Preliminary Proxy Materials
dated March 25, 2019;
Subject to Completion
2018 Notice of2019 Annual Meeting
Report and 2019 Proxy Statement
and
Annual Financial Report
May 23, 2018
10:00 a.m. local time
100 CenturyLink Drive
Monroe, Louisiana
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant ☒ Filed by a Party other than the Registrant ☐
Check the appropriate box:
| Preliminary Proxy Statement | ||||
| ☐ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |||
| ☐ | Definitive Proxy Statement | |||
| ☐ | Definitive Additional Materials | |||
| ☐ | Soliciting Material under §240.14a-12 | |||
CENTURYLINK, INC. | ||||
| (Name of registrant as specified in its charter) | ||||
| (Name of person(s) filing proxy statement, if other than the registrant) | ||||
| Payment of Filing Fee (Check the appropriate box): | ||||
| ☒ | No fee required. | |||
| ☐ | Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. | |||
| (1) | Title of each class of securities to which transaction applies: | |||
| ||||
| (2) | Aggregate number of securities to which transaction applies: | |||
| ||||
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | |||
| ||||
| (4) | Proposed maximum aggregate value of transaction: | |||
| ||||
| (5) | Total fee paid: | |||
| ||||
| ☐ | Fee paid previously with preliminary materials. | |||
| ☐ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. | |||
| (1) | Amount Previously Paid: | |||
| ||||
| (2) | Form, Schedule or Registration Statement No.: | |||
| ||||
| (3) | Filing Party: | |||
| ||||
| (4) | Date Filed: | |||
| ||||
Preliminary Proxy Materials
dated March 25, 2019;
Subject to Completion
2018 Notice of2019 Annual Meeting
Report and 2019 Proxy Statement
and
Annual Financial Report
May 23, 2018
10:00 a.m. local time
100 CenturyLink Drive
Monroe, Louisiana
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 23, 2018
This proxy statement and related materials are
available atwww.envisionreports.com/ctl.
All references in this proxy statement or related materials to “we,” “us,” “our,” the “Company” or “CenturyLink” refer to CenturyLink, Inc. In addition, each reference to (i) the “Board” refers to our Board of Directors, (ii) “Voting Shares” refers collectively to our shares of Common Stock (“Common Shares”) and shares of Series L Preferred Stock (“Preferred Shares”), (iii) our “executives” or “executive officers” refers to our sixfour executive officers listed in the tables beginningtable on page 37 of this proxy statement, (iii)(iv) “meeting” refers to the 20182019 annual meeting of our shareholders described further herein, (iv)(v) “named executives,” “named officers,” “named executive officers” or “NEOs” refers to the sixseven current or former executive officers listed in the Summary Compensation Table appearing on page 71 of this proxy statement, (v)(vi) “senior officers” refers to our executive officers and a limited number of additional officers whose compensation is determined by the Human Resources and Compensation Committee of our Board, (vi) “legacy officers” or “legacy named officers” refers to officers who commenced service with us prior to the Level 3 Combination, and “newly named executives” refers to named officers who commenced service with us upon completion of the Level 3 Combination, (vii) “Embarq” refers to Embarq Corporation, which we acquired on July 1, 2009, (viii) “Qwest” refers to Qwest Communications International Inc., which we acquired on April 1, 2011, (ix) “Level 3” refers to Level 3 Communications, Inc., prior to the Level 3 Combination on November 1, 2017, and to itssuccessor-in-interest Level 3 Parent, LLC thereafter, (x) “Level 3 Combination” refers to our business combination with Level 3, which was publicly announced on October 31, 2016 and consummated on November 1, 2017 (which we from time to time refer to as the “Closing” or “Closing Date”), and (xi) the “SEC” refers to the U.S. Securities and Exchange Commission. Unless otherwise provided, all information is presented as of the date of this proxy statement.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 22, 2019
This proxy statement and related materials are
available at www.proxyvote.com.
Forward-Looking Statements
Except for historical and factual information contained herein, matters set forth in our 2019 proxy materials identified by words such as “expects,” “believes,” “will” and similar expressions are forward-looking statements as defined by the federal securities laws, and are subject to the “safe harbor” protection thereunder. These forward-looking statements are not guarantees of future results and are based on current expectations only, and are subject to uncertainties. Actual events and results may differ materially from those anticipated by us in those statements due to several factors, including those disclosed in our other filings with the SEC. We may change our intentions or plans discussed in our forward-looking statements without notice at any time and for any reason.
CenturyLink, Inc.
100 CenturyLink Drive
Monroe, Louisiana 71203
Notice of 20182019 Annual Meeting
of Shareholders
TIME AND DATE | 10:00 a.m. local time May | |
CenturyLink Auditorium CenturyLink Headquarters 100 CenturyLink Drive Monroe, Louisiana | ||
ITEMS OF BUSINESS | ||
(1) |
Elect as directors the 13 nominees named in the accompanying proxy statement | |
(2) |
Ratify the appointment of KPMG LLP as our independent auditor for | |
(3) |
Amend our | |
(4) |
Ratify our NOL Rights Plan described herein | |
(5) | Conduct anon-binding advisory vote | |
(6) |
Act upon | |
(7) |
Transact such other business as may properly come before the meeting and any | |
RECORD DATE You can vote if you were a shareholder of record at the close of business on March 28, 2019.
PROXY VOTING Shareholders are invited to attend the meeting in person. Even if you expect to attend, we urge you to vote in advance using any of the methods listed below.
Stacey W. Goff
Secretary
April 9, 201810, 2019
YOUR VOTE IS IMPORTANT TO US. WE URGE YOUR PARTICIPATION.
Using the voting instructions provided in your proxy materials, you may vote one of the following ways:
 |  |  |  | |||
By Internet: visit www.proxyvote.com | By Phone: call 1-800-690-6903 | By Mail: mark, sign, date and return proxy card | In Person: attend Annual Meeting |
| Page | ||||
| COMPENSATION COMMITTEE REPORT | 70 | |||
| EXECUTIVE COMPENSATION | 71 | |||
| 71 | ||||
| 74 | ||||
| 79 | ||||
| 81 | ||||
| 82 | ||||
| DIRECTOR COMPENSATION | 88 | |||
| 88 | ||||
| 89 | ||||
| 89 | ||||
| 90 | ||||
| PERFORMANCE GRAPH | 91 | |||
| COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION | 92 | |||
| TRANSACTIONS WITH RELATED PARTIES | ||||
| SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE | ||||
i
ii
CenturyLink, Inc.
100 CenturyLink Drive
Monroe, Louisiana 71203
PROXY STATEMENT
April 9, 2018
GENERAL INFORMATION ABOUT THE ANNUAL MEETING
Why am I receiving these proxy materials?
Our Board of Directors is soliciting your proxy to vote at our 2018 annual meeting of shareholders because you owned shares of our stock at the close of business on April 6, 2018, the record date for the meeting, and are entitled to vote those shares at the meeting. Our proxy materials are being made available to you on the Internet beginning on or about April 12, 2018. This proxy statement summarizes information regarding matters to be considered at the meeting. For additional information on our proxy materials, see “Other Matters — Proxy Materials” appearing below.
When and where will the meeting be held?
The meeting will be held at 10:00 a.m. local time on Wednesday, May 23, 2018, in the corporate conference room at our corporate headquarters, 100 CenturyLink Drive, Monroe, Louisiana. If you would like directions to the meeting, please see our website,http://ir.centurylink.com. You do not need to attend the meeting to vote your shares.
What matters will be considered at the meeting?
Shareholders will vote on the following matters at the meeting:
|
|
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
How many votes may I cast?
You may cast one vote for every share of our common stock or Series L preferred stock that you owned on the record date. Our common stock and Series L preferred stock vote together as a single class on all matters. In this proxy statement, we refer to these shares as our “Common Shares” and “Preferred Shares,” respectively, and as our “Voting Shares,” collectively. As of the record date, we had 1,078,907,371 Common Shares and 7,018 Preferred Shares outstanding.
What is the difference between holding shares as a shareholder of record and as a beneficial owner?
If shares are registered in your name with our transfer agent, Computershare Investor Services L.L.C., you are the “shareholder of record” of those shares and you may directly vote these shares, together with any shares credited to your account if you are a participant in our automatic dividend reinvestment and stock purchase service.
If your shares are held on your behalf in a stock brokerage account or by a bank or other nominee, you are the “beneficial owner” of shares held in “street name.” We have requested that our proxy materials be made available to you by your broker, bank or nominee, who is considered the shareholder of record of those shares.
If I am a shareholder of record, how do I vote?
If you are a shareholder of record, you may vote in person at the meeting or by proxy in any of the following three ways:
Please note that you may not vote by telephone or the Internet after 1:00 a.m. Central Time on May 23, 2018.
If I am a beneficial owner of shares held in street name, how do I vote?
As the beneficial owner, you have the right to instruct your broker, bank or nominee how to vote your shares by using any voting instruction card supplied by them or by following their instructions for voting by telephone, the Internet, or in person.
If I am a benefit plan participant, how do I vote?
Please see “Additional Information About the Meeting — Voting by Participants in Our Benefit Plans” appearing below.
Do I need identification to attend the meeting in person?
Yes. Please bring proper identification, together with the Important Notice Regarding Availability of Proxy Materials mailed to you, which will serve as your admission ticket. If your shares are held in street name, please bring acceptable proof of ownership, such as a letter from your broker or an account statement stating or showing that you beneficially owned Voting Shares on the record date.
Where can I find additional information about the conduct of the meeting, voting requirements, and other similar matters relating to the meeting?
Please see “Additional Information About the Meeting” appearing below.
(Item 1 on Proxy or Voting InstructionInstructions Card)
The first proposal for consideration at
Upon the meeting isrecommendation of the election of each ofNominating and Corporate Governance Committee, the Board has nominated the 13 candidates named below as a director for aone-year term expiring at our 20192020 annual meeting of shareholders, or until his or her successor is duly elected and qualified. Each of the candidates is currently a director of the Company.
Acting upon the recommendation of its Nominating and Corporate Governance Committee, the Board has nominated the 13 below-named directors to stand forre-election toone-year terms at the meeting. Unless authority is withheld,otherwise directed, all votes attributable to Voting Sharesvoting shares represented by each duly executed and delivered proxy will be cast for the election of each of the 13 below-named nominees. Under our bylaw nominating procedures, these nominees are the only individuals who may be elected at the meeting. If for any reason any such nominee should
decline or become unable to stand for election as a director, which we do not anticipate, the persons named as proxies may vote instead for another candidate designated by the Board, withoutre-soliciting proxies.
For additional information about our director nomination process and agreements under which we are obligated to nominate certain directors at the meeting, see “Corporate Governance — Governance—Director Nomination Process.”
As discussed further under “Additional Information About the Meeting — Vote Required to Elect Directors,” toTo be elected, each of the 13 nominees must receive an affirmative vote of a majority of the votes cast.cast with respect to this matter.
 | THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR THE ELECTION OF EACH OF THE DIRECTOR NOMINEES. | |
Director Qualifications
Director Skills and Experience |  |  |  |  |  |  |  |  |  |  |  |  |  | |||||||||||||
Executive Management/ Operational Management | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | |||||||||||||
Industry Experience | ● | ● | ● | ● | ● | ● | ||||||||||||||||||||
Accounting/Finance | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ||||||||||||||||
Risk Management | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | |||||||||||||
Global | ● | ● | ● | ● | ● | ● | ● | ● | ● | |||||||||||||||||
Cybersecurity | ● | ● | ● | ● | ||||||||||||||||||||||
Government Relations/ Legal and Regulatory/Public Policy | ● | ● | ● | ● | ● | ● | ● | ● | ||||||||||||||||||
Strategic Planning/Transformation | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | |||||||||||||
Customer Experience/Sales | ● | ● | ● | ● | ● | ● | ● | |||||||||||||||||||
Environmental, Sustainability and Corporate Responsibility | ● | ● | ● | ● | ||||||||||||||||||||||
Human Resources/ Talent Management | ● | ● | ● | ● | ● | ● | ||||||||||||||||||||
Corporate Governance/ Other Board Experience | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● | ● |
| 2019 Proxy Statement | 1 | |||||||
ELECTION OF DIRECTORS
(Item 1 on Proxy or Voting Instructions Card)
Director Nominees
Nominees For Election
 | MARTHA H. BEJAR Age 57 Director Since 2016 Committees: ◾ Audit ◾ Risk and Security |
Martha H. Bejar is aco-founder of Red Bison Advisory Group LLC, which focuses on being a trusted advisor, providing objective and results-oriented analysis and solutions in the areas of Real Estate, Natural Resources and ICT. Previously, Ms. Bejar served as Chief Executive Officer and director of Unium Inc., aWi-Fi service provider, from March 2017 to March 2018. She also served as Chief Executive Officer and director of Flow Mobile, Inc., a communications company offering broadband wireless access services, from January 2012 to December 2015. She served as chairperson and Chief Executive Officer of Infocrossing Inc., a U.S.-based cloud services affiliate of Wipro Limited, from January 2011 to March 2012. She served as President of Worldwide Sales and Operations at Wipro Technologies Inc., an information technology services affiliate of Wipro Limited, from 2009 to 2011. From 2007 to 2009, Ms. Bejar worked at Microsoft Corporation, where she was corporate vice president for the Board:
Listed belowcommunications sector. From 1997 to 2007, she held various executive positions at Nortel Networks Corporation, a telecommunications and data networking company. Ms. Bejar is information on eachcurrently an independent director of CommVault Systems, Sportsman’s Warehouse Holdings, Inc. and Neopost SA.
 | VIRGINIA BOULET Age 65 Director Since 1995 Committees: ◾ Nominating and Corporate Governance(Chair) ◾ Human Resources and Compensation |
Virginia Boulet has served as a managing director of Legacy Capital LLC, an investment banking firm based in New Orleans, Louisiana, since March 2014. Previously, she was Special Counsel at Adams and Reese LLP, a law firm, from March 2002 to March 2014. She practiced as a corporate and securities attorney for Phelps Dunbar, L.L.P. from 1992 to 2002 and for Jones Walker LLP from 1983 to 1992. Since 2004, Ms. Boulet has served as an adjunct professor of securities regulation law and merger and acquisition law at LoyolaUniversity-New Orleans College of Law. She is currently a director of W&T Offshore, Inc. Ms. Boulet practiced law for 30 years, and has lectured for many years, in the 13 individuals nominated to stand for election to the Board.
The Board recommends that you vote “FOR” eacharea of the following nominees:corporate governance.
 |
Age 60 Director Since 2009 Committees:
|
Peter C. Brown has served as Chairman of Grassmere Partners, LLC, a private investment firm, since July 2009. From 1991 until his retirement in February 2009, Mr. Brown held several executive level positions with AMC Entertainment Inc., a theatrical exhibition company, including Chairman of the Board, President and Chief Executive Officer. In 1997, he founded EPR Properties, a NYSE-listed real estate investment trust, formerly known as Entertainment Properties Trust. Mr. Brown is currently a trustee of EPR Properties and a director of Cinedigm Corp.
Key Qualifications, Experiences and Skills:
• Executive experience in communications and technology industries
• Experience as a chief executive officer
• International business and engineering experience
• Qualifies as an “audit committee financial expert”
• Current or former director of other publicly-held companies
| 2 | 2019 Proxy Statement | | |||||
ELECTION OF DIRECTORS
(Item 1 on Proxy or Voting Instructions Card)
 |
Age 64 Director Since 2017 Committees: ◾ Audit ◾ Risk and Security
| |
|
| |
|
|
General Kevin P. Chilton (USAF, Retired) has served as a director since November 1, 2017. He retired from the U.S. Air Force after 34 years of service in February 2011. General Chilton served as Commander, U.S. Strategic Command, from 2007 through 2011, overseeing operations for the U.S. Department of Defense nuclear, space and cyberspace operations. From 2006 to 2007, General Chilton served as Commander of Air Force Space Command, where he was responsible for all Air Force space and nuclear ICBM programs. He also served as a NASA astronaut from 1987 to 1996, including on three space shuttle flights, and as the Deputy Program Manager for the International Space Station from 1996 to 1998. General Chilton served as a director of Orbital ATK Inc. until June 2018. He also served as a director of the Aerospace Corporation, a federally-funded research and development center that is sponsored by the United States Air Force, and Anadarko Petroleum Corporation until 2016. Prior to November 1, 2017, he served as a director of Level 3 Communications, Inc.
 |
Age 68 Director Since 2017 Committees: ◾ Human Resources and Compensation ◾ Nominating and Corporate |
Steven T. Clontzhas served as a Corporate Advisor to Singapore Technologies Telemedia Pte. Ltd. since January 2018 and a Corporate Advisor to Temasek International Advisors Pte. Ltd. since January 2010. He was Senior Executive Vice President (International) of Singapore Technologies Telemedia Pte. Ltd. from January 2010 to December 2017. Mr. Clontz previously served as chief executive officer of StarHub Limited from 1999 to 2010, and has served as theNon-Executive Chairman of StarHub Limited since July 2015 and a director of StarHub Limited since 1999. From December 1995 through December 1998, Mr. Clontz served as chief executive officer, president and a director of IPC Information Systems. Prior to that, Mr. Clontz worked at BellSouth International, joining in 1987 and holding senior executive positions, serving the last three years as president Asia-Pacific. Mr. Clontz served as a director of InterDigital, Inc. from 1998 until 2015 and Equinix, Inc. from 2005 until 2013. Prior to November 1, 2017, he served as a director of Level 3 Communications, Inc.
Key Qualifications, Experiences and Skills:
• Experience as a former chief executive of a publicly-held company
• Executive and engineering experience in the telecommunications industry
• International business experience
• Current or former director of other domestic and international publicly-held companies
|
|
| 2019 Proxy Statement | 3
| |||||||
ELECTION OF DIRECTORS
(Item 1 on Proxy or Voting Instructions Card)
 |
Age 63 Director Since 2017 Committees:
◾ Human Resources and
|
T. Michael Glenn has served as Senior Advisor at Oak Hill Capital Partners since 2017. Until his retirement in December 2016, Mr. Glenn was executive vice president of Market Development and Corporate Communications for FedEx Corporation. He also served as a member of the five-person Executive Committee, responsible for planning and executing the corporation’s strategic business activities, and as president and chief executive officer of FedEx Corporate Services, responsible for all marketing, sales and retail operations functions for all FedEx Corporation operating companies. Before FedEx Corporation was formed in 1998, Mr. Glenn was senior vice president, Worldwide Marketing, Customer Service and Corporate Communications for FedEx Express. In that role, he was responsible for directing all marketing, customer service, employee communications and public relations activities. Mr. Glenn currently serves as a director of Pentair plc. Prior to November 1, 2017, he served as a director of Level 3 Communications, Inc.
 |
Age 64 Director Since 1992 Committees:
◾ Finance |
W. Bruce Hanks has served asnon-executive Vice Chairman of the Board of Directors of CenturyLink since May 2017 and lead independent director since February 2018. He has served as a consultant with Graham, Bordelon, Golson and Gilbert, Inc., an investment management and financial planning company, since 2005. From March 2001 to June 2004, Mr. Hanks served as Athletic Director of the University of Louisiana at Monroe. From 1980 to 2001, he held various executive positions at CenturyLink, including Chief Operating Officer, Senior Vice President—Corporate Development and Strategy, Chief Financial Officer, and President—Telecommunications Services. Prior to then, Mr. Hanks worked as a certified public accountant with Peat, Marwick & Mitchell for three years. He currently serves as a Director of the American Football Coaches Foundation and is an advisory director of IberiaBank Corporation.Mr. Hanks also previously served on the executive boards of several telecommunications industry associations including the Cellular Telecommunications Industry Association and the National Exchange Carriers Association and the boards of other publicly-owned companies including Brooks Fiber Company and American Horizons Bank. He is recognized as a Board Leadership Fellow by the National Association of Corporate Directors. He is a member of the Louisiana State Society of CPAs.
Key Qualifications, Experiences and Skills:
• Governmental and government relations experience
• Public policy and governmental finance experience
|
| 4 | 2019 Proxy Statement | | |||||
ELECTION OF DIRECTORS
(Item 1 on Proxy or Voting Instructions Card)
 |
Age 63 Director Since 2015 Committees: ◾ Nominating and Corporate Governance ◾ Risk and Security |
Mary L. Landrieu has served as senior policy advisor at Van Ness Feldman, LLP, a Washington D.C.- based law firm, since May 2015. She also served as policy advisor at Walton Family Foundation, a philanthropic organization focused on improvingK-12 education and supporting economic incentives for sustainable resource management, from 2014 to 2016. Previously, Ms. Landrieu served as a U.S. Senator from the State of Louisiana from 1996 to 2014, where she chaired the Senate Committee on Energy and Natural Resources, served on the Senate Committee on Appropriations, chaired the Subcommittees on Homeland Security, Financial Services and General Government, and the District of Columbia, chaired the Senate Committee on Small Business and Entrepreneurship. In her work on Homeland Security, Senator Landrieu led the disaster recovery efforts after Hurricane Katrina and the Gulf restoration efforts after the BP oil spill. She also was elected as Louisiana treasurer from 1987 to 1995, and served as a member of the Louisiana legislature from 1979 to 1987. Ms. Landrieu currently serves on the board of trustees or board of directors of several national organizations promoting education or children’s welfare.
 | HARVEY P. Age 74 Director Since 1990 Committees:
◾ Risk and |
Harvey P. Perry has served asnon-executive Chairman of the Board of Directors of CenturyLink, since May 2017. From January 2004 to May 2017, Mr. Perry served asnon-executive Vice Chairman of the Board of Directors of CenturyLink. He retired from CenturyLink in 2003. Mr. Perry joined CenturyLink in 1984, serving as Secretary and General Counsel for approximately twenty years and Executive Vice President and Chief Administrative Officer for almost five years. Prior to joining CenturyLink, Mr. Perry worked as an attorney in private practice for 15 years.
 |
Age 66 Director Since 1985 Committees: ◾ Finance ◾ Risk and |
Glen F. Post, III served as Chief Executive Officer of CenturyLink from 1992 to May 2018 and as President of CenturyLink from 1990 to November 1, 2017 (except for 2002 to 2009). Mr. Post served as Chairman of the Board of CenturyLink from 2002 to 2009 and as Vice Chairman of the Board of CenturyLink from 1993 and 2002. Mr. Post has also held various other positions at CenturyLink between 1976 and 1993, most notably Treasurer, Chief Financial Officer and Chief Operating Officer. He retired from CenturyLink in May 2018. Mr. Post previously served on the National Security Telecommunications Advisory Committee (NSTAC) and a number of other Boards and Foundations. He previously chaired the FCC’s Communications Security, Reliability and Interoperability Council.
• Prior executive experience with, and historical knowledge of, our Company
• Legal experience representing telecommunications companies
| 2019 Proxy Statement | 5 | |||||||
ELECTION OF DIRECTORS
(Item 1 on Proxy or Voting Instructions Card)
 |
Age 68 Director Since 2011 Committees: ◾ Human Resources and ◾ Nominating and
| |
|
|
Michael J. Roberts has served as Chief Executive Officer and founder of Westside Holdings LLC, a marketing and brand development company, since 2006. He served as President and Chief Operating Officer of McDonald’s Corporation, a foodservice retailer, from 2004 to 2006. He also served as Chief Executive Officer of McDonald’s USA during 2004 and as President of McDonald’s USA from 2001 to 2004. Mr. Roberts is currently a director of W.W. Grainger, Inc.
Key Qualifications, Experiences and Skills:
• Experience as a chief executive
• Marketing and branding expertise
• Director of another publicly-held company
 |
Age 63 Director Since 2009 Committees: ◾ Human Resources and ◾ Nominating and
|
Laurie A. Siegel founded LAS Advisory Services in 2012, a business and human resources consultancy. She also serves as a Senior Advisor to the G100, and serves as Chairman of the G100 Talent Consortium. She retired in September 2012 from Tyco International Ltd., a diversified manufacturing and service company, where she served as Senior Vice President of Human Resources and Internal Communications from 2003 to 2012. From 1994 to 2002, she held various positions with Honeywell International Inc., including Vice President of Human Resources—Specialty Materials. She was previously a director of global compensation at Avon Products and a principal of Strategic Compensation Associates. Ms.Siegel is currently a director of FactSet Research Systems Inc. and California Resources Corporation.
 |
Age 58 Director Since 2017 Committees: ◾ Risk and |
Jeffrey K. Storey has served as Chief Executive Officer and President of CenturyLink since May 2018. He served as President and Chief Operating Officer of CenturyLink from November 2017 to May 2018. From April 2013 to October 2017, Mr. Storey served as President and Chief Executive Officer of Level 3 Communications, Inc. From December 2008 to April 2013, he served as Level 3’s President and Chief Operating Officer. From 2006 to 2008, Mr. Storey served as President of Leucadia Telecommunications Group of Leucadia National Corporation, where he directed and managed Leucadia’s investments in telecommunications companies. From October 2002 to 2005, Mr. Storey served as Chief Executive Officer of WilTel Communications Group, LLC. Prior to that position, Mr. Storey served as Chief Operations Officer, Network for Williams Communications, Inc., where he had responsibility for all areas of operations for the company’s communications network, including planning, engineering, field operations, service delivery and network management. Prior to November 1, 2017, he served as a director of Level 3 Communications, Inc.
| 6 | 2019 Proxy Statement | | |||||
ELECTION OF DIRECTORS
(Item 1 on Proxy or Voting Instructions Card)
Key Qualifications, Experiences and Skills:
• Executive experience in the telecommunications business
• Experience as a chief executive officer of a publicly-held company
Executive Officers Who Are Not Directors:Directors
Listed below is information on each of our executive officers who are not directors.(3) Unless otherwise indicated, each person has been engaged in the principal occupation shown for more than the past five years.
| ||
|
 | INDRANEEL DEV Age 47 |
Indraneel Dev, Executive Vice President—Chief Financial Officer since November 6, 2018; served as interim Chief Financial Officer from September 28, 2018 to November 6, 2018; served as Group Vice President, Finance of CenturyLink from November 1, 2017 until September 28, 2018 and with Level 3 from February 2004 until November 1, 2017.
 | STACEY W. GOFF Age 53 |
Stacey W. Goff, Executive Vice President, General Counsel and Secretary since 2009; served as Chief Administrative Officer from November 2014 to May 2018; served as Senior Vice President, General Counsel and Secretary prior to 2009.
 | SCOTT A. Age 50 |
Scott A. Trezise, Executive Vice President—Human Resources since August 2013; served as Senior Vice President—Human Resources for The Shaw Group, Inc. from June 2010 until its acquisition by Chicago Bridge & Iron Company N.V. in February 2013; served as Vice President of Human Resources for Honeywell International Inc. from 2005 to June 2010.
| 2019 Proxy Statement | 7 | |||||||
CenturyLink is committed to strong corporate governance principles. We believe our corporate governance practices and policies promote the long-term interests of our shareholders, strengthen the accountability of our Board and management and build public trust in our Company. Our Corporate
Governance Guidelines, along with the charters of our Board committees, our bylaws and Code of Conduct, provide the framework for the governance of our company and reflect the Board’s commitment to monitor the effectiveness of our decision-making processes.
| Governance Highlights |
| ü | Annual Election of Directors |
| ü | Majority Voting in Director Elections |
| ü | Proxy Access Bylaw |
| ü | Separation of Chairman and CEO Roles |
| ü | Lead Independent Director |
| ü | Regular Executive Sessions of Independent Directors |
| ü | All Directors Attending more than 75% of Meetings |
| ü | Annual Board and Committee Evaluations |
| ü | Stock Ownership Guidelines for Directors and Executive Officers |
| ü | Anti-Hedging, Short Sale and Pledging Policies |
| ü | Comprehensive Risk Oversight by the Board and its Committees |
| Key Governance Materials |
| ü | Corporate Governance Guidelines |
| ü | Articles of Incorporation |
| ü | Bylaws |
| ü | Charter for Each Board Committee |
| ü | Code of Conduct and Supplier Code of Conduct |
| ü | Anti-Corruption Policy |
| ü | Modern Slavery Statement |
| ü | Integrity Line |
These Corporate Governance Guidelines, committee charters and corporate ethics and compliance documents are available on our website athttp://www.centurylink.com/aboutus/governance.html
Our Board has adopted corporate governance guidelines, which it reviews at least annually. For information on how you can obtain a complete copy of our guidelines, see “— Access to Information” below.
Among other things, our corporate governance guidelines provide as follows:
Director QualificationsComposition
In accordance with our Corporate Governance Guidelines, our Nominating and Corporate Governance Committee is responsiblereviews annually the composition and size of the Board. We recognize the importance of Board refreshment to continually maintain a group of directors with a balanced mix of institutional knowledge and fresh perspectives. We seek directors who have diverse and extensive experience and skills that match our needs, and who can provide independent oversight of our operations.
The materials below provide additional information about our Board composition. We remain committed to an ongoing review of the Board’s composition to ensure that we maintain the right mix of skills, background and tenure as we continue to position the company for reviewing withlong-term success.
| 8 | 2019 Proxy Statement | | |||||
CORPORATE GOVERNANCE
Board Composition
BOARD COMPOSITION 10 of 13 Independent INDEPENDENCE 31% Female GENDER DIVERSITY Average Age: 64 AGE DISTRIBUTION Average Board Tenure: 12 yearsTENURE
Since 2009, the Board on an annual basis, the requisite skills and characteristics of new Board members as well as the composition ofhas annually elected anon-executive Chairman. In May 2017, the Board elected Harvey P. Perry as a whole.
Director Responsibilities
Chairman; Lead Director
CEO Evaluation and Management Succession
Recoupment of Compensation
Our lead independent director’s responsibilities include coordinating and developing an agenda for each meeting of non-management directors. With regard to information from management that is necessary for the non-management directors to perform their duties effectively and responsibly, the lead independent director also provides guidance to the CEO on the quality, quantity, and timeliness of
the flow of information, with the understanding that the non-management directors will receive any bonus, incentive payment, commission, equity award or other compensation awardedinformation requested on their behalf by the lead independent director.
The Board believes that the separation of the Chairman and CEO positions has functioned effectively over the past several years. Separating these positions has allowed our CEO to or received byhave primary responsibility for the operational leadership and strategic direction of our business, while allowing our Chairman to lead the Board in its fundamental role of providing guidance to and separate oversight of management.
Our Board periodically reviews its leadership structure and may make such changes in the future as it deems appropriate. The Board believes that its programs for overseeing risk would be effective under a variety of top leadership structures, and, accordingly, this factor has not materially affected its current choice of leadership structure.
On an executive officer wasannual basis, our Board evaluates the independence of each director nominee, based on any financial or operating result that was impacted by the executive officer’s knowing or intentional fraudulent or illegal conduct, we may recover from the executive officer the compensationindependence standards of our Corporate Governance Guidelines and applicable NYSE standards. Based on its review, the Board or any committee of the Board considers appropriate under the circumstances.
Stock Ownership Guidelines
Standards of Business Conduct and Ethics
Other
Based on the information made available to it, the Board of Directors has affirmatively determined that all but onethree of ournon-management directors qualifies directors—Messrs. Storey, Perry and Post – qualify as an independent director under the standards referred to above under “— Governance Guidelines.” directors.
In making these determinations, the Board, with assistance from counsel, evaluated responses to a questionnaire completed by each director regarding relationships and possible conflicts of interest. In its review of director independence, the Board considered all known commercial, banking, consulting, legal, accounting, charitable, familial or other relationships any director may have with us.
In late 2017, we awarded through competitive bidding a telecommunications service agreement to a company owned by the brother Some of Harvey P. Perry, the Company’s Chairman of the Board. In connection with reviewing this arrangement in early 2018, the Board determined that Mr. Perry did not qualify as anour independent director under the Company’s above-cited standards, and named W. Bruce Hanks, the Company’s Vice Chairman of the Board, as lead independent director.
Someof our other directors (excluding Mr. Perry) are employed by or affiliated with companies with which we do
business in the ordinary course, either as a service provider, a customer or both. As required under the NYSE listing standards and our corporate governance guidelines, our Board examined the amounts spent by us with those companies and by those companies with us. In all cases the amounts spent under these transactions fell well below the materiality thresholds established in the NYSE listing standards and in our corporate governance guidelines.Corporate Governance Guidelines. Consequently, our Board concluded that the amounts spent under these transactions did not create a material relationship with us that would interfere with the exercise of independent judgment by any of these other directors.
As illustratednoted further below, our Audit Committee, Human Resources and Compensation Committee, and Nominating and Corporate Governance Committee are composed solely of independent directors.
| 2019 Proxy Statement | 9 | |||||||
CORPORATE GOVERNANCE
Shareholder Engagement
We believe regular communication with our shareholders is critical to ensure that management and the Board are aware of our shareholders’ priorities. The Board strives to be responsive and to ensure that shareholders’ concerns and observations are appropriately addressed. Through our communications with shareholders over the years, we have strived to improve our governance practices and view obtaining this feedback as a priority.
Our senior management team, including our CEO, CFO and members of our Investor Relations team, maintain regular contact with a broad base of investors, including through investor meetings, conferences and quarterly earnings calls. For years, we have supplemented this engagement with annual outreach efforts.
In 2018, we established a more formal corporate governance outreach process to receive feedback from our large institutional investors, pension funds and the two largest proxy advisory firms, for their perspectives on our governance practices, board
diversity and composition, compensation philosophy and other topics. The outreach efforts are managed by a cross-functional team that includes the Human Resources/Executive Compensation, Legal and Investor Relations departments and the Board of Directors. In 2018, in more than one of these outreach meetings, at least one member of the Board teamed with senior management to facilitatein-depth discussions of these issues. Appropriate members of the Board were provided summaries of the feedback received.
We intend to continue with a regular and robust communication cycle throughout the year, including reviewing results from our most recent annual meeting of shareholders in the second quarter; engaging in active outreach with investors to understand corporate governance priorities and compensation practices in the third and fourth quarters; and sharing feedback with our Human Resources and Compensation Committee, Nominating and Governance Committee and full Board throughout the year.
Communicating with Your Board
If you would like to provide feedback to the Board, you may contact either our Chairman, lead independent director or any other director by writing a letter addressed specifically to them, c/o Post Office Box 5061, Monroe, Louisiana 71211, or by sending an email toboardinquiries@centurylink.com.
Board’s Role in Setting Strategy
Our Board oversees and provides guidance to senior management on the development and implementation of the Company’s strategic plans. This occurs year-round at quarterly Board meetings through presentations and discussion of the strategies to be pursued by the Company as a whole or by its lines of business. Each year, we schedule an extended meeting to enable a comprehensive review of our strategy and long-term plan.
Fromtime-to-time at these strategy sessions, we invite outside experts or consultants to share their
views on issues impacting our strategic options, industry trends and technological developments. As discussed further under “Compensation Discussion and Analysis,” our Human Resources and Compensation Committee reviews our strategies annually to ensure that the performance metrics used in our executive compensation programs appropriately incentivize the pursuit of our short and long-term strategic goals. In addition, our Board’s sharp focus on risk management oversight (discussed in detail below) plays a key role in our strategic planning process.
We strive to educate our Board on industry, technological and regulatory conditions impacting us, principally through the Board presentations and strategy sessions described immediately above. We also actively encourage our directors to attend educational conferences or seminars to supplement
their knowledge base. Our directors also have access to our internal technology advisory Board, including invitations to attend the advisory Board’s periodic educational update meetings, which is especially helpful in connection withon-boarding new directors.
| 10 | 2019 Proxy Statement | | |||||
CORPORATE GOVERNANCE
Oversight of Risk Management
Role of the Board.While senior management has primary responsibility for managing risk on aday-to-day basis, our Board is responsible for overseeing our risk management processes. These processes are a coordinated effort among our business units, senior leadership, risk management personnel and internal auditors.
Directors typically monitor our risk profile by receiving from management periodic briefing and educational presentations. The Board works with senior management to assess our key short- and long-term business risks, including an enterprise risk management reporting process designed to identify critical risks and formulate risk mitigation strategies.
The Board oversees the management of our critical risks by using several different levels of review. The
Board addresses the primary risks associated with our business units and corporate functions in connection with receiving periodic operational reports. The Board also reviews the risks associated with our strategic plan at an annual strategic planning session and periodically throughout the year. In addition, ournon-executive chairman and lead independent director regularly meet and discuss with our chief executive officer a variety of matters, including our business strategies, opportunities, key challenges and key risks, as well as management’s risk mitigation strategies. Finally, the Board assesses risks in connection with authorizing major transactions or initiatives, such as acquisitions, operating or capital budgets, new product development or strategic investments, as well as through regular communications with its committees.
| 2019 Proxy Statement | 11 | |||||||
CORPORATE GOVERNANCE
Oversight of Risk Management
Role of the Committees.Each of our Board committees oversees the management of risks that fall within that committee’s areas of responsibility and assist the Board in fulfilling its oversight responsibilities with respect to certain recurring risks, as described below:
Committee Oversight Responsibilities | ||||||||||
Risk and Security Committee ◾ Assists the Board in fulfilling its oversight responsibilities with respect to, among others: ◾ risks posed by cyberattacks or other casualty events (Quarterly Topic) ◾ risks related to network reliability, privacy and regulations ◾ other key enterprise or operational risks as jointly determined by the Committee and management ◾ Oversees our classified activities and facilities through a subcommittee ◾ Oversees our corporate compliance and enterprise risk management programs and activities ◾ Receives periodic reports on various risk exposures, including quarterly reports on cybersecurity, which typically include reports on recent cyber intrusions, mitigation steps taken in response to those intrusions, and ongoing cybersecurity initiatives ◾ Coordinates risk oversight functions of other Board committees | Audit Committee ◾ Responsible for reviewing and discussing with management, our internal auditors and our independent auditors our major financial risks, including matters potentially impacting financial reporting ◾ Assists the Board in fulfilling its oversight responsibilities relating to the adequacy and effectiveness of our (i) internal control over financial reporting, (ii) our internal controls regarding information technology security and (iii) our disclosure controls and procedures | |||||||||
Finance Committee ◾ Assists the Board in fulfilling its oversight responsibilities with respect to the management of our financial resources and capital structure, including our (i) capital requirements, (ii) capital allocation plans, (iii) benefit plan funding and (iv) hedging strategies ◾ Provides guidance, as needed, regarding capital markets transactions | Human Resources and Compensation Committee ◾ Responsible for overseeing the assessment of whether our compensation policies and practices are likely to expose us to material risks ◾ Responsible, in consultation with management, for overseeing our compliance with regulations governing executive and director compensation ◾ Oversees our labor relations risks | |||||||||
Nominating and Corporate Governance Committee ◾ Assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with the company’s Board leadership structure and corporate governance matters. | ||||||||||
For additional information on these committees, see “Committees of the Board.”
Role of Third Parties.From time to time, we retain third party firms to assist the Board in various capacities, including risk assessment. Over the past three years, we retained two different firms to conduct detailed reviews of our cybersecurity programs. These reviews were discussed with our directors and enabled us to further strengthen our cybersecurity programs. We also periodically retain consultants to assess with our Board the risks of our current or proposed business strategies.
| 12 | 2019 Proxy Statement | | |||||
CORPORATE GOVERNANCE
Board of Directors Meetings
Our Nominating and Corporate Governance Committee oversees the annual performance evaluation of the Board as a whole and each committee of the Board. Annually, each director completes an evaluation of the full Board and of each committee on which the director serves. The evaluations are intended to provide an opportunity to evaluate performance, with the goal of improving Board and committee processes and effectiveness.
Although questionnaires are used to frame issues, our process typically focuses primarily onin-depth director interviews by the chair of the Nominating and Corporate Governance Committee (or the appropriate committee chair in the case of committee evaluations). The process is designed to elicit both specific and general comments on various key areas of Board practices, and to ask each director to evaluate how well the Board and committees operate. Directors are also asked to assess the performance of the Chairman, lead independent director and each committee chair. Management input is also received and assessed. The Nominating
and Corporate Governance Committee reviews the results and the overall assessment is presented to the full Board. Each committee chair reviews the results of the committee reviews and presents those results to the committee. The results are typically used in connection with assessing Board recruitment strategies, committee assignments and changes in Board or committee procedures, among other things.
The Nominating and Corporate Governance Committee annually assesses its evaluation protocols to determine if changes are warranted. In addition to these annual self-assessments, the Board and its committees typically evaluate and modify their functions on an ongoing basis in executive sessions.
When evaluating candidates for nomination as new directors, our Corporate Governance Guidelines provide that our Nominating and Corporate Governance Committee will consider a pool of candidates that includes women and individuals from minority groups.
During 2018, the Board held seven meetings and all of our directors attended at least 75% of the aggregate number of all Board meetings and all meetings of Board committees on which they served. In addition, each of our directors attended the 2018 annual shareholders’ meeting.
All Board and committee members are actively encouraged to suggest agenda items to be discussed at upcoming meetings. Directors are generally free to attend all committee meetings. No less than quarterly, ournon-management directors and our independent directors meet in executive session, and almost half have served on our committees also periodically meet in executive session, in all cases without management present.
| 2019 Proxy Statement | 13 | |||||||
CORPORATE GOVERNANCE
Committees of the Board for three years or less:
| INDEPENDENCE
| TENURE
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10
| 3
| 6
| 3
| 4
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Independent | Non-independent | 1-3 yrs | 4-9 yrs | 10+ yrs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
During 2017,2018, we took a number of steps to reinvigorate our Board committee functions, including (i) refreshing committee composition to gain new perspectives, (ii) expanding or revising the Boardduties of Directors held 20 meetings.certain committees, particularly with respect tore-allocating various risk oversight responsibilities and (iii) renaming certain committees to reflect these changes. The table below lists the Board’s standing committees and their membership as of the date of this proxy statement:
During 2017,
Director | Audit Committee Member | Human Resources and Compensation Committee Member | Nominating and Corporate Governance Committee Member | Risk and Security Committee(1) Member | Finance Committee(2) Member | |||||
Martha H. Bejar | ü | ü | ||||||||
Virginia Boulet | ü | Chair | ||||||||
Peter C. Brown(3) | ü | Chair | ||||||||
Kevin P. Chilton(4) | ü | Chair | ||||||||
Steven T. Clontz(5) | ü | ü | ||||||||
T. Michael Glenn(6) | ü | ü | ||||||||
W. Bruce Hanks | Chair | ü | ||||||||
Mary L. Landrieu | ü | ü | ||||||||
Harvey P. Perry(7) | ü | ü | ||||||||
Glen F. Post, III(8) | ü | ü | ||||||||
Michael J. Roberts | ü | ü | ||||||||
Laurie A. Siegel(9) | Chair | ü | ||||||||
Jeffrey K. Storey(10) | ü | |||||||||
| (1) | Formerly named the Risk Evaluation Committee. |
| (2) | Formerly named the Pricing Committee. |
| (3) | Peter C. Brown became the chair of the Finance Committee on May 23, 2018. |
| (4) | Kevin P. Chilton became the chair of the Risk and Security Committee on May 23, 2018. |
| (5) | Steven T. Clontz joined the Human Resources and Compensation Committee on May 23, 2018. |
| (6) | T. Michael Glenn joined the Audit Committee on May 23, 2018. |
| (7) | Harvey P. Perry joined the Finance Committee on May 23, 2018. |
| (8) | Glen F. Post, III joined the Risk and Security Committee on May 23, 2018. |
| (9) | Laurie A. Siegel joined the Nominating and Corporate Governance Committee on May 23, 2018. |
| (10) | Jeffrey K. Storey joined the Risk and Security Committee on May 23, 2018. |
Audit Committee.During 2018, the Board’s Audit Committee held eight meetings. TheWith the exception of Mr. Glenn, the Audit Committee is currently composed of fourfive independent directors, all of whom the Board has determined to be audit committee financial experts, as defined under the federal securities laws. The Audit Committee’s functions are described further below under “Audit
Human Resources and Compensation Committee Report.”
The.The Board’s Human Resources and
Compensation Committee (which in most instances is hereinafter referred to as the “Compensation Committee”) met 11nine times during 2017.2018. The Compensation Committee is currently composed of fourfive independent directors, allof whom qualify as“non-employee directors” under Rule16b-3 promulgated under the Securities Exchange Act of 1934. The Compensation
| 14 | 2019 Proxy Statement | | |||||
CORPORATE GOVERNANCE
Committees of the Board
Nominating and Corporate Governance Committee is described further below under “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation — Our Compensation Decision-Making Process — Role of Compensation Committee.”
. The Board’s Nominating and Corporate Governance Committee (which in most instances is hereinafter referred to as the “Nominating Committee”) is currently composed of fourfive independent directors. It met six times during 2017.2018. The Nominating Committee is responsible for, among other things, (i) recommending to the Board nominees to serve as directors and officers, (ii) monitoring the composition and size of the Board and its
committees, (iii) periodically reassessing our corporate governance guidelinesCorporate Governance Guidelines described above, (iv) leading the Board in its annual review of the Board’s performance, (v) reviewing shareholder proposals and making recommendations to the Board regarding how to respond, (vi) conducting an intensive annual review of the performance of our Chief Executive Officer, including interviewing each of our other senior officers, and (vii) reporting to the Board on succession planning for executive officers and appointing an interim CEO if the Board does not make such an appointment within 72 hours of the CEO dying or becoming disabled. For information on the director nomination process, see “— Director Nomination Process” below.
Risk and Security Committee.The Board maintains a Risk Evaluationand Security Committee, which met four times during 2017. This2018.
Finance Committee is described further below under the heading “— Risk Oversight.”
.The Board has also establishedmaintains a Finance Committee, which formerly operated as the Pricing Committee which has authoritywith the power to approve the terms and conditions under which we offer or sell our securities or borrow money. ThisDuring 2018, this committee is comprisedwas renamed and its ambit was enlarged to include the finance oversight responsibilities described above under the heading “–Oversight of Peter C. Brown, W. Bruce Hanks and Glen F. Post, III.Risk Management.”
Each of the committees listed above is composed solely of independent directors, (as defined under the standards referred to above under “— Governance Guidelines”), except for the Risk Evaluationand Security Committee, which includes Harvey P.Messrs. Perry, Post and Storey, and the PricingFinance Committee, which includes Glen F. Post, III.Messrs. Perry and Post.
The table below lists the Board’s standing committees and their membership as of the date of this proxy statement:
|
|
|
|
|
| |||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
| ||||||||||
|
If you would like additionalAdditional information on the responsibilities of thethese committees listed above, please refer tocan be found elsewhere herein and in the committees’ respective charters, which can be obtained in the manner described below under “— Accesson page 8.
Succession Planning and Development
The Board is focused on ensuring that we have short- and long-term succession plans in place for our key senior executives. Our long-term succession plan is intended to Information.”develop a pipeline of qualified
talent for key roles. The planning process includes a discussion of succession candidates, an assessment of their relevant strengths and skills, and corrective steps where necessary to address gaps in skill sets. Multiple succession candidates may be identified for a specific position and provided with relevant growth opportunities. Where possible, the Board evaluates internal succession candidates based upon their presentations to the Board and participation in other Board activities. Board members also participate in annual 360° peer reviews of senior executives, which provides additional information on internal succession candidates.
The Nominating Committee is responsible for overseeing the succession planning process for our Chief Executive Officer and other key senior executives. The committee provides periodic updates on succession planning to the independent directors. During 2017,2018, the committee retained a nationally-recognized executive search firm to assist it with its succession planning activities, including the identification of future internal and external succession candidates.
We require our executive officers to beneficially own CenturyLink stock equal in market value to specified multiples of their annual base salary. See “Compensation Discussion and Analysis–Our Policies, Processes and Guidelines Related to Executive Compensation–Stock Ownership Guidelines” for information on the executive ownership multiples and the holding percentages currently in effect. All executive officers have three years from the date they first become subject to a particular ownership level to attain that target.
We require our outside directors to beneficially own CenturyLink stock equal in market value to five times their annual cash retainer. Outside directors have five years from their election or appointment date to attain that target.
The Human Resources and Compensation Committee administers the guidelines, and may modify their terms and grant hardship exceptions in its discretion. For any year during which an executive or director does not meet his or her ownership target, the executive or director is required to hold a specified percentage of the CenturyLink stock that the executive or director acquires through our equity compensation programs, excluding shares sold to
| 2019 Proxy Statement | 15 | |||||||
CORPORATE GOVERNANCE
Stock Ownership Guidelines
pay taxes associated with the acquisition thereof. As of December 31, 2018, all of our outside directors attended at least 75% of the aggregate number of all board meetings and all meetings of board committees on which they served. In addition, each of our directors then in office attended the 2017 annual shareholders’ meeting.
General.Nominations for the election of directors at our annual shareholders’ meetings may be made by the Board (upon the receipt of recommendations of the Nominating Committee) or by any shareholder of record who complies with our bylaws, which are summarized below.bylaws. For the meeting this year, the Board has nominated the 13 nominees listed above under “Election of Directors” to stand for electionre-election as directors, and no shareholders submitted any nominations.directors. For further information on procedures governing the submission of shareholder proposals, see “— Bylaw Requirements” and “Other Matters — Deadlines for Submitting Shareholder Nominations and Proposals for the 2019 Annual Meeting.“Frequently Asked Questions.”
BylawRole of Nominating Committee. The Nominating Committee will consider candidates properly and timely nominated by shareholders in accordance with our bylaws. Upon receipt of any such nominations, the Nominating Committee will review the submission for compliance with our bylaws, including determining if the proposed nominee meets the bylaw qualifications for service as a director.
From time to time, we have added to our Board directors who previously served as directors of companies we acquired. For instance, in connection with acquiring Embarq in 2009, Qwest in 2011 and Level 3 in 2017, we added several new directors to our Board who previously served as directors of those companies, seven of whom are nominees to bere-elected at the meeting.
Except as provided by our Corporate Governance Guidelines, the Nominating Committee has not established any specific minimum qualifications for director candidates. Under our Corporate Governance Guidelines, the Nominating Committee assesses director candidates based on their independence, diversity, character, skills and experience in the context of the needs of the Board. Further, our Corporate Governance Guidelines provide that no director may be appointed or nominated to a new term as a director if he or she would be age 75 or older at the time of the election or appointment. The committee evaluates each individual in the context of the Board as a whole, with the objective of recommending nominees who can best contribute to the success of the business and best represent shareholder interests through the exercise of their particular experience and skill set.
Waivers of Governance Requirements.If timely notice is provided, Our directors are subject to our bylaws permit shareholders to nominate a director or bring other matters before a shareholders’ meeting. The written notice required to be sent by any shareholder nominating a director must include various information, including, as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is being made, (i) the name and address of such shareholder, any such beneficial owner, and any other parties affiliated, associated or acting in concert therewith, (ii) their beneficial ownership interests in our Voting Shares, including disclosure of arrangements that might cause such person’s voting, investment or economic interests in our Voting Shares to differ from those of our other shareholders, (iii) certain additional information concerning such parties required under the federal proxy rules, (iv) a description of all agreements with respect to the nomination among the nominating shareholder, any beneficial owner, any person acting in concert with them, each proposed nominee and certain other persons, and (v) a representation whether any such person intends to solicit proxies or votes in support of their proposed nominees. With respect to each proposed nominee, the written notice must also,Corporate Governance Guidelines, which, among other things, (i) set forth biographical and other data required underprohibit a director from serving on more than two additional unaffiliated public company boards. In addition to serving on our Board, Martha H. Bejar serves on the federal proxy rules andboard of directors of more than two unaffiliated public companies. In connection with her re-nomination to serve as a description of various compensation or other arrangements or relationships between each proposed nominee anddirector on our Board at the nominating shareholder and its affiliated parties and (ii) furnish both a completed and duly executed questionnaire and a duly executed agreement designedmeeting, the Board waived compliance with the above-described service limitation, subject to disclose various aspectsthe understanding that this waiver permits Ms. Bejar to serve only on the boards of the proposed nominee’s background, qualifications and certain specified arrangements with other persons, as well as to receive the proposed nominee’s commitment to abide by certain specified agreements and undertakings. We may require a proposed nominee to furnish other reasonable information or certifications. Shareholders interested in bringing before a shareholders’ meeting any matter other than a director nomination should consult our bylaws for additional procedures governing such requests. We may disregard any nomination or submission of any other matter that fails to comply with these bylaw procedures.
In addition, our bylaws provide that under certain circumstances a shareholder or group of shareholders may include director candidates that they have nominated in our annual meeting proxy materials. These proxy access provisions of our bylaws provide, among other things, that a shareholder or group of up to ten shareholders seeking to include director candidates in our annual meeting proxy materials must own 3% or more of our outstanding Common Shares continuously for at least the previous three years. The number of shareholder-nominated candidates appearing in any of our annual meeting proxy materials cannot exceed 20% of the number of directors thenunaffiliated companies on which she was serving on the Board. If 20% is not a whole number, the maximum number of shareholder-nominated candidates would be the closest whole number below 20%. Based on the current Board size of 13, two is the maximum number of proxy access candidates that we would be required to include in our 2019 proxy materials for the 2019 annual meeting. The nominating shareholder or group of shareholders also must deliver the information required by our bylaws, and each nominee must meet the qualifications required by our bylaws.
Shareholder requests to nominate directors or to bring any other matter before our 2019 annual shareholders’ meeting, whether or not they wish to include their candidate or proposal in our proxy materials, must be received by our Secretary by the deadlines specified in “Other Matters — Deadlines for Submitting Shareholder Nominations and Proposals for the 2019 Annual Meeting.”
The summaries abovedate of the advance notificationwaiver, unless and proxy access provisions ofuntil she is permitted to accept a new directorship under our bylaws are qualified in their entirety by reference to the full text of Section 5 of Article IV of our bylaws. You may obtain a full copy of our bylaws by reviewing our reports filed with the SEC, by accessing our website at www.centurylink.com, or by contacting our Secretary in the manner specified below under “Other Matters.”
Agreements to Nominate Certain Directors.In.In connection with the Level 3 Combination, on October 31, 2016 we entered into a Shareholder Rights Agreement with STT Crossing Ltd. (“STT Crossing”), which was Level 3’s principallargest shareholder as of such date. In early 2018, STT Crossing assigned its rights under this agreement (the “Shareholder Rights Agreement”) to two of its affiliates, Everitt Investments Pte. Ltd and Aranda Investments Pte. Ltd. (the “STT Affiliates”). Pursuant to the Shareholder Rights Agreement, the Nominating and Corporate Governance Committee is currently obligated to nominate the individual designated by the STT Affiliates for election to the Board, subject to (i) the fiduciary duties of the members of that committee, (ii) any applicable regulation or listing requirement of the New York Stock Exchange and (iii) any applicable provisions of any network security agreement between us, STT Crossing and a government agency. Followingagency.Following the execution of the Shareholder Rights Agreement, STT Crossing designated Steven T. Clontz to be added to our Board upon consummation of the Level 3 Combination, and in early 2018or the STT Affiliates selected Mr.in each instance have designated Steven T. Clontz as their designee. The Board is required to recommend that the shareholders vote in favor of the STT Affiliates’ designee and we are required to use all reasonable efforts to cause the individual to be elected as a member of the Board. In making its recommendation to the full Board regarding the nominee for election to our Board at the meeting, the Nominating and Corporate Governance Committee considered, among other things, Mr. Clontz’s extensive experience in the telecommunications industry. For additional information about the Shareholder Rights Agreement, please see the full copy of the agreement that we have filed as an exhibit to our prior SEC reports.
On October 31, 2016, we also agreed pursuantCurrent Discussions.Through its Schedule 13D filing on February 19, 2019, Southeastern Asset Management, Inc. expressed its intent to have
| 16 | 2019 Proxy Statement | | |||||
CORPORATE GOVERNANCE
Corporate Social Responsibility
conversations with us about adding directors to the termsBoard. As we initially announced in our press release dated February 19, 2019, we are engaged in constructive discussions with Southeastern regarding its suggested nominees. Currently, members of our merger agreement with Level 3Board are evaluating potential nominees. While we are confident that we will mutually agree upon a candidate who will strengthen our Board, we cannot currently predict how long this process will take or its ultimate outcome.
Corporate Social Responsibility
The Board and management team are committed to appointCenturyLink’s vision to make a positive difference in the world and specifically in the communities we serve. This commitment is supported at all levels of our organization, across the globe. Through our actions, our goal is to make our employees, business partners and communities proud of our innovative and quality services, the unwavering integrity of our business ethics, our deep commitment to being a good employer, our respect for the environment, and our ongoing support of the communities where we live and work.
CenturyLink is committed to growing its business in a sustainable and socially responsible manner. We support the passions and interests of our employees, and empower them to be a positive influence in the world. We are proud to provide many opportunities to be good neighbors by volunteering time and talent to support the causes that matter most to our Board three membersemployees.
To learn more about our wide-ranging CSR programs, please see our Corporate Social Responsibility Report posted on the “Community” section of our website at https://www.centurylink.com/aboutus/community.html.
CenturyLink’s Unifying Principles
CenturyLink’s unifying principles serve as the Level 3 Board selected by us from anyfoundation upon which we continue to grow, conduct our business and guide our interactions with our customers, shareholders, communities and one another. They represent the fundamental values upon which CenturyLink is built and inform our CSR initiatives. Those principles are: Fairness, Honesty and Integrity, Commitment to Excellence, Positive Attitude, Respect, Faith and Perseverance.
| Social and Environmental Highlights | ||
Diversity and Inclusion | ◾ Maintain a Diversity & Inclusion Steering Committee to shape and drive our overall diversity strategy ◾ Embrace diversity and create a culture of inclusion ◾ Implement proactive policies to encourage diversity in our recruiting and outreach initiatives ◾ Include supplier diversity as part of our overall program ◾ Pursue and evaluate diversity starting at the Board level; four of our 13 Directors are female, representing 31% of our Board | |
Community Involvement | ◾ Strengthen the communities we serve through philanthropy, volunteerism and support of local community initiatives ◾ Encourage employee volunteerism with added support through the Matching Time Grants program ◾ Provide employees with a method for continual giving to charities they support ◾ Offer teachers and technology grants topre-K to 12th grade teachers within our service areas, in support of STEM education ◾ Unite around our annual food drive to fight hunger as an issue critical to our communities | |
Ethics and Compliance | ◾ Maintain a CenturyLink Code of Conduct that lays the foundation for our ethics and compliance program ◾ Create and maintain through training an ethical business culture based on our unifying principles ◾ Maintain a 24/7 Integrity Line with a firmno-retaliation policy ◾ Focus on human rights throughout our global locations ◾ Train and reinforce anti-bribery and fair competition principles; require all employees to adhere to all applicable anti-bribery and anti-corruption legislation worldwide | |
Environmental Sustainability | ◾ Strive to build and operate energy-efficient networks and data centers ◾ Pursue sustainability initiatives that reduce energy, waste and materials consumption ◾ Engage our employees and suppliers in our sustainability efforts ◾ Establish and maintain sustainability metrics to measure and report on the results of our efforts | |
| 2019 Proxy Statement | 17 | |||||||
CORPORATE GOVERNANCE
Corporate Social Responsibility
CenturyLink’s Environmental Sustainability Program
Managing our environmental impacts requires a thoughtful approach, balancing the needs of our employees, customers, shareholders and the Level 3 directors whoenvironment. This balanced approach means ensuring environmental sustainability efforts support the financial health of our business, the quality of service we offer our customers and the value we create for our shareholders and our communities.
Some of our environmental initiatives and achievements include:
| ◾ | Reducing our absolute carbon emissions and carbon intensity by purchasing renewable energy and investing in facility efficiency improvements and new technologies in our data centers and network facilities around the world. |
| ◾ | Improving energy efficiency by partnering with other service providers, as well as manufacturers ofset-top boxes and small network equipment. |
| ◾ | Maintaining or expanding the number of company locations with third-party certified Energy, Environmental, and Safety Management Systems. |
Political Contributions
We are unaffiliated with STT Crossing. During 2017,committed to advocating public policy solutions that best serve our customers, our shareholders, our employees, and the communities we selected Messrs. Chilton, Glennserve. We value transparency in this process and Storeyappreciate the need for disclosure of our political activity to serve onpromote ethical corporate governance and confidence in the democratic process. Our corporate political contributions and those of our Board. Under the merger agreement, we further agreed to cause such appointed directors to be nominated for election to the Board at the first annual meeting following the closing of the combination on November 1, 2017.
Role of Nominating Committee. The Nominating Committee will consider candidates properly and timely nominated by shareholderspolitical action committees are disclosed in accordance with applicable federal and state campaign finance laws, and our bylaws. Upon receipt of any such nominations, the Nominating Committee will review the submission for compliance withsemi-annual Political Contributions Reports. To learn more, please see our bylaws, including determining if the proposed nominee meets the bylaw qualifications for service as a director. These provisions disqualify any person who (i) fails to respond satisfactorily to any inquiry for information to enable us to make certifications required by the Federal Communications Commission under the Anti-Drug Abuse Act of 1988, (ii) has been arrested or convicted of certain specified drug offenses or engaged in actions that could lead to such an arrest or conviction or (iii) fails to furnish any materials or agreements required to be provided by director nominees under our bylaws, or makes false statements or materially misleading statements or omissions in connection therewith.
From time to time, we have added to our Board directors who previously served as directors of companies we acquired. For instance, in connection with acquiring Embarq in 2009, Qwest in 2011 and Level 3 in 2017, we added several new directors to our Board who previously served as directors of those companies, seven of whom are nominees to bere-elected at the meeting. Under the agreements described above under the heading “— Agreements to Nominate Certain Directors,” we agreed to nominate Messrs. Chilton, Clontz, Glenn and Storey to stand for election at the meeting.
Under our corporate governance guidelines, the Nominating Committee assesses director candidates based on their independence, diversity, character, skills and experience in the context of the needs of the Board. Although the guidelines permit the Nominating Committee to adopt additional selection guidelines or criteria, it has chosen not to do so. Instead, the Nominating Committee annually assesses skills and characteristics then required by the Board based on its membership and needs at the time of the assessment. In evaluating the needs of the Board, the Nominating Committee considers the qualifications of incumbent directors and consults with other members of the Board and senior management. In addition, the Nominating Committee seeks candidates committed to representing the interests of all shareholders and not any particular constituency. The Nominating Committee believes this flexible approach enables it to respond to changes caused by director vacancies and industry developments.
In connection with assessing the needs of the Board, the Nominating Committee has sought individuals who possess skill and experience in a diverse range of fields. The Nominating Committee also has sought a mix of individuals from inside and outside of the communications industry. The table above listing biographical data about our directors includes a listing of the key qualifications, experiences and skills that the Nominating Committee and Board reviewed in connection with nominating orre-nominating them for servicemost recent Political Contributions Report posted on the Board. In light“Public Policy” section of our current business and operations, we believe the following skills and experience are particularly important:
In connection with determining the current composition of the Board, the Nominating Committee has assessed the diverse range of skills and experience of our directors outlined above, coupled with the judgment that each has exhibited and the knowledge of our operations that each has acquired in connection with their service on the Board. Although it does not have a formal diversity policy, the Nominating Committee believes that our directors possess a diverse range of backgrounds, perspectives, skills and experiences.
Although we do not have a history of receiving director nominations from shareholders, the Nominating Committee envisions that it would evaluate any such candidate on the same terms as other proposed nominees, but would place a substantial premium on retaining incumbent directors who are familiar with our management, operations, business, industry, strategies and competitive position, and who have previously demonstrated a proven ability to provide valuable contributions to the Board and CenturyLink.
The Compensation Committee hires consulting firms to assist it in setting executive and director compensation. In June 2015, the Committee retained Meridian Compensation Partners, LLC, following a nationwide search to replaceHay Group, which advised the Committee for the previous six years. For additional information on the processes used by the Committee to set executive compensation, see “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation.”
Board’s Role in Overseeing Risk Management
Our Board oversees our Company’s risk management function, which is a coordinated effort among our business units, our senior leadership, our risk management personnel and our internal auditors. Our directors typically discharge their risk oversight responsibilities by having management provide periodic briefing and educational presentations. In some cases, including major new acquisitions, capital expenditures, product development or strategic investments, the full Board participates in risk oversight. In most cases involving
recurring systemic risk, a Board committee is primarily responsible for risk oversight. For several decades, our Board has maintained a Risk Evaluation Committee, which is responsible for assisting management to identify, monitor, and manage recurring risks to our business, properties and employees. The Risk Evaluation Committee regularly monitors our litigation, enterprise risk assessments, network operations, systems integration initiatives, insurance coverages and the status of our labor relations, and is also responsible for overseeing our ethics and compliance program. As part of its risk assessment oversight, the Risk Evaluation Committee receives quarterly reports on cybersecurity, which typically include reports on recent cyber intrusions, mitigation steps taken in response to those intrusions and ongoing cybersecurity initiatives. The Board’s other committees are responsible for overseeing specific risks, particularly the Audit Committee with respect to financial, tax and accounting risks and the Compensation Committee with respect to compensation risks. For a discussion of the Compensation Committee’s risk analysis, see “Compensation Discussion and Analysis — Our Policies, Processes and Guidelines Related to Executive Compensation — Our Compensation Decision-Making Process — Risk Assessment.” The Board regularly receives reports from each of these committees, and periodically receives enterprise risk assessment reports from management.
Board’s Role in Setting Strategy
At most of the Board’s quarterlyin-person meetings, at least one of the agenda items involves a review of the strategies to be pursued by the Company as a whole or by one of its lines of business. For most of the past 15 years, the Board has also scheduled a separateoff-sitemulti-day retreat to review industry developments and long-term strategies. From time to time at these meetings or retreats, we invite outside experts or consultants to share their views on issues impacting our strategic options. As discussed further under “Compensation Discussion and Analysis,” our Compensation Committee reviews our strategies annually to ensure that the performance metrics used in our executive compensation programs appropriately incentivize the pursuit of our short and long-term strategic goals.
Top Board Leadership Positions and Structure
Since 2009, the Board has annually elected anon-executive Chairman. In May 2017, the Board elected Harvey P. Perry to this position.
The Board believes that the separation of the Chairman and CEO positions has functioned effectively over the past several years. Separating these positions has allowed our CEO to have primary responsibility for the operational leadership and strategic direction of our business, while allowing our Chairman to lead the Board in its fundamental role of providing guidance to and separate oversight of management. While our bylaws and corporate governance guidelines do not require our Chairman and CEO positions to be separate, the Board believes that delegating responsibilities between our Chairman and our CEO has been the appropriate leadership structure for our Company over the past decade, which have been marked by rapid growth in our operations and a substantial change in our product offerings and our industry. As noted above under “— Independence and Tenure,” the Board named W. Bruce Hanks, the Company’s Vice Chairman of the Board, as lead independent director in early 2018. Prior to then, Mr. Perry performed all duties assigned to the Chairman and lead director. The responsibilities of the Chairman and the lead director are described above under “— Governance Guidelines.”
Our Board periodically reviews its leadership structure and may make such changes in the future as it deems appropriate. The Board believes that its programs for overseeing risk would be effective under a variety of top leadership structures, and, accordingly, this factor has not materially affected its current choice of leadership structure.
As explained further on our website, you may contact either our Chairman, lead independent director or any other director by writing a letter addressed to the Chairman, Lead Independent Director or any other director c/o Post Office Box 5061, Monroe, Louisiana 71211, or by sending an email to boardinquiries@centurylink.com.
The following documents are posted on our website at www.centurylink.com:https://www.centurylink.com/aboutus/company- information/public-policy.html.
| 18 | 2019 Proxy Statement | | |||||
RATIFICATION OF THE SELECTION OF THE INDEPENDENT AUDITOR
(Item 2 on Proxy or Voting Instruction Card)
The Audit Committee of the Board has appointed KPMG LLP as our independent auditor for the fiscal year ending December 31, 2018,2019, and we are submitting that appointment to our shareholders for ratification on an advisory basis at the meeting. Although shareholder ratification of KPMG’s appointment is not legally required, we are submitting this matter to the shareholders, as in the past, as a matter of good corporate practice. In determining whether to reappoint KPMG as our independent auditor, the Audit Committee considered a number of factors, including, among others, the firm’s qualifications, industry expertise, prior performance, control procedures, proposed staffing and the reasonableness of its fees on an absolute basis and as compared with fees paid by comparable companies.
If the shareholders fail to vote on an advisory basis in favor of the appointment, the Audit Committee will reconsider whether to retain KPMG, and may appoint that firm or another withoutre-submitting the matter to the shareholders. Even if the shareholders ratify the appointment, the Audit Committee may, in its discretion, select a different independent auditor at any time during the year if it determines that such a change would be in the Company’s best interests.
In connection with the audit of the 20182019 financial statements, we entered into an engagement letter with KPMG which sets forth the terms by which KPMG will provide audit services to us. Any future disputes between KPMG and us under that letter will be subject to certain specified alternative dispute resolution procedures, none of which are intended to restrict the remedies that our shareholders might independently pursue against KPMG.
The following table lists the aggregate fees and costs billed to us by KPMG and its affiliates for the 20162017 and 20172018 services identified below:
| Amount Billed | Amount Billed | |||||||||||||||
| 2016 | 2017 | 2017 | 2018 | |||||||||||||
Audit Fees(1) | $ | 11,316,096 | $ | 12,245,495 | $ | 12,245,495 | $ | 15,229,014 | ||||||||
Audit-Related Fees(2) | 118,178 | 207,554 | 207,554 | 106,528 | ||||||||||||
Tax Fees(3) | 2,079,160 | 2,121,869 | 2,121,869 | 1,318,798 | ||||||||||||
Other | — | — | — | — | ||||||||||||
|
| |||||||||||||||
Total Fees | $ | 13,513,434 | $ | 14,574,918 | $ | 14,574,918 | $ | 16,654,340 | ||||||||
|
| |||||||||||||||
| (1) | Includes the cost of services rendered in connection with (i) auditing our annual consolidated financial statements, (ii) auditing our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, (iii) reviewing our quarterly financial statements, (iv) auditing the financial statements of several of our subsidiaries, (v) reviewing our registration statements and issuing related comfort letters, (vi) statutory audits for certain of our foreign subsidiaries, and (vii) consultations regarding |
| accounting standards. Additionally, the amounts billed in |
| (2) | Includes the cost of preparing agreed upon procedures reports and providing general accounting consulting services. Amounts billed in 2017 exclude $172,000 of fees paid to KPMG by Level 3 prior to its acquisition by |
| (3) | Includes costs associated with (i) general tax planning, consultation and compliance (which were approximately |
| 2019 Proxy Statement | 19 | |||||||
RATIFICATION OF THE SELECTION OF THE INDEPENDENT AUDITOR
(Item 2 on Proxy or Voting Instruction Card)
The Audit Committee maintains written procedures that require it to annually review andpre-approve the scope of all services to be performed by our independent auditor. This review includes an evaluation of whether the provision ofnon-audit services by our independent auditor is compatible with maintaining the auditor’s independence in providing audit and audit-related services. The Committee’s procedures prohibit the independent auditor from providing anynon-audit services unless the service is permitted under applicable law and ispre-approved by the Audit Committee or its Chairman. The Chairman is authorized topre-approve projects if the total anticipated cost of all projectspre-approved by him during any fiscal quarter does not exceed $250,000. The Audit Committee haspre-approved the Company’s independent auditor to provide up to $75,000 per quarter of miscellaneous permitted tax services that
do not constitute discrete and separate projects. The Chairman and the Chief Financial Officer are required periodically to advise the full Committee of the scope and cost of services notpre-approved by the full Committee. Although applicable regulations waive thesepre-approval requirements in certain limited circumstances, the Audit Committee did not use these waiver provisions in either 20162017 or 2017.2018.
KPMG has advised us that one or more of its partners will be present at the meeting. We understand that these representatives will be available to respond to appropriate questions and will have an opportunity to make a statement if they desire to do so.
Ratification of KPMG’s appointment as our independent auditor for 20182019 will require the affirmative vote of the holders of at least a majority of the votes cast on the proposal at the meeting.
The Board unanimously recommends a vote FOR this proposal.
| | THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR THIS PROPOSAL. | |
| 20 | 2019 Proxy Statement | | |||||
Management is responsible for our internal controls and financial reporting process. Our independent auditor is responsible for performing an independent audit of our consolidated financial statements and the effectiveness of our internal control over financial reporting, and to issue reports thereon. As more fully described in its charter, the Audit Committee is responsible for assisting the Board in its general oversight of these processes and for appointing and overseeing the independent auditor, including reviewing their qualifications, independence and performance.
In this context, the Committee has met and held discussions with management and our internal auditors and independent auditor for 2017,2018, KPMG LLP. Management represented to the Committee that our consolidated financial statements were prepared in accordance with generally accepted U.S. accounting principles. The Committee has reviewed and discussed with management and KPMG the consolidated financial statements, and management’s report and KPMG’s report and attestation on internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.applicable law. The Committee also discussed with KPMG matters required to be discussed by Auditing Standard No. 1301,Communications with Audit Committees.Committees.
Among other matters, over the course of the past year, the Committee also:
| u | reviewed the scope of and overall plans for the annual audit and the internal audit program, including a review of critical accounting policies, critical accounting estimates, and significant unusual transactions; |
| u | reviewed a report by the independent auditor describing the independent auditor’s internal quality control procedures; |
| u | reviewed the performance of the lead engagement partner of our independent auditor; |
| u | reviewed the findings of the Public Company Accounting Oversight Board concerning its review of our independent auditor’s integrated audit of the consolidated financial statements included in our Annual Report on Form10-K for the year ended December 31, 2017; |
| u | reviewed and discussed each quarterly and annual earnings press release before issuance; |
| u | received quarterly reports including the company’s work regarding Internal Controls over Financial Reporting from the director of internal audit, and met with other members of the internal audit staff; |
| u | received periodic reports pursuant to our policy for the submission of confidential communications from employees and others about accounting, internal controls and auditing matters, and conducted certainfollow-up inquiries; |
| u | amended and restated our disclosure controls and procedures in connection with assessing their effectiveness; |
| u | received and evaluated a report concerning the Company’s major financial risks along with the Company’s mitigating actions; |
| u | performed quarterly reviews of the Company’s challenges concerning the implementation of the new revenue recognition standard and the appropriate internal controls related thereto; |
| u | monitored the Company’s work to finalize the booking of the purchase price accounting for the Level 3 transaction; |
| u | received quarterly reports on the Company’s work to prepare for the new lease accounting standard; |
| u | received detailed analyses on the Company’s accounting for income taxes, including the impacts of the new Federal tax law and the Company’s accounting for pension assets and liabilities; |
| u | received quarterly reports on the Company’s work to convert the acquired Level 3 ERP system to the CenturyLink ERP system; |
| u | discussed with KPMG what our Critical Accounting Matters would have been in 2018 if the new reporting model scheduled to go into effect next year had been in place this year; |
| u | met quarterly in separate executive sessions, including private sessions with the Company’s independent auditors, internal auditors and top executives; |
| 2019 Proxy Statement | 21 | |||||||
AUDIT COMMITTEE REPORT
| u | received a report with regard to any hiring of former employees of KPMG; and |
| u | as discussed in greater detail under “Corporate Governance–Oversight of Risk Management,” coordinated with other committees of the Board to oversee the Company’s risk management function, especially with respect to financial reporting, tax and accounting risks. |
KPMG also provided to the Committee the written disclosures required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor’s communications with audit committees concerning independence. The Committee discussed with KPMG that firm’s independence, and considered the effects that the provision ofnon-audit services may have on KPMG’s independence.
Based on and in reliance upon the reviews and discussions referred to above, and subject to the limitations on the role and responsibilities of the Committee referred to in its charter, the Committee recommended that the Board of Directors include the audited consolidated financial statements in our Annual Report on Form10-K for the year ended December 31, 2017.2018.
In addition to the Company’s corporate compliance program and hotline, the Audit Committee has established procedures for the receipt and evaluation, on a confidential basis, of any complaints or concerns regarding our accounting, auditing, financial reporting or related matters. To report such matters, please send written correspondence to Audit Committee Chair, c/o Post Office Box 4364, Monroe, Louisiana 71211.
If you would like additional information on the responsibilities of the Audit Committee, please refer to its charter, which you can obtain in the manner described above under “Corporate Governance — Access to Information.”
Submitted by the Audit Committee of the Board of Directors.
W. Bruce Hanks (Chair)
Martha H. Bejar
Peter C. Brown
Kevin P. Chilton
T. Michael Glenn
| 22 | 2019 Proxy Statement | | |||||
CENTURYLINK 2018 EQUITY INCENTIVE PLANAMEND OUR ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED SHARES OF COMMON STOCK
(Item 3 on Proxy or Voting Instruction Card)
Our
The Board has adopted, subject to shareholder approval, an amendment to our restated articles of incorporation to increase the number of shares of common stock authorized for issuance from
1,600,000,000 to 2,200,000,000. As of the record date, the Company had [●] Common Shares issued and outstanding, and approximately [●] Common Shares reserved for issuance.
Purpose for Adopting the Amendment
The Board believes that the increase in the number of authorized Common Shares is necessary to provide the Company with a sufficient number of authorized Common Shares available for general corporate purposes including, but not limited to: (i) issuing Common Shares to attract and retain employees and consultants and (ii) retaining the flexibility to pursue future potential strategic transactions requiring share issuances. Our reserve of authorized but unissued Common Shares was substantially reduced when we issued over 517 million shares in connection with acquiring Level 3 in late 2017. In addition, as discussed in
more detail in “Ratification of the NOL Rights Plan” below, we could potentially issue Common Shares in connection with the NOL Rights Plan under certain specified circumstances.
The Board believes that having such authorized Common Shares available for issuance in the future will give the Company greater flexibility and may allow such Common Shares to be issued without the expense and delay of an additional special meeting of shareholders unless such approval is expressly required by applicable law.
Effects
The terms of the additional Common Shares will be identical to those of the currently outstanding Common Shares and will not affect the relative voting power or equity interest of any shareholder, except for such effects as may be attendant to any future issuance of Common Shares. This amendment to increase the authorized Common Shares will not change the current number of issued Common Shares.
We do not have any current plans, proposals or arrangements, written or otherwise, to issue any of the additional authorized shares of common stock other than as disclosed in the Company’s filings with the SEC, including potential issuance of Common Shares in connection with the NOL Rights Plan. However, we may decide to seek additional financing through equity or debt issuances to provide additional capital to sustain our growth dependsoperations. The issuance of any
shares of common stock, or securities convertible into common stock, in connection with any such financing, may dilute the proportionate ownership and voting power of existing shareholders and depress the market price of our common stock. Although the future issuance of additional Common Shares would dilute the relative ownership interests of existing shareholders, the Board believes that having the flexibility to issue additional shares in appropriate circumstances could increase the overall value of the Company to its shareholders.
No further shareholder approval would be required prior to the issuance of the additional shares of common stock authorized by the amendment except as may be required in particular cases by our articles of incorporation, the Louisiana Business Corporations Act or other applicable law, regulatory agencies or NYSE rules. There are no cumulative
| 2019 Proxy Statement | 23 | |||||||
PROPOSAL TO AMEND OUR ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED SHARES OF COMMON STOCK
Effects
voting, preemptive, subscription or conversion rights associated with our Common Shares, which means that current shareholders do not have a right to purchase any new issue of common stock, or securities that are convertible into common stock, in order to maintain their proportionate ownership interests in the Company.
Although this proposal to increase the authorized common stock has been prompted by business and financial considerations and not by the threat of any hostile takeover attempt, the additional shares of common stock that would become available for issuance if this proposed amendment is approved could also be used by us, subject to our fiduciary duties, to oppose a hostile takeover attempt or to delay or prevent changes in control.
If adopted, the amendment to our articles will become effective upon the effortsfiling of our officers, directors, employees, consultants,amended and advisors, and thatrestated articles of incorporation with the proposed CenturyLink 2018 Equity Incentive Plan (the “2018 Plan”) will provide an effective meansSecretary of attracting, retaining, and motivating qualified key personnel while encouraging long-term focus on maximizingState of the State of Louisiana, which we intend to do promptly after shareholder value. The 2018 Plan has been adopted by our Board, subject to approval by our shareholders at the annual meeting.is obtained.
The principal featuresdescription of the 2018 Plan are summarized below. However, this summaryamendment to the articles of incorporation is qualified in its entirety by reference to by the fullcomplete text of the 2018 Plan, as attached to this proxy statement asAppendix A. Because this is a summary, it may not contain all the information that you may consider to be important. Therefore, we recommend that you readAppendix A carefully before you decide how to vote on this proposal.
Purpose of the Proposal
We believe that providing officers, directors, employees, consultants and advisors with a proprietary interest in the growth and performance of our Company is crucial to stimulating individual performance while at the same time enhancing shareholder value. While we believe that employee equity ownership is a significant contributing factor in achieving strong corporate performance, we recognize that increasing the number of available shares under incentive plans may potentially dilute the equity ownership of our current shareholders.
Prior to the Level 3 Combination, we had one active equity plan under which we granted long-term incentive awards — the Amended and Restated CenturyLink 2011 Equity Incentive Plan (the “2011 Plan”), which was most recently approved by our shareholders in 2016. In connection with the Level 3 Combination, we assumed the Legacy Level 3 Communications, Inc. Stock Plan (the “Legacy Level 3 Plan” and, together with the 2011 Plan, our “current equity plans”). As noted in the chart under the heading “— Equity Compensation Plan Information”, as of December 31, 2017, we had 43,570,576 shares available for grant under our current equity plans as of December 31, 2017. However, the majority of these shares are reserved for issuance under the Legacy Level 3 Plan, which, under NYSE rules, cannot be used to make grants to anyone who was employed by CenturyLink or our then-existing subsidiaries on the day prior to the closing of the Level 3 Combination.
Therefore, we are proposing adoption of the 2018 Plan in order to replace both of our current equity plans with a single,state-of-the-art equity plan free of the limitations contained in our current equity plans. We believe that adoption of the 2018 Plan is integralproposed amendment to our continued ability to attract, retain, and motivate key stakeholdersarticles of incorporation set forth in a manner aligned with the interests of our shareholders.
Assuming that our shareholders approve the 2018 Plan at the annual meeting, we will not make any future grants under either of our current equity plans. However, if shareholders do not approve the 2018 Plan at the annual meeting, we will continue to use our current equity plans but, given the limitations on use of those plans discussed above, we may be required tore-evaluate our compensation structure to ensure that it remains competitive. Specifically, if the 2018 Plan is not approved, the Company may be required to increase the cash-based component of employee compensation, which could reduce the alignment of employee and shareholder interests.
Summary of the 2018 Plan
Administration of the 2018 PlanAppendix B.The Human Resources and Compensation Committee (or a subcommittee thereof) will generally administer the 2018 Plan and has the authority to make awards under the 2018 Plan, including setting the terms of the awards. The Committee also generally has the authority to interpret the 2018 Plan, to establish any rules or regulations relating to the 2018 Plan, and to make any other determination that it
believes necessary or advisable for proper administration of the 2018 Plan. Subject to the limitations specified in the 2018 Plan, the Committee may delegate its authority to our Chief Executive Officer or his designee with respect to grants to employees or consultants who are not subject to Section 16 of the Securities Exchange Act of 1934.
Eligibility.Key employees, officers, and directors of CenturyLink and our consultants or advisors are eligible to receive awards (“Incentives”) under the 2018 Plan. Based on current estimates, we anticipate that approximately 2,175 officers and 11non-employee directors would be eligible to receive Incentives under the 2018 Plan. Incentives may be granted in any one or a combination of the following forms: incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”),non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”), and Other Stock-Based Awards (as defined below). Each of these types of Incentives is discussed in more detail in “Types of Incentives” below.
Shares Issuable under the 2018 Plan.A total of 34,600,000 of our Common Shares are authorized for issuance under the 2018 Plan. This figure represents approximately 3.2% of the outstanding Common Shares as of our record date of April 6, 2018. The closing price of a Common Share on the record date, as quoted on the NYSE, was $17.21.
Limitations on Shares Issuable under the 2018 Plan.Under the 2018 Plan, Incentives relating to no more than 1,500,000 Common Shares may be granted to a single participant in any fiscal year. A maximum of 34,600,000 Common Shares may be issued upon exercise of options intended to qualify as incentive stock options under the Code. The maximum value of Incentives that may be granted under the 2018 Plan to eachnon-employee director of CenturyLink during a single calendar year is $500,000.
Share Counting.For purposes of determining the maximum number of Common Shares available for delivery under the 2018 Plan, shares that are not delivered because an Incentive is forfeited, canceled, or expired will return to the 2018 Plan and be available for reissuance. In addition, any Common Shares subject to an Incentive originally granted under the 2011 Plan that are not delivered because, following shareholders’ approval of the 2018 Plan, such Incentive is forfeited, canceled, or expired, will also be available for issuance or delivery as a new Incentive under the 2018 Plan. However, Common Shares subject to an Incentive will not be recycled if (a) they are tendered in payment of exercise or base price of a stock option or stock-settled SAR; (b) they were covered by, but not issued upon settlement of, stock-settled SARs; or (c) they were delivered or withheld by the Company to satisfy any tax withholding obligation related to stock options or stock-settled SARs. If an Incentive, by its terms, may only be settled in cash, it will not impact the number of Common Shares available for issuance under the 2018 Plan.
Adjustments to Shares Issuable under the 2018 Plan.Proportionate adjustments will be made to all of the share limitations provided in the 2018 Plan, including shares subject to outstanding Incentives, in the event of any recapitalization, reclassification, stock dividend, stock split, combination of shares, or other comparable change in our Common Shares, and the terms of any Incentive will be adjusted to the extent appropriate to provide participants with the same relative rights before and after the occurrence of any such event.
Minimum Vesting Periods.Except for any Incentives that are issued in payment of cash amounts earned under our short-term incentive program, all Incentives must be granted with a minimum vesting period of at least one year without providing for incremental vesting during that first year.
Dividends and Dividend Equivalents.The 2018 Plan provides that the Committee may grant dividends or dividend equivalent rights on certain types of awards (restricted stock, RSUs, and Other Stock-Based Awards). If the Committee elects to grant such rights, any such rights must vest and pay out or be forfeited in tandem with underlying Incentives rather than during the vesting period.
Amendments to the 2018 Plan.Our Board may amend or discontinue the 2018 Plan at any time. However, our shareholders must approve any amendment to the 2018 Plan that would:
Duration of the 2018 Plan.No Incentives may be granted under the 2018 Plan after May 23, 2028.
Types of Incentives.Each type of Incentive that may be granted under the 2018 Plan is described below.
Stock Options.A stock option is a right to purchase Common Shares from CenturyLink. The Committee will determine the number and exercise price of the options, and the time or times that the options become exercisable, provided that the option exercise price may not be less than the fair market value of a Common Share on the date of grant, except for an option granted in substitution of an outstanding award in an acquisition. The term of an option will also be determined by the Committee, but may not exceed ten years. The Committee may accelerate the exercisability of any stock option at any time. As noted above, the Committee may not, without the prior approval of our shareholders, decrease the exercise price for any outstanding option after the date of grant. In addition, an outstanding option may not, as of any date that the option has a per share exercise price that is greater than the then-current fair market value of a Common Share, be surrendered to us as consideration for the grant of a new option with a lower exercise price, another Incentive, a cash payment, or Common Shares, unless approved by our shareholders. Incentive stock options will be subject to certain additional requirements necessary in order to qualify as incentive stock options under Section 422 of the Code.
The option exercise price may be paid:
Stock Appreciation Rights.A stock appreciation right, or SAR, is a right to receive, without payment to CenturyLink, a number of Common Shares determined by dividing the product of the number of shares as to which the stock appreciation right is exercised and the amount of the appreciation in each share by the fair market value of a share on the date of exercise of the right. The Committee will determine the base price used to measure share appreciation (which may not be less than the fair market value of a Common Share on the date of grant), whether the right may be paid in cash, and the number and term of stock appreciation rights, provided that the term of a SAR may not exceed ten years. The Committee may accelerate the exercisability of any SAR at any time. The 2018 Plan restricts decreases in the base price and certain exchanges of SARs on terms similar to the restrictions described above for options.
Restricted Stock.The Committee may grant Common Shares subject to restrictions on sale, pledge, or other transfer by the recipient for a certain restricted period. All shares of restricted stock will be subject to such restrictions as the Committee may provide in an agreement with the participant, including provisions that may
obligate the participant to forfeit the shares to us in the event of termination of employment or if specified performance goals or targets are not met. Subject to restrictions provided in the participant’s incentive agreement and the 2018 Plan, a participant receiving restricted stock shall have all of the rights of a shareholder as to such shares, including the right to receive dividends although, as noted above, any such dividends would not be paid currently but would vest or be forfeited in tandem with the related shares of restricted stock.
Restricted Stock Units.A restricted stock unit, or RSU, represents the right to receive from CenturyLink one Common Share on a specific future vesting or payment date. All RSUs will be subject to such restrictions as the Committee may provide in an agreement with the participant, including provisions that may obligate the participant to forfeit the RSUs in the event of termination of employment or if specified performance goals or targets are not met. Subject to the restrictions provided in the incentive agreement and the 2018 Plan, a participant receiving RSUs has no rights of a shareholder until Common Shares are issued to him or her. RSUs may be granted with dividend equivalent rights. Any such dividend equivalent rights would not be paid currently but would vest or be forfeited in tandem with the related RSUs.
Other Stock-Based Awards.The 2018 Plan also permits the Committee to grant to participants awards of Common Shares and other awards that are denominated in, payable in, valued in whole or in part by reference to, or are otherwise based on the value of, or the appreciation in value of, Common Shares (referred to herein as “Other Stock-Based Awards”). The Committee has discretion to determine the times at which such awards are to be made, the size of such awards, the form of payment, and all other conditions of such awards, including any restrictions, deferral periods, or performance requirements.
