsidiaries. Althoughthe Act. While we have not determined a reasonable estimate of the impact of the one-time repatriation tax,finalized our analysis, we do not expect this one-time taxthe provisions of the Act, exclusive of the rate reduction, to materially impact us butin 2018. However, we cannot provide any assurance that, upon completion of theour analysis, the amountimpact will not be material.material or that there will not be material tax impacts in future years. Accordingly, we have not made any additional adjustments related to the Act in our financial statements.
Because of our net operating loss carryforwards, we do not expect to experience a further material immediate reduction in the amount of cash income taxes paid by us to CenturyLink as part of our tax allocation policy.us. However, we anticipate that this provisionthe provisions of the Act may reduce our cash income taxes in future years.
Recently Adopted Accounting Pronouncements
In the first quarter or 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue“Revenue from Contracts with Customers”Customers”, ASU 2016-16, “Intra-Entity“Intra-Entity Transfers of Assets Other Than Inventory”,Inventory” and ASU 2018 - 02, “Income2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”Income”.
Each of these is described further below.
Revenue Recognition
On May 28, 2014, the FASB issued ASU 2014-09 which replaces virtually all existing generally accepted accounting principles 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.
ASU 2014-09 may be adopted by applying the provisions of this 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 2018. We adopted the new revenue recognition standard under the modified retrospective transition method. On January 1, 2018, we recorded a cumulative catch-up adjustment that increased our retained earnings by $9 million, net of $3 million of income taxes.
Upon adoption,Under ASU 2014-09, we are now deferring (i.e. capitalizing) incremental contract acquisition and fulfillment costs and are recognizing (i.e. amortizing) themsuch costs over the term ofeither the initial contract (plus and anticipated renewal contracts to which the costs relate.relate) or the average customer life. Our deferred contract acquisition and fulfillment costs for our customers have average amortization periods of approximately 12 months to 60 months and are subject to being monitored every period to reflect any significant change in assumptions. In addition, we assess our deferred contract cost asset for impairment on a periodic basis.
We have material obligations to our customers in our indefeasible right of use arrangements, including certain long-term prepaid customer capacity arrangements, which are accounted for as operating leases and service contracts. As our service contracts contain a significant financing component that are not separately accounted for, we are required to estimate and record incremental revenue and interest cost associated with these contractual terms. Mostarrangements. The majority of our indefeasible right of use arrangements are accounted for as operating leases.
We recognized a cumulative adjustment of $9 million to beginning retained earnings, net of tax effect, on January 1, 2018, as a result of deferring commissions as contract acquisition costs that were not previously deferred. Adoption of this standard increased our disclosures regarding revenue recognition, seeSee Note 54 - Revenue Recognition for additional information.
Income Taxes
On October 24, 2016, FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-16"). ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries. After adoption of this ASU, the income tax effects associated with these asset transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or over the remaining useful life of the asset. We adopted ASU 2016-16 on January 1, 2018. The adoption of ASU 2016-16 did not have a material impact to our consolidated financial statements.
Comprehensive Income
ASU 2018-02 provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. If an entity elects to reclassify the income tax effects of the Tax Cuts and Jobs Act, the amount of that reclassification shall include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income. The effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included. ASU 2018-02 is effective January 1, 2019, but early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We early adopted ASU 2018-02 in the first quarter of 2018 and applied it in the period of adoption. The adoption of ASU 2018-02 resulted in a $6 million decrease to member's equity and increase to accumulated other comprehensive income. See Note 911 - Accumulated Other Comprehensive Income (Loss)Loss for additional information.
Recent Accounting Pronouncements
LeasesIncome Taxes
On February 25,October 24, 2016, the FASB issued ASU 2016-02, “Leases” (“2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-02”2016-16"). The core principleASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries. After adoption of this ASU, 2016-02the income tax effects associated with these asset transfers, except for the transfer of inventory, will require lesseesbe recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to present right-of-use assets and lease liabilitiesa third party or over the remaining useful life of the asset. We adopted ASU 2016-16 on their balance sheets for operating leases, which are currently not reflected on their balance sheets.
ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Early2018. The adoption of ASU 2016-02 is permitted. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply.
On January 25, 2018, the FASB issued ASU 2018-01, “Leases: Land Easement Practical Expedient for Transition to ASU 2016-02. ASU 2018-01permits the election of an optional transition practical expedient to2016-16 did not evaluate land easements that exist or expired before the entity’s adoption of ASC 2016-02 and that were not previously accounted for as leases. We plan to adopt ASU 2018-01 at the same time we adopt ASU 2016-02.
We are in the process of implementing a new lease administrative and accounting system. We plan to adopt the standard when it becomes effective for us beginning January 1, 2019 and the adoption of the standard will result in the recognition of right of use assets and lease liabilities that have not previously been recorded. Although we believe it is premature as of the date of this report to provide any estimate of the impact of adopting ASU 2016-02, we do expect that it will have a material impact onto our consolidated financial statements.
Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.
We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020, but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption. As of the date of this report, we have not yet determined the date we will adopt ASU 2016-13.Recently Issued Accounting Pronouncements
Goodwill Impairment
On January 26, 2017, the FASB issued ASU 2017-04, “Simplifying“Simplifying the Test for Goodwill Impairment”Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the impairment testing for goodwill by changing the measurement for goodwill impairment. Under current rules, we are required to compute the implied fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value. Under ASU 2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned to the reporting unit.
We are required to adopt the provisions of ASU 2017-04 for any goodwill impairment tests, including our required annual test, occurring after January 1, 2020, but have the option to early adopt for any impairment test that we are required to perform. We have not determined if we will elect to early adopt the provisions of ASU 2017-04. The provisions of ASU 2017-04 would not have affected our last goodwill impairment assessment, but no assurance can be provided that the simplified testing methodology will not affect our goodwill impairment assessment in the future.
Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.
We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020 but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption. As of the date of this report, we have not yet determined the date we will adopt ASU 2016-13.
Leases
On February 25, 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which are currently not reflected on their balance sheets.
ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply.
On January 25, 2018, the FASB issued ASU 2018-01, “Leases: Land Easement Practical Expedient for Transition to ASU 2016-02". ASU 2018-01permits the election of an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of ASC 2016-02 and that were not previously accounted for as leases. We plan to adopt ASU 2018-01 at the same time we adopt ASU 2016-02.
On July 30, 2018, the FASB issued ASU 2018-11, "Leases: Targeted Improvements". ("ASU 2018-11") provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have not yet determined whether we will use the newly permitted adoption method.
We are in the process of implementing a new lease administrative and accounting system. We plan to adopt the standard when it becomes effective for us beginning January 1, 2019 and the adoption of the standard will result in the recognition of right of use assets and lease liabilities that have not previously been recorded. Although we believe it is premature as of the date of this report to provide any estimate of the impact of adopting ASU 2016-02, we do expect that it will have a material impact on our consolidated financial statements.
(2) CenturyLink Merger
On November 1, 2017, CenturyLink acquired us through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as CenturyLink's indirect wholly-owned subsidiary under the name of Level 3 Parent, LLC.
As a result of June 30, 2018, the acquisition, Level 3 Communications, Inc. shareholders received $26.50 per share in cash and 1.4286 shares of CenturyLink common stock, with cash paid in lieu of fractional shares, for each outstanding share of Level 3 Communications, Inc. common stock they owned at closing, subject to certain limited exceptions. CenturyLink issued this consideration with respect to all of the outstanding common stock of Level 3, with the exception of shares held by the dissenting common shareholders. Upon closing, CenturyLink shareholders owned approximately 51% and former Level 3 shareholders owned approximately 49% of the combined company.
In addition, each outstanding Level 3 restricted stock unit award granted prior to April 1, 2014 or granted to an outside director of Level 3 was converted into $26.50 in cash and 1.4286 shares of CenturyLink common stock (and cash in lieu of fractional shares) with respect to each Level 3 share covered by such award (the "Converted RSU Awards"). Each outstanding Level 3 restricted stock unit award granted on or after April 1, 2014 (other than those granted to outside directors of Level 3) was converted into a CenturyLink restricted stock unit award using a conversion ratio of 2.8386 to 1 as determined in accordance with a formula set forth in the merger agreement (“the Continuing RSU Awards”).
The preliminary estimated amount of aggregate consideration ofwas $19.628 billion is based on:billion.
the 517.3 million shares of CenturyLink’s common stock (including those issued in connection with the Converted RSU Awards) issued to consummate the acquisition and the closing stock price of CenturyLink common stock at October 31, 2017 of $18.99;
the cash consideration of $26.50 per share on the 362.2 million common shares of Level 3 issued and outstanding as of October 31, 2017, and the cash consideration of $1 million paid on the Converted RSUs awards;
the estimated value of $131 million of Continuing RSU Awards, which represents the pre-combination portion of Level 3’s share-based compensation awards replaced by CenturyLink; and
the approximately $58.0 million of cash paid to settle claims of former holders of dissenting shares.
At closing, CenturyLink assumed Level 3's long-term debt of approximately $10.6 billion.
In connection with the closing of the Merger Agreement, we loaned $1.825 billion to CenturyLink in exchange for an unsecured demand note that bears interest at 3.5% per annum. The principal amount of such note is payable upon demand by Level 3 Parent but no later than November 1, 2020, and may be prepaid by CenturyLink at any time.
The U.S. Department of Justice approved the acquisition subject to conditions of a consent decree on October 2, 2017, which requires the combined company to divest (i) certain Level 3 metro network assets in the markets located in Albuquerque, New Mexico; Boise, Idaho; and Tucson, Arizona and the combined company will divest(ii) 24 strands of dark fiber connecting 30 specified city-pairs across the United States in the form of an Indefeasible Rightindefeasible right of Useuse agreement.
On January 22, 2018, we entered into an agreement to sell certain intangible assets for $68 million. During the second quarter of 2018, we sold network assets in Boise, Idaho and Albuquerque, New Mexico that we were required to divest as a condition of the merger. The proceeds from these sales were included in the proceeds from sale of property, plant and equipment in our consolidated statements of cash flows. No gain or loss was recognized with these transactions. All of the metro network assets arewere classified as assets held for sale on theour consolidated balance sheetssheet as of March 31, 2018 and December 31, 2017. The Tucson, Arizona assets continue to be classified as assets held for sale on our consolidated balance sheet as of June 30, 2018.
Our results of operations have been included in the consolidated results of operations of CenturyLink beginning November 1, 2017. CenturyLink recognized our assets and liabilities based on CenturyLink’s preliminary estimates of the fair value of the acquired tangible and intangible assets and assumed liabilities of us as of November 1, 2017, the consummation date of the acquisition, with the excess aggregate consideration recorded as goodwill. The final determination of the allocation of the aggregate consideration paid by CenturyLink in the combination will be based on the fair value of such assets and liabilities as of the acquisition date with any excess aggregate consideration to be recorded as goodwill. The estimation of such fair values and the estimation of lives of depreciable tangible assets and amortizable intangible assets will require significant judgment. As such, CenturyLink has not completedis reviewing its valuation analysis and calculations in sufficient detail necessary to arrive atof the final estimates of the fair value of our assets acquired and liabilities assumed, along with the related allocation to goodwill. The fair values of certain tangible assets, intangible assets, certain liabilities and residual goodwill are the most significant areas not yet finalized and therefore are subject to change. CenturyLink expects to complete the final fair value determinations prior to the anniversary date of the acquisition. CenturyLink’s final fair value determinations may be significantly different than those reflected in our consolidated financial statements at March 31,June 30, 2018. The recognition of assets and liabilities at fair value are reflected in our financial statements and therefore result in a new basis of accounting for the “successor period” beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods will not be comparable to our previously reported financial statements, including the financial statements in this report.
Based solely on CenturyLink’s preliminary estimates through June 30, 2018, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $11.141$11.143 billion, which we have recognized as goodwill. The goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that CenturyLink expects to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.
TheAs of June 30, 2018, the following is our updated assignment of the preliminary estimated aggregate consideration:
| | | Adjusted November 1, 2017 Balance as of December 31, 2017 | | Purchase Price Adjustments(3) | | Adjusted November 1, 2017 Balance as of March 31, 2018 | Adjusted November 1, 2017 Balance as of December 31, 2017 | | Purchase Price Adjustments(3) | | Adjusted November 1, 2017 Balance as of June 30, 2018 |
| (Dollars in millions) | (Dollars in millions) |
Cash, accounts receivable and other current assets (1) | $ | 3,317 |
| | (3 | ) | | 3,314 |
| $ | 3,317 |
| | (14 | ) | | 3,303 |
|
Property, plant and equipment | 9,311 |
| | 92 |
| | 9,403 |
| 9,311 |
| | 113 |
| | 9,424 |
|
Identifiable intangible assets (2) |
|
| |
|
| | — |
| | | | |
|
|
Customer relationships | 8,964 |
| | (476 | ) | | 8,488 |
| 8,964 |
| | (476 | ) | | 8,488 |
|
Other | 391 |
| | (13 | ) | | 378 |
| 391 |
| | (13 | ) | | 378 |
|
Other noncurrent assets | 782 |
| | 156 |
| | 938 |
| 782 |
| | 184 |
| | 966 |
|
Current liabilities, excluding current maturities of long-term debt | (1,461 | ) | | — |
| | (1,461 | ) | (1,461 | ) | | (20 | ) | | (1,481 | ) |
Current maturities of long-term debt | (7 | ) | | — |
| | (7 | ) | (7 | ) | | — |
| | (7 | ) |
Long-term debt | (10,888 | ) | | — |
| | (10,888 | ) | (10,888 | ) | | — |
| | (10,888 | ) |
Deferred revenue and other liabilities | (1,613 | ) | | (65 | ) | | (1,678 | ) | (1,613 | ) | | (85 | ) | | (1,698 | ) |
Goodwill | 10,837 |
| | 304 |
| | 11,141 |
| 10,837 |
| | 306 |
| | 11,143 |
|
Total estimated aggregate consideration | $ | 19,633 |
| | (5 | ) | | 19,628 |
| $ | 19,633 |
| | (5 | ) | | 19,628 |
|
(1) Includes a preliminary estimated fair value of $863$861 million for accounts receivable, which had a gross contractual value of $884 million on November 1, 2017. The $21$23 million difference between the gross contractual value and the preliminary estimated fair value assigned represents our best estimate as of November 1, 2017 of contractual cash flows that will not be collected.
(2) The preliminary estimate of the weighted-average amortization period for the acquired intangible assets is approximately 12.0 years.
(3) All purchase price adjustments occurred during the threesix months ended March 31,June 30, 2018.
Acquisition-Related Expenses
We have incurred acquisition-related expenses related to our activities surrounding the CenturyLink Merger. The table below summarizes our acquisition-related expenses, which consist of integration-related expenses, including severance and retention compensation expenses, and transaction-related expenses:
| | | Successor | | | Predecessor | Successor | | | Predecessor |
| Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 |
| (Dollars in millions) | (Dollars in millions) |
Transaction-related expenses | $ | — |
| | | 3 |
| $ | — |
| — |
| | | 2 |
| 5 |
|
Integration-related expenses | 18 |
| | | 18 |
| 59 |
| 77 |
| | | 20 |
| 38 |
|
Total acquisition-related expenses | $ | 18 |
| | | 21 |
| $ | 59 |
| 77 |
| | | 22 |
| 43 |
|
Subsequent Events
In April 2018 we distributed $15 million to CenturyLink.
On May 4, 2018, we sold network assets in Boise that we were required to divest as a condition to the merger. These assets were classified as assets held for sale on our March 31, 2018 and December 31, 2017 consolidated balance sheets and no gain or loss was recognized on this transaction.
On January 22, 2018, we entered an agreement to sell certain intangible assets for $68 million. We received a deposit of $34 million in the first quarter of 2018 and it is recorded in other current liabilities on our March 31, 2018 consolidated balance sheet. The receipt of this $34 million is reflected in our cash flows from investing activities on our March 31, 2018 statement of cash flows. The remaining $34 million was collected in the second quarter of 2018.
(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
| | | March 31, 2018 | | December 31, 2017 | June 30, 2018 | | December 31, 2017 |
| (Dollars in millions) | (Dollars in millions) |
Goodwill | $ | 11,141 |
| | 10,837 |
| $ | 11,078 |
| | 10,837 |
|
Customer relationships, less accumulated amortization of $300 and $126 | 8,206 |
| | 8,845 |
| |
Customer relationships, less accumulated amortization of $477 and $126 | | $ | 7,990 |
| | 8,845 |
|
Other intangible assets subject to amortization: | | | | | | |
Trade names, less accumulated amortization of $11 and $4 | 119 |
| | 126 |
| |
Developed technology, less accumulated amortization of $22 and $9 | 271 |
| | 252 |
| |
Trade names, less accumulated amortization of $17 and $4 | | 113 |
| | 126 |
|
Developed technology, less accumulated amortization of $37 and $9 | | 283 |
| | 252 |
|
Total other intangible assets, net | $ | 390 |
| | 378 |
| $ | 396 |
| | 378 |
|
Our goodwill balance at December 31, 2017 includes $16 million of goodwill that was allocated to us from CenturyLink associated with differences in the deferred state income taxes that CenturyLink expects to realize due to its consolidation of our results of operations into its state tax returns.
Total amortization expense for intangible assets for the successor three and six months ended March 31,June 30, 2018 was $202 million and $396 million, respectively, and the predecessor three and six months ended March 31,June 30, 2017 was $194$52 million and $52$97 million, respectively. As of the successor date of March 31,June 30, 2018, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $20 billion. As of March 31, 2018, the weighted average remaining useful lives of our finite-lived intangible assets was 11.6 years in total; 11.9 years for customer contracts and relationships, 4.6 years for trade names, and 4.6 years for developed technology.
We estimate that total amortization expense for intangible assets for the successor years ending December 31, 2018 through 2022 will be as follows:
| | | (Dollars in millions) | (Dollars in millions) |
2018 (remaining nine months) | $ | 599 |
| |
2018 (remaining six months) | | $ | 402 |
|
2019 | 799 |
| 805 |
|
2020 | 799 |
| 805 |
|
2021 | 799 |
| 805 |
|
2022 | 787 |
| 792 |
|
The following table shows the rollforward of goodwill from December 31, 2017 through June 30, 2018: |
| | | |
| (Dollars in millions) |
As of December 31, 2017 | $ | 10,837 |
|
Purchase accounting and other adjustments | 306 |
|
Effect of foreign currency rate change | (65 | ) |
As of June 30, 2018 | $ | 11,078 |
|
(4) Revenue Recognition
We earn most of our consolidated revenue from contracts with customers, primarily through the provision of telecommunications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606, which we adopted on January 1, 2018 using the modified retrospective approach. We also earn revenues from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606.
Under ASC 606, revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:
Identification of the contract with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and,
Recognition of revenue when, or as, we satisfy a performance obligation.
We provide an array of communications services, including local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.
For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage, installation and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis.
Under ASC 606, we recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include certain activation and certain installation charges. If the activation and installation charges are separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one year to seven years depending on the service.
Promotional or performance-based incentive payments are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. In certain cases, customers may be permitted to modify their contracts without incurring a penalty. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract. The impact of contract modifications is not significant to our results.
Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The standalone selling price is the price we sell to similar customers. The revenue associated with each performance obligation is then recognized as earned. The portion of any advance payment allocated to the service based upon its relative selling price is recognized ratably over the contract term.
We periodically sell optical capacity on our network. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 - 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity and fiber assets and on all of the other elements deliverable under an IRU as non-ASC 606 lease revenue which we recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets.
In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction.
We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a reduction to revenues in the period that the service level commitment was not met.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. For certain products or services and customer types, payment is required before products or services are provided.
Comparative Results
The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| (Dollars in millions) |
| Reported Balances as of June 30, 2018 | | Impact of ASC 606 | | ASC 605 Historical Adjusted Balances | | Reported Balances as of June 30, 2018 | | Impact of ASC 606 | | ASC 605 Historical Adjusted Balances |
Operating revenues | $ | 2,052 |
| | — |
| | 2,052 |
| | 4,139 |
| | — |
| | 4,139 |
|
Cost of services and products (exclusive of depreciation and amortization) | 980 |
| | — |
| | 980 |
| | 1,978 |
| | — |
| | 1,978 |
|
Selling, general and administrative | 388 |
| | 7 |
| | 395 |
| | 732 |
| | 20 |
| | 752 |
|
Income tax expense | 44 |
| | (2 | ) | | 42 |
| | 146 |
| | (5 | ) | | 141 |
|
Net income | 40 |
| | (5 | ) | | 35 |
| | 102 |
| | (15 | ) | | 87 |
|
The following table presents a reconciliation of certain consolidated balance sheet captions under ASC 606 to the balance sheet results using the historical accounting method:
|
| | | | | | | | | |
| June 30, 2018 |
| (Dollars in millions) |
| Reported Balances as of June 30, 2018 | | Impact of ASC 606 | | ASC 605 Historical Adjusted Balances |
Other current assets | $ | 201 |
| | (16 | ) | | 185 |
|
Deferred income tax assets, net | 281 |
| | 9 |
| | 290 |
|
Other long-term assets, net | 108 |
| | (18 | ) | | 90 |
|
Member's equity | 18,749 |
| | (25 | ) | | 18,724 |
|
Disaggregated Revenue by Service Offering
The following table provides disaggregation of revenue from contracts with customers based on service offering for the three and six months ended June 30, 2018, respectively. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.
|
| | | | | | | | | | | | | | | | | | | | |
| Successor | | Successor |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| (Dollars in millions) | | (Dollars in millions) |
| Total Revenues | | Adjustments(7) | | Total Revenue from Contracts with Customers | | Total Revenues | | Adjustments(7) | | Total Revenue from Contracts with Customers |
IP & Data Services (4) | $ | 987 |
| | — |
| | 987 |
| | 1,990 |
| | — |
| | 1,990 |
|
Transport & Infrastructure (3) | 673 |
| | (52 | ) | | 621 |
| | 1,348 |
| | (94 | ) | | 1,254 |
|
Voice & Collaboration (1) | 363 |
| | — |
| | 363 |
| | 744 |
| | — |
| | 744 |
|
IT and Managed Services (2) | 1 |
| | — |
| | 1 |
| | 2 |
| | — |
| | 2 |
|
Other revenues (5) | 1 |
| | (1 | ) | | — |
| | 3 |
| | (3 | ) | | — |
|
Affiliate revenues (6) | 27 |
| | (27 | ) | | — |
| | 52 |
| | (52 | ) | | — |
|
Total revenues | $ | 2,052 |
| | (80 | ) | | 1,972 |
| | 4,139 |
| | (149 | ) | | 3,990 |
|
| | | | | | | | | | | |
Timing of revenue | | | | |
|
| | | | | |
|
|
Goods transferred at a point in time | | | | | $ | — |
| | | | | | $ | — |
|
Services performed over time | | | | | 1,972 |
| | | | | | 3,990 |
|
Total revenue from contracts with customers |
|
| |
|
| | $ | 1,972 |
| | | | | | $ | 3,990 |
|
(1) Includes local, long-distance and other ancillary revenues.
(2) Includes IT services and managed services revenues.
(3) Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.
(4) Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
(5) Includes sublease rental income.
(6) Includes telecommunications and data services we bill to our affiliates.
(7) Includes sublease rental income and revenue from fiber capacity lease arrangements which are not within the scope of ASC 606.
Customer Receivables and Contract Balances
The following table provides balances of customer receivables and contract liabilities as of June 30, 2018 and January 1, 2018: |
| | | | | | |
| Successor |
| June 30, 2018 | | January 1, 2018 |
| (Dollars in millions) |
Customer receivables (1) | $ | 744 |
| | 748 |
|
Contract liabilities | 392 |
| | 353 |
|
| |
(1) | Gross customer receivables of $753 and $751, net of allowance for doubtful accounts of $9 and $3, at June 30, 2018 and January 1, 2018, respectively. |
Contract liabilities are consideration we have received from our customers in advance of providing the goods or services promised in the contract. We defer this consideration until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which ranges from one to seven years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheet.
The following table provides information about revenues recognized for the three and six months ended June 30, 2018:
|
| | | | | | | | | |
| Successor |
| Three Months Ended March 31, 2018 | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| (Dollars in millions) |
Revenue recognized in the period from: | | | | | |
Amounts included in contract liability at the beginning of the period (January 1, 2018) | $ | 97 |
| | 16 |
| | 113 |
|
Performance obligations satisfied in previous periods | — |
| | — |
| | — |
|
Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. We recognize revenue for services when we satisfy our performance obligation as services are provided.
As of June 30, 2018, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts (including affiliates) that are unsatisfied (or partially satisfied) is approximately $6.5 billion. We expect to recognize approximately 51% of this revenue through 2019, with the balance recognized thereafter.
We do not disclose the amount of unsatisfied performance obligations for contracts under which we are contractually entitled to bill pre-determined amounts for future services (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606.
Contract Costs
The following table provides changes in our contract acquisition costs and fulfillment costs for the three and six months ended June 30, 2018:
|
| | | | | | | | | | | | |
| Successor |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| (Dollars in millions) |
| Acquisition Costs | | Fulfillment Costs | | Acquisition Costs | | Fulfillment Costs |
Beginning of period balance | $ | 26 |
| | 35 |
| | 13 |
| | 14 |
|
Costs incurred | 11 |
| | 24 |
| | 26 |
| | 47 |
|
Amortization | (3 | ) | | (7 | ) | | (5 | ) | | (9 | ) |
End of period balance | $ | 34 |
| | 52 |
| | 34 |
| | 52 |
|
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of telecommunications services to customers, including labor and materials consumed for these activities. Acquisition and fulfillment costs are amortized based on the transfer of services to which the assets relate which typically range from 12 months to 60 months and are included in cost of services and products and selling, general and administrative expenses in our consolidated statement of operations. A portion of these costs are amortized on a portfolio basis using an average expected contract term of 30 months. The amount of these capitalized costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. We recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets is less than one year. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.
(4)(5) Long-Term Debt
The following table summarizes our long-term debt:
| | | Interest Rates | | Maturities | | March 31, 2018 | | December 31, 2017 | Interest Rates | | Maturities | | June 30, 2018 | | December 31, 2017 |
| | (Dollars in millions) | | (Dollars in millions) |
Level 3 Parent, LLC | | | | | | | | |
Senior notes(1) | 5.750% | | 2022 | | $ | 600 |
| | 600 |
| 5.750% | | 2022 | | $ | 600 |
| | 600 |
|
Subsidiaries |
| | | | |
| | | | |
Level 3 Financing, Inc. |
| | | | |
| | | | |
Senior notes(2) | 5.125% - 6.125% | | 2021 - 2026 | | 5,315 |
| | 5,315 |
| 5.125% - 6.125% | | 2021 - 2026 | | 5,315 |
| | 5,315 |
|
Term loan(3) | LIBOR + 2.25% | | 2024 | | 4,611 |
| | 4,611 |
| LIBOR + 2.25% | | 2024 | | 4,611 |
| | 4,611 |
|
Capital Leases | Various | | Various | | 177 |
| | 179 |
| |
Capital leases | | Various | | Various | | 174 |
| | 179 |
|
Total long-term debt, excluding unamortized premiums | | 10,703 |
| | 10,705 |
| | 10,700 |
| | 10,705 |
|
Unamortized premiums, net | | 178 |
| | 185 |
| | 170 |
| | 185 |
|
Total long-term debt | | 10,881 |
| | 10,890 |
| | 10,870 |
| | 10,890 |
|
Less current maturities | | (9 | ) | | (8 | ) | | (13 | ) | | (8 | ) |
Long-term debt, excluding current maturities | | $ | 10,872 |
| | $ | 10,882 |
| | $ | 10,857 |
| | 10,882 |
|
(1) The notes are not guaranteed by any of Level 3 Parent, LLC's subsidiaries.
(2)The notes are fully and unconditionally guaranteed on an unsubordinated unsecured basis by Level 3 Parent, LLC and Level 3 Communications, LLC.
(3) The Tranche B 2024 Term Loan is a secured obligation and is guaranteed by Level 3 Parent, LLC and certain other subsidiaries. The Tranche B 2024 Term Loan had an interest rate of 4.111%4.334% as of March 31,June 30, 2018 and 3.557% as of December 31, 2017. The interest rate on the Tranche B 2024 Term Loan is set with a minimum London Interbank Offered Rate ("LIBOR ") of zero percent.
Capital Leases
As of March 31, 2018, we had $177 million of capital leases. We lease property, equipment, certain dark fiber facilities and metro fiber under non-cancelable IRU agreements that are accounted for as capital leases. The weighted average interest rate on these capital leases approximated 5.8% as of March 31, 2018.
Issuances
On February 22, 2017, we completed the refinancing of all of our then outstanding $4.611 billion senior secured term loans through the issuance of a new Tranche B 2024 Term Loan in the principal amount of $4.611 billion. The term loans refinanced were our Tranche B-III 2019 Term Loan, Tranche B 2020 Term Loan, and the Tranche B-II 2022 Term Loan. The new Tranche B 2024 Term Loan bears interest at LIBOR plus 2.25 percent, with a zero percent minimum LIBOR, and will mature on February 22, 2024. The Tranche B 2024 Term Loan was priced to lenders at par, with the payment to the lenders at closing of an upfront 25 basis point fee. We recognized a chargeof approximately $44 million for modification and extinguishment in the first quarter of 2017 related to this refinancing.
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt and capital leases (excluding unamortized premiums) maturing during the following years: | | | (Dollars in millions) | (Dollars in millions) |
2018 (remaining nine months) | $ | 9 |
| |
2018 (remaining six months) | | $ | 7 |
|
2019 | 8 |
| 8 |
|
2020 | 10 |
| 10 |
|
2021 | 651 |
| 651 |
|
2022 | 1,726 |
| 1,726 |
|
2023 and thereafter | 8,299 |
| 8,298 |
|
Total long-term debt | $ | 10,703 |
| $ | 10,700 |
|
Covenants
The senior notes of Level 3 Parent, LLC and term loan and senior notes of Level 3 Financing, Inc. contain extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates including CenturyLink and its other subsidiaries, dispose of assets and merge or consolidate with any other person. Also, Level 3 Parent, LLC, as well as Level 3 Financing, Inc., will be required to offer to purchase certain of its long-term debt securities under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC.