Termination of Employment.In the event that a participant ceases to be an employee of CenturyLink or its subsidiaries or to provide services to us for any reason, including death, disability, early retirement, or normal retirement, any Incentives may be exercised, shall vest, or shall expire at such times as provided in the applicable incentive agreement or as may be otherwise determined by the Committee.
Change in Control.Upon a change in control of CenturyLink, as defined in the Incentive Plan or the applicable incentive agreement, the vesting of time-based Incentives will only occur if the participant has a contemporaneous or subsequent termination of employment. In addition, the payout of any performance-based Incentives upon a change of control may not exceed the greater of apro-rata payout based on target performance or payout of the Incentive based on actual performance. However, within certain time periods and under certain circumstances, the Committee may:
Transferability of Incentives.No Incentives granted under the 2018 Plan may be transferred, pledged, assigned, or otherwise encumbered by a participant except: (a) by will; (b) by the laws of descent and distribution; (c) if permitted by the Committee and so provided in the applicable incentive agreement, pursuant to a domestic relations order, as defined in the Code; or (d) as to options only, if permitted by the Committee and so provided in the applicable incentive agreement, to immediate family members or to a partnership, limited liability company or trust for which the sole owners, members or beneficiaries are the participant or immediate family members.
Tax Withholding.We may withhold from any payments or share issuances under the 2018 Plan, or collect as a condition of payment, any taxes required by law to be withheld. The participant may, but is not required to, satisfy his or her withholding tax obligation by electing to deliver currently-owned Common Shares, or to have us withhold shares from the shares the participant would otherwise receive, in either case having a value equal to the maximum amount required to be withheld. This election must be made prior to the date on which the amount of tax to be withheld is determined. The Committee has the right to disapprove of any such election, except for participants who are subject to Section 16 of the Securities Exchange Act of 1934.
Purchase of Incentives.The Committee may approve the repurchase by CenturyLink of an unexercised or unvested Incentive from the holder by mutual agreement, so long as the repurchase would not constitute the repricing of an option or SAR.
Federal Income Tax Consequences
The federal income tax consequences related to the issuance of the different types of Incentives that may be awarded under the 2018 Plan are summarized below. Participants who are granted Incentives under the 2018 Plan should consult their own tax advisors to determine the tax consequences based on their particular circumstances.
Stock Options.A participant who is granted a stock option normally will not realize any income, nor will we normally receive any deduction for federal income tax purposes, in the year the option is granted.
When anon-qualified stock option granted under the 2018 Plan is exercised, the participant will realize ordinary income measured by the difference between the aggregate purchase price of the shares acquired and the aggregate fair market value of the shares acquired on the exercise date and, subject to the limitations of Section 162(m) (as described below), we will be entitled to a deduction in the year the option is exercised equal to the amount the participant is required to treat as ordinary income.
Incentive stock options may only be granted to employees. An employee generally will not recognize any income upon the exercise of any incentive stock option, but the excess of the fair market value of the shares at the time of exercise over the option price will be an item of tax preference, which may, depending on particular factors relating to the employee, subject the employee to the alternative minimum tax imposed by Section 55 of the Code. The alternative minimum tax is imposed in addition to the federal individual income tax, and it is intended to ensure that individual taxpayers do not completely avoid federal income tax by using preference items. An employee will recognize capital gain or loss in the amount of the difference between the exercise price and the sale price on the sale or exchange of shares acquired pursuant to the exercise of an incentive stock option, provided the employee does not dispose of such shares within two years from the date of grant and one year from the date of exercise of the incentive stock option (the holding periods). An employee disposing of such shares before the expiration of the holding periods will recognize ordinary income generally equal to the difference between the option price and the fair market value of the shares on the date of exercise. The remaining gain, if any, will be capital gain. We will not be entitled to a federal income tax deduction in connection with the exercise of an incentive stock option, except where the employee disposes of the shares received upon exercise before the expiration of the holding periods.
If the exercise price of anon-qualified option is paid by the surrender of previously-owned shares, the basis and the holding period of the previously-owned shares carry over to the same number of shares received in exchange for the previously-owned shares. The compensation income recognized on exercise of these options is added to the basis of the shares received. If the exercised option is an incentive stock option and the shares surrendered were acquired through the exercise of an incentive stock option and have not been held for the holding periods, the optionee will recognize income on such exchange, and the basis of the shares received will be equal to the fair market value of the shares surrendered. If the applicable holding period has been met on the date of exercise, there will be no income recognition and the basis and the holding period of the previously owned shares will carry over to the same number of shares received in exchange, and the remaining shares will begin a new holding period and have a zero basis.
Stock Appreciation Rights.Generally, a participant who is granted a stock appreciation right under the 2018 Plan will not recognize any taxable income at the time of the grant. The participant will recognize ordinary income upon exercise equal to the amount of cash or the fair market value of the shares received on the day they are received.
In general, there are no federal income tax deductions allowed to CenturyLink upon the grant of stock appreciation rights. Upon the exercise of the stock appreciation right, however, we will be entitled to a deduction equal to the amount of ordinary income that the participant is required to recognize as a result of the exercise, provided that the deduction is not otherwise disallowed under Section 162(m).
Restricted Stock.Unless the participant makes an election to accelerate recognition of the income to the date of grant under Section 83(b) of the Code (as described below), the participant will not recognize income, and we will not be allowed a tax deduction, at the time the restricted stock award is granted. When the restrictions lapse, the participant will recognize ordinary income equal to the fair market value of the shares as of that date, and we will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Section 162(m). If the participant files an election under Section 83(b) of the Code within 30 days of the date of grant of restricted stock, the participant will recognize ordinary income as of the date of the grant equal to the fair market value of the shares as of that date, and we will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Section 162(m). Any future appreciation in the shares will be taxable to the participant at capital gains rates. If the shares are later forfeited, however, the participant will not be able to recover the tax previously paid pursuant to a Section 83(b) election.
Restricted Stock Units.A participant will not be deemed to have received taxable income upon the grant of restricted stock units. The participant will be deemed to have received taxable ordinary income at such time as shares are distributed with respect to the restricted stock units in an amount equal to the fair market value of the shares distributed to the participant. Upon the distribution of shares to a participant with respect to restricted stock units, we will ordinarily be entitled to a deduction for federal income tax purposes in an amount equal to the taxable ordinary income of the participant, subject to any applicable limitations under Section 162(m). The basis of the shares received will equal the amount of taxable ordinary income recognized by the participant upon receipt of such shares.
Other Stock-Based Awards.Generally, a participant who is granted an Other Stock-Based Award under the 2018 Plan will recognize ordinary income at the time the cash or Common Shares associated with the award are received. If shares are received, the ordinary income will be equal to the excess of the fair market value of the shares received over any amount paid by the participant in exchange for the shares.
In the year that the participant recognizes ordinary taxable income in respect of such Incentive, we will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that the participant is required to recognize, provided that the deduction is not otherwise disallowed under Section 162(m).
Section 162(m). Section 162(m) of the Code limits the amount of compensation paid to certain covered employees that we may deduct for federal income tax purposes to $1 million per employee per year. As revised by federal tax reform legislation passed in December 2017, Section 162(m)’s definition of “covered employees” includes any individual who served as our CEO or CFO at any time during the taxable year plus the three other most highly-compensated officers (other than the CEO and CFO) for the taxable year. Once an individual becomes a covered employee for any taxable year beginning after December 31, 2016, that individual will remain a covered employee for all future years, including after termination of employment or even death. As a result, compensation payable to a covered employee under the 2018 Plan that might otherwise be deductible may not be deductible if all compensation paid to the employee for the taxable year exceeds $1 million.
Section 409A of the Code.If any Incentive constitutesnon-qualified deferred compensation under Section 409A, it will be necessary that the Incentive be structured to comply with Section 409A to avoid the imposition of additional tax, penalties, and interest on the participant.
Tax Consequences of a Change of Control.If, upon a change of control of CenturyLink, the exercisability, vesting, or payout of an Incentive is accelerated, any excess on the date of the change of control of the fair market value of the shares or cash issued under accelerated Incentives over the purchase price of such shares, if any, may be characterized as “parachute payments” (within the meaning of Section 280G of the Code) if the sum of such amounts and any other such contingent payments received by the employee exceeds an amount equal to three times the “base amount” for such employee. The base amount generally is the average of the annual compensation of the employee for the five years preceding such change in ownership or control. An “excess parachute payment,” with respect to any employee, is the excess of the parachute payments to such person, in the aggregate, over and above such person’s base amount. If the amounts received by an employee upon a change of control are characterized as parachute payments, the employee will be subject to a 20% excise tax on the excess parachute payment and we will be denied any deduction with respect to such excess parachute payment.
The foregoing discussion summarizes the federal income tax consequences of Incentives that may be granted under the 2018 Plan based on current provisions of the Code, which are subject to change. This summary does not cover any foreign, state, or local tax consequences.
Vote Required
Approval of the 2018 Plan requiresthis proposal will require the affirmative vote of the holders of at least a majority of the votes entitled to be cast on the proposal.
The Board recommends that you vote FORwith respect to this proposal.matter.
Equity Compensation Plan Information
The following table provides information as of December 31, 2017 about our equity compensation plans under which Common Shares are authorized for issuance.
Plan Category | Number of securities to be issued upon exercise of outstanding options and rights (a) | Weighted- average exercise price of outstanding options and rights (b) (1) | Number of securities remaining available for future issuance under plans (excluding securities reflected in column (a)) (c) (2) | |||||||||
Equity Compensation Plans approved by shareholders | 1,550,824 | 36.35 | 8,565,514 | |||||||||
Equity Compensation Plans not approved by shareholders | 12,403,513 | 27.37 | 35,005,062 | |||||||||
|
|
|
|
|
| |||||||
Totals | 13,954,337 | 27.41 | 43,570,576 | |||||||||
|
|
|
|
|
| |||||||
| | THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR THIS PROPOSAL. | |
| 24 | 2019 Proxy Statement | | |||||
In connection with the Level 3 Combination, we assumed the Legacy Level 3 Plan. The Legacy Level 3 Plan was approved by Level 3’s shareholders on May 21, 2015 and no new grants may be made under the Legacy Level 3 Plan after May 21, 2025, although awards made prior to that date may remain outstanding beyond that date. In accordance with NYSE rules, we will not make grants from the Legacy Level 3 Plan to those employees and directors who, prior to the Level 3 Combination, were employed by or provided services to CenturyLink or our then-existing subsidiaries. The Legacy Level 3 Plan is currently administered by our Compensation Committee, which may delegate some of its authority to officers and employees of the Company, subject to certain exceptions. As noted in the table above, after adjustment as provided in the merger agreement, a total of 35,005,062 Common Shares remained available for issuance under the Legacy Level 3 Plan at December 31, 2017 (out of an overall total of 48,677,624 shares reserved for issuance). Currently under the Legacy Level 3 Plan, the Committee may make awards of qualified or nonqualified stock options with a maximum term of 10 years, restricted stock, RSUs, SARs, performance awards, and Other Stock-Based Awards. Shares surrendered in payment of the exercise price of options or SARs or in payment of withholding taxes are not eligible for reissuance under the Legacy Level 3 Plan. Our Board amended the Legacy Level 3 Plan as of the Closing Date to, among other things, reflect these merger-adjusted share limitations and conform the administration and change of control provisions to those of our other outstanding equity incentive plans.
As noted above, if shareholders approve the 2018 Plan as proposed, we will make no future issuances under either of our two equity incentive plans (the 2011 Plan or the Legacy Level 3 Plan).
ADVISORY VOTE ON EXECUTIVE COMPENSATIONRATIFICATION OF THE NOL RIGHTS PLAN
(Item 4 on Proxy or Voting Instruction Card)
On February 13, 2019, the Company entered into a Section 382 Rights Agreement (the “NOL Rights Plan”). Pursuant to the NOL Rights Plan, the Board declared a dividend of one preferred share purchase right (each, a “Right”) for each outstanding share of common stock, par value $1.00, of the Company. The dividend was distributed to shareholders of record as of the close of business on February 25, 2019. At the meeting, the Board will seek the ratification by our shareholders of the NOL Rights Plan.
The Board adopted the NOL Rights Plan to diminish the risk that the Company could experience an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, which could substantially limit the Company’s ability to use its net operating loss carryovers (collectively, the “NOLs”) to reduce anticipated future tax liabilities. At December 31, 2018, we had $7.3 billion of NOLs available for use to offset our future federal taxable
income. Under the Code and the regulations promulgated thereunder by the U.S. Treasury Department, these NOLs may be “carried forward” in certain circumstances to offset any current and future taxable income and thus reduce federal income tax liability, subject to certain requirements and restrictions. While the amount and timing of the Company’s future taxable income cannot be predicted with any certainty and, accordingly, the Company cannot predict the amount of these NOLs that will ultimately be used to reduce its income tax liability, to the extent that the NOLs do not otherwise become limited, these NOLs are a valuable asset to the Company. The NOL Rights Plan has not been adopted as an anti-takeover measure.
If our shareholders do not ratify the NOL Rights Plan at the meeting, by its terms the NOL Rights Plan will expire on February 13, 2020.
Description of the NOL Rights Plan
The NOL Rights Plan is intended to act as a deterrent to any person or group acquiring “beneficial ownership” of 4.9% or more of the Company’s outstanding shares of common stock, without the approval of the Board. The following description of the NOL Rights Plan is qualified in its entirety by reference to the text of the NOL Rights Plan, which is attached to this Proxy Statement asAppendix C. We urge you to read the NOL Rights Plan carefully in its entirety as the discussion below is only a summary.
General. Under the NOL Rights Plan, from and after the record date of February 25, 2019, each of our Common Shares will carry with it one Right, until the earlier of the Distribution Date (as defined below) or expiration of the Rights, as described below. In general, any person that, together with all Affiliates and Associates (each as defined in the NOL Rights Plan), acquires 4.9% or more of our outstanding common stock after February 13, 2019, or entry into the NOL Rights Plan, will be subject to significant potential dilution. Shareholders who own 4.9% or more of the outstanding common stock as of the close of business on February 13, 2019, will not trigger the Rights so long as they do not (i) acquire
additional shares of common stock representingone-half of one percent (0.5%) or more of the Common Shares outstanding at the time of such acquisition or (ii) fall under 4.9% ownership of the Common Shares but thenre-acquire Common Shares that in the aggregate equal 4.9% or more of the Common Shares. A person will not trigger the Rights solely as a result of any transaction that the Board determines, in its sole discretion, is an exempt transaction for purposes of triggering the Rights. STT Crossing Ltd. and its Affiliates and Associates will be exempt shareholders for the purposes of the NOL Rights Plan, unless and until STT Crossing (or any Affiliates of STT Crossing) acquires any common stock other than (x) in a transaction that is permitted under Section 4 of the Stockholder Rights Agreement, dated as of October 31, 2016, by and among the Company and STT Crossing Ltd. (the “Shareholder Rights Agreement”) or (y) any transfers of common stock or other Company equity interests between STT Crossing and its Affiliates. A person to whom STT Crossing transfers any amount of common stock pursuant to and as permitted by Section 4.2 of the Shareholder Rights Agreement will be exempt for purposes of the NOL Rights Plan,
| 2019 Proxy Statement | 25 | |||||||
RATIFICATION OF THE NOL RIGHTS PLAN
Description of the NOL Rights Plan
unless and until such person (or any Affiliates or Associates of such person) acquires any additional common stock.
The Board may, in its sole discretion prior to the Distribution Date, exempt any person or group for purposes of the NOL Rights Plan if it determines the acquisition by such person or group will not jeopardize tax benefits or is otherwise in the Company’s best interests. Any person that acquires shares of common stock in violation of these limitations is known as an “Acquiring Person.” Notwithstanding the foregoing, a Person shall not be an “Acquiring Person” if the Independent Directors (as defined in the NOL Rights Plan) determine at any time that a Person who would otherwise be an “Acquiring Person,” has become such without intending to become an “Acquiring Person,” and such Person divests as promptly as practicable (or within such period of time as the Independent Directors determine is reasonable) a sufficient number of shares of common stock of the Company so that such Person would no longer be an “Acquiring Person,” as defined pursuant to the NOL Rights Plan. The NOL Rights Plan is not expected to interfere with any merger or other business combination approved by our Board.
The Rights. From the record date of February 25, 2019, until the Distribution Date or earlier expiration of the Rights, the Rights will trade with, and will be inseparable from, the common stock. New Rights will also accompany any new shares of common stock that we issue after February 13, 2019, until the Distribution Date or earlier expiration of the Rights.
Exercise Price. Each Right will allow its holder to purchase from our Company oneten-thousandth of a share of Series CC Junior Participating Preferred Stock (“NOL Preferred Share”) for $28, subject to adjustment (the “Exercise Price”), once the Rights become exercisable. This fraction of a NOL Preferred Share will give the shareholder approximately the same dividend, voting, and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.
We refer to the date when the Rights become exercisable as the “Distribution Date.” Until that date or earlier expiration of the Rights, the common stock certificates will also evidence the Rights, and any transfer of shares of common stock will constitute a transfer of Rights. After that date, the Rights will
separate from the common stock and be evidenced by book-entry credits or by Rights certificates that we will mail to all eligible holders of common stock. Any Rights held by an Acquiring Person, or any Affiliates or Associates of the Acquiring Person, are void and may not be exercised.
Consequences of a Person or Group Becoming an Acquiring Person. If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person, or any Affiliates or Associates of the Acquiring Person, may, upon payment of the Exercise Price, purchase Common Shares with an aggregate market value of twice the Exercise Price, based on the “current per share market price” of the common stock (as defined in the NOL Rights Plan) on the date of the acquisition that resulted in such person or group becoming an Acquiring Person.
Exchange. After a person or group becomes an Acquiring Person, our Independent Directors in their sole discretion may extinguish the Rights by exchanging one share of common stock or an equivalent security for each Right, other than Rights held by the Acquiring Person or any Affiliates or Associates of the Acquiring Person.
Preferred Share Provisions. Each oneten-thousandth of a NOL Preferred Share, if issued:
| ◾ | will not be redeemable. |
| ◾ | will entitle holders to dividends equal to the dividends, if any, paid on one share of common stock. |
| ◾ | will entitle holders upon liquidation either to receive $1.00 per share or an amount equal to the payment made on one share of common stock, whichever is greater. |
| ◾ | will vote together with the common stock as one class on all matters submitted to a vote of shareholders of the Company and will have the same voting power as one share of common stock, except as otherwise provided by law. |
| ◾ | will entitle holders to a per share payment equal to the payment made on one share of common stock, if shares of our common stock are exchanged via merger, consolidation, or a similar transaction. |
Exercisability. The Rights will not be exercisable until 10 business days (as may be extended in the discretion of the Independent Directors) after the public announcement that a person or group has become an Acquiring Person unless the NOL Rights Plan is theretofore terminated or the Rights are theretofore redeemed (as described below).
| 26 | 2019 Proxy Statement | | |||||
RATIFICATION OF THE NOL RIGHTS PLAN
Description of the NOL Rights Plan
Redemption. Our Board may redeem the Rights for $0.0001 per Right at any time before the Distribution Date. If our Board redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $0.0001 per Right. The redemption price will be adjusted if we have a stock split or stock dividends of our common stock.
Expiration. The Rights will expire on the earliest of (i) December 1, 2020, (ii) the time at which the Rights are redeemed, (iii) the time at which the Rights are exchanged, (iv) the time at which the Board determines that the Company’s NOLs are utilized in all material respects or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which the Company could use the NOLs, or materially impair the amount of the NOLs that could be used by the Company in any particular time period, for applicable tax purposes, (v) the first anniversary of the execution of the NOL Rights Plan
if approval of the NOL Rights Plan by the affirmative vote of a majority of the votes cast at a duly called meeting has not been obtained prior to such date, or (vi) a determination by the Board, prior to the Distribution Date, that the NOL Rights Plan and the Rights are no longer in the best interests of the Company and its shareholders.
Anti-Dilution Provisions. Our Board may adjust the Exercise Price, the number of NOL Preferred Shares issuable and the number of outstanding Rights to prevent dilution that may occur from a stock dividend, a stock split, or a reclassification of the NOL Preferred Shares or common stock.
Amendments. The terms of the NOL Rights Plan may be amended by our Board without the consent of the holders of the Rights. After the Distribution Date, our Board may not amend the agreement in a way that adversely affects holders of the Rights (other than an Acquiring Person, or an Affiliate or Associate of an Acquiring Person).
Certain Factors Shareholders Should Consider
Our Board believes that taking measures to safeguard the Company’s NOLs is in our shareholders’ best interests. However, you should consider the factors below when making your decision with respect to the ratification of the NOL Rights Plan.
Continued Risk of Ownership Change. Although the NOL Rights Plan is a deterrent measure intended to reduce the likelihood of an “ownership change,” we cannot assure you that it will be effective. The amount by which an ownership interest may change in the future could be affected by many factors, including purchases and sales of shares by shareholders holding 5% or more of our outstanding common stock notwithstanding the deterrent effects of the NOL Rights Plan, decisions over which we have little or no effective control.
Anti-Takeover Effect. While the NOL Rights Plan is not intended to prevent, or even discourage, a
proposal to acquire the Company, it may have a potential anti-takeover effect because an Acquiring Person may have his ownership interest diluted upon the occurrence of a triggering event. Accordingly, the overall effects of the NOL Rights Plan may be to render more difficult or discourage a merger, tender offer, or assumption of control by a substantial holder of our securities. However, as is the case with traditional shareholder rights plans, the NOL Rights Plan should not interfere with any merger or other business combination approved by the Board.
Potential Impact on Value. The NOL Rights Plan could have a negative impact on the trading price and intrinsic value of our common stock by deterring persons or groups of persons from acquiring our common stock, including in acquisitions for which some shareholders might receive a premium above market value.
| 2019 Proxy Statement | 27 | |||||||
RATIFICATION OF THE NOL RIGHTS PLAN
Certain Factors Shareholders Should Consider
Potential Effects on Liquidity. The NOL Rights Plan is intended to deter persons or groups of persons from acquiring beneficial ownership of our common stock in excess of the specified limitations. A shareholder’s ability to dispose of our common stock may be limited if the NOL Rights Plan reduces the number of persons willing to acquire our common stock or the amount they are willing to acquire. A shareholder may become an Acquiring Person upon actions taken by persons related to, or affiliated with, them.
Shareholders are advised to carefully monitor their ownership of our common stock and consult their own legal advisors and/or us to determine whether their ownership of the shares approaches the proscribed level.
Approval of this proposal will require the affirmative vote of the holders of a majority of the votes cast on the proposal at the meeting.
| | THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR THIS PROPOSAL. | |
| 28 | 2019 Proxy Statement | | |||||
ADVISORY VOTE ON EXECUTIVE COMPENSATION
(Item 5 on Proxy or Voting Instruction Card)
Each year, since 2011 we have providedprovide our shareholders the opportunity to vote on anon-binding, advisory resolution to approve the compensation of our named executive officers as disclosed in our annual proxy statements pursuant to the rules of the SEC.
Under our executive compensation programs, our named executive officers are rewarded for achieving specific annual and long-term goals, as well as increased shareholder value. We believe this structure aligns executive pay with our financial performance and the creation of sustainable shareholder value. The Compensation Committee of our Board continually reviews our executive compensation programs to ensure they achieve the goals of aligning our compensation with both current market practices and your interests as shareholders.
The last two years have been transformative ones in our Company’s history, given the consummation of the Level 3 Combination and the ensuing senior leadership transitions, presenting us with unique compensatory challenges and opportunities. As discussed in greater detail elsewhere in this proxy statement, the Compensation Committee spent considerable time and effort during 2018 to ensure that not only do we have the right leadership in place, but that our executive compensation programs continue to appropriately incentivize and reward each key member of the team in a manner that aligns with shareholder interests. For additional information on our executive compensation programs generally and our 2018 compensation actions specifically, we urge you to read the “Compensation Discussion and Analysis” and “Executive Compensation” sections of this proxy statement.
At the meeting, we will ask you to vote, in an advisory manner, to approve the overall compensation of our named executive officers, as described in this proxy statement, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and disclosures. This proposal, commonly known as a“say-on-pay” proposal, gives you the opportunity to express your views. This advisory vote is not intended to address any specific element of compensation, but rather relates to the overall compensation of our named executive officers and our executive compensation policies and practices as described in this proxy statement. Accordingly, your vote will not directly affect or otherwise limit any existing compensation or award arrangement of any of our named executive officers.
While this“say-on-pay” vote is advisory and will not be binding on our Company or the Board, it will provide valuable information for future use by our Compensation Committee regarding shareholder sentiment about our executive compensation. We understand that executive compensation is an important matter for our shareholders. Accordingly, we invite shareholders who wish to communicate with our Board on executive compensation or any other matters to contact us as provided under “Corporate Governance — Top Leadership Positions and Structure.Governance–Shareholder Engagement.”
Approval of this proposal will require the affirmative vote of the holders of at least a majority of the votes cast on the proposal at the meeting.
The Board recommends that you vote FOR the overall compensation of our named executive officers as described in this proxy statement.
(Items 5(a) and 5(b) on Proxy or Voting Instruction Card)
We periodically receive suggestions from our shareholders, some as formal shareholder proposals. We give careful consideration to all suggestions, and assess whether they promote the best long-term interests of CenturyLink and its shareholders.
We expect Items 5(a) and 5(b) to be presented by shareholders at the meeting. Following SEC rules, we are reprinting the proposals and supporting statements as they were submitted to us, other than minor formatting changes. We take no responsibility for them. On request to the Secretary at the address listed under “Other Matters — Annual Financial Report,” we will provide information about the sponsor’s shareholdings. Adoption of both of these proposals requires the affirmative vote of the holders of at least a majority of the votes cast on the proposal at the meeting.
The Board recommends that you vote AGAINST Items 5(a) and 5(b) for the reasons we give after each one below.
Lobbying Proposal (Item (5(a))
The following proposal was submitted by theAFL-CIO Reserve Fund, located at 816 16th Street, NW, Washington D.C., 20006.
“Whereas, we believe in full disclosure of CenturyLink direct and indirect lobbying activities and expenditures to assess whether CenturyLink’s lobbying is consistent with its expressed goals and in the best interests of shareholders.
Resolved, the shareholders of CenturyLink request the preparation of a report, updated annually, disclosing:
| |
For purposes of this proposal, a “grassroots lobbying communication” is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. “Indirect lobbying” is lobbying engaged in by a trade association or other organization of which CenturyLink is a member.
Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state and federal levels.
The report shall be presented to the Audit Committee or other relevant oversight committees and posted on CenturyLink’s website.
Supporting Statement
We encourage transparency and accountability in the use of corporate funds to influence legislation and regulation. CenturyLink spent over $20 million from 2010 — 2016 on federal lobbying. This figure does not include lobbying expenditures to influence legislation in states, where CenturyLink also lobbies in 38 states (“Amid Federal Gridlock, Lobbying Rises in the States,”Center for Public Integrity, February 11, 2016), but disclosure is uneven or absent. For example, CenturyLink spent $729,286 on lobbying in Minnesota from 2011 — 2016. CenturyLink’s lobbying over customer privacy has attracted media scrutiny (“Telecom Lobbying Muscle Kills Privacy Rules,”Associated Press, April 17, 2017).
CenturyLink is a member of USTelecom, which spent $9.38 million on lobbying in 2015 and 2016. CenturyLink does not comprehensively disclose its memberships in trade associations nor the amounts of its payments used for lobbying, and CenturyLink does not disclose membership in or contributions totax-exempt organizations that write and endorse model legislation, such as its membership in the American Legislative Exchange Council (ALEC). Transparent reporting would reveal whether company assets are being used for objectives contrary to CenturyLink’s long-term interests.
We are concerned that our company’s lack of trade association and ALEC disclosure presents reputational risks. For example, CenturyLink’s ALEC membership has drawn press scrutiny (“Telecom Sleaze: ALEC and Its Communication’s Funders — AT&T, Verizon, CenturyLink, Comcast and Time Warner Cable,”Huffington Post, May 2, 2015), and over 100 companies have publicly left ALEC, including 3M, Google, Shell, Sprint andT-Mobile.”
The Board recommends that you vote AGAINST this proposal for the following reasons:
We believe our continued success and long-term profitability are substantially dependent upon our ability to actively engage in political, legislative and regulatory processes to advocate in favor of laws and policies that are in the best interests of our company, shareholders and customers. The proponent’s proposal this year is substantially similar to the proposal it submitted last year, which received less than 30% support of the shares voted at last year’s annual meeting.
For the reasons discussed further below, we continue to believe that we currently disclose a substantial amount of information on our lobbying activities and that the preparation and publication of the report contemplated by this proposal is neither necessary nor an efficient use of our resources.
We also oppose the proposal because many of its aspects are vague or unworkable, and may create confusion. We believe the proposal’s definition of lobbying and lobbying expenditures are ambiguous
THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR THIS PROPOSAL. |
The Board is confident that the Company’s current lobbying activities are effective and fully aligned with the shareholders’ long-term interests. For the reasons set forth above, the Board believes that this proposal is overly burdensome, would result in an unproductive use of our resources, and is not in the best interests of our shareholders.
Billing Practices Proposal (Item 5(b))
The following proposal was submitted by Thomas P. Swiler, located at 3709 Embudito Drive NE, Albuquerque, New Mexico 87111.
“Whereas: Customers have a right to know how much the services they buy, including taxes, will cost them, and according to CenturyLink’s Code of Conduct, “We must truthfully market, promote, advertise and sell our products. This is consistent with our commitment to act honestly in all business affairs. All descriptions of our products, services, and prices must be truthful and accurate.”
Resolved: Shareholders request that CenturyLink ensure adherence to this principle by providing customers an itemized list, including taxes, of charges, credits, expected monthly costs, the value and duration of limited time promotions, and commitment period associated with any service change within seven days of their decision to change the service. Shareholders further request that customers shall be given the option to delay the service change until they have approved the costs by dialing a unique code listed on the itemized list, or, if an immediate service charge is desired, be able to revert to their previous service within seven days of receiving the itemized list. This procedure will ensure that customers receive what they expect, which will improve customer satisfaction and retention, and will ultimately benefit the company and its shareholders.
Supporting Statement:
You are urged to vote “Yes” for this proposal for the following reasons;
As a CenturyLink customer, I have experienced instances in which the monthly cost, after initial charges and credits, that appeared on my bill after making a service change was not the monthly cost promised, and it becomes contingent on me to correct the problem, if it can be fixed at all, wasting my time and causing me frustration. While this mode of operation may provide short-term benefits to the company and employees who may receive bonuses by locking customers into a limited term commitment as a price higher than anticipated, it does so at a long-term expense to the company and shareholders due to the dwindling customer base that results when dissatisfied customers choose different telecommunications options. By providing customers with written acknowledgement of agreed upon services and pricing, there can be no misrepresentation or misunderstanding of the agreed to terms. Customer satisfaction will increase, and more customers will be retained.”
The Board recommends that you vote AGAINST this proposal for the following reasons:
Our Board agrees that customer satisfaction and retention are crucial to the Company’s success, and spends considerable time with management attempting to improve our customers’ experience. As described in greater
| 2019 Proxy Statement | 29 | |||||||
detail below, our Board believes that the steps proposed by the proponent are unnecessary and unworkable because:
Actions Taken to Improve Customer Experience.We have long recognized the need for strong customer relations. In recent years we have worked to reduce the complexity of our product offerings and bills, which we believe were largely an outgrowth of sweeping changes in the communications and technology industries, among other factors. With extensive involvement of the Board, we augmented these efforts during the last half of 2017 with a comprehensive review of our policies, procedures and practices relating to consumer sales, service and billing.
As a result of these efforts, over the past couple of years we have, among other things:
In the near term, we plan to further improve our customer processes through, among other things, enhancing our ability to gather and analyze all forms of customer feedback and continuing to expand and improve our training programs. Moreover, we plan to continue to canvass our operations in anon-going manner to identify other potential changes we can make to improve customer satisfaction in an evolving marketplace.
Effect of Our Changes.The Board is confident that our above-described recent actions have simplified our products and strengthened our processes. The Board further believes that these changes, coupled with the other changes we plan to implement, will improve the experience of our customers, thereby attaining the goals sought by the proponent.
We do not believe that the additional changes proposed by the proponent are appropriate or workable. Unlike our focus on continuous improvements, the proponent has proposed a static mandate, which we believe could limit our future flexibility to adopt approaches that our management, customer base or regulators subsequently determine to be more effective in serving our customers’ needs. The proponent also seeks information which is already made available to customers. Presently, we generally make our prices and charges available to consumers online, during sales calls, and in correspondence and bills. We also routinely provide confirmation of service letters to customers after the point of sale.
The proposal seeks to have us make a more specific representation about a customer’s initial or later bills, but this information is not always available due to future events that are outside our control, or is not always determinable at or near the time of sale. The proposal would also obligate us to create an expensive and unduly
complex new infrastructure that we believe many of our customers might find cumbersome, confusing or unsatisfactory. We believe the proponent’s proposal would also require us to craft a proliferating number of software applications and additional steps for the activation of service, thereby hindering our efforts over the past couple of years to simplify our customer care and billing processes. In addition, the sequencing of installation events suggested by the proponent could create material inconsistencies with our existing order completion systems, as well as our legal and regulatory obligations.
Ultimately, we believe our recent, pending and future changes will more effectively advance the goal of customer satisfaction than the proponent’s proposal.
For the reasons set forth above, the Board believes that the concerns raised by this proposal have been addressed and that the proposal is unnecessary, unworkable and not in your best interests.
The following table sets forth information regarding ownership of our Common Shares by the persons known to us to have beneficially owned more than 5% of the outstanding Common Shares on December 31, 20172018 (the “investors”), unless otherwise noted.
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
Name and Address | Amount and Nature of Beneficial Ownership of Common Shares(1) | Percent of Outstanding Common Shares(1) | ||||
Temasek Holdings (Private) Limited 60B Orchard Road #06-18 Tower 2 Singapore 238891 | 107,201,207 | (2) | 9.9% | |||
The Vanguard Group 100 Vanguard Blvd. Malvern, Pennsylvania 19355 | 106,032,787 | (3) | 9.8% | |||
Blackrock, Inc. 55 East 52nd Street New York, New York 10055 | 86,713,858 | (4) | 8.0% | |||
Southeastern Asset Management, Inc. 6410 Poplar Avenue, Suite 900 Memphis, Tennessee 38119 | 67,403,179 | (5) | 6.2% | |||
| (1) | The figures and percentages in the table above have been determined in accordance with Rule13d-3 of the SEC based upon information furnished by the investors, except that we have calculated the percentages in the table based on the actual number of Common Shares outstanding on the dates as to which the investors have reported their holdings (as noted in notes 2 through 5), as opposed to the estimated percentages set forth in the reports of such investors referred to below in such notes. In addition to Common Shares, we have outstanding Preferred Shares that vote together with the Common Shares as a single class on all matters. One or more persons beneficially own more than 5% of the Preferred Shares; however, the percentage of total voting power held by such persons is immaterial. For additional information regarding the Preferred Shares, see |
| (2) | Based on information contained in a Schedule 13D/A Report dated as of |
| (3) | Based on information contained in a Schedule 13G/A Report dated as of February |
| (4) | Based on information contained in a Schedule 13G/A Report dated as of |
| (5) | Based on information contained in a Schedule |
| 30 | 2019 Proxy Statement | | |||||
OWNERSHIP OF OUR SECURITIES
Executive Officers and Directors
Executive Officers and Directors
The following table sets forth information, as of the record date,March 15, 2019, regarding the beneficial ownership of Common Shares by our executive officers and directors. Except as otherwise noted, all beneficially owned shares are held with sole voting and investment power and are not pledged to third parties.
| Components of Total Shares Beneficially Owned | Components of Total Shares Beneficially Owned | |||||||||||||||||||||||
Name | Unrestricted Shares Beneficially Owned(1) | Unvested Restricted Stock(2) | Total Shares Beneficially Owned(3), (4) | Unrestricted Beneficially Owned(1) | Unvested Restricted Stock(2) | Total Owned(3), (4) | ||||||||||||||||||
Current Executive Officers: | ||||||||||||||||||||||||
Jeffrey K. Storey | 2,035,269 | 392,176 | 2,427,445 | |||||||||||||||||||||
Indraneel Dev | 135,888 | 304,836 | 440,724 | |||||||||||||||||||||
Stacey W. Goff | 93,125 | 393,962 | 487,087 | 172,664 | 404,725 | 577,389 | ||||||||||||||||||
Aamir Hussain | 90,505 | 470,833 | 561,338 | |||||||||||||||||||||
Sunit S. Patel(5) | 682,820 | 318,616 | 1,001,436 | |||||||||||||||||||||
Glen F. Post, III | 1,001,645 | 1,086,431 | 2,088,076 | |||||||||||||||||||||
Jeffrey K. Storey | 1,180,107 | 542,590 | 1,722,697 | |||||||||||||||||||||
Scott A. Trezise | 25,126 | 234,812 | 259,938 | 22,045 | 208,470 | 230,515 | ||||||||||||||||||
Outside Directors: | ||||||||||||||||||||||||
Martha H. Bejar | 20,109 | 5,882 | 25,991 | 25,991 | 8,744 | 34,735 | ||||||||||||||||||
Virginia Boulet | 37,258 | 5,882 | 43,140 | 43,140 | 8,744 | 51,884 | ||||||||||||||||||
Peter C. Brown(6) | 24,297 | 5,882 | 30,179 | |||||||||||||||||||||
Peter C. Brown(5) | 30,179 | 8,744 | 38,923 | |||||||||||||||||||||
Kevin P. Chilton | 37,562 | 4,224 | 41,786 | 42,732 | 8,744 | 51,476 | ||||||||||||||||||
Steven T. Clontz(7) | 167,295 | 4,224 | 171,519 | |||||||||||||||||||||
T. Michael Glenn(8) | 71,028 | 4,224 | 75,252 | |||||||||||||||||||||
Steven T. Clontz(6) | 244,089 | 8,744 | 252,833 | |||||||||||||||||||||
T. Michael Glenn(7) | 75,617 | 8,744 | 84,361 | |||||||||||||||||||||
W. Bruce Hanks | 52,840 | 5,882 | 58,722 | 58,722 | 8,744 | 67,466 | ||||||||||||||||||
Mary L. Landrieu | 4,859 | 5,882 | 10,741 | 10,741 | 8,744 | 19,485 | ||||||||||||||||||
Harvey P. Perry(9) | 91,555 | 5,882 | 97,437 | |||||||||||||||||||||
Harvey P. Perry(8) | 104,462 | 8,744 | 113,206 | |||||||||||||||||||||
Glen F. Post, III | 979,540 | 359,259 | 1,338,799 | |||||||||||||||||||||
Michael J. Roberts | 34,630 | 5,882 | 40,512 | 40,512 | 8,744 | 49,256 | ||||||||||||||||||
Laurie A. Siegel | 32,038 | 5,882 | 37,920 | 37,920 | 9,804 | 47,724 | ||||||||||||||||||
Former Executive Officer: | ||||||||||||||||||||||||
R. Stewart Ewing, Jr. | 36,010 | 73,144 | 109,154 | |||||||||||||||||||||
All executive officers and directors as a group (17) persons)(10) | 3,646,799 | 3,106,972 | 6,753,771 | |||||||||||||||||||||
Former Executive Officers: | ||||||||||||||||||||||||
Aamir Hussain | 244,269 | 38,220 | 282,489 | |||||||||||||||||||||
Sunit S. Patel(9) | 682,842 | 0 | 682,842 | |||||||||||||||||||||
All current executive officers and directors as a group (16 persons)(10) | 4,059,511 | 1,766,710 | 5,826,221 | |||||||||||||||||||||
| (1) | This column includes the following number of shares allocated to the individual’s account under one of our qualified 401(k) plans: |
| (2) | Reflects (i) for all shares listed, unvested shares of restricted stock over which the person holds sole voting power but no investment power, and (ii) with respect to our performance-based restricted stock granted to our executive officers, the number of shares that will vest if we attain target levels of performance. |
| (3) | Excludes (i) shares that might be issued under restricted stock units if our performance exceeds target levels and (ii) “phantom units” held by Mr. Roberts that are payable in cash upon the termination of his service as a director, as described further under “Director Compensation — Other Benefits.” |
| (4) | None of the persons named in the table beneficially owns more than 1% of the outstanding Common Shares. The shares beneficially owned by all directors and executive officers as a group constituted |
| (5) |
Includes 24,297 shares held by atax-exempt charitable foundation, as to which Mr. Brown has voting and dispositive powers by virtue of his control of the foundation. |
| 2019 Proxy Statement | 31 | |||||||
OWNERSHIP OF OUR SECURITIES
Executive Officers and Directors
| (6) | Includes |
Includes 32,143 shares held indirectly by Mr. Glenn in a trust. |
Includes 709 shares beneficially held by Mr. Perry’s spouse, as to which Mr. Perry disclaims beneficial ownership, and 35,987 shares held by Mr. Perry through our dividend reinvestment plan (as of the most recent date practicable). |
| (9) | Includes 1,428 shares indirectly held and beneficially owned by Mr. Patel in an individual retirement account. |
| (10) | As described further in the notes above, includes (i) |
| 32 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
FiscalAs we noted in last year’s proxy statement, our November 1, 2017 was a transformational year in our company’s history. Our combination with Level 3 (the “Level 3 Combination”) was completed on November 1, 2017 (the “Closing” or “Closing Date”), creatingtransformed our Company into the second largest domestic communications provider serving global enterprise customers, with enhanced capabilities to meetcustomers. During 2018, as we moved into the demandsintegration phase of our customers in an increasingly competitive environment. Below are highlights of the combined company’s profile:
Given the dramatic increase in the Company’s scale and geographic footprint and the significant changes to corporate strategy resulting from the Level 3 Combination,combination, we took critical steps to restructure our leadership team, network and workforce to pursue our vision of delivering the most technologically-advanced suite of communications products and services in the industry.
~$23B Annual revenue * Consumer revenue $5B * Enterprise revenue $17B Services in 60+ countries and counting 45,000 employees globally 150,000+ on-Net buildings Approx. 450,000 Route miles of fiber globally
As described in greater detail below, during 2018, our Board and its Human Resources and Compensation Committee (the “Committee”) spent considerable time and effort assembling the right senior leadership team and recalibrating our existing executive compensation programprograms to support the challenges and opportunities inherent in combining the two companies. As described in greater detail below, during theone-year period between the merger announcement in October 2016 and the Closing, the Committee focused on designing an executive compensation program to retain, incentivize and appropriately reward the Company’s senior leadership team throughout the duration of the transaction, from the critical period between announcement and Closing and through post-ClosingCompany going forward.
38
Approx. 450,000 Route Miles of Fiber Globally Approx. 360,000 International Transport Miles International Transport Route Miles areAs a combination of leased and owned, fiber and optical transport connectivity. 100,000+ On-Net buildings 52,500 Employees Globally More Than 60+ Countries and Counting Proforma Revenue Approx. $24B (Estimated trailing twelve months ending December 31, 2017)*
implementation of the combined company’s strategy. An important componentresult of that process, was the implementation of previously-announced succession plans for the chief executive officerwe had a few senior leadership changes during 2018, including a change in both our Chief Executive Officer (“CEO”) and chief financial officerChief Financial Officer (“CFO”) positions, includingpositions. Therefore, this 2018 Compensation Discussion and Analysis (the “CD&A”) addresses the recruitmentcompensation of both current and incorporation of two former Level 3 executives into the CenturyLink executive management team who will succeed our long-tenured CFO and CEO.
officers. For 2017, our2018, we had seven named executive officers were:(“NEOs”), consisting of four current executives and three former executives:
| |||
| |||
| Executive Vice President and | ||
| |||
| Executive Vice President, | ||
| Executive Vice President, Human Resources | ||
Former Executives (or Former NEOs): | ||
◾ Glen F. Post, III | Former CEO, currently serving as anon-management director | |
◾ Sunit S. Patel | Former CFO | |
◾ Aamir Hussain | Former Executive Vice President | |
Because the Closing occurred during the fiscal year, our named executive officer group for 2017 consists of both legacy CenturyLink executives (Messrs. Post, Hussain, Goff, and Ewing, our “legacy named executives”) as well as two former Level 3 executives who joined us as CenturyLink executive officers at the Closing (Messrs. Storey and Patel, our “newly named executives”).
| 2019 Proxy Statement | 33 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
This Compensation Discussion and Analysis (the “CD&A”)CD&A section is organized intoonto four subsections:
| 34 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
As described further below, the central goals of our executive compensation program are to incentivize our executives to attain objectives that we believe will create shareholder value, to reward performance that contributes to the execution of our business strategies, and are:
| (1) | to incentivize our executives to attain objectives that we believe will create shareholder value, |
| (2) | to reward performance that contributes to the execution of our business strategies, and |
| (3) | to attract and retain the right executives for our business. |
2017 Business Highlights. In addition to successfully completing During 2018, we achieved and exceeded several significant financial and operational goals that the Committee had previously selected as short-term and equity compensation targets, including the following:
| ◾ | Raised guidance outlook in second quarter of 2018 for Adjusted Earnings Before Interest Taxes Depreciation and Amortization (“Adjusted EBITDA”) and Free Cash Flow and achieved full year results that met and exceeded the raised guidance. |
| ◾ | Generated Adjusted EBITDA of $9.040 billion. |
| ◾ | Expanded Adjusted EBITDA margin to 39.8% from 35.5% since the close of the Level 3 Combination. |
| ◾ | Generated Free Cash Flow of $4.215 billion. |
| ◾ | Achieved targeted $850 million of annualizedrun-rate Adjusted EBITDA synergies in approximately one year, rather than 80% in three years as initially projected. |
Executive Compensation Highlights.As described in greater detail below, given the transformative nature of the Level 3 Combination, we achieved several other significant accomplishments during 2017, including the following:
2017 Executive Compensation Highlights.Throughout 2017, the Committee took steps to (i) attractspent considerable time and appropriately compensate newly-hired executives with skills tailored toeffort during 2018 ensuring that we have the combined company, (ii) retain, rewardright senior leadership team in place for the Company and adequately incentivizethat our legacy named executives in connection with their integration efforts before and after the Closing and (iii) begin development of executive compensation programs suitable forcontinue to appropriately incentivize, retain, and reward each key member of the combined company. In the course of these actions, we continued to focus on maintaining a strong linkage between executive pay andteam.
We believe that our performance and strategic goals and developing executive compensation packages designed to be competitive with our market for executive talent.
Our recent key executive2018 compensation decisions are well aligned with driving long-term value and highlights are summarized below.in the best long-term interest of our shareholders. The following timeline provides an overview of the major executive transitions and compensation milestones that occurred during the year:
Nov. 1, 2017 continuedThe Closing Date (1) Nov. 1, 2017 - Feb. 22, 2018 The Committee recalibrated the Exec Comp programs (2) May 23, 2018 Mr. Post retires and Mr. Storey assumes role as CEO (3) Jun. 1, 2018 After the annual Meeting, the Board decides to emphasize variable “at risk” compensation, with the majority of each named executive officer’s total target compensation structured as a combination of short- and long-term performance-driven incentives (which, for our CEO, represented 90% of his total target compensation).
| (1) | Immediately after the Closing, the new senior leadership team for the combined company included the following named executive officers: Mr. Post as CEO, Mr. Storey as COO, Mr. Patel as CFO, Mr. Goff as General Counsel and Mr. Hussain as CTO. See 2018 proxy statement for additional details. |
| (2) | For a discussion of the modifications of the executive compensation programs, see the discussion below under the heading,Recalibrating Our Existing Executive Compensation Programs. |
| 2019 Proxy Statement | 35 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
| (3) | For details regarding Mr. Post’s retirement package, which included amounts to which he was contractually entitled as well as the acceleration of (or waiver of continued service requirements for) certain outstanding restricted stock awards, see Section III — Our Compensation Program Objectives and Components of Pay. For details regarding Mr. Storey’s CEO compensation package, see the discussion below under the heading,Accelerated CEO Succession. |
| (4) | For a discussion of the special long-term incentive (“LTI”) retention award for Mr. Patel, which, along with his other unvested equity awards, was forfeited upon his termination of employment, see the discussion below under the heading,Other Executive Leadership Changes. |
| (5) | Mr. Dev was named CFO on November 6, 2018, having served in the role on an interim basis immediately following Mr. Patel’s departure. For details regarding Mr. Dev’s compensation package, see Section III — Our Compensation Program Objectives and Components of Pay. For information regarding amounts paid to Mr. Hussain upon his termination of employment, which included amounts to which he was contractually entitled as well as the acceleration of (or waiver of continued service requirements for) certain outstanding restricted stock awards, please see the discussion below under the heading,Other Executive Leadership Changes. |
| (6) | For details regarding the 2018 short-term incentive (“STI”) plan performance, see Section III — Our Compensation Program Objectives and Components of Pay. For details regarding the payout on performance-based restricted stock (“PBRS”) from the 2016 annual LTI grants, see Section II — Our Compensation Philosophy and Linkage to Pay for Performance. For details regarding the payout of Mr. Storey’s initial PBRS grant, which was awarded to him at Closing in November 2017 (although it is reported in our 2018 compensation tables based on its accounting grant date), see the discussion below — Link Between Operating Performance and Our Executive Compensation. |
In June 2017, the Company announced a CEO succession plan, which initially envisioned Mr. Post,Recalibrating our current CEO, stepping down from that role effective January 1, 2019. In March 2018, Mr. Post elected to accelerate the plan by retiring at the meeting. We anticipate that Mr. Storey, who most recentlyExisting Executive Compensation Programs
| ◾ | Over a four-month period following the Closing, we conducted a rigorous process to recalibrate our existing executive compensation programs for 2018 to better align with the combined company’s profile and our business strategy of profitable growth. As a result, for our 2018 incentive programs, performance is measured on Adjusted EBITDA, Free Cash Flow and customer experience (for our STI plan) andtwo-year Adjusted EBITDA growth run rate (for PBRS grants). |
| ◾ | As previously described in our 2018 proxy statement, following the Closing, the Committee adopted a new compensation peer group, which better reflected the increased size and complexity of the combined company. |
| ◾ | Our executive compensation programs for 2018 continued to be highly performance-based and emphasize variable “at risk” compensation. The majority of each named executive officer’s total target compensation is structured as a combination of short- and long-term performance-driven incentives (which, for both our former and current CEO, represented 90% of his total target compensation). |
| ◾ | Our annual LTI grants to our named executives consisted of a combination of performance-based awards (60% of the target grant value) and time-vested awards (40% of the target grant value). Most executive officers received their LTI grants in February 2018 as shares of restricted stock. As discussed in greater detail below, Mr. Storey’s annual LTI grant was awarded to him as restricted stock units in May 2018. |
Link Between Operating Performance and Our Executive Compensation
| ◾ | As in prior years, the Committee set challenging performance targets under our incentive programs to ensure that payouts track corporate performance. |
| ◾ | For the first time since 2013, we met and exceeded ourpre-established goals for our STI plan and our external guidance provided to shareholder, achieving anadjusted company performance of 107% for 2018. Specifically, we: |
| ◾ | Met our target for Adjusted EBITDA, comprising 65% of our STI plan, at a 112% attainment level; |
| ◾ | Exceeded our target for Free Cash Flow, comprising 25% of our STI plan, at a 200% attainment level; and |
| ◾ | Partially met of our Customer Experience goals, comprising 10% of our STI plan, resulting in a 75% attainment level. |
| ◾ | After an assessment of the Company’s overall performance against ourpre-established goals and consideration of revenue performance which was not a performance metric in our STI plan, the Committee determined it was appropriate to use itsdiscretion to reduce the calculated performance for the 2018 STI plan from 130% to adjusted company performance of 107%. |
| ◾ | PBRS accounted for 60% of the LTI awards originally granted to our named executives in 2016 and approximately 79% of the performance-based restricted shares vested based upon our actual performance over the three-year performance period ending December 31, 2018. Specifically, our: |
| ◾ | Three-year cumulative revenue, comprising half the performance-shares, achieved 98.8% of target for a 82.4% payout; and |
| �� |
| 36 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
| Three-year relative total shareholder return (“TSR”), comprising half the performance-shares, achieved 38th percentile for a 76.19% payout. |
| ◾ | As initially described in our 2018 proxy statement, Mr. Storey received an initial LTI award upon Closing, 60% of which consisted of PBRS. Vesting of these PBRS was |
Accelerated CEO Succession
| ◾ | Following the announcement of our proposed combination with Level 3 |
| ◾ | In June 2017, the Board approved and we publicly announced a CEO succession plan in which Mr. Storey would succeed Mr. Post as CEO at the end of 2018, following a transition period as President and COO. |
| ◾ | Following the Closing in late 2017, we continued to engage in a dialogue with our shareholders, several of whom expressed the view that |
| ◾ | By March 2018, we announced that we were accelerating our previously-announced CEO succession plan by approximately 7 months, with the transition occurring immediately after our annual shareholders’ meeting on May 23, 2018. Following the meeting, Mr. Storey would be the new CEO and, contingent upon his reelection at the 2018 annual meeting, Mr. Post would continue |
to serve the Company as anon-management director. The accelerated timeline required a unique and thoughtful approach to addressing compensation actions with respect to our new CEO and our retiring CEO. |
| ◾ | Mr. Post, who served as our CEO for 26 years and was employed by the Company for a total of 42 years, received the standard retirement benefits to which he was entitled under our long-standing programs and plans (including apro-rata STI payout for 2018). Although he did not receive any severance, in consideration for his long tenure, the Committee did approve the acceleration of most, but not all, of his outstanding time-based equity awards and waived the continued service requirements for a portion of his outstanding performance-based equity awards (vesting of which remains subject to achievement of the original performance conditions). For more information, please see Section III — Our Compensation Program Objectives and Components of Pay for further discussion. |
| ◾ | In connection with negotiating Mr. Storey’s CEO compensation package, the Board and Committee endeavored to: |
| ◾ | create a package that would be, on the one hand, sufficient to entice Mr. Storey to agree to the accelerated succession plan and, on the other hand, aligned with our shareholders’ interests; |
| ◾ | weight the package heavily towards performance-based compensation; and |
| ◾ | complete the package in a timely manner to ensure a successful transition and to compensate Mr. Storey as CEO from the first day he assumed the role. |
| ◾ | In crafting Mr. Storey’s CEO package, we also listened to the opinions of our shareholders and analysts. These shareholders expressed the view that Mr. Storey possessed superior leadership skills and experience that merited pay that was competitive to the market benchmarks for our peer group. Although, historically, CenturyLink has been very conservative with respect to pay levels, we had to modify our approach in this instance in order to secure Mr. Storey as our new CEO and respond to shareholder feedback. Further, as noted previously, the Committee had adopted a new post-Level 3 Combination peer group to better reflect the increased size and complexity of our combined company, which resulted in increased CEO market benchmarks versus the prior peer group. |
| 2019 Proxy Statement | 37 | |||||||
pro-ratedCOMPENSATION DISCUSSION AND ANALYSIS for thetwo-month period of service (following which they will participate in our short-term incentive program)
I. Executive Summary
| ◾ | In March 2018, we focused on the key principles and weighed shareholder feedback and our ongoing dialogue with Mr. Storey, as we began a robust and thoughtful process that involved numerous meetings that transpired over two months. In addition to multiple meetings between Mr. Storey and the Chair of the Committee, thenon-management directors and the Committee formally met six times to discuss Mr. Storey’s CEO pay package. The directors were advised by its independent outside compensation consultant, Meridian Compensation Partners, LLC (“Meridian”), and outside counsel, Jones Walker LLP. |
| ◾ | In May 2018, in conjunction with his promotion to CEO, the Committee approved to increase Mr. Storey’s annual total target compensation to $18 million and awarded him two LTI grants (one annual grant for 2018 and one special promotion grant), as described in greater detail below. |
| ◾ | The approved annual total target compensation package of $18 million was comprised of $1.5 million salary, 200% short-term incentive opportunity and $12.6 million long-term incentive awards. His annual total target compensation is aligned with the long-term interest of our shareholders with 90% of pay at risk and slightly above the 50th percentile of market for our peers. |
| ◾ | The structure of Mr. Storey’s annual LTI grant is substantially similar to the annual LTI awards granted to other senior officers in 2018. His annual LTI grant consisted of 40% time-based restricted stock units (“RSUs”) and 60% performance-based RSUs, with the number of shares vesting ranging from0-200% depending upon the Company’s performance as measured against an Adjusted EBITDA run rate growth goal over atwo-year period. |
| ◾ | The second LTI grant was aone-time promotion award with a grant date value of $7,400,000, consisting of 40% time-vested restricted shares and 60% performance-based restricted shares. For the PBRS, payout is determined on atwo-step process: (1) between 0% to 100% may be earned on the Company’s cumulative Adjusted EBITDA results for a three-year period and (2) contingent upon target performance being met or exceeded in step 1, Mr. Storey may earn between 100% to 200% based on relative TSR performance over same three-year period against peer group. |
Other Executive Leadership Changes
| ◾ | By the second quarter of 2018, we became concerned around the retention risk of Mr. Patel, who had only been our CFO since Closing in November 2017. In June 2018, the Committee granted Mr. Patel aone-time performance-based retention award with a grant date award value of $2,000,000. The performance metrics applicable to this retention award were substantially similar to those included in the performance-based portion of Mr. Storey’s promotion grant(3-year cumulative Adjusted EBITDA targets and relative TSR performance). |
| ◾ | Despite our efforts to retain Mr. Patel, on September 28, 2018, he resigned to pursue other opportunities. As a result, Mr. Patel forfeited all outstanding unvested equity grants (including the June 2018 retention grant). However, per his April 2017 offer letter, we continue to pay him certain deferred compensation payments related to legacy Level 3 equity awards that were outstanding and converted at the Closing. For additional details on these amounts, see Section III — Our Compensation Program Objectives and Components of Pay. |
| ◾ | Upon Mr. Patel’s departure, Mr. Dev was named interim CFO until a longer-term replacement could be named. We did not make any adjustments to Mr. Dev’s compensation upon his appointment as interim CFO. |
| ◾ | With the assistance of an external executive search firm, we conducted an extensive search (both internally and externally) and Mr. Dev was named as CFO on November 6, 2018. For details regarding his compensation package, see Section III — Our Compensation Program Objectives and Components of Pay for further discussion. |
| ◾ | In November 2018, Aamir Hussain, who had served as Executive Vice President and Chief Technology Officer, departed from the Company as part of a planned restructuring of his responsibilities among other senior officers. Mr. Hussain received a standard severance package, including a cash severance payment, and certain other benefits to which he was entitled under long-standing programs and plans (including apro-rata STI payout for 2018). In addition, the Committee approved the acceleration of some, but not all, of his outstanding time-based equity awards and waived the continued service requirements for a portion of his outstanding performance-based equity awards (vesting of |
| 38 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
| which remains subject to achievement of the original performance conditions). Please see Section III — Our Compensation Program Objectives and Components of Pay for further discussion. |
Assessment of “Say on Pay”“Say-on-Pay” Voting Results and Shareholder Outreach
In May 2015, 2016, 2017 and 2017,2018, our shareholders cast approximately 95%89%, 89%88% and 87%79%, respectively, of their votes in favor of our “say on pay”“say-on-pay” proposal. The Committee takesis committed to taking the results of these votes into consideration when making executive compensation decisions. Although this level of support seems to indicate that our shareholders are generally satisfied with the scope and structure of our compensation programs,
Throughout 2018, our senior management continued our shareholder outreach program with our top institutional investors, thata process we first began in 2014. Most recently, in May 2017, we contacted our top institutional investors, holding approximately 20% of our outstanding shares, and offered shareholder outreach calls. We remain committed to providing our shareholders with an opportunity for open dialogue on compensation matters and other issues relevant to our business, and expectwe plan to continue to engage in outreach efforts in the future. In late 2018, the Chairman of our Board of Directors, the Chairman of the Committee, and members of management met with representatives from ISS and Glass Lewis to discuss the company’s compensation programs and governance practices.
We believe that the positivesay-on-pay vote of 79% in 2018, although reduced somewhat from prior years, indicates that our shareholders remain generally satisfied with the scope and structure of our annual executive compensation programs. However, we recognize that a source of some concern for shareholders, as expressed in the somewhat lower 2018say-on-pay vote, has been our decisions to grantone-time awards as well as certain supplemental severance payments in connection with executive transitions in prior years.
In general, we do not have a practice ofone-time items or excessive severance. However, in 2017 and in the first half of 2018, the Compensation Committee decided to make special grants to incentivize and retain the best executive team to lead the integration and transformation of the Company following the Level 3 Combination. In addition, as a result of the Level 3 Combination, we assumed certain retention awards originally granted by Level 3, many of which were paid out over aone-year period following the Closing in order to ensure continued employment of key executives through the critical integration period.
Many of these grants were disclosed in the 2018 proxy statement, with the remainder disclosed in this 2019 proxy statement. We believe that theseone-timesign-on, integration, and retention awards are common in large transactions like the Level 3 Combination and, in our specific case, are necessary (i) to incentivize top talent of the acquired company to continue in key positions post-closing, (ii) to reward the level of effort that must be sustained over an extended period in order to execute a transaction of this size and critical post-close integration and synergy goals, and (iii) to retain critical members of the executive team and assuage their concerns following the announcement of our CEO and CFO succession plan.
We do not have a practice of excessive severance in the event that the senior officer is involuntarily terminated by us without cause in the absence of a change of control. Other than the unique situation disclosed in our 2018 proxy statement, the Committee has approved severance in accordance with our executive severance plan (which is described in greater detail under “— Other Benefits — Severance Benefits” below) for previous terminations, such as Mr. Douglas and Mrs. Puckett as disclosed in our 2018 and 2016 proxy statements, respectively, and for Mr. Hussain as discussed in this proxy statement.
As discussed in this CD&A, during 2018, we awarded aone-time promotion LTI grant to Mr. Storey upon his appointment as CEO, 60% of which is performance-based (see Section III, Our Compensation Program Objectives and Components of Pay). In addition, in an attempt to retain our CFO, who was being actively recruited by other companies, we awarded aone-time retention LTI grant to Mr. Patel, of which 100% was performance-based, although this award along with all of his other unvested LTI were ultimately forfeited following his resignation in 2018.
Notwithstanding our general disinclination to useone-time awards or make supplemental severance payments, we believe that the extraordinary opportunities and challenges associated with the Level 3 Combination necessitated these actions and were in the best long-term interest of the Company for all the reasons noted in this and our 2018 proxy statement. We believe that the use of specialone-time awards in future years will diminish significantly as we have stabilized our leadership structure following the Level 3 Combination.
| 2019 Proxy Statement | 39 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
II. Our Compensation Philosophy and Linkage to Pay for Performance
We compensate our senior management through a mix of programs designed to be market-competitive and fiscally responsible. More specifically, our executive compensation programs are designed to:
| ◾ | provide anappropriatemix of fixed and variable compensation to attract, retain and motivate key executives, |
| ensure that a majority of our executive compensation isperformance-based to supportcreation of long-term shareholder value without encouraging excessive risk taking and toreward performance over multiple time horizons, |
| ◾ | generally targetcompensation at the 50th percentile of market levels,when targeted levels |
of performance are achieved, for similarly-situated and comparably-skilled executives at a select group of peer companies approved by the Committee, |
| ◾ | recognize and reward outstanding contributions and results, both on an individual basis and a company or divisional basis, compared to peer compensation and performance benchmark levels, |
| ◾ | promote internal equity by offering comparable pay to executives whom we expect to make roughly equivalent contributions, while differentiating executives’ compensation arrangements when appropriate, and |
| ◾ | monitorsharedilution. |
| 40 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
II. Our Compensation Philosophy and Linkage to Pay for Performance
Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives
We believeGiven the ongoing integration of the two companies during 2018, the Committee recalibrated our incentive programs to align them with the size, market, operations and strategic imperatives of the combined company. The Committee believes the following core elements of our compensation program help us to realize our compensation philosophy and objectives:objectives and support our strategic and cultural priorities for 2018 as described below:
|
and Objectives |
| Corporate Strategy | |||||||||
Base Salary | Annualfixed cash compensation | Provides acompetitive and stable component of income to our executives | Attract and retain key talent | |||||||||
Short-Term Incentive Bonus | Annualvariable cash compensation based on the achievement of annual performance | Providescompetitiveshort-term incentive opportunities for our executives to earn annual cash bonusesbased on performance objectives that, if attained, can reasonably be expected to (i) promote our business and strategic objectives and (ii) correspond to those paid to similarly-situated and comparably skilled executives at peer companies | STI annual performance measures were selected to align to our corporate strategy for profitable growth: Adjusted EBITDA (65% of STI plan) - enables us to, among other things, (i) fund strategic capital investments designed to expand our business opportunities, (ii) return cash to our shareholders through dividends or periodic share repurchases, (iii) meet our debt and pension commitments, and (iv) attain our Level 3 Combination synergies Free Cash Flow (25% of STI plan) - critical measure that enable us to provide dividends to our shareholders and pay down our debt Customer Experience (10% of STI plan) - critical to maintain and grow our revenue base. This performance measure includes operational goals and metrics that measure how well we are serving our customers as well as their perceptions of our service Individual Performance - for each senior officer, the Committee has an opportunity to make a positive or negative adjustment based on “line of sight” to each senior officer’s performance regarding their specific areas of responsibility and individual objectives | |||||||||
| Annual long-termvariable equity awards that | Fosters a culture of ownership, aligns the long-term interests of our executives with our shareholders and rewards or penalizes executives based on our performance of Adjusted EBITDA growth overtwo-year period and helps to retain executives through stock price growth and the creation of long-term | Performance-Based Restricted Shares (60% of LTI grant value) - Adjusted EBITDA growth run rate based on achieving profitable growth over atwo-year period Time-Vested Restricted Shares (40% of LTI grant value) - amount of time-vested restricted share compensation that is ultimately realized depends on how well we successfully execute our strategic plans and | |||||||||
| ||||||||
The Committee believes our incentive programs supported our strategic and cultural priorities for 2017 as described below:
COMPENSATION DISCUSSION AND ANALYSIS
II. Our Compensation Philosophy and Linkage to our peers was one of the performance measures used in our performance-based restricted shares, representing 18% to 21% of our executive officers’ 2017 target total compensation. This compensation will ultimately be realized only if we successfully execute our strategic plans and perform satisfactorily in relation to our industry peers.
Given theon-going integration of the two companies, the Committee has continued to revise our incentive programs to align them with the size, market, operations and strategic imperatives of the combined company.
The following chart illustrates the approximate allocation of our CEO and our current other named executive officers (“NEOs”)the total target compensation opportunity for 20172018 our current CEO and our current executive officers (shown as “CEO” and “NEO,” respectively, below) between elements that are fixed and variable or performance-based pay that is “at risk”:
CEO NEO
|
|
| ◾ | Variable pay is comprised of a short-term incentive (“STI”) bonus, time-vested restricted stock awards (“TBRS”) and performance-based restricted stock awards (“PBRS”), which represents 90% of our CEO’s total target compensation and 81% of our other current NEOs’ average target total compensation. This portion of pay is considered “at risk” since the receipt or value of the award is subject to the attainment of certain performance goals, vesting requirements and overall stock performance. |
Significant Stock Ownership.Stock ownership guidelines further align the interests of executives and shareholders while focusing theour executives on our long-term success. We established our executive stock ownership guidelines after review of executive compensation best practices. Under our stock ownership guidelines as of December 31, 2017:2018:
| ◾ | Mr. Storey held over $44 million in stock (including restricted shares and unvested restricted shares or units and excluding 400,655 target shares of |
unvested performance-based restricted stock units), which was 24.5 times his base salary and approximately 4.1 times greater than his target ownership level of six times base salary. |
| ◾ | Our other current NEOs held an aggregate of over $13 million in stock (including restricted shares and unvested restricted shares or units), which was, on average, 7.5 times their respective base salaries and nearly 2.5 times greater than their respective target ownership levels of three times base salary. |
As illustrated by the data below, we believe our compensationexecutive pay over the past several years has remained in alignmentbeen well aligned with ourCompany performance.
Short-Term Incentive Performance.The.The Committee sets target levels of performance basedperformance-based on a variety of factors, including its assessment of the difficulty of achieving such levels and the potential impact of such achievement on enhancing shareholder value.
The percentages in the table below represent the actual payouts to our senior officers under our short-term incentiveSTI program (our “STI program”) for each of the past three years as a percentage of the target opportunity set for him or hereach of them by the Committee for that performance year.
Performance Year | Actual Payout as a % of Target Opportunity | Actual Payout as a % of Target Opportunity | ||||||
2015 | 77.6 | % | ||||||
2016 | 80.2 | % | 80.2 | % | ||||
2017 | 73.0 | %(1) | 73.0 | % | ||||
| ||||||||
2018 | 107.0 | % | ||||||
3-year Average | 76.9 | % | 86.7 | % | ||||
| 42 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
II. Our Compensation Philosophy and Linkage to Pay for Performance
Long-Term Incentive Performance. For several years, Since 2014, 60% of our annual long-term incentiveLTI grants (our “LTI program”) have consisted of sharesperformance-based equity with the remaining 40% in the form of restricted stock, vesting of a portion of which istime-based equity, with PBRS payouts contingent upon the Company’s performance as measured against certainpre-established criteria. In recent years, we have used two different performance metrics with these LTI grants, with vesting ofone-half of the performance-based award being tied to a relative metric (our three-year total shareholder return relative to a select peer group), and vesting of the remainingone-half being tied to an absolute metric (the sum of our annual revenue targets over three-year performance periods as measured againstpre-established targets). Since 2014, the Committee has awarded 60% of the aggregate grant date value of the executives’ LTI awards in the form of performance-based restricted stock, up from 50% in prior years.
The percentages in the tables below represent the percentage of the target value of the executives’ LTI awards granted in the form of performance-based restricted stock and time-vested restricted stock, including the portion based upon relative TSR and absolute revenue performance objectives.
Grant Years(1) | % of Total Fair Value Awarded in Time-Vested Restricted Shares | % of Total Fair Value Awarded in TSR Performance- Based Restricted Shares(2) | % of Total Fair Value Awarded in Absolute Revenue Performance-Based Restricted Shares | |||||||||
2013 | 50 | % | 25 | % | 25 | % | ||||||
2014 — 2017 | 40 | % | 30 | % | 30 | % | ||||||
As described in greater detail in “— Long-Term Equity Incentive Compensation” under Subsection III below, in order to further align our pay with performance, our performance-based restricted sharesequity awards are granted at target performance levels, but the ultimate payout of those awards can range between 0% to 200%, depending on our actual performance as determined at the end of thetwo- or three-year performance period. Due to the transformative nature of the Level 3 combination and the continuing evolution of our business strategy as we integrate the two companies, the Committee believed that atwo-year performance period was most appropriate to achieve our business goals. The Committee intends to return to three-year performance period when we are no longer
in integration phase and we can solidly project performance for three years as a combined entity.
In 2014 through 2017, our annual grants of performance-based restricted stock were based on two different performance metrics, with vesting ofone-half of the performance-based award being tied to a relative TSR metric (our three-year total shareholder return relative to a select peer group), and vesting of the remainingone-half being tied to a cumulative core revenue metric (the sum of our annual revenue results over three-year performance periods as measured againstpre-established targets set annually over three-years). For greater detail on how targets and performance for these two performance metrics were determined, please see“—Long-Term Equity Incentive Compensation” in our 2018 proxy statement.
The payout percentages in the tables below represent the percentage of the target number ofperformance-based restricted stock granted to our senior officers that ultimately vested, with all remaining shares being forfeited. To further enhance the pay for performance linkage, any dividends grantedpaid on these shares of performance-based restricted stock (or dividend equivalents on performance-based RSUs) are not paid currently, but rather accumulate during the restricted period and vest or are forfeited in tandem with the related shares.
Actual Payoutsshares or units. The average target number of TSR Performance-Based Restricted Stockperformance-based restricted stock that ultimately vested for LTI grants from 2014 through 2016 (most recently completed performance period) is 62.3%.
Grant Year | Performance Period | Peer Group | CTL TSR | Percentile Rank | Actual Payout % | |||||||||||||||||||
2013 | 2013 — 2015 | TSR Peer Group | -19.47 | % | 16 | th | 0 | % | ||||||||||||||||
2014 | 2014 — 2016 | TSR Peer Group | -5.34 | % | 25 | th | 50 | % | ||||||||||||||||
2015 | 2015 — 2017 | TSR Peer Group | -47.17 | % | 13 | th | 0 | % | ||||||||||||||||
|
|
| ||||||||||||||||||||||
3-year average |
| 16.7 | % | |||||||||||||||||||||
Actual Payouts of Absolute Revenue Performance-Based Restricted Stock
Grant Year | Performance Period | Performance Goal(1) | Absolute Revenue Target | Company’s Performance | Actual Payout % | |||||||||||||||||||
2013 | 2013 — 2015 | | Sum of Core Revenue Targets over Three-Year Performance Period | | $ | 49.125 million | 99.5 | % | 92.6 | % | ||||||||||||||
2014 | 2014 — 2016 | | Sum of Core Revenue Targets over Three-Year Performance Period | | $ | 48.525 million | 99.2 | % | 89.1 | % | ||||||||||||||
2015 | 2015 — 2017 | | Sum of Core Revenue Targets over Three-Year Performance Period | | $ | 47.145 million | 98.3 | % | 76.2 | % | ||||||||||||||
|
|
| ||||||||||||||||||||||
3-year average |
| 86.0 | % | |||||||||||||||||||||
LTI Grant Year, Performance Period and Performance Metric | Attainment Level for LTI Grant Year | Total Payout Percentage(1) | ||||||||||||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||
2014 LTI Grant (2014-2016) | ||||||||||||||||||||||||||||||||
Cumulative Core Revenue | 89.1% | 44.6 | % | |||||||||||||||||||||||||||||
Relative TSR | 50% | 25.0 | % | |||||||||||||||||||||||||||||
Total | 69.6 | % | ||||||||||||||||||||||||||||||
2015 LTI Grant (2015-2017) | ||||||||||||||||||||||||||||||||
Cumulative Core Revenue | 76.2% | 38.1 | % | |||||||||||||||||||||||||||||
Relative TSR | 0% | 0.0 | % | |||||||||||||||||||||||||||||
Total | 38.1 | % | ||||||||||||||||||||||||||||||
2016 LTI Grant (2016-2018) | ||||||||||||||||||||||||||||||||
Cumulative Core Revenue | 82.4%(2) | 41.2 | % | |||||||||||||||||||||||||||||
Relative TSR | 76.19%(3) | 38.1 | % | |||||||||||||||||||||||||||||
Total | 79.3 | % | ||||||||||||||||||||||||||||||
2017 LTI Grant (2017-2019) | ||||||||||||||||||||||||||||||||
Cumulative Core Revenue | TBD | TBD | ||||||||||||||||||||||||||||||
Relative TSR | TBD | TBD | ||||||||||||||||||||||||||||||
Total | TBD | |||||||||||||||||||||||||||||||
2017 Special Grant for | ||||||||||||||||||||||||||||||||
Adjusted EBITDA Growth Run | 200 | %(4) | 200 | % | ||||||||||||||||||||||||||||
2018 LTI Grant (2018-2019) | ||||||||||||||||||||||||||||||||
Adjusted EBITDA Growth Run | TBD | TBD | ||||||||||||||||||||||||||||||
| �� | 2019 Proxy Statement | 43 | ||||||
COMPENSATION DISCUSSION AND ANALYSIS
II. Our Compensation Philosophy and Linkage to Pay for Performance
| (1) | The payout percentages reflect the corresponding payout for each metric multiplied by their weighting. In grant years 2014 through 2017, the two performance metrics of cumulative core revenue and relative TSR were equally weighted. |
| (2) | The three-year performance period was completed on December 31, 2018 for the cumulative core revenue performance-based restricted stock granted to our senior officers in 2016. The table below outlines the payout percentages that represent the percentage of the target number of that ultimately vested, with all remaining shares being forfeited. |
Cumulative Core Revenue | Target | Company’s Performance | Actual Payout % | |||||||||
Maximum | $ | 54.9 billion | ||||||||||
Target | $ | 53.0 billion | $ | 52.4 billion | 82.4 | % | ||||||
Threshold | $ | 51.2 billion | ||||||||||
| (3) | The three-year performance period was completed on December 31, 2018 for the Relative TSR performance-based restricted stock granted to our senior officers in 2016. The table below outlines the payout percentages that represent the percentage of the target number of that ultimately vested, with all remaining shares being forfeited. |
Relative TSR | Target | CTL TSR | Actual Payout % | |||||||||
Maximum | 75th Percentile Rank | |||||||||||
Target | 50th Percentile Rank | -14.24%; 38th Percentile Rank | 76.19 | % | ||||||||
Threshold | 25th Percentile Rank | |||||||||||
| (4) | The performance period was completed on December 31, 2018 for the Adjusted EBITDA growth run rate performance-based restricted stock granted to Mr. Storey in 2017. The table below outlines the payout percentages that represent the percentage of the target number of that ultimately vested. |
Adjusted EBITDA Growth Run Rate | Target | Company’s Performance | Actual Payout % | |||||||||
Maximum | 4.6 | % | ||||||||||
Target | 3.8 | % | 4.8 | % | 200 | % | ||||||
Threshold | 3.0 | % | ||||||||||
Stock Performance.As.As mentioned throughout this section, our LTI program is designed to align the interests of the executives with our shareholders and therefore reward and incent superior performance. Since these awards are grants of restricted stock or RSUs (representing the right to receive shares of stock in the future), the actual value of our LTI awards (both time-vested and performance-based shares of restricted stock)performance-based) fluctuates with the change in stock price. In making LTI grants, our Committee typically approves a target LTI value and the actual number of shares or units in each grant is determined by dividing that target value by the volume-weighted average closing price of a share of our common stock over the15-trading-day period ending five trading days prior to the grant date (“VWAP”), rounding to the nearest whole share. The chart below reflects the VWAP used to calculate each of our 2015, 2016, 2017, and 20172018 LTI grants, the closing share price on any vesting dates that have occurred for each grant between the applicable grant date and the end of fiscal 2017,2018, and the change in value of a share of our common stock from the grant date VWAP to the last trading day of fiscal 2017.2018.
| 44 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
II. Our Compensation Philosophy and Linkage to Pay for Performance
Stock performance through December 31, 20172018
Grant Date | Grant Date Value of a Share (VWAP)(1) | Closing Share Price on First Vesting Date(2) | Closing Share Price on Second Vesting Date(2) | Closing Share Price on 12/29/17(3) | Closing Share Price on 12/29/17 as a percentage of Grant Date Value(4) | Grant Date Value of a Share (VWAP)(1) | Closing Share Price on First Vesting Date(2) | Closing Share Price on Second Vesting Date(2) | Closing Share Price on 12/31/18(3) | Closing Share Price on 12/31/18 as a percentage of Grant Date Value (4) | ||||||||||||||||||||||||||||||||||||||
02/23/15 | $ | 38.74 | $ | 29.25 | $ | 24.71 | $ | 16.68 | -57 | % | ||||||||||||||||||||||||||||||||||||||
02/23/16 | $ | 26.09 | $ | 24.71 | — | $ | 16.68 | -36 | % | $ | 26.09 | $ | 24.71 | $ | 18.21 | $ | 15.15 | -42 | % | |||||||||||||||||||||||||||||
02/21/17 | $ | 25.12 | — | — | $ | 16.68 | -34 | % | $ | 25.12 | $ | 17.90 | — | $ | 15.15 | -40 | % | |||||||||||||||||||||||||||||||
02/21/18 | $ | 17.29 | — | — | $ | 15.15 | -12 | % | ||||||||||||||||||||||||||||||||||||||||
| (1) | As noted above, we determine the number of restricted shares or RSUs in a given LTI grant |
| (2) | The vesting dates for the first two tranches of the February |
| (3) | Represents the closing price on the last trading day of fiscal |
| (4) | Represents the stock performance (based on the change in value, but disregarding dividends) of the |
Realizable Pay for our CEO. The.The chart below illustrates the realizable pay for 2015, 2016 and 2017 for our CEO, most of which was “at risk” variable compensation. We calculate realizable pay for a given year by adding together the (i) actual salary paid during the year, (ii) STI bonus that was ultimately paid out for performance during that year, (iii) the value of RSAstime- and PSAsperformance-based LTI grants that vested during the year and (iv) the value of RSAstime- and PSAsperformance-based LTI grants that are projected to vest based on actual performance through the end of the year, valuingyear. The value of the shares or units is based on the closing price of our common stock on the last business day of the year.
As this chart illustrates, our CEO’s realizable pay has averaged 55% over the last 3 years, specifically 49%, 57% and 58% of his total target compensation for years 2015, 2016 and 2017, respectively. The realizable pay for each pay element of pay that impacted our CEO’s realizable pay is discussed further above in this Subsection under the headings “— Short-Term Incentive Performance,” “— Long-Term Incentive Performance” and “Stock Performance.”CEO Realizable Pay
 | ||||
Note: Light Shade - Normal Course Dark Shade - One Time Awards | ||||
For 2018, Normal Course includes Mr. Storey’s salary, STI bonus, and other compensation as shown in the Summary Compensation Table, time- and performance-based LTI granted as part of his annual grant.One-time awards include the assumed Level 3 integration bonus that paid out in 2018, as well as both his time- and performance-based LTI granted as part of his promotion to CEO on May 23, 2018.
| 2019 Proxy Statement | 45 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
II. Our Compensation Philosophy and Linkage to Pay for Performance
Normal Course — 2018
Comp Component | Target | Realizable | ||||||
Base | $ | 1.68 | $ | 1.68 | ||||
STI | $ | 3.22 | $ | 3.54 | ||||
Annual LTI (TBRS) | $ | 5.04 | $ | 4.05 | ||||
Annual LTI (PBRS) | $ | 7.56 | $ | 3.03 | ||||
Other Comp | $ | 0.07 | $ | 0.07 | ||||
2018 Normal Course | $ | 17.57 | $ | 12.37 | ||||
One Time Items — 2018
Comp Component | Target | Realizable | ||||||
Final Installment — Initial Signing Bonus | $ | 3.30 | $ | 3.300 | ||||
Level 3 Retention Bonus | $ | 2.54 | $ | 2.540 | ||||
5/24/18 CEO promotion grant (TBRS) | $ | 2.96 | $ | 2.377 | ||||
5/24/18 CEO promotion grant (PBRS) | $ | 4.44 | $ | 6.417 | ||||
2018 One -Time Items | $ | 13.24 | $ | 14.64 | ||||
Overall 2018 | Target | Realizable | % of TGT | |||||||||
| $ | 30.81 | $ | 27.01 | 88 | % | |||||||
| 46 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
III. Our Compensation Program Objectives and Components of Pay
To assist us in achieving our broad compensation goals, we apply the following practices (many of which are described further elsewhere in this CD&A):
What We Do…
ü What We Do... | ü | Focus onperformance-based compensationweighted heavily towards long-term incentive awards |
| ü | Benchmark generally against |
| ü | Maintain robuststock ownership guidelines applicable to our executive officers and outside directors |
| ü | Annually review our compensation programs to avoid encouraging excessively risky behavior |
| ü | Conductannual“say-on-pay” votes |
| Seek input annually from shareholders on our executive compensation program |
| ü | Maintain a compensation |
| ü | Imposecompensation forfeiture covenants broader than those mandated by law |
| ü | Review the composition of ourpeer groups at least annually |
| ü | Conductindependent and intensive performance reviews of our senior officers |
| ü | Cap the number of relative TSR performance-based shares that may vest if our own TSR is negative | ||||
| ü | Review realizable pay of our senior officers and total compensation “tally” sheets |
| ü | Requireshareholders to approve any future severance agreements valued at more than 2.99 times the executive’s target cash compensation |
48
2015-2017 Realizable Pay 2015 Target Comp 2015 Realizable Pay 2016 Target Comp 2016 Realizable Pay 2017 Target Comp 2017 Realizable Pay Base Salary STI TBRS PBRS: Core Revenue PBRS: TSR Cash: Integration Award PBRS: Integration Award
What We Don’t Do…
× What We Don’t Do... | ||||||
| Maintain asupplemental executive retirement plan |
| × | Permit our directors or employees tohedge our stock, |
| × | Paydividends on unvested restricted stock |
| × | Permit the Committee’scompensation consultant to provide other services to CenturyLink |
| × | Pay, provide or permit: | ||||
| (i)excessive perquisites, |
| (ii)excise tax“gross-up” payments, or |
| (iii)single-trigger change of controlequity acceleration | |||||
| 2019 Proxy Statement | 47 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
Summary of 20172018 Compensation for our Named Executive Officers
TwoHistorically, we have had considerable success in attracting and retaining talent with fiscally prudent market-based pay packages. As our Company continues to evolve into a leading technology company, the pool of individuals that we compete to hire has severely constricted, making recruitment more challenging. The individuals in that limited candidate pool, who have unique talents and expertise, are able to command much higher levels of compensation than what we have paid historically. The resignation of Mr. Patel (discussed earlier)
illustrates the core principlesintense competition for talent that we face.
The remaining sections outline why we believe the compensation packages awarded to our executives are in the best interests of our compensation philosophy are to offer (i) competitive compensation to our named executive officers at the 50th percentile of market levels and (ii) an appropriate mix of fixed and variable compensation.
During 2017, the Committee assessed the adequacy of our executive compensation both before and after the Closing, usingpre- and post-combination benchmarking data, and took the following actions:
Each element of our 2017 compensation is discussed further below in this Subsection under the headings “— Salary,” “— Short-Term Incentive Bonuses,” “— Annual Grants of Long-Term Equity Incentive Compensation” and “— Awards Related to Level 3 Combination.” In each case,shareholders. For more information on how we determined specific pay levels is located in Subsection IV2018, see further discussion under the headingsheading “—Our Compensation Decision-Making Process” and “—Use of ‘Benchmarking’ Data — ‘Benchmarking Data—Compensation Benchmarking.” Compensation paid to Mr. Ewing, whose employment ended on November 17, 2017, is discussed further belowBenchmarking” in this Subsection underIV below.
As of December 31, 2018, the heading “— Compensation Paid tototal target compensation for our Former Executive Officer.”named executive officers was as follows.
Total Target Compensation(1) | ||||||||||||||||||||||||
Named Officer | Salary | STI Target Bonus Percentage | STI Target Bonus Opportunity | Total Target Cash | LTI Target(2) | Total Target Compensation | ||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||
Jeffrey K. Storey | $ | 1,800,011 | 200 | % | $ | 3,600,022 | $ | 5,400,034 | $ | 12,600,000 | $ | 18,000,034 | (3) | |||||||||||
Indraneel Dev | $ | 650,000 | 120 | % | $ | 780,000 | $ | 1,430,000 | $ | 2,700,000 | $ | 4,130,000 | (4) | |||||||||||
Stacey W. Goff | $ | 600,018 | 120 | % | $ | 720,021 | $ | 1,320,039 | $ | 2,000,000 | $ | 3,320,039 | (5) | |||||||||||
Scott A. Trezise | $ | 475,010 | 80 | % | $ | 380,008 | $ | 855,017 | $ | 700,000 | $ | 1,555,017 | (6) | |||||||||||
| (1) | For more complete information presented in accordance with the SEC’s rules, see the Summary Compensation Table appearing elsewhere herein. |
| (2) | The LTI target in this table represents the grant date fair value of the target levels of equity awards to be granted in 2019, which differ from amounts reported in the Summary Compensation Table, which are calculated in accordance with FASB ASC Topic 718. |
| (3) | The Total Target Compensation for Mr. Storey is slightly above the 50th percentile of our compensation benchmarking data. |
| (4) | The Total Target Compensation for Mr. Dev is between the 25th and 50th percentile of our compensation benchmarking data. |
| (5) | The Total Target Compensation for Mr. Goff is near the 50th percentile of our compensation benchmarking data. |
| (6) | The Total Target Compensation for Mr. Trezise is between the 25th and 50th percentile of our compensation benchmarking data. |
General.Early each year, the Committee takes a number of steps in connection with setting annual salaries, including reviewing compensation tally sheets and benchmarking data, reviewing each senior officer’s pay and performance relative to other senior officers, and considering when the officer last received a pay increase. More information on how we determined specific pay levels in 2017,2018, see further discussion under the heading “—Our Compensation Decision-Making Process” and “—Use of ‘Benchmarking’ Data — Data—Compensation Benchmarking” in Subsection IV below.
Annual Review Process (February 2017)2018). In.During its annual review of executive compensation in February 2017,2018, the Committee reviewedpre-combination the compensation benchmarking data for all executive officerseach senior
officer, comparing the officer’s pay to our peer group for the combined company. Following this review and awarded a salary increasediscussion, the Committee did not change the target total compensation for any of 10% for Mr. Hussainour senior officers. See further discussion under the heading “—Use of ‘Benchmarking’ Data—Compensation Benchmarking” in recognition of his performance and market position, and left unchanged the salary for our other named executive officers.Subsection IV below.
Mid-YearSalary Adjustments Effective upon Closing (November 1, 2017). After its annual review process, the Committee conducted an additionalupdated the compensation benchmarking assessment mid-year in anticipation of the Level 3 Combination. The Committee’s review of this data informedto inform its decisions with respect to initialthemid-year compensation arrangements for each of the two newly named executives (as memorialized in each officer’s offer letter) and also additional base salary increases for certain legacy named executives, allMr. Storey and Mr. Dev. Following the acceleration of which were contingent and effective upon the Closing. Effective upon Closing,our CEO succession plan, Mr. Storey was named PresidentCEO and COOPresident with an annual salary of $1,500,000$1,800,000 effective as of the promotion date of May 23, 2018.
| 48 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
Mr. Patel became ourDev, who was appointed to serve as Interim CFO upon Mr. Patel’s departure on September 21, 2018, was named Executive Vice President and CFO with an annual base salary of $750,000. In addition, the base salary of each of Messrs. Hussain and Goff was increased to $600,000$650,000 effective on the Closing.November 6, 2018.