Certain of CenturyLink's and our debt instruments contain cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.
Compliance
At March 31,June 30, 2018, we believe we were in compliance with the provisions and financial covenants contained in theirour respective material debt agreements.
For additional information on our long-term debt, see Note 4—Long-Term Debt to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2017.
(6) Severance and Restructuring Costs
(5) Revenue RecognitionChanges in our accrued liabilities for severance expenses and restructuring costs were as follows: |
| | | | | | |
| Successor |
| Severance | | Restructuring |
| (Dollars in millions) |
Balance at January 1, 2018 | $ | 5 |
| | 4 |
|
Accrued to expense | 12 |
| | 46 |
|
Payments, net | (12 | ) | | (1 | ) |
Balance at June 30, 2018 | $ | 5 |
| | 49 |
|
Level 3 earns revenue from contracts with customers, primarily through the provision of telecommunications(7) Products and other services. Revenue from contracts with customers is accounted for under ASC 606, which we adopted on January 1, 2018 using the modified retrospective approach. We also earn revenues that are not accounted for under Accounting Standards Codification ("ASC") 606 from leasing arrangements (primarily fiber capacity agreements).
Services Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. Revenue recognition is recognized based on the following five-step model:
Identification of the contract(s) with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and,
Recognition of revenue when, or as, we satisfy a performance obligation.
We provideare an integrated communications company engaged primarily in providing an array of communications services, including local voice, broadband, private line (including special access)business data services), Ethernet, network access, Ethernet, information technology video and other ancillary services. OurWe 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.
We categorize our products, services and revenues among the following six categories:
IP and data services, which include global/international, enterprise, wholesale, government and small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.
For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the enforceable contract term in alignment with the period of customer benefit. For usage, installationprimarily VPN data networks, Ethernet, IP and other ancillary services, we generally bill in arrearsservices;
Transport and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis. To the extent certain products or services are discounted as part of a bundle arrangement, the bundle discounts are included in our calculation of the total transaction price with the customerinfrastructure, which is allocated to the various services in the bundled offering based on the estimated selling price of services included in each bundled combination.
Promotional or performance-based incentives are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. In certain cases, customers may be permitted to modify their contracts without incurring a penalty. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract. The impact of contract modifications is not typically significant to our results.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. For certain products or services and customer types, payment is required before products or services are provided.
Disaggregated Revenue by Service Offering
The following table provides disaggregation of revenue from contracts with customers based on service offering for the three months ended March 31, 2018 as well as a reconciliation of adjustments to revenue from the adoption of ASC 606 to ASC 605:
|
| | | | | | | | |
| Successor |
| Three Months Ended March 31, 2018 |
| (Dollars in millions) |
| Total Revenues | Adjustments(7) | Total Revenue from Contracts with Customers |
Voice & Collaboration(1) | $ | 381 |
| — |
| 381 |
|
IT and Managed Services(2) | 1 |
| — |
| 1 |
|
Transport & Infrastructure(3) | 675 |
| (42 | ) | 633 |
|
IP & Data Services(4) | 1,003 |
| — |
| 1,003 |
|
Regulatory revenues(5) | 2 |
| (2 | ) | — |
|
Affiliate revenues(6) | 25 |
| — |
| 25 |
|
Total revenues | $ | 2,087 |
| (44 | ) | 2,043 |
|
| | | |
Timing of revenue | | |
|
|
Goods transferred at a point in time | | | $ | — |
|
Services performed over time | | | 2,043 |
|
Total revenue from contracts with customers |
|
|
|
| $ | 2,043 |
|
(1) Includes local, long-distance and other ancillary revenues.
(2) Includes IT services and managed services revenues.
(3) Includes primarilyinclude broadband, private line (including business data services) and other ancillary services;
Voice and collaboration, colocationwhich includes primarily local voice, including wholesale voice, and data centers, wavelengthother ancillary services;
IT and ancillary revenues.managed services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;
(4) Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
(5) IncludesOther, which includes sublease rental income.income; and
(6) Includes telecommunicationsAffiliates services, we provide to our affiliates, telecommunication services that we also provide to external customers. In addition, we provide to our affiliates computer system development and datasupport services, network support and technical services.
From time to time, we may change the categorization of our products and services.
Our operating revenues for our products and services consisted of the following categories:
|
| | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
| (Dollars in millions) |
IP and data services | $ | 987 |
| | 1,990 |
| | | 986 |
| | 1,958 |
|
Transport and infrastructure | 673 |
| | 1,348 |
| | | 688 |
| | 1,366 |
|
Voice and collaboration | 363 |
| | 744 |
| | | 386 |
| | 782 |
|
IT and managed services | 1 |
| | 2 |
| | | — |
| | — |
|
Other | 1 |
| | 3 |
| | | 2 |
| | 4 |
|
Affiliate | 27 |
| | 52 |
| | | — |
| | — |
|
Total revenues | $ | 2,052 |
| | 4,139 |
| | | 2,062 |
| | 4,110 |
|
We recognize revenues in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our affiliates.
(7) Includes sublease rental income and revenue from fiber capacity lease arrangements.
Customer Receivables and Contract Balances
The following table provides balancescustomers. Our consolidated statements of customer receivables and contract liabilities as of March 31, 2018 and December 31, 2017:
|
| | | | | | |
| Successor |
| March 31, 2018 | | January 1, 2018 |
| (Dollars in millions) |
Customer receivables(1) | $ | 726 |
| | 748 |
|
Contract liabilities | 373 |
| | 353 |
|
(1) Gross customer receivables of $730 and $751, net of allowanceoperations also reflect the offsetting expense for doubtful accounts of $4 and $3, respectively.
Contract liabilities are considerationthe amounts we have received from our customers in advance of providing the goods or services promised in the contract. We defer this consideration until we have satisfied the related performance obligationremit to the customer. Contract liabilities include recurring services billed one monthgovernment agencies. The total amount of such surcharges and transaction taxes that we included in advancerevenues aggregated $98 million and installation and maintenance charges that are deferred and recognized over$100 million for the actual or expected contract term, which ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheet.
The following table provides information about revenues recognized for thesuccessor three months ended March 31, 2018:
|
| | | |
| Successor |
| March 31, 2018 |
| (Dollars in millions) |
Revenue recognized in the period from: | |
Amounts included in contract liability at the beginning of the period | $ | 97 |
|
Performance obligations satisfied in previous periods | — |
|
Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer a good or service toJune 30, 2018 and the customer. We recognize revenue for services when we satisfy our performance obligation as services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include certain activationpredecessor three months ended June 30, 2017, respectively, and certain installation charges, which we recognize as revenue over the actual or expected contract term, which ranges from one to five years depending on the service. Expected contract term periods are estimated using historical experience. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred$205 million and recognized over the new contract term.
We periodically transfer optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 to 20 years. In most cases, we account$198 million for the cash consideration received on transfers of optical capacity assetssuccessor six months ended June 30, 2018 and on all of the other elements deliverable underpredecessor six months ended June 30, 2017, respectively. These USF surcharges are assigned to the capacity IRU as lease revenue ratably over the term of the agreement. IRUs that are not classified as leases are accounted for as service contracts under ASC 605. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets.
In connection with offering products and services provided by third-party vendors, we reviewcategories based on the relationship between us, the vendor and the end customer to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether weunderlying revenues. We also act as a principal in thecollection agent for certain other USF and transaction and control the goods or services usedtaxes that we are required by government agencies to fulfill the performance obligation(s) associated with the transaction.
We have service level commitments pursuant to contracts with certain ofbill our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a reduction to revenues in the period that the service level commitment was not met.
As of March 31, 2018, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts (including affiliates) that are unsatisfied (or partially satisfied) is approximately $7.5 billion. We expect to recognize approximately 56% of this revenue through 2019, with the balance recognized thereafter.
We do not disclose the value of unsatisfied performance obligations for contractscustomers, for which we recognizedo not record any revenue at the amount to whichor expense because we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or contracts that are classifiedonly act as leasing arrangements that are not subject to ASC 606.
Contract Costs
The following table provides changes in our contract acquisition costs and fulfillment costs for the three months ended March 31, 2018:a pass-through agent.
|
| | | | | | |
| Successor |
| Three Months Ended March 31, 2018 |
| (Dollars in millions) |
| Acquisition Costs | | Fulfillment Costs |
Beginning of period balance | $ | 13 |
| | 14 |
|
Costs incurred | 15 |
| | 23 |
|
Amortization | (2 | ) | | (2 | ) |
Impairments | — |
| | — |
|
End of period balance | $ | 26 |
| | 35 |
|
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of telecommunications services to customers, including labor and materials consumed for these activities. The amount of these capitalized costs that are anticipated to be amortized in the next twelve months are included in other current assets on the consolidated balance sheet. The amount of capitalized costs expected to be amortized beyond the next twelve months is included on other assets on our consolidated balance. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.
Acquisition and fulfillment costs are amortized based on the transfer of services to which the assets relate to which typically range from 12 months to 60 months, and are included in cost of services and products and selling, general and administrative expenses in our consolidated statement of operations. A portion of these costs are amortized on a portfolio basis using an average expected contract term of 30 months.
Comparative Results
The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
|
| | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| (Dollars in millions) |
| Reported Balances as of March 31, 2018 | | Impact of 606 | | ASC 605 Historical Adjusted Balances |
Operating revenues | $ | 2,087 |
| | — |
| | $ | 2,087 |
|
Cost of services and products (exclusive of depreciation and amortization) | 998 |
| | — |
| | 998 |
|
Selling, general and administrative | 344 |
| | 13 |
| | 357 |
|
Income tax expense | 102 |
| | (3 | ) | | 99 |
|
Net income | 62 |
| | (10 | ) | | 52 |
|
|
| | | | | | | | | | |
| As of March 31, 2018 |
| (Dollars in millions) |
| Reported Balances as of March 31, 2018 | | Impact of 606 | | ASC 605 Historical Adjusted Balances |
Other current assets | $ | 183 |
| | (11 | ) | | $ | 172 |
|
Other long-term assets, net | 96 |
| | (15 | ) | | 81 |
|
Deferred income taxes, net | 249 |
| | 3 |
| | 252 |
|
Member's Equity | 18,924 |
| | (19 | ) | | 18,905 |
|
(6)(8) Fair Value of Financial Instruments
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 indicated below:
|
| | | | | | | | | | | | | | |
| | | As of | | As of |
| | | March 31, 2018 | | December 31, 2017 |
| Input Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | (Dollars in millions) |
Liabilities-Long-term debt, excluding capital lease and other obligations
| 2 | | $ | 10,704 |
| | 10,435 |
| | 10,711 |
| | 10,528 |
|
|
| | | | | | | | | | | | | | |
| | | June 30, 2018 | | December 31, 2017 |
| Input Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | (Dollars in millions) |
Liabilities-Long-term debt, excluding capital lease and other obligations | 2 | | $ | 10,696 |
| | 10,413 |
| | 10,711 |
| | 10,528 |
|
(7)(9) Commitments, Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for such contingencies at June 30, 2018 aggregate to $92approximately $76 million and are included in “Other” current liabilities and “Other Liabilities” in our consolidated balance sheet at March 31, 2018.as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued wouldcould have no effect on our results of operations but nonetheless could materially adversely affecthave an adverse effect on our cash flows for the affected period.flows.
We review our accruals at least quarterly and adjust them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertainingIn this Note, when we refer to a particular matter. Below is a description of material legal proceedings and other contingencies pending at March 31, 2018. Although we believe we have accrued for these matters in accordance with the accounting guidance for contingencies, contingencies are inherently unpredictable andclass action as "putative" it is possible that results of operations or cash flows could be materially and adversely affected in any particular period by unfavorable developments in, or resolution or disposition of, one or more of these matters. For those contingencies in respect of which we believe it is reasonably possible that a loss may result that is materially in excess of the accrual (if any) established for the matter, we have either provided an estimate of such possible loss or range of loss or included a statement that such an estimate cannot be made. In addition to the contingencies described below, we are party to many other legal proceedings and contingencies, the resolution of which are not expected to materially affect our financial condition or future results of operations beyond the amounts accrued.
Rights-of-Way Litigation
We have been party to a number of purported class action lawsuits involving our right to install fiber optic cable network in railroad right-of-ways adjacent to plaintiffs' land. In general, we obtained the rights to construct our networks from railroads, utilities, and others, and have installed our networks along the rights-of-way so granted. Plaintiffs in the purported class actions asserted that they are the owners of lands over which the fiber optic cable networks pass, and that the railroads, utilities and others who granted us the right to construct and maintain our network did not have the legal authority to do so. The complaints sought damages on theories of trespass, unjust enrichment and slander of title and property, as well as punitive damages. We also received, and may in the future receive, claims and demands related to rights-of-way issues similar to the issues in these cases that may be based on similar or different legal theories. We have defeated motions for class certification in a number of these actions but expected that, absent settlement of these actions, plaintiffs in the pending lawsuits would continue to seek certification of statewide or multi-state classes. The only lawsuit in whichbecause a class was certified against us, absent an agreed upon settlement, occurred in Koyle, et. al. v. Level 3 Communications, Inc., et. al., a purported two state class action filed in the United States District Court for the District of Idaho. The Koyle lawsuit has been dismissed pursuant to a settlement reachedalleged, but not certified in November 2010 as described further below.
We negotiated a series of class settlements affecting all persons who own or owned land next to or near railroad rights of way in which we have installed our fiber optic cable networks. The United States District Court for the District of Massachusetts in Kingsborough v. Sprint Communications Co. L.P. granted preliminary approval of the proposed settlement; however, on September 10, 2009, the court denied a motion for final approval of the settlement on the basis that the court lacked subject matter jurisdiction and dismissed the case.
In November 2010, we negotiated revised settlement terms for a series of state class settlements affecting all persons who own or owned land next to or near railroad rights of way in which we have installed our fiber optic cable networks and thereafter presented these proposed settlements to the applicable courts. The settlements, affecting current and former landowners, have received final federal court approval in all but one of the applicable states and the parties are actively engaged in, or have completed, the claims process for the vast majority of the applicable states, including payment of claims. We continue to seek approval in the remaining state.
Management believes that we have substantial defenses to the claims asserted in the remaining action and intends to defend it vigorously if a satisfactory settlement is not ultimately approved for all affected landowners. Additionally, given the now-final resolution of all but the last of these matters, management anticipates excluding specific discussion of them in our future reports.
Peruvian Tax Litigation
In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one of our Peruvian subsidiaries asserting $26 million of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, the total amount of exposure is $14$13 million at March 31, 2018, and is accrued for on the consolidated balance sheet.June 30, 2018.
We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the "Tribunal") decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. That appeal is pending.
In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. That appeal is pending.
Employee Severance and Contractor Termination Disputes
A number of former employees and third-party contractors have asserted a variety of claims in litigation against certain of our Latin American subsidiaries for separation pay, severance, commissions, pension benefits, unpaid vacation pay, breach of employment contracts, unpaid performance bonuses, property damages, moral damages and related statutory penalties, fines, costs and expenses (including accrued interest, attorneys' fees and statutorily mandated inflation adjustments) as a result of their separation from us or termination of service relationships. We are vigorously defending ourselves against the asserted claims, which aggregate to approximately $32$30 million at March 31,June 30, 2018.
Brazilian Tax Claims
In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authorities issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues.
We have filed objections to these assessments, arguing that the lease of assets and the provision of Internet access are not communication services subject to ICMS. The objections to the September 2002, December 2004 and March 2009 assessments were rejected by the respective state administrative courts, and we have appealed those decisions to the judicial courts. In October 2012 and June 2014, we received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014 at the first administrative level, and we appealed this decision to the second administrative level.
We are vigorously contesting all such assessments in both states and, in particular, view the assessment of ICMS on revenue from equipment leasing to be without merit. These assessments, if upheld, could result in a loss of up to $54$35 million at March 31,June 30, 2018 in excess of the accruals established for these matters.
We are vigorously contesting all such assessments in both states and, in particular, view the assessment of ICMS on revenue from leasing movable properties to be without merit.
Other Matters
We have recently beenwere notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc., certain former employees and others in the United States District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint was filed under seal on November 26, 2013, and an amended complaint was filed under seal on June 16, 2014. The court unsealed the complaints on October 26, 2017.
The amended complaint alleges that we, principally through two former employees, submitted false claims and made false statements to the government in connection with two government contracts. The relator seeks damages in this lawsuit of approximately $50 million, subject to trebling, plus statutory penalties, pre-and-post judgment interest, and attorney’s fees. The case is currently stayed.
We are evaluating our defenses to the claims. At this time, we do not believe it is probable we will incur a material loss. If, contrary to our expectations, the relatorplaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
The two former Level 3 employees named in the qui tam amended complaint and others were also indicted in the United States District Court for the Eastern District of Virginia on October 3, 2017, and charged with, among other things, accepting kickbacks from a subcontractor, who was also indicted, for work to be performed under a prime government contract. We are fully cooperating in the government’s investigations in this matter.
Letters of Credit
It is customary for us to use various financial instruments in the normal course of business. These instruments include letters of credit. Letters of credit which are conditional commitments issued on our behalf in accordance with specified terms and conditions. As of both March 31,June 30, 2018, and December 31, 2017, we had outstanding letters of credit or other similar obligations of approximately $36$32 million, of which $30$26 million are collateralized by cash that is reflected on the consolidated balance sheets as restricted cash and securities.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings or proceedings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial in the coming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various foreign, federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $100,000 in fines and penalties.
The outcome of these other proceedings is not predictable. However, based on current circumstances, we do not believe exposurethat 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.
The matters listed above in this Note do not reflect all of our contingencies. For additional information on our contingencies, See Note 14 to loss related tothe financial statements included in Item 8 of Part II of our letters of credit is material.annual report on Form 10-K for the year ended December 31, 2017.
(8)(10) Other Financial Information
Other Current Assets
The following table presents details of other current assets in our consolidated balance sheets:
| | | | | | | Successor |
| March 31, 2018 | | December 31, 2017 | June 30, 2018 | | December 31, 2017 |
| (Dollars in millions) | (Dollars in millions) |
Prepaid expenses | $ | 90 |
| | 68 |
| $ | 90 |
| | 68 |
|
Material, supplies and inventory | 4 |
| | 3 |
| 4 |
| | 3 |
|
Deferred activation and installation charges | 18 |
| | 17 |
| 19 |
| | 17 |
|
Deferred commissions | 12 |
| | — |
| 16 |
| | — |
|
Other | 59 |
| | 29 |
| 72 |
| | 29 |
|
Total other current assets | $ | 183 |
| | 117 |
| $ | 201 |
| | 117 |
|
Other Current Liabilities
The following table presents details of other current liabilities in our consolidated balance sheets:
| | | March 31, 2018 | | December 31, 2017 | Successor |
| (Dollars in millions) | June 30, 2018 | | December 31, 2017 |
Self insurance | $ | 6 |
| | 11 |
| |
| | (Dollars in millions) |
Self-insurance | | $ | 12 |
| | 11 |
|
Legal and tax reserves | 15 |
| | 31 |
| 13 |
| | 31 |
|
Other | 46 |
| | 15 |
| 20 |
| | 15 |
|
Total other current liabilities | $ | 67 |
| | 57 |
| $ | 45 |
| | 57 |
|
Included in accounts payable at March 31, 2018 and December 31, 2017 were $73 million and $74 million, respectively, associated with capital expenditures.
(9)(11) Accumulated Other Comprehensive Income (Loss)Loss
The tables below summarize changes in accumulated other comprehensive income recorded on our consolidated balance sheets by component for the successor three months ended March 31, 2018:
|
| | | | | | |
| Foreign Currency Translation Adjustments and Other | | Total |
| |
Balance at December 31, 2017 | $ | 18 |
| | 18 |
|
Other comprehensive income (loss) before reclassifications, net of tax | 72 |
| | 72 |
|
Adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | 6 |
| | 6 |
|
Net other comprehensive (loss) income | 78 |
| | 78 |
|
Balance at March 31, 2018 | $ | 96 |
| | 96 |
|
The tables below summarize changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the predecessor threesuccessor six months ended March 31, 2017:
June 30, 2018:
|
| | | | | | | | | |
| Pension Plans | | Foreign Currency Translation Adjustments and Other | | Total |
| (Dollars in millions) |
Balance at December 31, 2016 | $ | (34 | ) | | (353 | ) | | (387 | ) |
Other comprehensive income before reclassifications, net of tax | — |
| | 20 |
| | 20 |
|
Amounts reclassified from accumulated other comprehensive loss | 1 |
| | — |
| | 1 |
|
Net other comprehensive (loss) income | 1 |
| | 20 |
| | 21 |
|
Balance at March 31, 2017 | $ | (33 | ) | | (333 | ) |
| (366 | ) |
|
| | | | | | |
| Foreign Currency Translation Adjustment and Other | | Total |
| (Dollars in millions) |
Balance at December 31, 2017 | $ | 18 |
| | 18 |
|
Other comprehensive loss before reclassifications, net of tax | (163 | ) | | (163 | ) |
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | 6 |
| | 6 |
|
Net other comprehensive loss | (157 | ) | | (157 | ) |
Balance at June 30, 2018 | $ | (139 | ) | | (139 | ) |
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the predecessor six months ended June 30, 2017:
|
| | | | | | | | | |
| Pension Plans | | Foreign Currency Translation Adjustment and Other | | Total |
| (Dollars in millions) |
Balance at December 31, 2016 | $ | (34 | ) | | (353 | ) | | (387 | ) |
Other comprehensive income before reclassifications, net of tax | 1 |
| | 62 |
| | 63 |
|
Amounts reclassified from accumulated other comprehensive loss | (1 | ) | | — |
| | (1 | ) |
Net other comprehensive income | — |
| | 62 |
| | 62 |
|
Balance at June 30, 2017 | $ | (34 | ) | | (291 | ) | | (325 | ) |
(10)(12) Condensed Consolidating Financial Information
Level 3 Financing, Inc., a wholly owned subsidiary, has issued Senior Notes that are unsecured obligations of Level 3 Financing, Inc.; however, they are also fully and unconditionally and jointly and severally guaranteed on an unsecured senior basis by Level 3 Parent, LLC and Level 3 Communications, LLC.
In conjunction with the registration of the Level 3 Financing, Inc. Senior Notes, the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered."
The operating activities of the separate legal entities included in our consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the statements of comprehensive income (loss), balance sheets and statements of cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities and is not intended to present the operating results of those legal entities on a stand-alone basis. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Parent, LLC. These transactions are eliminated in our consolidated results.
Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended June 30, 2018 (Successor)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUES | | | | | | | | | | | |
Operating revenues | $ | — |
| | — |
| | 977 |
| | 1,091 |
| | (43 | ) | | 2,025 |
|
Operating revenues - affiliate | — |
| | — |
| | 6 |
| | 21 |
| | — |
| | 27 |
|
Total operating revenues | — |
| | — |
| | 983 |
| | 1,112 |
| | (43 | ) | | 2,052 |
|
OPERATING EXPENSES | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 600 |
| | 423 |
| | (43 | ) | | 980 |
|
Selling, general and administrative | — |
| | 2 |
| | 286 |
| | 100 |
| | — |
| | 388 |
|
Operating expenses - affiliates | — |
| | — |
| | 37 |
| | 18 |
| | — |
| | 55 |
|
Depreciation and amortization | — |
| | — |
| | 174 |
| | 259 |
| | — |
| | 433 |
|
Total operating expenses | — |
| | 2 |
| | 1,097 |
| | 800 |
| | (43 | ) | | 1,856 |
|
OPERATING INCOME (LOSS) | — |
| | (2 | ) | | (114 | ) | | 312 |
| | — |
| | 196 |
|
OTHER INCOME (EXPENSE) | | | | | | | | | | | |
Interest income | — |
| | — |
| | 1 |
| | — |
| | (1 | ) | | — |
|
Interest income - affiliate | 16 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Interest expense | (8 | ) | | (113 | ) | | — |
| | (4 | ) | | 1 |
| | (124 | ) |
Interest income (expense) - intercompany, net | 348 |
| | 604 |
| | (878 | ) | | (74 | ) | | — |
| | — |
|
Equity in net earnings (losses) of subsidiaries | (316 | ) | | (832 | ) | | — |
| | — |
| | 1,148 |
| | — |
|
Other income, net | — |
| | — |
| | 2 |
| | (6 | ) | | — |
| | (4 | ) |
Total other income (expense) | 40 |
| | (341 | ) | | (875 | ) | | (84 | ) | | 1,148 |
| | (112 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 40 |
| | (343 | ) | | (989 | ) | | 228 |
| | 1,148 |
| | 84 |
|
Income tax benefit (expense) | — |
| | 27 |
| | 13 |
| | (84 | ) | | — |
| | (44 | ) |
NET INCOME (LOSS) | 40 |
| | (316 | ) | | (976 | ) | | 144 |
| | 1,148 |
| | 40 |
|
Other comprehensive income (loss), net of income taxes | (235 | ) | | — |
| | — |
| | (235 | ) | | 235 |
| | (235 | ) |
COMPREHENSIVE INCOME (LOSS) | $ | (195 | ) | | $ | (316 | ) | | $ | (976 | ) | | $ | (91 | ) | | $ | 1,383 |
| | $ | (195 | ) |
Condensed Consolidating Statements of Comprehensive Income (Loss)
ThreeSix Months Ended March 31,June 30, 2018 (Successor)
| | | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) | (Dollars in millions) |
OPERATING REVENUES | | | | | | | | | | | | | | | | | | | | | | |
Operating revenues | $ | — |
| | $ | — |
| | $ | 956 |
| | $ | 1,146 |
| | $ | (40 | ) | | 2,062 |
| $ | — |
| | — |
| | 1,933 |
| | 2,237 |
| | (83 | ) | | 4,087 |
|
Operating revenues - affiliate | — |
| | — |
| | 25 |
| | — |
| | — |
| | 25 |
| — |
| | — |
| | 31 |
| | 21 |
| | — |
| | 52 |
|
Total operating revenues | — |
| | — |
| | 981 |
| | 1,146 |
| | (40 | ) | | 2,087 |
| — |
| | — |
| | 1,964 |
| | 2,258 |
| | (83 | ) | | 4,139 |
|
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 589 |
| | 449 |
| | (40 | ) | | 998 |
| — |
| | — |
| | 1,189 |
| | 872 |
| | (83 | ) | | 1,978 |
|
Selling, general and administrative | — |
| | 1 |
| | 259 |
| | 84 |
| | — |
| | 344 |
| — |
| | 3 |
| | 545 |
| | 184 |
| | — |
| | 732 |
|
Operating expenses - affiliate | — |
| | — |
| | 53 |
| | — |
| | — |
| | 53 |
| — |
| | — |
| | 90 |
| | 18 |
| | — |
| | 108 |
|
Depreciation and amortization | — |
| | — |
| | 170 |
| | 261 |
| | — |
| | 431 |
| — |
| | — |
| | 344 |
| | 520 |
| | — |
| | 864 |
|
Total cost and expenses | — |
| | 1 |
| | 1,071 |
| | 794 |
| | (40 | ) | | 1,826 |
| |
Total operating expenses | | — |
| | 3 |
| | 2,168 |
| | 1,594 |
| | (83 | ) | | 3,682 |
|
OPERATING INCOME (LOSS) | — |
| | (1 | ) | | (90 | ) | | 352 |
| | — |
| | 261 |
| — |
| | (3 | ) | | (204 | ) | | 664 |
| | — |
| | 457 |
|
OTHER INCOME (EXPENSE) | | | | | | | | | | | | | | | | | | | | | | |
Interest income | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| — |
| | — |
| | 1 |
| | 1 |
| | (1 | ) | | 1 |
|
Interest income - affiliate | 16 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
| 32 |
| | — |
| | — |
| | — |
| | — |
| | 32 |
|
Interest expense | (8 | ) | | (108 | ) | | (1 | ) | | (3 | ) | | — |
| | (120 | ) | (16 | ) | | (221 | ) | | (1 | ) | | (7 | ) | | 1 |
| | (244 | ) |
Interest income (expense) - intercompany, net | 355 |
| | 608 |
| | (881 | ) | | (82 | ) | | — |
| | — |
| 703 |
| | 1,212 |