Recent Actions (February 2019).In.In February 2018,2019, the Committee reviewed the updated compensation benchmarking data for all executive officers and increased Mr. Trezise’s annual salary to $500,011 and left unchanged the salary for our named executive officers.other NEOs. See further discussion under the heading “— Use“ —Use of ‘Benchmarking’ Data — Data—Compensation Benchmarking” in Subsection IV below.
General.With.With the assistance of its compensation consultant and management, the Committee approves STI bonus target percentages each year. Typically, in the first quarter of each year, with the assistance of management, the Committee evaluates our STI program and approves (i) the performance objectives for prospective bonuses, (ii) the “threshold,” “target” and “maximum” thresholdperformance levels, of performance, (iii) the weighting of the performance objectives, (iv) the amount of bonus payable if the target level of performance is attained and (v) the finally determined amount of bonus payments attributable to performance for the prior year. During 2017, the Committee took various actions to ensure that appropriate STI award opportunities were granted to (i) legacy named executives under CenturyLink programs covering the periods before and after the Level 3 Combination and (ii) Messrs. Storey and Patel under a legacy Level 3 bonus program for the two months following the Closing in which they served as members of our 2017 senior leadership team.
The table below summarizes the 2017 STI bonus opportunities for our named executive officers.
Named Officer | 2017 Salary(1) | x | Bonus Target%(2) | = | Target Bonus Opportunity | |||||||||||||||
Current Executives: | ||||||||||||||||||||
Glen F. Post, III | $ | 1,250,000 | 175 | % | $ | 2,187,500 | ||||||||||||||
Jeffrey K. Storey | 248,219 | 175 | % | 432,517 | ||||||||||||||||
Sunit S. Patel | 124,521 | 120 | % | 147,475 | ||||||||||||||||
Aamir Hussain | 550,699 | 103.6 | % | 570,755 | ||||||||||||||||
Stacey W. Goff | 550,662 | 111.8 | % | 615,756 | ||||||||||||||||
Former Executive: | ||||||||||||||||||||
R. Stewart Ewing, Jr. | 585,949 | 110 | % | 644,544 | ||||||||||||||||
STI Performance Objectives and TargetsTarget Setting Process.Each year, over the course of several meetings, the Committee reviews in detail the relevancealignment of our STI performance objectives for alignment with our business goals and objectives.objectives for the current year.
STI Performance Objectives. In March 2017,February 2018, the Committee reaffirmed its decision fromrevised the prior two yearsSTI performance objectives for our 2018 STI program, comprised of the below-listed financial and operational metrics, to offer STI bonuses for all senior officers based upon our attainment of consolidated operating cash flow and consolidated core revenue targets (collectively “financial performance objectives”). In addition,better align with the Committee added Customer Experience as an additional performance objectivecorporate strategy.
| ◾ | Adjusted EBITDA. As used in our 2018 STI plan, adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) is anon-GAAP measure that excludesnon-cash compensation and includes total STI bonus expense for eligible employees and approved payout level. Adjusted EBITDA is our largest financial performance objective, weighted at 65%, and, as noted further above, is critical to our 2018 corporate objective of focusing our operations on profitable growth. |
| ◾ | Free Cash Flow. Free Cash Flow is anon-GAAP measure of net cash from operating activities less capital expenditures and before dividends. Free Cash Flow performance similarly aligns with our 2018 corporate objective of focusing on profitable growth. |
| ◾ | Customer Experience. While we exceeded our Adjusted EBITDA target, this was mostly achieved through exceptional synergy achievements in 2018, of $850 million in the first year of integration, versus our target of achieving 80% of the $850 million over a three-year period, which overcame a decline in revenue of nearly $700 million in 2018 compared to pro forma 2017. Revenue growth was not a financial performance metric for our 2018 STI program but is important to our future and the Committee felt it was important to consider this and apply discretion. |
| ◾ | Individual Performance Objectives.The Committee evaluates the degree to which each senior officer achieves their individual performance objectives, comprised of certain specific objectives and benchmarks, as well as qualitative assessments of each officer’s performance during 2018 and reserves the right to increase or decrease the bonus payout level based on these assessments. Additional information about our views on discretionary adjustments is included below in this Subsection. |
See the further discussion under the heading “—Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives” in Subsection II above, “—2018 Performance Results and “— 2017 Performance Results”Calculation of Bonuses” below.
CenturyLink STI PlanTarget Setting Process. Similar to prior years, in 2018, the Company employed a rigorous process to establish its budget, which directly supported the Company’s strategic objectives and was the basis for developing the 2018 STI performance targets.
First, the annual budget was “built up” from business unit and department levels to create a consolidated corporate budget reviewed and approved by the Board and publicly-released financial guidance.
In March 2017,February 2018, the Committee approved a target level of 6% of operating cash flow return on average assets for purposes of fixing the maximum amount of potential annual bonuses for 2017 payable to our senior officers in accordance with Section 162(m) of the Internal Revenue Code (the “Code”).
In March 2017, the Committee also approvedpreviously-described STI performance objectives comprised ofincluding threshold, target, and maximum financial performance levels forpre-combination operating cash flowderived from the Board-approved budget and core revenues (weighted 85%) and certain specified operational performance metrics for measuring improvements in customer experience (weighted 15%). Immediately prior to the Level 3 Combination, the Committee approved similar financial performance targets for the combined company’s consolidated revenue and consolidated adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the post-combination portion of 2017 (weighted 85% for such period) and reaffirmed that operational performance metrics for customer experience would be weighted 15%.external guidance. The Committee further determined that actual STI bonuses paid to legacy CenturyLink officers for 2017 would be based on attainment of thesepre-combination and post-combination metrics, weighted in accordance with the proportionate length of each period.
If the threshold performance level with respect to any particular financial or operational performance objective under our STI program is not attained, the bonus payable to the participating officer with respect to that portion of his or her targeted bonus opportunity will be calculated to be zero. If threshold performance is met on
any particular metric, each participating officer will earn a reduced portion of his or her target bonus amount for that portion of the award. If the maximum performance level with respect to any particular metric is met or exceeded, each participating officer will earn 200% of his or her target bonus amount. Measurement of the attainment of any particular metric will be interpolated if actual performance is between (i) the “threshold” and the “target” performance levels or (ii) the “target” and the “maximum” performance levels.
In March 2017, the Committee, in collaboration with our CEO, also approved the above-described guidelines designed to enable the
| 2019 Proxy Statement | 49 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
Committee, in its discretion, to increase or decrease the bonus of each senior officer by up to 10%, based on the officer’s individual performance during 2017 with respect to (i) assisting the Company to meet its expense budget, (ii) exhibiting collaboration and leadership skills, (iii) attaining three to four specific individualized performance objectives and (iv) the officer’s individual assessment under our management performance rating system.2018.
Legacy Level 3 Discretionary Bonus Program.Given that the Level 3 Combination occurred very late in our fiscal year, the Committee agreed to determine bonuses payable to our newly named executives for thetwo-month period in which they were employed by CenturyLink using the same discretionary bonus program previously used by Level 3 for its executives. Under this program, the Committee would assess the performance of standalone Level 3 over thistwo-month period, measured against a variety of financial performance objectives. However, these objectives were not intended as specific targets and the Committee’s determination to pay a bonus under this program was entirely discretionary.
2017 Performance Results.In February 2018, the Committee reviewed audited results of the Company’s performance as compared to the financial performance targets established for 2017. As explained below, the Committee determined that the aggregate earned company performance was 73.0% of the target bonus for legacy named executives and 100% of the target bonus for our newly named executives.
CenturyLink STI Plan
|
|
Upon completion of each fiscal year, our actual operatingfinancial performance results may be adjusted up or down, as appropriate, in accordance with the Committee’s long-standing guidelines that are designed to eliminate the effects of extraordinary ornon-recurring transactions that were not known, anticipated or quantifiable on the date the performance goals were established. Consistent with these long-standing guidelines, theThe Committee made certaindid not make any adjustments to our actual operatingfinancial performance results for 2017, including adjustments2018.
2018 Performance Results and Calculation of Bonuses. During 2018, the Committee monitored
interim performance through quarterly updates to reflect the actual timing of the sale of our data center and colocation business.
Legacy Level 3 Discretionary Bonus Program
For thetwo-month discretionaryassess projected bonus program in which our newly named executives participated, when assessing our overall short-term incentive performance,payout levels. In February 2019, the Committee reviewed post-combinationaudited results of the Company’s performance as compared to the financial performance targets established for 2018 and certified the achieved company performance composite score. As explained below, the Committee determined that the adjusted company performance was 107.0% of the target bonus opportunity for our named executives.
The table below illustrates the weighting of each performance objective, the target and achieved performance for 2018. For a more detailed description of our performance under each of the performance objectives, please see “—Calculation of Bonuses” under this section
2018 STI Plan and Performance Results
Financial Performance Objectives (90% Weighting) | Weighted Score Achieved 122.7%(1) | |||||||||||||||||
Financial Targets ($ in Millions) | Threshold | Target | Maximum | Weighting | Achieved(1) | |||||||||||||
Adjusted EBITDA | $7,924 | $ | 8,804 | $ | 9,684 | 65 | % | $ | 9,040 | |||||||||
| 111.8 | % | |||||||||||||||||
Free Cash Flow | $2,891 | $ | 3,212 | $ | 3,533 | 25 | % | $ | 4,215 | |||||||||
| 200.0 | % | |||||||||||||||||
Customer Experience Performance (10% Weighting) | Weighted Score Achieved 7.5%(1) | |||||||||||||||||
Goals | Performance | Weighting | Achieved(2) | |||||||||||||||
Customer Experience | - Our overall customer satisfaction is not at our desired level but the Committee concluded that we made positive progress in 2018. Based on these results, the Committee awarded 75% for the customer experience performance objective. |
| 10% | 75.0% | ||||||||||||||
2018 Company Performance Composite Score | Achieved 130.2% (1) | |||||||||||
Committee Discretion on Performance | - After an assessment of the Company’s performance for 2018, the Committee determined it was appropriate to applyacross-the-board discretion to reduce the 2018 company composite score by 23.2% for all senior officers, resulting in an adjusted company performance payout of 107% | -23.2% (3) | ||||||||||
2018 Adjusted Company Performance | Payout 107% (1) | |||||||||||
| 50 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
| (1) | The achieved payout percentage is calculated for each financial performance objective based on a corresponding payout scale. If the threshold performance level with respect to any particular financial performance objective under our STI program is not attained, the bonus payable to the participating officer with respect to that portion of his or her targeted bonus opportunity will be calculated as zero. If threshold performance is met on any particular metric, each participating officer will earn a reduced portion of his or her target bonus amount for that portion of the award. If the maximum performance level with respect to any particular metric is met or exceeded, each participating officer will earn 200% of his or her target bonus amount. Measurement of the attainment of any particular metric will be interpolated if actual performance is between (i) the “threshold” and the “target” performance levels or (ii) the “target” and the “maximum” performance levels. |
| (2) | The achieved payout percentage is determined based on the Committee’s qualitative review of certain criteria and performance metrics, as described under “Customer Experience Performance” below. |
| (3) | The Committee’s decision to exercise this discretion was based on its review of other criteria as described under “Committee Discretion on Performance” below. |
Customer Experience Performance. Our overall customer satisfaction is not at our desired level and we fell short of our provisioning, customer satisfaction and service levels for our Business segment. However, we saw positive trends for our Consumer segment in 2018. Additionally, we completed several initiatives as part of our transformation that we believe will drive improved customer experience in future years, which included a refreshed global marketing campaign, the launch of Cloud Connect Dynamic Connections and self-service capabilities to expand the digital experience for our customers. As a result of these results, the Committee awarded 75% for the customer experience performance objective.
Committee Discretion on Company-Wide Performance. The Committee believes that exercising discretion (positive and negative) is an important supplemental component of ourpay-for-performance philosophy, which is designed to reach balanced compensation decisions that are consistent with our strategy and reward our executives for both current year performance and sustained long-term value creation. By applying discretion, the Committee seeks to mitigate the risks associated with a rigid and strictly formulaic compensation program, which could unintentionally create incentives for our executives to focus only on certain performance metrics, encourage imprudent risk taking, and not provide the best results for shareholders. In addition, the use of discretion allows the Committee to respond to changes in economic conditions, our operating environment, and other significant factors that may affect the long-term performance of our business that are not directly reflected in the year’s financial results. The use of discretion also allows the Committee to adjust compensation based on factors that would not be appropriately reflected by a strictly formulaic approach, such as reducing risk or championing company values. Notwithstanding the foregoing, the
Committee firmly believes that quantitative factors should play the central role in determining performance-based payouts, and that positive discretionary adjustments should be used sparingly.
For 2018, the Committee elected to use its discretion to reduce the actual payouts by 23.2%, after considering our company-wide performance for revenue and Free Cash Flow as described further below:
| ◾ | While we exceeded our Adjusted EBITDA target, by achieving the originally projected annualizedrun-rate Adjusted EBITDA synergy savings of $850 million related to the acquisition of Level 3 as of the end of 2018, which was approximately two years earlier than expected, we fell short of our internal expectations for revenue. Revenue was not a financial performance metric for our 2018 STI program, but is important to our future and the Committee felt it was important to consider this and apply discretion. |
| ◾ | For similar reasons, we thought it appropriate to apply discretion regarding our Free Cash Flow performance. While our Free Cash Flow for 2018 was well in excess of our target, it also benefitted from strong synergy savings. In addition, in 2018, we achieved positive Free Cash Flow from lower capital expenditure spending and the benefit of the receipt of large tax refunds partially offset by incremental pension funding. |
Discretionary Adjustment for Individual Performance. For 2018, the Committee elected to make individual performance adjustments for four of our named executive officers as discussed below.
The Committee discussed at great length the financial accomplishments achieved in 2018, including Adjusted EBITDA and Free Cash Flow results above raised guidance outlook and internal targets and performanceplaced emphasis on achieving targeted $850 million of annualizedrun-rate Adjusted EBITDA
| 2019 Proxy Statement | 51 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
synergies in approximately one year, rather than 80% in three years as initially projected. As a result of these achievements, the Committee rewarded Mr. Storey with a 110% discretionary adjustment for stand-alonehis individual performance. Mr. Dev’s leadership and fiscal oversight was pivotal to achievement of annualizedrun-rate Adjusted EBITDA synergy savings ahead of schedule, positive capital management and Free Cash Flow results above guidance. In consideration of these achievements, the Committee rewarded him with a 115% discretionary adjustment for individual performance. Mr. Goff exceeded expectations through the long-term corporate strategy for the Level 3 Combination as well as strong management of complex legal issues and the Committee rewarded him with a 110% discretionary adjustment for individual performance. Mr. Trezise exceeded expectations for the Human Resources related integration work, specifically the organization design and talent assessment process, integration and harmonization of compensation structure and programs, shaping the culture for the combined company and increasing employee
engagement. Based on these achievements, the Committee rewarded Mr. Trezise with a 115% discretionary adjustment for individual performance.
Calculation of Bonuses. For 2018, the STI bonuses paid to our named executives were calculated under atwo-step process.
In step one, the Committee calculated the company performance composite score by weighting the company’s achieved performance against the financial and operational performance objectives.
Calculation of Bonuses under the CenturyLink STI Plan. For 2017, the STI bonus payments were calculated using the performance objectives payout scale, and other criteria approved by the Committeedescribed in the first quarter of the year and immediately prior to Closing.table above. After our internal audit personnel have reviewed these determinations and calculations, they are provided in writing to the Committee for its review and approval.
The 2017 bonuses paid to our named executives were calculated under a three-step process. In step one, the Committee determined that we had exceeded our Section 162(m) target of operating cash flow return on average assets and, therefore, each of our legacy named executives qualified for potential annual bonuses up to a fixed maximum amount defined as a percentage of the executive’s 2017 salary. In step two, the Committee calculated bonuses by measuring the company’s performance against the financial and operational performance objectives described above under the heading “— 2017 Performance Results.” In step three, the Committee authorized actual STI bonuses for our legacy named executives, which were substantially lower than the maximum potential bonuses calculated in step one. For 2017 awards, no named executive officer received aconsistent with Committee approved company payout level, which includes discretion on performance and certain discretionary adjustmentadjustments for individual performance.performance as discussed above.
Determination of Bonuses for Newly Named Executives. In making its discretionary determination to authorize bonus payments for the last two months of 2017 to Messers. Patel and Storey at 100% of their target bonus opportunity, the Committee took into account Level 3’s financial performance described above under the heading “— 2017 Performance Results”.
Actual STI Bonus Amounts Authorized.The actual amounts of the named executive officers’ 20172018 bonuses were calculated as follows:
2018 STI Bonus Amounts | 2018 STI Bonus Amounts | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Named Officer | Target Bonus Opportunity(1) | x | Earned Company Performance %(2) | + | Discretionary Adjustment for Individual Performance(3) | = | Bonus(4) | Target Bonus Opportunity(1) | X | Adjusted Company Performance %(2) | X | Discretionary Adjustment for Individual Performance(3) | = | STI Bonus Amount | ||||||||||||||||||||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey K. Storey | $ | 3,220,707 | 107 | % | 110 | % | $ | 3,790,772 | ||||||||||||||||||||||||||||||||||||||||||||||||
Indraneel Dev | 356,300 | 107 | % | 115 | % | 438,427 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Stacey W. Goff | 720,021 | 107 | % | 110 | % | 847,465 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Scott A. Trezise | 380,008 | 107 | % | 115 | % | 467,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Former Executives: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Glen F. Post, III | $ | 2,187,500 | 73 | % | $ | 0 | $ | 1,596,675 | 857,021 | 107 | % | 100 | % | 917,012 | ||||||||||||||||||||||||||||||||||||||||||
Jeffrey K. Storey | 432,517 | 100 | % | 0 | 432,517 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Aamir Hussain | 611,525 | 107 | % | 100 | % | 654,332 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Sunit S. Patel | 147,475 | 100 | % | 0 | 147,475 | 0 | — | — | 0 | |||||||||||||||||||||||||||||||||||||||||||||||
Aamir Hussain | 570,755 | 73 | % | 0 | 416,651 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stacey W. Goff | 615,756 | 73 | % | 0 | 449,502 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
R. Stewart Ewing, Jr. | 644,544 | 73 | % | 0 | 470,517 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | Determined |
| a) | Target Bonus Opportunity for Mr. Storey reflects his salary earned during 2018 with a salary increase, from $1,500,013 to $1,800,011, effective on May 23, 2018, and an increase of STI target bonus percentage from 175% to 200%, also effective on May 23, 2018. |
| b) | Target Bonus Opportunity for Mr. Dev reflects his salary earned during 2018 with a salary increase, from $430,019 to $650,000, effective on November 6, 2018, and an increase of STI target bonus percentage from 65% to 120%, also effective on November 6, 2018. |
| c) | Target Bonus Opportunity for Mr. Goff reflects his salary earned during 2018 of $600,018 and an STI target bonus percentage of 120%. |
| 52 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
| d) | Target Bonus Opportunity for Mr. Trezise reflects his salary earned during 2018 of $475,010 and an STI target bonus percentage of 80%. |
| e) | Target Bonus Opportunity for Mr. Post is the portion of his annual salary of $489,726 that he earned through his retirement date of May 23, 2018 and an STI target bonus percentage of 175%. |
| f) | Target Bonus Opportunity for Mr. Hussain is the portion of his annual salary of $509,604 that he earned through his termination date of November 6, 2018 and an STI target bonus percentage of 120%. |
| g) | Mr. Patel resigned on September 28, 2018 and therefore did not receive a 2018 STI bonus. |
| (2) | Calculated or determined as discussed above under “— |
| (3) | Determined based on achievement of individual performance objectives as described further above in this Subsection. |
Committee Discretion to Pay in Cash or Shares.As noted above, for the CenturyLink STI Plan, we exceeded our target for our 162(m) objectives which set the maximum 2017 bonuses payable to each of our senior officers. The Committee maintains the discretion, subject to certain limits, to either increase or decrease the bonus amounts determined on the basis of actual performance earned for financial and individual targets and objectives. The actual performance earned onpre- and post-combination targets ranged from 71.5% to 73.7%. For the sake of administrative ease, the Committee elected to apply minimal discretionary adjustments and payout the 2017 annual incentive bonus payments at 73% for each of our legacy named executives.
The.The Committee may authorize the payment of annual bonuses in cash or shares of common stock. Since 2000, the Committee has paid these bonuses entirely in cash, principally to diversify our compensation mix and to conserve shares in our equity plans.
Recent ActionsFinal Installments of Cash Bonuses Related to Level 3 Combination.Effective January As disclosed in our 2018 proxy statement, prior to the Closing, Level 3 implemented certain retention programs in order to address its own transaction-related incentive and retentive concerns. The majority of these awards were paid out by Level 3 upon Closing. However, at the Closing, we assumed any unpaid balances of those cash awards, which were to be paid out over theone-year period following the Closing, and for which payout was contingent on the executive’s continued employment through the payment date. Specifically, each of Messrs. Storey, Dev, and Patel received payments in 2018 under this assumed retention bonus program (totaling $2,542,000, $227,027, and $1,214,500, respectively), although Mr. Patel forfeited an additional payment of $214,500 as he was not employed with us on November 1, 2018, our newly named executives participate2018. In addition, in Mr. Storey’s original offer letter, which was effective at the Closing, we agreed to pay him a cash signing bonus, with payment ofone-half of that bonus deferred until the first anniversary of the Closing and contingent upon his continuous employment with us through that date. Under that arrangement, Mr. Storey received a cash payment of $3,300,000. All of these amounts are reported in the CenturyLink STI program with our legacy named executives.“Bonus” column of the Summary Compensation Table.
Recent Actions (February 2019). In connection with establishing targets for the 20182019 STI program, the Committee increased Mr. Trezise’s STI Target Bonus Percentage to 90% and made no changes to the target bonus percentage for any of our named executives. However,other NEOs and kept the Committee revised the financialsame overall design and operationalweighting of performance objectives used in theas our 2018 STI program, including the weighting of the various metrics, in order to better align the program with the business strategies and goals of the combined company going forward.plan.
Annual Grants of Long-Term Incentive Compensation
General.Our.Our long-term incentive compensation plans authorize the Committee to grant a variety of stock-based incentive awards to key personnel. We strive to provide equity compensation in forms that (1) create appropriate incentives to optimize performance at reasonable cost, that(2) minimize enterprise risk, that(3) align the interests of our officers and shareholders, that(4) foster our long-term financial and strategic objectives and that(5) are competitive with incentives offered by other companies.
For the last teneleven years, the Committee has elected to grant all of our LTI awards in the form of restricted stock (and, in limited situations, in restricted stock units or RSUs) for a variety of reasons, including:
| ◾ | the Committee’s recognition of the prevalent use of restricted stock by our peers, |
| ◾ | the Committee’s desire to minimize the dilution associated with our LTI awards, and |
| ◾ | the retentive value of restricted stock under varying market conditions. |
Consistent with thispast practice, in February 2017,2018, the Committee granted 60% of our legacy named executives’senior officers’ target LTI in the form of performance-based shares of restricted stock, which is ultimately payable only if we attain certain specified goals. The remaining 40% of each legacy named executive’sof our senior officer’s LTI award was granted in the form of time-vested shares of restricted stock, the value of which is dependent on our performance over an extended vesting period. Due to the unique vesting acceleration provisions of Mr. Storey’s annual LTI awards, Mr. Storey received his 2018 annual LTI grant in the form of RSUs rather than shares of restricted stock.
Generally, our equity awards accelerate upon death and disability. The Committee has the discretion to accelerate outstanding equity awards following a retirement ornot-for-cause termination. Following achange-in-control of the Company, outstanding equity awards would accelerate only after a double-
| 2019 Proxy Statement | 53 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
trigger termination. As part of Mr. Storey’s amended and restated offer letter, he is entitled to acceleration of certain awards, subject to certain length of service and notice period requirements. For more information, please see “Potential Payments upon Termination or a Change of Control.”
Performance Benchmarks2018 Annual LTI Grants.On an annual basis, the Committee evaluates our LTI program and reviews the relevance of our performance benchmarks for alignment with our long-term strategic plan. In connection with making
As a result of the transformative effects of the Level 3 Combination on the Company’s long-term strategies, the Committee revised the performance benchmarks for our 2018 annual LTI grants to our legacy named executivesfrom those used in February 2017, the Committee elected to keep the same two performance benchmarks, relative TSRprior years. The 2018 performance-based LTI grants are described in further detail below and absolute revenue, that we used for performance-based restricted shares granted in the last few years. See further discussion under the heading “—Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives” in Subsection II above.
An overviewOur 2018 LTI program and grants for our senior officers consisted of ourTSR40% in time-vested restricted shares or RSUs and 60% in performance-based restricted shares granted or RSUs measured on an absolute Adjusted EBITDA growth run rateperformance
benchmark, which is described in early 2017 is outlined below.further detail below:
| Performance Benchmark:Our benchmark is |
| Performance Period:January 1, |
| Performance Vesting: The ultimate number of |
Performance Level | Adjusted EBITDA Growth Run Rate(1) | Payout as % of Target Award(2) | ||||||
Maximum | ³ 8.2 | % | 200 | % | ||||
Target | 6.8 | % | 100 | % | ||||
Threshold | 5.5 | % | 50 | % | ||||
Below Threshold | < 5.5 | % | 0 | % | ||||
| (1) | ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
Linear interpolation is used when our |
An overview
| ◾ | Vesting Dates:One-half of the restricted shares or RSUs earned under these performance-based LTI grants will vest ontwo-year anniversary of the grant date with the remainder vesting on three-year anniversary of the grant date, subject to continued employment through the applicable vesting date. |
Except for Mr. Storey, the Committee granted annual LTI awards to our named executives in February 2018 at amounts substantially similar to the awards granted to them in 2017.
As previously disclosed, the Committee granted Mr. Storey’s annual LTI award in May 2018 at an amount commensurate with market benchmarking for CEOs and on substantially the same terms as annual LTI awards to the rest of ourabsolute revenue senior officers. When we retained Mr. Storey on November 1, 2017 as our Chief Operating Officer, we granted him asign-on LTI award (60% performance-based, 40% time-based) with the mutual expectation of next granting him an annual LTI award in 2019 after he assumed
| 54 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
the CEO position on December 31, 2018 under our original CEO succession plan. When we accelerated our CEO succession plan by approximately seven months, however, the Committee determined that it was appropriate and, in the Company’s best interest,
to incentivize Mr. Storey with an equity grant extending further into the future and with a comprehensive pay package commensurate with his expanded responsibilities.
In 2018, the Committee granted our named executives the following number of (i) restricted shares or RSUs that will vest over a three-year period principally in exchange for continued service (“time-vested restricted shares or RSUs”), (ii) performance-based restricted shares or RSUs that will vest in two equal installments on February 21 of each of 2020 and 2021 based on attainment during the period beginning on January 1, 2018 and ending on December 31, 2019 (the “Performance Period”) of an Adjusted EBITDA growth run rate of 6.8% (the “Performance-Vested Shares or RSUs”), as described further above:
2018 Annual LTI Grants (Excluding Special Grants) | ||||||||||||||||||||
Named Officer | Time-vested Restricted Shares or RSUs | Performance-based Restricted Shares or RSUs | ||||||||||||||||||
| No. of Shares(1)(3) | Fair Value(1) | No. of Shares(2)(3) | Fair Value(4) | Total Fair Value(4) | ||||||||||||||||
Current Executives: | ||||||||||||||||||||
Jeffrey K. Storey(5) |
| 267,103 |
| $ | 5,040,000 |
|
| 400,655 |
| $ | 7,560,000 |
| $ | 12,600,000 |
| |||||
Indraneel Dev(6) |
| 19,777 |
|
| 342,732 |
|
| 19,777 |
|
| 342,732 |
|
| 685,464 |
| |||||
Stacey W. Goff |
| 46,265 |
|
| 800,000 |
|
| 69,399 |
|
| 1,200,000 |
|
| 2,000,000 |
| |||||
Scott A. Trezise |
| 16,193 |
|
| 280,000 |
|
| 24,290 |
|
| 420,000 |
|
| 700,000 |
| |||||
Former Executives: | ||||||||||||||||||||
Glen F. Post, III(7) |
| 196,629 |
|
| 3,400,000 |
|
| 294,945 |
|
| 5,100,000 |
|
| 8,500,000 |
| |||||
Sunit. S. Patel(8) |
| 69,398 |
|
| 1,200,000 |
|
| 104,099 |
|
| 1,800,000 |
|
| 3,000,000 |
| |||||
Aamir Hussain(9) |
| 62,458 |
|
| 360,000 |
|
| 93,689 |
|
| 810,000 |
|
| 2,700,000 |
| |||||
| (1) | Represents the number of restricted shares or RSUs granted in 2018. |
| (2) | As discussed further above, the actual number of shares that vest in the future may be lower or higher, depending on the level of performance achieved. |
| (3) | Dividends on the shares of restricted stock (or, with respect to RSUs, dividend equivalents) will not be paid currently, but will accrue and vest or be forfeited in tandem with the related shares or RSUs. |
| (4) | For purposes of these grants, we determined both the number of time-vested and performance-based restricted shares or RSUs by dividing the total fair value granted to the executive by the volume-weighted average closing price of a share of our common stock over the15-trading-day period ending five trading days prior to the grant date (“VWAP”), rounding to the nearest whole share. However, as noted previously, for purposes of reporting these awards in the Summary Compensation Table, our shares of time-vested restricted stock or RSUs are valued based on the closing price of our common stock on the date of grant and our shares of performance-based restricted stock or RSUs are valued as of the grant date based on probable outcomes, as required by applicable accounting and SEC disclosure rules. See footnote 2 to the Summary Compensation Table for more information. |
| (5) | Mr. Storey’s annual grant was in the form of RSUs. |
| (6) | Mr. Dev’s grant value based on his role prior to assuming CFO, and he received his fair value in 50% time-vested and 50% performance-based restricted shares, consistent with other participants at that executive level (compared to 40% and 60% respectively for our senior officers). |
| (7) | Mr. Post forfeitedone-half of these restricted shares upon his retirement in May 2018. |
| (8) | Mr. Patel forfeited all of these restricted shares upon his resignation in September 2018. |
| (9) | Mr. Hussain forfeited all of these restricted shares upon his termination in November 2018. |
| 2019 Proxy Statement | 55 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
Recent Actions (February 2019). At its February 2019 meeting, the Committee granted LTI awards to our senior officers with the same mix of 60% performance-based and 40% time-vested restricted stock awards or RSUs and based on similar performance goal of Adjusted EBITDA growth run rate with atwo-year performance period that will vest over three years. Mr. Dev’s 2019 LTI target was increased to $2,700,000, as previously approved by the Committee upon his promotion to CFO in November 2018. The Committee reviewed the compensation benchmarking data for all executive officers and increased Mr. Trezise’s LTI target to $800,000 and left unchanged the LTI target for our other NEOs. See further discussion under the heading “ —Use of Benchmarking Data—Compensation Benchmarking” in Subsection IV below.
Performance-Based Portion of Initial LTI Grants Awarded in 2017. grantedAs disclosed in early 2017our 2018 proxy statement, we awarded each of Messrs. Storey and Patel certain LTI grants at the Closing (late 2017). However, the Committee did not finalize the terms and conditions of the performance-based portion of these awards until February 2018. Consequently, as the SEC disclosure rules on reporting compensation generally follow the accounting rules, the performance-based portion of those LTI grants were not reported as compensation in the Summary Compensation Table or any of the other compensation tables in last year’s proxy statement but rather are reported as 2018 compensation in this proxy statement. Vesting of these initial grants to each of Messrs. Storey and Patel were contingent upon our performance as measured against an Adjusted EBITDA run rate target over a specified period (one year, for Mr. Storey, and two years, for Mr. Patel), with the number of shares earned ranging between0-200% of target shares granted. Additional details regarding these awards was disclosed in our 2018 proxy statement.
With respect to the performance-based portion of Mr. Storey’s initial LTI award, following the end of 2018, the Committee determined that our actual Adjusted EBITDA run rate was 4.8%, exceeding the maximum of 4.6%, and therefore this award would pay out at 200%. See further discussion under the heading, “—Long-Term Incentive Performance” in Subsection II. With respect to Mr. Patel’s initial LTI award, the entirety of it (both time- and performance-based portions) were forfeited upon his resignation
effective September 28, 2018. For more information, see “—Compensation Forfeited by our Former CFO” below.
Promotion Grant for Mr. Storey. We believe that, in most cases, a new CEO has the greatest impact on a company during the first few years of his or her service. As such, our Board and Committee felt it was important to retain and adequately incentivize him during this critical period, in part through the use of aone-time promotion grant. The Committee also considered Mr. Storey’s request for a promotion grant, recenton-boarding pay packages for other CEOs, and the views of certain shareholders about the critical importance of retaining Mr. Storey (summarized above in Subsection I). Based on these and other factors, the Committee concluded that it was in the Company’s best interest to offer a promotion grant that was highly performance-based. See further discussion under the heading “—Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives” in Subsection II above.
In May 2018, the Committee approved aone-time promotion grant with a grant date value of $7,400,000, which consisted of 60% performance-vested restricted stock and 40% time-based restricted stock. Vesting of the PBRS shares is outlined below.contingent upon achievement of athree-year cumulative Adjusted EBITDA target and relative total shareholder return (TSR)performance benchmark, each of which is described in further detail below:
| ◾ | Performance Benchmarks:As described further under “performance vesting” below, ourtwo-step process utilizes two performance benchmarks in order to determine the ultimate payout. |
Absolute Cumulative Adjusted EBITDA:Our first benchmark is an absolute |
| 56 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
| synergy savings, exclusion of stock based compensation, adjustments to reflect a 100% bonus accrual for the given quarter, and adjustments to excludeone-time ornon-recurring charges or credits), in each case defined |
| Relative TSR:Our second benchmark is our percentile rank versus the Company TSR peer group. See further discussion under the heading “ —Use of ‘Benchmarking’ Data—Performance Benchmarking” in Subsection IV below. |
| ◾ | Performance Period:January 1, |
| Performance Vesting: The ultimate number of our |
Step 1—Absolute Cumulative Adjusted EBITDA:
| ◾ | From 0% to 100% of the target number of performance-based restricted shares may be |
earned based on cumulative Adjusted EBITDA for the three-year performance period. |
Step 2—Relative TSR:
| ◾ | Provided that the cumulative Adjusted EBITDA target is met or exceeded, Mr. Storey has an opportunity to earn between 100% to 200% of the target number of performance-based restricted shares based on CenturyLink’s TSR performance for the three-year performance period relative to the Company TSR peer group. No additional incremental payout under Step 2 is possible unless (1) the cumulative Adjusted EBITDA target is met or exceeded and (2) CenturyLink’s TSR performance exceeds the 50th percentile. |
| ◾ | Vesting Dates: The ultimate number of our |
Absolute Revenue | ||||||||
Performance Level | Company’s Performance(1) | Payout as % of Target Award(2) | ||||||
Maximum | ³ 103.5% | 200% | ||||||
Target | 100.0% | 100% | ||||||
Threshold | 96.5% | 50% | ||||||
Below Threshold | < 96.5% | 0% | ||||||
Performance Achievement Level | Step 1: Absolute Cumulative | Step 2: Relative TSR | Payout as % of Target | |||
Maximum | N/A | 75th Percentile | 200% | |||
Stretch | N/A | 63rd Percentile | 152% | |||
Slightly Above Target | N/A | 51st Percentile | 104% | |||
Target | Target Amount(2) | N/A | 100% | |||
Threshold | Threshold Amount | N/A | 50% | |||
Below Threshold | < Threshold | N/A | 0% | |||
| (1) | Payouts interpolated between defined performance levels / minimum, target and maximum levels. |
| (2) | To further align this grant with our shareholders’ best interests, we set the |
Special Award for Mr. Patel.As a highly-negotiated component of the Level 3 Combination, Mr. Patel replaced Mr. Ewing as our CFO effective November 1, 2017. For further information, see our 2018 proxy statement.
Mr. Patel is a highly-regarded CFO who was periodically recruited by other companies. In early 2018, the Company became concerned that he was
a retention risk. In June 2018, the Committee, in consultation with members of management, other members of the Board, and its compensation consultant, took two compensation actions to address this retention concern:
| ◾ | First, the Committee approved an increase to his LTI target from $3,000,000 to $4,000,000, effective in 2019 as part of |
| 2019 Proxy Statement | 57 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
| ◾ | Second, in order to further align Mr. Patel’s interests with those of our |
Despite our best efforts, in September 2018, Mr. Patel resigned to pursue other opportunities.
Upon his resignation, Mr. Patel forfeited this $2,000,000 retention award, his 2018 annual LTI grant (which had a grant date value of $3,000,000), and all other unvested LTI grants. In addition, he did not receive any STI bonus for 2018. However, under the terms of his April 2017 offer letter, Mr. Patel is entitled to receive certain deferred compensation payments related to legacy Level 3 equity awards that were outstanding and converted at the Closing. For additionalmore information, on the above-described grants,please see “Executive Compensation — Incentive Compensation and Other Awards.”further discussion “— Deferred Compensation”.
2017 Annual LTI GrantsCEO Top Talent Award for Mr. Dev.Following its deliberations in February 2017, the Committee formally approved an increase in target annual LTI compensation for Mr. Hussain to $1,600,000. This increase was primarily the result In August of the Committee’s recognition of Mr. Hussain’s overall leadership and performance demonstrated in 2016, but also reflected the Committee’s review of compensation benchmarking. See further discussion under the heading “— Use of ‘Benchmarking’ Data — Performance Benchmarking” in Subsection IV below. During 2017,2018, the Committee granted annual LTIa limited number of performance-based equity awards to retain certain key employees(non-Senior Officers) who are essential to executing our other legacy named executives on termslong-term strategy. Prior to his appointment as an executive officer, Mr. Dev received one of these special performance-based equity awards. This award is divided into two equal tranches, with payout under each tranche ranging from 0 to 200% depending upon our achievement against atwo-year Adjusted EBITDA run rate target. The first tranche is defined and calculated in amounts substantially similarthe same manner as the performance-based portion of our 2018 annual grants and the performance period covers fiscal years 2018 and 2019, while the second tranche is defined in the same manner as the performance-based portion of our 2019 annual grants and covers fiscal years 2019 and 2020. In addition to the awards granted to them in 2016.
In February 2017,performance condition, the Committee granted to each of our legacy named executivesemployee must be continuously employed with us through the following number of (i) restricted shares that will vest over a three-year period principally in exchangeapplicable vesting date (February 28, 2020 for continued service (“time-vested restricted shares”), (ii) performance-based restricted shares that will vest in February 2020 based on our relative total shareholder return (the “TSR performance-based restricted shares”)the first tranche and (iii) performance-based restricted shares that will vest in February 2020 principally based on our attainment of absolute revenue targets overAugust 7, 2021 for the above-described three-year performance period (the “absolute revenue performance-based restricted shares”):
2017 Annual LTI Grants (Excluding Special Grants)second tranche).
| Performance-Based Restricted Shares | ||||||||||||||||||||||||
Named Officer |
Time-vested Restricted | No. of TSR Performance- Based Restricted Shares(2) | No. of Absolute Revenue Performance- Based Restricted Shares(2) | Fair Value(1) | Total Fair Value(1) | |||||||||||||||||||
| No. of Shares | Fair Value(1) | |||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||
Glen F. Post, III | 135,361 | $ | 3,400,000 | 101,521 | 101,522 | $ | 5,100,000 | $ | 8,500,000 | |||||||||||||||
Aamir Hussain | 25,480 | 640,000 | 19,110 | 19,110 | 960,000 | 1,600,000 | ||||||||||||||||||
Stacey W. Goff | 20,065 | 504,000 | 15,049 | 15,049 | 756,000 | 1,260,000 | ||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||
R. Stewart Ewing, Jr. | 24,842 | 624,000 | 18,632 | 18,633 | 936,000 | 1,560,000 | ||||||||||||||||||
| Special LTI Grants | ||||||||||||||||||||||||||||
Named Officer | Award Date | Accounting Grant Date | Time-vested Restricted Shares | Performance-based Restricted Shares | ||||||||||||||||||||||||
| No. of Shares(1)(2) | Fair Value(3) | No. of Shares(4)(2) | Fair Value(3) | Total Fair Value(3) | ||||||||||||||||||||||||
Current Executive: | ||||||||||||||||||||||||||||
Jeffrey K. Storey | ||||||||||||||||||||||||||||
Initial PBRS Grant(5) | 11/1/2017 | 2/21/2018 | — | — | 325,554 | $ | 6,281,400 | $ | 6,281,400 | |||||||||||||||||||
CEO Promotion Grant | 5/24/2018 | 5/24/2018 | 156,870 | $ | 2,960,000 | 235,306 | 4,440,000 | 7,400,000 | ||||||||||||||||||||
Indraneel Dev(6) | 8/7/2018 | 8/7/2018 | — | — | 45,063 | 860,038 | 860,038 | |||||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||||||
Sunit. S. Patel | ||||||||||||||||||||||||||||
Initial PBRS Grant(5) | 11/1/2017 | 2/21/2018 | — | — | 38,871 | 750,000 | 750,000 | |||||||||||||||||||||
Special Retention Grant | 6/1/2018 | 6/1/2018 | — | — | 104,976 | 2,000,000 | 2,000,000 | |||||||||||||||||||||
| (1) | Represents the number of restricted shares granted in 2018 pursuant to special grants. |
| (2) | Dividends on the shares of restricted stock will not be paid currently, but will accrue and vest or be forfeited in tandem with the related shares. |
| (3) | For purposes of these grants, we determined both the number of time-vested and performance-based restricted shares by dividing the total fair value granted to the executive by the volume-weighted average closing price of a share of our common stock over the15-trading-day period ending five trading days prior to the grant date (“VWAP”), rounding to the nearest whole share. However, as noted previously, for purposes of reporting these awards in the Summary Compensation Table, our shares of time-vested restricted stock are valued based on the closing price of our common stock on the date of grant and our shares of performance-based restricted stock are valued as of the grant date based on probable outcomes, as required by applicable accounting and SEC disclosure rules. See footnote 2 to the Summary Compensation Table for more information. Mr. Patel forfeited all of these restricted shares upon his resignation in September 2018. |
Represents the number of restricted shares granted in |
| (5) | As disclosed above and in our 2018 proxy statement, these grants were part of the officer’s initial LTI grant at the Closing but were not reported as 2017 compensation given that the accounting grant date did not occur until early 2018. With respect to Mr. Patel’s award, all of these shares were forfeited upon his resignation in September 2018. |
| (6) | As noted above, this equity award was granted to Mr. Dev prior to his appointment as an executive officer. |
Recent Actions.At its February 2018 meeting, the Committee granted LTI awards to our senior officers with a similar mix of 60% performance-based and 40% time-vested restricted stock awards. However, the performance measure and performance period were changed to an adjusted EBITDA run rate for atwo-year period that will vest over three years. For each of our named executives, other than Mr. Storey, the Committee elected to grant equity awards at levels based on the compensation benchmarking conducted in the summer of 2017 for the post-transaction combined company. Mr. Storey did not receive an award in February 2018, as his employment offer letter provides that he is not eligible to receive another LTI grant until February 2019 (at which time his target LTI value will be no less than $8,375,000). See further discussion under the heading “—Use of ‘Benchmarking’ Data — Compensation Benchmarking” in Subsection IV below.
In connection with the announcement of Mr. Post’s decision to retire at the meeting, the Committee authorized (i) the vesting upon retirement of half of Mr. Post’s 2018 time-vested restricted shares, (ii) Mr. Post’s retention of half of his 2018 performance-based restricted shares subject to their original performance conditions and (iii) the vesting upon retirement of the equity portion of Mr. Post’s 2017 special integration award at a 100% payout rate. The Committee also authorized Mr. Post to receive full vesting of all time-vested restricted shares
| 58 | 2019 Proxy Statement | | |||||
granted to him before 2018COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and to retain, subject to their original performance conditions, all performance-based restricted shares granted to him before 2018.Components of Pay
Awards Related to Level 3 Combination
Special Awards to Legacy Named Executives.Given the recruitment, retention and motivational challenges inherent in undertaking a transaction as complicated as the Level 3 Combination, in June of 2017, the Committee, with the assistance of its compensation consultant and management, approved an integration and retention award program in which our legacy named executives participated. The details of these awards are outlined below.
Integration Awards. These integration awards were intended to incentivize the performance of certain key officers through the Closing and the critical integration period following the Closing. Messrs. Post, Hussain and Goff were selected to participate.
The target value of the integration award to each of these officers was as follows: Mr. Post, $3,000,000; Mr. Hussain, $600,000 and Mr. Goff, $550,000. The target value of each integration award was split into two equally-weighted components: 50% in the form of cash and 50% in the form of shares of performance-based restricted stock.
The cash portion of this award was scheduled to vest on the Closing Date, with the actual payout to the officer ranging between 80% and 120% of the target value depending upon the Committee’s subjective determination of the officer’s integration-related performance. Immediately prior to the Closing, the Committee assessed the integration-related performance of each of Messrs. Post, Hussain, and Goff through the Closing, and decided to award each a payout on that cash portion at the 100% target value. The cash amounts paid at the Closing are included in the Summary Compensation under the heading “Bonus” in the following amounts: Mr. Post, $1,500,000; Mr. Hussain, $300,000 and Mr. Goff, $275,000.
With respect to the equity portion of the award, it will vest on December 15, 2018 subject to the officer’s continued service to the Company through the vesting date and the actual number of shares vesting will range between 80% and 120% of the number of shares granted, depending on the Committee’s subjective determination of the officer’s integration-related performance between the Closing and the vesting date. The equity portion of this integration award is reported in the Summary Compensation Table under the column “Stock Awards” and in the Grant of Plan-Based Awards Table.
Retention Awards. These retention awards were intended to assist the Company in retaining certain key executives whose services the Committee believed would be essential to successfully completing the Level 3 Combination and integrating the operations of the two companies. Messrs. Hussain and Goff were selected to participate. The retention awards consist of time-vested shares of restricted stock, with a grant date value of $4,500,000 for both Messrs. Hussain and Goff. The awards will vestone-third per year over a three-year period, subject to the executive’s continued service with the Company.
Mr. Hussain was selected to participate because he is a highly sought-after leader in the technology and network services market and the Committee determined that his leadership would be critical to the Company achieving its integration and synergy goals. Similarly, the Committee determined that Mr. Goff’s assistance was critical to successfully attaining the regulatory approvals necessary to complete the Level 3 Combination and to successfully integrating the legal and regulatory affairs of the Company post-Closing. These retention awardsspecial LTI grants are reported in the Summary Compensation Table under the column “Stock Awards” and also in the Grant of Plan-Based Awards Table.
CenturyLink Signing Awards to Newly Named Executives.Both of our newly named executives received certain cash and equity awards as inducements to join our senior leadership team following the Closing.
With respect to Mr. Storey, his offer letter entitled him to receive the following special awards:
In addition, the Committee approved an acceleration of the vesting of Mr. Storey’s outstanding restricted stock unit (“RSU”) awards that were previously granted by Level 3 and converted to CenturyLink restricted stock units in the Level 3 Combination effective as of the Closing, except for 50% of the RSUs that had been granted to him by Level 3 in 2017, which will vest as originally scheduled. Although the vesting of some of his RSUs were accelerated, each will settle and pay out in shares of common stock in accordance with its original payment schedule.
With respect to Mr. Patel, his offer letter entitled him to receive the following special awards:
In addition, the Committee approved the acceleration of vesting of Mr. Patel’s outstanding RSU awards that were previously granted by Level 3 and converted to CenturyLink RSUs in the Level 3 Combination effective as of the Closing, except with respect to the RSUs granted to him by Level 3 in 2017, which will continue to vest on
their original terms and conditions. In addition, all RSUs that were granted to him before 2017 were cancelled and converted to a deferred cash award based on theper-share closing price of our common stock on the date of Closing, which will be paid to Mr. Patel in cash on the same schedule that thenow-cancelled awards would have otherwise settled and paid out in shares.
Assumption of Level 3 Integration Awards with Continued Service Requirements.Prior to the Closing, Level 3 also implemented certain retention programs in order to address its own transaction-related incentive and retention concerns. The majority of these awards were paid out by Level 3 upon Closing. However, at the Closing, we assumed the remaining portion of those awards for which any portion remained contingent on continued service. Each of Messrs. Storey and Patel holds such an award. Specifically, provided the executive continues to provide services to us through November 1, 2018, Mr. Storey is entitled to a cash payments totaling $2,542,000 and Mr. Patel is entitled to cash payments totaling $1,429,000. Assuming the executive meets his continued service requirement, this amount will be reported for him in the “Bonus” column of Summary Compensation Table in our proxy statement for next year.
The number of time- and performance-based shares that were granted to our named executives in connection with the Level 3 Combination are summarized in the “2017 Acquisition-Related Stock Awards” table below.
2017 Acquisition-Related Stock Awards
| Performance-Based Restricted Shares | ||||||||||||||||||||||||
Named Officer |
Time-vested Restricted | No. of EBITDA Performance- Based Restricted Shares(1) (2) | No. of Integration Performance- Based Restricted Shares(1) | Fair Value(1) | Total Fair Value(1) | |||||||||||||||||||
| No. of Shares(1) | Fair Value(1) | |||||||||||||||||||||||
Glen F. Post, III | — | $ | — | — | 62,640 | $ | 1,500,000 | $ | 1,500,000 | |||||||||||||||
Jeffrey K. Storey | 217,036 | 4,187,600 | 325,554 | — | 6,281,400 | 10,469,000 | ||||||||||||||||||
Sunit S. Patel | 67,377 | 1,300,000 | 77,742 | — | 1,500,000 | 2,800,000 | ||||||||||||||||||
Aamir Hussain | 187,920 | 4,500,000 | — | 12,528 | 300,000 | 4,800,000 | ||||||||||||||||||
Stacey W. Goff | 187,920 | 4,500,000 | — | 11,484 | 275,000 | 4,775,000 | ||||||||||||||||||
Retirement Compensation Paid to our Former ExecutiveCEO
As notedIn connection with the previously the CFOdiscussed accelerated timing of our CEO succession plan and announcement of Mr. Post’s decision to retire at the shareholders’ meeting on May 23, 2018, the Committee’s objective for Mr. Post’s retirement was negotiatedto base his retirement pay package principally upon contractually-committed retirement payments. However, the Committee also felt it necessary to also recognize the benefits of Mr. Post’s agreement to voluntarily retire ahead of schedule and his critical role in conjunctiontransforming CenturyLink from a small rural local exchange telephone company into an internationally-recognized communications company over his total of 42 years of service.
To that end, the Committee approved certain changes to his outstanding equity awards. Specifically, vesting of all outstanding time-based restricted shares granted to Mr. Post before 2018 andone-half of such shares granted to him in fiscal 2018 accelerated as of his retirement date, with the Level 3 Combination andremainingone-half of his fiscal 2018 time-based restricted shares forfeited as of the same date. In addition, Mr. Ewing, who served as our Executive Vice President and Chief Financial OfficerPost was permitted to retain all outstanding performance-based restricted shares granted to him prior to 2018 andone-half of such shares granted to him in fiscal 2018, all of which remain subject to their original performance conditions. The remainingone-half of Mr. Post’s fiscal 2018 performance-based restricted shares was forfeited as of his retirement date. Finally, with respect to the Level 3 Combination, agreedequity portion of the special integration award granted to step down from all executive positions atMr. Post in June 2017, the Closing. AfterCommittee approved a short transition period,100% payout of those shares, which vested on Mr. Ewing fully retired from the Company on November 17, 2017.Post’s retirement date.
In addition to the compensation Mr. EwingPost earned while an employee and amounts or broad-based retention benefits paid or payable to him under our existing programs, under the Committee madeterms of our STI program, he was entitled to apro-rated annual bonus for 2018 based on actual performance. As this was a voluntary retirement, Mr. Post did not receive any severance benefits following his separation of service from the Company on May 23, 2018.
As he wasre-elected as a director of the Company at the 2018 annual meeting, Mr. Post began to receive compensation as anon-employee director as of that date, including an annual director equity grant. For more information regarding our director compensation program, please see the section entitled “Director Compensation.”
Compensation Paid to our Former CTO
As previously disclosed, Mr. Hussain was involuntarily terminated on November 6, 2018. Mr. Hussain earned compensation and broad-based benefits while an employee and he was entitled to certain supplemental compensation awards. Because Mr. Ewing was willing and ablebenefits payable to continue serving ashim under our CFO after the Closing if not for the CFO succession plan, theexisting programs. The Committee determined that he qualified for payments under our executive severance plan (which is described in greater detail under “— Other Benefits — Severance Benefits” below), of which 52 weeks of severance benefits was contractually due to Mr. EwingHussain ($1,399,158), increased by another 52 weeks at the Committee’s discretion ($1,399,158), for a total cash severance payable1,320,039). Pursuant to him of $2,798,316. Given that he was retirement-eligible at the time of his departure, under the terms of our STI program, Mr. EwingHussain earned apro-rated annual bonus for 20172018 based on actual performance. performance and per the terms of previously-disclosed restricted share award agreement, Mr. Hussain received the automatic acceleration of certain special equity awards granted to him on June 1, 2017. As such, these amounts are reflected in the Summary Compensation Table.
The Committee also approved certain changesadjustments to hissome, but not all, of Mr. Hussain’s outstanding annual equity awards. Specifically, the Committee accelerated the vesting of his fiscal 2015, 2016 and 2017the shares of time-vested restricted stock (5,369, 15,946granted to Mr. Hussain during fiscal 2016 and 24,842 shares, respectively)2017 (a total of 27,720 shares) effective on his retirement date.as of November 6, 2018. With respect to his 86,518 outstanding shares of performance-based restricted stock Mr. Ewing was permitted to continue to hold those awards granted to him in fiscal 2015, 2016 and 2017, (24,160, 35,879 and 37,265 shares, respectively), in each caseMr. Hussain will continue to hold those awards subject to their original performance conditions. The Committee also approved a special discretionary cash bonusAs noted above under this section “— Grants of $1,000,000. In approvingLong-Term Incentive Compensation — 2018 Annual LTI Grants” the additional severance benefits, accelerated vestingshares of time-vested and performance-based restricted stock granted to him in February 2018 were forfeited upon his outstanding stock awards and special cash bonus, the Committee considered a range of factors, including (i) the critical roledeparture. Mr. Ewing played in negotiating, financing and implementing the Level 3 Combination, (ii) his contributions to the growth of CenturyLink over the past 34 years and the implementation of the CFO succession plan and (iii) Mr. Ewing’sHussain signed an agreement to among other things, waive any claims against us and refrain from competing against us for a year.
| 2019 Proxy Statement | 59 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
Compensation Forfeited by our Former CFO
Upon Mr. Patel’s resignation on September 28, 2018, pursuant to the terms of our compensation plans and restricted stock award agreements, Mr. Patel forfeited all unvested LTI (521,098 shares), including his initial LTI grants (both time- and performance-based portions), 2018 annual LTI grant, and special retention grant. Mr. Patel also forfeited the balance of his retention bonus, originally granted by Level 3 and assumed by us in the Level 3 Combination, which was unearned as of the date of his resignation ($214,500). In addition, he was not eligible to receive an annual bonus under our 2018 STI program. Pursuant to the terms of Mr. Patel’s April 2017 offer letter, he is entitled to certain deferred compensation payments in 2019 and 2020. See further discussion under “Executive Compensation — Deferred Compensation.”
As a final component of executive compensation, we provide a broad array of benefits designed to be competitive, in the aggregate, with similar benefits provided by our peers. We summarize these additional benefits below.
Retirement Plans.We maintain traditional broad-based qualified defined benefit and defined contribution retirement plans for our employees who meet certain eligibility requirements. With respect to these qualified plans, we maintain nonqualified plans that permit our officers to receive or defer supplemental amounts in excess of federally-imposed caps that limit the amount of benefits highly-compensatedhighly-
compensated employees are entitled to receive under qualified plans. Additional information regarding our retirement plans is provided in the tables and accompanying discussion included below under the heading “Executive Compensation.”
Change of Control Arrangements.We have agreed to provide cash and other severance benefits to each of our executive officers who is terminated under certain specified circumstances following a change of control of CenturyLink. If triggered, benefits under these change of control agreements include payment of (i) a lump sum cash severance payment equal to a multiple of the officer’s annual cash compensation, (ii) the officer’s annual bonus, based on actual performance and the portion of the year served, (iii) certain welfare benefits are continued for a limited period, and (iv) the value or benefit of any long-term equity incentive compensation, if and to the extent that the exercisability, vesting or payment thereof is accelerated or otherwise enhanced upon a change of control pursuant to the terms of any applicable long-term equity incentive compensation plan or agreement.
Under these agreements, change of control benefits are payable to our executive officers if within a certain specified period following a change in control (referred to as the “protected period”) the officer is terminated without cause or resigns with “good reason,” which is defined to include a diminution of responsibilities, an assignment of inappropriate duties, and a transfer of the officer exceeding 50 miles.
The table below shows (i) the length of the “protected period” afforded to officers following a change of control and (ii) the multiple of salary and bonus payment and years of welfare benefits to which officers will be entitled if change of control benefits become payable under our agreements and related policies:
| Protected Period | Multiple of Annual Cash Compensation | Years of Welfare Benefits | ||||||||||
CEO | 2 years | 3 times | 3 years | |||||||||
Other Executives | 1.5 years | 2 times | 2 years | |||||||||
Other Officers | 1 year | 1 time | 1 year | |||||||||
For more information on change of control arrangements applicable to our executives, including our rationale for providing these benefits, see “Executive Compensation — Potential Termination Payments — Payments Made Upon a Change of Control.” For information on change of control severance benefits payable to our junior officers and
managers, see “— Severance Benefits” in the next subsection below.
Severance Benefits.Our executive severance plan provides cash severance payments equal to two years of total targeted cash compensation (defined as salary plus the targeted amount of annual
| 60 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of Pay
incentive bonus) for our CEO or one year of total targeted cash compensation for any other senior officer in the event that the senior officer is involuntarily terminated by us without cause in the absence of a change of control.
Payments to senior officers terminated in connection with a change of control are separately governed by the change of control arrangements discussed immediately above under the heading “— Change of Control Arrangements.”
Under our executive severance plan, subject to certain conditions and exclusions, more junior officers or managers receive certain specified cash payments and other benefits if they are either (i) involuntarily terminated without cause in the absence of a change of control or (ii) involuntarily terminated without cause or resign with good reason in connection with a change of control. Our full-timenon-union employees not covered by our executive severance plan may, subject to certain conditions, be entitled to certain specified cash severance payments in connection with certain qualifying terminations.
Under a policy that we adopted in 2012, we are required to seek shareholder approval of any future senior executive severance agreements providing for cash payments, perquisites and accelerated health or welfare benefits with a value greater than 2.99 times the sum of the executive’s base salary plus target bonus.
Level 3 Key Executive Severance Plan. CenturyLink assumed various benefit plans as part of the Level 3 Combination, including the Level 3 Key Executive Severance Plan (the “KESP”). The KESP will remain in effect through thetwo-year anniversary of the ClosingOctober 31, 2019 and certain employees who joined us in connection with the Level 3 Combination will continue to participate in it duringthrough thattwo-year period. Following date. Once thetwo-year period, KESP is no longer in effect, severance rights and benefits for current participants of KESP will be governed by CenturyLink’s executive severance plan and change of control arrangements discussed above.
Messrs. Storey and Patel areMr. Dev is currently participantsa participant in the KESP, which provides for the severance benefits described below upon a qualifying termination. In consideration for the severance benefits under the KESP, the executive officers are required to execute a release of claims and are subject to restrictive covenants concerning noncompetition andnon-solicitation of employees,
customers and business partners, in each case for 24 months following the applicable date ofhis termination with respect to Messrs. Storey and Patel.date.
Upon a qualifying termination, a KESP participant would be entitled to receive certain payments and benefits, including (i) a lump sum cash severance payment equal to a two times the sum of the participant’s base salary and most recent target annual bonus, (ii) apro-rated annual bonus for the year of termination, (iii) a lump
sum cash payment equal the total of certain welfare benefit premium payments that the company would have been obliged to cover over a24-month period, and (iv) reimbursement of up to $10,000 for the cost of outplacement services.
As provided in his offer letter, if, as anticipated, Mr. Storey assumes the position of CEO prior to the expiration of the KESP on the second anniversary of the Closing, then he will cease as a participant of the KESP effective with his appointment as CEO and his severance rights and benefits will be governed by the CenturyLink executive severance plan and change of control arrangements discussed above.
Life Insurance Benefits.We sponsor a long-standing supplemental life insurance premium reimbursement plan that has been closed to new participants for nearly a decade. Under this plan, three of our current or former senior officers hold supplemental life insurance policies for which we are obligated to pay the premiums. We paid no premiums to fund these benefits from 2012 to 2016, and therefore no premium reimbursement amounts were reported in the Summary Compensation Table for any of those years. Over the past several years, we began to assist our officers in converting older life insurance policies into newer, lower-cost policies. Most recently, in December 2016, we converted the last of these policies and were able to fix the cost of future annual premiums, resulting in reductions ranging from 33% to 91% from premiums paid in 2011. In 2017, the Committee approved the resumption of premium payments on behalf of our four grandfathered senior executives, and the Company paid premium for years 2016 and 2017. As such, the 2017 premium amount reflected in the Summary Compensation Table represents twice the annual premium cost that is duepaid in 2018 and future years. In consultation with the Committee, we plan to continue to evaluate other options to control the cost of providing these benefits to the three grandfathered plan participants.
Perquisites.Officers are entitled to be reimbursed for the cost of an annual physical examination, plus related travel expenses.
Our aircraft usage policy permits the CEO to use our aircraft for personal travel up to $250,000 per year in personal travel without reimbursing us, and permits each other executive officer to use our aircraft for up to $10,000 per year in personal travel without reimbursing us. Under the termsonly if he or she pays for cost in
| 2019 Proxy Statement | 61 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Program Objectives and Components of our offer letter with Mr. Storey, however, he is not subject to this limitation on aircraft usage during his interim service as President and COO.Pay
advance of flight. In all such cases, personal travel is permitted only if aircraft is available and not needed for superseding business purposes. Periodically, the Committee reviews the cost associated with the personal use of aircraft by senior management, and determines whether or not to alter our aircraft usage policy. In connection with electing to retain this policy, the Committee has determined that the policy (i) provides valuable and cost-effective benefits to our executives that reside or frequently travel into our corporate headquarters that is located in a small city with limited commercial airline service, (ii) enables our executives to travel in a manner that we believe is more expeditious than commercial airline service, and (iii) is being implemented responsibly by the executives.
For purposes of valuing and reporting the use of our aircraft, we determine the incremental cost of aircraft usage on an hourly basis, calculated in accordance with applicable guidelines of the SEC. The incremental cost of this usage, which may be substantially different than the cost as determined under alternative calculation methodologies, is reported in the Summary Compensation Table appearing below.
From time to time, we have scheduled one of our annual regular board meetings and related committee meetings over amulti-day period. These meetings are often held in an area where we conduct operations, and in such cases include site visits that enable our directors and senior officers to meet with local personnel. The spouses of our directors and executive officers are invited to attend these retreats, and we typically schedule recreational activities for those who are able and willing to participate.
For more information on the items under this heading, see the Summary Compensation Table appearing below.
Other Employee Benefits. We maintain certain broad-based employee welfare benefit plans in which the executive officers are generally permitted to participate on terms that are either substantially similar to those
provided to all other participants or which provide our executives with enhanced benefits upon their death or disability. We also maintain a supplemental disability plan designed
| 62 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our Policies, Processes and Guidelines Related to ensure disability payments to our officers in the event payments are unavailable from our disability insurer.Executive Compensation
IV. Our Policies, Processes and Guidelines Related to Executive Compensation
Our Compensation Decision-Making Process
As described further below, the Committee, subject to the Board’s oversight, establishes, evaluates and monitors our executive compensation programs. The compensation decision-making process includes input from the Committee’s independent consultant, our CEO and other members of management, and involves a careful balancing of a wide range of factors, including, but not limited to, the following:
Compensation Decision-Making Considerations | Consultant | Input From CEO | Management | ||||||||||
Structure and Elements of Pay Programs | |||||||||||||
The competitive compensation practices of peer companies | |||||||||||||
Performance of our Company in relation to our peers and our internal goals | |||||||||||||
| ü | |||||||||||||
The financial impact and risk characteristics of our compensation programs | | ||||||||||||
| ü | |||||||||||||
The strategic and financial imperatives of our business | |||||||||||||
| ü | |||||||||||||
| |||||||||||||
Setting Competitive Compensation Pay Levels | |||||||||||||
Market data regarding base salary, short-term incentive target, long-term incentive target and total target compensation paid to comparable executives at peer companies | |||||||||||||
The officer’s scope of responsibility, industry experience, particular set of skills, vulnerability to job solicitations from competitors and anticipated degree of difficulty of replacing the officer with someone of comparable experience and skill | | ||||||||||||
| ü | |||||||||||||
The officer’s pay and performance relative to other officers and employees | |||||||||||||
| ü | |||||||||||||
The officer’s demonstrated leadership characteristics, ability to act as a growth agent within the company and ability to think strategically | |||||||||||||
| ü | |||||||||||||
Internal equity issues that could impact cohesion, teamwork or the overall viability of the executive group | |||||||||||||
| ü | |||||||||||||
The potential of these senior officers to assume different, additional or greater responsibilities in the future | |||||||||||||
| ü | |||||||||||||
The officer’s realized and realizable compensation in recent years and, to a limited degree, his or her accumulated wealth under our programs | | ||||||||||||
| ü | ü | ||||||||||||
Pay for Performance | |||||||||||||
Performance of our Company in relation to our peers and our key performance objectives | | ||||||||||||
| ü | ü | ||||||||||||
The business performance under the officer’s leadership and scope of responsibility | |||||||||||||
| ü | |||||||||||||
The officer’s overall performance is assessed based on individual results, the role the officer plays in maintaining a cohesive management team and improving the performance of others, and the officer’s relative strengths and weaknesses compared to the other senior officers | | | |||||||||||
| ü | ü | ||||||||||||
The role the officer may have played in any recent extraordinary corporate achievements | | | ü | ü | |||||||||
| 2019 Proxy Statement | 63 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our Policies, Processes and Guidelines Related to Executive Compensation
Role of Human Resources and Compensation Committee.Subject to the Board’s oversight, the Committee establishes, evaluates and monitors our executive compensation programs and oversees our human resources strategies. Specifically, the Committee approves:
| ◾ | the compensation payable to each executive officer, as well as any other senior officer; |
| ◾ | for our STI and performance-based LTI programs, (i) the performance objectives, (ii) the “threshold,” “target” and “maximum” threshold levels of performance, (iii) the weighting of the performance objectives, (iv) the amount of bonus payable or shares to vest if the target level of performance is attained and (v) the finally determined amount of cash bonus payments or fully-vested shares; |
| ◾ | the peer group for compensation benchmarking and the peer group for performance benchmarking; and |
| ◾ | a delegation of authority to the CEO for LTI grants to ournon-senior officers. |
Among other things, the Committee also establishes, implements, administers and monitors our director cash and equity compensation programs. For more information, see “Director Compensation.”
Role of Compensation Consultants.The Committee engages the services of a compensation consultant to assist in the design and review of executive compensation programs, to determine whether the Committee’s philosophy and practices are reasonable and compatible with prevailing practices, and to provide guidance on specific compensation levels based on industry trends and practices.
The Committee has used Meridian Compensation Partners, LLC (“Meridian”) as its compensation consultant since August 2015. During 2017,2018, representatives of Meridian actively participated in the design and development of our executive compensation programs, assisted in the development of specialnon-recurring compensation grants and attended all of the Committee’s meetings. Meridian provides no other services to the Company, and, to our knowledge, has no prior relationship with any of our named executive officers. As required by SEC rules and NYSE listing standards, the Committee has assessed the independence of Meridian and concluded that its work has not raised any conflicts of interest.
Role of CEO and Management.Although the Compensation Committee is responsible for all
executive compensation decisions, each year it solicits and receives the CEO’s recommendations, particularly with respect to senior officers’ salaries and performance in the key areas outlined above in “— Our Compensation Decision-Making Process.”
Senior Officers.OfficersThe.The CEO and the executive management team, in consultation with the compensation consultant, recommend to the Committee business goals to be used in establishing incentive compensation performance targets and awards for our senior officers. In addition, our Executive Vice President, Human Resources, works closely with the Committee and its compensation consultant to ensure that the Committee is provided with appropriate information to discharge its responsibilities.
Non-Senior Officers.OfficersThe.The Committee oversees our processes and receives an annual report from the CEO on the compensation programs for ournon-senior officers. The CEO, in consultation with the executive management team, is responsible for approval of:
| ◾ | the total cash compensation paid to ournon-senior officers; and |
| ◾ | all LTI awards to thenon-senior officers, acting under authority delegated to him by the Committee in accordance with our shareholder-approved equity plans. |
Timing of Long-Term Incentive Awards.The.The Committee typically makes annual LTI grants to executives during the first quarter after we publicly release our earnings. However, the Committee may defer grants for a variety of reasons, including to request additional information or conduct further reviews of management’s performance. In addition, the Committee may grant special awards at different times during the year, when and as merited by the circumstances. LTI grants to newly-hired executive officers are typically made at the next regularly-scheduled Committee meeting following their hire date.
Tally Sheets.Each year, we compile lists of compensation data relating to each of our executives. These “tally sheets” include annual compensation data for each executive, including his or her salary, STI award, LTI award, and realizable pay. These tally sheets also contain performance highlights on results and behaviors for each of our executives. The Committee uses these tally sheets to (i) review the total annual compensation of the executive officers
| 64 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our Policies, Processes and Guidelines Related to Executive Compensation
and (ii) ensure that the Committee has a comprehensive understanding of all elements of our compensation programs.
Risk Assessment.As part of its duties, the Committee assesses risks arising out of our employee compensation policies and practices. Based on its most recent assessment, the Committee does not believe that the risks arising from our compensation policies and practices are reasonably likely to materially adversely affect us. In reaching this determination, we have taken into account the risk exposures of our operations and the following design elements of our compensation programs and policies:
| ◾ | our balance of annual and long-term compensation elements at the executive and management levels, |
| ◾ | our use in most years of a diverse mix of performance metrics that create incentives for management to attain goals well aligned with the shareholders’ interests, |
| ◾ | the multi-year vesting of LTI awards, which promotes focus on our long-term performance and mitigates the risk of undue focus on our short-term results, |
| ◾ | “clawback” policies and award caps that provide safeguards against inappropriate behavior, and |
| ◾ | bonus arrangements that generally permit either the Committee (for compensation payable to senior |
officers) or senior management (for compensation payable to other key employees) to exercise “discretion” to reduce the amount of certain incentive awards. |
We believe these features, as well as the stock ownership requirements for our executive officers, result in a compensation program that aligns our executives’ interests with those of our shareholders and does not promote excessive risk-taking on the part of our executives or other employees.
General.Each.Each year, with assistance from its consultant, the Committee reviews “peer groups” of other companies comparable to CenturyLink for purposes of assessing our comparative compensation and performance. We typically perform this analysis in the second half of each year in order to ensure the data remains well-suited for its intended purposes and uses during the upcoming year. However, during 2017, the Committee conducted supplemental analyses in connection with preparing for the changes in the size and character of the Company resulting from the Level 3 Combination.
Compensation Benchmarking.The.The Committee, based on input from its compensation consultant, reviewed peer group and survey data in support of pay decisions for our senior officers in order to benchmark compensation levels for our executives against peer executives at companies that are comparable to ours based on revenue size, market cap, industry and business model.
| 2019 Proxy Statement | 65 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our Policies, Processes and Guidelines Related to Executive Compensation
For our named executive officers, our compensation consultant compiled the compensation data publicly disclosed by the companies included within the peer groupscompanies identified below. During 2017, when makingAs noted in our overall compensation pay decisions, our2018 proxy statement, we constructed inpre-combinationmid-2017 compensation benchmarking was distinct from our post-combination compensation benchmarking.
In preparation for 2017 pay decisions, the Committee reviewed the continued suitability of the 2016 peer group and elected to remove Cablevision Systems Corporation and Time Warner Cable and approved the resultinga revised peer group labeled below as the“Pre-Combination Peer Group for 2017 Compensation Benchmarking.” The Committee and its consultant used thispre-combination16-company peer group for purposes of
assessingthat reflected the reasonablenessincreased size and sophistication of our compensation prior tooperations in anticipation of the pending closing of the Level 3 Combination. In selecting the companies included in thisThe Committee used that same peer group in connection with its 2018 executive compensation decisions. Once established, we believe that a well-selected peer group for compensation benchmarking should remain fairly stable for several years to help inform reliable and consistent market positioning, longer-term pay trends and market practices. Listed below are the Committee focused principally on telecommunications, cable and other communications16 companies that were generally comparable to us, prior to the Combination, in terms of size, markets and operations.make up our primary peer group:
| ||||
| ||||
| ||||
| ||||
| ||||
| ◾Telus Corporation | |||
| ◾ BCE Inc. | ◾T-Mobile US Inc. | ||
| ◾Frontier Communications Corp. | ||||
| ◾ Sprint Corporation |
In anticipation of the Combination, the Committee reviewed thepre-combination peer group and in May 2017 elected to add AT&T, HP Inc., and Verizon while at the same time removing Level 3, Windstream and Xerox, which resulted in the revised peer group labeled below as the “Post-Combination Peer Group for 2017 Compensation Benchmarking.” In selecting the 16 peer companies included in this revised group, the Committee focused principally on telecommunications, cable and other communications companies that are generally comparable to us, following the Combination, in terms of size, markets and operations. The Committee analyzed post-combination peer group data when making compensation pay decisions that became effective upon the Closing.
| ||||
| ||||
| ◾ DISH Network Corporation | |||
| ◾ Comcast Corporation | ◾Liberty Global PLC | |||
Industries 5 peers | ◾ CISCO Systems Inc. | ◾Motorola Solutions, Inc. | ||
| ◾ DXC Technology Company(1) | ◾QUALCOMM Incorporated | ||
| ◾ HP, Inc. |
| (1) | Computer Sciences Corporation was included in peer group for 2017 benchmarking. In early April 2017, CSC completed its merger with the Enterprise Services business of Hewlett Packard Enterprise and formed DXC Technology. | ||
| |||
|
In order to provide the Committee with additional information in support of their compensation decisions, the Committee developed a secondary “High Tech” peer group was developed.group. It includes companies across all aspectsrepresenting a broad array of high tech in such areas ashigh-tech fields, including IT services, Software, Hardware, Consulting, Distributors and Semiconductors. This group serves as a supplement to the revisedprimary16-company peer group and provides an additional perspective on pay levels and practices for the technology industry sector. Listed below are the 14 companies that make up our secondary “high tech” peer group:
Group | ||||
| ◾ CISCO Systems Inc. | ◾Motorola Solutions, Inc. | ||
| ◾ DXC Technology Company | ◾ QUALCOMM Incorporated | |||
| ◾ HP, Inc. | ||||
Industries 9 peers | ||||
| ◾Oracle Corp. | |||
| ◾ Cognizant Tech Solutions | |||
| ◾Seagate Technology PLC | |||
| ◾ Facebook Inc. | ◾Tech Data Corp. | ||
| ◾ Flex LTD | ◾Western Digital Corp | ||
| ◾ Netflix Inc. |
Also included in the Committee’s above-listed |
In addition to thepre- and post-combination compensation peer groups described above, the Committee’s compensation consultant utilized, to a lesser degree, survey data containing compensation information for companies in the telecommunications industry and general industry that are generally similar in size to us for executive positions where needed.
During the second half of 2018, the Committee, based on input from its compensation consultant,
reviewed the two compensation benchmarking peer groups outlined above and recommended a consolidated peer group in support of pay decisions for our senior officers in 2019.
For additional information about how we set pay levels, see “— Our Compensation Decision-Making Process.”
| 66 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our Policies, Processes and Guidelines Related to Executive Compensation
TSR Peer Group Performance Benchmarking.With.With the aid of its compensation consultant, the Committee annually reviews the broad industry peer group that it introduced in 2013set a TSR Peer Group for purposes of benchmarking our relative performance based upon our historical three-year TSR.TSR in performance determination of Mr. Storey’sone-time promotion grant (see further discussion under “Special Grants — Promotion Grant for Mr. Storey” and section III above). This peer group is focused principally on telecommunications, cable and other communications companies that are generally comparable to us in terms of size, markets and operations. The peer group is substantially similar to the peer group of 2016 with the exception that Cablevision Systems Corporation was acquired by Altice in May 2016 and was therefore removed from the TSR peer group. In addition, JDS Uniphase Corporation changed its name to Viavi Solutions after spinning off a portion of its operations. Our 20172018 peer groups for compensation benchmarking were somewhat constrained by the number of companies and revenue and market cap size. In contrast, the TSR peer group for performance benchmarking is comprised of a broader universe of companies we believe investors are considering when they decide whether to invest in us or our industry.
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ◾Telephone & Data Systems Inc. | |||
◾ Telus Corporation | ◾United States Cellular Corporation | |||
| ◾ Verizon Communications | |||
| ◾ Windstream Holdings, Inc. | ||||
Communications Equipment 6 peers | ◾ Motorola Solutions, Inc. | |||
| ◾ EchoStar Corporation | ◾ Viasat, Inc. | |||
| ◾ Mitel Networks Corporation | ◾ Zayo Group Holdings, Inc | |||
3 peers | ||||
| ||||
| ◾ DISH Network Corporation |
Forfeiture of Prior Compensation
For approximately 20 years, all recipients of our LTI grants have been required to contractually agree to forfeit certain of their awards (and to return to us any cash, securities or other assets received by them upon the sale of Common Shares they acquired through certain prior equity awards) if at any time during their employment with us or within 18 months after termination of employment they engage in activity contrary or harmful to our interests. The Committee is authorized to waive these forfeiture provisions if it determines in its sole discretion that such action is in our best interests. Our STI plan contains substantially similar forfeiture provisions.
Our Corporate Governance Guidelines authorize the Board to recover, or “clawback,” compensation from an executive officer if the Board determines that any bonus, incentive payment, equity award or other
compensation received by the executive was based on any financial or operating result that was impacted by the executive’s knowing or intentional fraudulent or illegal conduct. Certain provisions of the Sarbanes-Oxley Act of
2002 would require our CEO and CFO to reimburse us for incentive compensation paid or trading profits earned following the release of financial statements that are subsequently restated due to material noncompliance with SEC reporting requirements caused by misconduct. In addition, provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 will, upon the completion of related rulemaking, require all of our current or former executive officers to make similar reimbursement payments in connection with certain financial statement restatements, irrespective of whether such executives were involved with the mistake that caused the restatement.
| 2019 Proxy Statement | 67 | |||||||
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our Policies, Processes and Guidelines Related to Executive Compensation
Under our current stock ownership guidelines, our executive officers are required to beneficially own CenturyLink stock in market value equal to a multiple of their annual salary, as outlined in the table below, and each outside director must beneficially own CenturyLink stock equal in market value to five times the annual cash retainer payable to outside directors. Each executive officer and outside director has three and five years, respectively, to attain these targets.
Executive Officer | Stock Ownership Guidelines | Stock Ownership Guidelines | ||
CEO | 6 times base salary | $ | ||
All Other Executive Officers | 3 times base salary | $ | ||
Outside Directors | 5 times annual cash retainer | $ | ||
| (1) | Based on annual salary as of December 31, |
| (2) | Based on average annual salary for all other executive officers as of December 31, |
For any year during which an executive or outside director does not meet his or her ownership target, the executive or director is required to hold 65% of the CenturyLink stock that he or she acquires through our equity compensation programs, excluding shares sold to pay related taxes.
As of December 31, 2017,2018, all of our executive officers and all of our outside directors were in compliance with, and in most cases significantly exceeded, our stock ownership guidelines. For additional information on our stock ownership guidelines, see “Governance Guidelines.”
We have a long-standing practice of not providing traditional employment agreements to our officers, and none of our executives has an employment agreement. However, we do from time to time enter into initial employment offer letters with prospective new employees, including executive officers.officers, some of which include future commitments on our part. In connection with the Level 3 Combination, we entered into an offer letter with each of our newly named executives, Messrs. Storey and Patel. In connection with accelerating our CEO succession plan, we amended and restated Mr. Storey’s letter, which does contain future commitments by the Company. In addition, we entered into a standard offer letter with Mr. Dev in connection with promoting him to full-time (from interim) CFO, which set his initial compensation but does not provide any future commitments by the Company.
We do not provide taxgross-up benefits in any offor our executive compensation programs. However,programs; however, there are a few broad-based compensation programs in which we provide for taxgross-ups. These programs include our broad-based relocation policy, which provides for a taxgross-up to any employee who qualifies for relocation expense reimbursement. Mr. Trezise, who relocated from our Monroe, Louisiana corporate offices to our Broomfield, Colorado corporate offices during 2018, participated in this program and the applicable relocation expense is reported in the Summary Compensation Table appearing below. In addition, we provide taxgross-ups in limited situations where spouses attend business functions and accompany our senior officers on corporate aircraft. We do not intend to provide taxgross-up benefits in any new executive compensation programs.
Anti-Hedging and Anti-Pledging Policies
Under our insider trading policy, our employees and directors may not:
| ◾ | purchase or sell short-term options with respect to CenturyLink shares, |
| ◾ | engage in “short sales” of CenturyLink shares, or |
| ◾ | engage in hedging transactions involving CenturyLink shares which allow employees to fix the value of their CenturyLink shareholdings without all the risks of ownership or cause them to no longer have the same interests or objectives as our other shareholders. |
| 68 | 2019 Proxy Statement | | |||||
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our Policies, Processes and Guidelines Related to fix the value of their CenturyLink shareholdings without all the risks of ownership or cause them to no longer have the same interests or objectives as our other shareholders.
In addition, under our insider trading policy, our senior officers and directors are prohibited from holding our securities in a margin account or otherwise pledging our securities as collateral.
To our knowledge, all of our senior officers and directors are currently in compliance with our anti-hedging and anti-pledging policies.
Deductibility of Executive Compensation
Section 162(m) of the Code limits the amount of compensation paid to certain covered officers that we may deduct for federal income tax purposes to $1 million per covered officer per year.
Historically, compensation that qualified as “performance-based compensation” within the meaning of Section 162(m) was not subject to the $1 million limitation. In recent years,As recently as 2017, largely due to the availability of this performance-based exemption, the deductibility of various payments and benefits has beenwas one factor among many considered by the Committee in determining executive compensation. As in previous years, our 2017 executive compensation program was designed to allow us to grant certain awards (including our STI and performance-based LTI awards) that were intended to qualify as performance-based for purposes of Section 162(m) and thus be fully deductible.
However, the federal tax reform legislation passed in December 2017 included significant changes to Section 162(m). Among these changes were an expansion of the scope of covered officers subject to the Section 162(m) deduction
limitation and the elimination of the performance-based compensation exemption.
For taxable years beginning after December 31, 2017, compensation paid to a covered officer in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain performance-based arrangements in place as of November 2, 2017. Among other things, this means that all compensation paid to each covered officer in 2018 and beyond will be subject to the $1 million deduction limitation, regardless of whether it is structured as performance-based compensation, unless the transition relief applies.
Section 162(m) is highly technical and complex. Because of ambiguities as to the application and interpretation of Section 162(m), including the uncertain scope of the transition relief for “grandfathered” performance-based compensation, we can give no assurance that compensation intended to satisfy the requirements for performance-based exemption from the Section 162(m) deduction limit will, in fact, satisfy the exemption. Further, the Committee reserves the right to modify compensation that was initially intended to be exempt from Section 162(m) if it determines that such modifications are consistent with the company’s business needs.
| 2019 Proxy Statement | 69 | |||||||
The Human Resources and Compensation Committee has reviewed and discussed with management the report included above under the heading “Compensation Discussion and Analysis.” Based on this review and discussion, the Committee
recommended to the Board that the Compensation Discussion and Analysis report be included in this proxy statement and incorporated into our Annual Report on Form10-K for the year ended December 31, 2017.2018.
Submitted by the Human Resources and Compensation Committee of the Board of Directors.
Laurie A. Siegel (Chair)
Virginia Boulet
T. Michael Glenn
Steven T. Clontz
Michael J. Roberts
| 70 | 2019 Proxy Statement | | |||||
The following table sets forth certain information regarding the compensation of (i) our current and former principal executive officer,officers, (ii) our current and former principal financial officers, and (iii) each of our three most highly compensatedthe two other executive officers other than our principalwho were serving as executive officers at the end of 2018, and financial officers.(iv) a former executive officer. Following this table is additional information regarding incentive compensation, pension benefits, deferred compensation and potential termination payments pertaining to the named officers. For additional information on the compensation summarized below and other benefits, see “Compensation Discussion and Analysis.”
Summary Compensation Table
Name and Principal Position | Year | Salary | Bonus(1) | Equity Awards(2) | Non-Equity Incentive Plan Compensation(3) | Change in Pension Value(4) | All Other Compensation(5) | Total | ||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||
Glen F. Post, III Chief Executive Officer | 2017 | $ | 1,250,000 | $ | 1,500,000 | $ | 9,814,604 | $ | 1,596,875 | $ | 395,943 | $ | 158,138 | $ | 14,715,560 | |||||||||||||||||
| 2016 | 1,250,000 | — | 10,518,344 | 1,754,375 | 333,816 | 109,679 | 13,966,214 | |||||||||||||||||||||||||
| 2015 | 1,250,000 | — | 7,277,717 | 1,697,500 | 330,649 | 108,645 | 10,664,511 | |||||||||||||||||||||||||
Sunit S. Patel(6) Executive Vice President and Chief Financial Officer | 2017 | $ | 124,521 | $ | 1,447,475 | $ | 3,383,274 | (7) | — | — | — | $ | 4,955,269 | |||||||||||||||||||
Aamir Hussain Executive Vice President and Chief Technology Officer | 2017 | $ | 550,699 | $ | 300,000 | $ | 6,728,022 | $ | 416,651 | — | $ | 13,302 | $ | 8,008,674 | ||||||||||||||||||
| 2016 | 496,049 | — | 2,598,654 | 397,831 | — | 13,548 | 3,506,082 | |||||||||||||||||||||||||
| | 2015 | | | 475,010 | | | — | | | 1,198,665 | | | 368,607 | | | — | | | 9,275 | | | 2,051,557 | | |||||||||
Stacey W. Goff Executive Vice President, Chief Administrative Officer, General Counsel and Secretary | 2017 | $ | 550,662 | $ | 275,000 | $ | 6,373,228 | $ | 449,502 | $ | 54,643 | $ | 59,028 | $ | 7,762,063 | |||||||||||||||||
| 2016 | 540,758 | — | 1,559,195 | 477,057 | 161,857 | 36,146 | 2,775,013 | |||||||||||||||||||||||||
| 2015 | 537,728 | — | 1,078,819 | 459,417 | — | 54,279 | 2,130,243 | |||||||||||||||||||||||||
Jeffery K. Storey(8) President and Chief Operating Officer | 2017 | $ | 248,219 | $ | 3,732,517 | $ | 6,952,604 | (9) | — | — | $ | 11,589 | $ | 10,944,929 | ||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||||||||||
R. Stewart Ewing, Jr.(10) | 2017 | $ | 585,949 | $ | 1,000,000 | $ | 1,503,851 | $ | 470,517 | $ | 276,233 | $ | 2,901,491 | $ | 6,738,041 | |||||||||||||||||
| 2016 | 666,266 | — | 1,930,420 | 587,780 | 186,454 | 43,456 | 3,414,376 | |||||||||||||||||||||||||
| 2015 | 663,138 | — | 1,335,661 | 566,480 | 191,830 | 47,520 | 2,804,629 | |||||||||||||||||||||||||
Name and Principal Position | Year | Salary | Bonus(1) | Equity Awards(2) | Non-Equity Incentive Plan Compensation(3) | Change in Pension Value(4) | All Other Compensation(5) | Total | ||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||
Jeffrey K. Storey(6) President and Chief Executive Officer | 2018 | $ | 1,683,299 | $ | 5,842,000 | $ | 24,262,040 | $ | 3,790,772 | $ | — | $ | 77,535 | $ | 35,655,646 | |||||||||||||||||
| 2017 | 248,219 | 3,732,517 | 6,952,604 | — | — | 11,589 | 10,944,929 | |||||||||||||||||||||||||
Indraneel Dev(7) Executive Vice President and Chief Financial Officer | 2018 | $ | 463,770 | $ | 227,027 | $ | 1,588,732 | $ | 438,427 | $ | — | $ | 11,000 | $ | 2,728,955 | |||||||||||||||||
Stacey W. Goff Executive Vice President, General Counsel and Secretary | 2018 | $ | 600,018 | $ | — | $ | 2,070,386 | $ | 847,465 | $ | — | $ | 57,586 | $ | 3,575,455 | |||||||||||||||||
| 2017 | 550,662 | 275,000 | 6,373,228 | 449,502 | 54,643 | 59,528 | 7,762,563 | |||||||||||||||||||||||||
| 2016 | 540,758 | — | 1,559,195 | 477,057 | 161,857 | 36,146 | 2,775,013 | |||||||||||||||||||||||||
Scott A. Trezise Executive Vice President – Human Resources | 2018 | $ | 475,010 | — | $ | 724,646 | $ | 467,600 | — | $ | 194,048 | $ | 1,861,304 | |||||||||||||||||||
Former Executives: | ||||||||||||||||||||||||||||||||
Glen F. Post, III(8) Current Director, Former | 2018 | $ | 489,726 | $ | — | $ | 8,961,113 | $ | 917,012 | $ | 203,601 | $ | 172,762 | $ | 10,744,214 | |||||||||||||||||
| 2017 | 1,250,000 | 1,500,000 | 9,814,604 | 1,596,875 | 395,943 | 158,138 | 14,715,560 | |||||||||||||||||||||||||
| 2016 | 1,250,000 | — | 10,518,344 | 1,754,375 | 333,816 | 109,679 | 13,966,214 | |||||||||||||||||||||||||
Sunit S. Patel(9) Former Executive Vice | 2018 | $ | 556,854 | $ | 1,214,500 | $ | 5,148,229 | — | — | $ | 13,895 | $ | 6,933,478 | |||||||||||||||||||
| 2017 | 124,521 | 1,447,475 | 3,383,274 | — | — | — | 4,955,269 | |||||||||||||||||||||||||
Aamir Hussain(10) Former Executive Vice | 2018 | $ | 509,604 | $ | — | $ | 2,795,192 | $ | 654,332 | $ | — | $ | 1,331,039 | $ | 5,290,167 | |||||||||||||||||
| 2017 | 550,699 | 300,000 | 6,728,022 | 416,651 | — | 13,302 | 8,008,674 | |||||||||||||||||||||||||
| 2016 | 496,049 | — | 2,598,654 | 397,831 | — | 13,548 | 3,506,082 | |||||||||||||||||||||||||
| (1) | For 2018, the amounts shown in this column reflect: |
| ◾ | the final installments of certain cash retention bonuses, originally granted by Level 3, that we assumed in the Level 3 Combination ($2,542,000 to Mr. Storey, $227,027 to Mr. Dev, and $1,214,500 to Mr. Patel), payout of which were contingent upon continued employment through the payment date; and |
| ◾ | the final installment of a cash signing bonus due to Mr. Storey under his original offer letter, payout of which was contingent upon his continued employment through the first anniversary of the Closing ($3,300,000). |
Due to Messrs. Post, Hussain and Goff on June 1, 2017 in connection with the Level 3 Combination, which was paid to each at the Closing;
$214,500. For additional information about these cash awards,bonuses, see “Compensation Discussion and Analysis – Analysis—Our Compensation Program Objectives and Components of Pay – Short Term Incentive Bonuses” and “– AwardsPay—Final Installments of Cash Bonuses Related to Level 3 Combination.”
| (2) | For 2018, the amounts shown in this column reflect: |
| ◾ | the fair value of annual grants of restricted stock or restricted stock unit awards made to our named executives under our long-term incentive compensation program (and the additional restricted grant that Mr. Post received for his service as an outside director, which was granted following his retirement from all employment positions with the Company); |
| 2019 Proxy Statement | 71 | |||||||
EXECUTIVE COMPENSATION
Overview
| ◾ | the fair value of initial performance-based restricted stock grants made to each of Messrs. Storey and Patel at the Closing but which were not granted for accounting purposes until February 21, 2018; |
| ◾ | the fair value of the promotion restricted stock awards made to Mr. Storey on May 24, 2018 in accordance with his amended and restated offer letter; |
| ◾ | the fair value of a special performance-based restricted stock award granted to Mr. Patel, which was subsequently forfeited upon his resignation from all positions with the Company effective September 28, 2018; |
| ◾ | the fair value of a special performance-based restricted stock award that was granted to Mr. Dev prior to his appointment as an executive officer; and |
For additional information about thethese equity grants, made during 2017 and the acceleration of the RSUs held by our newly named executives, see “Compensation Discussion and Analysis – Analysis—Our Compensation Program Objectives and Components of Pay – Annual Pay—Grants of Long-Term Incentive Compensation” and “– Awards Related to Level 3 Combination.“—Special Grants.”