| | (1,759 | ) | | (156 | ) | | — |
| | — |
|
Equity in net earnings (losses) of subsidiaries | (315 | ) | | (839 | ) | | (1 | ) | | — |
| | 1,155 |
| | — |
| (631 | ) | | (1,671 | ) | | (1 | ) | | — |
| | 2,303 |
| | — |
|
Other income, net | — |
| | — |
| | 1 |
| | 5 |
| | — |
| | 6 |
| — |
| | — |
| | 3 |
| | (1 | ) | | — |
| | 2 |
|
Total other income (expense) | 48 |
| | (339 | ) | | (882 | ) | | (79 | ) | | 1,155 |
| | (97 | ) | 88 |
| | (680 | ) | | (1,757 | ) | | (163 | ) | | 2,303 |
| | (209 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 48 |
| | (340 | ) | | (972 | ) | | 273 |
| | 1,155 |
| | 164 |
| 88 |
| | (683 | ) | | (1,961 | ) | | 501 |
| | 2,303 |
| | 248 |
|
Income tax benefit (expense) | 14 |
| | 25 |
| | (47 | ) | | (94 | ) | | — |
| | (102 | ) | 14 |
| | 52 |
| | (34 | ) | | (178 | ) | | — |
| | (146 | ) |
NET INCOME (LOSS) | 62 |
| | (315 | ) | | (1,019 | ) | | 179 |
| | 1,155 |
| | 62 |
| 102 |
| | (631 | ) | | (1,995 | ) | | 323 |
| | 2,303 |
| | 102 |
|
Other comprehensive income (loss), net of income taxes | 72 |
| | — |
| | — |
| | 72 |
| | (72 | ) | | 72 |
| (163 | ) | | — |
| | — |
| | (163 | ) | | 163 |
| | (163 | ) |
COMPREHENSIVE INCOME (LOSS) | $ | 134 |
| | (315 | ) | | (1,019 | ) | | 251 |
| | 1,083 |
| | 134 |
| $ | (61 | ) | | (631 | ) | | (1,995 | ) | | 160 |
| | 2,466 |
| | (61 | ) |
Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended March 31,June 30, 2017 (Predecessor)
| | | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) | (Dollars in millions) |
OPERATING REVENUES | | | | | | | | | | | | | | | | | | | | | | |
Operating revenues | $ | — |
| | $ | — |
| | $ | 920 |
| | $ | 1,157 |
| | $ | (29 | ) | | $ | 2,048 |
| $ | — |
| | — |
| | 934 |
| | 1,174 |
| | (46 | ) | | 2,062 |
|
Operating revenues - affiliate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total operating revenues | — |
| | — |
| | 920 |
| | 1,157 |
| | (29 | ) | | 2,048 |
| — |
| | — |
| | 934 |
| | 1,174 |
| | (46 | ) | | 2,062 |
|
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 583 |
| | 497 |
| | (29 | ) | | 1,051 |
| — |
| | — |
| | 602 |
| | 479 |
| | (46 | ) | | 1,035 |
|
Selling, general and administrative expenses | 1 |
| | 1 |
| | 277 |
| | 85 |
| | — |
| | 364 |
| 1 |
| | 1 |
| | 294 |
| | 71 |
| | — |
| | 367 |
|
Operating expenses - affiliate | — |
| | — |
| | — |
| | — |
| | — |
|
| — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | — |
| | — |
| | 87 |
| | 209 |
| | — |
| | 296 |
| — |
| | — |
| | 92 |
| | 215 |
| | — |
| | 307 |
|
Total cost and expenses | 1 |
| | 1 |
| | 947 |
| | 791 |
| | (29 | ) | | 1,711 |
| |
Total operating expenses | | 1 |
| | 1 |
| | 988 |
| | 765 |
| | (46 | ) | | 1,709 |
|
OPERATING INCOME (LOSS) | (1 | ) | | (1 | ) | | (27 | ) | | 366 |
| | — |
| | 337 |
| (1 | ) | | (1 | ) | | (54 | ) | | 409 |
| | — |
| | 353 |
|
OTHER INCOME (EXPENSE) | | | | | | | | | | | | | | | | | | | | | | |
Interest income | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
| — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Interest income - affiliate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Interest expense | (9 | ) | | (120 | ) | | (1 | ) | | (4 | ) | | — |
| | (134 | ) | (9 | ) | | (117 | ) | | (1 | ) | | (4 | ) | | — |
| | (131 | ) |
Interest income (expense) - intercompany, net | 377 |
| | 574 |
| | (869 | ) | | (82 | ) | | — |
| | — |
| 378 |
| | 567 |
| | (868 | ) | | (77 | ) | | — |
| | — |
|
Equity in net earnings (losses) of subsidiaries | (275 | ) | | (646 | ) | | 203 |
| | — |
| | 718 |
| | — |
| (216 | ) | | (632 | ) | | 200 |
| | — |
| | 648 |
| | — |
|
Loss on modification and extinguishment of debt | — |
| | (44 | ) | | — |
| | — |
| | — |
| | (44 | ) | |
Other income, net | — |
| | — |
| | 5 |
| | (1 | ) | | — |
| | 4 |
| — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) |
Total other income (expense) | 93 |
| | (236 | ) | | (660 | ) | | (87 | ) | | 718 |
| | (172 | ) | 153 |
| | (182 | ) | | (668 | ) | | (81 | ) | | 648 |
| | (130 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 92 |
| | (237 | ) | | (687 | ) | | 279 |
| | 718 |
| | 165 |
| 152 |
| | (183 | ) | | (722 | ) | | 328 |
| | 648 |
| | 223 |
|
Income tax expense | 3 |
| | (38 | ) | | (1 | ) | | (34 | ) | | — |
| | (70 | ) | |
Income tax benefit (expense) | | 2 |
| | (33 | ) | | (1 | ) | | (37 | ) | | — |
| | (69 | ) |
NET INCOME (LOSS) | 95 |
| | (275 | ) | | (688 | ) | | 245 |
| | 718 |
| | 95 |
| 154 |
| | (216 | ) | | (723 | ) | | 291 |
| | 648 |
| | 154 |
|
Other comprehensive income (loss), net of income taxes | 21 |
| | — |
| | — |
| | 21 |
| | (21 | ) | | 21 |
| 41 |
| | — |
| | — |
| | 41 |
| | (41 | ) | | 41 |
|
COMPREHENSIVE INCOME (LOSS) | $ | 116 |
| | $ | (275 | ) | | $ | (688 | ) | | $ | 266 |
| | $ | 697 |
| | $ | 116 |
| $ | 195 |
| | (216 | ) | | (723 | ) | | 332 |
| | 607 |
| | 195 |
|
Condensed Consolidating Statements of Comprehensive Income (Loss)
Six Months Ended June 30, 2017 (Predecessor)
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
OPERATING REVENUES | | | | | | | | | | | |
Operating revenues | $ | — |
| | — |
| | 1,854 |
| | 2,331 |
| | (75 | ) | | 4,110 |
|
Operating revenues - affiliate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total operating revenues | — |
| | — |
| | 1,854 |
| | 2,331 |
| | (75 | ) | | 4,110 |
|
OPERATING EXPENSES | | | | | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 1,185 |
| | 976 |
| | (75 | ) | | 2,086 |
|
Selling, general and administrative expenses | 2 |
| | 2 |
| | 571 |
| | 156 |
| | — |
| | 731 |
|
Operating expenses - affiliate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | — |
| | — |
| | 179 |
| | 424 |
| | — |
| | 603 |
|
Total operating expenses | 2 |
| | 2 |
| | 1,935 |
| | 1,556 |
| | (75 | ) | | 3,420 |
|
OPERATING INCOME (LOSS) | (2 | ) | | (2 | ) | | (81 | ) | | 775 |
| | — |
| | 690 |
|
OTHER INCOME (EXPENSE) | | | | | | | | | | | |
Interest income | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Interest income - affiliate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Interest expense | (18 | ) | | (237 | ) | | (2 | ) | | (8 | ) | | — |
| | (265 | ) |
Interest income (expense) - intercompany, net | 755 |
| | 1,141 |
| | (1,737 | ) | | (159 | ) | | — |
| | — |
|
Equity in net earnings (losses) of subsidiaries | (491 | ) | | (1,278 | ) | | 403 |
| | — |
| | 1,366 |
| | — |
|
Loss on modification and extinguishment of debt | — |
| | (44 | ) | | — |
| | — |
| | — |
| | (44 | ) |
Other income, net | — |
| | — |
| | 3 |
| | (1 | ) | | — |
| | 2 |
|
Total other income (expense) | 246 |
| | (418 | ) | | (1,328 | ) | | (168 | ) | | 1,366 |
| | (302 | ) |
INCOME (LOSS) BEFORE INCOME TAXES | 244 |
| | (420 | ) | | (1,409 | ) | | 607 |
| | 1,366 |
| | 388 |
|
Income tax benefit (expense) | 5 |
| | (71 | ) | | (2 | ) | | (71 | ) | | — |
| | (139 | ) |
NET INCOME (LOSS) | 249 |
| | (491 | ) | | (1,411 | ) | | 536 |
| | 1,366 |
| | 249 |
|
Other comprehensive income (loss), net of income taxes | 62 |
| | — |
| | — |
| | 62 |
| | (62 | ) | | 62 |
|
COMPREHENSIVE INCOME (LOSS) | $ | 311 |
| | (491 | ) | | (1,411 | ) | | 598 |
| | 1,304 |
| | 311 |
|
Condensed Consolidating Balance Sheets
March 31,June 30, 2018 (Successor)
| | | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) | (Dollars in millions) |
ASSETS | | | | | | | | | | | | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 39 |
| | — |
| | 133 |
| | 87 |
| | — |
| | 259 |
| $ | 21 |
| | — |
| | 180 |
| | 81 |
| | — |
| | 282 |
|
Restricted cash and securities | — |
| | — |
| | 1 |
| | 4 |
| | — |
| | 5 |
| — |
| | — |
| | 2 |
| | 3 |
| | — |
| | 5 |
|
Assets held for sale | 68 |
| | — |
| | 5 |
| | 67 |
| | — |
| | 140 |
| — |
| | — |
| | 1 |
| | 14 |
| | — |
| | 15 |
|
Accounts receivable | — |
| | — |
| | 10 |
| | 716 |
| | — |
| | 726 |
| — |
| | — |
| | 65 |
| | 679 |
| | — |
| | 744 |
|
Accounts receivable - affiliate | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| — |
| | — |
| | 4 |
| | 31 |
| | (31 | ) | | 4 |
|
Intercompany advances | 16,493 |
| | 21,422 |
| | — |
| | 5,368 |
| | (43,283 | ) | | — |
| 16,727 |
| | 23,346 |
| | — |
| | 4,303 |
| | (44,376 | ) | | — |
|
Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
| 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
Other | — |
| | — |
| | 95 |
| | 88 |
| | — |
| | 183 |
| — |
| | 3 |
| | 101 |
| | 97 |
| | — |
| | 201 |
|
Total current assets | 18,425 |
| | 21,422 |
| | 244 |
| | 6,333 |
| | (43,283 | ) | | 3,141 |
| 18,573 |
| | 23,349 |
| | 353 |
| | 5,208 |
| | (44,407 | ) | | 3,076 |
|
Property, plant, and equipment, net | — |
| | — |
| | 3,103 |
| | 6,439 |
| | — |
| | 9,542 |
| — |
| | — |
| | 3,147 |
| | 6,249 |
| | — |
| | 9,396 |
|
Restricted cash and securities | 19 |
| | — |
| | 10 |
| | — |
| | — |
| | 29 |
| 15 |
| | — |
| | 10 |
| | — |
| | — |
| | 25 |
|
GOODWILL AND OTHER ASSETS | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 1,658 |
| | 9,483 |
| | — |
| | 11,141 |
| — |
| | — |
| | 9,423 |
| | 1,655 |
| | — |
| | 11,078 |
|
Customer relationships, net | — |
| | — |
| | 3,979 |
| | 4,227 |
| | — |
| | 8,206 |
| — |
| | — |
| | 3,897 |
| | 4,093 |
| | — |
| | 7,990 |
|
Other intangible assets, net | — |
| | — |
| | 390 |
| | — |
| | — |
| | 390 |
| — |
| | — |
| | 396 |
| | — |
| | — |
| | 396 |
|
Investment in subsidiaries | 16,955 |
| | 18,788 |
| | 3,609 |
| | — |
| | (39,352 | ) | | — |
| 16,955 |
| | 19,501 |
| | 3,605 |
| | — |
| | (40,061 | ) | | — |
|
Deferred tax assets | 279 |
| | 1,826 |
| | 114 |
| | 10 |
| | (1,771 | ) | | 458 |
| 281 |
| | 1,868 |
| | 167 |
| | — |
| | (1,833 | ) | | 483 |
|
Other, net | — |
| | — |
| | 54 |
| | 42 |
| | — |
| | 96 |
| — |
| | 3 |
| | 62 |
| | 43 |
| | — |
| | 108 |
|
Total goodwill and other assets | 17,234 |
| | 20,614 |
| | 9,804 |
| | 13,762 |
| | (41,123 | ) | | 20,291 |
| 17,236 |
| | 21,372 |
| | 17,550 |
| | 5,791 |
| | (41,894 | ) | | 20,055 |
|
TOTAL ASSETS | $ | 35,678 |
| | 42,036 |
| | 13,161 |
| | 26,534 |
| | (84,406 | ) | | 33,003 |
| $ | 35,824 |
| | 44,721 |
| | 21,060 |
| | 17,248 |
| | (86,301 | ) | | 32,552 |
|
| | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND MEMBER'S EQUITY | | | | | | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | | | | | | | | | | | |
Current portion of long-term debt | $ | — |
| | — |
| | 2 |
| | 7 |
| | — |
| | 9 |
| |
Current maturities of long-term debt | | $ | — |
| | — |
| | 2 |
| | 11 |
| | — |
| | 13 |
|
Accounts payable | — |
| | 1 |
| | 318 |
| | 359 |
| | — |
| | 678 |
| — |
| | 1 |
| | 285 |
| | 295 |
| | — |
| | 581 |
|
Accounts payable - affiliate | 27 |
| | — |
| | 66 |
| | 2 |
| | — |
| | 95 |
| 48 |
| | — |
| | 89 |
| | — |
| | (31 | ) | | 106 |
|
Accrued expenses and other liabilities | | | | | | | | | | | | |
Income and other taxes | — |
| | 1 |
| | 45 |
| | 41 |
| | — |
| | 87 |
| — |
| | — |
| | 43 |
| | 38 |
| | — |
| | 81 |
|
Salaries and benefits | — |
| | — |
| | 129 |
| | 34 |
| | — |
| | 163 |
| — |
| | — |
| | 162 |
| | 37 |
| | — |
| | 199 |
|
Interest | 3 |
| | 85 |
| | — |
| | 7 |
| | — |
| | 95 |
| 11 |
| | 77 |
| | — |
| | 6 |
| | — |
| | 94 |
|
Current portion of deferred revenue | | — |
| | — |
| | 153 |
| | 132 |
| | — |
| | 285 |
|
| | Current portion of deferred revenue | — |
| | — |
| | 135 |
| | 138 |
| | — |
| | 273 |
| |
Current portion of deferred revenue - affiliate | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
| |
Intercompany payables | — |
| | — |
| | 43,283 |
| | — |
| | (43,283 | ) | | — |
| — |
| | — |
| | 44,376 |
| | — |
| | (44,376 | ) | | — |
|
Other | — |
| | — |
| | 16 |
| | 51 |
| | — |
| | 67 |
| — |
| | — |
| | 26 |
| | 19 |
| | — |
| | 45 |
|
Total Current Liabilities | 30 |
| | 87 |
| | 43,996 |
| | 639 |
| | (43,283 | ) | | 1,469 |
| |
Total current liabilities | | 59 |
| | 78 |
| | 45,136 |
| | 538 |
| | (44,407 | ) | | 1,404 |
|
LONG-TERM DEBT | 615 |
| | 10,088 |
| | 13 |
| | 156 |
| | — |
| | 10,872 |
| 615 |
| | 10,082 |
| | 13 |
| | 147 |
| | — |
| | 10,857 |
|
DEFERRED REVENUES AND OTHER LIABILITIES | | | | | | | | | | | | |
DEFERRED REVENUE AND OTHER LIABILITIES | | | | | | | | | | | | |
Deferred revenues | — |
| | — |
| | 843 |
| | 263 |
| | — |
| | 1,106 |
| — |
| | — |
| | 931 |
| | 207 |
| | — |
| | 1,138 |
|
Deferred revenues - affiliate | — |
| | — |
| | 5 |
| | 1 |
| | — |
| | 6 |
| |
Deferred tax liability | 648 |
| | — |
| | 849 |
| | 483 |
| | (1,771 | ) | | 209 |
| |
Deferred income taxes | | 651 |
| | 14 |
| | 839 |
| | 531 |
| | (1,833 | ) | | 202 |
|
Other | 1 |
| | — |
| | 174 |
| | 146 |
| | — |
| | 321 |
| — |
| | — |
| | 163 |
| | 178 |
| | — |
| | 341 |
|
Total deferred credits and other | 649 |
| | — |
| | 1,871 |
| | 893 |
| | (1,771 | ) | | 1,642 |
| |
Total deferred revenue and other liabilities | | 651 |
| | 14 |
| | 1,933 |
| | 916 |
| | (1,833 | ) | | 1,681 |
|
COMMITMENTS AND CONTINGENCIES |
| |
| |
| |
| |
| |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
MEMBER'S EQUITY (DEFICIT) | 34,384 |
| | 31,861 |
| | (32,719 | ) | | 24,846 |
| | (39,352 | ) | | 19,020 |
| 34,499 |
| | 34,547 |
| | (26,022 | ) | | 15,647 |
| | (40,061 | ) | | 18,610 |
|
TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 35,678 |
| | 42,036 |
| | 13,161 |
| | 26,534 |
| | (84,406 | ) | | 33,003 |
| $ | 35,824 |
| | 44,721 |
| | 21,060 |
| | 17,248 |
| | (86,301 | ) | | 32,552 |
|
Condensed Consolidating Balance Sheets
December 31, 2017 (Successor)
|
| | | | | | | | | | | | | | | | | | |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | |
Cash and cash equivalents | $ | 13 |
| | — |
| | 175 |
| | 109 |
| | — |
| | 297 |
|
Restricted cash and securities | — |
| | — |
| | 1 |
| | 4 |
| | — |
| | 5 |
|
Assets held for sale | 68 |
| | — |
| | 5 |
| | 67 |
| | — |
| | 140 |
|
Accounts receivable | — |
| | — |
| | 26 |
| | 722 |
| | — |
| | 748 |
|
Accounts receivable - affiliate | — |
| | — |
| | 60 |
| | 4 |
| | (51 | ) | | 13 |
|
Intercompany advances | 16,251 |
| | 21,032 |
| | — |
| | 5,200 |
| | (42,483 | ) | | — |
|
Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
Other | — |
| | — |
| | 54 |
| | 63 |
| | — |
| | 117 |
|
Total current assets | 18,157 |
| | 21,032 |
| | 321 |
| | 6,169 |
| | (42,534 | ) | | 3,145 |
|
Property, plant, and equipment, net | — |
| | — |
| | 3,237 |
| | 6,175 |
| | — |
| | 9,412 |
|
Restricted cash and securities | 19 |
| | — |
| | 10 |
| | — |
| | — |
| | 29 |
|
GOODWILL AND OTHER ASSETS | | | | | | | | | | | |
Goodwill | — |
| | — |
| | 1,200 |
| | 9,637 |
| | — |
| | 10,837 |
|
Customer relationships, net | — |
| | — |
| | 4,324 |
| | 4,521 |
| | — |
| | 8,845 |
|
Other intangible assets, net | — |
| | — |
| | 378 |
| | — |
| | — |
| | 378 |
|
Investment in subsidiaries | 16,954 |
| | 18,403 |
| | 3,616 |
| | — |
| | (38,973 | ) | | — |
|
Deferred tax assets | 280 |
| | 1,795 |
| | — |
| | 122 |
| | (1,771 | ) | | 426 |
|
Other, net | — |
| | — |
| | 32 |
| | 31 |
| | — |
| | 63 |
|
Total goodwill and other assets | 17,234 |
| | 20,198 |
| | 9,550 |
| | 14,311 |
| | (40,744 | ) | | 20,549 |
|
TOTAL ASSETS | $ | 35,410 |
| | 41,230 |
| | 13,118 |
| | 26,655 |
| | (83,278 | ) | | 33,135 |
|
| | | | | | | | | | | |
LIABILITIES AND MEMBER'S EQUITY | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | |
Current maturities of long-term debt | $ | — |
| | — |
| | 2 |
| | 6 |
| | — |
| | 8 |
|
Accounts payable | — |
| | 1 |
| | 323 |
| | 371 |
| | — |
| | 695 |
|
Accounts payable - affiliate | 11 |
| | — |
| | — |
| | 81 |
| | (51 | ) | | 41 |
|
Accrued expenses and other liabilities | | | | | | | | | | | |
Income and other taxes | — |
| | — |
| | 55 |
| | 45 |
| | — |
| | 100 |
|
Salaries and benefits | — |
| | — |
| | 109 |
| | 27 |
| | — |
| | 136 |
|
Interest | 11 |
| | 91 |
| | — |
| | 7 |
| | — |
| | 109 |
|
| | Current portion of deferred revenue | — |
| | — |
| | 127 |
| | 131 |
| | — |
| | 258 |
| — |
| | — |
| | 129 |
| | 131 |
| | — |
| | 260 |
|
Current portion of deferred revenue - affiliate | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
| |
Intercompany payables | — |
| | — |
| | 42,483 |
| | — |
| | (42,483 | ) | | — |
| — |
| | — |
| | 42,483 |
| | — |
| | (42,483 | ) | | — |
|
Other | 16 |
| | — |
| | 23 |
| | 18 |
| | — |
| | 57 |
| 16 |
| | — |
| | 23 |
| | 18 |
| | — |
| | 57 |
|
Total current liabilities | 38 |
| | 92 |
| | 43,124 |
| | 686 |
| | (42,534 | ) | | 1,406 |
| 38 |
| | 92 |
| | 43,124 |
| | 686 |
| | (42,534 | ) | | 1,406 |
|
LONG-TERM DEBT | 616 |
| | 10,096 |
| | 13 |
| | 157 |
| | — |
| | 10,882 |
| 616 |
| | 10,096 |
| | 13 |
| | 157 |
| | — |
| | 10,882 |
|
DEFERRED REVENUES AND OTHER LIABILITIES | | | | | | | | | | | | |
DEFERRED REVENUE AND OTHER LIABILITIES | | | | | | | | | | | | |
Deferred revenues | — |
| | — |
| | 841 |
| | 252 |
| | — |
| | 1,093 |
| — |
| | — |
| | 846 |
| | 253 |
| | — |
| | 1,099 |
|
Deferred revenues - affiliate | — |
| | — |
| | 5 |
| | 1 |
| | — |
| | 6 |
| |
Deferred tax liability | 648 |
| | — |
| | 870 |
| | 465 |
| | (1,771 | ) | | 212 |
| |
Deferred income taxes | | 648 |
| | — |
| | 870 |
| | 465 |
| | (1,771 | ) | | 212 |
|
Other | 1 |
| | 1 |
| | 98 |
| | 164 |
| | — |
| | 264 |
| 1 |
| | 1 |
| | 98 |
| | 164 |
| | — |
| | 264 |
|
Total deferred credits and other liabilities | 649 |
| | 1 |
| | 1,814 |
| | 882 |
| | (1,771 | ) | | 1,575 |
| |
Total deferred revenue and other liabilities | | 649 |
| | 1 |
| | 1,814 |
| | 882 |
| | (1,771 | ) | | 1,575 |
|
COMMITMENTS AND CONTINGENCIES |
| |
| |
| |
| |
| |
|
| |
| |
| |
| |
| |
|
MEMBER'S EQUITY (DEFICIT) | 34,107 |
| | 31,041 |
| | (31,833 | ) | | 24,930 |
| | (38,973 | ) | | 19,272 |
| 34,107 |
| | 31,041 |
| | (31,833 | ) | | 24,930 |
| | (38,973 | ) | | 19,272 |
|
TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 35,410 |
| | 41,230 |
| | 13,118 |
| | 26,655 |
| | (83,278 | ) | | 33,135 |
| $ | 35,410 |
| | 41,230 |
| | 13,118 |
| | 26,655 |
| | (83,278 | ) | | 33,135 |
|
Condensed Consolidating Statements of Cash Flows
ThreeSix Months Ended March 31,June 30, 2018 (Successor)
| | | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) | (Dollars in millions) |
OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | (8 | ) | | — |
| | 490 |
| | 89 |
| | — |
| | 571 |
| $ | (85 | ) | | — |
| | 899 |
| | 204 |
| | — |
| | 1,018 |
|
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (142 | ) | | (110 | ) | | — |
| | (252 | ) | — |
| | — |
| | (289 | ) | | (257 | ) | | — |
| | (546 | ) |
Proceeds from the sale of property, plant and equipment and other assets | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| 68 |
| | — |
| | — |
| | 51 |
| | — |
| | 119 |
|
Deposits received on assets held for sale | 34 |
| | — |
| | — |
| | — |
| | — |
| | 34 |
| |
Net cash provided by (used in) investing activities | 34 |
| | — |
| | (142 | ) | | (109 | ) | | — |
| | (217 | ) | 68 |
| | — |
| | (289 | ) | | (206 | ) | | — |
| | (427 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | |
Payments of long-term debt | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Distributions | (390 | ) | | — |
| | — |
| | — |
| | — |
| | (390 | ) | (605 | ) | | — |
| | — |
| | — |
| | — |
| | (605 | ) |
Increase (decrease) due from/to affiliates, net | 390 |
| | — |
| | (390 | ) | | — |
| | — |
| | — |
| 605 |
| | — |
| | (605 | ) | | — |
| | — |
| | — |
|
Net cash provided by (used in) financing activities | — |
| | — |
| | (390 | ) | | (1 | ) | | — |
| | (391 | ) | — |
| | — |
| | (605 | ) | | (3 | ) | | — |
| | (608 | ) |
Effect of exchange rates on cash, cash equivalents and restricted cash and securities | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash and securities | 26 |
| | — |
| | (42 | ) | | (22 | ) | | — |
| | (38 | ) | (17 | ) | | — |
| | 5 |
| | (7 | ) | | — |
| | (19 | ) |
Cash, cash equivalents and restricted cash and securities and beginning of period | 32 |
| | — |
| | 186 |
| | 113 |
| | — |
| | 331 |
| 32 |
| | — |
| | 186 |
| | 113 |
| | — |
| | 331 |
|
Cash, cash equivalents and restricted cash and securities and end of period | $ | 58 |
| | — |
| | 144 |
| | 91 |
| | — |
| | 293 |
| $ | 15 |
| | — |
| | 191 |
| | 106 |
| | — |
| | 312 |
|
Condensed Consolidating Statements of Cash Flows
ThreeSix Months Ended March 31,June 30, 2017 (Predecessor)
| | | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| (Dollars in millions) | (Dollars in millions) |
OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | |
Net Cash Provided by (Used in) Operating Activities | $ | (16 | ) | | (135 | ) | | 109 |
| | 581 |
| | — |
| | 539 |
| $ | (14 | ) | | (267 | ) | | 352 |
| | 1,029 |
| | — |
| | 1,100 |
|
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures | — |
| | — |
| | (233 | ) | | (135 | ) | | — |
| | (368 | ) | — |
| | — |
| | (427 | ) | | (269 | ) | | — |
| | (696 | ) |
Purchase of marketable securities | | — |
| | — |
| | (1,127 | ) | | — |
| | — |
| | (1,127 | ) |
Net cash provided by (used in) investing activities | — |
| | — |
| | (233 | ) | | (135 | ) | | — |
| | (368 | ) | — |
| | — |
| | (1,554 | ) | | (269 | ) | | — |
| | (1,823 | ) |
FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | | | |
Net proceeds from issuance of long-term debt | — |
| | 4,569 |
| | — |
| | — |
| | — |
| | 4,569 |
| — |
| | 4,569 |
| | — |
| | — |
| | — |
| | 4,569 |
|
Payments of long-term debt | — |
| | (4,611 | ) | | — |
| | (2 | ) | | — |
| | (4,613 | ) | — |
| | (4,611 | ) | | (1 | ) | | (3 | ) | | — |
| | (4,615 | ) |
Increase (decrease) due from/to affiliates, net | 16 |
| | 177 |
| | 262 |
| | (455 | ) | | — |
| | — |
| 10 |
| | 309 |
| | 442 |
| | (761 | ) | | — |
| | — |
|
Net cash provided by (used in) financing activities | 16 |
| | 135 |
| | 262 |
| | (457 | ) | | — |
| | (44 | ) | 10 |
| | 267 |
| | 441 |
| | (764 | ) | | — |
| | (46 | ) |
Effect of exchange rates on cash, cash equivalents and restricted cash and securities | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash and securities | — |
| | — |
| | 138 |
| | (10 | ) | | — |
| | 128 |
| (4 | ) | | — |
| | (761 | ) | | (2 | ) | | — |
| | (767 | ) |
Cash, cash equivalents and restricted cash and securities and beginning of period | 37 |
| | — |
| | 1,710 |
| | 110 |
| | — |
| | 1,857 |
| 37 |
| | — |
| | 1,710 |
| | 110 |
| | — |
| | 1,857 |
|
Cash, cash equivalents and restricted cash and securities and end of period | $ | 37 |
| | — |
| | 1,848 |
| | 100 |
| | — |
| | 1,985 |
| $ | 33 |
| | — |
| | 949 |
| | 108 |
| | — |
| | 1,090 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.
Unless context requires otherwise, references to the period ended March 31,June 30, 2017 covers the predecessor period from January 1, 2017 through March 31,June 30, 2017, and the period ended March 31,June 30, 2018 covers the successor period from January 1, 2018 through March 31,June 30, 2018.
All references to "Notes" in this Item 2 of Part I refer to notesthe Notes to consolidated financial statementsConsolidated Financial Statements included in Item 1 of Part I of this report.
Certain statements in this report constitute forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to us. When used in this document, the words “anticipate”, “believe”, “plan”, “estimate” and “expect” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this document. See the last paragraph of this Item 2 of Part I 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, 2017, and with the consolidated financial statements and related notes in Item I1 of Part I of this report. The results of operations and cash flows for the first threesix months of the year are not necessarily indicative of the results of operations and cash flows that might be expected for the entire year.
We are a facilities-based provider of a broad range of communications services. Revenue for communications services is generally recognized on a monthly basis as these services are provided. For contracts involving private line, wavelength and the lease of dark fiber services, we may receive upfront payments for services to be delivered for a period of up to 25 years. In these situations, we defer the revenue and amortize it on a straight-line basis to earnings over the term of the contract.
As discussed in Note 2 - CenturyLink Merger, on November 1, 2017, we became a wholly owned subsidiary of CenturyLink.
Since November 1, 2017, our results of operations have been included in the consolidated results of operations of CenturyLink. CenturyLink has accounted for its acquisition of us under the acquisition method of accounting, which resulted in the assignment of the purchase price to the assets acquired and liabilities assumed based on preliminary estimates of their acquisition date fair values and have been updated through March 31,June 30, 2018. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. CenturyLink expects to complete its final fair value determinations no later than the fourth quarter of 2018. CenturyLink's final fair value determinations may be significantly different than those reflected in our consolidated financial statements as of and for the successor period ended March 31,June 30, 2018. The recognition of assets and liabilities at fair value is reflected in our financial statements and therefore has resulted in a new basis of accounting for the "successor period" beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.
We have recognized $18$59 million and $77 million of certain expenses associated with activities related to CenturyLink's acquisition of us during the successor periodthree and six months ended March 31, 2018.June 30, 2018, respectively. These expenses were comprised of severance, retention bonuses, share-based compensation and system integration consulting. During the predecessor periodthree and six months ended March 31,June 30, 2017, we recognized $20$22 and $43 million of expenses associated with our activities related to the acquisition.acquisition, respectively. As part of the acquisition accounting, on November 1, 2017, we also included in our goodwill approximately $1 million for certain restricted stock awards and $47 million related to transaction costs, all of which were contingent on the completion of the acquisition and had no benefit to CenturyLink after the acquisition.