The fair value of the awards presented in the table above has been determined in accordance with FASB ASC Topic 718. For purposes of this table, in accordance with SEC disclosure rules we determined the fair value of shares of:
| ◾ | time-vested restricted stock and restricted stock units – including the time-vested portion of annual grants, the time-vested portion of Mr. Storey’s promotion grant, and the director grant to Mr. Post – based on the closing trading price of our Common Shares on the day of grant; and |
| ◾ | performance-based restricted stock and restricted stock units – including the performance-based portion of annual grants, the initial performance-based restricted stock grants to Messrs. Storey and Patel, the performance-based portion of Mr. Storey’s promotion grant, and the special grant to Mr. Patel, using Monte-Carlo simulations. |
The aggregate value of the restricted stockequity awards granted to theseeach named executivesexecutive in 2017,2018, based on the grant date closing trading price of our Common Shares and assuming maximum payout of his performance-based restricted shares, would be as follows: Mr. Storey, $43,062,809, Mr. Dev, $2,803,084, Mr. Goff, $3,312,628, Mr. Trezise, $1,159,437, Mr. Post, $14,977,994,$14,078,690, Mr. Patel, $1,202,679,$10,085,099, and Mr. Hussain, $6,462,460, Mr. Goff, $7,138,620, Mr. Storey, $3,874,093, and Mr. Ewing, $2,451,507.$4,472,387. See Note 1011 titled “Share-based Compensation” of the notes to our audited financial statements included inAppendix BA for an explanation of material assumptions that we used to calculate the fair value of these stock awards.
| (3) | The amounts shown in this column reflect cash payments made under our short-term incentive program for actual performance in the respective years. For additional information, see |
| (4) | Reflects the net change during each of the years reflected in the present value of the named executives’ accumulated benefits under the defined benefit plans discussed below under the heading |
| (5) | For fiscal 2018, the amounts shown in this column are comprised of (i) reimbursements for the cost of an annual physical |
Name | Year | Physical Exam | Aircraft Use | Contributions to Plans | Relocation Costs | Tax Gross- up on Relocation Costs | Life Insurance Premiums | Post Employment Payments | Total | |||||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||||||
Mr. Storey | 2018 | — | $ | 66,535 | $ | 11,000 | — | — | — | — | $ | 77,535 | ||||||||||||||||||||||||
Mr. Dev | 2018 | — | — | $ | 11,000 | — | — | — | — | $ | 11,000 | |||||||||||||||||||||||||
Mr. Goff | 2018 | $ | 4,206 | $ | 21,690 | $ | 20,733 | — | $ | 10,957 | — | $ | 57,586 | |||||||||||||||||||||||
Mr. Trezise | 2018 | — | $ | 17,640 | $ | 11,000 | $ | 123,495 | $ | 41,913 | — | — | $ | 194,048 | ||||||||||||||||||||||
Former Executives: | ||||||||||||||||||||||||||||||||||||
Mr. Post | 2018 | $ | 3,060 | $ | 16,500 | $ | 86,952 | — | — | — | $ | 66,250 | $ | 172,762 | ||||||||||||||||||||||
Mr. Patel | 2018 | $ | 2,895 | — | $ | 11,000 | — | — | — | — | $ | 13,895 | ||||||||||||||||||||||||
Mr. Hussain | 2018 | $ | — | — | $ | 11,000 | — | — | — | $ | 1,320,039 | $ | 1,331,039 | |||||||||||||||||||||||
Name | Year | Physical Exam | Aircraft Use | Contributions to Plans | Life Insurance Premiums | Post Employment Payments | Total | |||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||
Mr. Post | 2017 | $ | 2,941 | $ | 16,500 | $ | 105,019 | $ | 33,678 | $ | — | $ | 158,138 | |||||||||||||||
| 2016 | 4,011 | 2,640 | 103,028 | — | — | 109,679 | ||||||||||||||||||||||
| 2015 | 3,035 | 6,120 | 99,490 | — | — | 108,645 | ||||||||||||||||||||||
Mr. Patel | 2017 | — | — | — | — | — | — | |||||||||||||||||||||
Mr. Hussain | 2017 | 4,027 | — | 9,275 | — | — | 13,302 | |||||||||||||||||||||
| 2016 | 4,273 | — | 9,275 | — | — | 13,548 | ||||||||||||||||||||||
| 2015 | — | — | 9,275 | — | — | 9,275 | ||||||||||||||||||||||
Mr. Goff | 2017 | — | 9,500 | 27,614 | 21,914 | — | 59,028 | |||||||||||||||||||||
| 2016 | — | 1,140 | 35,006 | — | — | 36,146 | ||||||||||||||||||||||
| 2015 | 7,441 | 6,600 | 40,238 | — | — | 54,279 | ||||||||||||||||||||||
Mr. Storey | 2017 | — | 11,589 | — | — | — | 11,589 | |||||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||||||
Mr. Ewing | 2017 | — | 3,750 | 38,497 | 45,308 | 2,814,116 | 2,901,491 | |||||||||||||||||||||
| 2016 | 3,753 | — | 39,703 | — | — | 43,456 | ||||||||||||||||||||||
| 2015 | 3,775 | — | 43,745 | — | — | 47,520 | ||||||||||||||||||||||
In accordance with applicable SEC and accounting rules, we have not reflected the accrual or payment of dividends relating to unvested restricted stock as compensation in the Summary Compensation Table. In addition, the amounts shown in the Summary Compensation Table do not reflect any benefits associated with the named officers or their family members participating in recreational activities scheduled during board retreats. For additional information regarding perquisites, see “Compensation Discussion and Analysis – Analysis–Our Compensation Program Objectives and Components of Pay – Pay—Other Benefits –Perquisites.Benefits—Perquisites.”
| (6) | Mr. Storey was promoted to Chief Executive Officer on May 23, 2018. |
| (7) | Mr. Dev was appointed as interim Chief Financial Officer effective September 28, 2018 and was promoted to Executive Vice President and Chief Financial Officer effective November 6, 2018. |
| 72 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Overview
| (8) | Mr. Post retired from his role as CenturyLink’s Chief Executive Officer immediately following the |
| (9) | Mr. Patel resigned from his roles as CenturyLink’s Executive Vice President and Chief Financial Officer effective as of September 28, 2018. Upon his resignation, all of Mr. Patel’s unvested equity awards (including the awards reported as granted during 2018 under “Stock Awards”) and the balance of his Level 3 retention bonus ($214,500) were forfeited. For more information, see “Compensation Discussion and Analysis – Our Compensation Program Objectives and Components of Pay – Compensation Forfeited by our Former CFO.” |
| (10) | Mr. Hussain was |
|
| 2019 Proxy Statement | 73 | |||||||
EXECUTIVE COMPENSATION
Incentive Compensation and Other Awards
Incentive Compensation and Other Awards
20172018 Awards.The table and discussion below summarize:
| ◾ | the range of potential cash payouts to each of our named executives under our short-term incentive program with respect to performance during 2018; and |
| ◾ | grants of long-term compensation awarded to each named officer on the dates indicated below, including the type of equity award and whether the award is time- or performance-based. |
Grants of Plan-Based Awards(1)
Name | Type of Award and Grant Date(2) | Range of Payouts Under 2017 Non- Equity Incentive Plan Awards(3) | Estimated Future Share Payouts Under Equity Incentive Plan Awards(4) | All other Stock Awards: Unvested Shares (#)(5) | Grant Date Fair Value of Stock Awards ($)(6) | Type of Award and Grant Date(2)
|
Range of Payouts Under |
Estimated Future Share Payouts |
All other
|
Grant of Stock
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) |
Threshold ($)
|
Target ($)
|
Maximum ($)
|
Threshold (#)
|
Target (#)
|
Maximum (#)
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Glen F. Post, III | Annual Bonus | $ | 1,093,750 | $ | 2,187,500 | $ | 4,375,000 | — | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey K. Storey | Annual Bonus | $ | 1,610,354 | $ | 3,220,707 | $ | 6,441,414 | — | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 135,361 | 3,339,356 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-R | — | — | — | 50,761 | 101,521 | 203,042 | — | 3,161,364 | Annual TVRS | — | — | — | — | — | — | 267,103 | 4,946,748 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-A | — | — | — | 50,761 | 101,522 | 203,044 | — | 1,693,387 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Integration RS | — | — | — | — | — | — | 62,640 | 1,620,497 | Annual PBRS | — | — | — | 200,328 | 400,655 | 801,310 | — | 7,420,131 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Sunit S. Patel | Signing TVRS | — | — | — | — | — | — | 67,377 | 1,202,679 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aamir Hussain | Annual Bonus | 285,377 | 570,755 | 1,141,510 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Initial PBRS | — | — | — | 162,777 | 325,554 | 651,108 | — | 5,827,417 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Promotion TVRS | — | — | — | — | — | — | 156,870 | 2,905,232 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Promotion PBRS | — | — | — | 117,653 | 235,306 | 470,612 | — | 3,162,513 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indraneel Dev | Annual Bonus | $ | 178,150 | $ | 356,300 | $ | 712,600 | — | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 19,777 | 374,379 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 25,480 | 628,592 | Annual PBRS | — | — | — | 9,889 | 19,777 | 39,554 | — | 374,379 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-R | — | — | — | 9,555 | 19,110 | 38,220 | — | 595,085 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-A | — | — | — | 9,555 | 19,110 | 38,220 | — | 318,755 | Special PBRS | — | — | — | 22,532 | 45,063 | 90,126 | — | 839,947 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retention TVRS | — | — | — | — | — | — | 187,920 | 4,861,490 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Integration RS | — | — | — | — | — | — | 12,528 | 324,099 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stacey W. Goff | Annual Bonus | 307,878 | 615,756 | 1,231,512 | — | — | — | — | — | Annual Bonus | $ | 360,011 | $ | 720,021 | $ | 1,440,042 | — | — | — | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 20,065 | 495,004 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-R | — | — | — | 7,525 | 15,049 | 30,098 | — | 468,626 | Annual TVRS | — | — | — | — | — | — | 46,265 | 828,144 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-A | — | — | — | 7,525 | 15,049 | 30,098 | — | 251,017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retention TVRS | — | — | — | — | — | — | 187,920 | 4,861,490 | Annual PBRS | — | — | — | 34,700 | 69,399 | 138,798 | — | 1,242,242 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Integration RS | — | — | — | �� | — | — | 11,484 | 297,091 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey K. Storey | Signing TVRS | — | — | — | — | — | — | 217,036 | 3,874,093 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
R. Stewart Ewing, Jr. | Annual Bonus | 322,272 | 644,544 | 1,289,087 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Scott A. Trezise | Annual Bonus | $ | 190,004 | $ | 380,008 | $ | 760,016 | — | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 24,842 | 612,852 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-R | — | — | — | 9,316 | 18,632 | 37,264 | — | 580,200 | Annual TVRS | — | — | — | — | — | — | 16,193 | 289,855 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| AnnualPBRS-A | — | — | — | 9,317 | 18,633 | 37,266 | — | 310,798 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual PBRS | — | — | — | 12,145 | 24,290 | 48,580 | — | 434,791 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Former Executives: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Glen F. Post, III | Annual Bonus | $ | 428,511 | $ | 857,021 | $ | 1,714,042 | — | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 196,629 | 3,519,659 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual PBRS | — | — | — | 147,473 | 294,945 | 589,890 | — | 5,279,516 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Director TVRS | — | — | — | — | — | — | 8,744 | 161,939 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sunit S. Patel | Annual Bonus | — | — | — | — | — | — | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 69,398 | 1,242,224 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual PBRS | — | — | — | 52,050 | 104,099 | 208,198 | — | 1,863,372 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Initial PBRS | — | — | — | 19,436 | 38,871 | 77,742 | — | 695,791 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special PBRS | — | — | — | 52,488 | 104,976 | 209,952 | — | 1,346,842 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aamir Hussain | Annual Bonus | $ | 305,763 | $ | 611,525 | $ | 1,223,050 | — | — | — | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual TVRS | — | — | — | — | — | — | 62,458 | 1,117,998 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annual PBRS | — | — | — | 46,849 | 93,698 | 187,396 | — | 1,677,194 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | This chart includes only cash bonuses granted under incentive plans, and excludes cash payments reported in the “Bonus” column of the Summary Compensation Table. For more information on |
| cash bonuses, see |
| 74 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Incentive Compensation and Other Awards
| (2) | For purposes of this column: |
| ◾ | “Annual Bonus” means the bonuses that our named executives were eligible to earn under the CenturyLink STI Program for 2018; |
| ◾ | “Annual TVRS” means our time-vested restricted stock or restricted stock units awarded under our annual long-term incentive program to certain named executives on February 21, 2018 (each named executive other than Mr. Storey) or on May 24, 2018 (Mr. Storey); |
| ◾ | “Annual PBRS” means our performance-based restricted stock or restricted stock units awarded under our annual long-term incentive program to certain named executives on February 21, 2018 (each named executive other than Mr. Storey) or on May 24, 2018 (Mr. Storey); |
| ◾ | “Promotion TVRS” means a grant of time-vested restricted stock granted to Mr. Storey on May 24, 2018 per his amended and |
| ◾ | “Promotion PBRS” means a grant of performance-based restricted stock granted to Mr. Storey on May 24, 2018 per his amended and restated offer letter; |
| ◾ | “Initial PBRS” means the |
| ◾ | “Director TVRS” means a grant of time-vested restricted stock awarded to Mr. Post under our director compensation program once he became an outside director following his May 23, 2018 retirement; and |
| ◾ | “Special PBRS” means a grant of performance-based restricted stock awarded to |
With respect to Mr. Patel’s awards, all of these were subsequently forfeited upon his resignation from all positions with the Company effective September 28, 2018. For more information on these awards, see “Compensation Discussion and Analysis—Our Compensation Program Objectives and Components of Pay—Short-Term Incentive Bonuses,” “—Grants of Long-Term Incentive Compensation” and “—Special Grants.” |
For more information on these awards, see “Compensation Discussion and Analysis — Our Compensation Program Objectives and Components of Pay — Short-Term Incentive Bonuses,” “ — Annual Grants of Long-Term Incentive Compensation,” and “ — Awards Related to Level 3 Combination.”
| (3) | These columns provide information on the potential payouts under the annual bonus program for |
| (4) |
Calculated in accordance with FASB ASC Topic 718 in the manner described in Note |
Short-Term Incentive Compensation.Our legacy named executives participated in the CenturyLink short-term incentive program for 2017, but our newly named executives, who were employed with us for only two months of 2017, earned discretionary bonuses under the Legacy Level 3 Discretionary Bonus Program.2018. For more information regarding these programs, including the specific performance metrics applicable to the CenturyLink STI program, see “Compensation Discussion and Analysis — Analysis—Our Compensation Program Objectives and Components of Pay — Pay—Short-Term Incentive Bonuses.”
Annual Grants of Long-Term Incentive Compensation.We make annual grants of long-term incentive awards to our executive officers. For the past several years, these awards have been 40% time-vested and 60%
performance-based. In February 2017,2018, each of our legacy named executives other than Mr. Storey was granted both time- and performance-based shares of restricted stock under this program. The time-vested shares will vestone-third per year over the first three anniversaries of the date of grant and the performance-based shares will vest in two equal installments on February 21 of 2020 and 2021, depending upon our attainmentachievement of two separate performance metricsatwo-year Adjusted EBITDA run rate target. On
May 24, 2018, Mr. Storey received a restricted stock unit award substantially similar to the February 2018 annual grants to executive officers, including 60% performance-based and 40% time-based, as measured over a three-year performance period (our total shareholder return, the “relative” metric, and our attainment of absolute revenue targets, the “absolute” metric).his annual grant for 2018. For more information, see “Compensation Discussion and Analysis — Analysis—Our Compensation Program Objectives and Components of Pay — Annual Pay—Grants of Long-Term Incentive Compensation.” For information regarding LTI grants made in prior years, see the disclosure in our proxy statement for the year following the date of grant.
Awards RelatedInitial Performance-Based Restricted Stock Grants to Level 3 CombinationMessrs. Storey and Patel.We granted a combination of integrationAs disclosed in our 2018 proxy statement, we made certain initial equity grants to Messrs. Storey and retention awards to certain legacy named executives,Patel when they joined us in order to retain and incentivize them through2017 following the closingClosing of the Level 3 CombinationCombination. Although these initial grants were awarded at the Closing, the performance-based portion of these initial grants were not granted for accounting purposes until February 2018, when the performance conditions were finalized by our Compensation Committee. As such, these performance-based awards were not reported in our
| 2019 Proxy Statement | 75 | |||||||
EXECUTIVE COMPENSATION
Incentive Compensation and Other Awards
2017 Summary Compensation Table but appear in our 2018 Summary Compensation Table. The number of shares earned would range between 0 to 200% of the critical post-Closing integration period. In addition, wenumber granted, certain cashdepending on our achievement of an Adjusted EBITDA run rate target. Mr. Storey’s award had aone-year target (fiscal 2018) while Mr. Patel’s award had atwo-year target (fiscal years 2018 and equity awards to2019). Mr. Patel’s award was forfeited following his resignation from employment on September 28, 2018. Based on our newly named executivesfiscal 2018 performance, Mr. Storey’s award vested at 200% in order to incentivize them to join our senior leadership team following the Level 3 Combination.March of 2019. For more information on these programs,initial grants, see “Compensation Discussion and Analysis — Analysis—Our Compensation Program Objectives and Components of Pay — Awards RelatedPay—Special Grants.”
Special Grants. In connection with Mr. Storey’s promotion to Level 3 Combination.Chief Executive Officer, he received the annual grant described above and also aone-time promotion grant that consisted of 60% performance-based restricted stock and 40% time-based restricted stock. The number of shares earned on the performance-based portion will range between 0 to 200% of the number granted, with the number earned determined using atwo-step process: (1) between 0 to 100% of target will be earned depending on the Company’s cumulative Adjusted EBITDA results for the three-year period from 2018 to 2020 and (2) provided that target performance is met or exceeded under step (1), Mr. Storey may earn above target (up to a maximum 200% of target) based on the Company’s relative total shareholder return over the same period against the performance of a peer group of companies in the telecommunications industry. In June 2018, Mr. Patel received a retention grant with the same performance conditions, which was forfeited in its entirety following his resignation in September 2019. In August 2018, prior to his appointment as executive officer, Mr. Dev received a retention grant comprised of performance-based restricted stock, which is divided into two equal tranches, with payout under each tranche ranging from 0 to 200% depending upon our achievement against atwo-year Adjusted EBITDA run rate target. For more information on these equity grants, see “Compensation Discussion and Analysis—Our Compensation Program Objectives and Components of Pay—Special Grants.”
Acceleration of Vesting of Equity Awards.All of the shares of the time-vested restricted stock and performance-based restricted stock awardedequity awards granted in 2017 also2018 will vest upon the death or disability of the named officer, and some or all of these sharesofficer. In addition, the Compensation Committee may, under certain circumstancesin its discretion, vest or remain subject to future vestingwaive the continued service requirement for a
named executive’s outstanding equity awards upon the retirement of the named officer at his or her retirement (at early or normal retirement age.age), in whole or in part. However, Mr. Storey’s equity awards may accelerate under certain additional scenarios, as memorialized in his amended and restated offer letter. For more information on these vesting acceleration triggers, see “Potential Termination Payments—Equity Acceleration Provisions of Mr. Storey’s Amended and Restated Offer Letter.” In addition, we have entered into change of control agreements with each named officer, which provide that, upon certain terminations of employment following a change of control of the Company, the sharestime-vested portions of the 2017 time-vested restricted stockoutstanding equity awards will vest and the shares of the 2017 performance-based restricted stock willportions may remain outstanding subject to future vesting, all as described in greater detail below under “ — “—Potential Termination Payments.Payments—Payments Made Upon a Change of Control.” The vesting terms for our outstanding restricted stock granted in earlier years are described in our prior proxy statements.
Dividends and Voting Rights.All dividends related to shares of the above-described time-vested and performance-based restricted stock (or dividend equivalents, in the case of time- or performance-based restricted stock units) will be paid to the holder only upon the vesting of such shares.shares or units. Unless and until forfeited, theseany shares of restricted stock may be voted by the named executive officers. However, holders of restricted stock units will have no voting rights unless and until they are issued shares in settlement of those awards.
Forfeiture.All of these above-described restricted sharesequity awards are subject to forfeiture if the officer competes with us or engages in certain other activities harmful to us, all as specified further in the forms of incentive agreements that we have filed with the SEC. For more information, see “ — “—Potential Termination Payments.”
Outstanding Awards.The following table summarizes information about all outstanding unvested equity awards held by our named executives at December 31, 2017.2018. Mr. Patel is not included in this chart because he did not have any unvested equity awards as of such date, as all such awards were forfeited upon his termination date of September 28, 2018.
| 76 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Incentive Compensation and Other Awards
Outstanding Equity Awards at December 31, 20172018(1)
| Stock Awards | Equity Incentive Awards(2) |
Stock Awards |
Equity Incentive Awards(2) | |||||||||||||||||||||||||||||||||||||
Name | Grant Date | Number of Unvested Shares or Units (#) | Market Value of Unvested Shares or Units ($) | Number of Unvested Shares or Units (#) | Market Value of Unvested Shares or Units ($) | Grant
| Number of Unvested Units (#)
| Market Value of Unvested Shares or Units ($)
| Number of Unvested Units (#)
| Market Value Units ($)
| ||||||||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||||||||||
Glen F. Post, III | 2/23/2015 | 29,254 | (3) | $ | 487,957 | 131,640 | (12) | $ | 2,195,755 | |||||||||||||||||||||||||||||||
Jeffrey K. Storey | 3/1/2017 | 108,921 | (3) | $ | 1,650,153 | — | $ | — | ||||||||||||||||||||||||||||||||
| 2/23/2016 | 86,884 | (3) | 1,449,225 | 195,491 | 3,260,790 | |||||||||||||||||||||||||||||||||||
| 2/21/2017 | 135,361 | (3) | 2,257,821 | 203,043 | 3,386,757 | 11/1/2017 | 217,036 | (4) | 3,288,095 | — | — | |||||||||||||||||||||||||||||
| 6/1/2017 | 62,640 | (3) | 1,044,835 | — | — | |||||||||||||||||||||||||||||||||||
Sunit S. Patel | 3/1/2017 | 146,262 | (4) | 2,439,650 | — | — | ||||||||||||||||||||||||||||||||||
| 11/1/2017 | 67,377 | (5) | 1,123,848 | — | — | 2/21/2018 | — | — | 325,554 | (12) | 4,932,143 | |||||||||||||||||||||||||||||
Aamir Hussain | 2/23/2015 | 4,818 | (6) | 80,364 | 21,682 | (12) | 361,656 | |||||||||||||||||||||||||||||||||
| 5/24/2018 | 267,103 | (5) | 4,046,610 | 400,655 | (13) | 6,069,923 | ||||||||||||||||||||||||||||||||||
| 5/24/2018 | 156,870 | (6) | 2,376,581 | 235,306 | (14) | 3,564,886 | ||||||||||||||||||||||||||||||||||
Indraneel Dev | 7/1/2015 | 4,505 | (3) | 68,251 | — | — | ||||||||||||||||||||||||||||||||||
| 4/1/2016 | 11,987 | (3) | 181,603 | — | — | |||||||||||||||||||||||||||||||||||
| 7/1/2016 | 7,988 | (3) | 121,018 | — | — | |||||||||||||||||||||||||||||||||||
| 3/1/2017 | 22,272 | (3) | 337,421 | — | — | |||||||||||||||||||||||||||||||||||
| 11/1/2017 | 34,552 | (7) | 523,463 | — | — | |||||||||||||||||||||||||||||||||||
| 2/19/2018 | 19,777 | (5) | 299,622 | 19,777 | (13) | 299,622 | ||||||||||||||||||||||||||||||||||
| 2/23/2016 | 21,466 | (7) | 358,053 | 48,298 | 805,611 | |||||||||||||||||||||||||||||||||||
| 2/21/2017 | 25,480 | (8) | 425,006 | 38,220 | 637,510 | 8/7/2018 | — | — | 45,063 | (15) | 682,704 | |||||||||||||||||||||||||||||
| 6/1/2017 | 12,528 | (9) | 208,967 | — | — | |||||||||||||||||||||||||||||||||||
| 6/1/2017 | 187,920 | (10) | 3,134,506 | — | — | |||||||||||||||||||||||||||||||||||
Stacey W. Goff | 2/23/2015 | 4,337 | (6) | 72,341 | 19,514 | (12) | 325,494 | 2/23/2016 | 6,440 | (8) | 97,566 | 28,979 | (16) | 439,032 | ||||||||||||||||||||||||||
| 2/23/2016 | 12,880 | (7) | 214,838 | 28,979 | 483,370 | |||||||||||||||||||||||||||||||||||
| 2/21/2017 | 20,065 | (8) | 334,684 | 30,098 | 502,035 | 2/21/2017 | 13,377 | (9) | 202,662 | 30,098 | (17) | 455,985 | ||||||||||||||||||||||||||||
| 6/1/2017 | 11,484 | (9) | 191,553 | — | — | |||||||||||||||||||||||||||||||||||
| 6/1/2017 | 187,920 | (10) | 3,134,506 | — | — | 6/1/2017 | 125,280 | (10) | 1,897,992 | — | — | |||||||||||||||||||||||||||||
Jeffrey K. Storey | 3/1/2017 | 163,382 | (4) | 2,725,212 | — | — | ||||||||||||||||||||||||||||||||||
| 11/1/2017 | 217,036 | (11) | 3,620,160 | — | — | |||||||||||||||||||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||||||||||||||||||
R. Stewart Ewing, Jr.(13) | 2/23/2015 | — | — | 24,160 | (12) | 402,989 | ||||||||||||||||||||||||||||||||||
| 2/23/2016 | — | — | 35,879 | 598,462 | ||||||||||||||||||||||||||||||||||||
| 2/21/2017 | — | — | 37,265 | 621,580 | 2/21/2018 | 46,265 | (5) | 700,915 | 69,399 | (13) | 1,051,395 | |||||||||||||||||||||||||||||
Scott A. Trezise | 2/23/2016 | 3,067 | (8) | 46,465 | 13,800 | (16) | 209,070 | |||||||||||||||||||||||||||||||||
| 2/21/2017 | 6,901 | (9) | 104,550 | 15,527 | (17) | 235,234 | ||||||||||||||||||||||||||||||||||
| 6/1/2017 | 97,440 | (10) | 1,476,216 | — | — | |||||||||||||||||||||||||||||||||||
| 2/21/2018 | 16,193 | (5) | 245,324 | 24,290 | (13) | 367,994 | ||||||||||||||||||||||||||||||||||
Former Executives: | ||||||||||||||||||||||||||||||||||||||||
Glen F. Post, III | 2/23/2016 | — | $ | — | 195,491 | (16) | $ | 2,961,689 | ||||||||||||||||||||||||||||||||
| 2/21/2017 | — | — | 203,043 | (17) | 3,076,101 | |||||||||||||||||||||||||||||||||||
| 2/21/2018 | — | — | 294,945 | (13) | 4,468,417 | |||||||||||||||||||||||||||||||||||
| 5/24/2018 | 8,744 | (11) | 132,472 | — | — | |||||||||||||||||||||||||||||||||||
Aamir Hussain | 2/23/2016 | — | — | 48,298 | (16) | 731,715 | ||||||||||||||||||||||||||||||||||
| 2/21/2017 | — | — | 38,220 | (17) | 579,033 | |||||||||||||||||||||||||||||||||||
| (1) | All information presented in this table is as of December 31, |
| (2) | Represents performance-based |
| 2019 Proxy Statement | 77 | |||||||
EXECUTIVE COMPENSATION
Incentive Compensation and Other Awards
| (3) |
Represents restricted stock units, originally granted to |
Grant Date | Vesting Date | |
July 1, 2015 | July 1, 2019 | |
April 1, 2016 | February 1, 2019 | |
July 1, 2016 | two equal installments on July 1 of 2019 and 2020 | |
March 1, 2017 | two equal installments on March 1 of 2019 and 2020 | |
| (4) | Represents a grant of time-vested restricted stock that vested on February 1, 2019, subject to Mr. Storey’s continued employment through such date. |
| (5) | Represents an annual grant of time-vested restricted stock (for Messrs. Dev, Goff, and Trezise) or restricted stock units (for Mr. Storey) that will vest in three equal installments on the first three anniversaries of the grant date (February 19 for Mr. Dev; February 21, 2018 for Messrs. Goff and Trezise; May 24, 2018 for Mr. Storey), subject to the executive’s continued employment through the applicable vesting date. |
| (6) | Represents a promotion grant of time-vested restricted stock that will vest in three equal installments on May 24 of 2019, 2020, and 2021, subject to the executive’s continued employment through the applicable vesting date. |
| (7) | These shares of time-vested restricted stock will vest in two equal installments on November 1 of 2019 and 2020, subject to the executive’s continued employment through the applicable vesting date. |
| These shares of time-vested restricted stock vested on February 23, |
These shares of time-vested restricted stock vested or will vest in two equal installments on February |
| (10) | Represents shares of restricted stock granted under a retention award program to certain legacy named executives. These awards will vest |
| (11) | These shares of time-based restricted stock, granted to Mr. |
| (12) | Represents the performance-based portion of an initial equity grant awarded to Mr. Storey on November 1, 2017 under his original offer letter. However, the performance-based portion of this initial grant was not granted for accounting purposes until February 2018, |
| (13) | Represents the performance-based portion of our 2018 annual restricted stock or restricted stock unit awards. These awards will vest in two equal installments on February 21 of 2020 and 2021, depending upon our achievement of atwo-year Adjusted EBITDA run rate target. For more information on these grants, see “—Incentive Compensation |
| (14) | Represents the performance-based portion of a promotion grant to Mr. Storey. The number of shares earned will range between 0 to 200% of the number granted, with the number earned determined using atwo-step process: (1) between 0 to 100% of target will be earned depending on the Company’s cumulative Adjusted EBITDA results for the three-year period from 2018 to 2020 and (2) provided that target performance is met or exceeded under step (1), Mr. Storey may earn above target (up to a maximum 200% of target) based on the Company’s relative total shareholder return over the same period against the performance of a peer group of companies in the telecommunications industry. For more information, see “—Incentive Compensation and other Awards” and “Compensation Discussion and Analysis—Our |
| (15) | Represents a special performance-based award granted to Mr. Dev before he was appointed an executive officer. This award is divided into two equal tranches, with payout under each tranche ranging from 0 to 200% depending upon our achievement against atwo-year Adjusted EBITDA run rate target. The first tranche is defined and calculated in the same manner as the performance-based portion of our 2018 annual grants and the performance period covers fiscal years 2018 and 2019 (vesting date of February 28, 2020), while the second tranche is defined in the same manner as the performance-based portion of our 2019 annual grants and covers fiscal years 2019 and 2020 (vesting date of August 7, 2021). |
| (16) | Represents the performance-based portion of awards granted in 2016 as part of our annual LTI program. Based on our performance from 2016 to 2018, 79.11% of the TSR performance-based restricted stock and 82.4% of the absolute revenue performance-based restricted stock vested in February 2019 and the remaining shares were forfeited. |
| (17) | Represents the performance-based portion of awards granted in 2017 as part of our annual LTI program. |
| 78 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Incentive Compensation and Other Awards
Vesting of Equity Awards During 20172018. The following table provides details regarding the shares of restricted stock or restricted stock unitsequity awards held by our named executives that vested during 2017. Although there2018. Restricted stock and restricted stock units were some stock options outstanding during part of 2017, all such optionsthe only equity awards held by our named executives expired, unexercised, on February 21, 2017.during 2018.
Stock Vested During 20172018
Name | Number of Shares Acquired on Vesting(1) | Value Realized on Vesting(2) | ||||||
Current Executives: | ||||||||
Glen F. Post, III | 215,325 | $ | 5,259,350 | |||||
Sunit S. Patel(3) | 387,437 | 6,915,750 | ||||||
Aamir Hussain | 36,572 | 725,217 | ||||||
Stacey W. Goff | 34,736 | 848,023 | ||||||
Jeffrey K. Storey(4) | 875,432 | 15,626,461 | ||||||
Former Executive: | ||||||||
R. Stewart Ewing, Jr. | 89,165 | 1,733,094 | ||||||
Name | Number of Shares Acquired on Vesting(1) | Value Realized on Vesting(2) | ||||||
Current Executives: | ||||||||
Jeffrey K. Storey | 54,461 | $ | 947,630 | |||||
Indraneel Dev | 93,046 | 1,702,029 | ||||||
Stacey W. Goff | 101,320 | 1,796,848 | ||||||
Scott A. Trezise | 70,416 | 1,245,422 | ||||||
Former Executives: | ||||||||
Glen F. Post, III | 462,608 | $ | 8,645,815 | (3) | ||||
Sunit S. Patel | 48,756 | 848,354 | ||||||
Aamir Hussain | 260,472 | 5,197,774 | (3) | |||||
| (1) | Represents both time- and performance-based equity awards that vested during 2018. For |
| (2) | Based on the closing trading price of the Common Shares on the applicable vesting date. |
| (3) | Includes shares accelerated upon the retirement of Mr. |
Amount of Benefits.The following table and discussion summarize pension benefits payable to the named officers under (i) the CenturyLink Component of the CenturyLink Combined Pension Plan, qualified under Internal Revenue Code Section 401(a), which permits eligible participants (including officers) who have completed at least five years of service to receive a pension benefit upon attaining early or normal retirement age, and (ii) our nonqualified supplemental defined benefit plan, which is designed to pay supplemental retirement benefits to certain officers in amounts equal to the benefits such officers would otherwise forego due to federal limitations on compensation and benefits under qualified plans. We refer to these particular defined benefit plans below as our “Qualified Plan” and our “Supplemental Plan,” respectively, and as our “Pension Plans,” collectively.
Name(1) | Plan Name | Number of Years of Credited Service | Present Value of Accumulated Benefit(2) | Payments During Last Fiscal Year | ||||||||||
Current Executives: | ||||||||||||||
Glen F. Post, III(3) | Qualified Plan | 19 | $ | 2,304,197 | $ | — | ||||||||
| Supplemental Plan
|
| 19
| �� |
| 2,945,407
|
|
| —
|
| |||||
Stacey W. Goff | Qualified Plan | 19 | 668,591 | — | ||||||||||
| Supplemental Plan | 19 | 523,687 | — | |||||||||||
Former Executive: | ||||||||||||||
R. Stewart Ewing, Jr.(4) | Qualified Plan | 19 | 1,711,675 | — | ||||||||||
| Supplemental Plan
|
| 19
|
|
| 1,209,531
|
|
| 9,619
| (5)
| |||||
Name(1) | Plan Name | Number of Years of Service | Present Value of Accumulated Benefit(2) | Payments During Last Fiscal Year | ||||||||||||
Current Executive: | ||||||||||||||||
Stacey W. Goff |
| Qualified Plan |
|
| 20 |
| $ | 670,391 |
|
| — |
| ||||
| Supplemental Plan |
|
| 20 |
|
| 465,877 |
|
| — |
| |||||
Former Executive: | ||||||||||||||||
Glen F. Post, III(3) |
| Qualified Plan |
|
| 20 |
| $ | — |
| $ | 2,381,686 |
| ||||
| Supplemental Plan |
|
| 20 |
|
| 2,961,465 |
|
| 110,054 |
| |||||
| (1) | Each of Messrs. Storey, Dev and Trezise are, and Messrs. Patel and Hussain |
| 2019 Proxy Statement | 79 | |||||||
EXECUTIVE COMPENSATION
Incentive Compensation and Other Awards
| (2) | These figures represent accumulated benefits as of December 31, |
| (3) | As described elsewhere herein in greater detail, Mr. Post |
Pension Plans.With limited exceptions specified in the Pension Plans, we “froze” our Qualified Plan and Supplemental Plan as of December 31, 2010, which means that no additional monthly pension benefits have accrued under such plans since that date (although service after that date continues to count towards vesting and benefit eligibility and a limited transitional benefit for eligible participants continued to accrue through 2015).
Prior to this freezing of benefit accruals, the aggregate amount of these named officers’ total monthly pension benefit under the Qualified Plan and Supplemental Plan was equal to the participant’s years of service since 1999 (up to a maximum of 30 years) multiplied by the sum of (i) 0.5% of his final average pay plus (ii) 0.5% of his final average pay in excess of his Social Security covered compensation, where “final average pay” was defined as the participant’s average monthly compensation during the 60 consecutive month period within his last ten years of employment in which he received his highest compensation. Effective December 31, 2010, the Qualified Plan and Supplemental Plan were amended to cease all future benefit accruals under the above formula (except where a collective bargaining agreement provides otherwise). In lieu of additional accruals under the above-described formula, each affected participant’s accrued benefit as of December 31, 2010 were increased 4% per year, compounded annually through the earlier of December 31, 2015 or the termination of the participant’s employment.
Under both Pension Plans, “average monthly compensation” is determined based on the participant’s salary plus annual cash incentive bonus. Although the retirement benefits described above are provided through separate plans, we have in the past transferred benefits from the Supplemental Plan to the Qualified Plan, and reserve the right to make
further similar transfers to the extent allowed under applicable law. The value of benefits transferred to the Qualified Plan, which directly offset the value of benefits in the Supplemental Plan, will be payable to the recipients in the form of enhanced annuities or supplemental benefits and are reflected in the table above under the “Present Value of Accumulated Benefits” column.
The normal form of benefit payment under both of our Pension Plans is (i) in the case of unmarried participants, a monthly annuity payable for the life of the participant, and (ii) in the case of married participants, an actuarially equivalent monthly annuity payable for the lifetime of the participant and a survivor annuity payable for the lifetime of the spouse upon the participant’s death. Participants may elect optional forms of annuity benefits under each Pension Plan and, in the case of the Qualified Plan, an annuity that guarantees ten years of benefits, all of which are actuarially equivalent in value to the normal form of benefit. The enhanced annuities described in the prior paragraph may be paid in the form of a lump sum, at the participant’s election.
The normal retirement age is 65 under both of the Pension Plans. Participants may receive benefits under both of these plans upon “early retirement,” which is defined as attaining age 55 with five years of service. Under both of these plans, the benefit payable upon early termination is calculated under formulas that pay between 60% to 100% of the base plan benefit and 48% to 92% of the excess plan benefit, in each case with the lowest percentage applying to early retirement at age 55 and proportionately higher percentages applying to early retirement after age 55. For additional information on early retirement benefits, please see the applicable early retirement provisions of the Pension Plans, copies of which are filed with the SEC.
| 80 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Deferred Compensation
The following table and discussion provides information on (i) our Supplemental Dollars & Sense Plan, under which certain of our legacy named officers have deferredmay elect to defer a portion of their salary in excess of the amounts that may be deferred under federal law governing qualified 401(k) plans, and (ii) the deferred compensation arrangements we have with each of our newly named executives as a result of accelerating the vesting of certain equity awards in connection with the Level 3 Combination,Messrs. Storey and Patel, which are described in more detail above under “- Vesting of Equity Awards During 2017” and in the text following the table below. For 2018, only Messrs. Goff and Post have elected to participate in our Supplemental Dollars & Sense Plan.
Non-Qualified Deferred Compensation
Name | Aggregate Balance at December 31, 2016 | Executive Contributions in 2017(2) | CenturyLink Contributions in 2017(3) | Aggregate Earnings in 2017(4) | Aggregate Withdrawals/ Distributions | Aggregate Balance at December 31, 2017 | Aggregate Balance at December 31, 2017(1) | Executive Contributions in 2018(2) | CenturyLink Contributions in 2018(3) | Aggregate Earnings | Aggregate Withdrawals/ Distributions(5) | Aggregate Balance at December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey K. Storey | $ | 14,602,206 | $ | — | $ | — | $ | 24,759 | $ | 9,349,129 | $ | 5,277,836 | ||||||||||||||||||||||||||||||||||||||||||
Stacey W. Goff |
| 2,126,398 |
| 37,989 |
| 10,143 |
| (84,260 | ) |
| — |
| 2,090,270 | |||||||||||||||||||||||||||||||||||||||||
Former Executives: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Glen F. Post, III | $ | 4,314,074 | $ | 256,207 | $ | 96,740 | $ | 572,097 | — | $ | 5,239,118 | $ | 5,239,118 | $ | 186,611 | $ | 77,337 | $ | (2,947 | ) | $ | 5,550,118 | $ | — | ||||||||||||||||||||||||||||||
Sunit S. Patel | — | 6,915,750 | — | — | — | 6,915,750 |
| 6,915,750 |
| — |
| — |
| — |
| 5,002,605 |
| 1,913,145 | ||||||||||||||||||||||||||||||||||||
Stacey W. Goff | 1,680,014 | 84,534 | 24,702 | 337,148 | — | 2,126,398 | ||||||||||||||||||||||||||||||||||||||||||||||||
Jeffrey K. Storey | — | 15,626,461 | — | (1,024,255 | ) | — | 14,602,206 | |||||||||||||||||||||||||||||||||||||||||||||||
Former Executive: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
R. Stewart Ewing, Jr. | 1,612,427 | 141,848 | 29,222 | 255,751 | — | 2,039,248 | ||||||||||||||||||||||||||||||||||||||||||||||||
| (1) |
For each |
| (2) | For participants in the Supplemental Dollars & Sense Plan, the amounts in this column reflect contributions under the Supplemental Dollars & Sense Plan by the officer of salary paid in 2018 and reported as 2018 salary compensation in the Summary Compensation Table. |
| (3) | For participants in the Supplemental Dollars & Sense Plan, this column includes our partial match of the officer’s contribution under the terms of that plan, all of which were included as |
| (4) | For participants in the Supplemental Dollars & Sense Plan, this column represents aggregate earnings in |
| (5) | For Mr. Storey, this figure represents the value of Deferred RSUs paid out to him during 2018 (valued based on the closing price of a Common Share on the scheduled payout date). For Mr. Patel, this figure represents the amount of the Deferred Cash Award paid out to him during 2018. |
Supplemental Dollars & Sense Plan.Under. Under this plan, certain of our senior officers may defer up to 50% of their salary in excess of the federal limit on annual contributions to a qualified 401(k) plan. For every dollar that
an eligible participant contributes to this plan up to 6% of his or her excess salary, we add an amount equal to the total matching percentage then in effect for matching contributions made by us under our qualified 401(k) plan (which for 20172018 equaled the sum of all of the initial 1% contributed and half of the next 5% contributed). All amounts contributed under this supplemental plan by the participants or us are allocated among deemed investments whichthat follow the performance of the same broad array of funds offered under our qualified 401(k) plan. This is
reflected in the market value of each participant’s account. Participants may change their deemed investments in these funds at any time. We reserve the right to transfer benefits from the Supplemental Dollars & Sense Plan to our qualified 401(k) or retirement plans to the extent allowed under Treasury regulations and other guidance. The value of benefits transferred to our qualified plans directly offsets the value of benefits in the Supplemental Dollars & Sense Plan. Participants in the Supplemental Dollars & Sense Plan normally receive payment of their account balances in a lump sum once they cease working full-time for us, subject to any deferrals mandated by federal law.
| 2019 Proxy Statement | 81 | |||||||
EXECUTIVE COMPENSATION
Deferred Compensation
Deferred Cash Award for Mr. Patel.As. As provided in Mr. Patel’s offer letter, we accelerated the vesting of his outstanding restricted stock units (previously granted by Level 3 and converted to CenturyLink RSUs in the Level 3 Combination) immediately following the Closing, except for the RSUs that Level 3 had granted to him in 2017, which will vest as originally scheduled (as described further in note 4 of the Outstanding Equity Awards table). In addition, all RSUs that had been granted to him by Level 3 before 2017 were cancelled and converted to a deferred cash award, based on theper-share closing price of our common stock on the date of Closing ($6,915,750), which will be paid to Mr. Patel in cash on the same schedule that thenow-cancelled awards would have otherwise settled and paid out in shares. In accordance with that schedule, Mr. Patel received or will receive the following approximate amounts on the following dates: $2,894,949 on February 1, 2018; $936,625 on April 1, 2018; $1,171,031 on July 1, 2018; $936,661 on February 1, 2019; $664,323 on July 1, 2019; and $312,161 on July 1, 2020.
Deferred RSUs for Mr. Storey.As. As provided in Mr. Storey’s original offer letter, upon the closing of
the Level 3 Combination, we accelerated the vesting of a portion of his outstanding restricted stock units (previouslyRSUs (which had originally been granted to him by Level 3 and were converted to CenturyLink RSUs in the Level 3 Combination) immediately following the Closing, except for 50% of the RSUs that Level 3 had granted, although they will continue to him in 2017, which will vest as originally scheduled (as described further in note 4 of the Outstanding Equity Awards table). Although the vesting of these 875,432 RSUs was accelerated, each will settle and pay out in shares in accordance with its original payment schedule. In accordance with that schedule, the following vested and deferred RSUs held by Mr. Storey settled or will settle in Common Shares on the following dates: 215,450 RSUs on February 1, 2018; 54,462 RSUs on March 1, 2018; 117,229 RSUs on April 1, 2018; 139,919 RSUs on July 1, 2018; 117,229 RSUs on February 1, 2019; 54,462 RSUs on March 1, 2019; 83,146 RSUs on July 1, 2019; 54,460 RSUs on March 1, 2020; and 39,075 RSUs on July 1, 2020.
Potential Termination Payments
The materials below discuss payments and benefits that our officers are eligible to receive if they (i) resign or retire, (ii) are terminated by us, with or without cause, (iii) die or become disabled, or (iv) become entitled to termination benefits following a change of control of CenturyLink. The amounts actually paid to Mr. EwingMessrs. Post, Patel and Hussain in connection with the termination of histheir employment with us in late 20172018 are detailed below under “- “—Amounts Paid to Former Executive.Executives.”
Notwithstanding the information appearing below, you should be aware that our officers have agreed to forfeit their equity compensation awards (and profits derived therefrom) if they compete with us or engage in other activity harmful to our interests while employed with us or within 18 months after termination. Certain other compensation might also be recoverable by us under certain circumstances after termination of employment. See “Compensation Discussion and Analysis — Analysis—Our Policies, Processes and Guidelines Related to Executive Compensation — Compensation—Forfeiture of Prior Compensation” for more information.
Payments Made Upon All Terminations.Regardless of the manner in which our employees’ employment terminates prior to a change of control, they are entitled to receive amounts earned during their term of employment (subject to the potential forfeitures discussed above). With respect to each such terminated employee, such amounts include his or her:
| ◾ | salary and earned but unused vacation pay through the date of termination, payable immediately following termination in cash; |
| ◾ | annual incentive bonus, but only if such employee served for the entire bonus period or through the date such bonus is payable (unless this service requirement is waived or more favorable treatment is applicable in the case of retirement, death or disability); |
| ◾ | equity awards that have vested; |
| ◾ | benefits accrued and vested under our qualified and supplemental defined benefit pension plans, with payouts generally occurring at early or normal retirement age; |
| ◾ | vested account balance held in our qualified and supplemental defined contribution plans, which the employee is generally free to receive at the time of termination; and |
| ◾ | rights to continued health care benefits to the extent required by law. |
Payments Made Upon Voluntary or Involuntary Terminations.In addition to benefits described under the heading immediately above, employees involuntarily terminated by us without cause prior to a change of control are also entitled, subject to certain conditions, to:
| ◾ | payment of their annual incentive bonus or apro rataportion thereof, depending on their termination date; |
| ◾ | if approved by our Compensation Committee in its discretion, accelerated vesting of all, or a portion of, unvested time-vested equity awards and/or to permit an employee to retain all or a portion of his or her unvested performance-based restricted stock for the remainder of the applicable performance period; and |
| 82 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Potential Termination Payments
| ◾ | a cash severance payment in the amount described under “Compensation Discussion and Analysis—Our Compensation Program Objectives and Components of Pay—Other Benefits—Severance Benefits” plus the receipt of any short-term incentive bonus payable under their applicable bonus plan and outplacement assistance benefits. |
None of the benefits listed immediately above are payable if the employee resigns or is terminated for cause, except that resigning employees are entitled to exercise their vested options within 190 days and employees terminated for cause could request the Compensation Committee to accelerate their unvested time-vested restricted stock (which is unlikely to be granted).cause.
Payments Made Upon Retirement.Employees who retire in conformity with our retirement plans and policies are entitled, subject to certain conditions, to:
| payment of their annual incentive bonus or apro rata portion thereof, depending on their retirement date; |
| ◾ | post-retirement life, health and welfare benefits; and |
| ◾ | all of the benefits described under the heading “—Payments Made Upon All Terminations.” |
In addition, the Committee has discretion to accelerate the vesting of all, or a portion of, unvested time-vested restricted stockequity awards and/or to permit an employee who retires from the Company to retain all or a portion of his or her unvested performance-based restricted stockequity awards for the remainder of the applicable performance period.
Payments Made Upon Death or Disability.Upon death or disability, officers (or their estates) are generally entitled to (without duplication of benefits):
| ◾ | payments under our disability or life insurance plans, as applicable; |
| ◾ | keep all of their time-vested equity awards, whether vested or unvested; |
| ◾ | retain a pro rata portion of their performance-based equity awards, which would remain subject to performance conditions and original payout timing; |
| ◾ | payment of their annual incentive bonus or apro rata portion thereof, depending on their date of death or disability; |
| ◾ | continued rights to receive (i) life, health and welfare benefits at early or normal retirement age, in the event of disabilities of employees with ten years of prior service, or (ii) health and welfare benefits payable to surviving eligible dependents, in the event of death of employees meeting certain age and service requirements; and |
| ◾ | all of the benefits described under the heading “—Payments Made Upon All Terminations,” except that (i) upon death benefits under our retirement plans are generally available only to surviving spouses and (ii) benefits payable to mentally disabled employees under our nonqualified defined benefit retirement plans may be paid prior to retirement age. |
Equity Acceleration Provisions of Mr. Storey’s Amended and Restated Offer Letter.In conjunction with appointing Mr. Storey as our CEO, we amended and restated our offer letter with him that provides that certain outstanding, unvested equity awards will accelerate upon a “qualifying termination” or, subject to certain conditions, his retirement. A “qualifying termination” is defined in his amended and restated offer letter to include death, “disability,” termination by us without “cause,” or termination by Mr. Storey with “good reason” (each as further defined in the offer letter). Upon a qualifying termination, vesting of all unvested time-vested awards is accelerated and, with respect to performance-based awards, Mr. Storey will be permitted to retain all such awards although they will remain subject to their original performance conditions and payout schedule (except upon his death, when the awards would pay out at target). In addition, upon his retirement, provided that he has given us 90 days notice of his intent to retire, Mr. Storey is entitled to receive (i) life, healthfull service vesting as well with respect to his annual LTI grants (not including the promotion grant he was awarded upon his appointment as CEO), with any performance-based awards remaining subject to their original performance conditions and welfare benefits at early or normalpayout schedule. However, his 2018 annual LTI grant is not eligible for this retirement age, intreatment until the event of disabilities of employees with ten years of prior service, or (ii) health and welfare benefits payable to surviving eligible dependents, in the event of death of employees meeting certain age and service requirements; and
Payments Made Upon a Change of Control.We.We have entered into agreements that entitle each of our executive officers who are terminated without cause or resign under certain specified circumstances within certain specified periods following any change in control of CenturyLink to (i) receive a lump sum cash severance payment equal to a multiple of such officer’s annual cash compensation (defined as salary plus the average annual incentive bonus over the past three years), (ii) receive such officer’s currently pending bonus orpro rata portion thereof, depending on the date of termination, and (iii) continue to receive, subject to certain exceptions, certain welfare benefits for certain specified periods. See “Compensation Discussion and Analysis — Analysis—Our
| 2019 Proxy Statement | 83 | |||||||
EXECUTIVE COMPENSATION
Potential Termination Payments
Compensation Program Objectives and Components of Pay — Pay—Other Benefits — Benefits—Change of Control Arrangements” for a description of the benefits under our change of control agreements.
Under CenturyLink’s above-referenced agreements, a “change in control” of CenturyLink would be deemed to occur upon (i) any person (as defined in the Securities Exchange Act of 1934) becoming the beneficial owner of 30% or more of the outstanding Common Shares, (ii) a majority of our directors being replaced, (iii) consummation of certain mergers, substantial asset sales or similar business combinations, or (iv) approval by the shareholders of a liquidation or dissolution of CenturyLink.
The above-referenced agreements provide the benefits described above if we terminate the officer’s employment without cause or the officer resigns with “good reason,” which we describe further under the heading “Compensation Discussion and Analysis — Analysis—Our Compensation Program Objectives and Components of Pay — Pay—Other Benefits — Benefits–Change of Control Arrangements.” We have filed copies or forms of these agreements with the SEC.
Participants in our supplemental defined benefit plan whose service is terminated within two years of the change in control of CenturyLink will receive a cash payment equal to the present value of their plan benefits (after providing age and service credits of up to three years if the participant is terminated by us without cause or resigns with “good���good reason”), determined in accordance with actuarial assumptions specified in the plan. Certain account balances under our qualified retirement plans will also fully vest upon a change of control of CenturyLink.
Under the terms of our equity incentive plans, incentives granted under those plans will not vest, accelerate, become exercisable or be deemed fully paid unless otherwise provided in a separate agreement, plan or instrument. None of our equity award agreements since 2011 have provided for any such accelerated recognition of benefits solely upon a change of control. Instead, our current award agreements provide that any holder of incentives who is terminated by us or our successor without cause or resigns with good reason following a change of control will be entitled to receive full vesting of his or her time-vested restricted shares and continued rights under his or her performance-based restricted shares (on the same terms as if he or she had not been terminated).
We believe the above-described change of control benefits enhance shareholder value because:
| ◾ | prior to a takeover, these protections help us to recruit and retain talented officers and to help maintain the productivity of our workforce by alleviating concerns over economic security, and |
| ◾ | during or after a takeover, these protections (i) help our personnel, when evaluating a possible business combination, to focus on the best interests of CenturyLink and its shareholders, and (ii) reduce the risk that personnel will accept job offers from competitors during takeover discussions. |
Estimated Potential Termination Payments. The table below provides estimates of the value of payments and benefits that would become payable if our current named executives were terminated in the manner described below, in each case based on various assumptions, the most significant of which are described in the table’s notes.
| 84 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Potential Termination Payments
| Type of Termination of Employment(1) | ||||||||||||||||||||||
Name | Type of Termination Payment(2) | Involuntary Termination Without Cause(3) | Retirement(4) | Disability | Death | Termination Upon a Change of Control(5) | ||||||||||||||||
Glen F. Post, III
| Annual Bonus
| $
| 1,596,875
|
| $
| 1,596,875
|
| $
| 1,596,875
|
| $
| 1,596,875
|
| $
| 1,596,875
|
| ||||||
Equity Awards(6)
|
| —
|
|
| 11,260,851
|
|
| 14,083,141
|
|
| 14,083,141
|
|
| 14,083,141
|
| |||||||
Pension and Welfare(7)
|
| 81,300
|
|
| —
|
|
| —
|
|
| —
|
|
| 118,200
|
| |||||||
Cash Severance(8)
|
| 6,875,000
|
|
| —
|
|
| —
|
|
| —
|
|
| 10,312,500
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
| $
| 8,553,175
|
| $
| 12,857,726
|
| $
| 15,680,016
|
| $
| 15,680,016
|
| $
| 26,110,716
|
| ||||||||
Sunit S. Patel
| Annual Bonus
| $
| 147,475
|
| $
| 147,475
|
| $
| 147,475
|
| $
| 147,475
|
| $
| 147,475
|
| ||||||
Equity Awards(6)
|
| 2,439,650
|
|
| 2,439,650
|
|
| 3,563,499
|
|
| 3,563,499
|
|
| 3,563,499
|
| |||||||
Pension and Welfare(7)
|
| 41,192
|
|
| —
|
|
| —
|
|
| —
|
|
| 41,192
|
| |||||||
Cash Severance(8)
|
| 3,300,028
|
|
| —
|
|
| —
|
|
| —
|
|
| 3,300,028
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
| $
| 5,928,345
|
| $
| 2,587,125
|
| $
| 3,710,974
|
| $
| 3,710,974
|
| $
| 7,052,194
|
| ||||||||
Aamir Hussain
| Annual Bonus
| $
| 416,651
|
| $
| —
|
| $
| 416,651
|
| $
| 416,651
|
| $
| 416,651
|
| ||||||
Equity Awards(6)
|
| —
|
|
| —
|
|
| 6,011,672
|
|
| 6,011,672
|
|
| 6,011,672
|
| |||||||
Pension and Welfare(7)
|
| 35,300
|
|
| —
|
|
| —
|
|
| —
|
|
| 63,100
|
| |||||||
Cash Severance(8)
|
| 1,000,022
|
|
| —
|
|
| —
|
|
| —
|
|
| 2,000,044
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
| $
| 1,451,973
|
| $
| —
|
| $
| 6,428,323
|
| $
| 6,428,323
|
| $
| 8,491,467
|
| ||||||||
Stacey W. Goff
| Annual Bonus
| $
| 449,502
|
| $
| —
|
| $
| 449,502
|
| $
| 449,502
|
| $
| 449,502
|
| ||||||
Equity Awards(6)
|
| —
|
|
| —
|
|
| 5,258,820
|
|
| 5,258,820
|
|
| 5,258,820
|
| |||||||
Pension and Welfare(7)
|
| 33,100
|
|
| —
|
|
| —
|
|
| —
|
|
| 58,700
|
| |||||||
Cash Severance(8)
|
| 1,135,583
|
|
| —
|
|
| —
|
|
| —
|
|
| 2,271,166
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
| $
| 1,618,185
|
| $
| —
|
| $
| 5,708,322
|
| $
| 5,708,322
|
| $
| 8,038,188
|
| ||||||||
Jeffrey K. Storey
| Annual Bonus
| $
| 432,517
|
| $
| 432,517
|
| $
| 432,517
|
| $
| 432,517
|
| $
| 432,517
|
| ||||||
Equity Awards(6)
|
| 6,345,372
|
|
| 6,345,372
|
|
| 6,345,372
|
|
| 6,345,372
|
|
| 6,345,372
|
| |||||||
Pension and Welfare(7)
|
| 41,192
|
|
| —
|
|
| —
|
|
| —
|
|
| 41,192
|
| |||||||
Cash Severance(8)
|
| 8,250,070
|
|
| —
|
|
| —
|
|
| —
|
|
| 8,250,070
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
| $
| 15,069,152
|
| $
| 6,777,889
|
| $
| 6,777,889
|
| $
| 6,777,889
|
| $
| 15,069,152
|
| ||||||||
Potential Termination Payments
Name | Type of Termination | Type of Termination of Employment(1) | ||||||||||||||||||
| Involuntary Termination Without Cause(3) | Retirement | Death or Disability | Termination Upon a | |||||||||||||||||
Jeffrey K. Storey | Annual Bonus | $ | 3,790,772 | $ | 3,790,772 | $ | 3,790,722 | $ | 3,790,722 | |||||||||||
| Equity Awards(5) | 25,928,392 | 9,870,392 | 25,928,392 | 25,928,392 | ||||||||||||||||
| Pension and Welfare(6) | 58,500 | — | — | 84,000 | ||||||||||||||||
| Cash Severance(7) | 10,800,067 | — | — | 16,200,101 | ||||||||||||||||
| $ | 40,577,731 | $ | 13,661,164 | $ | 29,719,163 | $ | 46,003,265 | |||||||||||||
Indraneel Dev | Annual Bonus | $ | 438,427 | n/a | $ | 438,427 | $ | 438,427 | ||||||||||||
| Equity Awards(5) | 1,390,376 | n/a | 2,513,703 | 2,513,703 | ||||||||||||||||
| | Pension and Welfare(6) | | 28,675 | n/a | — | 28,675 | ||||||||||||||
| Cash Severance(7) | 487,500 | n/a | — | 487,500 | ||||||||||||||||
| $ | 2,344,978 | n/a | $ | 2,952,130 | $ | 3,468,305 | ||||||||||||||
Stacey W. Goff | Annual Bonus | $ | 847,465 | n/a | $ | 847,465 | $ | 591,341 | ||||||||||||
| Equity Awards(5) | 1,897,992 | n/a | 4,845,546 | 4,845,546 | ||||||||||||||||
| | Pension and Welfare(6) | | 33,800 | n/a | — | 60,100 | ||||||||||||||
| Cash Severance(7) | 1,320,039 | n/a | — | 2,640,077 | ||||||||||||||||
| $ | 4,099,296 | n/a | $ | 5,693,011 | $ | 8,137,064 | ||||||||||||||
Scott A. Trezise | Annual Bonus | $ | 467,600 | n/a | $ | 467,600 | $ | 328,490 | ||||||||||||
| Equity Awards(5) | 1,476,216 | n/a | 2,684,853 | 2,684,853 | ||||||||||||||||
| | Pension and Welfare(6) | | 32,400 | n/a | — | 57,300 | ||||||||||||||
| Cash Severance(7) | 855,017 | n/a | — | 1,710,035 | ||||||||||||||||
| $ | 2,831,233 | n/a | $ | 3,152,453 | $ | 4,780,677 | ||||||||||||||
| (1) | All data in the table reflects our estimates of the value of payments and benefits assuming the named officer was terminated on December 31, |
| $15.15. The table reflects only estimates of amounts earned or payable through or at such date based on various assumptions. Actual amounts can be determined only at the time of termination. If a named officer voluntarily resigns or is terminated with cause, he will not be entitled to any special or accelerated benefits, but will be entitled to receive various payments or benefits that vested before the termination date. The table reflects potential payments based upon a physical disability; additional benefits may be payable in the event of a mental disability. |
| (2) | As further described above, upon termination of employment, the named officers may become entitled to receive certain special, accelerated or enhanced benefits, including, subject to certain exceptions, the right to receive payment of their annual cash incentive bonus, an acceleration under certain circumstances of the vesting of their outstanding equity awards, current or enhanced pension and welfare benefits, or cash severance payments. The table excludes (i) payments or benefits made under broad-based plans or arrangements generally available to all salaried full-time employees and (ii) benefits, awards or amounts that the officer was entitled to receive prior to termination of employment. |
| (3) | The amounts listed in this column reflect payments to which the named officer would be entitled to under our executive severance plan if involuntarily terminated by us without cause (or, for Mr. Storey, by him with good reason, as provided in his amended and restated offer letter) prior to a change of control. The amounts listed in this column would not be payable if the officer voluntarily resigns (for Mr. Storey, without good reason) or is terminated for cause. |
| (4) |
The information in this column assumes each named officer became entitled at December 31, |
| 2019 Proxy Statement | 85 | |||||||
EXECUTIVE COMPENSATION
Potential Termination Payments
| (5) | The information in this row (i) reflects the benefit to the named officer arising out of the accelerated vesting of some or all of his restricted stock |
The information in this row reflects only the incremental benefits that accrue upon an event of termination, and excludes benefits that were vested on December 31, |
The information in this row excludes, in the case of disability or death, payments made by insurance companies. |
Amounts Paid to Former ExecutiveExecutives. In accordance
Three of our named officers terminated employment with the CFO succession plan discussed further elsewhere herein, R. Stewart Ewing, Jr., who had served as our CFOus prior to the Level 3 Combination, agreed to step down from all executive positions effective with the ClosingDecember 31, 2018, and then fully retired from all positions with
the Company effective November 17, 2017. Under the termstherefore none of our short-term incentive bonus program, Mr. Ewing earned a prorated annual incentive bonus of $470,517 for 2017 based on actual performance, as reportedthem (Messrs. Post, Patel, and Hussain) are included in the Summary Compensation Table above under the heading“Non-Equity Incentive Plan Compensation.”
In addition to othertable. The amounts paid or
payable to himthese officers upon his retirement under certain broad-based plans, our Pension Plans (see “— Pension Benefits” above) and our Supplemental Dollars & Sense Plan (see “— Deferred Compensation” above), the Compensation Committee determined that, because Mr. Ewing was willing and able to continue serving as our CFO after the Closing if not for the CFO succession plan, he qualified for payments under our executive severance plan. Under that plan, Mr. Ewing received (i) a cash severance payment equal to 104 weeks of severance benefits ($2,798,316), half of which was contractually due to him and half of which was awarded at the direction of the Committee and (ii) the continuation of health and welfare benefits for one year (valued at $15,800), both of whichtheir termination are reported abovedetailed in the Summary Compensation Table under the heading “All Other Benefits.”
In addition to these payments, the Committee exercised its discretion to (i) accelerate vesting of all 46,157 of Mr. Ewing’s time-vested restricted shares (valued at $683,124, based on the per share closing price of our Common Shares on his date of retirement, and included above in the “Stock Vested During 2017” table) and (ii) permit him to continue to hold all 97,304 of his performance-based restricted stock, subject to their original performance conditions as disclosed above in the “Outstanding Equity Awards” table. The Committee also approved a special discretionary cash bonus of $1,000,000, which is reported in the “Bonus” column of the Summary Compensation Table.
For information on factors considered by the Committee in connection with authorizing Mr. Ewing’s retirement compensation, see “Compensation Discussion and Analysis — Analysis—Our Compensation Program Objectives and Components of Pay —Pay—Retirement Compensation Paid to our Retired Executive.Former CEO,” “—Compensation paid to our former CTO” and “—compensation formatted by our former CFO.”
As mandated by federal law and related SEC rules, we are required to disclose a ratio of the pay of our CEO to that of our median employee. For 2017,2018, the total compensation of our CEO, Mr. Post, asStorey (as reported in the Summary Compensation Table but annualized as noted below), was $14,715,560,$36,218,812, while the annual total compensation for our median employee was $69,252.$68,674. As a result, the ratio of CEO pay to median employee pay was approximately 212527 to 1.
Because the SEC rules provide companies with some flexibility in choosing how to calculate thisWe calculated our 2018 pay ratio using the following Q&As describe how we calculated our 2017 pay ratio:assumptions:
| ◾ | Median employee identification. The median employee was identified as a network technician, located in Portland, Oregon and |
Because Mr. Storey was not serving as CEO for the full year, we annualized certain compensation items that he received for his services as CEO during 2018 (specifically, using his CEO salary for the full year and for calculation of his STI payout). As a result, the compensation figure we used for purposes of calculating our pay ratio differs from the total of his 2018 compensation as reported in the Summary Compensation Table, as detailed in the middle column of the table appearing below.
In addition, Mr. Storey’s 2018 annualized compensation, excluding special one-time events associated with the Level 3 combination, would have been $18,714,772 (as detailed in the final column of the table below), which would have yielded a ratio of CEO pay to median employee pay of approximately 273 to 1.
Compensation Components | Amount Reported in Summary Compensation Table | Annualized Amount Used for Pay Ratio Calculation | Total Compensation Excluding One-time Items | |||||||||
Salary | $ | 1,683,299 | $ | 1,800,011 | (1) | $ | 1,800,011 | (1) | ||||
Bonus | 5,842,000 | 5,842,000 | — | |||||||||
Equity Awards | 24,262,040 | 24,262,040 | 12,600,000 | (3) | ||||||||
Non-Equity Incentive Plan Compensation | 3,790,772 | 4,237,226 | (2) | 4,237,226 | (2) | |||||||
All Other Compensation | 77,535 | 77,535 | 77,535 | |||||||||
Total | $ | 35,655,646 | $ | 36,218,812 | $ | 18,714,772 | ||||||
| 86 | 2019 Proxy Statement | | |||||
EXECUTIVE COMPENSATION
Pay Ratio Disclosure
| (1) | Represents Mr. Storey’s CEO salary, as established upon his promotion to CEO, for a full twelve months. |
| (2) | Represents the product of Mr. Storey’s CEO target STI percentage (200%) and his annualized CEO salary (see footnote 1), multiplied by the product of the actual STI payout percentage and Mr. Storey’s individual modifier as approved by the Committee (107% * 110%). |
| (3) | Represents Mr. Storey’s target annual LTI award for 2018. |
As the SEC rules permit companies to choose between different methodologies for median pay calculations, our ratio should not be used as a basis for comparison with other companies. Other public companies may calculate their pay ratio using a different methodology than what is used by CenturyLink.
| 2019 Proxy Statement | 87 | |||||||
The Board believes that each director who is not employed by us (whom we refer to as outside directors ornon-management directors) should be compensated through a mix of cash and equity-based compensation, which most recently has been granted in the form of restricted stock. The Compensation Committee, consisting entirely of independent directors, has primary responsibility for periodically reviewing and considering any revisions to director compensation. The Committee’sIn recent years, the Committee has reviewed director compensation annually with assistance from its compensation consultant, typically assists the Committee in connection with its review of director compensation, including conducting annual benchmarking to help assess the appropriateness and competitiveness of our director compensation programs. The Board reviews the Compensation
Committee’s recommendations, discussing those recommendations among themselves and with the compensation consultant, and determines the amount of director compensation.
The table and the discussion below summarize how we compensated our outside directors in 2017.2018. This table does not include compensation paid to either Mr. Storey, who currently serves as Chief Executive Officer and President as well as a director, or to Mr. Post, who was Mr. Storey’s predecessor in those roles and who has served as an outside director since the date of the management transition (May 23, 2018). Please see the “Summary Compensation Table” above for details regarding all compensation paid to each of them during fiscal 2018.
20172018 Compensation of Outside Directors
Name | Fees Earned or Paid in Cash | Stock Awards(1),(2) | All Other Compensation(3) | Total | Fees Earned Paid in Cash | Stock Awards(1),(2) | All Other Compensation(3) | Total | ||||||||||||||||||||||||
Continuing Directors: | ||||||||||||||||||||||||||||||||
Martha H. Bejar | $ | 167,000 | $ | 146,815 | $ | — | $ | 313,815 | $
| 130,500
|
| $
| 161,939
|
| $
| —
|
| $
| 292,439
|
| ||||||||||||
Virginia Boulet | 150,000 | 146,815 | — | 296,815 |
| 133,500
|
|
| 161,939
|
|
| —
|
|
| 295,439
|
| ||||||||||||||||
Peter C. Brown | 140,375 | 146,815 | — | 287,190 |
| 114,750
|
|
| 161,939
|
|
| —
|
|
| 276,689
|
| ||||||||||||||||
Kevin P. Chilton(4) | 29,250 | 75,399 | — | 104,649 | ||||||||||||||||||||||||||||
Steven T. Clontz(4) | 20,250 | 75,399 | — | 95,649 | ||||||||||||||||||||||||||||
T. Michael Glenn(4) | 22,250 | 75,399 | — | 97,649 | ||||||||||||||||||||||||||||
Kevin P. Chilton
|
| 139,750
|
|
| 161,939
|
|
| —
|
|
| 301,689
|
| ||||||||||||||||||||
Steven T. Clontz
|
| 104,500
|
|
| 161,939
|
|
| —
|
|
| 266,439
|
| ||||||||||||||||||||
T. Michael Glenn
|
| 118,500
|
|
| 161,939
|
|
| —
|
|
| 280,439
|
| ||||||||||||||||||||
W. Bruce Hanks | 250,000 | 146,815 | 3,338 | 400,153 |
| 241,500
|
|
| 161,939
|
|
| 10,181
|
|
| 413,620
|
| ||||||||||||||||
Mary L. Landrieu | 119,000 | 146,815 | — | 265,815 |
| 108,500
|
|
| 161,939
|
|
| 6,000
|
|
| 276,439
|
| ||||||||||||||||
Harvey P. Perry | 332,000 | 146,815 | 5,526 | 484,341 |
| 302,500
|
|
| 161,939
|
|
| 11,468
|
|
| 475,907
|
| ||||||||||||||||
Michael J. Roberts | 161,000 | 146,815 | — | 307,815 |
| 141,500
|
|
| 161,939
|
|
| —
|
|
| 303,439
|
| ||||||||||||||||
Laurie A. Siegel | 145,750 | 146,815 | — | 292,565 |
| 139,937
|
|
| 181,571
|
|
| —
|
|
| 321,508
|
| ||||||||||||||||
Former Directors:(5) | ||||||||||||||||||||||||||||||||
Gregory J. McCray | 31,375 | — | — | 31,375 | ||||||||||||||||||||||||||||
William A. Owens | 64,500 | — | — | 64,500 | ||||||||||||||||||||||||||||
| (1) | For purposes of determining the number of restricted shares to grant on May |
| (2) | As of December 31, |
| (3) | Includes (i) reimbursements for the cost of annual physical examinations and related travel of |
| 88 | 2019 Proxy Statement | | |||||
DIRECTOR COMPENSATION
Overview
| in the prior sentence, the table above does not reflect (i) reimbursements for travel expenses or (ii) any benefits associated with the directors or their family members participating in recreational activities scheduled during board retreats or meetings (as described further under the heading “Compensation Discussion and |
Each outside director is paid an annual fee of $65,000 plus $2,000 for attending each regular board meeting, special board meeting (including each day of the Board’s annual planning session), committee meeting and separate director education program.
During 2017,2018, Harvey P. Perry, in his capacity as thenon-executive Chairman of the Board, received supplemental board fees of $200,000 payable in cash. The Chairman’s duties are set forth in our corporate governance guidelines.Corporate Governance Guidelines. See “Corporate Governance.”
During 2017,2018, W. Bruce Hanks, in his capacity asnon-executive Vice Chairman of the Board and Lead Independent Director, received supplemental board fees of $100,000 cash. Under our Bylaws, the Vice Chairman is charged with the responsibility of assisting the Chairman and performing such other duties as may be assigned to him by the Board or the Bylaws.
We also pay annual supplemental board fees to the chairs of each of the following committees as follows: (i) the chair of the Audit Committee receives $25,000,
(ii) the chair of the Compensation Committee receives $18,750, (iii) the chair of the Nominating Committee receives $15,000 and (iv) the chair of the Risk Evaluationand Security Committee receives $12,500.
Inmid-2017, Mr. Perry, Mr. Hanks, Martha H. Bejar and Michael J. Roberts were appointed to a special committee to investigate allegations of improper sales and billing practices and related matters, and were compensated at the rate of $2,000 for attending eachin-person meeting of the special committee and $1,000 for attending each telephonic meeting. Shortly thereafter, Ms. Bejar and Mr. Roberts and, following the Level 3 Combination, Mr. Kevin P. Chilton were appointed to a special litigation committee to address allegations of impropriety contained in various shareholder derivative demands, and were compensated at the same rates for attendingin-person or telephonic meetings of the special litigation committee.
During 2017,2018, the Compensation Committee authorizedawarded to each outside director to receive an annual or prorated allotmentgrant of shares of time-vested restricted stock in the amounts andvalued at $165,000 on the terms and conditions specified in Note 1 of the table appearing above under “ — Overview”).—Overview,” plus a special incremental grant of time-vested shares of restricted stock valued at $20,000 to Ms. Siegel. The Compensation Committee, with Ms. Siegel abstaining, awarded her this grant in recognition of her leadership of the Compensation Committee in its successful negotiations of a series of complex executive compensation arrangements over the preceding year, including those related to the senior management transition. The Compensation Committee currently expects to grant a comparable annual award in May 2018 to each outside director who is serving as a director on the day after our 20182019 annual meeting.meeting (not including the special incremental grant to Ms. Siegel).
Each outside director is entitled to be reimbursed (i) for expenses incurred in attending board and committee meetings, (ii) for expenses incurred in attending director education programs and (iii) up to $5,000 per year for the cost of an annual physical examination, plus related travel expenses.
In connection with our 2011 merger with Qwest, we assumed the Qwest Deferred Compensation Plan forNon-Employee Directors. Under this plan, Qwest outside directors could elect to defer all or a portion of their cash directors’ fees, which were then converted to a number of “phantom units” based the value of a share of Qwest stock, with credit for dividends paid to stockholdersshareholders “reinvested” in additional phantom units. Certain plan balances were distributed to participants at the close of the merger,
but plan balances attributable to amounts deferred on or after January 1, 2005 by Qwest directors who joined our Board following the merger were converted, based on the merger exchange ratio, to phantom units based on the value of one of our Common Shares. Other than the crediting and “reinvestment” of dividends for outstanding phantom units, CenturyLink does not make any contributions to, and no additional elective deferrals are permitted under this plan. Subject to the terms of the plan, each participant’s account will be distributed as a lump sum in cash as soon as practicable following the end of his or her service as a director. As of December 31, 2017,2018, Michael J. Roberts was the only remaining participant in this plan, with a balance of 6,1946,945 phantom units with an aggregate value of approximately $103,316$105,217 as of such date.
| 2019 Proxy Statement | 89 | |||||||
DIRECTOR COMPENSATION
Other Benefits
We supply company-owned tablets to our outside directors for use in reviewing materials posted to a dedicated portal that permits management to communicate with the Board.
Directors may use our aircraft in connection with company-related business. However, we generally do not permit either our directors or their family members to use our aircraft for personal trips (except when such use can be accommodated at no incremental cost to us or on terms generally available
to all of our employees in connection with a medical emergency).
Our bylaws require us to indemnify our directors and officers so that they will be free from undue concern about personal liability in connection with their service to CenturyLink. We have signed agreements with each of those individuals contractually obligating us to provide these indemnification rights. We also provide our directors with customary directors and officers liability insurance.
Director Stock Ownership Guidelines
For information on our stock ownership guidelines for outside directors, see “Corporate Governance —Governance Guidelines — Governance—Stock Ownership Guidelines.”
| 90 | 2019 Proxy Statement | | |||||
The graph below compares the cumulative total shareholder return on the Common Shares with the cumulative total return of the S&P 500 Index and the S&P 500 Telecommunication ServiceCommunication Services Sector Index for the period from December 31, 20122013 to December 31, 2017,2018, in each case assuming (i) the investment of $100 on January 1, 20132014 at closing prices on December 31, 2012,2013, and (ii) reinvestment of dividends.
| December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
CenturyLink | $ | 100.00 | $ | 86.94 | $ | 112.22 | $ | 80.88 | $ | 82.87 | $ | 70.25 | $
| 100.00
|
| $
| 131.05
|
| $
| 92.56
|
| $
| 95.01
|
| $
| 79.50
|
| $
| 81.48
|
| ||||||||||||||||||
S&P 500 Index | 100.00 | 132.06 | 149.63 | 151.66 | 168.60 | 202.63 |
| 100.00
|
|
| 113.56
|
|
| 115.13
|
|
| 128.20
|
|
| 154.45
|
|
| 148.34
|
| ||||||||||||||||||||||||
S&P 500 Telecommunication Service Sector Index(1) | 100.00 | 111.47 | 114.62 | 118.06 | 141.71 | 140.20 | ||||||||||||||||||||||||||||||||||||||||||
S&P 500 Communication Services Sector Index(1)
|
| 100.00
|
|
| 109.64
|
|
| 113.09
|
|
| 136.74
|
|
| 135.22
|
|
| 118.08
|
| ||||||||||||||||||||||||||||||
| (1) | As of December 31, |
| 2019 Proxy Statement | 91 | |||||||
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, our Compensation Committee included (i) William A. Owens (through May 24, 2017) and T. Michael Glenn (beginning November 1, 2017) and (ii) Laurie A. Siegel, Virginia Boulet, T. Michael Glenn and Michael J. Roberts (for the entire year) and (ii) Steven T. Clontz (beginning on May 23, 2018). No member of the Compensation Committee served as an officer or employee of the Company or any of our subsidiaries prior to or while serving on the Compensation Committee.
| 92 | 2019 Proxy Statement | | |||||
TRANSACTIONS WITH RELATED PARTIES
During 2017,2018, we paid Matthew J. Post, who served as Director–Big Data Services, total gross compensation of approximately $212,384, consisting of approximately $76,943 in salary, $19,104 in annual incentive bonuses, $51,338 in equity grants, $61,922 in a patent bonus and $3,078 in matching contributions to his qualified 401(k) plan account. Matthew J. Post is the son of Glen F. Post, III, a member of our Board who previously served as our Chief Executive Officer from 1992 until May 2018. Matthew J. Post was an employee of ours from 2014 until August 2018.
During 2018, we paid H. Parnell Perry, Jr., who serves as Manager —TechnologyManager–Technology Management, total gross compensation of approximately $131,954,$139,332, consisting of approximately $115,287$115,752 in salary, $12,632$18,950 in annual incentive bonuses and $4,035$4,630 in matching contributions to his qualified 401(k) plan account. Mr.H. Parnell Perry, Jr. is the son of Harvey P. Perry, our Chairman of the Board, and has been an employee of ours since 1987.
During 2017,2018, we paid Matthew J. Post,Jonathan Perry, who serves as Director Big Data Technology Implementation,Director–Sales & Marketing, Century Marketing Solutions, total gross compensation of approximately $129,659,$160,433, consisting of approximately $110,832$103,226 in salary, $15,109$26,549 in annual incentive bonuses, $26,786 in equity grants and $3,718$3,873 in matching contributions to his qualified 401(k) plan account. Mr. PostJonathan Perry is the son of Glen Post,Harvey P. Perry, our Chief Executive Officer,Chairman of the Board, and has been an employee of ours since 2014.2008.
We are one of the largest employers in Monroe, Louisiana and in several of our other markets, and, as such, employ personnel related by birth or marriage throughout our organization. Several of our executive officers or directors have family members employed by us, although none of them (other than Matthew J. Post, H. Parnell Perry, Jr. and Matthew J. Post)Jonathan Perry) earned 20172018 compensation in excess of the $120,000 threshold that would require detailed disclosures under the federal proxy rules.
Early each year, our management distributes to the Audit Committee a written report listing our payments to vendors, including a list of transactions with our directors, officers or employees. This annual report permits the independent directors to assess and discuss our related party transactions. Although we have no formal writtenpre-approval procedure governing related party transactions, our CEO typically seeks approval of the Board before engaging in any new related party transaction involving significant sums or risks.
| 2019 Proxy Statement | 93 | |||||||
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Securities Exchange Act of 1934 requires our executive officers and directors, among others, to file certain beneficial ownership reports with the SEC. To our knowledge, based solely on our review of copies of reports received by us and written representations by certain reporting persons, we believe that all such reports were timely filed during fiscal year 2017.2018, except for a Form 4 report for Steven T. Clontz, a director of the Company, to disclose one transaction that occurred on May 25, 2018, which was subsequently disclosed on a Form 5 report.
| 94 | 2019 Proxy Statement | | |||||
ADDITIONAL INFORMATION ABOUT THE MEETINGSHAREHOLDER PROPOSAL
Quorum(Item 6 on Proxy or Voting Instruction Card)
Our bylaws provide that
We periodically receive suggestions from our shareholders, some as formal shareholder proposals. We give careful consideration to all suggestions, and assess whether they promote the presencebest long-term interests of CenturyLink and its shareholders.
We expect Item 6 to be presented by shareholders at the meeting, in person or by proxy, of a majority ofmeeting. Following SEC rules, we are reprinting the outstanding Voting Shares constitutes a quorumproposal and supporting statement as it was
submitted to organize the meeting.
Vote Required to Elect Directors
Our bylaws provide that each of the 13 director nominees will be elected if the number of votes cast in favor of the director exceeds the number of votes withheld with respectus, other than minor formatting changes. We take no responsibility for it. On request to the director. You may vote “for” all director nominees or withhold your vote for any one or more of the director nominees. If any of the nine directors fails to receive a majority of the votes castSecretary at the meeting, our bylawsaddress listed under “Other Matters – Annual Financial Report,” we will require such director to tender his or her resignation toprovide information about the Board for its consideration.
Vote Required to Adopt Other Proposals at the Meeting
With respect to all matters to be submitted to a vote at the meeting, the matter will be approved if the votes cast in favorsponsor’s shareholdings. Adoption of such matter exceed the votes cast against such matter. Although Item 3 technicallythis proposal requires the affirmative vote of the holders of a majority of the votes cast to approveon the Incentive Plan,proposal at the treatment of abstentions (discussed below) results inmeeting.
 | THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE AGAINST ITEM 6 FOR THE REASONS WE GIVE BELOW. | |
The following proposal was submitted by theAFL-CIO Reserve Fund, located at 815 16th Street, NW, Washington, D.C., 20006, as a voting standard thatlead filer, and Friends Fiduciary Corporation, located at 1650 Arch Street, Suite 1904, Philadelphia, Pennsylvania, 19103, as aco-filer.
“Whereas, we believe in full disclosure of CenturyLink’s direct and indirect lobbying activities and expenditures to assess whether CenturyLink’s lobbying is functionallyconsistent with its expressed goals and in the same asbest interests of shareholders.
Resolved, the standard forshareholders of CenturyLink request the other matters.preparation of a report, updated annually, disclosing:
| 1. | Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications. |
| 2. | Payments by CenturyLink used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient. |
| 3. | CenturyLink’s membership in and payments to anytax-exempt organization that writes and endorses model legislation. |
| 4. | Description of management’s decision making process and the Board’s oversight for making payments described in sections 2 and 3 above. |
For purposes of Abstentions
Shares asthis proposal, a “grassroots lobbying communication” is a communication directed to which the proxy holders have been instructedgeneral public that (a) refers to abstain from votingspecific legislation or
regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to any particularthe legislation or regulation. “Indirect lobbying” is lobbying engaged in by a trade association or other organization of which CenturyLink is a member.
Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state and federal levels.
The report shall be presented to the Audit Committee or other relevant oversight committees and posted on CenturyLink’s website.
Supporting Statement
We encourage transparency and accountability in the use of funds to lobby. CenturyLink spent $23,070,486 from 2010 – 2017 on federal lobbying (opensecrets.org). This figure does not include lobbying expenditures to influence legislation in states, where CenturyLink also lobbies in 38 states (“Amid Federal Gridlock, Lobbying Rises in the States,”Center for Public Integrity,February 11, 2016), but disclosure is uneven or absent. A study found CenturyLink spent $1,552,902 lobbying in six states from 2012 – 2015 (“How Leading U.S. Corporations Govern and Spend on State Lobbying,”Sustainable Investments Institute,March 2017).
CenturyLink serves on the board of USTelecom, which spent $42.13 million on lobbying from 2010 – 2017. USTelecom’s lobbying against net neutrality has attracted attention (“AT&T/Verizon Lobbyists to
| 2019 Proxy Statement | 95 | |||||||
SHAREHOLDER PROPOSAL
(Item 6 on Proxy or Voting Instruction Card)
‘Aggressively’ Sue States that Enact Net Neutrality,”Ars Technica,March 27, 2018). CenturyLink does not comprehensively disclose its memberships in trade associations nor the amounts of its payments used for lobbying. And CenturyLink is a member of the American Legislative Exchange Council (ALEC).
We are concerned that our company’s lack of lobbying and trade association disclosure presents reputational risks. For example, CenturyLink’s ALEC membership has drawn press scrutiny (“AT&T Drops ALEC for Hosting Hate Speech,”PR Watch,November 30, 2018), and over 110 companies have publicly left ALEC, including peers AT&T, Sprint,T-Mobile and Verizon. And CenturyLink was included in a 2018 list of America’s 20 most hated companies (“Bad Reputation: America’s Top 20 Most-hated Companies,”24/7 Wall Street,January 22, 2018).”
The Board recommends that you vote AGAINST this proposal for the following reasons:
We believe our continued success and long-term profitability are substantially dependent upon our ability to actively engage in political, legislative and regulatory processes to advocate in favor of laws and policies that are in the best interests of our company, shareholders and customers. The proponent’s proposal this year is substantially similar to the proposal it submitted last year, which received less than 21.5% support of the shares voted at last year’s annual meeting.
For the reasons discussed further below, we continue to believe that (i) we currently disclose a substantial amount of detailed information on the cost and scope of our lobbying activities and (ii) the preparation and publication of the report contemplated by this proposal is neither necessary nor an efficient use of our resources.
| ◾ | Information regarding our participation in the political process is set forth in our semi-annual Political Contributions Reports (the “Semi-Annual Reports”), which are available for review on our website. Our Semi-Annual Reports outline the core principles governing our political participation. |
| ◾ | In addition to furnishing our Semi-Annual Reports, we file substantial amounts of information about our lobbying activity under federal, state and local laws. At the federal level, we file quarterly reports under the Lobbying Disclosure Act disclosing our lobbying expenditures and detailing the entities we lobbied and the subject matter of our lobbying |
efforts. This includes quarterly reporting to the Federal Election Commission regarding our employee political action committee. Any lobbying firms hired by us file similar reports, and trade associations to which we contribute are separately subject to strict public disclosure requirements regarding their lobbying activities. We and ourin-house and external lobbyists also file reports disclosing political contributions and related payments. Furthermore, we file all lobbying reports required by state laws, which in some cases have broader disclosure requirements than federal law. Shareholders can access this information through websites maintained by the U.S. House of Representatives, the U.S. Senate, the Federal Election Commission, and various state governmental bodies, or through various commercial websites that aggregate similar data. |
| ◾ | Our policies and procedures governing lobbying and political activities are subject to rigorous internal controls designed to ensure, among other things, that our applicable disclosures are full and complete. As noted in our Semi-Annual Reports, our Senior Vice President, Public Policy and Government Relations, together with senior management, the Board, and various public policy and legal personnel, oversees and manages our corporate political activities in an effort to attain our public policy objectives and comply with all applicable laws. We have a policy of not contributing to “Super PACs”. |
| ◾ | We believe we significantly benefit by participating in a number of industry and trade associations, which provide us with access to valuable industry data and expertise. These groups are independent organizations that represent the diverse interests of their members, and deal with a wide range of issues. These organizations frequently make expenditures or take action contrary to our preferences, often without our knowledge. As such, we do not believe that our membership in these organizations should be viewed as an endorsement of any particular organization or policy. Disclosure of the information contemplated by the proposal could be used to unfairly suggest that we support every position taken by organizations to which we contribute. For these reasons, we do not believe that additional disclosures regarding our contributions to such organizations would be helpful to shareholders. |
| ◾ | We believe the information that we currently furnish in our Semi-Annual Reports and file with state and federal agencies strikes an appropriate |
| 96 | 2019 Proxy Statement | | |||||
SHAREHOLDER PROPOSAL
(Item 6 on Proxy or Voting Instruction Card)
| balance between transparency and avoiding excessive burden and cost. We believe that requiring us to gather and disclose additional information would result in an unproductive use of valuable time and corporate resources by tracking insignificant activities without materially enhancing existing disclosures. |
| ◾ | We also oppose the proposal because many of its aspects are vague or unworkable, and may create confusion. We believe the proposal’s definition of lobbying and lobbying expenditures are ambiguous and could, depending on the jurisdiction, include items such as office rent, business travel expenses, and even employee salaries. As a result, the disclosures required by the proposal could be inconsistent and confusing, because a particular expenditure might be lobbying-related in one jurisdiction, but not in another. |
| ◾ | The proposal seeks to impose unnecessary line-item disclosures on lobbying expenditures that are |
not required by law and are not standard among other companies, including our competitors. Complying with the requirements of this proposal could put us at a relative disadvantage to our competitors. Any new requirements should be addressed by lawmakers and uniformly imposed on all entities. |
| ◾ | Finally, you should be aware that the proponent’s Supporting Statement cites figures and information that we cannot verify. |
The Board is confident that the Company’s current lobbying activities are effective and fully aligned with the shareholders’ long-term interests. For the reasons set forth above, the Board believes that this proposal is overly burdensome, would result in an unproductive use of our resources, and is not in the best interests of our shareholders.
| 2019 Proxy Statement | 97 | |||||||
Why am I receiving these proxy materials?
Our Board of Directors is soliciting your proxy to vote at our 2019 annual meeting of shareholders because you owned shares of our stock at the close of business on March 28, 2019, the record date for the meeting, and are entitled to vote those shares at the meeting. Our proxy materials are being made available to you on the Internet beginning on or about April 10, 2019. This proxy statement summarizes information regarding matters to be considered at the meeting. For additional information on our proxy materials, see “Other Matters—Proxy Materials” appearing below.
When and where will the meeting be held?
The meeting will be treated underheld at 10:00 a.m. local time on Wednesday, May 22, 2019, in the Company’s bylaws as not being cast for purposes of such vote. Because all matters expectedCenturyLink Auditorium at our corporate headquarters, 100 CenturyLink Drive, Monroe, Louisiana. If you would like directions to be brought before the meeting, for aplease see our website, www.proxyvote.com. You do not need to attend the meeting to vote mustyour shares.
What matters will be approved byconsidered at the holdersmeeting and what vote is required to approve such matters?
Item | Board Voting Recommendation | Vote Required for Approval | Effect of Abstentions | Effect of Broker Non-Votes | Page Reference | |||||||||||||
Management Proposals: | ||||||||||||||||||
Item 1 | Election of the 13 director nominees named herein | FOR | Affirmative vote of a majority of the votes cast | No effect | No effect | 1 | ||||||||||||
Item 2 | Ratification of the appointment of KPMG LLP as our independent auditor for 2019 | FOR | Affirmative vote of a majority of the votes cast | No effect | N/A | 19 | ||||||||||||
Item 3 | Proposal to amend our Articles of Incorporation to increase authorized shares of common stock | FOR | Affirmative vote of a majority of the votes entitled to be cast | Counted the | Counted the | 23 | ||||||||||||
Item 4 | Ratification of the NOL Rights Plan | FOR | Affirmative vote of a majority of the votes cast | No effect | No effect | 25 | ||||||||||||
Item 5 | Non-binding advisory vote to approve our executive compensation | FOR | Affirmative vote of a majority of the votes cast | No effect | No effect | 29 | ||||||||||||
Shareholder Proposals: | ||||||||||||||||||
Item 6 | Shareholder proposal regarding our lobbying activities, if properly presented at the meeting | AGAINST | Affirmative vote of a majority of the votes cast | No effect | No effect | 95 | ||||||||||||
How many votes may I cast?
You may cast one vote for every share of our common stock or Series L preferred stock that you owned on the record date. Our common stock and Series L preferred stock vote together as a single class on all matters. In this proxy statement, we refer to these shares as our “Common Shares” and “Preferred Shares,” respectively, and as our “Voting Shares,” collectively. As of the votes cast, abstentions will not affectrecord date, we had [●] Common Shares and 7,018 Preferred Shares outstanding.
| 98 | 2019 Proxy Statement | | |||||
FREQUENTLY ASKED QUESTIONS
What is the outcomedifference between holding shares as a shareholder of any such vote. Shareholders abstaining from voting, however, will be countedrecord and as present for purposes of constituting a quorum to organize the meeting.
Effect ofNon-Votingbeneficial owner?
If shares are registered in your name with our transfer agent, Computershare Investor Services L.L.C., you properly executeare the “shareholder of record” of those shares and returnyou may directly vote these shares, together with any shares credited to your account if you are a proxy or voting instruction card,participant in our automatic dividend reinvestment and stock purchase service.
If your shares willare held on your behalf in a stock brokerage account or by a bank or other nominee, you are the “beneficial owner” of shares held in “street name.” We have requested that our proxy materials be voted asmade available to you specify. by your broker, bank or nominee, who is considered the shareholder of record of those shares.
If I am a shareholder of record, how do I vote?
If you are a shareholder of record, and make no specifications on your validly submittedyou may vote in person at the meeting or by proxy card, your shares will be voted againstin any of the shareholder proposals and in favor of all other matters. following three ways:
| ◾ | call1-800-690-6903 and follow the instructions provided; |
| ◾ | log on to the Internet at www.proxyvote.com and follow the instructions at that site; or |
| ◾ | request a paper copy of our proxy materials and, following receipt thereof, mark, sign and date your proxy card and return it to Broadridge Financial Solutions, Inc. |
If you areneed additional help with this year’s proxy, control numbers or using ProxyVote.com, please call proxy support at 866-232-3037 (Toll-free) or 720-358-3640 (Int’l Toll).
Please note that you may not vote by telephone or the Internet after 11:59 p.m. Eastern Time on May 21, 2019.
If I am a beneficial owner of shares andheld in street name, how do not give voting instructionsI vote?
As the beneficial owner, you have the right to instruct your broker, bank or nominee they will be entitledhow to vote your shares only to the extent specified below.
Under the rules of the New York Stock Exchange, brokers who hold shares in street name for customers may vote in their discretion on matters considered to be “routine” when they have not receivedby using any voting instructions from beneficial owners. Under these rules, brokers who do not receive such instructions will be entitled to vote in their discretion at the meeting with respect to the ratification of the appointment of the independent auditor, but will not be entitled to vote in their discretion with respect to any of the other matters submitted to a vote. If brokers who do not receive voting instructions do not, or cannot, exercise discretionary voting power (a “brokernon-vote”) with respect to any matter to be considered at the meeting, shares that are not voted will be treated as present for purposes of constituting a quorum to organize the meeting but not cast with respect to considering such matter. Because all matters to be considered at the meeting must be approvedinstruction card supplied by the holders of a majority of the votes cast, brokernon-votes will not affect the outcome of any such vote.
Shareholders of record may revoke their proxy or change their votes at any time before their proxy is voted at the meeting by giving a written revocation notice to our secretary, by timely delivering a proxy bearing a later datethem or by following their instructions for voting by telephone, the Internet, or in person at the meeting. Beneficial shareholders may revoke or change their voting instructions by contacting the broker, bank or nominee that holds their shares.person.
Voting by Participants in Our Benefit PlansIf I am a benefit plan participant, how do I vote?
If you beneficially own any of our Common Shares by virtue of participating in any retirement plan of CenturyLink, then you will receive a separate voting instruction card that will enable you to direct the voting of
these shares. This voting instruction card entitles you, on a confidential basis, to instruct the trustees how to vote the shares allocated to your plan account. The plans require you to act as a “named fiduciary,” which requires you to exercise your voting rights prudently and in the interests of all plan participants. Plan participants who wish to vote should complete and return the voting instruction card in accordance with its instructions. If you elect not to vote the shares allocated to your accounts, your shares will be voted in the same proportion as voted shares regarding each of the items submitted to a vote at the meeting. Plan participants that wish to revoke their voting instructions must contact the trustee and follow its procedures.
If you beneficially own any of our Common Shares by virtue of previously participating in an employee stock purchase plan formerly maintained by us or a company that we have acquired, we have made arrangements for our proxy materials to be made available to you by the record owner of those shares. Consequently, you will be afforded the opportunity to vote those shares in the same manner as any other shares held in street name. See “General Information About
How do I register to attend the meeting in person?
If you would like to attend the meeting in person, you must register in advance at www.proxyvote.com and follow the instructions at that site.
How do I gain admission to the Annual Meeting.”Meeting?
CostFor admission to the Annual Meeting, each shareholder will be asked to present (i) valid picture identification, such as a driver’s license or passport, and (ii) proof of ownership of our common stock as of the record date, such as an admission ticket, a brokerage statement, proxy card or voting instruction form reflecting stock ownership. To request an admission ticket in advance of the Annual Meeting please visit www.proxyvote.com and follow the instructions provided. If you do not have internet access, you can register by calling 1-844-318-0137. You will need the16-digit number included on your proxy card, voting instruction form or Notice of Internet Availability of Proxy SolicitationMaterials.
What is the quorum requirement for the Meeting?
Our bylaws provide that the presence at the meeting, in person or by proxy, of a majority of the outstanding Voting Shares constitutes a quorum to organize the meeting.
| 2019 Proxy Statement | 99 | |||||||
FREQUENTLY ASKED QUESTIONS
Can I revoke or change my voting instructions after I deliver my proxy?
Shareholders of record may revoke their proxy or change their votes at any time before their proxy is voted at the meeting by giving a written revocation notice to our secretary, by timely delivering a proxy bearing a later date or by voting in person at the meeting. Beneficial shareholders may revoke or change their voting instructions by contacting the broker, bank or nominee that holds their shares.
Who pays the cost of soliciting proxies?
We will pay all expenses of soliciting proxies for the meeting. Proxies may be solicited personally, by mail, by telephone or by facsimile by our directors, officers and employees, who will not be additionally compensated therefor. We will also request persons holding Voting Shares in their names for others, such as brokers, banks and other nominees, to forward materials to their principals and request authority for the execution of proxies, and we will reimburse them for their expenses incurred in connection therewith. We have retained Innisfree M&A Incorporated, New York, New York, to assist in the solicitation of proxies, for which we will pay Innisfree fees anticipated to be $22,500 and will reimburse Innisfree for certain of itsout-of-pocket expenses.
Other Matters ConsideredCould other matters be considered and voted upon at the MeetingMeeting?
ManagementOur Board does not expect to bring any other matter before the Meeting. Further, management has not timely received any notice that a shareholder desires to present any matter for action at the meeting in accordance with our bylaws (which are described below in “Other Matters –Deadlinesunder “Frequently Asked Questions—What is the deadline to propose actions for Submitting Shareholder Nominations and Proposals forconsideration at the 20192020 Annual Meeting – Other Proposals and Nominations”of Shareholders or to nominate individuals to serve as directors?”) other than the shareholder proposalsproposal described in this proxy statement, and is otherwise unaware of any matter to be considered by shareholders at the meeting other than those matters specified in the accompanying notice of the meeting. Our proxy and voting instruction cards, however, will confer discretionary voting authority with respect to any other matter that may properly come before the meeting. It is the intention of the persons named therein to vote in accordance with their best judgment on any such matter.
Conduct ofWho sets the Meetingrules regarding conduct at the Meeting?
The Chairman has broad responsibility and legal authority to conduct the meeting in an orderly and timely manner. This authority includes establishing rules for shareholders who wish to address the meeting. Copies of these rules will be available at the meeting. The Chairman may also exercise broad discretion in recognizing shareholders who wish to speak and in determining the extent of discussion on each item of business. In light of the need to conduct all necessary business and to conclude the meeting within a reasonable period of time, we cannot assure that every shareholder who wishes to speak on an item of business will be able to do so.
You will not be permitted to bring audio visual equipment, ampliphones or posters into the meeting. We reserve the right, to be exercised in our sole discretion, to admit guests, such as local politicians or the press, into the meeting.
PostponementWhat happens if the Meeting is postponed or Adjournment of the Meetingadjourned?
The Chairman may postpone or adjourn the meeting. Your proxy will still be valid and may be voted at the postponed or adjourned meeting. You will still be able to change or revoke your proxy until it is voted.
DeadlinesWhat is the deadline to propose actions for Submitting Shareholder Nominations and Proposals forconsideration at the 20192020 Annual Meeting of Shareholders or to nominate individuals to serve as directors?
You may submit proposals, including director nominations, for consideration at future annual meetings of shareholders.
Proxy Statement Proposals.In order to To be eligible for inclusion in our 20192020 proxy materials, any shareholder proposal to elect shareholder-nominated candidates as directors or to take any other action at such meeting must be received by December 13, 2018,14, 2019, and must comply with applicable federal proxy rules and our bylaws. See “Corporate Governance — Director Nomination Process.“Frequently Asked Questions – What information needs to be included in a shareholder notice nominating a director or proposing other action?” These shareholder proposals must be in writing and received by the deadline described above at our principal executive offices at 100 CenturyLink Drive, Monroe, Louisiana 71203, Attention: Stacey W. Goff, Secretary. If we do not receive a shareholder proposal by the deadline described above, we may exclude the proposal from our proxy materials for our 20192020 annual meeting.
| 100 | 2019 Proxy Statement | | |||||
FREQUENTLY ASKED QUESTIONS
Other Proposals and Nominations.In addition, our bylaws require shareholders to furnish timely advance written notice of their intent to nominate a director or bring any other matter before a shareholders’ meeting, whether or not they wish to include their candidate or proposal in our proxy materials. In general, notice must be received in writing by our Secretary, addressed in the manner specified in the immediately-preceding paragraph, between November 24, 20182019 and February 22, 20192020 and must contain various information specified in our bylaws. (If the date of the 20192020 annual meeting is more than 30 days before or more than 60 days after May 23, 2019,22, 2020, notice must be delivered not earlier than the close of business on the 180th day prior to the date of such annual meeting and not later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, then 10th day following the day on which such public announcement of the date of such meeting is first made by the Company.) Notices that are not delivered in accordance with our bylaws may be disregarded by us. For additional information on these procedures, see “Corporate Governance — Director Nomination Process.“Frequently Asked Questions – What information needs to be included in a shareholder notice nominating a director or proposing other action?”
Our above-described advance notice bylaw provisions are in addition to, and separate from, the requirements that a shareholder must meet in order to have a candidate or proposal included in our proxy materials.
Proxies granted by a shareholder will give discretionary authority to the proxy holders to vote on any matters introduced pursuant to theabove-described advance notice bylaw provisions, subject to applicable rules of the SEC.
The summaries above are qualified in their entirety by reference to the full text of our bylaws. You may obtain a full copy of our bylaws by reviewing our reports filed with the SEC, by accessing our website at www.centurylink.com, or by contacting our Secretary in the manner specified below.
What information needs to be included in a shareholder notice nominating a director or proposing other action?
If timely notice is provided, our bylaws permit shareholders to nominate a director or bring other matters before a shareholders’ meeting. The written notice required to be sent by any shareholder nominating a director must include various information, including, as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is being made, (i) the name and address of such shareholder, any such beneficial owner, and any other parties affiliated, associated or acting in concert therewith, (ii) their beneficial ownership interests in our Voting Shares, including disclosure of arrangements that might cause such person’s voting, investment or economic interests in our Voting Shares to differ from those of our other shareholders, (iii) certain additional information concerning such parties required under the federal proxy rules, (iv) a description of all agreements with respect to the nomination among the nominating shareholder, any beneficial owner, any person acting in concert with them, each proposed nominee and certain other persons, and (v) a representation whether any such person intends to solicit proxies or votes in support of their proposed nominees. With respect to each proposed nominee, the written notice must also, among other things, (i) set forth biographical and other data required under the federal proxy rules and a description of various compensation or other arrangements or relationships between each proposed nominee and the nominating shareholder and its affiliated parties and (ii) furnish both a completed and duly executed questionnaire and a duly executed agreement designed to disclose various aspects of the proposed nominee’s background, qualifications and certain specified arrangements with other persons, as well as to receive the proposed nominee’s commitment to abide by certain specified agreements and undertakings. We may require a proposed nominee to furnish other reasonable information or certifications. Shareholders interested in bringing before a shareholders’ meeting any matter other than a director nomination should consult our bylaws for additional procedures governing such requests. We may disregard any nomination or submission of any other matter that fails to comply with these bylaw procedures.
In addition, our bylaws provide that under certain circumstances a shareholder or group of shareholders may include director candidates that they have nominated in our annual meeting proxy materials. These proxy access provisions of our bylaws provide, among other things, that a shareholder or group of up to ten shareholders seeking to include director candidates in our annual meeting proxy materials must own 3% or more of our
| 2019 Proxy Statement | 101 | |||||||
FREQUENTLY ASKED QUESTIONS
outstanding Common Shares continuously for at least the previous three years. The number of shareholder-nominated candidates appearing in any of our annual meeting proxy materials cannot exceed 20% of the number of directors then serving on the Board. If 20% is not a whole number, the maximum number of shareholder-nominated candidates would be the closest whole number below 20%. Based on the current board size of 13, two is the maximum number of proxy access candidates that we would be required to include in our 2020 proxy materials for the 2020 annual meeting. The nominating shareholder or group of shareholders also must deliver the information required by our bylaws, and each nominee must meet the qualifications required by our bylaws.
Shareholder requests to nominate directors or to bring any other matter before our 2020 annual shareholders’ meeting, whether or not they wish to include their candidate or proposal in our proxy materials, must be received by our Secretary by the deadlines specified in the response to the preceding question.
The summaries above of the advance notification and proxy access provisions of our bylaws are qualified in their entirety by reference to the full text of Section 5 of Article IV of our bylaws. You may obtain a full copy of our bylaws by reviewing our reports filed with the SEC, by accessing our website at www.centurylink.com, or by contacting our Secretary in the manner specified below under “Other Matters.”
| 102 | 2019 Proxy Statement | | |||||
Most shareholders will receive only a written notice of how to access our proxy materials, and will not receive printed copies of the proxy materials unless requested. If you would like to receive a paper copy of our proxy materials, you should follow the instructions for requesting the materials in the notice.
The full set of our materials include:
| ◾ | the notice and proxy statement for the meeting, |
| ◾ | a proxy or voting instruction card, and |
| our |
Appendix BA includes our 20172018 Annual Financial Report, which is excerpted from portions of our Annual Report on Form10-K for the year ended December 31, 20172018 that we filed with the SEC on March 1, 2018.11, 2019. In addition, we have provided you with a copy of or access to our 2017 review and CEO’s letter, which precedes this proxy statement at the beginning of this booklet.
document. Neither of these documents is a part of our proxy soliciting materials.
You may obtain a copy of our Form10-K report without charge by writing to Stacey W. Goff, Secretary, CenturyLink, Inc., 100 CenturyLink Drive, Monroe, Louisiana 71203, or by visiting our website atwww.centurylink.com.
You may view online this proxy statement and related materials atwww.envisionreports.com/ctl. www.proxyvote.com.
By Order of the Board of Directors
Stacey W. Goff
Secretary
Dated: April 9, 201810, 2019
| 2019 Proxy Statement | 103 | |||||||
to Proxy Statement
CENTURYLINKProposed Amendment to Our Articles of Incorporation
2018 EQUITY INCENTIVE PLANIf the proposal to amend our articles of incorporation is adopted, Section A of Article III of our restated articles of incorporation would be amended and restated as follows (language that would be removed and replaced is shown as a strikethrough; language that would be adopted in place of the removed text is shown in boldface text and is underscored):
1.ARTICLE III
Capital
A.PurposeAuthorized Stock. The purposeCorporation shall be authorized to issue an aggregate of the CenturyLink 2018 Equity Incentive Plan (the “1.602 billionPlan2,202,000,000”) is to increase shareholder value and to advance the interests of CenturyLink, Inc. (“CenturyLink”) and its subsidiaries (collectively, the “Company”) by furnishing stock-based economic incentives (the “Incentives”) designed to attract, retain, reward, and motivate the Company’s key employees, officers, directors, consultants, and advisors and to strengthen the mutuality of interests between such persons and CenturyLink’s shareholders. Incentives consist of opportunities to purchase or receive shares of commoncapital stock, of which1.6 billion2,200,000,000 shares shall be Common Stock, $1.00 par value per share, and 2,000,000 shares shall be Preferred Stock, $25.00 par value per share.
| 2019 Proxy Statement | B-1 | |||||||
| Page | ||||||
| Section 1. | C-1 | |||||
| Section 2. | C-4 | |||||
| Section 3. | C-4 | |||||
| Section 4. | C-6 | |||||
| Section 5. | C-6 | |||||
| Section 6. | C-7 | |||||
| Section 7. | Exercise of Rights; Purchase Price; Expiration Date of Rights | C-7 | ||||
| Section 8. | C-8 | |||||
| Section 9. | C-9 | |||||
| Section 10. | C-9 | |||||
| Section 11. | Adjustment of Purchase Price, Number of Shares or Number of Rights | C-9 | ||||
| Section 12. | C-14 | |||||
| Section 13. | C-14 | |||||
| Section 14. | C-14 | |||||
| Section 15. | C-15 | |||||
| Section 16. | C-15 | |||||
| Section 17. | C-16 | |||||
| Section 18. | C-16 | |||||
| Section 19. | C-17 | |||||
| Section 20. | C-18 | |||||
| Section 21. | C-20 | |||||
| Section 22. | C-20 | |||||
| Section 23. | C-21 | |||||
| Section 24. | C-21 | |||||
| Section 25. | C-22 | |||||
| Section 26. | C-22 | |||||
| Section 27. | C-23 | |||||
| Section 28. | C-23 | |||||
| Section 29. | C-23 | |||||
| Section 30. | C-23 | |||||
| Section 31. | C-23 | |||||
| Section 32. | C-24 | |||||
| Section 33. | C-24 | |||||
| 2019 Proxy Statement | C-i | |||||||
| C-ii | 2019 Proxy Statement | | |||||
Section 382 Rights Agreement, dated as of February 13, 2019, between CenturyLink, Inc., a Louisiana corporation (the “Common StockCompany”), and Computershare Trust Company, N.A., as rights agent (the “Rights Agent”).
The Company has generated net operating loss carryovers and tax credit carryovers for United States federal income tax purposes (“NOLs”), which are expected to provide valuable tax benefits to the Company. The ability to use the NOLs may be impaired or cash valued in relation to Common Stock, on terms determined under this Plan. As used in this Plan, the term “subsidiary” means any corporation, limited liability company, or other entity of which CenturyLink owns (directly or indirectly)destroyed by an “ownership change” within the meaning of Section 424(f)382 (as such term is hereinafter defined). The Company desires to avoid such an “ownership change” and thereby preserve the ability to use the NOLs without limitation.
The Board of Directors of the Company has authorized and declared a dividend of one preferred share purchase right (a “Right”) for each Common Share (as hereinafter defined) of the Company outstanding on February 25, 2019 (the “Record Date”), each Right representing the right to purchase oneten-thousandth of a Preferred Share (as hereinafter defined), upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date, the Early Expiration Date and the Final Expiration Date (as such terms are hereinafter defined).
Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:
Section 1.Definitions. For purposes of this Agreement, the following terms have the meanings indicated:
(a) “Acquiring Person” shall mean any Person (other than any Exempt Person) who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 4.9% or more of the Common Shares of the Company then outstanding, but shall not include the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan;provided,however, that, (i) any Person who or which would otherwise be an Acquiring Person as of the date of this Agreement will not be deemed to be an Acquiring Person for any purpose of this Agreement prior to or after the date of this Agreement unless and until such time as (A) such Person or any Affiliate or Associate of such Person thereafter becomes, individually or in the aggregate, by reason of a transaction or transactions after the date of this Agreement the Beneficial Owner of additional Common Shares representingone-half of one percent (0.5%) or more of the Common Shares outstanding at the time of such acquisition, other than (1) pursuant to any agreement orregular-way purchase order for Common Shares that is in effect on or prior to the date of this Agreement and consummated in accordance with its terms after the date of this Agreement, or (2) as a result of a stock dividend, rights dividend, stock split or similar transaction effected by the Company in which all holders of Common Shares are treated equally, or (B) any other Person who is the Beneficial Owner of Common Shares becomes an Affiliate or Associate of such Person after the date of this Agreement;provided,however, that the foregoing exclusion in this clause (i) shall cease to apply with respect to any Person at such time as such Person, together with all Affiliates and Associates of such Person, Beneficially Owns less than 4.9% of the then-outstanding Common Shares; (ii) a Person will not be deemed to have become an Acquiring Person solely as a result of a reduction in the number of Common Shares outstanding unless and until such time as (A) such Person or any Affiliate or Associate of such Person thereafter becomes the Beneficial Owner of any additional Common Shares, other than as a result of a stock dividend, stock split or similar transaction effected by the Company in which all holders of Common Shares are treated equally, or (B) any other Person who is the Beneficial Owner of Common Shares becomes an Affiliate or Associate of such Person after the date of this Agreement; and (iii) a Person will not be deemed to have become an Acquiring Person solely as a result of an Exempted Transaction,provided,however, that the foregoing exclusion in this clause (iii) shall cease to apply with respect to any Person at such time as such Person (or any Affiliates or Associates of such Person) acquires any additional Common Shares.
In addition, notwithstanding the foregoing, and notwithstanding anything to the contrary provided in this Agreement, a Person shall not be an “Acquiring Person” if the Independent Directors determine at any time prior to the Distribution Date that a Person who would otherwise be an “Acquiring Person,” has become such inadvertently or without intending to become an “Acquiring Person,” and such Person divests as promptly as practicable (or within such period of time as the Independent Directors determine is reasonable) a sufficient
| 2019 Proxy Statement | C-1 | |||||||
number of Common Shares so that such Person would no longer be an “Acquiring Person,” as defined pursuant to the foregoing.
(b) “Affiliate” shall have the meaning ascribed to such term in Rule12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date of this Agreement and, to the extent not included within the foregoing, will also include, with respect to any Person, any other Person (other than an Exempt Person) whose Common Shares would be deemed constructively owned by such first Person pursuant to the provisions of Section 382;provided,however, that a Person will not be deemed to be the Affiliate or Associate of another Person solely because either or both Persons are or were directors or officers of the Company;provided, that with respect to STT, “Affiliate” shall have the meaning set forth in the Stockholder Rights Agreement.
(d) “Associate” shall have the meaning ascribed to such term in Rule12b-2 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement.
(e) A Person shall be deemed the “Beneficial Owner” of and shall be deemed to “beneficially own” any securities:
(i) which such Person or any of such Person’s Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than these Rights), warrants or options, or otherwise;provided,however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or
(ii) which such Person or any of such Person’s Affiliates or Associates has the right to vote pursuant to any agreement, arrangement or understanding;provided,however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person’s Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(e)(ii) hereof) or disposing of any securities of the Company; or
(iv) which such Person would be deemed to constructively own or which otherwise would be aggregated with shares owned by such Person pursuant to Section 382.
Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase “then outstanding,” when used with reference to a Person’s Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to beneficially own hereunder.
(e) “Business Day” shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in New York are authorized or obligated by law or executive order to close.
(f) “Close of Business” on any given date shall mean 5:00 P.M., New York time, on such date;provided,however, that, if such date is not a Business Day, it shall mean 5:00 P.M., New York time, on the next succeeding Business Day.
(g) “Common Shares” when used with reference to the Company shall mean the shares of common stock, par value $1.00 per share, of the Company. “Common Shares” when used with reference to any Person other than
| C-2 | 2019 Proxy Statement | | |||||
the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person.
(h) “Common Share Equivalents” shall have the meaning set forth in Section 11(a)(iii) hereof.
(i) “Current Value” shall have the meaning set forth in Section 11(a)(iii) hereof.
(j) “Distribution Date” shall have the meaning set forth in Section 3(a) hereof.
(k) “Early Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
(l) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
(m) “Exchange Ratio” shall have the meaning set forth in Section 24(a) hereof.
(n) “Exempt Person” shall mean (i) STT and its Affiliates and Associates unless and until STT (or any Affiliates of STT) acquires any Common Shares other than (x) in a transaction that is permitted under Section 4 of the Stockholder Rights Agreement or (y) any transfers of Common Shares or other Company equity interests between STT and its Affiliates, (ii) any Person to whom STT transfers any amount of Common Shares permitted by Section 4.2 of the Stockholder Rights Agreement unless and until such Person (or any Affiliates or Associates of such Person) acquires any additional Common Shares and (iii) any other Person whose Beneficial Ownership (together with all Affiliates and Associates of such Person) of 4.9% or more of the then-outstanding Common Shares (1) will not jeopardize or endanger the availability to the Company of any income tax benefit or (2) is otherwise in the best interests of the Company, in each case as determined by the Independent Directors in their sole discretion prior to the Distribution Date;provided,however, that such a Person will cease to be an Exempt Person if the Independent Directors make a contrary determination with respect to the effect of such Person’s Beneficial Ownership (together with all Affiliates and Associates of such Person) regardless of the reason therefor.
(o) “Exempted Transaction” means any transaction that the Independent Directors, in their sole discretion, have declared exempt pursuant to Section 35, which determination shall be irrevocable with respect to such transaction.
(p) “Final Expiration Date” shall have the meaning set forth in Section 7(a) hereof.
(q) “Independent Directors” shall mean any director of the Company who is an “independent director” under the rules of the NYSE and also is not (a) a director, an officer or an employee of an Exempt Person or a Person excluded from definition of “Acquiring Person” in clause (i) of such definition, (b) a director, an officer or an employee of an Affiliate or Associate of an Exempt Person or a Person excluded from definition of “Acquiring Person” in clause (i) of such definition; (c) an Exempt Person or a Person excluded from definition of “Acquiring Person” in clause (i) of such definition; or (d) an Affiliate or an Associate of an Exempt Person or a Person excluded from definition of “Acquiring Person” in clause (i) of such definition.
(r) “NOLs” shall have the meaning set forth in recitals hereof.
(s) “NYSE” shall mean the New York Stock Exchange.
(t) “Person” shall mean any individual, firm, corporation, partnership, limited liability company, limited liability partnership, trust or other entity, or a group of Persons making a “coordinated acquisition” of shares or otherwise treated as an entity within the meaning of Section 1.382-3(a)(1) of the Treasury Regulations, and shall include any successor (by merger or otherwise) of such individual or entity, but shall not include a Public Group (as such term is defined in Section 1.382-2T(f)(13) of the Treasury Regulations).
(u) “Preferred Shares” shall mean shares of Series CC Junior Participating Preferred Shares, par value $28.00 per share, of the Company having the rights and preferences set forth in the Form of Certificate of Designations attached to this Agreement as Exhibit A.
| 2019 Proxy Statement | C-3 | |||||||
(v) “Purchase Price” shall have the meaning set forth in Section 4 hereof.
(w) “Record Date” shall have the meaning set forth in the second paragraph hereof.
(x) “Redemption Date” shall have the meaning set forth in Section 7(a) hereof.
(y) “Redemption Price” shall have the meaning set forth in Section 23(a) hereof.
(z) “Right” shall have the meaning set forth in the second paragraph hereof.
(aa) “Right Certificate” shall have the meaning set forth in Section 3(a) hereof.
(bb) “Section 382” shall mean Section 382 of the Internal Revenue Code of 1986, as amended, (theand any successor provision or replacement provision.
(cc) “CodeShares Acquisition Date”), 50% or more shall mean the date of the total combined voting power of all classes of stock, membership interests, or other equity interests issued thereby.
2.Administration.
2.1Composition. This Plan shall generally be administeredfirst public announcement by the compensation committeeCompany that an Acquiring Person has become such, which announcement shall follow a determination by the Board to such effect, which is made and reflected in a Board resolution prior to the earliest of the Board of Directors of CenturyLink (theRedemption Date, the Early Expiration Date and the Final Expiration Date.
(dd) “BoardSpread”) or by a subcommittee thereof (such administrator, as used in this Plan, the “Committee”). The Committee shall consist of not fewer than two members of the Board, each of whom shall qualify as a“non-employee director” under Rule16b-3 under the Securities Exchange Act of 1934 (the “1934 Act”) or any successor rule.
2.2Authority. The Committee shall have plenary authority to award Incentives under this Plan and to enter into agreements with or provide notices to participants as to the terms of the Incentives (collectively, the “Incentive Agreements”). The Committee shall have the general authority to interpret this Plan, to establish any rules or regulations relating to this Plan that it determines to be appropriate, and to make any other determination that it believes necessary or advisable for the proper administration of this Plan. Committee decisions regarding matters relating to this Plan shall be final, conclusive, and binding on the Company, participants, and all other interested persons. The Committee may delegate its authority hereunder to the extent provided in Section 3.2.
3.Eligible Participants.
3.1Eligibility. Key employees, officers, and directors of the Company and persons providing services as consultants or advisors to the Company shall become eligible to receive Incentives under the Plan when designated by the Committee.
3.2Delegation of Authority to Chief Executive Officer. With respect to participants not subject to Section 16 of the 1934 Act, the Committee may delegate to the chief executive officer of CenturyLink its authority to designate participants, to determine the size and type of Incentives to be received by those participants, to determine any performance objectives for these participants, and to approve or authorize the form of Incentive Agreement governing such Incentives. Following any grants of Incentives pursuant to such delegated authority, the chief executive officer of CenturyLink or any officer designated by him may exercise any powers of the Committee under this Plan to accelerate vesting or exercise periods, to terminate restricted periods, to waive compliance with specified provisions, or to otherwise make determinations contemplated hereunder with respect to those participants;provided, however, that (a) the chief executive officer may only grant options at a per share exercise price equal to or greater than the Fair Market Value (as defined in Section 12.10) of a share of Common Stock on the later of the date the officer approves such grant or the date the participant commences employment and (b) the Committee retains sole authority to make any of the determinationsmeaning set forth in Section 5.4, 12.10 or Section 1111(a)(iii) hereof.
(ee) “Stockholder Approval” shall mean the approval of this Plan.
4.Types(ff) “Stockholder Approval” shall mean the approval of Incentives. Incentives may be granted under this Plan to eligible participantsAgreement by the affirmative vote of a majority of the votes cast at the meeting of stockholders of the Company duly held in accordance with the formsCompany’s Articles of (a) incentive stock options,(b) non-qualified stock options, (c) stock appreciation rights (“Incorporation (as amended) and applicable law.
(gg) “SARsSTT”), (d) restricted stock, (e) restricted stock units (“ shall mean STT Crossing Ltd.
(hh) “RSUsSubsidiary”), and (f) Other Stock-Based Awards (as defined of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person.
(ii) “Summary of Rights” shall have the meaning set forth in Section 10).3(b) hereof.
5.(jj) “Shares Subject toTrading Day” shall have the Plan.
5.1Number of Shares. Subject to the counting provisions of Section 5.2 and adjustment as providedmeaning set forth in Section 5.4, the maximum number of shares of Common Stock that may be delivered to participants11(d) hereof.
(kk) “Treasury Regulations” shall mean final, temporary and their permitted transferees under this Plan shall be 34,600,000.
5.2Share Counting. Subject to adjustment as provided in Section 5.4:
(a) The maximum number of shares of Common Stock that may be issued upon exercise of stock options intended to qualify as incentive stock options under Section 422 of the Code shall be 34,600,000.
(b) Any shares of Common Stock subject to an Incentive granted under this Plan that is subsequently canceled, forfeited, or expires prior to exercise or realization, whether in full or in part, shall be available again for issuance or deliveryproposed income tax regulations promulgated under the Plan. Any sharesInternal Revenue Code of Common Stock subject1986, as amended, including any amendments thereto.
Section 2.Appointment of Rights Agent. The Company hereby appoints the Rights Agent to an Incentive granted under the Amended and Restated CenturyLink, Inc. 2011 Equity Incentive Plan that, after the date this Plan is first approved by shareholders, is cancelled, forfeited, or expires prior to exercise or realization, whether in full or in part, shall be availableact as rights agent for issuance or delivery under this Plan. Notwithstanding the foregoing, shares subject to an Incentive shall not be available again for issuance or delivery under this Plan if such shares were (a) tendered in payment of the exercise or base price of a stock option or stock-settled SAR; (b) covered by, but not issued upon settlement of, stock-settled SARs; or (c) delivered or withheld by the Company to satisfy any tax withholding obligation related to a stock option or stock-settled SAR.
(c) If an Incentive, by its terms, may be settled only in cash, then the grant, vesting, payout, settlement, or forfeiture of such Incentive shall have no impact on the number of shares available for grant under the Plan.
5.3Participant Limits. Subject to adjustment as provided in Section 5.4, the following additional limitations are imposed under the Plan:
(a) The maximum number of shares of Common Stock that may be covered by Incentives granted under the Plan to any one individual during any calendar year shall be 1,500,000.
(b) The maximum value of Incentives that may be granted under the Plan to eachnon-employee director of CenturyLink during any single calendar year shall be $500,000, with any shares granted under such Incentives valued at Fair Market Value on the date of grant.
5.4Adjustment.
(a) In the event of any recapitalization, reclassification, stock dividend, stock split, combination of shares or other comparable change in the Common Stock, all limitations on numbers of shares of Common Stock provided in this Section 5 and the number of shares of Common Stock subject to outstanding Incentives shall be equitably adjusted in proportion to the change in outstanding shares of Common Stock. In addition, in the event of any such change in the Common Stock, the Committee shall make any other adjustment that it determines to be equitable, including adjustments to the exercise price of any option or the Base Price (defined in Section 7.5) of any SAR and any per share performance objectives of any Incentive in order to provide participantsaccordance with the same relative rights before and after such adjustment.
(b) If the Company merges, consolidates, sells substantially all of its assets, or dissolves, and such transaction is not a Change of Control as defined in Section 11 (each of the foregoing, a “Fundamental Change”),
then thereafter, upon any exercise or payout of an Incentive granted prior to the Fundamental Change, the participant shall be entitled to receive (i) in lieu of shares of Common Stock previously issuable thereunder, the number and class of shares of stock or securities to which the participant would have been entitled pursuant to the terms of the Fundamental Change if, immediately prior to such Fundamental Change, the participant had been the holder of record of the number of shares of Common Stock subject to such Incentive or (ii) in lieu of payments based on the Common Stock previously payable thereunder, payments based on any formula that the Committee determines to be equitable in order to provide participants with substantially equivalent rights before and after the Fundamental Change. In the event any such Fundamental Change causes a change in the outstanding Common Stock, the aggregate number of shares available under the Plan may be appropriately adjusted by the Committee in its sole discretion, whose determination shall be conclusive.
5.5Type of Common Stock. Common Stock issued under the Plan may be authorized and unissued shares or issued shares held as treasury shares.
5.6Minimum Vesting Requirements. Except for any Incentives that are issued in payment of cash amounts earned under the Company’s short-term incentive program, all Incentives must be granted with a minimum vesting period of at least one year without providing for incremental vesting during suchone-year period.
5.7Dividends and Dividend Equivalent Rights. Incentives granted under this Plan in the form of stock options and SARs may not be granted with dividend or dividend equivalent rights. Subject to theexpress terms and conditions of this Planhereof (and no implied terms or conditions), and the applicable Incentive Agreement, as well as any procedures established by the Committee, the CommitteeRights Agent hereby accepts such appointment. The Company may determine to pay dividends or dividend equivalents, as applicable, on Incentives granted under this Plan in the form of restricted stock, RSUs, or Other Stock Based Awards. In the event that the Committee grants dividend equivalent rights, the Company shall establish an account for the participant and reflect in that account any securities, cash, or other property comprising any dividend or property distribution with respect to each share of Common Stock underlying each Incentive. For any Incentives granted under this Plan with dividend or dividend equivalent rights, such dividends or dividend equivalent rights shall vest and pay out or be forfeited in tandem with underlying Incentives rather than during the vesting period.
6.Stock Options. A stock option is a right to purchase shares of Common Stock from CenturyLink. Stock options granted under the Plan may be incentive stock options (as such term is defined in Section 422 of the Code) ornon-qualified stock options. Any option that is designated as anon-qualified stock option shall not be treated as an incentive stock option. Each stock option granted by the Committee under this Plan shall be subject to the following terms and conditions:
6.1Price. The exercise price per share shall be determined by the Committee, subject to adjustment under Section 5.4; provided that in no event shall the exercise price be less than the Fair Market Value (as defined in Section 12.10) of a share of Common Stock as of the date of grant, except in the case of a stock option granted in assumption of or substitution for an outstanding award of a company acquired by the Company or with which the Company combines. In the event that an option grant is approved by the Committee, but is to take effect on a later date, such as when employment or service commences, such later date shall be the date of grant.
6.2Number. The number of shares of Common Stock subject to the option shall be determined by the Committee, subject to Section 5, including, but not limited to, any adjustment as provided in Section 5.4.
6.3Duration and Time for Exercise. The term of each stock option shall be determined by the Committee, but shall not exceed a maximum term of ten years. Subject to Section 5.6, each stock option shall become exercisable at such time or times during its term as determined by the Committee and provided for in the Incentive Agreement. Notwithstanding the foregoing, the Committee may accelerate the exercisability of any stock option at any time.
6.4Manner of Exercise. A stock option may be exercised, in whole or in part, by giving written notice to the Company, specifying the number of shares of Common Stock to be purchased. The exercise notice shall be
accompanied by the full purchase price for such shares. The option price shall be payable in United States dollars and may be paid (a) in cash; (b) by check; (c) by delivery to the Company of currently-owned shares of Common Stock (including through any attestation of ownership that effectively transfers title), which shares shall be valued for this purpose at the Fair Market Value on the business day immediately preceding the date such option is exercised; (d) by delivery of irrevocable written instructions to a broker approved by the Company (with a copy to the Company) to immediately sell a portion of the shares issuable under the option and to deliver promptly to the Company the amount of sale proceeds (or loan proceeds if the broker lends funds to the participant for delivery to the Company) to pay the exercise price; (e) if approved by the Committee, through a net exercise procedure whereby the optionee surrenders the option in exchange for that number of shares of Common Stock with an aggregate Fair Market Value equal to the difference between the aggregate exercise price of the options being surrendered and the aggregate Fair Market Value of the shares of Common Stock subject to the option; (f) in such other manner as may be authorized from time to time byappoint suchco-Rights Agents as it may deem necessary or desirable; provided that the Committee;Company shall notify the Rights Agent in writing ten (10) Business Days prior to such appointment. In the event the Company appoints one or (g) through any combinationmoreco-Rights Agents, the respective duties of the foregoing methods.
6.5Limitations on Repricing. Except for adjustments pursuant to Section 5.4 or actions permitted toRights Agent and anyco-Rights Agents under the provisions of this Agreement shall be taken by the Committee under Section 11 in the event of a Change of Control, unless approved by the shareholders ofas the Company reasonably determines, and the Company shall notify, in writing, the Rights Agent and anyco-Rights Agents of such duties. The Rights Agent shall have no duty to supervise, and shall in no event be liable for, the acts or omissions of any suchco-Rights Agents.
Section 3.Issue of Right Certificates. (a) Until the exercise price fortenth Business Day after the Shares Acquisition Date (including any outstanding option granted under this Plan may not be decreasedsuch Shares Acquisition Date which is after the date of grant;this Agreement and (b) an outstanding option that has been granted under this Plan may not, as of any date that such option has a per share exercise price that is greater than the then-current Fair Market Value of a share of Common Stock, be surrendered to the Company as consideration for the grant of a new option or SAR with a lower exercise price, shares of restricted stock, restricted stock units, an Other Stock-Based Award, a cash payment, or Common Stock.
6.6Incentive Stock Options. Notwithstanding anything in the Plan to the contrary, the following additional provisions shall apply to the grant of stock options that are intended to qualify as incentive stock options (as such term is defined in Section 422 of the Code):
(a) Any incentive stock option agreement authorized under the Plan shall contain such other provisions as the Committee shall deem advisable, but shall in all events be consistent with and contain or be deemed to contain all provisions required in order to qualify the options as incentive stock options.
(b) All incentive stock options must be granted within ten years from the date on which this Plan is adopted by the Board.
(c) No incentive stock options shall be granted to anynon-employee or to any participant who, at the time such option is granted, would own (within the meaning of Section 422 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of CenturyLink.
(d) The aggregate Fair Market Value (determined with respect to each incentive stock option as of the time such incentive stock option is granted) of the Common Stock with respect to which incentive stock options are exercisable for the first time by a participant during any calendar year (under the Plan or any other plan of CenturyLink or any of its subsidiaries) shall not exceed $100,000. To the extent that such limitation is exceeded, the excess options shall be treated asnon-qualified stock options for federal income tax purposes.
7.Stock Appreciation Rights.
7.1Grant of Stock Appreciation Rights. A stock appreciation right, or SAR, is a right to receive, without payment to the Company, a number of shares of Common Stock, cash, or any combination thereof, the number or amount of which is determined pursuant to the formula set forth in Section 7.5. Each SAR granted by the Committee under the Plan shall be subject to the terms and conditions of the Plan and the applicable Incentive Agreement.
7.2Number. Each SAR granted to any participant shall relate to such number of shares of Common Stock as shall be determined by the Committee, subject to adjustment as provided in Section 5.4.
7.3Duration and Time for Exercise. The term of each SAR shall be determined by the Committee, but shall not exceed a maximum term of ten years. Subject to Section 5.6, each SAR shall become exercisable at such time or times during its term as shall be determined by the Committee and provided for in the Incentive Agreement. Notwithstanding the foregoing, the Committee may accelerate the exercisability of any SAR at any time in its discretion.
7.4Exercise. A SAR may be exercised, in whole or in part, by giving written notice to the Company, specifying the number of SARs that the holder wishes to exercise. The date that the Company receives such written notice shall be referred to herein as the “Exercise Date.” The Company shall, within 30 days of an Exercise Date, deliver to the exercising holder certificates for the shares of Common Stock to which the holder is entitled pursuant to Section 7.5 or cash or both, as provided in the Incentive Agreement.
7.5Payment.
(a) The number of shares of Common Stock which shall be issuable upon the exercise of a SAR payable in Common Stock shall be determined by dividing:
(i) the number of shares of Common Stock as to which the SAR is exercised, multiplied by the amount of the appreciation in each such share (for this purpose, the “appreciation” shall be the amount by which the Fair Market Value (as defined in Section 12.10) of a share of Common Stock subject to the SAR on the trading day prior to the Exercise Date exceeds the “Base Price,” which is an amount, not less than the Fair Market Value of a share of Common Stock on the date of grant, which shall be determined by the Committee at the time of grant, subject to adjustment under Section 5.4); by
(ii) the Fair Market Value of a share of Common Stock on the Exercise Date.
(b) No fractional shares of Common Stock shall be issued upon the exercise of a SAR; instead, the holder of a SAR shall be entitled to purchase the portion necessary to make a whole share at its Fair Market Value on the Exercise Date.
(c) If so provided in the Incentive Agreement, a SAR may be exercised for cash equal to the Fair Market Valueissuance of the shares of Common Stock that would be issuable under Section 7.5(a),Rights) (or such later day, if any, as the exercise had been for Common Stock.
7.6Limitations on Repricing. Except for adjustments pursuant to Section 5.4 or actions permittedIndependent Directors determine in their discretion to be taken byno longer than a 15 Business Day extension) (the “Distribution Date”), (i) the Committee under Section 11 in the event of a Change of Control, unless approved by the shareholders of the Company, (a) the Base Price for any outstanding SAR granted under this Plan may notRights will be decreased after the date of grant; and (b) an outstanding SAR that has been granted under this Plan may not, as of any date that such SAR has a Base Price that is greater than the then-current Fair Market Value of a share of Common Stock, be surrendered to the Company as consideration for the grant of a new option or SAR with a lower exercise price, shares of restricted stock, restricted stock units, an Other Stock-Based Award, a cash payment, or Common Stock.
8.Restricted Stock.
8.1Grant of Restricted Stock. The Committee may award shares of restricted stock to such eligible participants as determined pursuant to the terms of Section 3. An award of restricted stock shall be subject to such restrictions on transfer and forfeitability provisions and such other terms and conditions, including the attainment of specified performance goals, as the Committee may determine, subjectevidenced (subject to the provisions of the Plan.
8.2The Restricted Period. Subject to Section 5.6, at the time an award of restricted stock is made, the Committee shall establish a period of time during which the transfer of the shares of restricted stock shall be restricted and after which the shares of restricted stock shall be vested (the “Restricted Period”). Each award of restricted stock may have a different Restricted Period.
8.3Escrow. The participant receiving restricted stock shall enter into an Incentive Agreement with the Company setting forth the conditions of the grant. Any certificates representing shares of restricted stock shall be registered in the name of the participant and deposited with the Company, together with a stock power endorsed in blank3(b) hereof) by the participant. Each such certificate shall bear a legend in substantially the following form:
The transferability of this certificate and the shares ofcertificates for Common Stock represented by it are subject to the terms and conditions (including conditions of forfeiture) contained in the CenturyLink 2018 Equity Incentive Plan (the “Plan”), and an agreement entered into between the registered owner and CenturyLink, Inc. (the “Company”) thereunder. Copies of the Plan and the agreement are on file at the principal office of the Company.
Alternatively, in the discretion of the Company, ownership of the shares of restricted stock and the appropriate restrictions shall be reflected in the records of the Company’s transfer agent and no physical certificates shall be issued.
8.4Forfeiture. In the event of the forfeiture of any shares of restricted stock under the terms provided in the Incentive Agreement (including any additional shares of restricted stock that may result from the reinvestment of cash and stock dividends, if so provided in the Incentive Agreement), such forfeited shares shall be surrendered, any certificates shall be cancelled, and any related accrued but unpaid cash dividends will be forfeited. The participants shall have the same rights and privileges, and be subject to the same forfeiture provisions, with respect to any additional shares received pursuant to Section 5.4 due to a recapitalization or other change in capitalization.
8.5Expiration of Restricted Period. Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee, the restrictions applicable to the restricted stock shall lapse, and the Company shall cause to be delivered to the participant or the participant’s estate, as the case may be, the number of shares of restricted stock with respect to which the restrictions have lapsed, free of all such restrictions and legends, except any that may be imposed by law. The Company, in its discretion, may elect to deliver such shares through issuance of a stock certificate or by book entry.
8.6Rights as a Shareholder. Subject to the terms and conditions of the Plan (including, but not limited to, Section 5.7) and the applicable Incentive Agreement, each participant receiving restricted stock shall have all the rights of a shareholder with respect to shares of stock during the Restricted Period, including without limitation, the right to vote any shares of Common Stock.
9.Restricted Stock Units.
9.1Grant of Restricted Stock Units. A restricted stock unit, or RSU, represents the right to receive from the Company on the respective scheduled vesting or payment date for such RSU, one share of Common Stock. An award of RSUs may be subject to the attainment of specified performance goals or targets, forfeitability provisions and such other terms and conditions as the Committee may determine, subject to the provisions of the Plan
9.2Vesting Period. Subject to Section 5.6, at the time an award of RSUs is made, the Committee shall establish a period of time during which the restricted stock units shall vest (the “Vesting Period”). Each award of RSUs may have a different Vesting Period.
9.3Rights as a Shareholder. Subject to the restrictions imposed under the terms and conditions of this Plan and subject to any other restrictions that may be imposed in the Incentive Agreement, each participant receiving restricted stock units shall have no rights as a shareholder with respect to such restricted stock units until such time as shares of Common Stock are issued to the participant.
10.Other Stock-Based Awards. The Committee may grant to eligible participants “Other Stock-Based Awards,” which shall consist of awards (other than options, SARs, restricted stock, or RSUs, described in
Sections 6 through 9 hereof) paid out in shares of Common Stock or the value of which is based in whole or in part on the value of shares of Common Stock. Other Stock-Based Awards may be awards of shares of Common Stock, awards of phantom stock, or may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of, or appreciation in the value of, Common Stock (including, without limitation, securities convertible or exchangeable into or exercisable for shares of Common Stock), as deemed by the Committee consistent with the purposes of this Plan. Subject to Section 5.6, the Committee shall determine the terms and conditions of any Other Stock-Based Award (including which rights of a shareholder, if any, the recipient shall have with respect to Common Stock associated with any such award) and may provide that such award is payable in whole or in part in cash. An Other Stock-Based Award may be subject to the attainment of such specified performance goals or targets as the Committee may determine, subject to the provisions of this Plan.
11.Change of Control.
(a) A Change of Control shall mean:
(i) the acquisition by any person of beneficial ownership of 30% or more of the outstanding shares of the Common Stock or 30% or more of the combined voting power of CenturyLink’s then outstanding securities entitled to vote generally in the election of directors;provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control:
(A) any acquisition (other than a Business Combination (as defined below) which constitutes a Change of Control under Section 11(a)(iii) hereof) of Common Stock directly from the Company,
(B) any acquisition of Common Stock by the Company,
(C) any acquisition of Common Stock by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or
(D) any acquisition of Common Stock by any corporation pursuant to a Business Combination that does not constitute a Change of Control under Section 11(a)(iii) hereof; or
(ii) individuals who, as of May 23, 2018, constituted the Board of Directors of CenturyLink (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors;provided, however, that any individual becoming a director subsequent to such date whose election, or nomination for election by CenturyLink’s shareholders, was approved by a vote of at leasttwo-thirds of the directors then comprising the Incumbent Board shall be considered a member of the Incumbent Board, unless such individual’s initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Incumbent Board; or
(iii) consummation of a reorganization, share exchange, merger or consolidation (including any such transaction involving any direct or indirect subsidiary of CenturyLink) or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”);provided, however, that in no such case shall any such transaction constitute a Change of Control if immediately following such Business Combination:
(A) the individuals and entities who were the beneficial owners of CenturyLink’s outstanding Common Stock and CenturyLink’s voting securities entitled to vote generally in the election of directors immediately prior to such Business Combination have direct or indirect beneficial ownership, respectively, of more than 50% of the then outstanding shares of common stock, and more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the surviving or successor corporation, or, if applicable, the ultimate parent company thereof (the “Post-Transaction Corporation”), and
(B) except to the extent that such ownership existed prior to the Business Combination, no person (excluding the Post-Transaction Corporation and any employee benefit plan or related trust of either CenturyLink, the Post-Transaction Corporation or any subsidiary of either corporation) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of the corporation resulting from such Business Combination or 20% or more of the combined voting power of the then outstanding voting securities of such corporation, and
(C) at least a majority of the members of the board of directors of the Post-Transaction Corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or
(iv) approval by the shareholders of CenturyLink of a complete liquidation or dissolution of CenturyLink.
For purposes of this Section 11, the term “person” shall mean a natural person or entity, and shall also mean the group or syndicate created when two or more persons act as a syndicate or other group (including a partnership or limited partnership) for the purpose of acquiring, holding, or disposing of a security, except that “person” shall not include an underwriter temporarily holding a security pursuant to an offering of the security.
(b) No Incentive Agreement shall provide for (1) the acceleration of the vesting of time-based Incentives upon the occurrence of a Change of Control without a contemporaneous or subsequent termination of the participant’s employment or service relationship or (2) the payout of any performance-based Incentives upon a Change of Control in an amount exceeds the greater of (i) the payout of apro-rata portion of such Incentive, based on the portion of the performance period that has elapsed and assuming target performance and (ii) payout of such Incentive based on actual performance. Notwithstanding the foregoing, no later than 30 days after a Change of Control of the type described in subsections (a)(i) or (a)(ii) of this Section 11 and no later than 30 days after the approval by the Board of a Change of Control of the type described in subsections (a)(iii) or (a)(iv) of this Section 11, the Committee, acting in its sole discretion without the consent or approval of any participant (and notwithstanding any removal or attempted removal of some or all of the members thereof as directors or Committee members), may act to effect one or more of the alternatives listed below, which may vary among individual participants and which may vary among Incentives held by any individual participant;provided, however, that no such action may be taken if it would result in the imposition of a penalty on the participant under Section 409A of the Code as a result thereof:
(i) require that all outstanding options, SARs or Other Stock-Based Awards be exercised on or before a specified date (before or after such Change of Control) fixed by the Committee, after which specified date all unexercised options, SARs and Other Stock-Based Awards and all rights of participants thereunder would terminate,
(ii) make such equitable adjustments to Incentives then outstanding as the Committee deems appropriate to reflect such Change of Control and provide participants with substantially equivalent rights before and after such Change of Control (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary),
(iii) provide for mandatory conversion or exchange of some or all of the outstanding options, SARs, restricted stock units or Other Stock-Based Awards held by some or all participants as of a date, before or after such Change of Control, specified by the Committee, in which event such Incentives would be deemed automatically cancelled and the Company would pay, or cause to be paid, to each such participant an amount of cash per share equal to the excess, if any, of the Change of Control Value of the shares subject to such option, SAR, restricted stock unit or Other Stock-Based Award, as defined and calculated below, over the per share exercise price or Base Price of such Incentive or, in lieu of such cash payment, the issuance of Common Stock or securities of an acquiring entity having a Fair Market Value equal to such excess, or
(iv) provide that thereafter, upon any exercise or payment of an Incentive that entitles the holder to receive Common Stock, the holder shall be entitled to purchase or receive under such Incentive, in lieu of the number of shares of Common Stock then covered by such Incentive, the number and class of shares of stock or other securities or property (including cash) to which the holder would have been entitled pursuant to the terms of the agreement providing for the reorganization, share exchange, merger, consolidation or asset sale, if, immediately prior to such Change of Control, the holder had been the record owner of the number of shares of Common Stock then covered by such Incentive.
(c) For the purposes of conversions or exchanges under paragraph (iii) of Section 11(c), the “Change of Control Value” shall equal the amount determined by whichever of the following items is applicable:
(i) the per share price to be paid to holders of Common Stock in any such merger, consolidation or other reorganization,
(ii) the price per share offered to holders of Common Stock in any tender offer or exchange offer whereby a Change of Control takes place, or
(iii) in all other events, the fair market value of a share of Common Stock, as determined by the Committee as of the time determined by the Committee to be immediately prior to the effective time of the conversion or exchange.
(d) In the event that the consideration offered to shareholders of CenturyLink in any transaction described in this Section 11 consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered that is other than cash.
12.General.
12.1Duration. No Incentives may be granted under the Plan after May 23, 2028;provided, however, that subject to Section 12.8, the Plan shall remain in effect after such date with respect to Incentives granted prior to that date, until all such Incentives have either been satisfied by the issuance of shares of Common Stock or otherwise been terminated under the terms of the Plan and all restrictions imposed on shares of Common Stock in connection with their issuance under the Plan have lapsed.
12.2Transferability.
(a) No Incentives granted hereunder may be transferred, pledged, assigned, or otherwise encumbered by a participant except:
(i) by will;
(ii) by the laws of descent and distribution;
(iii) if permitted by the Committee and so provided in the Incentive Agreement or an amendment thereto, pursuant to a domestic relations order, as defined in the Code; or
(iv) as to options only, if permitted by the Committee and so provided in the Incentive Agreement or an amendment thereto, (i) to Immediate Family Members (as defined in Section 12.2(b)); (ii) to a partnership in which the participant and/or Immediate Family Members, or entities in which the participant and/or Immediate Family Members are the sole owners, members, or beneficiaries, as appropriate, are the sole partners; (iii) to a limited liability company in which the participant and/or Immediate Family Members, or entities in which the participant and/or Immediate Family Members are the sole owners, members, or beneficiaries, as appropriate, are the sole members; or (iv) to a trust for the sole benefit of the participant and/or Immediate Family Members.
(b) “Immediate Family Members” shall be defined as the spouse and natural or adopted children or grandchildren of the participant and their spouses. To the extent that an incentive stock option is permitted to
be transferred during the lifetime of the participant, it shall be treated thereafter as a nonqualified stock option. Any attempted assignment, transfer, pledge, hypothecation, or other disposition of Incentives, or levy of attachment or similar process upon Incentives not specifically permitted herein, shall be null and void and without effect.
12.3Effect of Termination of Employment or Death. In the event that a participant ceases to be an employeeShares of the Company or to provide services to the Company for any reason, including death, disability, early retirement or normal retirement, any Incentives may be exercised, shall vest or shall expire at such times as may be determined by the Committee or as provided in the Incentive Agreement.
12.4Additional Conditions. Anything in this Plan to the contrary notwithstanding: (a) the Company may, if it shall determine it necessary or desirable for any reason, at the time of award of any Incentive or the issuance of any shares of Common Stock pursuant to any Incentive, require the recipient of the Incentive, as a condition to the receipt thereof or to the receipt of shares of Common Stock issued pursuant thereto, to deliver to the Company a written representation of present intention to acquire the Incentive or the shares of Common Stock issued pursuant thereto for his own account for investment and not for distribution; and (b) if at any time the Company further determines, in its sole discretion, that the listing, registration or qualification (or any updating of any such document) of any Incentive or the shares of Common Stock issuable pursuant thereto is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with the award of any Incentive, the issuance of shares of Common Stock pursuant thereto, or the removal of any restrictions imposed on such shares, such Incentive shall not be awarded or such shares of Common Stock shall not be issued or such restrictions shall not be removed, as the case may be, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company.
12.5Withholding.
(a) The Company shall have the right to withhold from any payments made or stock issued under the Plan or to collect as a condition of payment, issuance or vesting, any taxes required by law to be withheld (up to the maximum permissible withholding rate). At any time that a participant is required to pay to the Company an amount required to be withheld under applicable income tax laws in connection with an Incentive (each such date, a “Tax Date”), the participant may, subject to Section 12.5(b) below, satisfy this obligation in whole or in part by electing (the “Election”) to deliver currently owned shares of Common Stock or to have the Company withhold shares of Common Stock, in each case having a value equal to the maximum statutory amount required to be withheld under federal, state and local law. The value of the shares to be delivered or withheld shall be based on the Fair Market Value of the Common Stock on the Tax Date.
(b) Each Election must be made prior to the Tax Date. For participants who are not subject to Section 16 of the 1934 Act, the Committee may disapprove of any Election, may suspend or terminate the right to make Elections, or may provide with respect to any Incentive that the right to make Elections shall not apply to such Incentive. If a participant makes an election under Section 83(b) of the Code with respect to shares of restricted stock, an Election to have shares withheld to satisfy withholding taxes is not permitted to be made.
12.6No Continued Employment. No participant under the Plan shall have any right, solely based on his or her participation in the Plan, to continue to serve as an employee, officer, director, consultant, or advisor of the Company for any period of time or to any right to continue his or her present or any other rate of compensation.
12.7Deferral Permitted. Payment of an Incentive may be deferred at the option of the participant if permitted in the Incentive Agreement. Any deferral arrangements shall comply with Section 409A of the Code.
12.8Amendments to or Termination of the Plan. The Board may amend or discontinue this Plan at any time;provided, however, that no such amendment may:
(a) amend Section 6.5 or Section 7.6 to permit repricing of options or SARs without the approval of shareholders;
(b) materially impair, without the consent of the recipient, an Incentive previously granted, except that the Company retains all of its rights under Section 11; or
(c) materially revise the Plan without the approval of the shareholders. A material revision of the Plan includes (i) except for adjustments permitted herein, a material increase to the maximum number of shares of Common Stock that may be issued through the Plan, (ii) a material increase to the benefits accruing to participants under the Plan, (iii) a material expansion of the classes of persons eligible to participate in the Plan, (iv) an expansion of the types of awards available for grant under the Plan, (v) a material extension of the term of the Plan and (vi) a material change that reduces the price at which shares of Common Stock may be offered through the Plan.
12.9Repurchase. Upon approval of the Committee, the Company may repurchase all or a portion of a previously granted Incentive from a participant by mutual agreement by payment to the participant of cash or Common Stock or a combination thereof with a value equal to the value of the Incentive determined in good faith by the Committee;provided, however, that in no event will this section be construed to grant the Committee the power to take any action in violation of Section 6.5, 7.6, or 12.13.
12.10Definition of Fair Market Value. Whenever “Fair Market Value” of Common Stock shall be determined for purposes of this Plan, except as provided below in connection with a cashless exercise through a broker, it shall be determined as follows: (a) if the Common Stock is listed on an established stock exchange or any automated quotation system that provides sale quotations, the closing sale price for a share of the Common Stock on such exchange or quotation system on the date as of which fair market value is to be determined, (b) if the Common Stock is not listed on any exchange or quotation system, but bid and asked prices are quoted and published, the mean between the quoted bid and asked prices on the date as of which fair market value is to be determined, and if bid and asked prices are not available on such day, on the next preceding day on which such prices were available; and (c) if the Common Stock is not regularly quoted, the fair market value of a share of Common Stock on the date as of which fair market value is to be determined, as established by the Committee in good faith. In the context of a cashless exercise through a broker, the “Fair Market Value” shall be the price at which the Common Stock subject to the stock option is actually sold in the market to pay the option exercise price. Notwithstanding the foregoing, if so determined by the Committee, “Fair Market Value” may be determined as an average selling price during a period specified by the Committee that is within 30 days before or 30 days after the date of grant, provided that the commitment to grant the stock right based on such valuation method must be irrevocable before the beginning of the specified period, and such valuation method must be used consistently for grants of stock rights under the same and substantially similar programs during any particular calendar year.
12.11Liability.
(a) Neither CenturyLink, its affiliates or any of their respective directors or officers shall be liable to any participant relating to the participant’s failure to (i) realize any anticipated benefit under an Incentive due to the failure to satisfy any applicable conditions to vesting, payment or settlement, or (ii) realize any anticipated tax benefit or consequence due to changes in applicable law, the particular circumstances of the participant, or any other reason.
(b) No member of the Committee (or officer of the Company exercising delegated authority of the Committee under Section 3 thereof) will be liable for any action or determination made in good faith with respect to this Plan or any Incentive.
12.12Interpretation.
(a) Unless the context otherwise requires, (i) all references to Sections are to Sections of this Plan, (ii) the term “including” means including without limitation, (iii) all references to any particular Incentive Agreement shall be deemed to include any amendments thereto or restatements thereof, and (iv) all references to any particular statute shall be deemed to include any amendment, restatement orre-enactment thereof or any statute or regulation substituted therefore.
(b) The titles and subtitles used in this Plan or any Incentive Agreement are used for convenience only and are not to be considered in construing or interpreting this Plan or the Incentive Agreement.
(c) All pronouns contained in this Plan or any Incentive Agreement, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as the identities of the parties may require.
(d) Whenever any provision of this Plan authorizes the Committee to take action or make determinations with respect to outstanding Incentives that have been granted or awarded by the chief executive officer of CenturyLink under Section 3.2 hereof, each such reference to “Committee” shall be deemed to include a reference to any officer of the Company that has delegated administrative authority under Section 3.2 of this Plan (subject to the limitations of such section).
12.13Compliance with Section 409A. It is the intent of the Company that this Plan comply with the requirements of Section 409A of the Code with respect to any Incentives that constitutenon-qualified deferred compensation under Section 409A, and the Company intends to operate the Plan in compliance with Section 409A and the Department of Treasury’s guidance or regulations promulgated thereunder. If the Committee grants any Incentives or takes any other action that would, either immediately or upon vesting or payment of the Incentive, inadvertently result in the imposition of a penalty on a participant under Section 409A of the Code, then the Company, in its discretion, may, to the maximum extent permitted by law, unilaterally rescindab initio, sever, amend or otherwise modify the grant or action (or any provision of the Incentive) in such manner necessary for the penalty to be inapplicable or reduced.
12.14Data Privacy. As a condition of receipt of any Incentive, each participant explicitly and unambiguously consents to the collection, use, and transfer, in electronic or other form, of personal data as described in this Section by and among, as applicable, the Company and its affiliates for the exclusive purpose of implementing, administering, and managing the Plan and Incentives and such participant’s participation in the Plan. In furtherance of such implementation, administration, and management, the Company and its affiliates may hold certain personal information about a participant, including, but not limited to, the participant’s name, home address, telephone number, date of birth, social security or insurance number or other identification number, salary, nationality, job title(s), information regarding any securities of the Company or any of its affiliates, and details of all Incentives (the “Data”). In addition to transferring the Data amongst themselves as necessary for the purpose of implementation, administration, and management of the Plan and Incentives and the participant’s participation in the Plan, the Company and its affiliates may each transfer the Data to any third parties assisting the Company in the implementation, administration, and management of the Plan and Incentives and such participant’s participation in the Plan. Recipients of the Data may be located in the participant’s country or elsewhere, and the participant’s country and any given recipient’s country may have different data privacy laws and protections. By accepting an Incentive, each participant authorizes such recipients to receive, possess, use, retain, and transfer the Data, in electronic or other form, for the purposes of assisting the Company in the implementation, administration, and management of the Plan and Incentives and such participant’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Company or the participant may elect to deposit any shares of Common Stock. The Data related to a participant will be held only as long as is necessary to implement, administer, and manage the Plan and Incentives and the participant’s participation in the Plan. A participant may, at any time, view the Data held by
the Company with respect to such Participant, request additional information about the storage and processing of the Data with respect to such participant, recommend any necessary corrections to the Data with respect to the participant, or refuse or withdraw the consents herein in writing, in any case without cost, by contacting his or her local human resources representative. However, if a participant refuses or withdraws the consents described herein, the Company may cancel the participant’s eligibility to participate in the Plan, and in the Committee’s discretion, the participant may forfeit any outstanding Incentive. For more information on the consequences of refusal to consent or withdrawal of consent, participants may contact their local human resources representative.
12.15Participants Outside of the United States. The Committee may modify the terms of any Incentive under the Plan made to or held by a participant who is then a resident, or is primarily employed or providing services, outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that such Incentive shall conform to laws, regulations, and customs of the country in which the Participant is then a resident or primarily employed or providing services, or so that the value and other benefits of the Incentive to such participant, as affected bynon-United States tax laws and other restrictions applicable as a result of the participant’s residence, employment, or providing services abroad, shall be comparable to the value of such Incentive to a Participant who is a resident, or is primarily employed or providing services, in the United States. An Incentive may be modified under this Section 12.15 in a manner that is inconsistent with the express terms of the Plan, so long as such modifications will not contravene any applicable law or regulation or result in actual liability under Section 16(b) of the 1934 Act for the participant whose Incentive is modified. Additionally, the Committee may adopt such procedures andsub-plans as are necessary or appropriate to permit participation in the Plan by Eligible Persons who arenon-United States nationals or are primarily employed or providing services outside the United States.
* * * * * * * * * *
[certificate intentionally omitted]
INDEX TO ANNUAL FINANCIAL REPORT
December 31, 2017
The materials included in this Appendix B are excerpted from Items 5, 6, 7 and 8 of our Annual Report on Form10-K for the year ended December 31, 2017. We filed the Form10-K with the Securities and Exchange Commission on March 1, 2018, and have not updated any of the following excepted materials for any changes or developments since such date. Please see the Form10-K for additional information about our business and operations.book entry
| C-4 | 2019 Proxy Statement | | |||||
Common Shares of the Company registered in the names of the holders thereof (which certificates or book entry shares shall also be deemed to be Right Certificates) and not by separate Right Certificates, and (ii) the right to receive Right Certificates will be transferable only in connection with the transfer of Common Shares of the Company. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested to do so by the Company and provided with all necessary information and documentation, in form and substance reasonably satisfactory to the Rights Agent, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Shares of the Company as of the Close of Business on the Distribution Date (other than any Acquiring Person or any Associate or Affiliate of any Acquiring Person), at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit B hereto (a “Right Certificate”), evidencing one Right for each Common Share so held (other than with respect to Rights that have become void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof). As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates, and the Rights Certificates and the Rights shall be transferable separately from the transfer of Common Shares. The Company shall promptly notify the Rights Agent in writing upon the occurrence of the Distribution Date and, if such notification is given orally, the Company shall confirm the same in writing on or prior to the Business Day next following. Until such written notice is received by the Rights Agent, the Rights Agent may presume conclusively for all purposes that the Distribution Date has not occurred.
(b) On the Record Date, or as soon as practicable thereafter, the Company will send (directly or, at the expense of the Company, through the Rights Agent or its transfer agent if the Rights Agent or transfer agent is directed by the Company and provided with all necessary information and documents) a copy of a Summary of Rights to Purchase Preferred Shares, in substantially the form of Exhibit C hereto (the “Summary of Rights”), to each record holder of Common Shares as of the Close of Business on the Record Date (other than any Acquiring Person or any Associate or Affiliate of any Acquiring Person), at the address of such holder shown on the records of the Company or transfer agent or register for Common Shares. With respect to certificates for Common Shares (or book-entry Common Shares) outstanding as of the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates registered in the names of the holders thereof together with a copy of the Summary of Rights attached thereto and not by separate Rights Certificates. With respect to book-entry Common Shares outstanding as of the Record Date, until the Distribution Date (or the earliest of the Redemption Date, the Early Expiration Date or the Final Expiration Date), the Rights shall be evidenced by the balances indicated in the book-entry account system of the transfer agent for the Common Shares together with the Summary of Rights. Until the Distribution Date (or the earliest of the Redemption Date, the Early Expiration Date or the Final Expiration Date), the surrender for transfer of any Common Shares outstanding on the Record Date (whether represented by certificates or evidenced by the balances indicated in the book-entry account system of the transfer agent for the Common Shares, and, in either case, regardless of whether a copy of the Summary of Rights is submitted with the surrender or request for transfer), shall also constitute the transfer of the Rights associated with the Common Shares of the Company represented thereby.
(c) Certificates for Common Shares (or confirmation or account statements sent to holders of Common Shares in book-entry form) which become outstanding (including, without limitation, reacquired Common Shares referred to in the last sentence of this paragraph (c)) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date, the Early Expiration Date or the Final Expiration Date shall bear the following legend:
This certificate also evidences and entitles the holder hereof to certain rights as set forth in an Agreement between CenturyLink, Inc. (the “Company”) and Computershare Trust Company, N.A., or any successor rights agent, dated as of February 13, 2019, as it may be amended from time to time (the “Agreement”), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Agreement, such Rights (as defined in the Agreement) will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Agreement without charge after receipt of a written request therefor. As set forth in the Agreement, Rights beneficially owned by any Person (as defined in the Agreement) who becomes an Acquiring Person (as defined in the Agreement) become null and void.
| ||||||||
| 2019 Proxy Statement | C-5 | |||||||
With respect to such certificates bearing the foregoing legend, until the earliest of the Distribution Date, the Redemption Date, the Early Expiration Date or the Final Expiration Date, the Rights associated with the Common Shares of the Company represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares of the Company represented thereby. In the event that the Company purchases or acquires any Common Shares of the Company after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares of the Company shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares of the Company which are no longer outstanding.
With respect to Common Shares in book entry form for which there has been sent a confirmation or account statement containing the foregoing legend in substantially similar form, until the earliest of the Distribution Date, the Redemption Date, the Early Expiration Date or the Final Expiration Date, the Rights associated with the Common Shares shall be evidenced by such Common Shares alone and registered holders of Common Shares shall also be the registered holders of the associated Rights, and the transfer of any such Common Shares shall also constitute the transfer of the Rights associated with such Common Shares.
Notwithstanding this paragraph (c), the omission of the legend or the failure to send, deliver or provide the registered owner of Common Shares a copy of the Summary of Rights shall not affect the enforceability of any part of this Agreement or the rights of any holder of the Rights.
Section 4.Form of Right Certificates. The Right Certificates (and the forms of election to purchase Preferred Shares and of assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto, and may have such changes or marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate (but which do not affect the rights, duties, liabilities, protections or responsibilities of the Rights Agent hereunder) and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any applicable rule or regulation made pursuant thereto or with any applicable rule or regulation of any stock exchange or the Financial Industry Regulatory Authority, or to conform to usage. Subject to the provisions of Section 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of oneten-thousandths of a Preferred Share as shall be set forth therein at the price per oneten-thousandth of a Preferred Share set forth therein (the “Purchase Price”), but the number of such oneten-thousandths of a Preferred Share and the Purchase Price shall be subject to adjustment as provided herein.
Section 5.Countersignature and Registration. The Right Certificates shall be executed on behalf of the Company by its Chief Executive Officer, Chief Financial Officer, President, General Counsel, Corporate Secretary, any of its Senior Vice Presidents or its Treasurer, either manually or by facsimile or other electronic signature (e.g., PDF), shall have affixed thereto the Company’s seal or a copy by facsimile or electronic means, if necessary, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile or other electronic signature. The Right Certificates shall be countersigned manually or by facsimile or other electronic means (e.g., PDF) by an authorized signatory of the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the individual who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any individual who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Agreement any such individual was not such an officer.
Following the Distribution Date, upon receipt by the Rights Agent of notice to that effect and all other relevant information and documents referred to in Section 3(a), the Rights Agent will keep or cause to be kept, at its office(s) designated for such purpose, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates,
| C-6 | 2019 Proxy Statement | | |||||
the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates.
Section 6.Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject to the provisions of Section 14 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the earliest of the Redemption Date, the Early Expiration Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11(a)(ii) hereof, that have been redeemed pursuant to Section 23, or that have been exchanged pursuant to Section 24 hereof) may be transferred, split up, combined or exchanged for another Right Certificate or Right Certificates entitling the registered holder to purchase a like number of oneten-thousandths of a Preferred Share as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender, together with any required form of assignment duly executed and properly completed, the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the office(s) of the Rights Agent designated for such purpose, along with a signature guarantee (if required) and such other and further documentation as the Company or the Rights Agent may reasonably request.. The Rights Certificates are transferable only on the books and records of the Rights Agent. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate until the registered holder has properly completed and duly executed the certificate set forth in the form of assignment on the reverse side of such Rights Certificate and has provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) of the Rights represented by such Rights Certificate as the Company or the Rights Agent may reasonably request. Thereupon the Rights Agent shall countersign and deliver to the Person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company or the Rights Agent may require payment by the holder of the Rights of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. If and to the extent the Company does require payment of any such taxes or governmental charges, the Company shall give the Rights Agent prompt written notice thereof and the Rights Agent shall not deliver any Rights Certificate unless and until it is satisfied that all such payments have been made, and the Rights Agent shall forward any such sum collected by it to the Company or to such Persons as the Company specifies by written notice. The Rights Agent shall have no duty or obligation to take any action under any Section of this Agreement which requires the payment of applicable taxes and/or governmental charges unless and until it is satisfied that all such taxes and/or governmental charges have been paid.
Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, along with such other and further documentation as the Company or the Rights Agent may reasonably request and, at the Company’s request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will execute and deliver a new Right Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated.
Notwithstanding any other provision hereof, the Company and the Rights Agent may amend this Agreement to provide for uncertificated Rights in addition to or in lieu of Rights evidenced by Right Certificates, to the extent permitted by applicable law.
Section 7.Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) The registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein), in whole or in part, at any time after the Distribution Date, upon surrender of the Right Certificate, with the form of election to purchase and the certificate on the reverse side thereof properly completed and duly executed (with such signature duly guaranteed, if required), to the Rights Agent at the office or offices of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each oneten-thousandth of a Preferred Share as to which the Rights are exercised, at or prior to the earliest of (i) December 1, 2020 (the “Final
| 2019 Proxy Statement | C-7 | |||||||
INFORMATION ON OUR TRADING PRICE AND DIVIDENDS
Our common stock is listed onExpiration Date”), (ii) the New York Stock Exchange (“NYSE”) andtime at which the Berlin Stock Exchange and is tradedRights are redeemed as provided in Section 23 hereof (the “Redemption Date”), (iii) the time at which such Rights are exchanged as provided in Section 24 hereof, (iv) the time at which the Independent Directors determine that the NOLs are utilized in all material respects or that an ownership change under Section 382 would not adversely impact in any material respect the symbol CTL and CYT, respectively. The following table sets forthtime period in which the high and low reported sales prices onCompany could use the NYSE along withNOLs, or materially impair the quarterly dividends, for eachamount of the quarters indicated.
| Sales Price | Cash Dividend per Common Share | |||||||||||
| High | Low | |||||||||||
2017 | ||||||||||||
First quarter | $ | 26.29 | 22.33 | 0.540 | ||||||||
Second quarter | 27.61 | 23.05 | 0.540 | |||||||||
Third quarter | 24.14 | 18.17 | 0.540 | |||||||||
Fourth quarter | 20.55 | 13.16 | 0.540 | |||||||||
2016 | ||||||||||||
First quarter | $ | 32.49 | 21.94 | 0.540 | ||||||||
Second quarter | 32.94 | 26.35 | 0.540 | |||||||||
Third quarter | 31.56 | 26.51 | 0.540 | |||||||||
Fourth quarter | 33.45 | 22.86 | 0.540 | |||||||||
Dividends on common stock during 2017 and 2016 were paid each quarter. On February 21, 2018, our Board of Directors declared a common stock dividend of $0.54 per share.
As describedNOLs that could be used by the Company in greater detail in “Risk Factors” in Item 1A of our Annual Report on Form10-Kany particular time period, for the year ended December 31, 2017, the declaration and payment of dividends is at the discretion of our Board of Directors, and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.
At February 16, 2018, there were approximately 121,000 stockholders of record, although there were significantly more beneficial holders of our common stock. At February 16, 2018, the closing stock price of our common stock was $18.93.
The following tables of selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form10-K for the year ended December 31, 2017.
The tables of selected financial data shown below are derived from our audited consolidated financial statements, which include the operating results, cash flows and operational metrics of Level 3 for the 2 months ended December 31, 2017, and the assets and liabilities of Level 3 as of December 31, 2017. These historical results are not necessarily indicative of results that you can expect for any future period.
The following table summarizes selected financial information from our consolidated statements of operations.
| Years Ended December 31,(1) | ||||||||||||||||||||
| 2017(2)(3)(5) | 2016(3)(4)(5)(6) | 2015(4)(5) | 2014(4)(7) | 2013(4)(8) | ||||||||||||||||
(Dollars in millions, except per share amounts and shares in thousands) | ||||||||||||||||||||
Operating revenues | $ | 17,656 | 17,470 | 17,900 | 18,031 | 18,095 | ||||||||||||||
Operating expenses | 15,647 | 15,137 | 15,321 | 15,674 | 16,800 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating income | $ | 2,009 | 2,333 | 2,579 | 2,357 | 1,295 | ||||||||||||||
Income before income tax expense | 540 | 1,020 | 1,316 | 1,110 | 224 | |||||||||||||||
Net income (loss) | 1,389 | 626 | 878 | 772 | (239 | ) | ||||||||||||||
Basic earnings (loss) per common share | 2.21 | 1.16 | 1.58 | 1.36 | (0.40 | ) | ||||||||||||||
Diluted earnings (loss) per common share | 2.21 | 1.16 | 1.58 | 1.36 | (0.40 | ) | ||||||||||||||
Dividends declared per common share | 2.16 | 2.16 | 2.16 | 2.16 | 2.16 | |||||||||||||||
Weighted average basic common shares outstanding | 627,808 | 539,549 | 554,278 | 568,435 | 600,892 | |||||||||||||||
Weighted average diluted common shares outstanding | 628,693 | 540,679 | 555,093 | 569,739 | 600,892 | |||||||||||||||
Selected financial information from our consolidated balance sheets is as follows:
| As of December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Net property, plant and equipment(1) | $ | 26,852 | 17,039 | 18,069 | 18,433 | 18,646 | ||||||||||||||
Goodwill(1) | 30,475 | 19,650 | 20,742 | 20,755 | 20,674 | |||||||||||||||
Total assets(2) | 75,611 | 47,017 | 47,604 | 49,103 | 50,471 | |||||||||||||||
Total long-term debt(2)(3) | 37,726 | 19,993 | 20,225 | 20,503 | 20,809 | |||||||||||||||
Total stockholders’ equity | 23,491 | 13,399 | 14,060 | 15,023 | 17,191 | |||||||||||||||
Selected financial information from our consolidated statements of cash flows is as follows:
| Years Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Net cash provided by operating activities | $ | 3,878 | 4,608 | 5,153 | 5,188 | 5,559 | ||||||||||||||
Net cash used in investing activities | (8,871 | ) | (2,994 | ) | (2,853 | ) | (3,077 | ) | (3,148 | ) | ||||||||||
Net cash provided by (used in) financing activities | 5,358 | (1,518 | ) | (2,301 | ) | (2,151 | ) | (2,454 | ) | |||||||||||
Payments for property, plant and equipment and capitalized software | (3,106 | ) | (2,981 | ) | (2,872 | ) | (3,047 | ) | (3,048 | ) | ||||||||||
The following table presents certain of our selected operational metrics:
| As of December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Operational metrics: | ||||||||||||||||||||
Total access lines(1) | 10,282 | 11,090 | 11,748 | 12,394 | 13,002 | |||||||||||||||
Total broadband subscribers(1) | 5,662 | 5,945 | 6,048 | 6,082 | 5,991 | |||||||||||||||
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements in our Annual Report constitute forward-looking statements. See “Special Note Regarding Forward-Looking Statements and Related Matters” in Item 1 of our Annual Report on Form10-K for the year ended December 31, 2017 for factors relating to these statements and “Risk Factors” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017 for a discussion of certain risk factors applicable to our business, financial condition, results of operations, liquidity or prospects.
OVERVIEW
We are an international facilities-based communications company engaged primarily in providing an integrated array of services to our residential and business customers. Our communications services include local and long-distance voice, virtual private network (“VPN”) data network, private line (including business data services), Ethernet, information technology, wavelength, broadband, colocation and data center services, managed services, professional and other services provided in connection with selling equipment, network security and various other ancillary services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.
With approximately 450,000 route miles of fiber optic cable globally, we believe we are among the largest providers of communications services to global enterprise customers. Our terrestrial and subsea fiber optic long-haul network throughout North America, Europe and Latin America connects to metropolitan fiber networks that we operate. We operate in over 60 countries, with the substantial majority of our revenues being derived in the United States.
Based on our approximately 10.3 million total access lines at December 31, 2017, we believe we are the third largest wireline telecommunications company in the United States.
Acquisition of Level 3
On November 1, 2017, CenturyLink, Inc. (“CenturyLink”) acquired Level 3 Communications, Inc. (“Level 3”) through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as our indirect wholly-owned subsidiary under the name of Level 3 Parent, LLC. We entered into this transaction, among other things, to realize certain strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks.