Since the November 1, 2017 closing of CenturyLink's acquisition of us, our operations are integrated into and are reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has become our CODM but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission ("SEC"). Otherwise, we do not provide our discrete financial information to the CODM on a regular basis.
Results of Operations
The following table summarizes the results of our consolidated operations for the successor three months and six months ended March 31,June 30, 2018 and predecessor three months and six months ended March 31,June 30, 2017:
| | | Successor | | | Predecessor | Successor | | | Predecessor |
| Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
| (Dollars in millions) | (Dollars in millions) |
Operating revenues | $ | 2,087 |
| | | 2,048 |
| $ | 2,052 |
| | 4,139 |
| | | 2,062 |
| | 4,110 |
|
Operating expenses | 1,826 |
| | | 1,711 |
| 1,856 |
| | 3,682 |
| | | 1,709 |
| | 3,420 |
|
Operating income | 261 |
| | | 337 |
| 196 |
| | 457 |
| | | 353 |
| | 690 |
|
Other income (expense) | (97 | ) | | | (172 | ) | (112 | ) | | (209 | ) | | | (130 | ) | | (302 | ) |
Income before income taxes | | 84 |
| | 248 |
| | | 223 |
| | 388 |
|
Income tax expense | (102 | ) | | | (70 | ) | (44 | ) | | (146 | ) | | | (69 | ) | | (139 | ) |
Net income | $ | 62 |
| | | 95 |
| $ | 40 |
| | 102 |
| | | 154 |
| | 249 |
|
Operating Revenues
We categorize our products, services and revenues among the following six categories:
VoiceIP and collaboration, which includes local, long-distance and other ancillary revenues.
IT and manageddata services, which includes IT servicesprimarily VPN data network, Ethernet, IP, video (including our Vyvx broadcast services) and managed services revenues.ancillary services;
Transport and infrastructure, which includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.revenues;
IPVoice and datacollaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services;
IT and managed services, which includes primarily VPN datainformation technology services and managed services, which may be purchased in conjunction with our network Ethernet, IP, video and ancillary revenues.services;
Regulatory, Other revenues, which includes sublease rental income and revenue from fiber capacity lease arrangements.income;
Affiliate, which includes telecommunications and data services we bill to our affiliates.
The following tables summarize our consolidated operating revenues recorded under our six revenue categories:
| | | Successor | | | Predecessor | | | | | Successor | | | Predecessor | | | | | | Successor | | | Predecessor | | | | |
| Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | | Increase/(Decrease) | | % Change | Three Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change | | Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | (Dollars in millions) | | | | (Dollars in millions) | | |
IP and data services | | $ | 987 |
| | | 986 |
| | 1 |
| | — | % | | 1,990 |
| | | 1,958 |
| | 32 |
| | 2 | % |
Transport and infrastructure | | 673 |
| | | 688 |
| | (15 | ) | | (2 | )% | | 1,348 |
| | | 1,366 |
| | (18 | ) | | (1 | )% |
Voice and collaboration | $ | 381 |
| | | 396 |
| | (15 | ) | | (4 | )% | 363 |
| | | 386 |
| | (23 | ) | | (6 | )% | | 744 |
| | | 782 |
| | (38 | ) | | (5 | )% |
IT and managed services | 1 |
| | | — |
| | 1 |
| | nm |
| 1 |
| | | — |
| | 1 |
| | nm |
| | 2 |
| | | — |
| | 2 |
| | nm |
|
Transport and infrastructure | 675 |
| | | 678 |
| | (3 | ) | | — | % | |
IP and data services | 1,003 |
| | | 972 |
| | 31 |
| | 3 | % | |
Regulatory | 2 |
| | | 2 |
| | — |
| | — | % | |
Other revenues | | 1 |
| | | 2 |
| | (1 | ) | | (50 | )% | | 3 |
| | | 4 |
| | (1 | ) | | (25 | )% |
Affiliate | 25 |
| | | — |
| | 25 |
| | nm |
| 27 |
| | | — |
| | 27 |
| | nm |
| | 52 |
| | | — |
| | 52 |
| | nm |
|
Total revenues | $ | 2,087 |
| | | 2,048 |
| | 39 |
| | 2 | % | $ | 2,052 |
| | | 2,062 |
| | (10 | ) | | — | % | | $ | 4,139 |
| | | 4,110 |
| | 29 |
| | 1 | % |
nm-Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
Our total operating revenues increaseddecreased by $39$10 million, or 2%less than 1%, for the successor three months ended March 31,June 30, 2018, as compared to the predecessor three months ended March 31,June 30, 2017. The decrease in our total operating revenues was primarily due to decreases in voice and collaboration of $23 million and transport and infrastructure of $15 million, partially offset by an increase in affiliate revenues of $27 million.
Our total operating revenues increased by $29 million, or 1%, for the successor six months ended June 30, 2018, as compared to the predecessor six months ended June 30, 2017. The increase in our total operating revenues was primarily due to an increaseincreases in affiliate revenues of $52 million and IP and data services of $31$32 million, an increase in affiliate revenues of $25 million, partially offset by a decreasedecreases in voice and collaboration revenues of $15$38 million.
Voice and collaboration revenues decreased by $15$23 million, or 4%6%, and by $38 million, or 5%, for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31,June 30, 2017. The decrease in voice and collaboration revenues was primarily due to a decline in voice of $23 million and a decline in collaboration of $2 million, offset by a $10 millionan increase in VoIP revenues.
IT and managed services revenues increased $1 millionremained flat for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31, 2017 due to a $1 million increase in managed services for the successor three months ended March 31, 2018.June 30, 2017.
Transport and infrastructure revenues decreased $3$15 million, or less than2%, and by $18 million, or 1%, for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31,June 30, 2017. The decrease in transport and infrastructure revenues was primarily due to a decrease in private line, revenues of $26 million, partially offset by an increase in wavelength revenues of $13 million, a $5 million increase in professional services, a $4 million increase incolocation and data center, dark fiber, revenues.wavelength, managed security and professional services.
IP and data services revenues increased $31$1 million, or 3%less than 1%, and by $32 million, or 2%, for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31,June 30, 2017. The increase in IP and data services revenues was primarily due to a $12 million increase in VPN data networks, an $11 million increase in CDN, partially offset by a decrease in Ethernet and Vyyx.
Other revenues remained essentially flat for the successor three and a $9six months ended June 30, 2018, as compared to the predecessor three and six months ended June 30, 2017.
Affiliate revenues increased by $27 million increase in IP revenues for the successor three months ended March 31, 2018.
Regulatory revenues remained flat for the successor three months ended March 31,June 30, 2018, as compared to the predecessor three months ended March 31, 2017.
Affiliate revenues increased by $25June 30, 2017, and $52 million for the successor threesix months ended March 31,June 30, 2018, as compared to the predecessor threesix months ended March 31,June 30, 2017. The increase in affiliate revenues was due to our acquisition by CenturyLink on November 1, 2017. Since CenturyLink's acquisition of us, we have recorded revenues from telecommunications and data services we bill to CenturyLink and certain of its subsidiaries as affiliate revenues. In the predecessor periods, since they were not affiliates, revenue associated with CenturyLink and its subsidiaries was recorded in the other operating revenue categories.
Operating Expenses
The following tables summarize our consolidated operating expenses:
| | | Successor | | | Predecessor | | | | | Successor | | | Predecessor | | | | | | Successor | | | Predecessor | | | | |
| Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | | Increase/(Decrease) | | % Change | Three Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change | | Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | (Dollars in millions) | | | | (Dollars in millions) | | |
Cost of services and products (exclusive of depreciation and amortization) | $ | 998 |
| | | 1,051 |
| | (53 | ) | | (5 | )% | $ | 980 |
| | | 1,035 |
| | (55 | ) | | (5 | )% | | 1,978 |
| | | 2,086 |
| | (108 | ) | | (5 | )% |
Selling, general and administrative | 344 |
| | | 364 |
| | (20 | ) | | (5 | )% | 388 |
| | | 367 |
| | 21 |
| | 6 | % | | 732 |
| | | 731 |
| | 1 |
| | — | % |
Operating expenses - affiliate | 53 |
| | | — |
| | 53 |
| | nm |
| 55 |
| | | — |
| | 55 |
| | nm |
| | 108 |
| | | — |
| | 108 |
| | nm |
|
Depreciation and amortization | 431 |
| | | 296 |
| | 135 |
| | 46 | % | 433 |
| | | 307 |
| | 126 |
| | 41 | % | | 864 |
| | | 603 |
| | 261 |
| | 43 | % |
Total costs and expenses | $ | 1,826 |
| | | 1,711 |
| | 115 |
| | 7 | % | |
Total operating expenses | | $ | 1,856 |
| | | 1,709 |
| | 147 |
| | 9 | % | | $ | 3,682 |
| | | 3,420 |
| | 262 |
| | 8 | % |
nm-Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
Cost of Services and Products (Exclusive of Depreciationdepreciation and Amortization)amortization)
Cost of services and products (exclusive of depreciation and amortization) decreased by $53$55 million, or 5%, and by $108 million, or 5%, for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31,June 30, 2017. The decrease in our cost of services and products for the successor three months ended March 31, 2018period was primarily due to our acquisition by CenturyLink on November 1, 2017. In the predecessor period, since they were not an affiliate, the expense associated with CenturyLink and its subsidiaries was recorded as cost of services and products and selling, general and administrative expenses.
Selling, General and Administrative
Selling, general and administrative decreasedincreased by $20$21 million, or 5%6%, and by $1 million, or less than 1%, for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31,June 30, 2017. This decrease in our selling, general and administrative expensesThe increase was primarily due to an increase in facilities based expenses primarily resulting from impaired leases, partially offset by a $16 million decrease in stock basedemployee-related expense primarily due to lower retention bonuses and headcount, a decrease in stock-based compensation expense as a result of accelerated vesting for certain restricted stock awards associated with the CenturyLink acquisition as well as the vesting of performance restricted stock units, and a decrease of $12 million forin affiliate expenses which were included in selling, general and administrative during the predecessor period, offset by an $8 million increase in other expenses.
Operating Expenses - Affiliate
Operating expenses - affiliate increased by $53$55 million, and by $108 million for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31,June 30, 2017. The increase in our operating expenses - affiliate was due to our acquisition by CenturyLink on November 1, 2017. In the predecessor period, since they were not affiliates, the expense associated with CenturyLink and its subsidiaries was recorded as cost of services and products and selling, general and administrative expenses.
Depreciation and Amortization
The following table provides detail regarding depreciation and amortization expense:
| | | Successor | | | Predecessor | | | | | Successor | | | Predecessor | | | | | | Successor | | | Predecessor | | | | |
| Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | | Increase/(Decrease) | | % Change | Three Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change | | Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | (Dollars in millions) | | | | (Dollars in millions) | | |
Depreciation | $ | 237 |
| | | 251 |
| | (14 | ) | | (6 | )% | $ | 231 |
| | | 255 |
| | (24 | ) | | (9 | )% | | 468 |
| | | 506 |
| | (38 | ) | | (8 | )% |
Amortization | 194 |
| | | 45 |
| | 149 |
| | 331 | % | 202 |
| | | 52 |
| | 150 |
| | 288 | % | | 396 |
| | | 97 |
| | 299 |
| | 308 | % |
Total depreciation and amortization | $ | 431 |
| | | 296 |
| | 135 |
| | 46 | % | $ | 433 |
| | | 307 |
| | 126 |
| | 41 | % | | 864 |
| | | 603 |
| | 261 |
| | 43 | % |
Depreciation expense decreased by $14$24 million, or 6%9%, and by $38 million, or 8%, for the successor three and six months ended March 31,June 30, 2018, as compared to the predecessor three and six months ended March 31,June 30, 2017. As of November 1, 2017, our property, plant and equipment were recorded at preliminary fair value and as a result net property, plant and equipment decreased $1 billion due to CenturyLink's acquisition of us. This decrease in asset value resulted in lower depreciation expense for the successor three and six months ended March 31,June 30, 2018 than would have been recorded had the acquisition not occurred. The accounting for CenturyLink's acquisition of us also resulted in an additional $8.740$8.7 billion in amortizable intangible customer relationship assets, which resulted in an additional $128 million of amortization expense for the successor three and six months ended March 31,June 30, 2018. In addition, trade names and developed technology were recorded at a fair value of $423$378 million, an increase of $401$356 million, which resulted in an additional $14 million of amortization expense for the successor three and six months ended March 31,June 30, 2018.
Other Consolidated Results
The following tables summarize our total other expense, net and income tax expense:
|
| | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | |
| Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | |
Interest income | $ | 1 |
| | | 2 |
| | (1 | ) | | (50 | )% |
Interest income - affiliate | 16 |
| | | — |
| | 16 |
| | nm |
|
Interest expense | (120 | ) | | | (134 | ) | | (14 | ) | | (10 | )% |
Loss on modification and extinguishment of debt | — |
| | | (44 | ) | | (44 | ) | | (100 | )% |
Other income | 6 |
| | | 4 |
| | 2 |
| | 50 | % |
Total other income (expense) | (97 | ) | | | (172 | ) | | (75 | ) | | (44 | )% |
Income tax expense | $ | (102 | ) | | | (70 | ) | | 32 |
| | 46 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | | | Successor | | | Predecessor | | | | |
| Three Months Ended June 30, 2018 | | | Three Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change | | Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 | | Increase/(Decrease) | | % Change |
| (Dollars in millions) | | | | (Dollars in millions) | | |
Interest income | $ | — |
| | | 3 |
| | (3 | ) | | (100 | )% | | 1 |
| | | 5 |
| | (4 | ) | | (80 | )% |
Interest income - affiliate | 16 |
| | | — |
| | 16 |
| | nm |
| | 32 |
| | | — |
| | 32 |
| | nm |
|
Interest expense | (124 | ) | | | (131 | ) | | 7 |
| | (5 | )% | | (244 | ) | | | (265 | ) | | 21 |
| | (8 | )% |
Gain (loss) on modification and extinguishment of debt, net | — |
| | | — |
| | — |
| | nm |
| | — |
| | | (44 | ) | | 44 |
| | (100 | )% |
Other, net | (4 | ) | | | (2 | ) | | (2 | ) | | 100 | % | | 2 |
| | | 2 |
| | — |
| | — | % |
Total Other Expense | $ | (112 | ) | | | (130 | ) | | 18 |
| | (14 | )% | | (209 | ) | | | (302 | ) | | 93 |
| | (31 | )% |
nm-Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
Interest Income
Interest income decreased by $1$3 million, or 50%100%, for the successor three months ended March 31,June 30, 2018, as compared to the predecessor three months ended March 31,June 30, 2017, and $4 million, or 80%, for the successor six months ended June 30, 2018, as compared to the predecessor six months ended June 30, 2017. The decrease in interest income was primarily due to the decrease in our cash and cash equivalents balance.
Interest Income - Affiliate
Interest income - affiliate increased by $16 million for the successor three months ended March 31,June 30, 2018, as compared to the predecessor three months ended March 31,June 30, 2017, and $32 million for the successor six months ended June 30, 2018, as compared to the predecessor six months ended June 30, 2017. The increase in interest income - affiliate was due to the interest associated with our $1.825 billion loan made to CenturyLink in connection with the closing of the Merger Agreement.