During the year ended December 31, 2017, we recognized $97 million of integration-related expenses associated with our activities related to the Level 3 acquisition. During 2017, we also recognized $174 million in merger-related transaction costs, including investment banker and legal fees in connection with consummating the transaction.
Our consolidated financial statements include the accounts of CenturyLink and its majority owned subsidiaries, including Level 3 beginning on November 1, 2017. Due to the significant size of the acquisition, direct comparison of our results of operations for the periods ending on or after December 31, 2017 to prior periods are less meaningful than usual.
As a result of the acquisition, Level 3’s assets and liabilities have been revalued and recorded at their preliminary estimated fair value. The assignment of estimated fair value requires a significant amount of judgment. The use of fair value measures affects the comparability of our post-acquisition financial information and may make it more difficult to predict earnings in future periods. We expect to complete our final fair value
determinations prior totax purposes, (v) the first anniversary of the acquisition. Our final fair value determinations may be significantly different than those preliminary values reflected in our consolidated financial statements at December 31, 2017.
Inexecution of this Agreement if Stockholder Approval has not been obtained prior to such date, (vi) a determination by the discussion that follows, we refer to the business that we operatedIndependent Directors, prior to the LevelDistribution Date, that this Agreement and the Rights are no longer in the best interests of the Company and its stockholders (the earliest of the dates set forth in clauses (iv), (v)and (vi) the “Early Expiration Date”).
(b) The Purchase Price for each oneten-thousandth of a Preferred Share purchasable pursuant to the exercise of a Right shall initially be $28, and shall be subject to adjustment from time to time as provided in Section 11 hereof, and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase properly completed and duly executed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof by certified check, cashier’s check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares certificates for the number of Preferred Shares to be purchased and the Company hereby irrevocably authorizes any such transfer agent to comply with all such requests, or (B) requisition from the depositary agent depositary receipts representing such number of oneten-thousandths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent of the Preferred Shares with such depositary agent) and the Company shall direct such depositary agent to comply with such request; (ii) when necessary to comply with this Rights Agreement, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof; (iii) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder; and (iv) when necessary to comply with this Rights Agreement, after receipt, promptly deliver such cash to or upon the order of the registered holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall properly exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to registered holder of such Right Certificate or to such holder’s duly authorized assigns, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement or any Right Certificate to the contrary, neither the Rights Agent nor the Company shall be obligated to take any action with respect to a registered holder upon the occurrence of any purported transfer or exercise as set forth in this Section 7 by such registered holder unless such registered holder has (i) properly completed and duly executed the certificate following the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) of the Rights represented by such Rights Certificate as the Company or the Rights Agent reasonably requests.
(g) Except for those provisions herein that expressly survive the termination of this Agreement, this Agreement shall terminate upon the earlier of the Redemption Date, Early Expiration Date or Final Expiration Date and such time as all outstanding Rights have been exercised, redeemed or exchanged hereunder.
Section 8.Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right Certificates shall be issued in lieu thereof except as expressly
| C-8 | 2019 Proxy Statement | | |||||
permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. Subject to applicable law and regulation, the Rights Agent shall maintain in a retrievable database electronic records of all cancelled or destroyed stock certificates which have been canceled or destroyed by the Rights Agent. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy or cause to be destroyed such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company.
Section 9.Availability of Preferred Shares. The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares or any Preferred Shares held in its treasury the number of Preferred Shares that will be sufficient to permit the exercise in full of all outstanding Rights in accordance with Section 7 hereof. The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Preferred Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any Preferred Shares upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Preferred Shares upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company’s reasonable satisfaction that no such tax is due.
Section 10.Preferred Shares Record Date. Each Person in whose name any certificate for Preferred Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made;provided,however, that, if the date of such surrender and payment is a date upon which the Preferred Shares transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a holder of Preferred Shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein.
Section 11.Adjustment of Purchase Price, Number of Shares or Number of Rights. The Purchase Price, the number of Preferred Shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of Preferred Shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer
| 2019 Proxy Statement | C-9 | |||||||
books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right.
(ii) Subject to Section 24 hereof, in the event any Person becomes an Acquiring Person after the date of this agreement (including becoming such prior to the Record Date), each holder of a Right (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person) shall thereafter have a right to receive, upon exercise thereof at a price equal to the then current Purchase Price multiplied by the number of oneten-thousandths of a Preferred Share for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Shares, such number of Common Shares of the Company as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of oneten-thousandths of a Preferred Share for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of the Company (determined pursuant to Section 11(d) hereof) on the date of the occurrence of such event. In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Company shall not take any action which would eliminate or diminish the benefits intended to be afforded by the Rights.
From and after the occurrence of such event, any Rights that are or were acquired or beneficially owned by any Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be void, and any holder of such Rights shall thereafter have no right to exercise such Rights under any provision of this Agreement. No Right Certificate shall be issued pursuant to Section 3 acquisitionhereof that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit the exercise in full of the Rights in accordance with subparagraph (ii) above, the Company shall take all such action as “Legacy CenturyLink”may be necessary to authorize additional Common Shares for issuance upon exercise of the Rights. In the event the Company shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional Common Shares, the Company shall, to the extent permitted by applicable law and any agreements or instruments then in effect to which the Company is a party, (A) determine the excess of (1) the value of the Common Shares issuable upon the exercise of a Right (the “Current Value”) over (2) the Purchase Price (such excess being the “Spread”), and we refer(B) with respect to each Right, make adequate provision to substitute, for each Common Share that would otherwise be issuable upon exercise of a Right, upon exercise of a Right and payment of the applicable Purchase Price, (1) cash; (2) Preferred Shares or fractions of Preferred Shares or other equity securities of the Company (including, without limitation, shares, or units of shares, of Preferred Shares which the Board has determined to have the same value as the Common Shares) (such shares of equity securities being herein called “Common Share Equivalents”); (3) debt securities of the Company; (4) other assets; or (5) any combination of the foregoing, in each case having an aggregate value equal to the incrementalCurrent Value, as determined by the Board based upon the advice of a financial advisor selected by the Board.
(b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares (“equivalent preferred shares”)) or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the then current per share market price of the Preferred Shares (as defined in Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred
| C-10 | 2019 Proxy Statement | | |||||
Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible);provided,however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding and conclusive for all purposes on the Rights Agent and holders of the Rights. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed; and, in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend or a dividend payable in Preferred Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then-current per share market price of the Preferred Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and holders of the Rights) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share and the denominator of which shall be such then-current per share market price of the Preferred Shares on such record date;provided,however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company to be issued upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and, in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the “current per share market price” of any security (a “Security” for the purpose of this Section 11(d)(i)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days immediately prior to such date;provided,however, that, in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or Securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after theex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, reported at or prior to 4:00 P.M. Eastern time or, in case no such sale takes place on such day, the average of the bid and asked prices, regular way, reported as of 4:00 P.M. Eastern time, in either case, as reported on the national securities exchange with respect to securities listed or admitted to trading on the NYSE or NASDAQ or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price reported at or prior to 4:00 P.M. Eastern time or, if not so quoted, the average of the high bid and low asked prices in theover-the-counter market, as reported as of 4:00 P.M. Eastern time by the OTC Bulletin Board or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. The term “Trading
| 2019 Proxy Statement | C-11 | |||||||
Day” shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business, activitiesor, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the “current per share market price” of the Preferred Shares shall be determined in accordance with the method set forth in Section 11(d)(i). If the Preferred Shares are not publicly traded, the “current per share market price” of the Preferred Shares shall be conclusively deemed to be the current per share market price of the Common Shares as determined pursuant to Section 11(d)(i) hereof (appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof), multiplied by one hundred. If neither the Common Shares nor the Preferred Shares are publicly held or so listed or traded, “current per share market price” shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that we now operateany adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one one- millionth of a Preferred Share or oneten-thousandth of any other share or security as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights.
(f) If, as a result of an adjustment made pursuant to Section 11(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in Section 11(a) through (c) hereof, inclusive, and the provisions of Sections 7, 9 and 10 hereof with respect to the Preferred Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of oneten-thousandths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of the Level 3 acquisition as “Legacy Level 3.”calculations made in Sections 11(b) and (c) hereof, each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of oneten-thousandths of a Preferred Share (calculated to the nearest oneone-millionth of a Preferred Share) obtained by (A) multiplying (x) the number of oneten-thousandths of a share covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (B) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price.
For additional information about our acquisition(i) The Company may elect, on or after the date of Level 3, see (i) Note 2—Acquisitionany adjustment of Level 3the Purchase Price, to our consolidated financial statementsadjust the number of Rights in Item 8substitution for any adjustment in the number of our Annual Report on Formone10-Kten-thousandths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the year ended December 31, 2017,number of oneten-thousandths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest oneten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement (with simultaneous written notice to the Rights Agent) of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to
| C-12 | 2019 Proxy Statement | | |||||
be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein, and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or in the number of oneten-thousandths of a Preferred Share issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of oneten-thousandths of a Preferred Share which were expressed in the initial Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the Purchase Price below oneten-thousandth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer (with prompt written notice thereof to the Rights Agent; and until such written notice is received by the Rights Agent, the Rights Agent may presume conclusively that no such election has occurred) until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment;provided,however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder’s right to receive such additional shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it, in its sole discretion, shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or issuance of rights, options or warrants referred to in Section 11(b) hereof, hereafter made by the Company to holders of the Preferred Shares shall not be taxable to such stockholders.
(n) In the event that, at any time after the date of this Agreement and prior to the Distribution Date, the Company shall (i) declare or pay any dividend on the Common Shares payable in Common Shares, or (ii) our current report on Formeffect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then, in any such case, (A) the number of one8-K/Aten-thousandths filedof a Preferred Share purchasable after such event upon proper exercise of each Right shall be determined by usmultiplying the number of oneten-thousandths of a Preferred Share so purchasable immediately prior to such event by a fraction, the numerator of which is the number of Common Shares outstanding immediately before such event and the denominator of which is the number of Common Shares outstanding immediately after such event, and (B) each Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights which each Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in
| 2019 Proxy Statement | C-13 | |||||||
this Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected.
Section 12.Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Section 11 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares or the Preferred Shares and the Securities and Exchange Commission (the “SEC”)a copy of such certificate and (c) if such adjustment occurs at any time after the Distribution Date, mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof. The Rights Agent is protected in relying on January 16, 2018, (iii) ourany such certificate and on any adjustments or statements therein contained and shall not be deemed to have knowledge of any such adjustment or event unless and until it shall have received such certificate.
Section 14.Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current reportmarket value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on Formwhich such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case, as reported on the national securities exchange with respect to securities listed or admitted to trading on the NYSE or NASDAQ or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the8-Kover-the-counter filedmarket, as reported by usthe OTC Bulletin Board or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions which are integral multiples of oneten-thousandth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions which are integral multiples of oneten-thousandth of a Preferred Share). Fractions of Preferred Shares in integral multiples of oneten-thousandth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it;provided that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional Preferred Shares that are not integral multiples of oneten-thousandth of a Preferred Share, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share. For the purposes of this Section 14(b), the current market value of a Preferred Share shall be the closing price of a Preferred Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of one of the events specified in Section 11 hereof giving rise to the right to receive Common Shares or other securities upon the exercise of a Right, the Company will not be required to issue fractions of Common Shares or other securities upon exercise of the Rights or to distribute certificates which evidence fractional Common Shares or other securities. In lieu of fractional Common Shares or other securities, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one share of a Common Share or other securities. For purposes of this Section 14(c), the current market value of one share of
| C-14 | 2019 Proxy Statement | | |||||
a Common Shares is the Closing Price of one share of a Common Share for the Trading Day immediately prior to the date of such exercise.
(d) The holder of a Right, by the acceptance of the Right, expressly waives such holder’s right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above).
(e) Whenever a payment for fractional Rights or fractional shares is to be made by the Rights Agent under this Agreement, the Company shall (i) promptly prepare and deliver to the Rights Agent a certificate setting forth in reasonable detail the facts related to such payments and the prices and formulas utilized in calculating such payments; and (ii) provide sufficient monies to the Rights Agent in the form of fully collected funds to make such payments. The Rights Agent shall be fully protected in relying upon such a certificate and has no duty with respect to, and will not be deemed to have knowledge of, any payment for fractional Rights or fractional shares under any Section of this Agreement relating to the payment of fractional Rights or fractional shares unless and until the Rights Agent has received such a certificate and sufficient monies.
Section 15.Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent hereunder, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares), may, in such holder’s own behalf and for such holder’s own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such holder’s right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement by the Company will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations by the Company of the obligations of any Person (including, without limitation, the Company) subject to, this Agreement.
Section 16.Agreement of Right Holders. Every holder of a Right, by accepting the same, consents and agrees with the SEC on November 1, 2017Company and (iv) the definitive joint proxy statement/prospectus filedRights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights shall be evidenced by usthe balances indicated in the book entry account system of the transfer agent for the Common Shares registered in the names of the holders of Common Shares (which Common Shares shall also be deemed to represent certificates for Rights) or, in the case of certificated shares, the certificates for the Common Shares registered in the names of the holders of the Common Shares (which certificates for Common Shares also constitute certificates for Rights) and each Right is transferable only in connection with the SECtransfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are transferable only on February 13, 2017.
Salethe registry books of Data Centersthe Rights Agent if surrendered at the office(s) of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer and Colocation Business
On May 1, 2017, we sold our data centerswith the appropriate forms and colocation business to a consortium led by BC Partners, Inc.certificates properly completed and Medina Capital (“the Purchaser”) in exchange forpre-tax cash proceeds of $1.8 billion and a minority stakeduly executed, as determined in the limited partnership that owns the consortium’s newly-formed global secure infrastructure company, Cyxtera Technologies. As partsole discretion of the transaction,Rights Agent;
(c) the Purchaser acquired 57 of our data centersCompany and assumed our capital lease obligations, which amounted to $294 million on May 1, 2017, relatedthe Rights Agent may deem and treat the person in whose name the Right Certificate (or, prior to the divested properties.
Our colocation business generated revenues (excluding revenue from affiliates)Distribution Date, the associated balance indicated in the book entry account system of $210 million from January 1, 2017 through May 1, 2017, and $622 million and $626 millionthe transfer agent for the years ended December 31, 2016Common Shares, or in the case of certificated shares, by the associated Common Shares certificate) is registered as the absolute owner thereof and 2015, respectively (a small portion of which has been retained by us).
This transaction did not meet the accounting requirements for a sale-leaseback transaction as describedRights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificate or the associated balance indicated in ASC840-40,Leases - Sale-Leaseback Transaction. Under the failed-sale-leaseback accounting model, we are deemed under GAAP to still own certain real estate assets sold to Cyxtera. The failed-sale-leaseback accounting treatment decreased net income by $103 million on our consolidated resultsbook entry account system of operationsthe transfer agent for the year ended December 31, 2017.
After factoringCommon Shares. or in the costscase of certificated shares, by the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to sell the data centerscontrary; and colocation business, excluding
(d) notwithstanding anything in this Agreement to the impacts fromcontrary, neither the failed-sale-leaseback accounting treatment,Company nor the sale resulted inRights Agent has any liability to any holder of a $20 million gainRight or any other Person as a result of the aggregate valueinability of the consideration we received exceedingCompany or the carrying valueRights
| 2019 Proxy Statement | C-15 | |||||||
Agent to perform any of its or their obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree, judgment or ruling (whether interlocutory or final) issued by a court of competent jurisdiction or by a governmental, regulatory, self-regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority, prohibiting or otherwise restraining performance of such obligation;provided,however, the Company shall use its commercially reasonable efforts to have any such injunction, order, decree, judgment or ruling lifted or otherwise overturned as promptly as practicable.
Section 17.Right Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the assets sold and liabilities assumed. BasedPreferred Shares or any other securities of the Company which may at any time be issuable on the fair market valuesexercise of the failed-sale-leaseback assets,Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the failed-sale-leaseback accounting treatment resultedholder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof.
Section 18.Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and from time to time, on demand of the Rights Agent, to reimburse the Rights Agent for all of its reasonable and documented expenses and counsel fees and other disbursements incurred in the preparation, negotiation, delivery, amendment, administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent and its affiliates, employees, officers, directors, representatives and advisors for, and to hold it harmless against, any loss, liability, damage, demand, judgment, fine, penalty, claim, settlement, cost or expense (including the reasonable and documented fees and expenses of legal counsel) for any action taken, suffered or omitted to be taken by the Rights Agent pursuant to or arising from this Agreement or in connection with the acceptance, administration, exercise and performance of its duties under this Agreement, including the reasonable and documented costs and expenses of defending against any claim of liability arising therefrom, directly or indirectly. The reasonable costs and expenses incurred in enforcing this right of indemnification shall also be paid by the Company.
(b) The Rights Agent shall be authorized and protected and shall incur no liability for or in respect of any action taken, suffered or omitted to be taken by it in connection with its acceptance and administration of this Agreement and the exercise and performance of its duties hereunder in reliance upon any Rights Certificate or book entry for Common Shares or other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statements or other paper or document believed by it to be genuine and to be signed, executed and shall not be obligated to verify the accuracy or completeness of such instrument, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statements or other paper or document and, where necessary, guaranteed, verified or acknowledged, by the proper Person or Persons, or upon any written instructions or statements from the Company with respect to any matter relating to its acting as Rights Agent hereunder without further inquiry or examination on its part, or otherwise upon the advice or opinion of counsel as set forth in Section 20(a) hereof. The Rights Agent shall not be deemed to have knowledge of any event of which it was supposed to receive notice thereof hereunder, and the Rights Agent shall be fully protected and shall incur no liability for failing to take action in connection therewith unless and until it has received such notice in writing.
(c) Notwithstanding anything in this Agreement to the contrary, in no case shall the Company be liable with respect to any action, proceeding, suit or claim against the Rights Agent unless the Rights Agent shall have notified the Company hereof of the assertion of such action, proceeding, suit or claim against the Rights Agent, promptly after the Rights Agent shall have notice of such assertion of an action, proceeding, suit or claim or have been served with the summons or other first legal process giving information as to the nature and basis of the action, proceeding, suit or claim; provided that the failure to provide such notice promptly shall not affect the
| C-16 | 2019 Proxy Statement | | |||||
rights of the Rights Agent hereunder and shall not relieve the Company of any liability to the Rights Agent, except to the extent that such failure actually prejudices the Company. The Company shall be entitled to participate at its own expense in the defense of any such action, proceeding, suit or claim, and, if the Company so elects, the Company shall assume the defense of any such action, proceeding, suit or claim, unless such action, proceeding, suit or claim is (a) brought by the Rights Agent or (b) the Rights Agent reasonably determines that there may be a conflict of interest between the Company and the Rights Agent in the defense of an action and the Rights Agent does in fact assume the defense. In the event that the Company assumes such defense, the Company shall not thereafter be liable for the fees and expenses of any counsel retained by the Rights Agent, so long as the Company shall retain counsel satisfactory to the Rights Agent, in the exercise of its reasonable judgment, to defend such action, proceeding, suit or claim, and provided that the Rights Agent does not have defenses that are adverse to or different from any defenses of the Company. The Rights Agent agrees not to settle any litigation in connection with any action, proceeding, suit or claim with respect to which it may seek indemnification from the Company without the prior written consent of the Company, which shall not be unreasonably withheld.
(d) The provisions of this Section 18 and Section 20 hereof shall survive the termination or expiration of this Agreement, the resignation, replacement or removal of the Rights Agent and the exercise, termination or expiration of the Rights. Notwithstanding anything in this Agreement to the contrary, in no event shall the Rights Agent be liable for special, punitive, incidental, indirect or consequential loss or damage of $102 millionany kind whatsoever (including but not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage and regardless of the form of the action; and the Company agrees to indemnify the Rights Agent and its affiliates, directors, employees, representatives and advisors and hold them harmless to the fullest extent permitted by law against any loss, liability or expense incurred as a result of claims for special, punitive, incidental, indirect or consequential loss or damages of any kind whatsoever. Any liability of the requirementRights Agent under this Agreement shall be limited to treat a certainthe amount of annual fees paid by thepre-tax cash proceeds Company to the Rights Agent during the 12 months immediately preceding the event for which recovery from the saleRights Agent is being sought.
Section 19.Merger or Consolidation or Change of Name of Rights Agent.
(a) Any Person into which the Rights Agent or any successor Rights Agent is merged or with which the Rights Agent or any successor Rights Agent is consolidated, or any Person resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent is a party, or any Person succeeding to the corporate trust, stock transfer or other stockholder services business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; but only if such Person would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. The purchase of all or substantially all of the Rights Agent’s assets as though it wereemployed in the resultperformance of transfer agent activities shall be deemed a merger or consolidation for purposes of this Section 19. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a financing obligation. The combined net loss of $82 million is includedpredecessor Rights Agent and deliver such Rights Certificates so countersigned; and in selling, general and administrative expenses in our consolidated statement of operations for the year ended December 31, 2017. The sale also resulted in a significant capital loss carryforward, which was entirely offset by a valuation allowance due to our determinationcase at that we are not likely to be able to utilize this carryforward prior to its expiration.
For all of 2018, we will be required by GAAP to record similarnon-cash adjustments to our net income. Upon the January 1, 2019 implementationtime any of the new accounting standard for Leases (ASU2016-02), which was issued by the FASBRights Certificates have not been countersigned, any successor Rights Agent may countersign such Rights Certificates either in early 2016, this particular accounting treatment will no longer be applicable for this transaction, and the above-described real estate assets and corresponding financing obligation will be derecognized from our consolidated balance sheet.
See Note 3—Sale of Data Centers and Colocation Business to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017 for additional information on the sale.
New Organizational Structure
In January 2017, we implemented a new organization structure designed to further strengthen our ability to attain our operational, strategic and financial goals. Prior to this reorganization, we operated and reported as two segments, business and consumer. As a result of this reorganization, we changed the name of the predecessor business segment to “enterprise” segment. Additionally, we also reassigned our information technology, managed hosting, cloud hostingor in the name of the successor Rights Agent; and hosting area network services from our business segment to a newnon-reportable operating segment. We reported two segments, enterprisein all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and consumer, from January 2017 through October 2017.in this Agreement.
(b) In connection with our acquisitioncase at any time the name of Level 3 (discussed furtherthe Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in Note 2—Acquisitioncase at that time any of Level 3 to our consolidated financial statementsthe Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in Item 8 of our Annual Report on Form10-K forits prior name or in its changed name; and in all such cases such Rights Certificates shall have the year ended December 31, 2017), effective November 1, 2017, we implemented a new organization structurefull force provided in the Rights Certificates and began managing our operations in two segments: business and consumer. Our consumer segment remains substantially unchanged under this reorganization, and our newly reorganized business segment includes the legacy CenturyLink enterprise segment operations and the legacy Level 3 operations. In addition, we reassigned our information technology, managed hosting, cloud hosting and hosting area network operations back into the business segment from the formernon-reportable operating segment. At December 31, 2017, we had the following two segments:Agreement.
|
|
RESULTS OF OPERATIONS
The following table summarizes the results of our consolidated operations for the years ended December 31, 2017, 2016 and 2015:
| Years Ended December 31, | ||||||||||||
| 2017(1)(2) | 2016(2)(3)(4) | 2015(3) | ||||||||||
(Dollars in millions except per share amounts) | ||||||||||||
Operating revenues | $ | 17,656 | 17,470 | 17,900 | ||||||||
Operating expenses | 15,647 | 15,137 | 15,321 | |||||||||
|
|
|
|
|
| |||||||
Operating income | 2,009 | 2,333 | 2,579 | |||||||||
Other expense, net | 1,469 | 1,313 | 1,263 | |||||||||
Income tax (benefit) expense | (849 | ) | 394 | 438 | ||||||||
|
|
|
|
|
| |||||||
Net income | $ | 1,389 | 626 | 878 | ||||||||
|
|
|
|
|
| |||||||
Basic earnings per common share | $ | 2.21 | 1.16 | 1.58 | ||||||||
Diluted earnings per common share | $ | 2.21 | 1.16 | 1.58 | ||||||||
| 2019 Proxy Statement | C-17 | |||||||
Section 20.Duties of Rights Agent. The Rights Agent undertakes the duties and obligations expressly imposed by this Agreement (and no implied duties or obligations) upon the following table summarizes our access lines, broadband subscribersterms and numberconditions, by all of employees aswhich the Company and the holders of December 31, 2017, 2016Right Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Rights Agent or the Company or an employee of the Rights agent), and 2015:the advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent, and the Rights Agent will have no liability for or in respect of, any action taken or omitted by it in good faith and in accordance with such opinion.
| As of December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (in thousands) | ||||||||||||
Operational metrics: | ||||||||||||
Total access lines(1) | 10,282 | 11,090 | 11,748 | |||||||||
Total broadband subscribers(1) | 5,662 | 5,945 | 6,048 | |||||||||
Total employees | 51 | 40 | 43 | |||||||||
During the last decade, we have experienced revenue declines primarily due to declines in access lines, private line customers, switched access rates and minutes of use. To mitigate these revenue declines, we remain focused on efforts to, among other things:
promote long-term relationships with our customers through bundling of integrated services;
increase the capacity, speed and usage of our networks;
provide a wide array of diverse services, including enhanced or additional services that may become available(b) Whenever in the futureperformance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chief Executive Officer, Chief Financial Officer, the President, General Counsel, any Senior Vice President, the Treasurer or the Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. The Rights Agent shall have no duty to act without such a certificate from an officer of the Company as set forth in the preceding sentence.
(c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross negligence, bad faith, or willful misconduct (which gross negligence, bad faith or willful misconduct must be determined by a court of competent jurisdiction in a finalnon-appealable order, judgment, decree or ruling). Anything to the contrary notwithstanding, in no event shall the Rights Agent be liable for special, punitive, indirect, consequential or incidental loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Rights Agent has been advised of the likelihood of such loss or damage and regardless of the form of the action; and the Company agrees to indemnify the Rights Agent and its affiliates, directors, employees, representatives and advisors and to hold them harmless to the fullest extent permitted by law against any loss, liability or expense incurred as a result of claims for special, punitive, incidental, indirect or consequential loss or damage of any kind whatsoever. Any liability of the Rights Agent under this Agreement will be limited to the amount of annual fees paid by the Company to the Rights Agent during the twelve (12) months immediately preceding the event for which recovery from the Rights Agent is being sought.
(d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not have any liability nor be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to amongSection 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Section 3, 11, 23 or 24 hereof, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other things, advances in technologyacts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or improvements in our infrastructure;
provide our premium services to a higher percentageperforming by the Rights Agent of our customers;
pursue acquisitionsthe provisions of additional assets if available at attractive prices;
increase prices on our products and services if and when practicable; and
market our products and services to new customers.
Operating Revenues
We categorize our products, services and revenues among the following five categories:this Agreement.
|
| C-18 | 2019 Proxy Statement | | |||||
(g) The Rights Agent is hereby authorized and directed to accept verbal or written instructions with respect to the performance of its duties hereunder from any one of the Chief Executive Officer, Chief Financial Officer, the President, General Counsel, any Senior Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and such advice or instruction shall be full authorization and protection to the Rights Agent and the Rights Agent shall have no duty to independently verify the accuracy or completeness of such advice or such instructions and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. The Rights Agent will not be held to have notice of any change of authority of any person until its receipt of written notice thereof from the Company in accordance with this Agreement. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted to be taken by the Rights Agent under this Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall be fully authorized and protected in relying upon the most recent verbal or written instructions received from any such officer, and shall not be liable for any action taken, suffered or omitted to be taken by the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually receives such application unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken, suffered or omitted to be taken. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself (through its directors, officers and/or employees) or by or through its attorneys or agents, and the Rights Agent shall not be liable for any act, omission, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company, any holder of Rights or any other Person resulting from any such act, omission, default, neglect or misconduct, absent gross negligence, bad faith or willful misconduct (which gross negligence, bad faith or willful misconduct must be determined by a final,non-appealable order, judgment, decree or ruling of a court of competent jurisdiction) in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if there are reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, either (i) the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, or (ii) any other actual or suspected irregularity exists, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company, and the Rights Agent shall not be liable for any delays arising from the duties under this Section 20(k). (l) In the event that the Rights Agent reasonably believes any ambiguity or uncertainty exists hereunder or in any notice, instruction, direction, request or other communication, paper or document received by the Rights Agent hereunder, the Rights Agent shall, as soon as practicable, inform the Company or such Person seeking clarification and may, in its sole discretion, refrain from taking any action, and will be fully protected and will not be liable or responsible in any way to the Company or other Person or entity for refraining from taking such action, unless the Rights Agent receives written instructions signed by the Company which eliminates such ambiguity or uncertainty to the reasonable satisfaction of the Rights Agent. |
|
|
|
For more information, see “Products and Services” in Item I of our Annual Report on Form10-K for the year ended December 31, 2017.
The following tables summarize our consolidated operating revenues recorded under our five revenue categories:
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
IP & Data Services(1) | $ | 4,043 | 3,357 | 686 | 20 % | |||||||||||
Transport & Infrastructure(2) | 6,551 | 6,826 | (275 | ) | (4)% | |||||||||||
Voice & Collaboration(3) | 5,679 | 5,943 | (264 | ) | (4)% | |||||||||||
IT & Managed Services(4) | 651 | 640 | 11 | 2 % | ||||||||||||
Regulatory revenues(5) | 732 | 704 | 28 | 4 % | ||||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | $ | 17,656 | 17,470 | 186 | 1 % | |||||||||||
|
|
|
|
|
| |||||||||||
| |||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
IP & Data Services(1) | $ | 3,357 | 3,172 | 185 | 6 % | |||||||||||
Transport & Infrastructure(2) | 6,826 | 6,986 | (160 | ) | (2)% | |||||||||||
Voice & Collaboration(3) | 5,943 | 6,326 | (383 | ) | (6)% | |||||||||||
IT & Managed Services(4) | 640 | 687 | (47 | ) | (7)% | |||||||||||
Regulatory revenues(5) | 704 | 729 | (25 | ) | (3)% | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | $ | 17,470 | 17,900 | (430 | ) | (2)% | ||||||||||
|
|
|
|
|
| |||||||||||
Our total operating revenues increased(m) The Rights Agent shall have no responsibility to the Company, any holders of Rights or any holders of Common Shares for interest or earnings on any moneys held by $186the Rights Agent pursuant to this Agreement.
(n) The Rights Agent shall not be required to take notice or be deemed to have notice of any event or condition hereunder, including any event or condition that may require action by the Rights Agent, unless the Rights Agent shall be specifically notified in writing of such event or condition by the Company, and all notices or other instruments required by this Agreement to be delivered to the Rights Agent must, in order to be effective, be received by the Rights Agent, and in the absence of such notice so delivered, the Rights Agent may conclusively assume no such event or condition exists.
Section 21.Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon at least 30 days’ notice in writing to the Company in accordance with Section 26 hereof, and in the event that the Rights Agent or one of its Affiliates is not also the transfer agent for the Company, to each transfer agent of the Common Shares or Preferred Shares by first class mail or by recognized overnight delivery in which case the Company will give or cause to be given written notice to the holders of the Right Certificates by first-class mail. In the event the transfer agency relationship in effect between the Company and the Rights Agent terminates, the Rights Agent will be deemed to have resigned automatically and be discharged from its duties under this Agreement as of the effective date of such termination, and the Company shall be responsible for sending any required notice. The Company may remove the Rights Agent or any successor Rights Agent upon at least 30 days’ notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and, if such removal occurs after the Distribution Date, to the holders of the Right Certificates by first-class mail. If the Rights Agent resigns or is removed or otherwise becomes incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company fails to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (which holder shall, with such notice, submit such holder’s Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a Person organized and doing business under the laws of the United States or of the any State , in good standing, which is authorized under such laws to exercise corporate trust, stock transfer, or stockholder services powers and is subject to supervision or examination by federal or state authority and which at the time of its appointment as Rights Agent has, along with its Affiliates, a combined capital and surplus of at least $50 million, or 1%,(b) an affiliate of a Person described in clause (a) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent under this Agreement without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the year ended December 31, 2017 as comparedpurpose, in each case at the sole expense of the Company. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares or Preferred Shares, and mail a notice thereof in writing to the year ended December 31, 2016 dueregistered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22.Issuance of New Right Certificates. Notwithstanding any of the provisions of this Agreement or of the Rights to the inclusioncontrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by the Board of $1.39 billionDirectors of the Company to reflect any adjustment or change made in post-acquisition Legacy Level 3 operating revenuesaccordance with the provisions of this Agreement in our 2017 consolidated operating revenues. Total operating revenues for Legacy CenturyLink decreased by $1.204 billion for the year ended December 31, 2017 as comparedPurchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date (other than upon exercise of a Right) and prior to the year ended December 31, 2016 and by $430 million forearlier of the year ended December 31, 2016 as comparedRedemption Date, Early Expiration Date or Final Expiration Date, the Company (a) shall, with respect to Common Shares so issued or sold pursuant to the year ended December 31, 2015. The decline in total operating revenues for both periods reflectsexercise of stock options or under any employee plan or arrangement, or upon the continuing loss of access lines, loss of long-distance revenues primarily due to the displacement of traditional wireline telephone services by other competitive products and services, including data and wireless communication services, and reductions in the volume of our private line (including business data services) services. Our total operating revenues for the year ended December 31, 2017 were also impacted by the May 1, 2017 sale of our data centers and colocation business, which resulted in a reduction of colocation revenues of $396 million for the year ended December 31, 2017 as compared to the prior year period.
Further analysis of our segment operating revenues and trends impacting our performance are provided below in “Segment Results.”
Operating Expenses
Our current definitions of operating expenses are as follows:exercise,
|
|
| C-20 | 2019 Proxy Statement | | |||||
|
These expense classificationsconversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Rights Certificate may be issued if, and to the extent that, the Company, in its sole discretion, determines that such issuance would jeopardize or endanger the value or availability to the Company of the NOLs or otherwise create a significant risk of material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued, and (ii) no such Rights Certificate may be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23.Redemption. (a) The Independent Directors may, at their option, at any time prior to the Distribution Date, redeem all but not less than all the then outstanding Rights at a redemption price of $0.0001 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the “Redemption Price”). The redemption of the Rights by the Independent Directors may be comparablemade effective at such time, on such basis and with such conditions as the Independent Directors, in their sole discretion, may establish.
(b) Immediately upon the action of the Independent Directors ordering the redemption of the Rights pursuant to thoseparagraph (a) of other companies.
this Section 23, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The following tables summarize our operating expenses:
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Cost of services and products (exclusive of depreciation and amortization) | $ | 8,203 | 7,774 | 429 | 6% | |||||||||||
Selling, general and administrative | 3,508 | 3,447 | 61 | 2% | ||||||||||||
Depreciation and amortization | 3,936 | 3,916 | 20 | 1% | ||||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | $ | 15,647 | 15,137 | 510 | 3% | |||||||||||
|
|
|
|
|
| |||||||||||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Cost of services and products (exclusive of depreciation and amortization) | $ | 7,774 | 7,778 | (4 | ) | — % | ||||||||||
Selling, general and administrative | 3,447 | 3,354 | 93 | 3 % | ||||||||||||
Depreciation and amortization | 3,916 | 4,189 | (273 | ) | (7)% | |||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | $ | 15,137 | 15,321 | (184 | ) | (1)% | ||||||||||
|
|
|
|
|
| |||||||||||
CostCompany shall promptly give (i) written notice to the Rights Agent of Servicesany such redemption (and until such written notice is received by the Rights Agent, the Rights Agent may presume conclusively that no such redemptions have occurred); and Products (exclusive(ii) public notice of depreciation and amortization)
Costany such redemption;provided,however, that the failure to give, or any defect in, any such notice shall not affect the validity of services and products (exclusivesuch redemption. Within ten (10) days after such action of depreciation and amortization) increased by $429 million,the Independent Directors ordering the redemption of the Rights, the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their last addresses as they appear upon the registry books of the Rights Agent or, 6%,prior to the Distribution Date, on the registry books of the transfer agent for the year ended December 31, 2017 as comparedCommon Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the year ended December 31, 2016.Distribution Date.
Section 24.Exchange. (a) The increase in costsIndependent Directors may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of servicesthe then outstanding and products (exclusive of depreciation and amortization) was attributableexercisable Rights (which shall not include Rights that have become void pursuant to the inclusionprovisions of $690 million in post-acquisition Legacy Level 3 costs (netSection 11(a)(ii) hereof) for Common Shares at an exchange ratio of intercompany eliminations) in our consolidated costs of services and products (exclusive of depreciation and amortization). Costs of services and products (exclusive of depreciation and amortization) for Legacy CenturyLink decreased by $261 million, or 3%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The decrease in cost of services and products (exclusive of depreciation and amortization) was primarily due to reductions in salaries and wages and employee benefits from lower headcount and healthcare costs, lower real estate and power expenses from the sale of the data centers and colocation business, and reduced customer premises equipment costs due to a decrease in sales of customer premises equipment and USF rates, which were partially offset by increases in facility costs. Cost of services and products (exclusive of depreciation and amortization) decreased by $4 million, or less than 1%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease in cost of services and products (exclusive of depreciation and amortization) was primarily due to reductions in salaries and wages from lower headcount, professional fees, payment processing fees and customer premises equipment costs, which were substantially offset by increases in content costs for Prism TV (resulting from higher content volume and rates), network expense and USF rates.
Selling, General and Administrative
Selling, general and administrative expenses increased by $61 million, or 2%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase in selling, general and
administrative expenses was primarily attributable to the inclusion of $253 million in post-acquisition Legacy Level 3 expenses (net of intercompany eliminations) in our consolidated selling, general and administrative expenses. Legacy CenturyLink’s selling, general and administrative expenses decreased by $192 million, or 6%, primarily due to reductions in salaries and wages and employee benefits from lower headcount and healthcare costs, external commissions and bad debt expenses. These decreases were substantially offset by losses recognized from the sale of our data centers and colocation business and the related failed-sale-leaseback as further described in Note 3—Sale of Data Centers and Colocation Business to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017 and increases in transaction and integration costs associated with the Level 3 acquisition. Selling, general and administrative expenses increased by $93 million, or 3%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase in selling, general and administrative expenses was primarily due to increases in severance expenses associated with workforce reductions, higher payments of employee health care claims, bad debt and other expenses (including fees related to the Level 3 acquisition), which were partially offset by reductions in professional fees and property and other taxes.
Depreciation and Amortization
The following tables provide detail of our depreciation and amortization expense:
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Depreciation | $ | 2,710 | 2,691 | 19 | 1% | |||||||||||
Amortization | 1,226 | 1,225 | 1 | —% | ||||||||||||
|
|
|
|
|
| |||||||||||
Total depreciation and amortization | $ | 3,936 | 3,916 | 20 | 1% | |||||||||||
|
|
|
|
|
| |||||||||||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Depreciation | $ | 2,691 | 2,836 | (145 | ) | (5)% | ||||||||||
Amortization | 1,225 | 1,353 | (128 | ) | (9)% | |||||||||||
|
|
|
|
|
| |||||||||||
Total depreciation and amortization | $ | 3,916 | 4,189 | (273 | ) | (7)% | ||||||||||
|
|
|
|
|
| |||||||||||
Annual depreciation expense is impacted by several factors, including changes in our depreciable cost basis, changes in our estimates of the remaining economic life of certain network assets, the addition of new plant (including from the acquisition of Level 3) and the sale of our data centers and colocation business. Depreciation expense increased by $19 million, or 1%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016 and decreased by $145 million, or 5%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase in depreciation expense for the year ended December 31, 2017 was primarily attributable to the inclusion of $143 million in post-acquisition Legacy Level 3 depreciation expense in our consolidated depreciation expense. Legacy CenturyLink’s depreciation expense was lower for both periods due to full depreciation and retirement of certain plant placed in service prior to 2017 and 2016. Additionally, we ceased depreciating property, plant and equipment assets of our colocation business when we entered into the agreement to sell that business in late 2016. Absent the sale, we estimate that we would have recorded additional depreciation expense of $54 million from January 1, 2017 through May 1, 2017 related to the conveyed property. These decreases were partially offset by an increase in depreciation expense attributable to new plant placed in service since January 1, 2016 and 2015, respectively. As a result of not meeting sale-leaseback accounting requirements, we are deemed under GAAP to still own certain real estate assets sold to Cyxtera; therefore, we are requiredone Common Share per Right, appropriately adjusted to reflect a portion of the real estate assets on our consolidated balance sheet and depreciate these assets over their useful lives. As further described in Note 3—Sale of Data Centers and
Colocation Business, of the $91 million increase in depreciation expense on these real estate assets, $44 million is not expected to recur in future periods.
Amortization expense increased by $1 million, or less than 1%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016 and decreased by $128 million, or 9%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase in amortization expense for the year ended December 31, 2017 was primarily attributable to the inclusion of $139 million in post-acquisition Legacy Level 3 amortization expense in our consolidated amortization expense. Legacy CenturyLink’s amortization expense was lower for both periods primarily due to the use of accelerated amortization for a portion of our customer relationship assets and our entry into an agreement to sell our data centers and colocation business. The effect of using an accelerated amortization method results in an incremental decline in expense each period as the intangible assets amortize. We ceased amortizing the intangible assets of our colocation business when we entered into the agreement to sell that business. Absent the sale, we estimate that we would have recorded additional amortization expense of $13 million from January 1, 2017 through May 1, 2017, related to the conveyed intangible assets. In addition, amortization of capitalized software was lower in both periods due to software becoming fully amortized faster than new software was acquired or developed.
Other Consolidated Results
The following tables summarize our total other expense, net and income tax (benefit) expense:
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Interest expense | $ | (1,481 | ) | (1,318 | ) | 163 | 12 % | |||||||||
Other income, net | 12 | 5 | 7 | 140 % | ||||||||||||
|
|
|
| |||||||||||||
Total other expense, net | $ | (1,469 | ) | (1,313 | ) | 156 | 12 % | |||||||||
|
|
|
| |||||||||||||
Income tax (benefit) expense | $ | (849 | ) | 394 | (1,243 | ) | nm | |||||||||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Interest expense | $ | (1,318 | ) | (1,312 | ) | 6 | — % | |||||||||
Other income, net | 5 | 49 | (44 | ) | (90)% | |||||||||||
|
|
|
| |||||||||||||
Total other expense, net | $ | (1,313 | ) | (1,263 | ) | 50 | 4 % | |||||||||
|
|
|
| |||||||||||||
Income tax expense | $ | 394 | 438 | (44 | ) | (10)% | ||||||||||
nm - Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
Interest Expense
Interest expense increased by $163 million, or 12%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase in interest expense was primarily due to (i) the issuance of $7.945 billion of term loans in 2017 for the purpose of providing funding for the Level 3 acquisition, (ii) the assumption of Level 3’s debt upon the consummation of the acquisition of Level 3, which accounted for $80 million in post-acquisition interest expense and (iii) the recognition of imputed interest expense resulting from the failed-sale-leaseback as further described in Note 3—Sale of Data Centers and Colocation Business. Interest expense increased by $6 million, or less than 1%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase in interest expense was substantially due to a reduction in the
amount of net premium amortization recorded at acquisition due to the early retirement of several issuances of debt during the period, which has the effect of increasing interest expense, and an increase in interest expense on unsecured notes related to the issuance of $1.0 billion of new debt in April, 2016 in advance of a debt maturity in June, 2016.
Other Income, Net
Other income, net reflects certain items not directly related to our core operations, including our share of income from partnerships we do not control, interest income, gains and losses fromnon-operating asset dispositions, foreign currency gains and losses and components of net periodic pension and postretirement benefit costs. Other income (expense), net increased by $7 million, or 140%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. This increase in other income, net was primarily due to a reduction in the loss on early retirement of debt, an increase in interest income from the $6 billion Term Loan B funds held in escrow and income generated from our services agreements with Cyxtera, which was substantially offset by a lower expected return on assets in 2017 for our pension and post-retirement plans. The expected return on assets for our pension and post-retirement plans was lower in 2017 as compared to 2016, which resulted in us recording pension and post-retirement expense in 2017 as compared to recording pension and post-retirement income in 2016. Other income, net decreased by $44 million, or 90%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease in other income, net was primarily due to losses on early retirement of debt, which was partially offset by the impact of nonrecurring funding from a state economic development program.
Income Tax (Benefits) Expense
The enactment of the Tax Cuts and Jobs Act legislation in December 2017 resulted in are-measurement of our deferred tax assets and liabilities at the new federal corporate tax rate of 21%. There-measurement resulted in a tax benefit of approximately $1.1 billion recorded in the fourth quarter of 2017, which was the predominant factor contributing to our recognition of an $849 million income tax benefit for 2017, versus income tax expense of $394 million in the prior year. Income tax expense decreased by $44 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. For the years ended December 31, 2017, 2016 and 2015, our effective income tax rate was (157.2)%, 38.6% and 33.3%, respectively. The effective tax rate for the year ended December 31, 2017 reflects the benefit from there-measurement of deferred taxes as noted above, a $27 million tax expense related to the sale of our data centers and colocation business and a $32 million tax impact ofnon-deductible transaction costs related to the Level 3 acquisition. The effective tax rate for the year ended December 31, 2016 reflects a tax impact of $18 million from an intercompany dividend payment from one of our foreign subsidiaries to its domestic parent company that was made as part of our corporate restructuring in preparation for the sale of our colocation business. The effective tax rate for the year ended December 31, 2015 reflects a tax benefit of approximately $34 million related to affiliate debt rationalization, research and development tax credits of $28 million for 2011 through 2015, and a $16 million tax decrease due to changes in state taxes caused by apportionment changes, state tax rate changes and the changes in the expected utilization of net operating loss carryforwards (“NOLs”). See Note 13—Income Taxes to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017 and “Critical Accounting Policies and Estimates—Income Taxes” below for additional information.
Segment Results
The results for our business and consumer segments are summarized below for the years ended December 31, 2017, 2016 and 2015:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Total segment revenues | $ | 16,924 | 16,766 | 17,171 | ||||||||
Total segment expenses | 9,390 | 9,081 | 9,025 | |||||||||
|
|
|
|
|
| |||||||
Total segment income | $ | 7,534 | 7,685 | 8,146 | ||||||||
|
|
|
|
|
| |||||||
Total margin percentage | 45 | % | 46 | % | 47 | % | ||||||
Business segment: | ||||||||||||
Revenues | $ | 11,220 | 10,704 | 10,977 | ||||||||
Expenses | 6,847 | 6,391 | 6,395 | |||||||||
|
|
|
|
|
| |||||||
Income | $ | 4,373 | 4,313 | 4,582 | ||||||||
|
|
|
|
|
| |||||||
Margin percentage | 39 | % | 40 | % | 42 | % | ||||||
Consumer segment: | ||||||||||||
Revenues | $ | 5,704 | 6,062 | 6,194 | ||||||||
Expenses | 2,543 | 2,690 | 2,630 | |||||||||
|
|
|
|
|
| |||||||
Income | $ | 3,161 | 3,372 | 3,564 | ||||||||
|
|
|
|
|
| |||||||
Margin percentage | 55 | % | 56 | % | 58 | % | ||||||
The following table reconciles our total segment revenues and total segment income presented above to consolidated operating revenues and consolidated operating income reported in our consolidated statements of operations.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Total segment revenues | $ | 16,924 | 16,766 | 17,171 | ||||||||
Regulatory revenues | 732 | 704 | 729 | |||||||||
|
|
|
|
|
| |||||||
Operating revenues reported in our consolidated statements of operations | $ | 17,656 | 17,470 | 17,900 | ||||||||
|
|
|
|
|
| |||||||
Total segment income | $ | 7,534 | 7,685 | 8,146 | ||||||||
Regulatory revenues | 732 | 704 | 729 | |||||||||
Depreciation and amortization | (3,936 | ) | (3,916 | ) | (4,189 | ) | ||||||
Non-segment expenses | (2,321 | ) | (2,140 | ) | (2,107 | ) | ||||||
|
|
|
|
|
| |||||||
Operating income reported in our consolidated statements of operations | $ | 2,009 | 2,333 | 2,579 | ||||||||
|
|
|
|
|
| |||||||
Products and Services
In connection with our acquisition of Level 3 on November 1, 2017, we revised the way we categorize our products and services and now report our related revenues under the following categories: IP and data services, transport and infrastructure, voice and collaboration, IT and managed services and regulatory revenues. From time to time, we change the categorization of our products and services, and we may make similar changes in the future.
We offer our customers the ability to bundle together several products and services. We believe our customers value the convenience and price discounts associated with receiving multiple services through a single company.
Business Segment
The operations of our business segment have been impacted by several significant trends, including those described below:
Our mix of total business segment revenues continues to migrate from traditional wireline voice services to newer, lower cost more technologically advanced products and services as our small, medium and enterprise business, wholesale and government customers increasingly demand integrated data, broadband, hosting and voice services. Our Ethernet-based services in the wholesale market face competition from cable companies and competitive fiber-based telecommunications providers. We anticipate continued pricing pressure for our colocation services as our competitors continue to expand their enterprise colocation operations. In recent years, our competitors, as well as several large, diversified technology companies, have made substantial investments in cloud computing. This expansion in competitive cloud computing offerings has led to increased pricing pressure, a migration towards lower-priced cloud-based services and enhanced competition for contracts, and we expect these trends to continue. Customers’ demand for new technology has also increased the number of competitors offering services similar to ours. Price compression from each of these above-mentioned competitive pressures has negatively impacted the operating margins of certain business product and service offerings, and we expect this trend to continue. Our traditional wireline products and services revenues have been, and we expect they will continue to be, adversely affected by access line losses and price compression. In particular, our access, local services and long-distance revenues have been, and we expect will continue to be, adversely affected by customer migration to more technologically advanced services, a substantial increase in the use ofnon-voice communications, industry consolidation and price compression caused by regulation and rate reductions. For example, many of our business segment customers are substituting cable, wireless and Voice over Internet Protocol (“VoIP”) services for traditional voice telecommunications services, resulting in continued access revenue loss. Demand for our private line services (including business data services) continues to decline due to our customers’ optimization of their networks, industry consolidation and technological migration to higher-speed services. Although our traditional wireline services generally face fewer direct competitors than certain of our newer, lower cost more advanced products and services, customer migration and, to a lesser degree, price compression from competitive pressures have negatively impacted our traditional wireline revenues and the operating margins of these services. We expect this trend to continue. We expect both equipment sales and professional services revenue and the related costs will fluctuate from year to year as this offering tends to be more sensitive than others to changes in the economy and in spending trends of our federal, state and local government customers, many of whom have experienced substantial budget cuts over the past several years, with the possibility of additional future budget cuts.
Our operating costs also impact the operating margins of all of our above-mentioned services, but to a lesser extent than price compression and customer disconnects. These operating costs include employee costs, sales commissions, software costs on selected services, installation costs and third-party facility costs. We believe increases in operating costs have generally had a greater impact on the operating margins of some of our newer, more technologically advanced services as compared to our traditional wireline services, principally because those newer services rely more heavily upon the above-listed support functions. Operating costs, such as installation costs and third-party facility costs, have also negatively impacted the operating margins of our traditional wireline products and services, but to a lesser extent than customer loss, customer migration and price compression.
We continue to evaluate our segment operating structure and focus. This involves balancing our workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions, while achieving operational efficiencies and improving our processes through automation. However, our ongoing efforts to increase revenue will continue to require that we incur higher costs in some areas. We also expect our business segment to benefit indirectly from enhanced efficiencies in our company-wide network operations.
The following tables summarize the results of operations from our business segment:
| Business Segment | ||||||||||||||||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Segment revenues: | ||||||||||||||||
IP & Data Services(1) | $ | 3,595 | 2,851 | 744 | 26 % | |||||||||||
Transport & Infrastructure(2) | 3,680 | 3,929 | (249 | ) | (6)% | |||||||||||
Voice & Collaboration(3) | 3,294 | 3,284 | 10 | — % | ||||||||||||
IT & Managed Services(4) | 651 | 640 | 11 | 2 % | ||||||||||||
|
|
|
|
|
| |||||||||||
Total segment revenues | 11,220 | 10,704 | 516 | 5 % | ||||||||||||
|
|
|
|
|
| |||||||||||
Segment expenses: | ||||||||||||||||
Total expenses | 6,847 | 6,391 | 456 | 7 % | ||||||||||||
|
|
|
|
|
| |||||||||||
Segment income | $ | 4,373 | 4,313 | 60 | 1 % | |||||||||||
|
|
|
|
|
| |||||||||||
Segment margin percentage | 39 | % | 40 | % | ||||||||||||
| Business Segment | ||||||||||||||||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Segment revenues: | ||||||||||||||||
IP & Data Services(1) | $ | 2,851 | 2,704 | 147 | 5 % | |||||||||||
Transport & Infrastructure(2) | 3,929 | 4,157 | (228 | ) | (5)% | |||||||||||
Voice & Collaboration(3) | 3,284 | 3,429 | (145 | ) | (4)% | |||||||||||
IT & Managed Services(4) | 640 | 687 | (47 | ) | (7)% | |||||||||||
|
|
|
|
|
| |||||||||||
Total segment revenues | 10,704 | 10,977 | (273 | ) | (2)% | |||||||||||
|
|
|
|
|
| |||||||||||
Segment expenses: | ||||||||||||||||
Total expenses | 6,391 | 6,395 | (4 | ) | — % | |||||||||||
|
|
|
|
|
| |||||||||||
Segment income | $ | 4,313 | 4,582 | (269 | ) | (6)% | ||||||||||
|
|
|
|
|
| |||||||||||
Segment margin percentage | 40 | % | 42 | % | ||||||||||||
Segment Revenues
Business segment revenues increased by $516 million, or 5%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016 due to the inclusion of $1.39 billion in post-acquisition Legacy Level 3 business segment revenues in our consolidated business segment revenues. Business segment revenues
for Legacy CenturyLink decreased by $874 billion for the year ended December 31, 2017 as compared to the year ended December 31, 2016 and by $273 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decline in business segment revenues for both periods is attributable to a reduction in access lines and lower volumes of long-distance and access services resulting from the competitive and technological factors noted above and to reductions in the volume of private line (including business data services) services. Our business segment revenues for the year ended December 31, 2017 were also impacted by the May 1, 2017 sale of our data centers and colocation business, which resulted in a reduction of colocation revenues of $396 million for the year ended December 31, 2017 as compared to the prior year period.
Segment Expenses
Business segment expenses increased by $456 million, or 7%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016, primarily due to the inclusion of $749 million in post-acquisition Legacy Level 3 business segment expenses in our consolidated business segment expenses. Business segment expenses for Legacy CenturyLink decreased by $293 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily due to decreases in salaries and wages and employee benefits from lower headcount, real estate and power costs due to the sale of the data centers and colocation business, marketing and advertising expenses and network expense. These decreases were partially offset by an increase in facility costs. Business segment expenses for Legacy CenturyLink decreased by $4 million, or less than 1%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease in our business segment expenses was primarily due to decreases in salaries and wages, professional fees and payment processing fees, which were substantially offset by increases in facility costs, network expense and real estate and power costs.
Segment Income
Business segment income increased by $60 million, or 1%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily due to the inclusion of $641 million in post-acquisition Legacy Level 3 business segment net income and decreased by $269 million, or 6%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease of $581 million in Legacy CenturyLink business segment income for the year ended December 31, 2017 was due to the loss of customers, lower service volumes and the loss of income generated by our colocation business. The decrease in business segment income for the year ended December 31, 2016 was due predominantly to the loss of customers and lower service volumes.
Consumer Segment
The operations of our consumer segment have been impacted by several significant trends, including those described below:
In order to remain competitive and attract additional residential broadband subscribers, we believe it is important to continually increase our broadband network’s scope and connection speeds. As a result, we continue to invest in our broadband network, which allows for the delivery of higher-speed broadband services to a greater number of customers. We compete in a maturing broadband market in which most consumers already have broadband services and growth rates in new subscribers have slowed or declined. Moreover, as described further in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017, certain of our competitors continue to provide broadband services at higher average transmission speeds than ours or through advanced wireless data service offerings, both of which we believe have impacted the competitiveness of certain of our broadband offerings. The offering of our facilities-based video services in our markets has required us to incur substantialstart-up expenses in advance of marketing and selling the service. Also, our associated content costs continue to increase and the video business has become more competitive as more options become available to customers to access video services through new technologies. The demand for new technology has
increased the number of competitors offering services similar to ours. Price compression and new technology from our competitors have negatively impacted the operating margins of our newer, more technologically advanced products and services and we expect this trend to continue. Our voice revenues have been, and we expect they will continue to be, adversely affected by access line losses and lower long-distance voice service volumes. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are substituting cable and wireless voice services and electronic mail, texting and social networkingnon-voice services for traditional voice telecommunications services. We expect that these factors will continue to negatively impact our business. As a result of the expected loss of higher margin services associated with access lines, we continue to offer our customers service bundling and other product promotions to help mitigate this trend, as described below. Customer migration and price compression from competitive pressures have not only negatively impacted our traditional wireline services revenues, but they have also negatively impacted the operating margins of these services and we expect this trend to continue.
Operating costs also impact the operating margins of these services. These operating costs include employee costs, marketing and advertising expenses, sales commissions, TV content costs and installation costs. We believe increases in operating costs have generally had a greater impact on our operating margins of our newer, more technologically advanced products and services as compared to our traditional wireline services, principally because our newer, more technologically advanced products and services rely more heavily upon the above-listed operating expenses. Operating costs, such as installation costs and facility costs, have also negatively impacted the operating margins of our traditional wireline products and services, but to a lesser extent than customer migration and price compression. Operating costs also tend to impact our traditional wireline products and services margins to a lesser extent than our newer, more technologically advanced products and services as noted above.
Service bundling and product promotions. We offer our customers the ability to bundle multiple products and services. These customers can bundle broadband services with other services such as local voice, video and long-distance. While we believe our bundled service offerings can help retain customers, they also tend to lower our profit margins in the consumer segment due to the related discounts; and
Operating efficiencies. We continue to evaluate our segment operating structure and focus. This involves balancing our workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions. We also expect our consumer segment to benefit indirectly from enhanced efficiencies in our company-wide network operations.
The following tables summarize the results of operations from our consumer segment:
| Consumer Segment | ||||||||||||||||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Segment revenues: | ||||||||||||||||
IP & Data Services(1) | $ | 448 | 506 | (58 | ) | (11 | )% | |||||||||
Transport & Infrastructure(2) | 2,871 | 2,897 | (26 | ) | (1 | )% | ||||||||||
Voice & Collaboration(3) | 2,385 | 2,659 | (274 | ) | (10 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total segment revenues | 5,704 | 6,062 | (358 | ) | (6 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Segment expenses: | ||||||||||||||||
Total expenses | 2,543 | 2,690 | (147 | ) | (5 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Segment income | $ | 3,161 | 3,372 | (211 | ) | (6 | )% | |||||||||
|
|
|
|
|
| |||||||||||
Segment income margin percentage | 55 | % | 56 | % | ||||||||||||
| Consumer Segment | ||||||||||||||||
| Years Ended December 31, | Increase / (Decrease) | % Change | ||||||||||||||
| 2016 | 2015 | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Segment revenues: | ||||||||||||||||
IP & Data Services(1) | $ | 506 | 468 | 38 | 8 | % | ||||||||||
Transport & Infrastructure(2) | 2,897 | 2,829 | 68 | 2 | % | |||||||||||
Voice & Collaboration(3) | 2,659 | 2,897 | (238 | ) | (8 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Total segment revenues | 6,062 | 6,194 | (132 | ) | (2 | )% | ||||||||||
|
|
|
|
|
| |||||||||||
Segment expenses: | ||||||||||||||||
Total expenses | 2,690 | 2,630 | 60 | 2 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Segment income | $ | 3,372 | 3,564 | (192 | ) | (5 | )% | |||||||||
|
|
|
|
|
| |||||||||||
Segment income margin percentage | 56 | % | 58 | % | ||||||||||||
Segment Revenues
Consumer segment revenues decreased by $358 million, or 6%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The decrease in our consumer segment revenues was primarily due to lower local and long-distance voice service volumes associated with access line losses resulting from the competitive and technological factors noted above and a decreaseany adjustment in the number of Prism TV customers. Consumer segment revenues decreased by $132 million, or 2%, forRights pursuant to Section 11(i) (such exchange ratio being hereinafter referred to as the year ended December 31, 2016 as compared“Exchange Ratio”).
(b) Immediately upon the action of the Independent Directors ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24 and without any further action and without any notice, the year ended December 31, 2015. The decline in consumer segment services revenues was primarily dueright to declines in localexercise such Rights shall terminate and long-distance services volumes associated with access line losses resulting from the competitive and technological factors as further described above. These declines were partially offset by an increase inonly right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of Prism TV customers and various pricing initiatives for broadband, Prism TV and other products and services, which were partially offsetsuch Rights held by a decline in broadband customers.
Segment Expenses
Consumer segment expenses decreasedsuch holder multiplied by $147 million, or 5%, for the year ended December 31, 2017 as comparedExchange Ratio. The Company shall promptly give (i) written notice to the year ended December 31, 2016.Rights Agent of any such exchange, and (ii) public notice of any such exchange;provided,however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange (and until such written notice is received by the Rights Agent, the Rights Agent may presume conclusively that no such exchange has occurred). The decreaseCompany promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in our consumer segment expenses was primarily due to decreasesthe manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected, and, in salaries and wages and employee benefits from lower headcount, external commissions and USF surcharges from rate decreases,the event of any partial exchange, the number of Rights which were partially offset by increases in marketing and advertising expenses. Consumer segment expenses increased by $60 million, or 2%, forwill be exchanged. Any partial exchange shall be effectedpro rata based on the year ended December 31, 2016 as comparednumber of Rights (other than Rights which have become void pursuant to the year ended December 31, 2015. This increase in our consumer segment expenses was primarily due to increases in costs related to Prism TV (resulting from higher volume and rates), professional fees, sales commissions, bad debt expense and network costs, which were partially offsetprovisions of Section 11(a)(ii) hereof) held by reductions in salaries and wages from lower headcount and payment processing fees.each holder of Rights.
Segment Income
Consumer segment income decreased by $211 million, or 6%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016 and by $192 million, or 5%, for the year ended December 31,
| 2019 Proxy Statement | C-21 | |||||||
2016(c) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit any exchange of Rights as compared to the year ended December 31, 2015. The decline in our consumer segment income for both periods was primarily due to loss of customers and increases in the costs associated with Prism TV.
Critical Accounting Policies and Estimates
Our consolidated financial statements are preparedcontemplated in accordance with accounting principlesthis Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exchange of the Rights. In the event the Company shall, after good faith effort, be unable to take all such action as may be necessary to authorize such additional Common Shares, the Company shall substitute, for each Common Share that are generally acceptedwould otherwise be issuable upon exchange of a Right, a number of Preferred Shares or fraction thereof such that the current per share market price of one Preferred Share multiplied by such number or fraction is equal to the current per share market price of one Common Share as of the date of issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Common Shares would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this paragraph (d), the current market value of a whole Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24.
Section 25.Notice of Certain Events. (a) In case the Company shall, at any time after the Distribution Date, propose (i) to pay any dividend payable in stock of any class to the holders of the Preferred Shares or to make any other distribution to the holders of the Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of the Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of the Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and, in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall occur, then the Company shall, as soon as practicable thereafter, give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe such event and the consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26.Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if by electronic transmission or sent by first-class or express United States.States mail, or recognized overnight delivery, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows:
CenturyLink, Inc.
100 CenturyLink Drive
Monroe, LA 7121039
Attention: Company Secretary
Email:stacey.goff@centurylink.com
| C-22 | 2019 Proxy Statement | | |||||
Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if by or sent by first-class mail or express United States mail, or recognized overnight delivery, postage prepaid, addressed (until another address is filed in writing with the Company) as follows:
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Attention: Client Services
Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company.
Section 27.Supplements and Amendments. The preparationCompany may from time to time supplement or amend this Agreement without the approval of these consolidated financial statements requires managementany holders of Right Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, to shorten or lengthen any time period hereunder, or to amend or make any other provisions with respect to the Rights which the Company may deem necessary or desirable, any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent;provided,however, that, from and after the Distribution Date, this Agreement shall not be amended in any manner which would adversely affect the interests of the holders of Rights (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). Upon the delivery of a certificate from an appropriate officer of the Company that states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment;provided,however, that the Rights Agent may, but shall not be obligated to, enter into any supplement or amendment that affects the Rights Agent’s own rights, duties, obligations or immunities under this Agreement.
Section 28.Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
Section 29.Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30.Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, null and void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement will remain in full force and effect and will in no way be affected, impaired or invalidated;provided,however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, null and void or unenforceable and the Board determines in good faith judgment that severing the invalid language from this Agreement would materially and adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and will not expire until the close of business on the tenth (10th) Business Day following the date of such determination by the Board;provided, further, that if any such severed term, provision, covenant or restriction shall adversely affect the rights, immunities, duties or obligations of the Rights Agent, then the Rights Agent shall be entitled to resign immediately.
Section 31.Governing Law. This Agreement, each Right, and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state, except that the rights, duties and obligations of the Rights Agent shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts to be made and performed entirely within such State.
| 2019 Proxy Statement | C-23 | |||||||
Section 32.Counterparts. This Agreement may be executed in one or more counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Delivery of an executed signature page of Agreement by facsimile or other customary shall mean of electronic transmission (e.g., “pdf”) shall be effective as delivery of a manually executed counterpart hereof.
Section 33.Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect in any way the meaning or construction of any of the provisions hereof.
Section 34.Determinations and Actions by the Independent Directors. For all purposes of this Agreement, any calculation of the number of Common Shares outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding Common Shares of which any Person is the Beneficial Owner, will be made in accordance with, as the Independent Directors deems to be applicable, the last sentence of Rule13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act or the provisions of Section 382. The Independent Directors will have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Independent Directors or to the Company, or as may be necessary or advisable in the administration of this Agreement, including without limitation the right and power to (i) interpret the provisions of this Agreement (including without limitation Section 27, this Section 34 and other provisions hereof relating to its powers or authority hereunder) and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including without limitation any determination contemplated by Section 1(a) or any determination as to whether particular Rights shall have become void). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, any omission with respect to any of the foregoing) which are done or made by the Independent Directors in good faith will (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties and (y) not subject any member of the Board to any liability to any Person, including without limitation the Rights Agent and the holders of the Rights.
Section 35.Process to Seek Exemption. Any Person who desires to effect any acquisition of Common Shares that would, if consummated, result in such Person (together with its Affiliates and Associates) beneficially own 4.9% or more of the then outstanding Common Shares (or, in the case of a person excluded from the definition of “Acquiring Person” in clause (1) of such definition, such applicable percentage) (a “Requesting Person”) may, prior to the Shares Acquisition Date, and in accordance with this Section 35, request that the Independent Directors grant an exemption with respect to such acquisition under this Agreement (an “Exemption Request”). An Exemption Request shall be in proper form and shall be delivered by registered mail, return receipt requested, to the Secretary of the Company at the principal executive office of the Company. To be in proper form, an Exemption Request shall set forth (a) the name and address of the Requesting Person, (b) the number and percentage of Common Shares then Beneficially Owned by the Requesting Person, together with all Affiliates and Associates of the Requesting Person, (c) a reasonably detailed description of the transaction or transactions by which the Requesting Person would propose to acquire Beneficial Ownership of Common Shares aggregating 4.9% or more of the then outstanding Common Shares (or, in the case of a person excluded from the definition of “Acquiring Person” in clause (1) of such definition, such applicable percentage) and the maximum number and percentage of Common Shares that the Requesting Person proposes to acquire and (d) a reasonably detailed statement of the benefits such Requesting Person expects to be received the Company and the other stockholders of the Company were the exemption to be granted. The Independent Directors shall make a determination whether to grant an exemption in response to an Exemption Request as promptly as practicable (and, in any event, within ten Business Days) after receipt thereof; provided, that the failure of the Independent Directors to make estimates and assumptions that affecta determination within such period shall be deemed to constitute the reported amountsdenial by the Independent Directors of our assets, liabilities, revenues and expenses. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations related to (i) business combinations, (ii) goodwill, customer relationships and other intangible assets; (iii) property, plant and equipment; (iv) pension and post-retirement benefits; (v) loss contingencies and litigation reserves; (vi) Connect America Fund; and (vii) income taxes. These policies and estimates are considered critical because they had a material impact, or they haveExemption Request. The Independent Directors may deny an Exemption Request if the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions or estimates. We believeIndependent Directors determine, in their sole discretion, that the estimates, judgmentsacquisition of Beneficial Ownership of Common Shares by the Requesting Person could jeopardize or endanger the availability to the Company of the NOLs or for whatever other reason they deem reasonable, desirable or appropriate. Any exemption granted hereunder may be granted in whole or in part, and assumptions made when accounting formay be subject to limitations or conditions (including a requirement that the items described below were reasonable, based on information available at the time they were made. However, there can be no assuranceRequesting Person agree that actual resultsit will not differ from those estimates.acquire
Business Combination
| C-24 | 2019 Proxy Statement | | |||||
We have accounted for our acquisition
Beneficial Ownership of Level 3 on November 1, 2017, under the acquisition method of accounting, whereby the tangible and separately identifiable intangible assets acquired and liabilities assumed are recognized at their preliminary estimated fair values at the acquisition date. The portion of the purchase priceCommon Shares in excess of the preliminary estimated fair valuemaximum number and percentage of shares approved by the Independent Directors or that it will not make another Exemption Request), in each case as and to the extent the Independent Directors shall determine necessary, desirable or appropriate.
Section 36.Tax Compliance and Withholding. The Company hereby authorizes the Rights Agent to deduct from all payments disbursed by the Rights Agent to the holders of the net tangibleRights, if applicable, the tax required to be withheld pursuant to Sections 1441, 1442, 1445, 1471 through 1474, and separately identifiable intangible assets acquired represents goodwill. The preliminary estimates of fair value and resulting assignment3406 of the purchase price relatedInternal Revenue Code of 1986, as amended, or by any federal or state statutes subsequently enacted, and to our acquisitionmake the necessary returns and payments of Level 3 involved significant estimatessuch tax to the relevant taxing authority. The Company will provide withholding and judgments by our management. In arriving atreporting instructions to the preliminary fair values of assets acquiredRights Agent from time to time as relevant, and liabilities assumed, we considered the following generally accepted valuation approaches: the cost approach, income approach and market approach. Our preliminary estimates also included assumptions about projected growth rates, cost of capital, effective tax rates, tax amortization periods, technology life cycles, the regulatory and legal environment and industry and economic trends. For additional information about our acquisition of Level 3, see Note 2—Acquisition of Level 3 to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017.
Goodwill, Customer Relationships and Other Intangible Assets
We amortize customer relationships primarily over an estimated life of 7 to 15 years, using either thesum-of-the-years-digits or the straight-line methods, depending on the customer retention patterns for the type of customer at the companies we acquire. We amortize capitalized software using the straight-line method over estimated lives ranging up to 7 years, except for approximately $237 million of our capitalized software costs, which represents costs to develop an integrated billing and customer care system which is amortized using the straight-line method over a 20 year period. We annually review the estimated lives and methods used to amortize our other intangible assets, primarily capitalized software. The amount of future amortization expense may differ materially from current amounts, depending on the results of our annual reviews.
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair valueupon request of the net assets acquired.Rights Agent. The Rights Agent shall have no responsibilities with respect to tax withholding, reporting, or payment except as specifically instructed by the Company.
We are requiredSection 37.Force Majeure. Notwithstanding anything to reassign goodwill to reporting units each time we reorganize our internal reporting structure which causesthe contrary contained herein, the Rights Agent will not have any liability for not performing, or a changedelay in the compositionperformance of, our reporting units. We assign goodwillany act, duty, obligation or responsibility by reason of any occurrence beyond the reasonable control of the Rights Agent (including, without limitation, any act or provision of any present or future law or regulation or governmental authority, any act of God, war, civil or military disobedience or disorder, riot, rebellion, terrorism, insurrection, fire, earthquake, storm, flood, strike, work stoppage, interruptions or malfunctions of computer facilities, loss of data due to the reporting units using a relative fair value approach. We utilize the trailing twelve months earnings before interest, taxes,power failures or mechanical difficulties with information, labor dispute, accident or failure or malfunction of any utilities, communication or computer (software or hardware) services or similar occurrence).
[Remainder of this page intentionally left blank.]
| 2019 Proxy Statement | C-25 | |||||||
depreciation and amortization as our allocation methodology as we believe that it represents a reasonable proxy forIN WITNESS WHEREOF, the fair value of the operations being reorganized. The use of other fair value assignment methods could result in materially different results. For additional information on our segments, see Note 14—Segment Information to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017.
We are required to assess goodwill for impairment at least annually, or more frequently, if an event occurs or circumstances change that would indicate an impairment mayparties hereto have occurred. We are required to write-down the value of goodwill in periods in which the recorded amount of goodwill exceeds the implied fair value of goodwill. Our reporting units are not discrete legal entities with discrete financial statements. Our assets and liabilities are employed in and relate to the operations of our reporting units. Therefore, the equity carrying value and future cash flows must be estimated each time a goodwill impairment analysis is performed on a reporting unit. As a result, our assets, liabilities and cash flows are assigned to reporting units using reasonable and consistent allocation methodologies. Certain estimates, judgments and assumptions are required to perform these assignments. We believe these estimates, judgments and assumptionscaused this Agreement to be reasonable, but changes in any of these can significantly affect each reporting unit’s equity carrying valueduly executed and future cash flows utilized for our goodwill impairment test. Our annual assessment date for testing goodwill impairment is October 31.
As of October 31, 2017, we assessed goodwill for impairment for our three reporting units, which we determined to be enterprise (excluding wholesale), consumer and wholesale and determined that the estimated fair value of our wholesale reporting unit was substantially in excess of our carrying value of equity and the estimated fair value of our enterprise and consumer reporting units exceeded our carrying value of equity by approximately 9.0% and 4.0%, respectively.
For additional information on our goodwill balances by segment, see Note 4—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017.
We may be required to assess our goodwill for impairment before our next required assessment date of October 31, 2018 under certain circumstances, including any failure to meet our forecasted future operating results or any significant increases in our weighted average cost of capital. In addition, we cannot assure that adverse conditions will not trigger future goodwill impairment assessments or impairment charges. A number of factors, many of which we cannot control, could affect our financial condition, operating results and business prospects and could cause our actual results to differ from the estimates and assumptions we employed in our goodwill impairment assessment. These factors include, but are not limited to, (i) further weakening in the overall economy; (ii) a significant decline in our stock price and resulting market capitalization as a result of an adverse change to our overall business operations; (iii) changes in the discount rate we use in our testing; (iv) successful efforts by our competitors to gain market share in our markets; (v) adverse changes as a result of regulatory or legislative actions; (vi) a significant adverse change in our legal affairs or in the overall business climate; and (vii) recognition of a goodwill impairment loss in the financial statements of one or more of our subsidiaries that are a component of our segments. For additional information, see “Risk Factors” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017. We will continue to monitor certain events that impact our operations to determine if an interim assessment of goodwill impairment should be performed prior to the next required assessment date of October 31, 2018.
Property, Plant and Equipment
Property, plant and equipment acquired in connection with our acquisitions was recorded based on its estimated fair value as of its acquisition date, plus the estimated value of any associated legally or contractually required asset retirement obligation. Purchased and constructed property, plant and equipment is recorded at cost, plus the estimated value of any associated legally or contractually required asset retirement obligation. Renewals
and betterments of plant and equipment are capitalized while repairs, as well as renewals of minor items, are charged to operating expense. Depreciation of property, plant and equipment is provided on the straight-line method using class or overall group rates. The group method provides for the recognition of the remaining net investment, less anticipated net salvage value, over the remaining useful life of the assets. This method requires the periodic revision of depreciation rates.
Normal retirements of property, plant and equipment are charged against accumulated depreciation, with no gain or loss recognized. We depreciate such property on the straight-line method over estimated service lives ranging from 3 to 45 years.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining life of our asset base.
Due to rapid changes in technology and the competitive environment, determining the estimated economic life of telecommunications plant and equipment requires a significant amount of judgment. We regularly review data on utilization of equipment, asset retirements and salvage values to determine adjustments to our depreciation rates. The effect of a hypothetical one year increase or decrease in the estimated remaining useful lives of our property, plant and equipment would have decreased depreciation expense by approximately $420 million annually or increased depreciation expense by approximately $550 million annually, respectively.
Pension and Post-retirement Benefits
We sponsor a noncontributory qualified defined benefit pension plan (referred to as our qualified pension plan) for a substantial portion of our employees. In addition to thistax-qualified pension plan, we also maintain severalnon-qualified pension plans for certain eligible highly compensated employees. We also maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. On November 1, 2017, we assumed Level 3’s pension and post-retirement plans, and certain obligations associated with these plans. Due to the insignificant impact of these plans on our consolidated financial statements, we have excluded them from the following pension and post-retirement benefits disclosures for 2017.
In 2017, approximately 58% of the qualified pension plan’s January 1, 2017 net actuarial loss balance of $3.134 billion was subject to amortization as a component of net periodic expense over the average remaining service period of participating employees expected to receive benefits, which ranges from 9 to 10 years for the plan. The other 42% of the qualified pension plan’s beginning net actuarial loss balance was treated as indefinitely deferred during 2017. The entire beginning net actuarial loss of $137 million for the post-retirement benefit plans was treated as indefinitely deferred during 2017.
In 2016, approximately 53% of the qualified pension plan’s January 1, 2016 net actuarial loss balance of $2.843 billion was subject to amortization as a component of net periodic expense over the average remaining service period of participating employees expected to receive benefits, which ranges from 9 to 10 years for the plan. The other 47% of the qualified pension plan’s beginning net actuarial loss balance was treated as indefinitely deferred during 2016. The entire beginning net actuarial loss of $147 million for the post-retirement benefit plans was treated as indefinitely deferred during 2016.
In 2015, approximately 45% of the qualified pension plan’s January 1, 2015 net actuarial loss balance of $2.740 billion was subject to amortization as a component of net periodic expense over the average remaining service period of participating employees expected to receive benefits, which ranges from 8 to 9 years for the plan. The other 55% of the qualified pension plan’s beginning net actuarial loss balance was treated as indefinitely deferred during 2015. The entire beginning net actuarial loss of $277 million for the post-retirement benefit plans was treated as indefinitely deferred during 2015.
In computing our pension and post-retirement health care and life insurance benefit obligations, our most significant assumptions are the discount rate and mortality rates. In computing our periodic pension and post-retirement benefit expense, our most significant assumptions are the discount rate and the expected rate of return on plan assets.
The discount rate for each plan is the rate at which we believe we could effectively settle the plan’s benefit obligationsattested, all as of the endday and year first above written.
| CenturyLink, Inc. | ||||
| By | /s/ Stacey W. Goff | |||
| Name: | Stacey W. Goff | |||
| Title: | Executive Vice President, General Counsel and Secretary | |||
| Computershare Trust Company, N.A. | ||||
| By | /s/ Fred Papenmeier | |||
| Name: | Fred Papenmeier | |||
| Title: | Vice President | |||
[Signature Page to Section 382 Rights Agreement]
| C-26 | 2019 Proxy Statement | | |||||
ARTICLES OF AMENDMENT
to the
ARTICLES OF INCORPORATION
of
CENTURYLINK, INC.
(Pursuant to Sections 1--602, 1005(8) and 1006 of the year. We selected each plan’s discount rate based on
Louisiana Business Corporation Act)
These articles of amendment (“Articles of Amendment”) to the articles of incorporation (“Articles of Incorporation”) of CENTURYLINK, INC., a cash flow matching analysis using hypothetical yield curves from U.S. corporate bonds rated high qualityLouisiana business corporation (“Corporation”), have been prepared for filing with the Secretary of State of Louisiana pursuant to Sections12:1-602, 1005(8) and projections1006 of the future benefit payments that constituteLouisiana Business Corporation Act (the “Act”), R.S.12:1-101 et seq., to set forth the projected benefit obligation forfollowing:
FIRST: At a meeting duly called and held on February 13, 2019, the plans. This process establishes the uniform discount rate that produces the same present valueBoard of Directors of the estimated future benefit payments as is generated by discounting each year’s benefit payments by a spot rate applicable to that year. The spot rates used in this process are derived from a yield curve created from yields onCorporation unanimously approved and adopted the 60th to 90th percentile of U.S. high quality bonds.
In 2016, we changed the method we use to estimate the service and interest components of net periodic benefit expense for pension and other postretirement benefit obligations. This change resulted in a decrease in the service and interest components in 2017 and 2016. Beginning in 2016, we utilized a full yield curve approach in connection with estimating these components by applying the specific spot rates along the yield curve used in the determinationfollowing amendment of the benefit obligationArticles of Incorporation of the Corporation, as set forth below. Shareholder approval was not required for this amendment.
SECOND: ARTICLE III of the Articles of Incorporation of the Corporation is hereby amended to the relevant projected cash flows, as opposed to the single weighted-average discount rate derived from the yield curve that we have used in the past. We believe this change more precisely measures service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change did not affect the measurement of our total benefit obligations but lowered our annual net periodic benefit cost by $122 million and $149 million in 2017 and 2016, respectively, when compared to thepre-2016 methodology. This change was treated as a change in accounting estimate and, accordingly, we did not adjust the amounts recorded in 2015.
Mortality rates help predict the expected life of plan participants and are based on historical demographic studies by the Society of Actuaries (“SOA”)add Section F,Series CC Junior Participating Preferred Shares. The SOA publishes new mortality rates (mortality tablestext of this amendment is as follows:
F.Series CC Junior Participating Preferred Shares:
(1)Designation and projection scales) on a regular basis which reflect updates to projected life expectancies in North America. Historically, we have adopted the new projection tables immediately after publication. In 2017, we adopted the revised morality tables and projection scale released by the SOA, which decreased the projected benefit obligationAmount. The shares of our benefit plans by $113 million. In 2016, we adopted the revised mortality table and projection scale released by the SOA, which decreased the projected benefit obligation of our benefit plans by $268 million. The 2015 revised mortality table and projection scale decreased the 2015 projected benefit obligation of our benefit plans by $379 million. The change in the projected benefit obligation of our benefit plans was recognizedsuch series shall be designated as part of the net actuarial loss and is included in accumulated other comprehensive loss, a portion of which is subject to amortization over the remaining estimated life of plan participants, which was approximately 9 to 10 years as of December 31, 2017.
The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans’ assets in the future, net of administrative expenses paid from plan assets. The rate of return is determined by the strategic allocation of plan assets“Series CC Junior Participating Preferred Shares” (the “Series CC Shares”) and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysisnumber of shares constituting the long-term expectationsSeries CC Shares shall be 150,000. Such number of various third party investment management organizations to which we then add a factor of 50 basis points to reflect the benefit we expect to result from our active management of the assets. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.
To compute the expected return on pension and post-retirement benefit plan assets, we apply an expected rate of return to the fair value of the pension plan assets and to the fair value of the post-retirement benefit plan assets adjusted for contribution timing and for projected benefit payments to be made from the plan assets. Annual market volatility for these assets (higher or lower than expected return) is reflected in the net actuarial losses.
Changes in any of the above factors could significantly impact operating expenses in the consolidated statements of operations and other comprehensive income (loss) in the consolidated statements of comprehensive income as well as the value of the liability and accumulated other comprehensive loss of stockholders’ equity on our consolidated balance sheets. The expected return on plan assets is reflected as a reduction to our pension and post-retirement benefit expense. If our assumed expected rates of return for 2017 were 100 basis points lower, our qualified pension and post-retirement benefit expenses for 2017 would have increased by $103 million. If our assumed discount rates for 2017 were 100 basis points lower, our qualified pension and post-retirement benefit expenses for 2017 would have increased by $63 million and our projected benefit obligation for 2017 would have increased by approximately $1.780 billion.
Loss Contingencies and Litigation Reserves
We are involved in several material legal proceedings, as described in more detail in Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017. We periodically assess potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings willshares may be increased or decreased accordingly. Ifby resolution of the differences are material, our consolidated financial statements could be materially impacted.
For matters relatedBoard of Directors;provided, that no decrease shall reduce the number of Series CC Shares to income taxes, if we determine in our judgment thata number less than the impactnumber of an uncertain tax position is more likely than not to be sustainedshares then outstanding plus the number of shares reserved for issuance upon auditthe exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the relevant taxing authority, then we recognize in our financial statements a benefit forCorporation convertible into Series CC Shares.
(2)Dividends and Distributions.
(a) Subject to the largest amount that is more likely than not to be sustained. No portionrights of an uncertain tax position will be recognized if we determine in our judgment that the position has less than a 50% likelihood of being sustained. Though the validityholders of any tax position is a mattershares of tax law, the bodyany series of statutory, regulatoryPreferred Stock (or any similar stock) ranking prior and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain.
Connect America Fund
In 2015, we accepted CAF funding from the FCC of approximately $500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses (living units) in 33 states under the CAF Phase 2 high-cost support program. This program provides a monthly high-cost subsidy similarsuperior to the support provided bySeries CC Shares with respect to dividends, the FCC’s previous cost reimbursement programs. Although we believe that there is no specific authoritative U.S. GAAP guidance for the treatmentholders of government assistance, we identified three acceptable methods to account for these funds: (1) recognize revenue whenSeries CC Shares shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash (2) deferon the dividend date declared on the Common Stock, par value $1.00 per share (the “Common Stock”) in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series CC Shares, in an amount per share (rounded to the nearest cent), subject to the provision for adjustment hereinafter set forth, equal to 10,000 times the aggregate per share amount of all cash received untildividends, and 10,000 times the living units are enabledaggregate per share amount (payable in kind) of allnon-cash dividends or other distributions, declared on the Common Stock of the Corporation since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series CC Shares, other than, in each case, a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise). In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of Series CC Shares were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
| 2019 Proxy Statement | C-27 | |||||||
(b) The Corporation shall declare a dividend or distribution on the Series CC Shares as provided in paragraph (a) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock).
(c) Dividends, to the extent payable as provided in paragraphs (a) and (b) of this Section, shall begin to accrue and be cumulative on outstanding Series CC Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series CC Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the serviceSeries CC Shares in an amount less than the total amount of such dividends at the FCC specified level,time accrued and payable on such shares shall be allocated pro rata on ashare-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series CC Shares entitled to receive payment of a dividend or (3)distribution declared thereon, which record date shall be not more than 60 days prior to the cash receiveddate fixed for the payment thereof.
(3)Voting Rights. The holders of Series CC Shares shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each share of Series CC Shares shall entitle the holder thereof to 10,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of Series CC Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(b) Except as contra capital. After assessing these alternatives, weotherwise provided herein, in any other articles of amendment creating a series of Preferred Stock or any similar stock, or by law, the holders of Series CC Shares and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided by law, holders of Series CC Shares shall have determined that we will recognize CAF Phase 2 funds each month as revenue when weno special voting rights and their consent shall not be required (except to the extent they are entitled to receivevote with holders of Common Stock as set forth herein) for taking any corporate action.
(4)Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions payable on the cash lessSeries CC Shares as provided in Article III.F.(2) are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series CC Shares outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series CC Shares;
(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a deferred amount. The amountparity (either as to dividends or upon liquidation, dissolution or winding up) with the Series CC Shares, except dividends paid ratably on the Series CC Shares and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of revenue deferredall such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series CC Shares, provided that
| C-28 | 2019 Proxy Statement | | |||||
the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in 2017 was approximately $94 million. We believe our recognition methodology is consistent with other companies in our industry in the United States, but may not necessarily be consistent with companies outside the United States that receive similar government funding, and we cannot provide assurances to this effect.
In computing the amountexchange for shares of revenue to recognize, we assume that we will not be able to economically enable 100%any stock of the required living unitsCorporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series CC Shares; or
(iv) redeem or purchase or otherwise acquire for consideration any Series CC Shares, or any shares of stock ranking on a parity with the Series CC Shares, except in every stateaccordance with voice and broadband capabilities undera purchase offer made in writing or by publication (as determined by the CAF Phase 2 program. We defer recognitionBoard of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the funds related to potential living units that we estimate we will not enable until we can with reasonable assurance determine that we can fully meet the enablement targets. As disclosed elsewhere herein, in some limited instances, a portionrespective annual dividend rates and other relative rights and preferences of the funds must be returned if enablement targets are not attained. Based on estimated enablement, a hypothetical 1% decreaserespective series and classes, shall determine in our estimate of living units wegood faith will not enable with voiceresult in fair and broadband capabilities under the CAF Phase 2 program would have
increased our revenue by $7 million in 2017, and a 1% increase would have decreased our revenue by $29 million in 2017.
For additional information about the CAF Phase 2 support program, see “Business—Regulations” in Item 1 of our Annual Report on Form10-K for the year ended December 31, 2017.
Income Taxes
Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax credit carryforwards, differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities and tax net operating loss carryforwards, or NOLs. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
The measurement of deferred taxes often involves the exercise of considerable judgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our incomeequitable treatment among the statesrespective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Articles III.F.(4), purchase or otherwise acquire such shares at such time and in which we operate.such manner.
(5)Reacquired Shares. Any changes in our practicesSeries CC Shares purchased or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.
In connection with recording deferred income tax assets and liabilities, we establish valuation allowances when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be realized. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history ofpre-tax earnings. We also rely on our forecasts of future earnings and the nature and timing of future deductions and benefits representedotherwise acquired by the deferred tax assets, all which involveCorporation in any manner whatsoever shall be retired and cancelled promptly after the exerciseacquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of significant judgment. At December 31, 2017, we established a valuation allowance of $1.341 billion primarily related to foreignPreferred Stock and state NOLs that we acquired from Level 3, as it is more likely than not that these NOLs will expire unused. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations. See Note 13—Income Taxes to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017 for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Sources and Uses of Cash
We are a holding company that is dependent on the capital resources of our subsidiaries to satisfy our parent company liquidity requirements. Several of our significant operating subsidiaries have borrowed funds either on a standalone basis orbe reissued as part of a separate restricted groupnew series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other Articles of Amendment to the Articles of Incorporation creating a series of Preferred Stock or any similar stock or as otherwise required by law.
(6)Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series CC Shares unless, prior thereto, the holders of Series CC Shares shall have received $10,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of Series CC Shares shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 10,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with certainthe Series CC Shares, except distributions made ratably on the Series CC Shares and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of Series CC Shares were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(7)Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series CC Shares shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 10,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series CC Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
| 2019 Proxy Statement | C-29 | |||||||
(8)No Redemption. The Series CC Shares shall not be redeemable.
(9)Rank. The Series CC Shares shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation’s Preferred Stock.
(10)Amendment. The Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series CC Shares so as to affect them adversely without the affirmative vote of the holders of at leasttwo-thirds of the outstanding Series CC Shares, voting together as a single class.
IN WITNESS WHEREOF, CenturyLink, Inc. has caused this Articles of Amendment of Articles of Incorporation relating to the establishment of rights and preferences of Series CC Junior Participating Preferred Stock to be duly executed by its President this 13th day of February, 2019.
| CenturyLink, Inc. | ||
| By: | ||
| Name: Jeffrey K. Storey | ||
| Title: Chief Executive Officer and President | ||
| C-30 | 2019 Proxy Statement | | |||||
Form of Right Certificate
| Certificate No. R- | Rights |
NOT EXERCISABLE AFTER THE FINAL EXPIRATION DATE (AS DEFINED IN THE AGREEMENT) OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS OR AS OTHER-WISE SPECIFIED IN THE AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.0001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE AGREEMENT.
Right Certificate
CENTURYLINK, INC.
This certifies that , or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Section 382 Rights Agreement, dated as of February 13, 2019 (the “Agreement”), between CenturyLink, Inc., a Louisiana corporation (the “Company”), and Computershare Trust Company, N.A. (the “Rights Agent”), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Agreement) and prior to the Final Expiration Date (as such term is defined in the Agreement) or earlier as specified in the Agreement, at the office or offices of the Rights Agent designated for such purpose, or at the office of its subsidiaries or affiliates. The termssuccessor as Rights Agent, oneten-thousandth of a fully paidnon-assessable share of Series CC Junior Participating Preferred Stock, par value $25 per share, of the instruments governingCompany (the “Preferred Shares”), at a purchase price of $28 per oneten-thousandth of a Preferred Share (the “Exercise Price”), upon presentation and surrender of this Right Certificate with the indebtednessForm of these borrowers or borrowing groups may restrict our abilityElection to access their accumulated cash. In addition, our ability to accessPurchase duly executed. The number of Rights evidenced by this Right Certificate (and the liquiditynumber of these and other subsidiariesoneten-thousandths of a Preferred Share which may be limited by taxpurchased upon exercise hereof) set forth above, and legal considerationsthe Exercise Price set forth above, are the number and other factors.
At December 31, 2017, we held cashExercise Price as of February 13, 2019, based on the Preferred Shares as constituted at such date. As provided in the Agreement, the Exercise Price and cash equivalentsthe number of $551 million and we had $1.595 billiononeten-thousandths of borrowing capacity available undera Preferred Share which may be purchased upon the then existing terms of our revolving credit facility. We had approximately
$186 million of cash and cash equivalents outside the United States at December 31, 2017. We currently believe we have the ability to repatriate cash and cash equivalents into the United States without paying or accruing U.S. taxes, other than the possible paymentexercise of the Deemed Repatriation Transition Tax discussed elsewhere hereinRights evidenced by this Right Certificate are subject to modification and other limited exceptions. We do not currently intendadjustment upon the happening of certain events.
This Right Certificate is subject to repatriate to the United States any of our foreign cash and cash equivalents from operating entities outside of Latin America. We have no material restrictions on our ability to repatriate to the United States foreign cash and cash equivalents.
Our acquisition of Level 3 on November 1, 2017, resulted in significant changes in our consolidated financial position, our debt structure and our future cash requirements.
Our executive officers and our Board of Directors periodically review our sources and potential uses of cash in connection with our annual budgeting process. Generally speaking, our principal funding source is cash from operating activities, and our principal cash requirements include operating expenses, capital expenditures, income taxes, debt repayments, dividends, periodic stock repurchases, periodic pension contributions and other benefits payments. As discussed further below, the amount of cash we paid in 2017 for income taxes and retiree healthcare benefits increased substantially compared to prior periods. We currently expect our cash income tax payments will be lower in 2018 due to the utilizationall of the NOLs acquired in the Level 3 acquisition,terms, provisions and we expect that our cash paid for retiree healthcare benefits will remain flat.
Based on our current capital allocation objectives, during 2018 we project expending approximately $3.8 billion to $3.9 billion (excluding integration capital) of cash for capital investment in property, plant and equipment and approximately $2.3 billion of cash for dividends on our common stock (based on the assumptions described below under “Dividends”). At December 31, 2017, we have debt maturities of $188 million, scheduled debt principal payments of $157 million and capital lease and other fixed payments of $98 million, each due during 2018. Eachconditions of the expendituresAgreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Agreement reference is described further below.hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Agreement are on file at the principal executive offices of the Company and the offices of the Rights Agent.
We will continueThis Right Certificate, with or without other Right Certificates, upon surrender at the office or offices of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to monitor our future sources and usespurchase a like aggregate number of cash, and anticipate that we will make adjustmentsPreferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to our capital allocation strategies when, as and if determined by our Board of Directors. We typically use our revolving credit facility as a source of liquidity for operating activities and our other cash requirements.
For additional information, see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources”purchase. If this Right Certificate shall be exercised in Item 1A of our Annual Report on Form10-Kpart, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the year ended December 31, 2017.
Capital Expenditures
We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets, expand and improve our service offerings. We evaluate capital expenditure projects based on a varietynumber of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as our CAF Phase 2 infrastructure buildout requirements). Based on current circumstances, we estimate that our total capital expenditures for 2018 will be approximately $3.8 billion to $3.9 billion, inclusive of CAF Phase 2 related capital expenditures, but excludes integration capital.
Our capital expenditures continue to be focused on keeping the network operating efficiently and supporting new service developments. For more information on our capital spending, see “Historical Information—Investing Activities” below and Item 1 of our Annual Report on Form10-K for the year ended December 31, 2017.
Debt and Other Financing Arrangementswhole Rights not exercised.
Subject to market conditions, we expect to continue to issue debt securities from time to timethe provisions of the Agreement, the Rights evidenced by this Right Certificate (i) may be redeemed by the Company at a redemption price of $0.0001 per Right or (ii) may be exchanged in whole or in part for Preferred Shares or shares of the Company’s Common Stock, par value $1.00 per share.
No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of oneten-thousandth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but, in lieu thereof, a cash payment will be made, as provided in the future to refinance a substantial portion of our maturing debt, including issuing Qwest Corporation and Level 3 Financing,Agreement.
| 2019 Proxy Statement | C-31 | |||||||
Inc. debt securitiesNo holder of this Right Certificate shall be entitled to refinance their maturing debt tovote or receive dividends or be deemed for any purpose the extent feasible. The availability, interest rate and other termsholder of the Preferred Shares or of any new borrowings will dependother securities of the Company which may at any time be issuable on the ratings assigned by credit rating agencies, among other factors.
Followingexercise hereof, nor shall anything contained in the closing of our acquisition of Level 3,Agreement or herein be construed to confer upon the rating agencies took action on the ratingsholder hereof, as such, any of the debtrights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the table below. Generally,Agreement), or to receive dividends or subscription rights, or otherwise, until the agencies downgraded ratingsRight or Rights evidenced by this Right Certificate shall have been exercised as provided in the Agreement.
This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned manually or by facsimile by the Rights Agent.
WITNESS the signature of the CenturyLink, Inc. debt from previous levels as they indicated they intended to at the timeproper officers of the announcementCompany. Dated as of the transaction. Additionally, Standard and Poor’s and Moody’s Investors Service, Inc. placed such ratings on negative outlook while Fitch Ratings placed them on stable outlook. As for the Level 3 debt, Moody’s Investors Service, Inc. upgraded the unsecured debt and affirmed the rating of the secured debt, with all ratings placed on negative outlook. Standard and Poor’s affirmed all previous Level 3 ratings with negative outlook, and Fitch Ratings affirmed all previous Level 3 ratings with stable outlook.
As of the date of our Annual Report on Form10-K for the year ended December 31, 2017, the credit ratings for the senior unsecured debt of CenturyLink, Inc., Qwest Corporation, Level 3 Parent, LLC and Level 3 Financing, Inc. were as follows:20 .
| ATTEST: | CENTURYLINK, INC. | ||||||||||
| |||||||||||
| By | ||||||||||
| Name: | Name: | ||||||||||
| Title: | Title: | ||||||||||
| Countersigned: | |||||||||||
| COMPUTERSHARE TRUST COMPANY, N.A. | |||||||||||
| By | |||||||||||
| Name: | |||||||||||
| Title: | |||||||||||
| C-32 | 2019 Proxy Statement | | |||||
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED hereby sells, assigns and transfers
unto
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution.
Dated: | ||
Signature | ||
Signature Medallion Guaranteed:
All Guarantees must be made by a financial institution (such as a bank or broker) which is a participant in the Securities Transfer Agents Medallion Program (“STAMP”), the New York Stock Exchange, Inc. Medallion Signature Program (“MSP”), or the Stock Exchanges Medallion Program (“SEMP”) and must not be dated. Guarantees by a notary public are not acceptable.
The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Agreement).
Signature |
| 2019 Proxy Statement | C-33 | |||||||
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Right Certificate.)
To: CENTURYLINK, INC.
The undersigned hereby irrevocably elects to exercise Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
(Print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Print name and address)
| ||
Signature | ||
Signature Medallion Guaranteed:
All Guarantees must be made by a financial institution (such as a bank or broker) which is a participant in the Securities Transfer Agents Medallion Program (“STAMP”), the New York Stock Exchange, Inc. Medallion Signature Program (“MSP”), or the Stock Exchanges Medallion Program (“SEMP”) and must not be dated. Guarantees by a notary public are not acceptable.
The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Agreement).
Signature |
NOTICE
The signature in the Form of Assignment or Form of Election to Purchase, as the case may be, must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Agreement) and such Assignment or Election to Purchase will not be honored.
| C-34 | 2019 Proxy Statement | | |||||
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
Introduction
Our Company, CenturyLink, Inc., a Louisiana corporation, has entered into a Rights Agreement with Computershare Trust Company, N.A., as Rights Agent, dated as of February 13, 2019 (the “Rights Agreement”). Our Board of Directors (the “Board”) approved the Rights Agreement in an effort to deter acquisitions of our common stock that would potentially limit our ability to use our built in losses and any resulting net loss carryforwards to reduce potential future federal income tax obligations.
For those interested in the specific terms of the Rights Agreement, we provide the following summary description. Please note, however, that this description is only a summary, and is not complete, and should be read together with the entire Rights Agreement, which has been filed with the Securities and Exchange Commission as an exhibit to our Current Report on Form8-K, dated February 14, 2019. A copy of the agreement is available free of charge from our Company.
General. Under the Rights Agreement, from and after the record date of February 25, 2019, each share of our common stock will carry with it one preferred share purchase right (a “Right”), until the Distribution Date (as defined below) or earlier expiration of the Rights, as described below. In general, any person that, together with all Affiliates and Associates (each as defined in the Rights Agreement), acquires 4.9% or more of our outstanding common stock after February 13, 2019, or entry into the Rights Agreement, will be subject to significant potential dilution. Stockholders who own 4.9% or more of the outstanding common stock as of the close of business on February 13, 2019, will not trigger the Rights so long as they do not (i) acquire additional shares of common stock representingone-half of one percent (0.5%) or more of the shares of common stock outstanding at the time of such acquisition or (ii) fall under 4.9% ownership of common stock and thenre-acquire shares that in the aggregate equal 4.9% or more of the common stock. A person will not trigger the Rights solely as a result of any transaction that the Board determines, in its sole discretion, is an exempt transaction for purposes of triggering the Rights. STT Crossing Ltd. and its Affiliates and Associates will be exempt stockholders for the purposes of the Rights Agreement, unless and until STT Crossing Ltd. (or any Affiliates of STT Crossing Ltd.) acquires any common stock other than (x) in a transaction that is permitted under Section 4 of the Stockholder Rights Agreement, dated as of October 31, 2016, by and among the Company and STT Crossing Ltd. (the “Stockholder Rights Agreement”) or (y) any transfers of common stock or other Company equity interests between STT Crossing Ltd. and its Affiliates. A person to whom STT Crossing Ltd. transfers any amount of common stock pursuant to and as permitted by Section 4.2 of the Stockholder Rights Agreement will be exempt for purposes of the Rights Agreement, unless and until such person (or any Affiliates or Associates of such person) acquires any additional common stock.
The Board may, in its sole discretion prior to the Distribution Date, exempt any person or group for purposes of the Rights Agreement if it determines the acquisition by such person or group will not jeopardize tax benefits or is otherwise in the Company’s best interests. Any person that acquires shares of common stock in violation of these limitations is known as an “Acquiring Person.” Notwithstanding the foregoing, a Person shall not be an “Acquiring Person” if the Independent Directors determines at any time that a Person who would otherwise be an “Acquiring Person,” has become such without intending to become an “Acquiring Person,” and such Person divests as promptly as practicable (or within such period of time as the Independent Directors determine is reasonable) a sufficient number of shares of Common Stock of the Company so that such Person would no longer be an “Acquiring Person,” as defined pursuant to The Rights Agreement is not expected to interfere with any merger or other business combination approved by our Board.
The Rights. From the record date of February 25, 2019, until the Distribution Date or earlier expiration of the Rights, the Rights will trade with, and will be inseparable from, the common stock. New Rights will also accompany any new shares of common stock that we issue after February 13, 2019, until the Distribution Date or earlier expiration of the Rights.
| ||||||||||||
| ||||||||||||
| 2019 Proxy Statement | C-35 | |||||||||||
Exercise Price. Each Right will allow its holder to purchase from our Company oneten-thousandth of a share of Series CC Junior Participating Preferred Stock (“Preferred Share”) for $28, subject to adjustment (the “Exercise Price”), once the Rights become exercisable. This fraction of a Preferred Share will give the stockholder approximately the same dividend, voting, and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, voting, or liquidation rights.
Exercisability. The Rights will not be exercisable until 10 business days (as may be extended in the discretion of the Independent Directors) after the public announcement that a person or group has become an Acquiring Person unless the Rights Agreement is theretofore terminated or the Rights are theretofore redeemed (as described below).
We refer to the date when the Rights become exercisable as the “Distribution Date.” Until that date or earlier expiration of the Rights, the common stock certificates will also evidence the Rights, and any transfer of shares of common stock will constitute a transfer of Rights. After that date, the Rights will separate from the common stock and be evidenced by book-entry credits or by Rights certificates that we will mail to all eligible holders of common stock. Any Rights held by an Acquiring Person, or any Affiliates or Associates of the Acquiring Person, are void and may not be exercised.
Consequences of a Person or Group Becoming an Acquiring Person. If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person, or any Affiliates or Associates of the Acquiring Person, may, upon payment of the Exercise Price, purchase shares of our common stock with a market value of twice the Exercise Price, based on the “current per share market price” of the common stock (as defined in the Rights Agreement) on the date of the acquisition that resulted in such person or group becoming an Acquiring Person.
Exchange. After a person or group becomes an Acquiring Person, our Independent Directors in their sole discretion may extinguish the Rights by exchanging one share of common stock or an equivalent security for each Right, other than Rights held by the Acquiring Person or any Affiliates or Associates of the Acquiring Person.
Preferred Share Provisions. Each oneten-thousandth of a Preferred Share, if issued:
| will not be redeemable. |
will entitle holders to dividends equal to the dividends, if any, paid on one share of common stock. |
| ◾ | will entitle holders upon liquidation either to receive $1.00 per share or an amount equal to the payment made on one share of common stock, whichever is greater. |
| ◾ | will vote together with the common stock as one class on all matters submitted to a vote of stockholders of the Company and will have the same voting power as one share of common stock, except as otherwise provided by law. |
| ◾ | ||||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
| ||||||||||||
|
The value of oneOur credit ratingsten-thousandth interest in a Preferred Share is expected to approximate the value of one share of common stock.
Expiration. The Rights will expire on the earliest of (i) December 1, 2020, (ii) the time at which the Rights are reviewed and adjusted fromredeemed, (iii) the time toat which the Rights are exchanged, (iv) the time byat which the rating agencies. Any future downgradesBoard determines that the Net Operating Losses of the senior unsecuredCompany (the “NOLs”) are utilized in all material respects or secured debt ratings of us or our subsidiaries could impact our access to debt capital or further raise our borrowing costs. See “Risk Factors—Risks Affecting our Liquidity and Capital Resources” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017.
Net Operating Loss Carryforwards
As of December 31, 2017, CenturyLink had approximately $9.1 billion of net operating loss carryforwards. (“NOLs”), which for U.S. federal income tax purposes can be used to offset future taxable income. These NOLs are primarily related to federal NOLs we acquired through the Level 3 acquisition on November 1, 2017, and are subject to prior limitationsthat an ownership change under Section 382 of the Internal Revenue Code (“Code”) and related U.S. Treasury Department regulations. Additionally, these NOLs are subject to a current Section 382 limitation as a result of our acquisition of Level 3. Prior to this acquisition,would not adversely impact in any material respect the amounts of our cash flows dedicated to or required for the payment of federal taxes increased substantially in 2017. As a result of the completion of this acquisition we expect to significantly reduce our federal cash taxes for the next several years. Additionally, we are seeking a significant refund of federal income taxes related to 2017 that we hope to receive in the first quarter of 2018. The amounts of our near-term future tax payments will depend upon many factors, including our future earnings and tax circumstances and results of any corporate tax reform. Based on current laws and our current estimates of 2018 earnings, exclusive of the pending refund request noted previously, we estimate our cash income tax liability related to 2018 will be approximately $100 million.
We cannot assure you that we will be able to use these NOL carryforwards fully. See “Risk Factors—Risks Relating to Our Recently-Completed Acquisition of Level 3—We cannot assure you, whether, when or in what
amounts we will be able to use Level 3’s net operating loss carryforwards” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017.
Dividends
We currently expect to continue our current practice of paying quarterly cash dividends in respect of our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.54 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing our business, paying our fixed commitments and returning a substantial portion of our cash to our shareholders. We paid an average of almost $294 million of dividends during each of the first three quarters of 2017. Based on our issuance of shares in connection with the Level 3 acquisition on November 1, 2017, we paid $572 million of dividends in the fourth quarter. Assuming continued payment during 2018 at this rate of $0.54 per share, our average total dividend paid each quarter would be approximately $575 million to $580 million based on our current number of outstanding shares (assuming no increases or decreases in the number of shares, except in connection with the vesting of currently outstanding equity awards). See Risk Factors—Risks Affecting Our Business” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017.
Revolving Facilities and Other Debt Instruments
To substantially fund our recent acquisition of Level 3, on June 19, 2017, one of our affiliates entered into a credit agreement (the “2017 CenturyLink Credit Agreement”) providing for $9.945 billion in senior secured credit facilities, consisting of a new $2 billion revolving credit facility (which replaced our 2012 credit facility upon consummation of the Level 3 acquisition) and $7.945 billion of term loan facilities, of which approximately $6.0 billion were funded into escrow on such date, and $1.945 billion of which were funded upon the closing of the acquisition on November 1, 2017. On November 1, 2017, CenturyLink, Inc. also, among other things, (i) assumed all rights and obligations under the 2017 CenturyLink Credit Agreement, (ii) borrowed $400 million under the new $2.0 billion revolving credit facility and (iii) received $6.0 billion of Term Loan B loan proceeds from escrow. On January 29, 2018, the 2017 CenturyLink Credit Agreement was amended to increase the borrowing capacity of the new revolving credit facility from $2.0 billion to $2.168 billion, and to increase the borrowing capacity under one of the term loan tranches by $132 million. For additional information, see (i) Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017, (ii) our current report on Form8-K filed with the SEC on June 20, 2017 and (iii) our current report on Form8-K filed with the SEC on November 1, 2017.
On November 1, 2017, we also amended our uncommitted revolving letter of credit facility to secure the facility and to permit us to draw up to $225 million of letters of credit thereunder. At December 31, 2017, we had $104 million of letters of credit outstanding under this facility.
For information on the terms and conditions of other debt instruments of ours and our subsidiaries, including financial and operating covenants, see Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017.
Future Contractual Obligations
The following table summarizes our estimated future contractual obligations as of December 31, 2017:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 and thereafter | Total | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
Long-term debt(1)(2) | $ | 404 | 593 | 1,178 | 3,109 | 5,033 | 27,137 | 37,454 | ||||||||||||||||||||
Interest on long-term debt and capital leases(2) | 2,116 | 2,096 | 2,030 | 1,915 | 1,705 | 16,611 | 26,473 | |||||||||||||||||||||
Data centers obligation(3) | 84 | 86 | 28 | — | — | — | 198 | |||||||||||||||||||||
Operating leases | 666 | 533 | 467 | 367 | 326 | 2,116 | 4,475 | |||||||||||||||||||||
Purchase commitments(4) | 343 | 158 | 107 | 56 | 47 | 242 | 953 | |||||||||||||||||||||
Post-retirement benefit obligation(5) | 92 | 88 | 86 | 83 | 79 | 680 | 1,108 | |||||||||||||||||||||
Non-qualified pension obligations(5) | 5 | 5 | 5 | 4 | 4 | 19 | 42 | |||||||||||||||||||||
Unrecognized tax benefits(6) | — | — | — | — | — | 96 | 96 | |||||||||||||||||||||
Asset retirement obligations | 24 | 14 | 11 | 4 | 3 | 59 | 115 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total future contractual obligations(7) | $ | 3,734 | 3,573 | 3,912 | 5,538 | 7,197 | 46,960 | 70,914 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
contingent liabilities;
our open purchase orders as of December 31, 2017. These purchase orders are generally issued at fair value, and are generally cancelable without penalty;
other long-term liabilities, such as accruals for legal matters and other taxes that are not contractual obligations by nature. We cannot determine with any degree of reliability the yearsperiod in which these liabilities might ultimately settle;
cash funding requirements for qualified pension benefits payable to certain eligible current and future retirees. Benefits paid by our qualified pension plan are paid through a trust. Cash funding requirements for this trust are not included in this table as we are not able to reliably estimate required contributions to this trust. Our funding projections are discussed further below;
certain post-retirement benefits payable to certain eligible current and future retirees. Not all of our post-retirement benefit obligation amount is a contractual obligation and only the portion that we believe is a contractual obligation is reported in the table. See additional information on our benefits plans in Note 9—Employee Benefits to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017;
contract termination fees. These fees arenon-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business and to optimize our cost structure, we enter into contracts with terms greater than one year toCompany could use the network facilities of other carriers and to purchase other goods and services. Our contracts to use other carriers’ network facilities generally have no minimum volume requirements and pricing is based upon volumes and usage. Assuming we terminate these contracts in 2018,NOLs, or materially impair the contract termination fees would be $360 million. Under the same assumption, we estimate that our termination fees for these contracts to purchase goods and services would be $89 million. In the normal course of business, we do not believe payment of these fees is likely;
service level commitments to our customers, the violation of which typically results in service credits rather than cash payments; and
potential indemnification obligations to counterparties in certain agreements entered into in the normal course of business. The nature and terms of these arrangements vary.
For information on debt that we expect to assume or incur in connection with consummating the Level 3 acquisition, see “Risk Factors” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017, and Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017.
Pension and Post-retirement Benefit Obligations
We are subject to material obligations under our existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2017, the accounting unfunded status of our qualified andnon-qualified defined benefit pension plans and qualified post-retirement benefit plans was $2.062 billion and $3.352 billion, respectively. See Note 9—Employee Benefits to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017 for additional information about our pension and post-retirement benefit arrangements.
Benefits paid by our qualified pension plan are paid through a trust that holds all of the plan’s assets. Based on current laws and circumstances, we do not expect any contributions to be required for our qualified pension plan during 2018. The amount of required contributions to our qualified pension plan in 2019 and beyond will depend on a variety of factors, most of which are beyond our control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. We occasionally make voluntary contributions in addition to required contributions. We made a voluntary contribution of $100 million to the trust for our qualified pension plan during 2017. Based on current circumstances, we currently anticipate making a voluntary contribution of $100 million to the trust for our qualified pension plan in 2018.
Substantially all of our post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that have been used to help cover the health care costs of certain retirees. As of December 31, 2017, assets in the post-retirement trusts had been substantially depleted and had a fair value of $23 million (a portion of which was comprised of investments with restricted liquidity), which has significantly limited our ability to continue paying benefits from the trusts; however, we plan to continue paying certain benefits through the trusts. Benefits not paid from the trusts are expected to be paid directly by us with available cash. As described further in Note 9—Employee Benefits to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017, aggregate benefits paid by us under these plans (net of participant contributions and direct subsidy receipts) were $237 million, $129 million and $116 million for the years ended December 31, 2017, 2016 and 2015, respectively, while the amounts paid from the trust were $31 million, $145 million and $163 million, respectively. For additional information on our expected future benefits payments for our post-retirement benefit plans, please see Note 9—Employee Benefits to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017.
For 2017, our annual long-term rates of return were 6.5% and 5.0% for the pension plan trust assets and post-retirement plans’ trust assets, respectively, based on the assets held. For 2018, our annual long-term rates of return are 6.5% and 4.0% for the pension plan trust assets and post-retirement plans’ trust assets, respectively, based on the assets currently held. However, actual returns could be substantially different.
Connect America Fund
As a result of accepting CAF Phase 2 support payments, we must meet certain specified infrastructure buildout requirements in 33 states over the next several years. In order to meet these specified infrastructure buildout requirements, we may be obligated to make substantial capital expenditures. See “Capital Expenditures” above.
For additional information on the FCC’s CAF order and the USF program, see “Business—Regulation” in Item 1 of our Annual Report on Form10-K for the year ended December 31, 2017 and see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017.
Historical Information
The following tables summarize our consolidated cash flow activities:
| Years Ended December 31, | Increase / (Decrease) | |||||||||||
| 2017 | 2016 | |||||||||||
| (Dollars in millions) | ||||||||||||
Net cash provided by operating activities | $ | 3,878 | 4,608 | (730 | ) | |||||||
Net cash used in investing activities | (8,871 | ) | (2,994 | ) | 5,877 | |||||||
Net cash provided by (used in) financing activities | 5,358 | (1,518 | ) | (6,876 | ) | |||||||
| Years Ended December 31, | Increase / (Decrease) | |||||||||||
| 2016 | 2015 | |||||||||||
| (Dollars in millions) | ||||||||||||
Net cash provided by operating activities | $ | 4,608 | 5,153 | (545 | ) | |||||||
Net cash used in investing activities | (2,994 | ) | (2,853 | ) | 141 | |||||||
Net cash used in financing activities | (1,518 | ) | (2,301 | ) | (783 | ) | ||||||
Operating Activities
Net cash provided by operating activities decreased by $730 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily due to a negative variance in net income adjusted
fornon-cash items and from negative variances in the changes in accounts payable, other current assets and liabilities, net and other noncurrent assets and liabilities, net, which were partially offset with a positive variance in the change in accounts receivable. Net cash provided by operating activities decreased by $545 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 primarily due to a significant negative variance in net income adjusted fornon-cash items (attributable to higher cash taxes paid and lower profitability), which was partially offset by a positive variance in the change in accounts payable. For additional information about our operating results, see “Results of Operations” above.
Investing Activities
Net cash used in investing activities increased by $5.877 billion for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily due to cash paid for the acquisition of Level 3 on November 1, 2017, which was partially offset with the cash proceeds from the May 2017 sale of our data centers and colocation business. Net cash used in investing activities increased by $141 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 substantially due to an increase in payments for property, plant and equipment.
Financing Activities
Net cash provided by (used in) financing activities changed by $6.876 billion for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily due to net proceeds from issuance of new debt, which was slightly offset by an increase in dividend payments related to the issuance of common shares, both of which were in connection with the acquisition of Level 3. Net cash used in financing activities decreased by $783 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015 primarily due to a reduction of common stock repurchases.
On November 1, 2017, CenturyLink, Inc. entered into a $1.575 billion senior secured term loan in exchange for net proceeds, after deducting debt issuance costs of $28 million, and a $370 million senior secured term loan in exchange for net proceeds, after deducting an immaterial amount of debt issuance costs.
On November 1, 2017, CenturyLink, Inc. repaid the outstanding principal amount of $319 million under its 2012 term loan.
On August 1, 2017, subsidiaries of Embarq Corporation paid at maturity the $72 million principal amount and accrued and unpaid interest due under their 8.77% Notes.
On June 19, 2017, CenturyLink Escrow, LLC entered into a $6 billion term loan, net of an original issue discount of 0.5%.
On June 15, 2017, CenturyLink, Inc. paid at maturity the $350 million principal and accrued and unpaid interest due under its 5.15% Notes.
On May 9, 2017, Qwest Corporation redeemed $125 million aggregate principal amount of the remaining $288 million of its 7.5% Notes due 2051, which resulted in an immaterial loss.
On May 4, 2017, Qwest Corporation redeemed all $500 million of its 6.5% Notes due 2017, which resulted in an immaterial loss.
On April 27, 2017, Qwest Corporation issued $575 million aggregate principal amount of 6.75% Notes due 2057 and, on May 5, 2017, issued an additional $85 million aggregate principal amount of such notes pursuant to an over-allotment option in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $638 million. All of the 6.75% Notes are unsecured obligations and may be redeemed by Qwest Corporation, in whole or in part, on or after June 15, 2022, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
On April 3, 2017, CenturyLink, Inc. paid at maturity the $500 million principal and accrued and unpaid interest due under its 6.00% Notes.
See Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017, for additional information on our outstanding debt securities.
Other Matters
Recent Tax Changes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act significantly changes U.S. tax law. The Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures and various other items.
As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we provisionallyre-measured our net deferred tax liabilities at December 31, 2017 and recognized a tax benefit of approximately $1.1 billion in our consolidated statement of operations for the year ended December 31, 2017.
The Act imposed aone-time repatriation tax on certain earnings of foreign subsidiaries. Although we have not determined a reasonable estimate of the impact of theone-time repatriation tax, we do not expect thisone-time tax to materially impact us, but we cannot provide any assuranceNOLs that upon completion of the analysis the amount will not be material.
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. However, we anticipate that the provisions of the Act may reduce our cash income taxes in future years.
Changes from our current provisional estimates described above will be reflected in our future statements of operations and could be material. For a more detailed description of the Act and its impact on us, please see Note 13 to the accompanying consolidated financial statements included in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017.
Other
We have cash management arrangements with certain of our principal subsidiaries, in which substantial portions of the subsidiaries’ cash is regularly advanced to us. Although we periodically repay these advances to fund the subsidiaries’ cash requirements throughout the year, at any given point in time we may owe a substantial sum to our subsidiaries under these advances, which, in accordance with generally accepted accounting principles, are eliminated in consolidation and therefore not recognized on our consolidated balance sheets.
We also are involved in various legal proceedings that could substantially impact our financial position. See Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017 for the current status of such legal proceedings.
MARKET RISK
As of December 31, 2017, we are exposed to market risk from changes in interest rates on our variable rate long-term debt obligations and fluctuations in certain foreign currencies. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.
Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure. From time to time, we have used derivative instruments to(i) lock-in or swap our exposure to changing variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. As of December 31, 2017, we had no such instruments outstanding. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. As of December 31, 2017, we did not hold or issue derivative financial instruments for trading or speculative purposes.
As further discussed in Note 5—Long-Term Debt and Credit Facilities, on June 19, 2017, and on November 1, 2017, we borrowed substantial sums under a credit agreement dated June 19, 2017 with various lending institutions to provide a substantial amount of the funding for the Level 3 acquisition. As further noted in Note 5—Long-Term Debt and Credit Facilities, loans under the term loan facilities and new revolving credit facility under the June 19, 2017 credit agreement bear interest at floating rates. A hypothetical increase in 100 basis points in LIBOR relative to this debt would decrease our annualpre-tax earnings by $131 million.
By operating internationally, we are exposed to the risk of fluctuations in the foreign currencies used by our international subsidiaries, including the British Pound, the Euro, the Brazilian Real, the Canadian Dollar, the Japanese Yen, the Hong Kong Dollar and the Singapore Dollar, in each case as of December 31, 2017. 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, which substantially increased upon the consummation of our acquisition of Level 3 discussed elsewhere herein. We use a sensitivity analysis to estimate our exposure to this foreign currency risk, measuring the change in financial position arising from a hypothetical 10% change in the exchange rates of these currencies, relative to the U.S. dollar, with all other variables held constant. The aggregate potential change in the fair value of financial assets resulting from a hypothetical 10% change in these exchange rates was $178 million at December 31, 2017.
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 December 31, 2017.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of our Annual Report on Form10-K for the year ended December 31, 2017, we have no special purpose or limited purpose entities that provideoff-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii) disclosed in Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of our Annual Report on Form10-K for the year ended December 31, 2017, or in the Future Contractual Obligations table included above, or (iii) discussed under the heading “Market Risk” above.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The stockholders and board of directors
CenturyLink, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CenturyLink, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance withany particular time period, for applicable tax purposes, (v) the U.S. federal securities lawsfirst anniversary of the execution of the Rights Plan if approval of the Rights Plan by the affirmative vote of a majority of the votes cast at a duly called meeting has not been obtained prior to such date, or (vi) a determination by the Board, prior to the Distribution Date, that the Rights Agreement and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statementsRights are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresno longer in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1977.
Shreveport, Louisiana
February 28, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The stockholders and board of directors
CenturyLink, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited CenturyLink Inc.’s (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetsbest interests of the Company and subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three year period ended December 31, 2017, and the related notes, and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired Level 3 Communications, Inc., which was renamed Level 3 Parent, LLC during 2017, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, Level 3 Parent, LLC’s internal control over financial reporting representing 15% of total assets (excluding goodwill and intangibles which are included within the scope of the assessment) and 8% of total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2017. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Level 3 Parent, LLC.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Shreveport, Louisiana
February 28, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| | (Dollars in millions, except per share amounts and shares in thousands) |
| ||||||||||
OPERATING REVENUES | $ | 17,656 | 17,470 | 17,900 | ||||||||
|
|
|
|
|
| |||||||
OPERATING EXPENSES | ||||||||||||
Cost of services and products (exclusive of depreciation and amortization) | 8,203 | 7,774 | 7,778 | |||||||||
Selling, general and administrative | 3,508 | 3,447 | 3,354 | |||||||||
Depreciation and amortization | 3,936 | 3,916 | 4,189 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 15,647 | 15,137 | 15,321 | |||||||||
|
|
|
|
|
| |||||||
OPERATING INCOME | 2,009 | 2,333 | 2,579 | |||||||||
OTHER (EXPENSE) INCOME | ||||||||||||
Interest expense | (1,481 | ) | (1,318 | ) | (1,312 | ) | ||||||
Other income, net | 12 | 5 | 49 | |||||||||
|
|
|
|
|
| |||||||
Total other expense, net | (1,469 | ) | (1,313 | ) | (1,263 | ) | ||||||
|
|
|
|
|
| |||||||
INCOME BEFORE INCOME TAX EXPENSE | 540 | 1,020 | 1,316 | |||||||||
Income tax (benefit) expense | (849 | ) | 394 | 438 | ||||||||
|
|
|
|
|
| |||||||
NET INCOME | $ | 1,389 | 626 | 878 | ||||||||
|
|
|
|
|
| |||||||
BASIC AND DILUTED EARNINGS PER COMMON SHARE | ||||||||||||
BASIC | $ | 2.21 | 1.16 | 1.58 | ||||||||
DILUTED | $ | 2.21 | 1.16 | 1.58 | ||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||
BASIC | 627,808 | 539,549 | 554,278 | |||||||||
DILUTED | 628,693 | 540,679 | 555,093 | |||||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
NET INCOME | $ | 1,389 | 626 | 878 | ||||||||
|
|
|
|
|
| |||||||
OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||
Items related to employee benefit plans: | ||||||||||||
Change in net actuarial gain (loss), net of $(60), $113 and $(12) tax | 83 | (168 | ) | 21 | ||||||||
Change in net prior service credit, net of $(4), $(4) and $(47) tax | 8 | 6 | 76 | |||||||||
Foreign currency translation adjustment and other, net of $(17), $— and $— tax | 31 | (21 | ) | (14 | ) | |||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss) | 122 | (183 | ) | 83 | ||||||||
|
|
|
|
|
| |||||||
COMPREHENSIVE INCOME | $ | 1,511 | 443 | 961 | ||||||||
|
|
|
|
|
| |||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
(Dollars in millions and shares in thousands) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 551 | 222 | |||||
Restricted cash - current | 5 | — | ||||||
Accounts receivable, less allowance of $164 and $178 | 2,557 | 2,017 | ||||||
Assets held for sale | 140 | 2,376 | ||||||
Other | 941 | 547 | ||||||
|
|
|
| |||||
Total current assets | 4,194 | 5,162 | ||||||
|
|
|
| |||||
NET PROPERTY, PLANT AND EQUIPMENT | ||||||||
Property, plant and equipment | 51,204 | 39,194 | ||||||
Accumulated depreciation | (24,352 | ) | (22,155 | ) | ||||
|
|
|
| |||||
Net property, plant and equipment | 26,852 | 17,039 | ||||||
|
|
|
| |||||
GOODWILL AND OTHER ASSETS | ||||||||
Goodwill | 30,475 | 19,650 | ||||||
Restricted cash | 31 | 2 | ||||||
Customer relationships, net | 10,876 | 2,797 | ||||||
Other intangible assets, net | 1,897 | 1,531 | ||||||
Other, net | 1,286 | 836 | ||||||
|
|
|
| |||||
Total goodwill and other assets | 44,565 | 24,816 | ||||||
|
|
|
| |||||
TOTAL ASSETS | $ | 75,611 | 47,017 | |||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Current maturities of long-term debt | $ | 443 | 1,503 | |||||
Accounts payable | 1,555 | 1,179 | ||||||
Accrued expenses and other liabilities | ||||||||
Salaries and benefits | 890 | 802 | ||||||
Income and other taxes | 370 | 301 | ||||||
Interest | 363 | 260 | ||||||
Other | 344 | 213 | ||||||
Current liabilities associated with assets held for sale | — | 419 | ||||||
Advance billings and customer deposits | 892 | 672 | ||||||
|
|
|
| |||||
Total current liabilities | 4,857 | 5,349 | ||||||
|
|
|
| |||||
LONG-TERM DEBT | 37,283 | 18,185 | ||||||
|
|
|
| |||||
DEFERRED CREDITS AND OTHER LIABILITIES | ||||||||
Deferred income taxes, net | 2,413 | 3,471 | ||||||
Benefit plan obligations, net | 5,178 | 5,527 | ||||||
Other | 2,389 | 1,086 | ||||||
|
|
|
| |||||
Total deferred credits and other liabilities | 9,980 | 10,084 | ||||||
|
|
|
| |||||
COMMITMENTS AND CONTINGENCIES (Note 16) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferredstock—non-redeemable, $25.00 par value, authorized 2,000 and 2,000 shares, issued and outstanding 7 and 7 shares | — | — | ||||||
Common stock, $1.00 par value, authorized 1,600,000 and 1,600,000 shares, issued and outstanding 1,069,169 and 546,545 shares | 1,069 | 547 | ||||||
Additionalpaid-in capital | 23,314 | 14,970 | ||||||
Accumulated other comprehensive loss | (1,995 | ) | (2,117 | ) | ||||
Retained earnings (accumulated deficit) | 1,103 | (1 | ) | |||||
|
|
|
| |||||
Total stockholders’ equity | 23,491 | 13,399 | ||||||
|
|
|
| |||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 75,611 | 47,017 | |||||
|
|
|
| |||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 1,389 | 626 | 878 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 3,936 | 3,916 | 4,189 | |||||||||
Impairment of assets | — | 13 | 9 | |||||||||
Deferred income taxes | (931 | ) | 6 | 350 | ||||||||
Loss on the sale of data centers and colocation business | 82 | — | — | |||||||||
Provision for uncollectible accounts | 176 | 192 | 177 | |||||||||
Net long-term debt issuance costs and premium amortization | 9 | 2 | (3 | ) | ||||||||
Net loss on early retirement of debt | 5 | 27 | — | |||||||||
Share-based compensation | 111 | 80 | 73 | |||||||||
Changes in current assets and liabilities: | ||||||||||||
Accounts receivable | 31 | (266 | ) | (132 | ) | |||||||
Accounts payable | (123 | ) | 109 | (168 | ) | |||||||
Accrued income and other taxes | 54 | (43 | ) | 32 | ||||||||
Other current assets and liabilities, net | (614 | ) | 92 | (53 | ) | |||||||
Retirement benefits | (202 | ) | (152 | ) | (141 | ) | ||||||
Changes in other noncurrent assets and liabilities, net | (174 | ) | (18 | ) | (77 | ) | ||||||
Other, net | 129 | 24 | 19 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 3,878 | 4,608 | 5,153 | |||||||||
|
|
|
|
|
| |||||||
INVESTING ACTIVITIES | ||||||||||||
Payments for property, plant and equipment and capitalized software | (3,106 | ) | (2,981 | ) | (2,872 | ) | ||||||
Cash paid for Level 3 acquisition, net of $2.3 billion cash acquired | (7,289 | ) | — | — | ||||||||
Cash paid for other acquisitions | (5 | ) | (39 | ) | (4 | ) | ||||||
Proceeds from sale of property and intangible assets | 1,529 | 30 | 31 | |||||||||
Other, net | — | (4 | ) | (8 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used in investing activities | (8,871 | ) | (2,994 | ) | (2,853 | ) | ||||||
|
|
|
|
|
| |||||||
FINANCING ACTIVITIES | ||||||||||||
Net proceeds from issuance of long-term debt | 8,398 | 2,161 | 989 | |||||||||
Proceeds from financing obligation (Note 3) | 356 | — | — | |||||||||
Payments of long-term debt | (1,963 | ) | (2,462 | ) | (966 | ) | ||||||
Net proceeds (payments) on credit facility and revolving line of credit | 35 | (40 | ) | (315 | ) | |||||||
Dividends paid | (1,453 | ) | (1,167 | ) | (1,198 | ) | ||||||
Repurchase of common stock and shares withheld to satisfy tax withholdings | (17 | ) | (16 | ) | (819 | ) | ||||||
Other, net | 2 | 6 | 8 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) financing activities | 5,358 | (1,518 | ) | (2,301 | ) | |||||||
|
|
|
|
|
| |||||||
Effect of exchange rate changes on cash and cash equivalents | (2 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 363 | 96 | (1 | ) | ||||||||
Cash, cash equivalents and restricted cash at beginning of period | 224 | 128 | 129 | |||||||||
|
|
|
|
|
| |||||||
Cash, cash equivalents and restricted cash at end of period | $ | 587 | 224 | 128 | ||||||||
|
|
|
|
|
| |||||||
Supplemental cash flow information: | ||||||||||||
Income taxes paid, net | $ | (392 | ) | (397 | ) | (63 | ) | |||||
Interest paid (net of capitalized interest of $78, $54 and $52) | $ | (1,401 | ) | (1,301 | ) | (1,310 | ) | |||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
COMMON STOCK (represents dollars and shares) | ||||||||||||
Balance at beginning of period | $ | 547 | 544 | 569 | ||||||||
Issuance of common stock to acquire Level 3, including replacement of Level 3’s share-based compensation awards | 517 | — | — | |||||||||
Issuance of common stock through dividend reinvestment, incentive and benefit plans | 5 | 3 | 2 | |||||||||
Repurchase of common stock | — | — | (27 | ) | ||||||||
|
|
|
|
|
| |||||||
Balance at end of period | 1,069 | 547 | 544 | |||||||||
|
|
|
|
|
| |||||||
ADDITIONALPAID-IN CAPITAL | ||||||||||||
Balance at beginning of period | 14,970 | 15,178 | 16,324 | |||||||||
Issuance of common stock to acquire Level 3, including replacement of Level 3’s share-based compensation awards | 9,462 | — | — | |||||||||
Issuance of common stock through dividend reinvestment, incentive and benefit plans | — | 7 | 9 | |||||||||
Repurchase of common stock | — | — | (767 | ) | ||||||||
Shares withheld to satisfy tax withholdings | (20 | ) | (15 | ) | (19 | ) | ||||||
Share-based compensation and other, net | 79 | 79 | 77 | |||||||||
Dividends declared | (1,177 | ) | (279 | ) | (446 | ) | ||||||
|
|
|
|
|
| |||||||
Balance at end of period | 23,314 | 14,970 | 15,178 | |||||||||
|
|
|
|
|
| |||||||
ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||||
Balance at beginning of period | (2,117 | ) | (1,934 | ) | (2,017 | ) | ||||||
Other comprehensive income (loss) | 122 | (183 | ) | 83 | ||||||||
|
|
|
|
|
| |||||||
Balance at end of period | (1,995 | ) | (2,117 | ) | (1,934 | ) | ||||||
|
|
|
|
|
| |||||||
RETAINED EARNINGS (ACCUMULATED DEFICIT) | ||||||||||||
Balance at beginning of period | (1 | ) | 272 | 147 | ||||||||
Net income | 1,389 | 626 | 878 | |||||||||
Cumulative effect of adoption of ASU2016-09,Improvements to Employee Share-Based Payment Accounting | 3 | — | — | |||||||||
Dividends declared | (288 | ) | (899 | ) | (753 | ) | ||||||
|
|
|
|
|
| |||||||
Balance at end of period | 1,103 | (1 | ) | 272 | ||||||||
|
|
|
|
|
| |||||||
TOTAL STOCKHOLDERS’ EQUITY | $ | 23,491 | 13,399 | 14,060 | ||||||||
|
|
|
|
|
| |||||||
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
References in the Notes to “CenturyLink,” “we,” “us” and “our” refer to CenturyLink, Inc. and its consolidated subsidiaries, unless the content otherwise requires and except in Note 5, where such references refer solely to CenturyLink, Inc. References in the Notes to “Level 3” refer to Level 3 Communications, Inc. prior to our acquisition thereof and to itssuccessor-in-interest Level 3 Parent, LLC after such acquisition, unless the context otherwise requires.
General
We are an international facilities-based communications company engaged primarily in providing an integrated array of services to our residential and business customers. Our communications services include local and long-distance voice, virtual private network (“VPN”) data network, private line (including business data services), Ethernet, information technology, wavelength, broadband, colocation and data center services, managed services, professional and other services provided in connection with selling equipment, network security and various other ancillary services.
On November 1, 2017, we acquired Level 3 Communications, Inc. (“Level 3”) in a cash and stock transaction. See Note 2—Acquisition of Level 3 for additional information. On May 1, 2017, we sold our data centers and colocation business to a consortium led by BC Partners, Inc. and Medina Capital for a combination of cash and equity. See Note 3—Sale of Data Centers and Colocation Business for additional information.
Basis of Presentation
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. These subsidiaries include Level 3 on and after November 1, 2017. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. In connection with our acquisition of Level 3, we acquired its deconsolidated Venezuela subsidiary and due to exchange restrictions and other conditions we have assigned no value to the assets acquired. Additionally, we have excluded this subsidiary from our consolidated financial statements.
To simplify the overall presentation of our consolidated financial statements, we report immaterial amounts attributable to noncontrolling interests in certain of our subsidiaries as follows: (i) income attributable to noncontrolling interests in other income (expense), net, (ii) equity attributable to noncontrolling interests in additionalpaid-in capital and (iii) cash flows attributable to noncontrolling interests in other, net financing activities.
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenues and our segment reporting for 2016 and 2015. See Note 14—Segment Information for additional information. These changes had no impact on total operating revenues, total operating expenses or net income for any period.
Changes in Estimates
In 2016, we changed the method we use to estimate the service and interest components of net periodic benefit expense for pension and other postretirement benefit obligations. This change resulted in a decrease in the service and interest components in 2017 and 2016. Beginning in 2016, we utilized a full yield curve approach in connection with estimating these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows, as opposed to the single weighted-
average discount rate derived from the yield curve that we have used in the past. We believe this change more precisely measures service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change did not affect the measurement of our total benefit obligations but lowered our annual net periodic benefit cost by $122 million and $149 million in 2017 and 2016, respectively. This change was treated as a change in accounting estimate and accordingly, we did not adjust the amounts recorded in 2015. The reduction in expense described above, net of tax, increased net income by $75 million and $91 million, or $0.12 and $0.17 per basic and diluted common share, for the years ended December 31, 2017 and 2016, respectively.
Summary of Significant Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for specific items and matters, including, but not limited to, investments, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and contingencies, are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can materially affect the reported amounts of assets, liabilities and components of stockholders’ equity as of the dates of the consolidated balance sheets, as well as the reported amounts of revenues, expenses and components of cash flows during the periods presented in our other consolidated financial statements. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 13—Income Taxes and Note 16—Commitments and Contingencies for additional information.
For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.
For all of these and other matters, actual results could differ materially from our estimates.
Revenue Recognition
We recognize revenue for services when the related 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 activation and installation charges, which we recognize as revenue over the expected customer relationship period, which ranges from three years to over seven years depending on the service. We also defer costs for customer activations and installations. The deferral of customer activation and installation costs is limited to the amount of revenue deferred on advance payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected customer relationship 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 and recognized over the new contract term.
We offer bundle discounts to our customers who receive certain groupings of services. These bundle discounts are recognized concurrently with the associated revenue and are allocated to the various services in the bundled offering based on the estimated selling price of services included in each bundled combination.
Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the elements are deemed separable and separate earnings processes exist, the revenue associated with the customer arrangement is allocated to each element based on the relative estimated selling price of the separate elements. We have estimated the selling prices of each element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized as earned. For example, if we receive an advance payment when we sell equipment and continuing service together, we immediately recognize as revenue the amount allocated to the equipment as long as all the conditions for revenue recognition have been satisfied. The portion of the advance payment allocated to the service based upon its relative selling price is recognized ratably over the longer of the contractual period or the expected customer relationship period.
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 20 years. We account for the cash consideration received on transfers of optical capacity assets and on all of the other elements deliverable under an IRU, as revenue 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 by third-party vendors, we review 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 we act as a principal in the transaction, take title to the products, have risk and rewards of ownership or act as an agent or broker.
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, with a corresponding increase in the credit reserve.
USF Surcharges, Gross Receipts Taxes and Other Surcharges
In determining whether to include in our revenues and expenses the taxes and surcharges collected from customers and remitted to government authorities, including USF surcharges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we are the principal taxpayer, we record the surcharges on a gross basis and include them in our revenues and costs of services and products. In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenues and costs of services and products.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Our advertising expense was $218 million, $216 million and $210 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.
Income Taxes
We file a consolidated federal income tax return with our eligible subsidiaries. The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods and adjustments to our liabilities for uncertain tax positions. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax net operating loss carryforwards (“NOLs”), tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. See Note 13—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. In evaluating investments for classification as cash equivalents, we require that individual securities have original maturities of ninety days or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.
Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet. This activity is included in the operating activities section in our consolidated statements of cash flows.
Accounts Receivable and Allowance for Doubtful Accounts
We record accounts receivable acquired in connection with our acquisitions based on their estimated fair value as of the applicable acquisition date. Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer’s credit risk. Our past due accounts are written off against our allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful accounts approximates fair value.
Property, Plant and Equipment
We record property, plant and equipment acquired in connection with our acquisitions based on its estimated fair value as of its acquisition date plus the estimated value of any associated legally or contractually required retirement obligations. We record purchased and constructed property, plant and equipment at cost, plus the estimated value of any associated legally or contractually required retirement obligations. The majority of our property, plant and equipment is depreciated using the straight-line group method, but certain of our assets are depreciated using the straight-line method over their estimated useful lives. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. The equal life group procedure is used to establish each pool’s average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the construction phase of network and otherinternal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments anticipate the loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers leave the network. However, the asset is not retired until all customers no longer utilize the asset and we determine there is no alternative use for the asset.
We have asset retirement obligations associated with the legally or contractually required removal of a limited group of property, plant and equipment assets from leased properties and the disposal of certain hazardous materials present in our owned properties. When an asset retirement obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period in which the costs are actually incurred.
We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group’s carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and trade names, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 7 to 15 years, using either thesum-of-the-years-digits or the
straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives ranging up to 7 years, except for approximately $237 million of our capitalized software costs, which represents costs to develop an integrated billing and customer care system which is amortized using the straight-line method over a 20 year period. We amortize our other intangible assets predominantly using thesum-of-the-years-digits method over an estimated life of 4 to 20 years. Other intangible assets not arising from business combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite-lived and such intangible assets are not amortized.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades tointernal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
Our long-lived intangible assets, other than goodwill, with indefinite lives are assessed for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be an impairment. These assets are carried at the estimated fair value at the time of acquisition and assets not acquired in acquisitions are recorded at historical cost. However, if their estimated fair value is less than the carrying amount, other indefinite-lived intangible assets are reduced to their estimated fair value through an impairment charge to our consolidated statements of operations.
We are required to assess goodwill for impairment at least annually, or more frequently, if an event occurs or circumstances change that would indicate an impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded amount of goodwill exceeds the implied fair value of goodwill. Our reporting units are not discrete legal entities with discrete financial statements. Therefore, the equity carrying value and future cash flows must be estimated each time a goodwill impairment assessment is performed on a reporting unit. As a result, our assets, liabilities and cash flows are assigned to reporting units using reasonable and consistent allocation methodologies. Certain estimates, judgments and assumptions are required to perform these assignments. We believe these estimates, judgments and assumptions to be reasonable, but changes in any of these can significantly affect each reporting unit’s equity carrying value and future cash flows utilized for our goodwill impairment assessment.
We are required to reassign goodwill to reporting units each time we reorganize our internal reporting structure which causes a change in the composition of our reporting units. Goodwill is reassigned to the reporting units using a relative fair value approach. We utilize the earnings before interest, taxes, depreciation and amortization of each reporting unit as our allocation methodology as it represents a reasonable proxy for the fair value of the operations being reorganized.
See Note 4—Goodwill, Customer Relationships and Other Intangible Assets for additional information.
Pension and Post-Retirement Benefits
We recognize the funded status of our defined benefit and post-retirement plans as an asset or a liability on our consolidated balance sheet. Each year’s actuarial gains or losses are a component of our other comprehensive income (loss), which is then included in our accumulated other comprehensive loss. Pension and post-retirement benefit expenses are recognized over the period in which the employee renders service and becomes eligible to
receive benefits. We make significant assumptions (including the discount rate, expected rate of return on plan assets, mortality and health care trend rates) in computing the pension and post-retirement benefits expense and obligations. See Note 9—Employee Benefits for additional information.
Foreign Currency
Our results of operations include foreign subsidiaries, which are translated from the applicable functional currency to the United States Dollar using the average exchange rates during the reporting period, while assets and liabilities are translated at the reporting date. We include gains or losses from foreign currencyre-measurement in other income, net in our consolidated statements of operations. Certainnon-U.S. subsidiaries designate the local currency as their functional currency, and we record the translation of their assets and liabilities into U.S. dollars at the balance sheet date as translation adjustments and include them as a component of accumulated other comprehensive loss in our consolidated balance sheets. We consider the majority of our investments in our foreign subsidiaries to be long-term in nature.
Common Stock
At December 31, 2017, we had 4 million unissued shares of CenturyLink, Inc. common stock reserved for acquisitions. In addition, we had 45 million shares authorized for future issuance under our equity incentive plans.
Preferred stock
Holders of outstanding CenturyLink, Inc. preferred stock are entitled to receive cumulative dividends, receive preferential distributions equal to $25 per share plus unpaid dividends upon CenturyLink, Inc.‘s liquidation and vote as a single class with the holders of common stock.
Dividends
We pay dividends out of retained earnings to the extent we have retained earnings on the date the dividend is declared. If the dividend is in excess of our retained earnings on the declaration date, then the excess is drawn from our additionalpaid-in capital.
Recently Adopted Accounting Pronouncements
In 2017, we adopted Accounting Standards Update (“ASU”)2016-18, “Restricted Cash (a consensus of the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force)” (“ASU2016-18”). In the first quarter of 2017, we adopted ASU2016-09, “Improvements to Employee Share Based Compensation” (“ASU2016-09”) and ASU2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU2017-07”). Each of these is described further below.
Restricted Cash
On November 17, 2016, the FASB issued ASU2016-18, which requires that a statement of cash flows explain the change in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents as compared to the previous presentation, which explains only the change in cash and cash equivalents. ASU2016-18 is effective January 1, 2018, but early adoption is permitted and requires retrospective application of the requirements to all previous periods presented. We early adopted ASU2016-18 in the second quarter of 2017.
Share-based Compensation
ASU2016-09 modified the accounting and associated income tax accounting for share-based compensation in order to reduce the cost and complexity associated with previous U.S. generally accepted accounting principles (“GAAP”). The primary provisions of ASU2016-09 that affect our consolidated financial statements for the year ended December 31, 2017 are:
Net Periodic Pension and Postretirement Benefit Costs
ASU2017-07 modified the presentation of net periodic pension and postretirement benefit costs and requires the service cost component to be reported separately from the other components in order to provide more useful information. Under ASU2017-07, the service cost component of net periodic pension and postretirement benefit costs is required to be presented in the same expense category as the related salary and wages for the employee. The other components of the net periodic pension and postretirement benefit costs are required to be recognized below operating income in other income (expense), net in our consolidated statements of operations. This change was applied on a retrospective basis to all previous periods to match the current period presentation. This retrospective application resulted in a $2 million increase in operating income and a corresponding increase in total other expense, net for the year ended December 31, 2016 and a $26 million reduction in operating income and a corresponding decrease in total other expense, net for the year ended December 31, 2015.
Recent Accounting Pronouncements
Comprehensive Income
On February 14, 2018, the FASB issued ASU2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU2018-02”). Under current accounting guidance, the income tax effects for changes in income tax rates and certain other transactions are recognized in income from continuing operations resulting in income tax effects recognized in accumulated other comprehensive income that don’t reflect the current tax rate of the entity (“stranded tax effects”). ASU2018-02 allows us the option to reclassify these stranded tax effects related to the change in the federal income tax rate as a result of the Tax Cuts and Jobs Act to retained earnings.
We currently plan to adopt the provisions of ASU2018-02 in the first quarter of 2018 and elect to reclassify the stranded tax effects related to the Tax Cuts and Job Act from accumulated comprehensive income to retained earnings in first quarter of 2018. We currently estimate that our retained earnings and accumulated other comprehensive loss will increase by approximately $400 million as a result of the adoption of ASU2018-02.
Goodwill Impairment
On January 26, 2017, the FASB issued ASU2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU2017-04”). ASU2017-04 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 ASU2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above fair value, limited to the amount of goodwill assigned to the reporting unit.
We are required to adopt the provisions of ASU2017-04 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 ASU2017-04. The provisions of ASU2017-04 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.
Income Taxes
On October 24, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” (“ASU2016-16”). ASU2016-16 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 plan to adopt the provisions of ASU2016-16 on January 1, 2018. The adoption of ASU2016-16 is not expected to have a material impact to our consolidated financial statements.
Financial Instruments
On June 16, 2016, the FASB issued ASU2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU2016-13”). The primary impact of ASU2016-13 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 ASU2016-13 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 ASU2016-13 through a cumulative adjustment to (accumulated deficit) retained earnings as of the date of adoption. As of the date of our Annual Report on Form10-K for the year ended December 31, 2017, we have not yet determined the date we will adopt ASU2016-13.
Leases
On February 25, 2016, the FASB issued ASU2016-02, “Leases” (“ASU2016-02”). The core principle of ASU2016-02 will require lessees to presentright-of-use assets and lease liabilities on their balance sheets for operating leases, which are currently not reflected on their balance sheets.
ASU2016-02 is effective for annual and interim periods beginning January 1, 2019. Early adoption of ASU2016-02 is permitted. Upon adoption of ASU2016-02, 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.
We have completed our initial assessment of our business and system requirements and we are currently developing and implementing a new lease accounting and administrative system to comply with the requirements of ASU2016-02. 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 our Annual Report on Form10-K for the year ended December 31, 2017 to provide any estimate of the impact of adopting ASU2016-02, we do expect that it will have a material impact on our consolidated financial statements. Additionally, upon the January 1, 2019, implementation of ASU2016-02, accounting for the failed-sale-leaseback transaction described in Note 3—Sale of Data Centers and Colocation Business will no longer be applicable based on our facts and circumstances, and the real estate assets and corresponding financing obligation will be derecognized from our consolidated balance sheet.
Revenue Recognition
On May 28, 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers” (“ASU2014-09”). ASU2014-09 replaces virtually all existing generally accepted accounting principles (“GAAP”) on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU2014-09 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. ASU2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.
On July 9, 2015, the FASB approved the deferral of the effective date of ASU2014-09 by one year until January 1, 2018, which is the date we plan to adopt this standard. ASU2014-09 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 ASU2014-09 in the first quarter of 2018. We adopted the new revenue recognition standard under the modified retrospective transition method.
The most significant judgments and impacts upon adoption of the standard include the following items:
Upon adoption, we will defer (i.e. capitalize) incremental contract acquisition costs and recognize (i.e. amortize) them over the term of the initial contract and anticipated renewal contracts to which the costs relate. Our deferred contract costs for our business and consumer customers have average amortization periods of approximately 49 months and 30 months, respectively, and are subject to being monitored every period to reflect any significant change in assumptions. In addition, we will assess our deferred contract cost asset for impairment on a periodic basis.
Promotional bill credits, discounts and prepaid cards offered to customers as part of renewing services or entering into a new services arrangement that are paid over time and are contingent on the customer maintaining a service contract results in an extended service contract term with multiple performance obligations, which impacts the allocation and timing of revenue recognition between service revenue and revenue assigned to the customer credits. A contract asset will be recorded when services are delivered to the customer, and subsequently recognized as a reduction to service revenue over the extended contract term.
We are in the process of implementing a new revenue accounting system, as well as, new processes and internal controls over revenue recognition to assist us in the application of the new standard.
The cumulative effect of initially applying the new revenue standard on January 1, 2018 is estimated to be an increase to retained earnings of approximately $400 million to $600 million.
Most of our indefeasible right of use arrangements, including certain long-term prepaid customer capacity arrangements, are accounted for as operating leases.
On November 1, 2017, CenturyLink acquired Level 3 through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as our indirect wholly-owned subsidiary under the name of Level 3 Parent, LLC. We entered into this acquisition to, among other things, realize certain strategic benefits, including enhanced financial and operational scale, market diversification and an enhanced combined network. As a result of the acquisition, Level 3 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 common stock they owned at closing, subject to certain limited exceptions. We 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 of $19.617 billion is based on:
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 362.1 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 $136 million the Continuing RSU Awards, which represents thepre-combination portion of Level 3’s share-based compensation awards replaced by CenturyLink; and
the estimated liability of $60 million for the dissenting common shares issued and outstanding as of October 31, 2017.
At closing, CenturyLink assumed Level 3’s long-term debt of approximately $10.6 billion.
The aggregate cash payments required to be paid on or about the closing date were funded with the proceeds of $7.945 billion of term loans and $400 million of funds borrowed under our new revolving credit facility together with other available funds, which included $1.825 billion borrowed from Level 3 Parent, LLC. For additional information regarding CenturyLink’s financing of the Level 3 acquisition see Note 5—Long-Term Debt and Credit Facilities.
We have recognized the assets and liabilities of Level 3 based on CenturyLink’s preliminary estimates of the fair value of the acquired tangible and intangible assets and assumed liabilities of Level 3 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, we have not completed our valuation analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of Level 3’s 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. We expect to complete our final fair value determinations prior to the anniversary date of the acquisition. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements at December 31, 2017.
Based solely on our preliminary estimates, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $10.837 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 we expect to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.
The following is our preliminary assignment of the preliminary estimated aggregate consideration:
| November 1, 2017 | ||||
| (Dollars in millions) | ||||
Cash, accounts receivable and other current assets(1) | $ | 3,317 | ||
Property, plant and equipment | 9,311 | |||
Identifiable intangible assets(2) | ||||
Customer relationships | 8,964 | |||
Other | 391 | |||
Other noncurrent assets | 782 | |||
Current liabilities, excluding current maturities of long-term debt | (1,461 | ) | ||
Current maturities of long-term debt | (7 | ) | ||
Long-term debt | (10,888 | ) | ||
Deferred credits and other liabilities | (1,629 | ) | ||
Goodwill | 10,837 | |||
|
| |||
Total estimated aggregate consideration | $ | 19,617 | ||
|
| |||
On the acquisition date, we assumed Level 3’s contingencies. For more information on our contingencies, see Note 16—Commitments and Contingencies.
Acquisition-Related Expenses
We have incurred acquisition-related expenses related to our acquisition of Level 3. The table below summarizes our acquisition-related expenses, which consist of integration-related expenses, including severance and retention compensation expenses, and transaction-related expenses:
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Transaction-related expenses | $ | 174 | 47 | |||||
Integration-related expenses | 97 | 5 | ||||||
|
|
|
| |||||
Total acquisition-related expenses | $ | 271 | 52 | |||||
|
|
|
| |||||
At December 31, 2017, we had incurred cumulative acquisition-related expenses of $323 million for Level 3. The total amounts of these expenses are included in our selling, general and administrative expenses.
Level 3 incurred transaction-related expenses of $47 million on the date of acquisition. This amount is not included in our results of operations.
References to Acquired Businesses
In the discussion that follows, we refer to the incremental business activities that we now operate as a result of the Level 3 acquisition as “Legacy Level 3”. References to “Legacy CenturyLink”, when used to a comparison of our consolidated results for the years ended December 31, 2017 and 2016, mean the business we operated prior to the Level 3 acquisition.
Combined Pro Forma Operating Results (Unaudited)
For the year ended December 31, 2017, CenturyLink’s results of operations included operating revenues (net of intercompany eliminations) attributable to Level 3 of $1.39 billion. The addition of Level 3’s post-acquisition operations contributed a net loss of $144 million to our consolidated net income.
The following unaudited pro forma financial information presents the combined results of CenturyLink as if the Level 3 acquisition had been consummated as of January 1, 2016.
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions, except per share amounts) | ||||||||
Operating revenues | $ | 24,321 | 25,378 | |||||
Net income | 1,632 | 883 | ||||||
Basic earnings per common share | 1.54 | 0.84 | ||||||
Diluted earnings per common share | 1.54 | 0.84 | ||||||
This pro forma information reflects certain adjustments to previously-reported operating results, consisting of primarily:
decreased operating revenues and expenses due to the elimination of deferred revenues associated with installation activities that were preliminarily assigned no value at the acquisition date (excluding certain deferred revenue associated with certain long-term prepaid customer capacity arrangements, which have been included at its current carrying value) and the elimination of transactions among CenturyLink and Level 3 that are now subject to intercompany elimination;
increased amortization expense related to identifiable intangible assets, net of decreased depreciation expense to reflect the preliminary fair value of property, plant and equipment;
increased interest expense resulting from (i) interest on the new debt to finance the combination and amortization of the related debt discount and debt issuance costs, (ii) the elimination of Level 3’s historical amortization of debt discount and debt issuance costs and (iii) a reduction in interest expense due to the accretion of an adjustment to reflect the increased preliminary fair value of the long-term debt of Level 3 recognized on the acquisition date; and
the related income tax effects.
The pro forma information is presented for illustrative purposes only and does not necessarily reflect the actual results of operations had the Level 3 acquisition been consummated at January 1, 2016, nor is it necessarily indicative of future operating results. The pro forma information excludes transaction costs incurred by us and Level 3 during 2017 (which are further described above in this note) and does not reflect integration costs to be incurred by us in future periods. In addition, the pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisitions (other than those realized in our historical consolidated financial statements after November 1, 2017).
On May 1, 2017, we sold our data centers and colocation business to a consortium led by BC Partners, Inc. and Medina Capital in exchange for cash and a minority stake in the limited partnership that owns the consortium’s newly-formed global secure infrastructure company, Cyxtera Technologies (“Cyxtera”).
We receivedpre-tax cash proceeds of $1.8 billion, and we have valued our minority stake at $150 million, which was based upon the total amount of equity contributions to the limited partnership on the date made. Due to the sale and related restructuring actions we have taken regarding certain subsidiaries involved in the data centers and colocation business, we have estimated a cumulative current tax impact relating to the sale totaling $65 million, $18 million of which was accrued in 2016 and $47 million of which was accrued in 2017.
In connection with our sale of the data centers and colocation business to Cyxtera, we agreed to lease back from Cyxtera a portion of the data center space to provide data hosting services to our customers. Because we have continuing involvement in the business through our minority stake in Cyxtera’s parent, we do not meet the requirements for a sale-leaseback transaction as described in ASC840-40,Leases - Sale-Leaseback Transactions. Under the failed-sale-leaseback accounting model, we are deemed under GAAP to still own certain real estate assets sold to Cyxtera, which we must continue to reflect on our consolidated balance sheet and depreciate over the assets’ remaining useful life. We must also treat a certain amount of thepre-tax cash proceeds from the sale of the assets as though it were the result of a financing obligation on our consolidated balance sheet, and our consolidated results of operations must include imputed revenue associated with the portion of the real estate assets that we have not leased back and imputed interest expense on the financing obligation. A portion of the rent payments required under our leaseback arrangement with Cyxtera is recognized as a reduction of the financing obligation, resulting in lower recognized rent expense than the amounts actually paid each period. At the end of the lease term, the remaining imputed financing obligation and the remaining net book value of the real estate assets will be derecognized. Please see “Leases” (ASU2016-02) in Note 1—Background for additional information on the impact the new lease standard will have on the accounting for the failed-sale-leaseback.
The following table reflects the assets sold to and the liabilities assumed by Cyxtera on May 1, 2017, including the impact of failed-sale-leaseback:
| Dollars in millions | ||||
Goodwill | $ | 1,142 | ||
Property, plant and equipment | 1,051 | |||
Other intangible assets | 249 | |||
Other assets | 66 | |||
Less assets not removed as a result of the failed-sale-leaseback | (526 | ) | ||
|
| |||
Total net amount of assets derecognized | $ | 1,982 | ||
|
| |||
Capital lease obligations | 294 | |||
Other liabilities | 274 | |||
Less imputed financing obligations from the failed-sale-leaseback | (628 | ) | ||
|
| |||
Total net imputed liabilities recognized | $ | (60 | ) | |
|
| |||
In addition, the failed-sale-leaseback accounting treatment had the following effects on our consolidated results of operations for the year ended December 31, 2017:
| Positive (Negative) Impact to Net Income | ||||
| (Dollars in millions) | ||||
Increase in revenue | $ | 49 | ||
Decrease in cost of sales | 15 | |||
Increase in loss on sale of business included in selling, general and administrative expense | (102 | ) | ||
Increase in depreciation expense(one-time) | (44 | ) | ||
Increase in depreciation expense (ongoing) | (47 | ) | ||
Increase in interest expense | (39 | ) | ||
Decrease in income tax expense | 65 | |||
|
| |||
Decrease in net income | $ | (103 | ) | |
|
| |||
After factoring in the costs to sell the data centers and colocation business, excluding the impact from the failed-sale-leaseback accounting treatment, the sale resulted in a $20 million gain as a result of the aggregate value of the proceeds we received exceeding the carrying value of the assets sold and liabilities assumed. Based on the fair market values of the failed-sale-leaseback assets, the failed-sale-leaseback accounting treatment resulted in a loss of $102 million as a result of the requirement to treat a certain amount of thepre-tax cash proceeds from the sale of the assets as though it were the result of a financing obligation. The combined net loss of $82 million was included in selling, general and administrative expenses in our consolidated statement of operations for the year ended December 31, 2017. The sale also resulted in a significant capital loss carryforward, which was entirely offset by a valuation allowance due to our determination that we are not likely to be able to utilize this carryforward prior to its expiration.
We evaluated our minority stake in the limited partnership and determined that we were not the primary beneficiary of the entity. As a result, we classified our $150 million investment in the limited partnership in other assets on our consolidated balance sheet as of December 31, 2017. In addition to our investment, we have a receivable for $49 million from Cyxtera, classified primarily in other current assets on our consolidated balance sheet as of December 31, 2017. We will continue to have an ongoing obligation to Cyxtera related to our lease of data center space from them. From May 1, 2017 through December 31, 2017, we paid rent to Cyxtera totaling $80 million.
Effective November 3, 2016, which is the date we entered into the agreement to sell our data centers and colocation business, we ceased recording depreciation of the property, plant and equipment to be sold and amortization of the business’s intangible assets in accordance with applicable accounting rules. Otherwise, we estimate that we would have recorded additional depreciation and amortization expense of $67 million from January 1, 2017 through May 1, 2017.
Goodwill, customer relationships and other intangible assets consisted of the following:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Goodwill | $ | 30,475 | 19,650 | |||||
|
|
|
| |||||
Customer relationships, less accumulated amortization of $7,096 and $6,318 | $ | 10,876 | 2,797 | |||||
|
|
|
| |||||
Indefinite-life intangible assets | $ | 269 | 269 | |||||
Other intangible assets subject to amortization: | ||||||||
Capitalized software, less accumulated amortization of $2,294 and $2,019 | 1,469 | 1,227 | ||||||
Trade names and patents, less accumulated amortization of $31 and $23 | 159 | 35 | ||||||
|
|
|
| |||||
Total other intangible assets, net | $ | 1,897 | 1,531 | |||||
|
|
|
| |||||
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired (including the acquisition described in Note 2—Acquisition of Level 3). At December 31, 2017, the net carrying amounts of goodwill, customer relationships and other intangibles assets included preliminary estimates of $20.060 billion as a result of our Level 3 acquisition. As of December 31, 2017, the preliminary estimate of the weighted average remaining useful lives of the intangible assets acquired in the acquisition of Level 3 was approximately 12 years in total, approximately 12 years for customer relationships, 5 years for capitalized software and 5 years for trade names.
Total amortization expense for intangible assets for the years ended December 31, 2017, 2016 and 2015 was $1.226 billion, $1.225 billion and $1.353 billion, respectively. As of December 31, 2017, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $52.669 billion.
We estimate that total amortization expense for intangible assets (which include preliminary estimates for the intangible assets acquired from Level 3) for the years ending December 31, 2018 through 2022 will be as follows:
| (Dollars in millions) | ||||
2018 | $ | 1,802 | ||
2019 | 1,701 | |||
2020 | 1,590 | |||
2021 | 1,149 | |||
2022 | 977 | |||
We assess our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the recorded amount of goodwill exceeds the implied fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assessed our reporting units, which were enterprise (excluding wholesale), consumer and wholesale. Our annual impairment assessment date for indefinite-lived intangible assets other than goodwill is December 31.
Our reporting units are not discrete legal entities with discrete financial statements. Our assets and liabilities are employed in and relate to the operations of multiple reporting units. For each reporting unit, we compare its estimated fair value of equity to its carrying value of equity that we assign to the reporting unit. If the estimated fair value of the reporting unit is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second calculation is required in which
the implied fair value of goodwill is compared to the carrying value of goodwill that we assigned to the reporting unit. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value.
At October 31, 2017, we utilized a level 3 valuation technique to estimate the fair value of our enterprise (excluding wholesale), consumer and wholesale reporting units by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period. We reconciled the estimated fair values of the reporting units to our market capitalization as of October 31, 2017 and concluded that the indicated implied control premium of approximately 36% was reasonable based on recent transactions in the market place. As of October 31, 2017, based on our assessment performed with respect to these reporting units as described above, we concluded that our goodwill for our three reporting units was not impaired as of that date.
The following table shows the rollforward of goodwill assigned to our reportable segments from December 31, 2015 through December 31, 2017.
| Business | Consumer | Total | ||||||||||
| (Dollars in millions) | ||||||||||||
As of December 31, 2015(1) | $ | 10,464 | 10,278 | 20,742 | ||||||||
Purchase accounting and other adjustments | 49 | — | 49 | |||||||||
Goodwill attributable to the colocation business and data centers reclassified to assets held for sale | (1,141 | ) | — | (1,141 | ) | |||||||
|
|
|
|
|
| |||||||
As of December 31, 2016(1) | 9,372 | 10,278 | 19,650 | |||||||||
Purchase accounting and other adjustments | 10,825 | — | 10,825 | |||||||||
|
|
|
|
|
| |||||||
As of December 31, 2017(1) | $ | 20,197 | 10,278 | 30,475 | ||||||||
|
|
|
|
|
| |||||||
As of December 31, 2017, the $20.197 billion of goodwill assigned to our business reportable segment has not been allocated to our expected future reporting units ((i) medium and small business, (ii) enterprise, (iii) international and global accounts, (iv) wholesale and indirect and (v) consumer) as we have not completed our valuation analysis and calculation in sufficient detail necessary to allocate the goodwill to these reporting units.
During 2016, we acquired all of the outstanding stock of three companies for total consideration of $53 million, including future deferred or contingent cash payments of $14 million, of which $49 million has been attributed to goodwill. We have completed our valuations of the fair values of assets acquired and liabilities assumed, along with the related allocations to goodwill and intangible assets for these three acquisitions. These acquisitions were consummated to expand the product offerings of our business segment and therefore the goodwill has been assigned to that segment. The majority of the goodwill is attributed primarily to expected future increases in business segment revenue from the sale of new products. The majority of the goodwill from these acquisitions is expected to be deductible for tax purposes.
None of the above-described acquisitions materially impacted the consolidated results of operations from the dates of the acquisitions and would not materially impact pro forma results of operations.
For additional information on our segments, see Note 14—Segment Information.
We completed our qualitative assessment of our indefinite-lived intangible assets other than goodwill as of December 31, 2017 and concluded it is more likely than not that our indefinite-lived intangible assets are not impaired; thus, no impairment charge was recorded in 2017.
As of October 31, 2016 and 2015, based on our assessments performed, we concluded that our goodwill for our then three reporting units was not impaired as of those dates.
The following chart reflects the consolidated long-term debt of CenturyLink, Inc. and its subsidiaries, including unamortized discounts and premiums and unamortized debt issuance costs, but excluding intercompany debt:
| As of December 31, | ||||||||||||||||
| Interest Rates(1) | Maturities | 2017 | 2016 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Senior Secured Debt: | ||||||||||||||||
CenturyLink, Inc. | ||||||||||||||||
2017 Revolving Credit Facility(2) | 4.153% - 4.285% | 2022 | $ | 405 | — | |||||||||||
Term Loan A | 4.319% | 2022 | 1,575 | — | ||||||||||||
Term LoanA-1 | 4.319% | 2022 | 370 | — | ||||||||||||
Term Loan B | 4.319% | 2025 | 6,000 | — | ||||||||||||
Subsidiaries: | ||||||||||||||||
Level 3 Financing, Inc. | ||||||||||||||||
Tranche B 2024 Term Loan | 3.696% | 2024 | 4,611 | — | ||||||||||||
Embarq Corporation subsidiaries | ||||||||||||||||
First mortgage bonds | 7.125% - 8.770% | 2018 - 2025 | 151 | 223 | ||||||||||||
Senior Notes and Other Debt: | ||||||||||||||||
CenturyLink, Inc. | ||||||||||||||||
Senior notes | 5.625% - 7.650% | 2019 - 2042 | 8,125 | 8,975 | ||||||||||||
2012 Credit facility and revolving line of credit(2) | — | — | — | 370 | ||||||||||||
2012 Term loan | — | — | — | 336 | ||||||||||||
Subsidiaries: | ||||||||||||||||
Level 3 Financing, Inc. | ||||||||||||||||
Senior notes | 5.125% - 6.125% | 2021 - 2026 | 5,315 | — | ||||||||||||
Level 3 Parent, LLC | ||||||||||||||||
Senior notes | 5.750% | 2022 | 600 | — | ||||||||||||
Qwest Corporation | ||||||||||||||||
Senior notes | 6.125% - 7.750% | 2018 - 2057 | 7,294 | 7,259 | ||||||||||||
Term loan | 3.570% | 2025 | 100 | 100 | ||||||||||||
Qwest Capital Funding, Inc. | ||||||||||||||||
Senior notes | 6.500% - 7.750% | 2018 - 2031 | 981 | 981 | ||||||||||||
Embarq Corporation and subsidiary | ||||||||||||||||
Senior note | 7.995% | 2036 | 1,485 | 1,485 | ||||||||||||
Other | 9.000% | 2019 | 150 | 150 | ||||||||||||
Capital lease and other obligations(3) | Various | Various | 891 | 440 | ||||||||||||
Unamortized discounts and other, net | 23 | (133 | ) | |||||||||||||
Unamortized debt issuance costs | (350 | ) | (193 | ) | ||||||||||||
|
|
|
| |||||||||||||
Total long-term debt | 37,726 | 19,993 | ||||||||||||||
Less current maturities not associated with assets held for sale | (443 | ) | (1,503 | ) | ||||||||||||
Less capital lease obligations associated with assets held for sale | — | (305 | ) | |||||||||||||
|
|
|
| |||||||||||||
Long-term debt, excluding current maturities and capital leases obligations associated with assets held for sale | $ | 37,283 | 18,185 | |||||||||||||
|
|
|
| |||||||||||||
Debt of CenturyLink, Inc. and its Subsidiaries
At December 31, 2017, most of our outstanding consolidated debt had been incurred by CenturyLink, Inc. or one of the following four other primary borrowers or “borrowing groups,” each of which has borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries:
Qwest Corporation;
Qwest Capital Funding, Inc. (including its parent guarantor, Qwest Communications International Inc.);
Embarq Corporation; and
Level 3 Parent, LLC (including its finance subsidiary, Level 3 Financing, Inc.).
Each of these borrowers or borrowing groups has entered into one or more credit agreements with certain financial institutions or other institutional lenders, or issued senior notes. Certain of these debt instruments are described further below.
Level 3 Long-Term Debt Acquired
As a result of the acquisition of Level 3 on November 1, 2017, Level 3’spre-existing debt obligations, which consisted of senior notes and a term loan issued by Level 3 Parent, LLC and Level 3 Financing, Inc., are now included in our consolidated debt balances. Level 3 Financing, Inc.’s Tranche B 2024 Term Loan is further described below under “Term Loans and Certain Other Debt of Subsidiaries”. On the acquisition date, Level 3’s debt securities had (i) stated principal balances totaling $10.526 billion, (ii) fixed contractual interest rates on senior notes ranging from 5.125% to 6.125% (with a weighted average of 5.47%) and a floating interest rate on the term loan and (iii) maturities ranging from 2021 to 2026. In accounting for the Level 3 acquisition, we recorded Level 3’s debt securities at their estimated fair values, which totaled $10.716 billion as of November 1, 2017. In addition, we assumed Level 3’s capital lease obligations of $179 million. Our acquisition date fair value estimates were based primarily on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates. The amount by which the fair value of Level 3 debt securities exceeded their stated principal balances on the acquisition date of $190 million is being recognized as a reduction to interest expense over the remaining terms of the debt.
2017 CenturyLink Credit Agreement
As further described in Note 2—Acquisition of Level 3, CenturyLink, Inc. completed its acquisition of Level 3 on November 1, 2017. To finance a substantial portion of its acquisition of Level 3, on June 19, 2017, CenturyLink, Inc. caused its wholly-owned subsidiary, CenturyLink Escrow, LLC (the “Escrow Borrower”), to enter into a credit agreement (the “2017 CenturyLink Credit Agreement”) with, among others, Bank of America,
N.A., as administrative agent and collateral agent, initially providing for $9.945 billion in senior secured credit facilities (the “2017 Senior Secured Credit Facilities”). These facilities consist of the following:
a $2 billion revolving credit facility (“2017 Revolving Credit Facility”), which originally had 18 lenders, each with allocations ranging from $36.4 million to $167.8 million, which we initially drew upon on November 1, 2017;
a $1.575 billion senior secured Term Loan A credit facility, which originally had 17 lenders, each with commitments ranging from $28.6 million to $132.2 million, which we drew in full on November 1, 2017;
a $370 million senior secured Term LoanA-1 credit facility with CoBank, ACB, which we drew in full on November 1, 2017; and
a $6 billion senior secured Term Loan “B” credit facility, which we fullypre-funded the proceeds, net of a discount, into escrow on June 19, 2017 and released to us on November 1, 2017.
Loans under the Term Loan A andA-1 facilities and the 2017 Revolving Credit Facility bear interest at a rate equal to, at our option, the London Interbank Offered Rate (“LIBOR”) or the alternative base rate (each as defined in the 2017 CenturyLink Credit Agreement) plus an applicable margin between 2.25% to 3.00% per annum for LIBOR loans and 1.25% to 2.00% per annum for alternative base rate loans, depending on our then current total leverage ratio. Borrowings under the Term Loan B facility bore interest at 1.375% per annum through July 18, 2017 and at 2.75% per annum thereafter through November 1, 2017. Subsequent to November 1, 2017, borrowings under the Term Loan B facility bear interest at LIBOR plus 2.75% per annum. Loans under each of the term loan facilities require certain specified quarterly amortization payments and certain specified mandatory prepayments in connection with certain asset sales and debt issuances and out of excess cash flow, among other things, subject in each case to certain significant exceptions.
CenturyLink, Inc. used the proceeds of the borrowings under the 2017 Senior Secured Credit Facilities, together with other available funds (including $1.825 billion borrowed from Level 3), (i) to fund the cash portion of the consideration and transaction costs payable in connection with the Level 3 acquisition and (ii) to repay all indebtedness outstanding under its 2012 term loan. The 2017 Revolving Credit Facility and borrowings under the Term Loan A andA-1 facilities will mature on November 1, 2022. Borrowings under the Term Loan B facility will mature on January 31, 2025.
By virtue of merging the Escrow Borrower into CenturyLink, Inc. on November 1, 2017, CenturyLink, Inc. assumed all rights and obligations under the 2017 CenturyLink Credit Agreement, including the right to borrow funds under the 2017 Revolving Credit Facility on the terms and conditions specified in the 2017 CenturyLink Credit Agreement.
All of CenturyLink, Inc.‘s obligations under the 2017 Senior Secured Credit Facilities are guaranteed by certain of its subsidiaries. The guarantees by certain of those guarantors are secured by a first priority security interest in substantially all assets (including certain subsidiaries stock) directly owned by them, subject to certain exceptions and limitations.
The 2017 Revolving Credit Facility replaced CenturyLink, Inc.‘s 2012 revolving credit facility. A portion of the 2017 Revolving Credit Facility in an amount not to exceed $100 million is available for swingline loans, and a portion in an amount not to exceed $400 million is available for the issuance of letters of credit. In addition, on November 1, 2017, CenturyLink, Inc. discharged its 2012 term loan scheduled to mature in 2019 and entered into Term LoanA-1 with the same lender.
CenturyLink, Inc. is permitted under the 2017 CenturyLink Credit Agreement to request certain incremental borrowings subject to the satisfaction of various conditions and to certain other limitations. Any incremental borrowings would be subject to the same terms and conditions under the 2017 CenturyLink Credit Agreement.
Term Loans and Certain Other Debt of Subsidiaries
Qwest Corporation
In 2015, Qwest Corporation entered into a term loan in the amount of $100 million with CoBank, ACB. The outstanding unpaid principal amount of this term loan plus any accrued and unpaid interest is due on February 20, 2025. Interest is paid monthly based upon either the London Interbank Offered Rate (“LIBOR”) or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for base rate loans depending on Qwest Corporation’s then current senior unsecured long-term debt rating. At both December 31, 2017 and 2016, the outstanding principal balance on this term loan was $100 million.
Level 3 Financing, Inc.
At November 1, 2017 and December 31, 2017, Level 3 Financing, Inc. owed $4.611 billion under the Tranche B 2024 Term Loan, which matures on February 22, 2024. The Tranche B 2024 Term Loan carries an interest rate, in the case of base rate borrowings, equal to (i) the greater of the Prime Rate, the Federal Funds Effective Rate plus 50 basis points, or LIBOR plus 100 basis points (with all such terms and calculations as defined or further specified in the applicable credit agreement) plus (ii) 1.25% per annum. Any Eurodollar borrowings under the Tranche B 2024 Term Loan bear interest at LIBOR plus 2.25% per annum.
The Tranche B 2024 Term Loan requires certain specified mandatory prepayments in connection with certain asset sales and other transactions, subject to certain significant exceptions. The obligations of Level 3 Financing, Inc. under the Tranche B 2024 Term Loan are, subject to certain exceptions, secured by certain assets of Level 3 Parent, LLC and, subject to pending regulatory approvals, certain of its material domestic telecommunication subsidiaries. Also, Level 3 Parent, LLC has guaranteed and, upon receipt of pending regulatory approvals, certain of its subsidiaries will guarantee the obligations of Level 3 Financing, Inc. under the Tranche B 2024 Term Loan. Subject to the receipt of pending regulatory approvals, Level 3 Communications, LLC and its material domestic subsidiaries will guarantee and, subject to certain exceptions, will pledge certain of their assets to secure the obligations of Level 3 Financing, Inc. under the Tranche B 2024 Term Loan.
Embarq Subsidiaries
At December 31, 2017, two of our Embarq subsidiaries had outstanding first mortgage bonds. Each issue of these first mortgage bonds is secured by substantially all of the property, plant and equipment of the issuing subsidiary.