Interest Expense
Interest expense decreased by $14$7 million, or 10%5%, for the successor three months ended March 31,June 30, 2018, as compared to the predecessor three months ended March 31,June 30, 2017, and $21 million, or 8%, for thesuccessor six months ended June 30, 2018, as compared to the predecessor six months ended June 30, 2017. The decrease in interest expenses was primarily due to refinancing of alllower interest expense associated with the repayment of our then outstanding$300 million Floating rate Notes due in 2018, partially offset by a higher LIBOR on the $4.611 billion senior secured term loans during the predecessor three months ended March 31, 2017 resulting in a lower effective interest rate.Tranche B 2024 Term Loan.
Loss on Modification and Extinguishment of Debt
Loss on modification and extinguishment of debt decreased by $44 million or 100%, for the successor threesix months ended March 31,June 30, 2018, as compared to the predecessor threesix months ended March 31,June 30, 2017. The decrease in loss on modification and extinguishment of debt was due to the refinancing of all of our then outstanding $4.611 billion senior secured term loans during the predecessor threesix months ended March 31,June 30, 2017.
Other Income (Expense)
Other income (expense) increaseddecreased by $2 million, or 50%100%, for the successor three months ended March 31,June 30, 2018, as compared to the predecessor three months ended March 31,June 30, 2017 and was flat, for the successor six months ended June 30, 2018, as compared to the predecessor six months ended June 30, 2017. The increasedecrease in other income (expense) was due to a $4 milliondecrease in foreign currency gain in the successor three months ended March 31,June 30, 2018, as compared to a $2 million foreign currency gain in the predecessor three months ended March 31,June 30, 2017.
Income Tax Expense
For the successor three months ended March 31,June 30, 2018 and the predecessor three months ended March 31,June 30, 2017, our effective income tax rate was 62%52% and 42%31%, and was 59% and 36% for the successor six months ended June 30, 2018 and the predecessor six months ended June 30, 2017, respectively. The effective tax rate for the successor three and six months ended March 31,June 30, 2018 was significantly impacted by purchase price adjustments as a result of the CenturyLink merger and the enactment of the Tax Cuts and Jobs Act legislation in December 2017 which resulted in a re-measurement of our deferred tax assets and liabilities at the new federal corporate tax rate. See "Other Matters-Recent Tax Changes." This increase was partially offset by a tax benefit from releasing liabilities from uncertain tax positions due to statute expiration.
Liquidity and Capital Resources
Overview of Sources and Uses of Cash
At March 31,June 30, 2018, we held cash and cash equivalents of $259$282 million. At March 31,June 30, 2018, cash and cash equivalents of $226$81 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.
Impact of Merger with CenturyLink
As of November 1, 2017, we became a wholly owned subsidiary of CenturyLink. As such, factors relating to, or affecting, CenturyLink's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.
In connection with the closing of the Merger Agreement, we loaned $1.825 billion to CenturyLink in exchange for an unsecured demand note that bears interest at 3.5% per annum. The principal amount of such note is payable upon demand by Level 3 Parent but no later than November 1, 2020 and is prepayable by CenturyLink at any time.
A significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.
We anticipate that any future liquidity needs will be met through (i) our cash provided by operating activities (ii) amounts due to us from CenturyLink (iii) our ability to refinance our debt obligations at maturity and (iv) capital contributions, advances or loans from CenturyLink or its affiliates if and to the extent they have available funds or access to funds that they are willing and able to contribute, advance or loan.
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. CenturyLink and we evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of CenturyLink's consolidated capital investment is influenced by, among other things, demand for CenturyLink's services and products, cash flow generated by operating activities and cash required for other purposes.
Debt and Other Financing Arrangements
As of March 31,June 30, 2018, our long-term debt (including current maturities and capital leases) totaled $10.881$10.870 billion, compared to $10.890 billion outstanding as of December 31, 2017.
Subject to market conditions, from time to time, we expect to continue to issue term debt or senior notes to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned us by the three major credit rating agencies, among other factors. As of the date of this report, the credit ratings for the senior unsecured debt of Level 3 Parent, LLC and Level 3 Financing, Inc. were as follows:
|
| | | | | | |
Borrower | | Moody's Investor Services, Inc. | | Standard & Poor's | | Fitch Ratings |
Level 3 Parent, LLC | | | | | | |
Unsecured | | B1 | | B+ | | BB- |
| | | | | | |
Level 3 Financing, Inc. | | | | | | |
Unsecured | | Ba3 | | BB | | BB |
Secured | | Ba1 | | BBB- | | BBB- |
Historical Information
The following table summarizes our consolidated cash flow activities:
| | | Successor | | | Predecessor | | | Successor | | | Predecessor | | |
| Three Months Ended March 31, 2018 | | | Three Months Ended March 31, 2017 | | Increase/(Decrease) | Six Months Ended June 30, 2018 | | | Six Months Ended June 30, 2017 | | Increase/ (Decrease) |
| (Dollars in millions) | (Dollars in millions) |
Net cash provided by operating activities | $ | 571 |
| | | 539 |
| | 32 |
| $ | 1,018 |
| | | 1,100 |
| | (82 | ) |
Net cash used in investing activities | (217 | ) | | | (368 | ) | | (151 | ) | $ | (427 | ) | | | (1,823 | ) | | (1,396 | ) |
Net cash used in financing activities | $ | (391 | ) | | | (44 | ) | | 347 |
| $ | (608 | ) | | | (46 | ) | | 562 |
|
Operating Activities
Net cash provided by operating activities increased $32decreased $82 million for the successor threesix months ended March 31,June 30, 2018, as compared to the predecessor threesix months ended March 31,June 30, 2017, primarily resulting from increased revenues.due to the change in accounts payable. Cash provided by operating activities is subject to variability period over period as a resultbecause of the timing of the collection of receivables and payments related to interest expense, accounts payable, and bonuses.
Investing Activities
Net cash used in investing activities decreased $151$1,396 million for the successor threesix months ended March 31,June 30, 2018, as compared to the predecessor threesix months ended March 31,June 30, 2017 primarily due to capital expendituresthe purchase of $368marketable securities of $1,127 million in the predecessor threesix months ended March 31,June 30, 2017, compared to $252a decrease in capital expenditures of $150 million in the successor threesix months ended March 31,June 30, 2018, partially offsetand by $34$119 million of depositsproceeds received on assets held for sale in the successor threesix months ended March 31, 2018 related to an agreement we entered into to sell $68 million of our assets held for sale.June 30, 2018.
Financing Activities
Net cash used in financing activities increased $347$562 million for the successor threesix months ended March 31,June 30, 2018, as compared to the predecessor threesix months ended March 31,June 30, 2017 primarily due to the $390$605 million of distributions we made to CenturyLink in the successor threesix months ended March 31,June 30, 2018, partially offset by the $44$46 million of cash used for the refinancing of debt in the predecessor threesix months ended March 31,June 30, 2017.
Other Matters
We are subject to various legal proceedings and other contingent liabilities that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. See Note 79 - Commitments, Contingencies and Other Items for additional information.
CenturyLink is involved in several legal proceedings to which we are not a party that, if resolved against them, could have a material adverse effect on their business and financial condition. As a wholly owned subsidiary of CenturyLink, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for these matters.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law and in December 2017, the SEC staff issued Staff Accounting Bulletin (SAB) 118 to provide guidance for companies that have not completed their accounting for the income tax effects of the Act. As of March 31,June 30, 2018, we havehad not completed our accounting for the tax effects of the Act. In order toTax Cuts and Jobs Act (the "Act") which was signed into law and in late December 2017. To complete our accounting for the impact of the Act, we continue to obtain, analyze and interpret additional guidance as such guidance becomes available from the U.S. Treasury Department, the Internal Revenue Service (“IRS”), state taxing jurisdictions, the FASB, and other standard-setting and regulatory bodies. New guidance or interpretations may materially impact our provision for income taxes in future periods.
Additional information that is needed to complete the analysis but is currently unavailable includes, but is not limited to, the amount of earnings of foreign subsidiaries, the final determination of certain net deferred tax assets subject to remeasurement due to purchase accounting adjustments and other matters and the tax treatment of such provisions of the Act by various state tax authorities. We have provisionally recognized the tax impacts related to the re-measurement of deferred tax assets and liabilities. The ultimate impact may differ from our current provisional amountestimate due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a resultbecause of the Act. The change from our current provisional estimates will be reflected in our future statements of operations and could be material. We expect to complete the accounting in the fourth quarter of 2018, although we cannot assure you of this.2018.
The Act reduced the U.S. corporate income tax rate from a resultmaximum of 35% to 21% for all C corporations, introduced further limitations on the deductibility of interest expense, made certain changes to capital expenditures and various other items, and imposed a one-time repatriation tax on certain earnings of certain foreign subsidiaries. In addition, the Tax Act introduces additional base-broadening measures, including Global Intangible Low-Taxed Income (“GILTI”) and the Base-Erosion Anti-Abuse Tax (“BEAT”). Because of the reduction in the U.S. corporate income tax rate from 35% to 21%, we provisionally re-measured our net deferred tax assets at December 31, 2017 and recognized a tax expense of approximately $195 million in our consolidated statement of operations for the year ended December 31, 2017. During the first threesix months of 2018, we increased the tax expense from tax reform by $64$76 million due to changes in certain purchase accounting adjustments related to CenturyLink’s acquisition of us.us, which was reflected in income tax expense.
The Act imposed a one-time repatriationDuring the second quarter of 2018, we continued to evaluate and analyze the tax on certain earningsimpacts of foreign subsidiaries. Althoughthe Act. While we have not determined a reasonable estimate of the impact of the one-time repatriation tax,finalized our analysis, we do not expect this one-time taxthe provisions of the Act, exclusive of the rate reduction, to materially impact us butin 2018. However, we cannot provide any assurance that, upon completion of theour analysis, the amountimpact will not be material.material or that there will not be material tax impacts in future years. Accordingly, we have not made any additional adjustments related to the Act in our financial statements.
Because of our net operating loss carryforwards, we do not expect to experience a further material immediate reduction in the amount of cash income taxes paid by us to CenturyLink as part of our tax allocation policy.us. However, we anticipate that this provisionthe provisions of the Act may reduce our cash income taxes in future years.
Certain Matters Related to the Merger with CenturyLink
Until November 1, 2017, we filed a consolidated federal income tax return of Level 3 Communications, Inc. Since CenturyLink's acquisition of us on November 1, 2017, we have been included in the consolidated federal income tax return of CenturyLink. Under CenturyLink's tax allocation policy, CenturyLink treats our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities to CenturyLink in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by CenturyLink and the same payment and allocation policy applies.
As of the successor date of March 31,June 30, 2018, we had paid certain costs that were associated with the CenturyLink acquisition. These costs include compensation costs comprised of retention bonuses and severance. The final amounts and timing of the compensation costs to be paid is partially dependent upon personnel decisions that continue to be made as part of the continuing integration. These amounts may be material.
In accounting for the CenturyLink's acquisition of us, we recorded our debt securities at their preliminary estimated fair values, which totaled $10.716 billion as of November 1, 2017. Our acquisition date fair value estimates were based primarily on inputs other than quoted market prices in active markets that are either directly or indirectly observable. The fair value of our debt securities exceeded their stated principal balances on the acquisition date by $190 million, which is being recognized as a reduction to interest expense over the remaining terms of the debt.
Market Risk
We areAt June 30, 2018, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations.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.
As of the successor date of March 31,June 30, 2018, we have approximately $10.526 billion (excluding capital lease and other obligations) of long-term debt outstanding, 56% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held $4.611 billion of floating rate debt exposed to changes in the London InterBankInterbank Offered Rate (LIBOR)("LIBOR"). A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $46 million.
By operating internationally, we are exposed to the risk of fluctuations in the foreign currencies used by our international subsidiaries, including the British Pound, the Euro, the Brazilian Real and the Argentinian Peso, in each case as of March 31,June 30, 2018. Although the percentages of our consolidated revenues and costs that are denominated in these currencies are immaterial, our consolidated results of operations could be adversely impacted by volatility in exchange rates or an increase in the number of foreign currency transactions. Argentina will be considered hyperinflationary in 2018, however, the Company already accounts for Argentina in U.S. Dollars, its functional currency.
Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those disclosed by us from time to time if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those disclosed by us from time to time if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at June 30, 2018.
Off-Balance Sheet Arrangements
WeAs of June 30, 2018. we have had no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we dodid 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 14-Commitments and Contingencies to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2017, or (ii)in the Future Contractual Obligations table included in Item 7 of Part II of the same report, or (iii) discussed under the heading "Market Risk" above.
Other Information
CenturyLink's and our website is www.centurylink.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this quarterly report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.com) under the heading "SEC Filings." These reports are available on our website as soon as reasonably practicable after we electronically file them with the SEC. From time to time, we also use our website to webcast our earnings calls and certain of our meetings with investors or other members of the investment community.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have omitted this information pursuant to General Instruction H(2).
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer, Glen F. Post, III,Jeff K. Storey, and our Chief Financial Officer, Sunit S. Patel, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31,June 30, 2018. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, as of March 31,June 30, 2018, in providing reasonable assurance that the information required to be disclosed by us in this report was accumulated and communicated in the manner provided above.
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.
Changes in Internal Control Over Financial Reporting
Beginning January 1, 2018, we adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the new accounting standard related to revenue recognition on our consolidated financial statements.
CenturyLink completed the acquisition of Level 3, Inc. on November 1, 2017. The Company is currently integrating policies, processes, people, technology, and operations of the combined Company.company. Management will continue to evaluate the Company's internal controls over financial reporting as it continues the integration of Level 3. Other than the internal controls related to the adoption of ASC606ASC 606 referenced above there were no changes in the Company's internal control over financial reporting that occurred during the firstsecond quarter of 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II-OTHER INFORMATION
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc.’s name changed to Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries. The Level 3 logo and Level 3 are registered service marks of our wholly owned subsidiary, Level 3 Communications, LLC, in the United States and other countries. All rights are reserved. This Form 10-Q refers to trade names and trademarks of other companies. The mention of these trade names and trademarks in this Form 10-Q is made with due recognition of the rights of these companies and without any intent to misappropriate those names or marks. All other trade names and trademarks appearing in this Form 10-Q are the property of their respective owners.
ITEM 1. LEGAL PROCEEDINGS
ForThe information regarding legal proceedingscontained in which we are involved, see Note 79 - Commitments, Contingencies and Other Items, to our unaudited consolidated financial statements included in Item 1 of Part I of this quarterly report on Form 10-Q.10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition or future results. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2017.
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(a) | Exhibits incorporated by reference are indicated in parentheses. |
1212* | |
31.131.1* | |
31.231.2* | |
32.132* | |
32.2 | |
101101* | The following materials from the Quarterly Report on Form 10-Q of Level 3 Parent, LLC for the quarter ended March 31,June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Member's/Stockholders' Equity and (vi) Notes to Consolidated Financial Statements. |
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 10,August 9, 2018.
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| | LEVEL 3 PARENT, LLC |
| | /s/ Eric J. Mortensen |
| | Eric J. Mortensen |
| | Senior Vice President - Interim Controller |
| | (Principal Accounting Officer) |