Revolving Letters of Credit
CenturyLink, Inc. maintains an uncommitted revolving letter of credit facility separate from the letter of credit facility included in the 2017 Revolving Credit Facility noted above. On November 1, 2017, this facility was amended to increase its size from $160 million to $225 million and to provide the lender with credit enhancements in the form of secured guarantees issued by certain CenturyLink subsidiaries. As of December 31, 2017 and 2016, CenturyLink, Inc.’s outstanding letters of credit under this credit facility totaled $104 million and $105 million, respectively.
As of December 31, 2017, Level 3 Parent, LLC had outstanding letters of credit or other similar obligations of approximately $36 million of which $30 million is collateralized by cash that is reflected on the consolidated balance sheets in restricted cash and securities.
Senior Notes
CenturyLink, Inc., Level 3 Financing, Inc., Level 3 Parent, LLC, Qwest Corporation, Qwest Capital Funding, Inc. and Embarq Corporation have each issued unsecured senior notes. All of these notes carry fixed
interest rates and all principal is due on the notes’ respective maturity dates, which rates and maturity dates are summarized in the table above. The senior notes issued by Level 3 Financing, Inc. are guaranteed by its parent, Level 3 Parent, LLC and another of its affiliates. The senior notes issued by Qwest Capital Funding, Inc. are guaranteed by its parent, Qwest Communications International Inc. Except for a limited number of senior notes issued by Qwest Corporation, the issuer generally can redeem the notes, at its option, in whole or in part, (i) pursuant to a fixed schedule ofpre-established redemption prices, (ii) pursuant to a “make whole” redemption price or (iii) under certain other specified limited conditions. Under certain circumstances in connection with a “change of control” of CenturyLink, Inc., it will be required to make an offer to repurchase each series of these senior notes (other than two of its older series of notes) at a price of 101% of the principal amount redeemed, plus accrued and unpaid interest. Also, under certain circumstances in connection with a “change of control” of Level 3 Parent, LLC, it, as well as Level 3 Financing, Inc., will be required to make an offer to repurchase each series of its outstanding senior notes at a price of 101% of the principal amount redeemed, plus accrued and unpaid interest.
New Issuances
2017
As described above under “2017 CenturyLink Credit Agreement”, on June 19, 2017, CenturyLink, Inc. caused one of its wholly-owned subsidiaries to enter into the 2017 CenturyLink Credit Agreement initially providing for $9.945 billion of senior secured credit facilities. Upon the execution of the 2017 CenturyLink Credit Agreement, the $6 billion Term Loan B credit facility was fully funded. On November 1, 2017, CenturyLink, Inc. assumed the obligations and borrowed additional sums under such credit agreement.
On April 27, 2017, Qwest Corporation issued $575 million aggregate principal amount of 6.75% Notes due 2057 and, on May 5, 2017, issued an additional $85 million aggregate principal amount of such notes pursuant to an over-allotment option in exchange for aggregate net proceeds, after deducting underwriting discounts and other expenses, of $638 million. All of the 6.75% Notes are senior unsecured obligations and may be redeemed by Qwest Corporation, in whole or in part, on or after June 15, 2022, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
2016
On August 22, 2016, Qwest Corporation issued $978 million aggregate principal amount of 6.5% Notes due 2056, including $128 million principal amount that was sold pursuant to an over-allotment option, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $946 million. All of the 6.5% Notes are unsecured obligations and may be redeemed by Qwest Corporation, in whole or in part, on or after September 1, 2021, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
On April 6, 2016, CenturyLink, Inc. issued $1 billion aggregate principal amount of 7.5% Notes due 2024, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $988 million. All of the 7.5% Notes are unsecured obligations and may be redeemed by CenturyLink, Inc., in whole or in part, on or after January 1, 2024, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date. At any time before January 1, 2024, the Notes are redeemable, in whole or in part, at CenturyLink, Inc.‘s option, at a redemption price equal to the greater of 100% of the principal amount of the Notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed, discounted to the redemption date in the manner described in the Notes, plus accrued and unpaid interest to the redemption date. In addition, at any time on or prior to April 1, 2019, CenturyLink, Inc. may redeem up to 35% of the aggregate principal amount of the Notes at a redemption price of 107.5% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of certain equity offerings. Under certain circumstances, CenturyLink, Inc. will be required to make an offer to repurchase the Notes at a price of 101% of the aggregate principal amount plus accrued and unpaid interest to the repurchase date.
On January 29, 2016, Qwest Corporation issued $235 million aggregate principal amount of 7% Notes due 2056, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $227 million. All of the 7% Notes are unsecured obligations and may be redeemed by Qwest Corporation, in whole or in part, on or after February 1, 2021, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
Repayments
2017
As described above under “2017 CenturyLink Credit Agreement”, on November 1, 2017, CenturyLink, Inc. repaid the outstanding principal amount of $319 million under its 2012 term loan.
On August 1, 2017, subsidiaries of Embarq Corporation paid at maturity the $72 million principal amount and accrued and unpaid interest due under their 8.77% Notes.
On June 15, 2017, CenturyLink, Inc. paid at maturity the $350 million principal and accrued and unpaid interest due under its 5.15% Notes.
On May 9, 2017, Qwest Corporation redeemed $125 million aggregate principal amount of the remaining $288 million of its 7.5% Notes due 2051, which resulted in an immaterial loss.
On May 4, 2017, Qwest Corporation redeemed all $500 million of its 6.5% Notes due 2017, which resulted in an immaterial loss.
On April 3, 2017, CenturyLink, Inc. paid at maturity the $500 million principal and accrued and unpaid interest due under its 6.00% Notes.
2016
On December 23, 2016, a subsidiary of Embarq Corporation redeemed $5 million of its 8.375% Notes due 2025, which resulted in an immaterial loss.
On September 19, 2016, a subsidiary of Embarq Corporation redeemed all of its 8.77% Notes due 2017, which was less than $4 million and resulted in an immaterial loss.
On September 15, 2016, Qwest Corporation redeemed $287 million of its 7.5% Notes due 2051, which resulted in a loss of $9 million.
On August 29, 2016, Qwest Corporation redeemed all $661 million of its 7.375% Notes due 2051, which resulted in a loss of $18 million.
On June 1, 2016, Embarq Corporation paid at maturity the $1.184 billion principal amount and accrued and unpaid interest due under its 7.082% Notes.
On May 2, 2016, Qwest Corporation paid at maturity the $235 million principal amount and accrued and unpaid interest due under its 8.375% Notes.
Aggregate Maturities of Long-Term Debt
Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized discounts, net and unamortized debt issuance costs) maturing during the following years:
| (Dollars in millions)(1)(2) | ||||
2018 | $ | 443 | ||
2019 | 638 | |||
2020 | 1,194 | |||
2021 | 3,109 | |||
2022 | 5,033 | |||
2023 and thereafter | 27,137 | |||
|
| |||
Total long-term debt | $ | 37,554 | ||
|
| |||
Interest Expense
Interest expense includes interest on total long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Interest expense: | ||||||||||||
Gross interest expense | $ | 1,559 | 1,372 | 1,364 | ||||||||
Capitalized interest | (78 | ) | (54 | ) | (52 | ) | ||||||
|
|
|
|
|
| |||||||
Total interest expense | $ | 1,481 | 1,318 | 1,312 | ||||||||
|
|
|
|
|
| |||||||
Covenants
CenturyLink, Inc.
With respect to the Term Loan A andA-1 facilities and the 2017 Revolving Credit Facility, the 2017 CenturyLink Credit Agreement requires us to maintain (i) a maximum total leverage ratio of not more than 5.00 to 1.00 between the closing date of the Level 3 acquisition and the second anniversary thereof and 4.75 to 1.00 thereafter and (ii) a minimum consolidated interest coverage ratio of at least 2.00 to 1.00, with such ratios being determined and calculated in the manner described in the 2017 CenturyLink Credit Agreement.
The 2017 Senior Secured Credit Facilities contain various representations and warranties and extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on our ability to declare or pay dividends, repurchase stock, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with its affiliates, dispose of assets and merge or consolidate with any other person.
The senior notes of CenturyLink, Inc. were issued under an indenture dated March 31, 1994. This indenture restricts our ability to (i) incur, issue or create liens upon the property of CenturyLink, Inc. and (ii) consolidate with or merge into, or transfer or lease all or substantially all of our assets to any other party. The indenture does not contain any provisions that are impacted by our credit ratings or that restrict the issuance of new securities in the event of a material adverse change to us. However, as indicated above under “Senior Notes”, CenturyLink, Inc. will be required to offer to purchase certain of its long-term debt securities issued under this indenture under certain circumstances in connection with a “change of control” of CenturyLink, Inc.
Level 3 Companies
The term loan and senior notes of Level 3 Parent, LLC and 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, dispose of assets and merge or consolidate with any other person. Also, as indicated above under “Senior Notes”, 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.
Qwest Companies
Under its term loan, Qwest Corporation must maintain a debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined in such term loan) ratio of not more than 2.85:1.0, as of the last day of each fiscal quarter for the four quarters then ended. The term loan also contains a negative pledge covenant, which generally requires Qwest Corporation to secure equally and ratably any advances under the term loan if it pledges assets or permit liens on its property for the benefit of other debtholders.
The senior notes of Qwest Corporation were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures contain restrictions on the incurrence of liens and the consummation of certain transactions substantially similar to the above-described covenants in CenturyLink, Inc.‘s March 31, 1994 indenture (but contain no mandatory repurchase provisions). The senior notes of Qwest Capital Funding, Inc. were issued under an indenture dated June 29, 1998 containing terms substantially similar to those set forth in Qwest Corporation’s indentures.
Embarq
Embarq’s senior note was issued pursuant to an indenture dated as of May 17, 2006. While Embarq is generally prohibited from creating liens on its property unless its senior notes are secured equally and ratably, Embarq can create liens on its property without equally and ratably securing its senior notes so long as the sum of all indebtedness so secured does not exceed 15% of Embarq’s consolidated net tangible assets. The indenture also contains restrictions on the consummation of certain transactions substantially similar to CenturyLink, Inc.’s above-described covenants (but without mandatory repurchase provision), as well as certain customary covenants to maintain properties and pay all taxes and lawful claims.
Impact of Covenants
The debt covenants applicable to CenturyLink, Inc. and its subsidiaries could materially adversely affect their ability to operate or expand their respective businesses, to pursue strategic transactions, or to otherwise pursue their plans and strategies. The covenants of the Level 3 companies may significantly restrict the ability of CenturyLink, Inc. to receive cash from the Level 3 companies, to distribute cash from the Level 3 companies to other of CenturyLink, Inc.’s affiliated entities, or to enter into other transactions among CenturyLink, Inc.’s wholly-owned entities.
Certain of the debt instruments of CenturyLink, Inc. and its subsidiaries contain cross payment default or cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.
The ability of CenturyLink, Inc. and its subsidiaries to comply with the financial covenants in their respective debt instruments could be adversely impacted by a wide variety of events, including unforeseen contingencies, many of which are beyond their control.
Compliance
At December 31, 2017, CenturyLink, Inc. believes it and its subsidiaries were in compliance with the provisions and covenants contained in their respective material debt agreements.
Guarantees
CenturyLink, Inc. does not guarantee the debt of any unaffiliated parties, but, as noted above, certain of its largest subsidiaries guarantee (i) its debt outstanding under the 2017 CenturyLink Credit Agreement and (ii) the outstanding term loans or senior notes issued by certain other subsidiaries. As further noted above, several of the subsidiaries guaranteeing the 2017 CenturyLink Credit Agreement have pledged substantially all of their assets to secure their respective guarantees.
Subsequent Events
On January 21, 2018, a subsidiary of Embarq Corporation redeemed all $13 million of its 8.77% Notes due 2019, which resulted in an immaterial loss.
On January 29, 2018, the 2017 CenturyLink Credit Agreement was amended to:
Add a lender to the 2017 Revolving Credit Facility and to increase CenturyLink, Inc.’s borrowing capacity thereunder to approximately $2.168 billion; and
Add a lender to the Term Loan A credit facility and to increase CenturyLink, Inc.’s borrowing capacity thereunder to approximately $1.707 billion.
In connection with this amendment, the new lender provided approximately $132 million of Term Loan A loan proceeds, which CenturyLink used, together with available cash, to reduce its borrowings under the 2017 Revolving Credit Facility.
The following table presents details of our accounts receivable balances:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Trade and purchased receivables | $ | 2,245 | 1,882 | |||||
Earned and unbilled receivables | 436 | 299 | ||||||
Other | 40 | 14 | ||||||
|
|
|
| |||||
Total accounts receivable | 2,721 | 2,195 | ||||||
Less: allowance for doubtful accounts | (164 | ) | (178 | ) | ||||
|
|
|
| |||||
Accounts receivable, less allowance | $ | 2,557 | 2,017 | |||||
|
|
|
| |||||
We are exposed to concentrations of credit risk from residential and business customers within our local service area, business customers outside of our local service area and from other telecommunications service providers. We generally do not require collateral to secure our receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for doubtful accounts:
| Beginning Balance | Additions | Deductions | Ending Balance | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
2017 | $ | 178 | 176 | (190 | ) | 164 | ||||||||||
2016 | $ | 152 | 192 | (166 | ) | 178 | ||||||||||
2015 | $ | 162 | 177 | (187 | ) | 152 | ||||||||||
Net property, plant and equipment is composed of the following:
| Depreciable Lives | As of December 31, | |||||||||
| 2017 | 2016 | |||||||||
| (Dollars in millions) | ||||||||||
Land | N/A | $ | 883 | 563 | ||||||
Fiber, conduit and other outside plant(1) | 15-45 years | 22,798 | 16,996 | |||||||
Central office and other network electronics(2) | 3-10 years | 18,538 | 13,768 | |||||||
Support assets(3) | 3-30 years | 7,586 | 6,623 | |||||||
Construction in progress(4) | N/A | 1,399 | 1,244 | |||||||
|
|
|
| |||||||
Gross property, plant and equipment | 51,204 | 39,194 | ||||||||
Accumulated depreciation | (24,352 | ) | (22,155 | ) | ||||||
|
|
|
| |||||||
Net property, plant and equipment | $ | 26,852 | 17,039 | |||||||
|
|
|
| |||||||
We recorded depreciation expense of $2.710 billion, $2.691 billion and $2.836 billion for the years ended December 31, 2017, 2016 and 2015, respectively.
Asset Retirement Obligations
At December 31, 2017, our asset retirement obligations balance was primarily related to estimated future costs of removing equipment from leased properties and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing buildings. Asset retirement obligations are included in other long-term liabilities on our consolidated balance sheets.
As of the Level 3 acquisition date, we recorded liabilities to reflect our preliminary estimates of fair values of Level 3’s asset retirement obligations. Our preliminary fair value estimates were determined using discounted cash flow method.
The following table provides asset retirement obligation activity:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Balance at beginning of year | $ | 95 | 91 | 107 | ||||||||
Accretion expense | 6 | 6 | 7 | |||||||||
Liabilities assumed in acquisition of Level 3 | 45 | — | — | |||||||||
Liabilities settled | (3 | ) | (2 | ) | (2 | ) | ||||||
Liabilities transferred to Cyxtera | (20 | ) | — | — | ||||||||
Change in estimate | (8 | ) | — | (21 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at end of year | $ | 115 | 95 | 91 | ||||||||
|
|
|
|
|
| |||||||
We revised our estimates for the cost of removal of network equipment, asbestos remediation, and other obligations by $8 million and $21 million, for the years ended December 31, 2017 and 2015, respectively. These revisions resulted in a reduction of the asset retirement obligation and offsetting reduction to gross property, plant and equipment, and revisions to assets specifically identified are recorded as a reduction to accretion expense. We did not revise our estimates for the cost of removal of network equipment, asbestos remediation, and other obligations during 2016.
Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to the loss of customers purchasing certain services.
We report severance liabilities within accrued expenses and other liabilities—salaries and benefits in our consolidated balance sheets and report severance expenses in selling, general and administrative expenses in our consolidated statements of operations. As described in Note 14—Segment Information, we do not allocate these severance expenses to our segments.
We have recognized liabilities to reflect our estimates of the fair values of the existing lease obligations for real estate which we have ceased using, net of estimated sublease rentals. As of the Level 3 acquisition date, we recorded liabilities to reflect our preliminary estimates of the fair values of the existing lease obligations for real estate for which we had ceased using, net of estimated sublease rentals. Our fair value estimates were determined using discounted cash flow methods. We recognize expense to reflect accretion of the discounted liabilities and periodically we adjust the expense when our actual subleasing experience differs from our initial estimates. We report the current portion of liabilities forceased-use real estate leases in accrued expenses and other liabilities-other and report the noncurrent portion in deferred credits and other liabilities-other in our consolidated balance sheets. We report the related expenses in selling, general and administrative expenses in our consolidated statements of operations. At December 31, 2017, the current and noncurrent portions of our leased real estate accrual were $11 million and $53 million, respectively. The remaining lease terms range from 0.16 years to 7.9 years, with a weighted average of 6.7 years.
Changes in our accrued liabilities for severance expenses and leased real estate were as follows:
| Severance | Real Estate | |||||||
| (Dollars in millions) | ||||||||
Balance at December 31, 2015 | $ | 14 | 80 | |||||
Accrued to expense | 173 | 4 | ||||||
Payments, net | (89 | ) | (20 | ) | ||||
Reversals and adjustments | — | 3 | ||||||
|
|
|
| |||||
Balance at December 31, 2016 | 98 | 67 | ||||||
|
|
|
| |||||
Accrued to expense | 42 | 4 | ||||||
Liabilities assumed in acquisition of Level 3 | 1 | 4 | ||||||
Payments, net | (108 | ) | (13 | ) | ||||
Reversals and adjustments | — | 2 | ||||||
|
|
|
| |||||
Balance at December 31, 2017 | $ | 33 | 64 | |||||
|
|
|
| |||||
Pension, Post-Retirement and Other Post-Employment Benefits
We sponsor various defined benefit pension plans (qualified andnon-qualified) which, in the aggregate, cover a substantial portion of our employees including legacy CenturyLink, legacy Qwest Communications International, Inc. (“Qwest”) and legacy Embarq employees. On December 31, 2015, we merged our existing qualified pension plans, which included merging the Qwest Pension Plan and Embarq Retirement Pension Plan into the CenturyLink Retirement Plan. The CenturyLink Retirement Plan was renamed the CenturyLink Combined Pension Plan (“Combined Plan”). Pension benefits for participants of the new Combined Plan who are represented by a collective bargaining agreement are based on negotiated schedules. All other participants’ pension benefits are based on each individual participant’s years of service and compensation. We also maintainnon-qualified pension plans for certain current and former highly compensated employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for certain eligible former employees. We use a December 31 measurement date for all our plans.
Pension Benefits
In connection with the acquisition of Level 3 Communications, Inc. on November 1, 2017, we assumed defined benefit pension plans sponsored by various Level 3 companies for their employees. Based on a valuation analysis, we recognized a $20 million liability on November 1, 2017 for the unfunded status of the Level 3 pension plans, reflecting projected benefit obligations of 167 million, in excess of the $147 million fair value of plan assets.
Current funding laws require a company with a pension shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Our funding policy for our Combined Plan is to make contributions with the objective of accumulating sufficient assets to pay all qualified pension benefits when due under the terms of the plan. The accounting unfunded status of our qualified pension plan was $2.004 billion and $2.352 billion as of December 31, 2017 and 2016, respectively.
We made a voluntary cash contribution to our qualified pension plan of $100 million in both 2017 and 2016, and paid $5 million and $7 million of benefits directly to participants of ournon-qualified pension plans in 2017 and 2016, respectively. Based on current laws and circumstances, we are not required to make any contributions to our qualified pension plan in 2018, but we currently expect to make a voluntary contribution of $100 million to the trust for our qualified pension plan in 2018. We estimate that in 2018 we will pay $5 million of benefits directly to participants of ournon-qualified pension plans.
As mentioned above, we assumed in the Level 3 acquisition certain contributory andnon-contributory employee pension plans, both qualified andnon-qualified plans (the “Level 3 Pensions”). At December 31, 2017, the fair value of the Level 3 Pensions’ plan assets was $147 million, and the associated benefit obligation was $167 million. We recognized the unfunded status of Level 3’s pension plans of $20 million on our consolidated balance sheet as of December 31, 2017, and the net periodic benefit expense of less than $1 million for the period November 1, 2017 to December 31, 2017, in our consolidated income statement for the year ended December 31, 2017. Due to the insignificant amount of these pension plans, we have predominantly excluded them from the remaining employee benefit disclosures in this Note.
Post-Retirement Benefits
In connection with our acquisition of Level 3 Communications, Inc. on November 1, 2017, we assumed post-retirement benefit plans sponsored by Level 3 Communications, L.L.C. and Continental Level 3, Inc. for certain of its current and former employees. Based on a valuation analysis, we recognized less than $1 million in liability for the unfunded status of Level 3’s post-retirement benefit plans.
Our post-retirement benefit plans provide post-retirement benefits to qualified retirees and allow (i) eligible employees retiring before certain dates to receive benefits at no or reduced cost and (ii) eligible employees retiring after certain dates to receive benefits on a shared cost basis. The post-retirement benefits not paid by the trusts are funded by us and we expect to continue funding these post-retirement obligations as benefits are paid. The accounting unfunded status of our qualified post-retirement benefit plan was $3.352 billion and $3.360 billion as of December 31, 2017 and 2016, respectively.
Assets in the post-retirement trusts have been substantially depleted as of December 31, 2016; however we will continue to pay certain post-retirement benefits through the trusts. No contributions were made to the post-retirement trusts in 2017 and 2016. Benefits not paid from the trusts are expected to be paid directly by us with available cash. In 2017, we paid $237 million of post-retirement benefits, net of participant contributions and direct subsidies. In 2018, we expect to pay $283 million of post-retirement benefits, net of participant contributions and direct subsidies. The increase in anticipated post-retirement benefit payments is the result of increased utilization coupled with a continued rise in the cost of care.
We expect our health care cost trend rate to range from 5.0% to 6.5% in 2018, 5.0% to 7.0% in 2019, 5.0% to 6.5% in 2020 and grading to 4.50% by 2025. Our post-retirement benefit cost, for certain eligible legacy Qwest retirees and certain eligible legacy CenturyLink retirees, is capped at a set dollar amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.
As mentioned above, we assumed in the Level 3 acquisition certain post-retirement plans. Though largely unfunded, these post-retirement plans, in the aggregate, are immaterial to our consolidated financial statements. Due to the insignificant amount of these post-retirement plans, we have predominantly excluded them from the remaining employee benefit disclosures in this Note.
A change of 100 basis points in the assumed initial health care cost trend rate would have had the following effects in 2017:
| 100 Basis Points Change | ||||||||||||||||
| Increase | (Decrease) | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||
Effect on the aggregate of the service and interest cost components of net periodic post-retirement benefit expense (consolidated statement of operations) | $ | 2 | (2 | ) | ||||||||||||
Effect on benefit obligation (consolidated balance sheet) | 60 | (57 | ) | |||||||||||||
Expected Cash Flows
The qualified pension,non-qualified pension and post-retirement health care benefit payments and premiums and life insurance premium payments are paid by us or distributed from plan assets. The estimated benefit payments provided below are based on actuarial assumptions using the demographics of the employee and retiree populations and have been reduced by estimated participant contributions.
| Pension Plans | Post-Retirement Benefit Plans | Medicare Part D Subsidy Receipts | ||||||||||
| (Dollars in millions) | ||||||||||||
Estimated future benefit payments: | ||||||||||||
2018 | $ | 1,031 | 293 | (7 | ) | |||||||
2019 | 973 | 280 | (7 | ) | ||||||||
2020 | 951 | 271 | (7 | ) | ||||||||
2021 | 929 | 262 | (7 | ) | ||||||||
2022 | 908 | 253 | (7 | ) | ||||||||
2023—2027 | 4,170 | 1,122 | (31 | ) | ||||||||
Net Periodic Benefit Expense
In 2016, we changed the method we use to estimate the service and interest components of net periodic benefit expense for pension and other postretirement benefit obligations. This change resulted in a decrease in the service and interest components in 2017 and 2016. Beginning in 2016, we utilized a full yield curve approach in connection with estimating these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows, as opposed to the single weighted-average discount rate derived from the yield curve that we have used in the past. We believe this change more precisely measures service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change did not affect the measurement of our total benefit obligations but lowered our annual net periodic benefit cost by $122 million and $149 million in 2017 and 2016, respectively, when compared topre-2016 methodology. This change was treated as a change in accounting estimate and accordingly, we did not adjust the amounts recorded in 2015.
The actuarial assumptions used to compute the net periodic benefit expense for our qualified pension,non-qualified pension and post-retirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.
Pension Plans | Post-Retirement Benefit Plans | |||||||||||||
2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||
Actuarial assumptions at beginning of year: | ||||||||||||||
Discount rate | 3.50% - 4.10% | 3.50% - 4.50% | 3.50% - 4.10% | 3.90% | 4.15% | 3.80% | ||||||||
Rate of compensation increase | 3.25% | 3.25% | 3.25% | N/A | N/A | N/A | ||||||||
Expected long-term rate of return on plan assets | 6.50% | 7.00% | 7.50% | 5.00% | 7.00% | 7.50% | ||||||||
Initial health care cost trend rate | N/A | N/A | N/A | 7.00% / 5.00% | 5.00% / 5.25% | 6.00% / 6.50% | ||||||||
Ultimate health care cost trend rate | N/A | N/A | N/A | 4.50% | 4.50% | 4.50% | ||||||||
Year ultimate trend rate is reached | N/A | N/A | N/A | 2025 | 2025 | 2025 | ||||||||
N/A—Not applicable
Net periodic benefit expense (income) for our qualified andnon-qualified pension plans includes the following components:
| Pension Plans Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Service cost | $ | 63 | 64 | 83 | ||||||||
Interest cost | 411 | 427 | 568 | |||||||||
Expected return on plan assets | (666 | ) | (732 | ) | (898 | ) | ||||||
Special termination benefits charge | — | 13 | — | |||||||||
Recognition of prior service (credit) cost | (8 | ) | (8 | ) | 5 | |||||||
Recognition of actuarial loss | 205 | 175 | 161 | |||||||||
|
|
|
|
|
| |||||||
Net periodic pension benefit expense (income) | $ | 5 | (61 | ) | (81 | ) | ||||||
|
|
|
|
|
| |||||||
Net periodic benefit expense for our post-retirement benefit plans includes the following components:
| Post-Retirement Plans Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Service cost | $ | 18 | 19 | 24 | ||||||||
Interest cost | 100 | 111 | 140 | |||||||||
Expected return on plan assets | (2 | ) | (7 | ) | (21 | ) | ||||||
Special termination benefits charge | — | 3 | — | |||||||||
Recognition of prior service cost | 20 | 20 | 19 | |||||||||
|
|
|
|
|
| |||||||
Net periodic post-retirement benefit expense | $ | 136 | 146 | 162 | ||||||||
|
|
|
|
|
| |||||||
We report service costs for our qualified pension,non-qualified pension and post-retirement benefit plans in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015. Additionally, a portion of the service cost is also allocated to certain assets under construction, which are capitalized and reflected as part of property, plant and equipment in our consolidated balance sheets. The remaining components of net periodic benefit expense (income) are reported in other income (expense), net in our consolidated statements of operations. In 2016, we announced plans to reduce our workforce, initially through voluntary severance packages and the balance through involuntary reductions, as a result we recognized aone-time charge of $16 million for special termination benefit enhancements paid to certain eligible employees upon voluntary retirement.
Benefit Obligations
The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2017 and 2016 and are as follows:
| Pension Plans | Post-Retirement Benefit Plans | |||||||||||
| December 31, | December 31, | |||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||
Actuarial assumptions at end of year: | ||||||||||||
Discount rate | 3.44% - 3.70% | 3.50% - 4.10% | 3.53% | 3.90% | ||||||||
Rate of compensation increase | 3.25% | 3.25% | N/A | N/A | ||||||||
Initial health care cost trend rate | N/A | N/A | 7.00% / 5.00% | 5.00% / 5.50% | ||||||||
Ultimate health care cost trend rate | N/A | N/A | 4.50% | 4.50% | ||||||||
Year ultimate trend rate is reached | N/A | N/A | 2025 | 2025 | ||||||||
N/A—Not applicable
In 2017, 2016 and 2015, we adopted the revised mortality tables and projection scales released by the Society of Actuaries (“SOA”), which decreased the projected benefit obligation of our benefit plans by $113 million, $268 million and $379 million, respectively. The change in the projected benefit obligation of our benefit plans was recognized as part of the net actuarial loss and is included in accumulated other comprehensive loss, a portion of which is subject to amortization over the remaining estimated life of plan participants, which was approximately 9 to 10 years as of December 31, 2017.
The following tables summarize the change in the benefit obligations for the pension and post-retirement benefit plans:
| Pension Plans Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation at beginning of year | $ | 13,301 | 13,349 | 15,042 | ||||||||
Service cost | 63 | 64 | 83 | |||||||||
Interest cost | 411 | 427 | 568 | |||||||||
Plan amendments | — | 2 | (100 | ) | ||||||||
Special termination benefits charge | — | 13 | — | |||||||||
Actuarial loss (gain) | 590 | 487 | (800 | ) | ||||||||
Benefits paid by company | (5 | ) | (7 | ) | (6 | ) | ||||||
Benefits paid from plan assets | (1,238 | ) | (1,034 | ) | (1,438 | ) | ||||||
|
|
|
|
|
| |||||||
Benefit obligation at end of year | $ | 13,122 | 13,301 | 13,349 | ||||||||
|
|
|
|
|
| |||||||
| Post-Retirement Benefit Plans Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Change in benefit obligation | ||||||||||||
Benefit obligation at beginning of year | $ | 3,413 | 3,567 | 3,830 | ||||||||
Service cost | 18 | 19 | 24 | |||||||||
Interest cost | 100 | 111 | 140 | |||||||||
Participant contributions | 54 | 57 | 57 | |||||||||
Direct subsidy receipts | 7 | 5 | 8 | |||||||||
Special termination benefits charge | — | 3 | — | |||||||||
Actuarial loss (gain) | 112 | (13 | ) | (148 | ) | |||||||
Benefits paid by company | (298 | ) | (191 | ) | (181 | ) | ||||||
Benefits paid from plan assets | (31 | ) | (145 | ) | (163 | ) | ||||||
|
|
|
|
|
| |||||||
Benefit obligation at end of year | $ | 3,375 | 3,413 | 3,567 | ||||||||
|
|
|
|
|
| |||||||
Our aggregate benefit obligation as of December 31, 2017, 2016 and 2015 was $16.497 billion, $16.714 billion and $16.916 billion, respectively.
Plan Assets
We maintain plan assets for our qualified pension plan and certain post-retirement benefit plans. The qualified pension plan’s assets are used for the payment of pension benefits and certain eligible plan expenses. The post-retirement benefit plan’s assets are used to pay health care benefits and premiums on behalf of eligible retirees and to pay certain eligible plan expenses. As discussed further above, the liquid plan assets in our post-retirement trust have been substantially depleted as of December 31, 2017. The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans’ assets, net of administrative expenses paid
from plan assets. The rate of return is determined by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysis of the long-term expectations of various third party investment management organizations. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.
The following tables summarize the change in the fair value of plan assets for the pension and post-retirement benefit plans:
| Pension Plans Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Change in plan assets | ||||||||||||
Fair value of plan assets at beginning of year | $ | 10,892 | 11,072 | 12,571 | ||||||||
Return on plan assets | 1,306 | 754 | (161 | ) | ||||||||
Employer contributions | 100 | 100 | 100 | |||||||||
Benefits paid from plan assets | (1,238 | ) | (1,034 | ) | (1,438 | ) | ||||||
|
|
|
|
|
| |||||||
Fair value of plan assets at end of year | $ | 11,060 | 10,892 | 11,072 | ||||||||
|
|
|
|
|
| |||||||
| Post-Retirement Benefit Plans Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Change in plan assets | ||||||||||||
Fair value of plan assets at beginning of year | $ | 53 | 193 | 353 | ||||||||
Return on plan assets | 1 | 5 | 3 | |||||||||
Benefits paid from plan assets | (31 | ) | (145 | ) | (163 | ) | ||||||
|
|
|
|
|
| |||||||
Fair value of plan assets at end of year | $ | 23 | 53 | 193 | ||||||||
|
|
|
|
|
| |||||||
Pension Plans: Our investment objective for the qualified pension plan assets is to achieve an attractive risk-adjusted return over time that will provide for the payment of benefits and minimize the risk of large losses. Our pension plan investment strategy is designed to meet this objective by broadly diversifying plan assets across numerous strategies with differing expected returns, volatilities and correlations. The pension plan assets have target allocations of 45% to interest rate sensitive investments and 55% to investments designed to provide higher expected returns than the interest rate sensitive investments. Interest rate sensitive investments include 30% of plan assets targeted primarily to long-duration investment grade bonds, 10% targeted to high yield and emerging market bonds and 5% targeted to diversified strategies, which primarily have exposures to global bonds, as well as some exposures to global stocks and commodities. Assets expected to provide higher returns than the interest rate sensitive assets include broadly diversified equity investments with targets of approximately 15% to U.S. equity markets and 15% tonon-U.S. developed and emerging markets. Approximately 7% is targeted to broadly diversified multi-asset class strategies that have the flexibility to adjust exposures to different asset classes. Approximately 10% is allocated to private markets investments including funds primarily invested in private equity, private debt and hedge funds. Real estate investments are targeted at 8% of plan assets. At the beginning of 2018, our expected annual long-term rate of return on pension assets before consideration of administrative expenses is assumed to be 7.0%. However, projected increases in PBGC (Pension Benefit Guaranty Corporation) premium rates have now become large enough to reduce the annual long-term expected return net of administrative expenses to 6.5%.
Ournon-qualified pension plans are not funded. We pay benefits directly to the participants of these plans.
Post-Retirement Benefit Plans: Our investment objective for the post-retirement benefit plans’ assets is to achieve an attractive risk-adjusted return and minimize the risk of large losses over the expected life of the assets. At the beginning of 2018, our expected annual long-term rate of return on post-retirement benefit plan assets is assumed to be 4.0%.
Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act of 1974, as amended, which requires diversification of assets and also generally prohibits defined benefit and welfare plans from investing more than 10% of their assets in securities issued by the sponsor company. At December 31, 2017 and 2016, the post-retirement benefit plans did not directly own any shares of our common stock or debt instruments. At December 31, 2017, the pension benefit plan directly held approximately $4 million of our equity securities and approximately $2 million of CenturyLink, Inc. debt securities. At December 31, 2016 the pension benefit plan held approximately $1 million of our debt securities.
Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The pension plan uses exchange traded futures and swaps to gain exposure to equity and interest rate markets consistent with target asset allocations and to reduce risk relative to measurement of the benefit obligation, which is sensitive to interest rate changes. Foreign exchange forward contracts are used to manage currency exposures. Credit default swaps are used to manage credit risk exposures in a cost effective and targeted manner relative to transacting with physical corporate fixed income securities. Options are currently used to manage interest rate exposure taking into account the implied volatility and current pricing of the specific underlying market instrument. Some derivative instruments subject the plans to counterparty risk. The external investment managers, along with Plan Management, monitor counterparty exposure and mitigate this risk by diversifying the exposure among multiple high credit quality counterparties, requiring collateral and limiting exposure by periodically settling contracts.
The gross notional exposure of the derivative instruments directly held by the pension benefit plan is shown below. The notional amount of the derivatives corresponds to market exposure but does not represent an actual cash investment. Our post-retirement plans were not invested in derivative instruments for the years ended December 31, 2017 or 2016.
| Gross Notional Exposure | ||||||||
| Pension Plan | ||||||||
| Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Derivative instruments: | ||||||||
Exchange-traded U.S. equity futures | $ | 256 | 104 | |||||
Exchange-traded Treasury and other interest rate futures | 1,830 | 1,813 | ||||||
Interest rate swaps | 137 | 260 | ||||||
Credit default swaps | 100 | 240 | ||||||
Equity index swaps | 1 | — | ||||||
Foreign exchange forwards | 293 | 778 | ||||||
Options | 259 | 206 | ||||||
Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For additional information on the fair value hierarchy, see Note 12—Fair Value Disclosure.
At December 31, 2017, we used the following valuation techniques to measure fair value for assets. There were no changes to these methodologies during 2017:
Level 1—Assets were valued using the closing price reported in the active market in which the individual security was traded.
Level 2—Assets were valued using quoted prices in markets that are not active, broker dealer quotations, net asset value of shares held by the plans and other methods by which all significant inputs were observable at the measurement date.
Level 3—Assets were valued using unobservable inputs in which little or no market data exists as reported by the respective institutions at the measurement date.
The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2017. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivables, pending trades and accrued expenses.
| Fair Value of Pension Plan Assets at December 31, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Investment grade bonds(a) | $ | 432 | 1,315 | — | $ | 1,747 | ||||||||||
High yield bonds(b) | — | 575 | 7 | 582 | ||||||||||||
Emerging market bonds(c) | 217 | 219 | 1 | 437 | ||||||||||||
U.S. stocks(e) | 1,030 | 2 | 3 | 1,035 | ||||||||||||
Non-U.S. stocks(f) | 706 | — | — | 706 | ||||||||||||
Private debt(i) | — | — | 15 | 15 | ||||||||||||
Multi-asset strategies(l) | 440 | — | — | 440 | ||||||||||||
Derivatives(m) | 2 | — | — | 2 | ||||||||||||
Cash equivalents and short-term investments(n) | — | 476 | 1 | 477 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments, excluding investments valued at NAV | $ | 2,827 | 2,587 | 27 | 5,441 | |||||||||||
|
|
|
|
|
| |||||||||||
Investments valued at NAV | 5,619 | |||||||||||||||
|
| |||||||||||||||
Total pension plan assets | $ | 11,060 | ||||||||||||||
|
| |||||||||||||||
| Fair Value of Post-Retirement Plan Assets at December 31, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Investment grade bonds(a) | $ | — | — | — | $ | — | ||||||||||
High yield bonds(b) | — | — | — | — | ||||||||||||
U.S. stocks(e) | 1 | — | — | 1 | ||||||||||||
Non-U.S. stocks(f) | — | — | — | — | ||||||||||||
Cash equivalents and short-term investments(n) | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments, excluding investments valued at NAV | $ | 1 | — | — | 1 | |||||||||||
|
|
|
|
|
| |||||||||||
Investments valued at NAV | 22 | |||||||||||||||
|
| |||||||||||||||
Total post-retirement plan assets | $ | 23 | ||||||||||||||
|
| |||||||||||||||
The tables below present the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2016. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivable, pending trades and accrued expenses.
| Fair Value of Pension Plan Assets at December 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Investment grade bonds(a) | $ | 420 | 1,404 | — | $ | 1,824 | ||||||||||
High yield bonds(b) | 7 | 597 | 11 | 615 | ||||||||||||
Emerging market bonds(c) | 212 | 212 | — | 424 | ||||||||||||
U.S. stocks(e) | 1,146 | 1 | — | 1,147 | ||||||||||||
Non-U.S. stocks(f) | 721 | 1 | — | 722 | ||||||||||||
Multi-asset strategies(l) | 389 | — | — | 389 | ||||||||||||
Cash equivalents and short-term investments(n) | — | 207 | — | 207 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments, excluding investments valued at NAV | $ | 2,895 | 2,422 | 11 | 5,328 | |||||||||||
|
|
|
|
|
| |||||||||||
Investments valued at NAV | 5,564 | |||||||||||||||
|
| |||||||||||||||
Total pension plan assets | $ | 10,892 | ||||||||||||||
|
| |||||||||||||||
| Fair Value of Post-Retirement Plan Assets at December 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Investment grade bonds(a) | $ | 1 | 2 | — | $ | 3 | ||||||||||
High yield bonds(b) | — | 1 | — | 1 | ||||||||||||
U.S. stocks(e) | 2 | — | — | 2 | ||||||||||||
Non-U.S. stocks(f) | 1 | — | — | 1 | ||||||||||||
Cash equivalents and short-term investments(n) | — | 5 | — | 5 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments, excluding investments valued at NAV | $ | 4 | 8 | — | 12 | |||||||||||
|
|
|
|
|
| |||||||||||
Investments valued at NAV | 41 | |||||||||||||||
|
| |||||||||||||||
Total post-retirement plan assets | $ | 53 | ||||||||||||||
|
| |||||||||||||||
The table below presents the fair value of plan assets valued at NAV by category for our pension and post-retirement plans at December 31, 2017 and 2016.
| Fair Value of Plan Assets Valued at NAV | ||||||||||||||||
| Pension Plans at December 31, | Post-Retirement Benefit Plans at December 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Investment grade bonds(a) | $ | 163 | 106 | — | — | |||||||||||
High yield bonds(b) | 483 | 521 | — | 1 | ||||||||||||
Emerging market bonds(c) | 14 | 6 | — | — | ||||||||||||
Diversified strategies(d) | 538 | 522 | — | 1 | ||||||||||||
U.S. stocks(e) | 73 | 58 | — | — | ||||||||||||
Non-U.S. stocks(f) | 627 | 560 | — | 1 | ||||||||||||
Emerging market stocks(g) | 98 | 76 | — | — | ||||||||||||
Private equity(h) | 460 | 506 | 10 | 14 | ||||||||||||
Private debt(i) | 374 | 369 | 1 | 1 | ||||||||||||
Market neutral hedge funds(j) | 769 | 739 | — | 1 | ||||||||||||
Directional hedge funds(j) | 636 | 657 | — | 1 | ||||||||||||
Real estate(k) | 903 | 926 | 1 | 8 | ||||||||||||
Multi-asset strategies(l) | 424 | 412 | — | — | ||||||||||||
Cash equivalents and short-term investments(n) | 57 | 106 | 10 | 13 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments valued at NAV | $ | 5,619 | 5,564 | 22 | 41 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
The plans’ assets are invested in various asset categories utilizing multiple strategies and investment managers. Interests in commingled funds are valued using the net asset value (“NAV”) per unit of each fund. The NAV reported by the fund manager is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. Commingled funds can be redeemed at NAV, generally within a year of the financial statement date. Investments in private funds, primarily limited partnerships, represent long-term commitments with a fixed maturity date and are also valued at NAV. Valuation inputs for these private fund interests are generally based on assumptions and other information not observable in the market. The assumptions and valuation methodologies of the pricing vendors, account managers, fund managers and partnerships are monitored and evaluated for reasonableness. Below is an overview of the asset categories, the underlying strategies and valuation inputs used to value the assets in the preceding tables:
(a)Investment grade bonds represent investments in fixed income securities as well as commingled bond funds comprised of U.S. Treasury securities, agencies, corporate bonds, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. Treasury securities are valued at the bid price reported in the active market in which the security is traded and are classified as Level 1. The valuation inputs of other investment grade bonds primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. The primary observable inputs include references to the new issue market for similar securities, the secondary trading markets and dealer quotes. Option adjusted spread models are utilized to evaluate securities such as asset backed securities that have early redemption features. These securities are classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying fixed income securities using the same valuation inputs previously described.
(b)High yield bonds represent investments in below investment grade fixed income securities as well as commingled high yield bond funds. The valuation inputs for the securities primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings. These securities are primarily classified as Level 2. Securities
whose valuation inputs are not based on observable market information are classified as Level 3. The commingled funds are valued at NAV based on the market value of the underlying high yield instruments using the same valuation inputs previously described.
(c)Emerging market bonds represent investments in securities issued by governments and other entities located in developing countries as well as registered mutual funds and commingled emerging market bond funds. The valuation inputs for the securities utilize observable market information and are primarily based on dealer quotes or a spread relative to the local government bonds. The registered mutual fund is classified as Level 1 while individual securities are primarily classified as Level 2. Securities whose valuation inputs are not based on observable market information are classified as Level 3. The commingled funds are valued at NAV based on the market value of the underlying emerging market bonds using the same valuation inputs previously described.
(d)Diversified strategies represent an investment in a commingled fund that primarily has exposures to global government, corporate and inflation linked bonds, global stocks and commodities. This asset category includes investments in a registered mutual fund which is classified at Level 1, and a commingled fund which is valued at NAV based on the market value of the underlying investments. The valuation inputs utilize observable market information including published prices for exchange traded securities, bid prices for government bonds, and spreads and yields available for comparable fixed income securities with similar credit ratings.
(e)U.S. stocks represent investments in stocks of U.S. based companies as well as commingled U.S. stock funds. The valuation inputs for U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are primarily classified as Level 1. Securities whose valuation inputs are not based on observable market information are classified as Level 3. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs previously described.
(f)Non-U.S. stocks represent investments in stocks of companies based in developed countries outside the U.S. as well as commingled funds. The valuation inputs fornon-U.S. stocks are based on the last published price reported on the major stock market on which the securities are traded and are primarily classified as Level 1. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs previously described.
(g)Emerging market stocks represent investments in commingled funds comprised of stocks of companies located in developing markets. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described previously for individual stocks.
(h)Private equity representsnon-public investments in domestic and foreign buy out and venture capital funds. Private equity funds are primarily structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The partnerships are valued at NAV using valuation methodologies that consider a range of factors, including but not limited to the price at which investments were acquired, the nature of the investments, market conditions, trading values on comparable public securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investments. These valuation methodologies involve a significant degree of judgment.
(i)Private debt representsnon-public investments in distressed or mezzanine debt funds and pension group insurance contracts. Pension group insurance contracts are valued based on actuarial assumptions, and are classified as Level 3. Mezzanine debt instruments are debt instruments that are subordinated to other debt issues and may include embedded equity instruments such as warrants. Private debt funds are primarily structured as limited partnerships and are valued at NAV according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines. The valuation of underlying fund investments are based on
factors including the issuer’s current and projected credit worthiness, the security’s terms, reference to the securities of comparable companies, and other market factors. These valuation methodologies involve a significant degree of judgment.
(j)Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low correlations to market fluctuations. These investments are typically combined with futures to achieve uncorrelated excess returns over various markets.Directional hedge funds—This asset category represents investments that may exhibit somewhat higher correlations to market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in diversified funds of funds. Hedge funds are valued at NAV based on the market value of the underlying investments which include publicly traded equity and fixed income securities and privately negotiated debt securities. The hedge funds are valued by third party administrators using the same valuation inputs previously described.
(k)Real estate represents investments in commingled funds and limited partnerships that invest in a diversified portfolio of real estate properties. These investments are valued at NAV according to the valuation policy of each fund or partnership, subject to prevailing accounting and other regulatory guidelines. The valuation inputs of the underlying properties are generally based on third-party appraisals that use comparable sales or a projection of future cash flows to determine fair value.
(l)Multi-asset strategies represent broadly diversified strategies that have the flexibility to tactically adjust exposures to different asset classes through time. This asset category includes investments in a registered mutual fund which is classified as Level 1 and a commingled fund which is valued at NAV based on the market value of the underlying investments.
(m)Derivatives include exchange traded futures contracts which are classified as Level 1, as well as privately negotiated over the counter swaps and options that are valued based on the change in interest rates or a specific market index and are classified as Level 2. The market values represent gains or losses that occur due to fluctuations in interest rates, foreign currency exchange rates, security prices, or other factors.
(n)Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are used to provide liquidity for the payment of benefits or other purposes. The valuation inputs of securities are based on a spread to U.S. Treasury Bills, the Federal Funds Rate, or London Interbank Offered Rate and consider yields available on comparable securities of issuers with similar credit ratings and are primarily classified as Level 2. The commingled funds are valued at NAV based on the market value of the underlying investments using the same valuation inputs described above.
Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign currency and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies with differing expected returns, volatilities and correlations. Risk is also broadly diversified across numerous market sectors and individual companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed, limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan assets could change materially depending upon the overall market volatility, which could affect the funded status of the plans.
The table below presents a rollforward of the pension plan assets valued using Level 3 inputs:
| Pension Plan Assets Valued Using Level 3 Inputs | ||||||||||||||||||||||||
| High Yield Bonds | Emerging Market Bonds | U.S. Stocks | Private Debt | Cash | Total | |||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 13 | 1 | — | — | — | 14 | |||||||||||||||||
Net transfers | (2 | ) | — | — | — | — | (2 | ) | ||||||||||||||||
Acquisitions | 1 | — | — | — | — | 1 | ||||||||||||||||||
Dispositions | (1 | ) | (1 | ) | — | — | — | (2 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at December 31, 2016 | 11 | — | — | — | — | 11 | ||||||||||||||||||
Net transfers | (1 | ) | — | — | 14 | — | 13 | |||||||||||||||||
Acquisitions | 2 | 1 | — | 1 | 1 | 5 | ||||||||||||||||||
Actual return on plan assets | (5 | ) | — | 3 | — | — | (2 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance at December 31, 2017 | $ | 7 | 1 | 3 | 15 | 1 | 27 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Certain gains and losses are allocated between assets sold during the year and assets still held atyear-end based on transactions and changes in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.
For the year ended December 31, 2017, the investment program produced actual gains on qualified pension and post-retirement plan assets of $1.307 billion as compared to expected returns of $668 million for a difference of $639 million. For the year ended December 31, 2016, the investment program produced actual losses on pension and post-retirement plan assets of $759 million as compared to the expected returns of $739 million for a difference of $20 million. The short-term annual returns on plan assets will almost always be different from the expected long-term returns and the plans could experience net gains or losses, due primarily to the volatility occurring in the financial markets during any given year.
Unfunded Status
The following table presents the unfunded status of the pensions and post-retirement benefit plans:
| Pension Plans | Post-Retirement Benefit Plans | |||||||||||||||
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Benefit obligation | $ | (13,122 | ) | (13,301 | ) | (3,375 | ) | (3,413 | ) | |||||||
Fair value of plan assets | 11,060 | 10,892 | 23 | 53 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Unfunded status | (2,062 | ) | (2,409 | ) | (3,352 | ) | (3,360 | ) | ||||||||
|
|
|
|
|
|
|
| |||||||||
Current portion of unfunded status | $ | (5 | ) | (6 | ) | (262 | ) | (236 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Non-current portion of unfunded status | $ | (2,057 | ) | (2,403 | ) | (3,090 | ) | (3,124 | ) | |||||||
The current portion of our post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other current liabilities-salaries and benefits.
Accumulated Other Comprehensive Loss-Recognition and Deferrals
The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2016, items recognized as a component of net periodic benefits expense in 2017,
additional items deferred during 2017 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2017. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
| As of and for the Years Ended December 31, | ||||||||||||||||||||
| 2016 | Recognition of Net Periodic Benefits Expense | Deferrals | Net Change in AOCL | 2017 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Accumulated other comprehensive loss: | ||||||||||||||||||||
Pension plans: | ||||||||||||||||||||
Net actuarial (loss) gain | $ | (3,148 | ) | 205 | 51 | 256 | (2,892 | ) | ||||||||||||
Prior service benefit (cost) | 62 | (8 | ) | — | (8 | ) | 54 | |||||||||||||
Deferred income tax benefit (expense) | 1,191 | (72 | ) | (12 | ) | (84 | ) | 1,107 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total pension plans | (1,895 | ) | 125 | 39 | 164 | (1,731 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Post-retirement benefit plans: | ||||||||||||||||||||
Net actuarial (loss) gain | (137 | ) | — | (113 | ) | (113 | ) | (250 | ) | |||||||||||
Prior service (cost) benefit | (127 | ) | 20 | — | 20 | (107 | ) | |||||||||||||
Deferred income tax benefit (expense) | 102 | (7 | ) | 27 | 20 | 122 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total post-retirement benefit plans | (162 | ) | 13 | (86 | ) | (73 | ) | (235 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total accumulated other comprehensive loss | $ | (2,057 | ) | 138 | (47 | ) | 91 | (1,966 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2015, items recognized as a component of net periodic benefits expense in 2016, additional items deferred during 2016 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2016. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
| As of and for the Years Ended December 31, | ||||||||||||||||||||
| 2015 | Recognition of Net Periodic Benefits Expense | Deferrals | Net Change in AOCL | 2016 | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Accumulated other comprehensive loss: | ||||||||||||||||||||
Pension plans: | ||||||||||||||||||||
Net actuarial (loss) gain | $ | (2,857 | ) | 175 | (466 | ) | (291 | ) | (3,148 | ) | ||||||||||
Prior service benefit (cost) | 72 | (8 | ) | (2 | ) | (10 | ) | 62 | ||||||||||||
Deferred income tax benefit (expense) | 1,070 | (67 | ) | 188 | 121 | 1,191 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total pension plans | (1,715 | ) | 100 | (280 | ) | (180 | ) | (1,895 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Post-retirement benefit plans: | ||||||||||||||||||||
Net actuarial (loss) gain | (147 | ) | — | 10 | 10 | (137 | ) | |||||||||||||
Prior service (cost) benefit | (147 | ) | 20 | — | 20 | (127 | ) | |||||||||||||
Deferred income tax benefit (expense) | 114 | (8 | ) | (4 | ) | (12 | ) | 102 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total post-retirement benefit plans | (180 | ) | 12 | 6 | 18 | (162 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total accumulated other comprehensive loss | $ | (1,895 | ) | 112 | (274 | ) | (162 | ) | (2,057 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The following table presents estimated items to be recognized in 2018 as a component of net periodic benefit expense of the pension,non-qualified pension and post-retirement benefit plans:
| Pension Plans | Post- Retirement Plans | |||||||
| (Dollars in millions) | ||||||||
Estimated recognition of net periodic (cost) benefit income in 2018: | ||||||||
Net actuarial loss | $ | (205 | ) | — | ||||
Prior service income (cost) | 8 | (20 | ) | |||||
Deferred income tax benefit | 48 | 4 | ||||||
|
|
|
| |||||
Estimated net periodic benefit expense to be recorded in 2018 as a component of other comprehensive (loss) income | $ | (149 | ) | (16 | ) | |||
|
|
|
| |||||
Medicare Prescription Drug, Improvement and Modernization Act of 2003
We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit expense.
Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expense for current employees was $341 million, $399 million and $381 million for the years ended December 31, 2017, 2016 and 2015, respectively. Union-represented employee benefits are based on negotiated collective bargaining agreements. Employees contributed $128 million, $127 million and $125 million for the years ended December 31, 2017, 2016 and 2015, respectively. Our group basic life insurance plans are fully insured and the premiums are paid by us.
401(k) Plans
We sponsor qualified defined contribution plans covering substantially all of our employees. Under these plans, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plans and by the Internal Revenue Service (“IRS”). Currently, we match a percentage of employee contributions in cash. At December 31, 2017 and 2016, the assets of the plans included approximately 7 million shares and 7 million shares, respectively, of our common stock all of which were the result of the combination of previous employer match and participant directed contributions. We recognized expenses related to these plans of $77 million, $79 million and $83 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Upon the November 1, 2017 closing of our acquisition of Level 3, we assumed various defined contribution plans covering substantially all eligible employees of Level 3. On December 31, 2017, we merged the Level 3 Communications, Inc. 401(k) Plan into the CenturyLink Dollar & Sense 401(k) Plan. The resulting plan covers substantially all eligiblenon-represented employees of the combined company in the US.
Deferred Compensation Plans
We sponsorednon-qualified deferred compensation plans for various groups that included certain of our current and former highly compensated employees. The value of liabilities related to these plans was not significant.
We maintain equity programs that allow our Board of Directors (through its Compensation Committee or our Chief Executive Officer as its delegate) to grant incentives to certain employees and our outside directors in any one or a combination of several forms, including incentive andnon-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and market and performance shares. Stock options generally expire ten years from the date of grant.
Acquisition of Level 3
Upon the November 1, 2017 closing of our acquisition of Level 3, and pursuant to the terms of the merger agreement, we replaced certain of Level 3’s share-based compensation awards with our share-based compensation awards. Specifically:
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 our common stock (and cash in lieu of fractional shares) with respect to each Level 3 share covered by such award (the “Converted RSU Awards”); and
each outstanding Level 3 restricted stock unit award granted on or after April 1, 2014 (other than these 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 aggregate fair value of the replaced Level 3 awards was $239 million, of which $103 million was attributable to service performed prior to the acquisition date and was included in the cost of the acquisition. The fair value of CenturyLink shares was determined based on the $18.99 closing price of our common stock on November 1, 2017. The remaining $137 million of the preliminary aggregate fair value of the replaced Level 3 awards was attributable to post-acquisition period and is being recognized as compensation expense, net of estimated forfeitures, over the remaining vesting period from 1 to 2 years.
Stock Options
The following table summarizes activity involving stock option awards for the year ended December 31, 2017:
| Number of Options | Weighted- Average Exercise Price | |||||||
| (in thousands) | ||||||||
Outstanding and Exercisable at December 31, 2016 | 3,008 | $ | 40.08 | |||||
Exercised | (12 | ) | 10.75 | |||||
Forfeited/Expired | (1,974 | ) | 46.82 | |||||
|
| |||||||
Outstanding and Exercisable at December 31, 2017 | 1,022 | 27.41 | ||||||
|
| |||||||
The aggregate intrinsic value of our options outstanding and exercisable at December 31, 2017 was less than $1 million. The weighted-average remaining contractual term for such options was 1.44 years.
During 2017, we received net cash proceeds of less than $1 million in connection with our option exercises. The tax benefit realized from these exercises was less than $1 million. The total intrinsic value of options exercised for the years ended December 31, 2017 and 2016, was less than $1 million each year. The total intrinsic value of options exercised for the year ended December 31, 2015 was $4 million.
Restricted Stock Awards
For equity based restricted stock awards that contain only service conditions for vesting (time-based awards), we calculate the award fair value based on the closing price of CenturyLink common stock on the accounting grant date. We also grant equity based awards that contain service conditions as well as additional market or performance conditions. For awards with service and market conditions, the award fair value is calculated using Monte-Carlo simulations. Awards with service as well as market or performance conditions specify a target number of shares for the award. Each recipient ultimately has the opportunity to receive between 0% and 200% of the target number of shares. For awards with service and market conditions, the percentage received is based on our total shareholder return over the three-year service period versus that of selected peer companies. For awards with service and performance conditions, the percentage received depends upon the attainment of two financial performance targets during the three-year service period.
Awards Granted in 2017
In 2017, we granted 6 million shares of restricted stock awards, of which 4.7 million shares contained only service conditions and 1.3 million target shares that contained service conditions and either market or performance conditions. The details of these grants are as follows:
During the first quarter of 2017, we granted 784 thousand shares of restricted stock to certain executive level employees as part of our long-term incentive program, of which 314 thousand shares contained only service conditions and will vest on a straight-line basis on February 21, 2018, 2019 and 2020. The remaining awards, 470 thousand target shares, contain service conditions and either market or performance conditions and are scheduled to vest on February 21, 2020.
During the first quarter of 2017, we also granted 2 million shares to certain key employees as part of our annual equity compensation program, of which 1.8 million shares contained only service conditions and will vest on a straight-line basis on February 20, 2018, 2019 and 2020. The remaining awards, 200 thousand target shares, contain service conditions and either market or performance conditions and are scheduled to vest on February 20, 2020.
During the second quarter of 2017, we granted 894 thousand shares to certain executive level employees as integration and retention awards related to the Level 3 acquisition, of which 647 thousand shares of the retention awards will vest on June 1, 2018, 2019 and 2020. The remaining retention awards, 125 thousand shares, will vest on December 15, 2018 and 2019. Integration awards, which contain service and performance conditions, specify a target number of shares for the award. Each recipient ultimately has the opportunity to receive from 80% to 120% of the target number of shares. Integration awards of 122 thousand target shares are scheduled to vest on December 15, 2018.
During the fourth quarter of 2017, we granted 948 thousand shares of restricted stock to certain executive level employees as part of our long-term equity retention program. Time-based awards totaled 493 thousand shares. The remaining awards, 455 thousand target shares, contain service conditions and either market or performance conditions are scheduled to vest on March 31, 2019 and November 1, 2020. We also granted 1.1 million shares to certain key employees as part of our special retention program. Of these, time-based awards totaled 911 thousand shares and will vest on November 1, 2019 and 2020. The remaining awards, 187 thousand shares, are scheduled to vest on November 1, 2018, 2019 and 2020.
Awards Granted in 2016
In 2016, we granted 3.8 million shares of restricted stock awards, of which 3.1 million shares contained only service conditions and 700 thousand target shares that contained service conditions and either market or performance conditions. The details of these grants are as follows:
During the first quarter of 2016, we granted 766 thousand shares of restricted stock to certain executive level employees as part of our long-term incentive program, of which 306 thousand contained only service conditions and will vest on a straight-line basis on February 23, 2017, 2018 and 2019. The remaining awards, 460 thousand target shares, contain service conditions and either market or performance conditions and are scheduled to vest on February 23, 2019.
During the first quarter of 2016, we also granted 1.9 million shares to certain key employees as part of our annual equity compensation program, of which 1.7 million contained only service conditions and will vest on a straight-line basis on February 25, 2017, 2018 and 2019. The remaining awards, 200 thousand target shares, contain service conditions and either market or performance conditions and are scheduled to vest on February 25, 2019. During the first and third quarter of 2016, we granted shares to certain key employees as part of our long-term equity retention program. These awards will vest over a three to seven year period with 113 thousand, 322 thousand and 209 thousand shares vesting on August 16, 2019, 2021 and 2023, respectively, and 22 thousand shares vesting on January 13, 2021 and 22 thousand shares vesting on January 13, 2023. The remaining awards granted throughout 2016 to certain other key employees and our outside directors were made as part of our equity compensation and retention programs. These awards require only service conditions for vesting and typically vest equally over a three year period.
Awards Granted in 2015
In 2015, we granted 2.9 million shares of restricted stock awards, of which 2.6 million shares contained only service conditions and 300 thousand target shares that contained service conditions and either market or performance conditions. The details of these grants are as follows:
During the first quarter of 2015, we granted 496 thousand shares of restricted stock to certain executive-level employees as part of our long-term incentive program, of which 198 thousand contained only service conditions and will vest on a straight-line basis on February 23, 2016, 2017 and 2018. The remaining awards, 298 thousand target shares, contain service conditions and market or performance conditions and are scheduled to vest on February 23, 2018.
At the end of the first quarter of 2015, we granted 1.2 million shares to certain key employees as part of our annual equity compensation program. These awards contained only service conditions and will vest on a straight-line basis on March 12, 2016, 2017 and 2018. During the third quarter of 2015 we granted shares to certain key employees as part of our long-term equity retention program. These awards will vest over a three to seven year period with 193 thousand, 423 thousand and 230 thousand shares vesting on August 14, 2018, 2020 and 2022, respectively, and 55 thousand shares vesting equally on August 14, 2017, 2019, and 2021. The remaining awards granted throughout 2015 to certain other key employees and our outside directors were made as part of our equity compensation and retention programs. These awards require only service conditions for vesting and typically vest equally over a three year period.
The following table summarizes activity involving restricted stock and restricted stock unit awards for the year ended December 31, 2017:
| Number of Shares | Weighted- Average Grant Date Fair Value | |||||||
| (in thousands) | ||||||||
Non-vested at December 31, 2016 | 5,948 | $ | 31.89 | |||||
Level 3 replacement awards | 12,530 | 18.99 | ||||||
Granted(1) | 5,223 | 22.02 | ||||||
Vested | (2,762 | ) | 28.55 | |||||
Forfeited | (1,165 | ) | 26.43 | |||||
|
| |||||||
Non-vested at December 31, 2017 | 19,774 | 21.90 | ||||||
|
| |||||||
During 2016, we granted 3.6 million shares of restricted stock and restricted stock unit awards at a weighted-average price of $30.83. During 2015, we granted 2.9 million shares of restricted stock and restricted stock unit awards at a weighted-average price of $31.83. The total fair value of restricted stock that vested during 2017, 2016 and 2015, was $60 million, $47 million and $59 million, respectively.
Compensation Expense and Tax Benefit
We recognize compensation expense related to our market and performance share-based awards with graded vesting that only have a service condition on a straight-line basis over the requisite service period for the entire award. Total compensation expense for all share-based payment arrangements for the years ended December 31, 2017, 2016 and 2015, was $111 million, $80 million and $73 million, respectively. Our tax benefit recognized in the consolidated statements of operations for our share-based payment arrangements for the years ended December 31, 2017, 2016 and 2015, was $28 million, $31 million and $28 million, respectively. At December 31, 2017, there was $240 million of total unrecognized compensation expense related to our share-based payment arrangements, which we expect to recognize over a weighted-average period of 1.9 years.
Basic and diluted earnings per common share for the years ended December 31, 2017, 2016 and 2015 were calculated as follows:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
(Dollars in millions, except per share amounts, shares in thousands) | ||||||||||||
Income (Numerator): | ||||||||||||
Net income | $ | 1,389 | 626 | 878 | ||||||||
Earnings applicable tonon-vested restricted stock | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Net income applicable to common stock for computing basic earnings per common share | 1,389 | 626 | 878 | |||||||||
|
|
|
|
|
| |||||||
Net income as adjusted for purposes of computing diluted earnings per common share | $ | 1,389 | 626 | 878 | ||||||||
|
|
|
|
|
| |||||||
Shares (Denominator): | ||||||||||||
Weighted average number of shares: | ||||||||||||
Outstanding during period | 635,576 | 545,946 | 559,260 | |||||||||
Non-vested restricted stock | (7,768 | ) | (6,397 | ) | (4,982 | ) | ||||||
|
|
|
|
|
| |||||||
Weighted average shares outstanding for computing basic earnings per common share | 627,808 | 539,549 | 554,278 | |||||||||
Incremental common shares attributable to dilutive securities: | ||||||||||||
Shares issuable under convertible securities | 10 | 10 | 10 | |||||||||
Shares issuable under incentive compensation plans | 875 | 1,120 | 805 | |||||||||
|
|
|
|
|
| |||||||
Number of shares as adjusted for purposes of computing diluted earnings per common share | 628,693 | 540,679 | 555,093 | |||||||||
|
|
|
|
|
| |||||||
Basic earnings per common share | $ | 2.21 | 1.16 | 1.58 | ||||||||
|
|
|
|
|
| |||||||
Diluted earnings per common share | $ | 2.21 | 1.16 | 1.58 | ||||||||
|
|
|
|
|
| |||||||
Our calculation of diluted earnings per common share excludes shares of common stock that are issuable upon exercise of stock options when the exercise price is greater than the average market price of our common stock. We also exclude unvested restricted stock awards that are antidilutive as a result of unrecognized compensation cost. Such shares averaged 4.7 million, 3.3 million and 3.1 million for 2017, 2016 and 2015, respectively.
Our financial instruments consist of cash, cash equivalents and restricted cash, accounts receivable, accounts payable and long-term debt, excluding capital lease and other obligations. Due to their short-term nature, the carrying amounts of our cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB.
We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:stockholders.
|
| |||
|
| ||||||
| C-36 | 2019 Proxy Statement | ||||||
| | |||||
Redemption. Our Board may redeem the Rights for $0.0001 per Right at any time before the Distribution Date. If our Board redeems any Rights, it must redeem all of the Rights. Once the Rights are redeemed, the only right of the holders of Rights will be to receive the redemption price of $0.0001 per Right. The following table presents the carrying amounts and estimated fair valuesredemption price will be adjusted if we have a stock split or stock dividends of our long-term debt, excluding capital leasecommon stock.
Anti-Dilution Provisions. Our Board may adjust the Exercise Price, the number of Preferred Shares issuable and other obligations, as well as the input level usednumber of outstanding Rights to determine the fair values indicated below:
| As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||||
| Input Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
Liabilities-Long-term debt, excluding capital lease and other obligations | 2 | $ | 36,835 | 36,402 | 19,553 | 19,639 | ||||||||||||||
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act significantly changes U.S. tax law. The Act reduces the U.S. corporate income tax rateprevent dilution that may occur from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.
Asstock dividend, a resultstock split, or a reclassification of the reduction inPreferred Shares or common stock.
Amendments. The terms of the U.S. corporate income tax rate from 35% to 21%, were-measured our net deferred tax liabilities at December 31, 2017 and recognized a provisional tax benefit of approximately $1.1 billion in our consolidated statement of operations for the year ended December 31, 2017.
The Act imposed aone-time repatriation tax on certain earnings of foreign subsidiaries. The Act also includes certain anti-abuse and base erosion provisions thatRights Agreement may impact the amounts of U.S. tax that we pay with respect to income earnedbe amended by our foreign subsidiaries. We have not yet been able to make a reasonable estimateBoard without the consent of the impact of these provisions and continue to account for these items based on our existing accounting under U.S. GAAP and the provisionsholders of the tax lawsRights. After the Distribution Date, our Board may not amend the agreement in a way that were in effect prior to the Act’s enactment.
On December 22, 2017, the SEC staff addressed the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effectsadversely affects holders of the Act. We have provisionally recognized the tax impacts related to there-measurementRights (other than an Acquiring Person, or an Affiliate or Associate of deferred tax assets and liabilities in the amount noted above in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from our provisional amount 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 by the time we file our 2017 U.S. corporate income tax return in the 4th quarter of 2018, although we cannot assure you of this.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Income tax expense was as follows: | ||||||||||||
Federal | ||||||||||||
Current | $ | 82 | 335 | 28 | ||||||||
Deferred | (988 | ) | 5 | 329 | ||||||||
|
|
|
|
|
| |||||||
State | ||||||||||||
Current | 21 | 27 | 40 | |||||||||
Deferred | 16 | 8 | 21 | |||||||||
|
|
|
|
|
| |||||||
Foreign | ||||||||||||
Current | 22 | 26 | 16 | |||||||||
Deferred | (2 | ) | (7 | ) | 4 | |||||||
|
|
|
|
|
| |||||||
Total income tax expense | $ | (849 | ) | 394 | 438 | |||||||
|
|
|
|
|
| |||||||
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Income tax (benefit) expense was allocated as follows: | ||||||||||||
Income tax (benefit) expense in the consolidated statements of operations: | ||||||||||||
Attributable to income | $ | (849 | ) | 394 | 438 | |||||||
Stockholders’ equity: | ||||||||||||
Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes | — | (2 | ) | (5 | ) | |||||||
Tax effect of the change in accumulated other comprehensive loss | 81 | (109 | ) | 59 | ||||||||
The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Percentage of pre-tax income) | ||||||||||||
Statutory federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of federal income tax benefit | 3.9 | % | 2.3 | % | 2.6 | % | ||||||
Change in liability for unrecognized tax position | 1.0 | % | 0.2 | % | 0.4 | % | ||||||
Tax reform | (209.8) | % | — | % | — | % | ||||||
Net foreign income taxes | (0.7) | % | 0.1 | % | 0.7 | % | ||||||
Foreign dividend paid to a domestic parent company | 0.2 | % | 1.8 | % | — | % | ||||||
Affiliate debt rationalization | — | % | — | % | (2.6) | % | ||||||
Research and development credits | (1.4) | % | (0.6) | % | (2.1) | % | ||||||
Tax impact on sale of data centers and colocation business | 5.0 | % | — | % | — | % | ||||||
Level 3 acquisition transaction costs | 6.0 | % | — | % | — | % | ||||||
Other, net | 3.6 | % | (0.2) | % | (0.7) | % | ||||||
|
|
|
|
|
| |||||||
Effective income tax rate | (157.2) | % | 38.6 | % | 33.3 | % | ||||||
|
|
|
|
|
| |||||||
The effective tax rate for the year ended December 31, 2017 reflects the benefit of approximately $1.1 billion from there-measurement of deferred taxes as noted above, a $27 million tax expense related to the
sale of our colocation business and $32 million tax impact ofnon-deductible transaction costs related to the Level 3 acquisition. The effective tax rate for the year ended December 31, 2016 reflects a tax impact of $18 million from an intercompany dividend payment from one of our foreign subsidiaries to its domestic parent company that was made as part of our corporate restructuring in preparation for the sale of our colocation business. The 2015 rate reflects a tax benefit of approximately $34 million related to affiliate debt rationalization, research and development tax credits of $28 million for 2011 through 2015 and a $16 million tax decrease due to changes in state taxes caused by apportionment changes, state tax rate changes and the changes in the expected utilization of net operating loss carryforwards (“NOLs”)Acquiring Person).
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Deferred tax assets | ||||||||
Post-retirement and pension benefit costs | $ | 1,321 | 2,175 | |||||
Net operating loss carryforwards | 3,951 | 473 | ||||||
Other employee benefits | 112 | 125 | ||||||
Other | 714 | 342 | ||||||
|
|
|
| |||||
Gross deferred tax assets | 6,098 | 3,115 | ||||||
Less valuation allowance | (1,341 | ) | (375 | ) | ||||
|
|
|
| |||||
Net deferred tax assets | 4,757 | 2,740 | ||||||
|
|
|
| |||||
Deferred tax liabilities | ||||||||
Property, plant and equipment, primarily due to depreciation differences | (2,935 | ) | (3,626 | ) | ||||
Goodwill and other intangible assets | (3,785 | ) | (2,577 | ) | ||||
Other | (16 | ) | — | |||||
|
|
|
| |||||
Gross deferred tax liabilities | (6,736 | ) | (6,203 | ) | ||||
|
|
|
| |||||
Net deferred tax liability | $ | (1,979 | ) | (3,463 | ) | |||
|
|
|
| |||||
Of the $1.979 billion and $3.463 billion net deferred tax liability at December 31, 2017 and 2016, respectively, $2.413 billion and $3.471 billion is reflected as a long-term liability and $434 million and $8 million is reflected as a net noncurrent deferred tax asset at December 31, 2017 and 2016, respectively.
At December 31, 2017, we had federal NOLs of $9.1 billion and state NOLs of $21 billion. If unused, the NOLs will expire between 2018 and 2033; however, no significant amounts expire until 2023. We also had foreign NOL carryforwards of $5.8 billion as a result of the Level 3 acquisition. At December 31, 2017, we had an immaterial amount of federal tax credits. Our acquisitions of Level 3, Qwest and SAVVIS, Inc. (“Savvis”) caused “ownership changes” within the meaning of Section 382 of the Internal Revenue Code (“Section 382”). As a result, our ability to use these NOLs and AMT credits are subject to annual limits imposed by Section 382. Despite this, we expect to use substantially all of these tax attributes to reduce our future federal tax liabilities, although the timing of that use will depend upon our future earnings and future tax circumstances.
We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2017, a valuation allowance of $1.341 billion was established as it is more likely than not that this amount of net operating loss, capital loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2017 and 2016 is primarily related to foreign and state NOL carryforwards. This valuation allowance increased by $966 million during 2017, primarily due to the acquisition of Level 3 and the related valuation allowances.
A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2017 and 2016 is as follows:
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Unrecognized tax benefits at beginning of year | $ | 16 | 15 | |||||
Assumed in the acquisition of Level 3 | 18 | — | ||||||
Tax position of prior periods netted against deferred tax assets assumed in the acquisition of Level 3 | 2 | — | ||||||
Increase in tax positions taken in the current year | 1 | 1 | ||||||
Increase in tax positions taken in the prior year | 3 | — | ||||||
|
|
|
| |||||
Unrecognized tax benefits at end of year | $ | 40 | 16 | |||||
|
|
|
| |||||
The total amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $66 million and $34 million at December 31, 2017 and 2016, respectively.
Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $56 million and $35 million at December 31, 2017 and 2016, respectively.
We, or at least one of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, ornon-U.S. income tax examinations by tax authorities for years before 2003. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.
Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $16 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.
In January 2017, we implemented a new organization structure designed to further strengthen our ability to attain our operational, strategic and financial goals. Prior to this reorganization, we operated and reported as two segments, business and consumer. As a result of this reorganization, we changed the name of the predecessor business segment to “enterprise” segment. Additionally, we also reassigned our information technology, managed hosting, cloud hosting and hosting area network services from our business segment to a newnon-reportable operating segment. We reported two segments, enterprise and consumer, from January 2017 through October 2017.
In connection with our acquisition of Level 3 (discussed further in Note 2—Acquisition of Level 3), effective November 1, 2017, we implemented a new organization structure and began managing our operations in two segments: business and consumer. Our consumer segment remains substantially unchanged under this reorganization, and our newly reorganized business segment includes the legacy CenturyLink enterprise segment operations and the legacy Level 3 operations. In addition, we reassigned our information technology, managed hosting, cloud hosting and hosting area network operations back into the business segment from the formernon-reportable operating segment. At December 31, 2017, we had the following two segments:
|
| 2019 Proxy Statement | C-37 | |||||||
|
Corporate Headquarters
|
The following table summarizes our segment results100 CenturyLink Drive
Monroe, Louisiana 71203
General Information: 318-388-9000
Transfer Agent
For address changes, stock transfers, name changes, registration changes, lost stock certificates and stock holdings, please contact:
Computershare Investor Services L.L.C.
Post Office Box 505000
Louisville, Kentucky 40233
1-800-969-6718
www.computershare.com/centurylink
Auditors
KPMG LLP
333 Texas Street, Suite 1900
Shreveport, Louisiana 71101
Investor Relations
Inquiries by securities analysts, investment professionals and shareholders about CenturyLink, Inc. common stock, including requests for 2017, 2016any SEC or other shareholder reports should be directed to:
Investor.relations@centurylink.com
318-340-5627
http://ir.centurylink.com
Website
Additional corporate information including company history, current and 2015 basedhistoric financials, Annual Report, and press releases, can be found on the segment categorization we were operating underCenturyLink Investor Relations Web Site at December 31, 2017.http://ir.centurylink.com/ir-home.
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Total segment revenues | $ | 16,924 | 16,766 | 17,171 | ||||||||
Total segment expenses | 9,390 | 9,081 | 9,025 | |||||||||
|
|
|
|
|
| |||||||
Total segment income | $ | 7,534 | 7,685 | 8,146 | ||||||||
|
|
|
|
|
| |||||||
Total margin percentage | 45 | % | 46 | % | 47 | % | ||||||
Business segment: | ||||||||||||
Revenues | $ | 11,220 | 10,704 | 10,977 | ||||||||
Expenses | 6,847 | 6,391 | 6,395 | |||||||||
|
|
|
|
|
| |||||||
Income | $ | 4,373 | 4,313 | 4,582 | ||||||||
|
|
|
|
|
| |||||||
Margin percentage | 39 | % | 40 | % | 42 | % | ||||||
Consumer segment: | ||||||||||||
Revenues | $ | 5,704 | 6,062 | 6,194 | ||||||||
Expenses | 2,543 | 2,690 | 2,630 | |||||||||
|
|
|
|
|
| |||||||
Income | $ | 3,161 | 3,372 | 3,564 | ||||||||
|
|
|
|
|
| |||||||
Margin percentage | 55 | % | 56 | % | 58 | % | ||||||
Product and Service CategoriesAnnual Report
We categorize our products, services and revenues amongAfter the following five categories:
|
|
|
|
|
|
Our operating revenues for our products and services are presented as follows for the years ended December 31, 2017, 2016 and 2015:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Business segment | ||||||||||||
IP & Data Services(1) | $ | 3,595 | 2,851 | 2,704 | ||||||||
Transport & Infrastructure(2) | 3,680 | 3,929 | 4,157 | |||||||||
Voice & Collaboration(3) | 3,294 | 3,284 | 3,429 | |||||||||
IT & Managed Services(4) | 651 | 640 | 687 | |||||||||
|
|
|
|
|
| |||||||
Total business segment revenues | 11,220 | 10,704 | 10,977 | |||||||||
|
|
|
|
|
| |||||||
Consumer segment | ||||||||||||
IP & Data Services(5) | 448 | 506 | 468 | |||||||||
Transport & Infrastructure(6) | 2,871 | 2,897 | 2,829 | |||||||||
Voice & Collaboration(3) | 2,385 | 2,659 | 2,897 | |||||||||
|
|
|
|
|
| |||||||
Total consumer segment revenues | 5,704 | 6,062 | 6,194 | |||||||||
|
|
|
|
|
| |||||||
Non-segment revenues | ||||||||||||
Regulatory revenues(7) | 732 | 704 | 729 | |||||||||
|
|
|
|
|
| |||||||
Totalnon-segment revenues | 732 | 704 | 729 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | $ | 17,656 | 17,470 | 17,900 | ||||||||
|
|
|
|
|
| |||||||
We recognize revenues in our consolidated statementsclose of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remiteach fiscal year, CenturyLink, Inc. submits an Annual Report on Form 10-K to the government agencies. The total amountSEC containing certain additional information about its business. A copy of such surcharges and transaction taxes that we included in revenues aggregatedthe 10-K report may be obtained without charge by addressing your request to $601 million, $572 million and $544 million for the years ended December 31, 2017, 2016 and 2015, respectively. These USF surcharges, where we record revenue, and transaction taxes are assigned to the products and services categories of each segments basedStacey W. Goff, Secretary, CenturyLink, Inc., 100 CenturyLink Drive, Monroe, Louisiana 71203, or by visiting our website at www.centurylink.com.
Common Stock
CenturyLink common stock is traded on the underlying revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.
Allocations of Revenues and Expenses
Our segment revenues include all revenues from our IP and data services, transport and infrastructure services, voice and collaboration, colocation and security services and IT and managed services as described in more detail above. Our segment revenues are based upon each customer’s classification. We report our segment revenues based upon all services provided to that segment’s customers. Our segment expenses include specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are (i) directly associated with specific segment customers or activities, and (ii) allocated expenses which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses. We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the chief operating decision maker (“CODM”) by segment. Generally speaking, severance expenses, restructuring expenses and certain centrally managed administrative functions (such as finance, information technology, legal and human resources) are not assigned to our segments. Interest expense is also excluded from segment results because we manage our financing on a consolidated basis and have not allocated assets or debt to specific segments. Other income and expense items are not monitored as a part of our segment operations and are therefore excluded from our segment results.
The following table reconciles segment income to net income for the years ended December 31, 2017, 2016 and 2015:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Total segment income | $ | 7,534 | 7,685 | 8,146 | ||||||||
Regulatory revenues | 732 | 704 | 729 | |||||||||
Depreciation and amortization | (3,936 | ) | (3,916 | ) | (4,189 | ) | ||||||
Non-segment expenses | (2,321 | ) | (2,140 | ) | (2,107 | ) | ||||||
Other expenses, net | (1,469 | ) | (1,313 | ) | (1,263 | ) | ||||||
|
|
|
|
|
| |||||||
Income before income tax expense | 540 | 1,020 | 1,316 | |||||||||
Income tax benefit (expense) | 849 | (394 | ) | (438 | ) | |||||||
|
|
|
|
|
| |||||||
Net income | $ | 1,389 | 626 | 878 | ||||||||
|
|
|
|
|
| |||||||
We do not have any single customer that provides more than 10% of our consolidated total operating revenues. Approximately 2% of our consolidated total operating revenues come from customers located outsideAs of the U.S. Approximately 10%record date, we had [●] shares of our consolidated total assetscommon stock and approximately 10%[7,018] shares of our consolidated long-lived assets are located outsideSeries L preferred stock issued and outstanding. There were [●] shareholders of the U.S.
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | ||||||||||||||||
| (Dollars in millions, except per share amounts) | ||||||||||||||||||||
2017 | ||||||||||||||||||||
Operating revenues | $ | 4,209 | 4,090 | 4,034 | 5,323 | 17,656 | ||||||||||||||
Operating income | 631 | 367 | 487 | 524 | 2,009 | |||||||||||||||
Net income | 163 | 17 | 92 | 1,117 | 1,389 | |||||||||||||||
Basic earnings per common share | 0.30 | 0.03 | 0.17 | 1.26 | 2.21 | |||||||||||||||
Diluted earnings per common share | 0.30 | 0.03 | 0.17 | 1.26 | 2.21 | |||||||||||||||
2016 | ||||||||||||||||||||
Operating revenues | $ | 4,401 | 4,398 | 4,382 | 4,289 | 17,470 | ||||||||||||||
Operating income | 688 | 647 | 593 | 405 | 2,333 | |||||||||||||||
Net income | 236 | 196 | 152 | 42 | 626 | |||||||||||||||
Basic earnings per common share | 0.44 | 0.36 | 0.28 | 0.08 | 1.16 | |||||||||||||||
Diluted earnings per common share | 0.44 | 0.36 | 0.28 | 0.08 | 1.16 | |||||||||||||||
During the first quarter of 2017, we recognized $10 million of expenses related to our acquisition of Level 3 followed by acquisition-related expenses of $18 million, $37 million and $206 million in the second, third and fourth quarters of 2017, respectively. During the first quarter of 2017, depreciation and amortization expense of $50 million was not recognized on colocation assets held for sale. During the second quarter, we recognized a combined loss of $119 million resulting from the sale of the colocation business and data centersCenturyLink, CenturyLink, Inc. and the accounting treatmentCenturyLink logos are either registered service marks or service marks of the failed-sale-leaseback. During the second quarterCenturyLink, Inc. and/or one of 2017, we recognized aone-time depreciation charge of $44 million related to the failed-sale-leaseback accounting. During the third and fourth quarters of 2017, we recognized $44 million and $20 million, respectively, of interest expense related to CenturyLink, Inc.‘s $6 billion secured term loan utilized in the acquisition of Level 3. In the fourth quarter of 2017, we recognized a tax benefit of approximately $1.1 billion due to the change in the federal corporate tax rate from 35% to 21%.
During the fourth quarter of 2016, we recognized $164 million of severance expenses and otherone-time termination benefits associated with our workforce reductions and $52 million of expenses related to our pending acquisition of Level 3.
We are vigorously defending against all of the matters described below (excluding those referred to under the heading “Hurricane Damage”). As a matter of course, we are prepared to both litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities. In this Note, when we refer to a class action as “putative” it is because a class has been alleged, but not certified in that matter. We have established accrued liabilities for these matters described below where losses are deemed probable and reasonably estimable.
Shareholder Class Action Suit
CenturyLink and certain members of the CenturyLink Board of Directors have been named as defendants in a putative shareholder class action lawsuit filed on January 11, 2017 in the 4th Judicial District Court of the State of Louisiana, Ouachita Parish, captioned Jeffery Tomasulo v. CenturyLink, Inc., et al. The complaint asserts, among other things, that the members of CenturyLink’s Board allegedly breached their fiduciary duties to the CenturyLink shareholders in approving the Level 3 merger agreement and, more particularly, that: the consideration that CenturyLink agreed to pay to Level 3 stockholders in the transaction is allegedly unfairly high; the CenturyLink directors allegedly had conflicts of interest in negotiating and approving the transaction; and the
disclosures set forth in our preliminary joint proxy statement/prospectus filed in December 2016 are insufficient in that they allegedly fail to contain material information concerning the transaction. The complaint seeks, among other things, a declaration that the members of the CenturyLink Board have breached their fiduciary duties, corrective disclosure, rescissory or other damages and equitable relief, including rescission of the transaction. On February 13, 2017, the parties entered into a memorandum of understanding providing for the settlement of the lawsuit. The proposed settlement is subject to court approval, among other conditions, and the amount of the settlement is not material to our consolidated financial statements.
Retiree Benefits Suit
In William Douglas Fulghum, et al. v. Embarq Corporation, et al., filed on December 28, 2007its Affiliates in the United States District Court forand/or other countries. Any other service names, product names, company names or logos included herein are the Districttrademarks or service marks of Kansas, a group of retirees filed a class action lawsuit challenging the decision to make certain modifications in retiree benefits programs relating to life insurance, medical insurance and prescription drug benefits, generally effective January 1, 2006 and January 1, 2008 (which, at the time of the modifications, were expected to reduce estimated future expenses for the subject benefits by more than $300 million). Defendants include Embarq, certain of its benefit plans, its Employee Benefits Committee and the individual plan administrator of certain of its benefits plans. Additional defendants include Sprint Nextel and certain of its benefit plans. The court certified classes on the claims for vested benefits and age discrimination, but rejected class certification on the claims for breach of fiduciary duty. On October 14, 2011, the Fulghum lawyers filed a new, related lawsuit, Abbott et al. v. Sprint Nextel et al. InAbbott, approximately 1,500 plaintiffs alleged breach of fiduciary duty in connection with the changes in retiree benefits that were at issue inFulghum. After extensive district court proceedings inFulghum, and an interlocutory appeal to the United States Court of Appeals for the Tenth Circuit, defendants prevailed in 2015 on all age discrimination claims and on the majority of claims for vested benefits. The district court inFulghum subsequently granted judgment in favor of defendants on all remaining vested benefits claims, and in July 2016 ordered that any affected class members could appeal this ruling. No appeal was taken, and all claims for vested benefits thus have lapsed. On August 31, 2016, the parties reached a settlement in principle on all remaining claims inFulghum andAbbott. Since then, a settlement agreement has been finalized and, per its terms, the settlement funds have been distributed to class members. The settlement payments were not material to our consolidated financial statements.
Switched Access Disputes
Subsidiaries of CenturyLink, Inc. are among hundreds of companies involved in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated in the United States District Court for the Northern District of Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers (“LECs”) collect from interexchange carriers (“IXCs”) for IXCs’ use of LEC’s access services. In the lawsuits, IXCs, including Sprint Communications Company L.P. (“Sprint”) and various affiliates of Verizon Communications Inc. (“Verizon”), assert that federal and state laws bar LECs from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices that are routed through an IXC. Some of these IXCs have asserted claims seeking refunds of payments for access charges previously paid and relief from future access charges.
In November 2015, the federal court agreed with the LECs and rejected the IXCs’ contention that federal law prohibits these particular access charges, and also allowed the IXCs to refilestate-law claims. Since then, many of the LECs and IXCs have filed revised pleadings and additional motions, which remain pending. Separately, some of the defendants, including CenturyLink, Inc.‘s LECs, have petitioned the FCC to address these issues on an industry-wide basis.
As both an IXC and a LEC, we both pay and assess significant amounts of the charges in question. The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, are currently not predictable. If we are required to stop assessing these charges or to pay refunds of any such charges, our financial results could be negatively affected.their respective owners.
State Tax Suits
CenturyLink, Inc. and several of its subsidiaries are defendants in lawsuits filed over the past few years in the Circuit Court of St. Louis County, Missouri by numerous Missouri municipalities alleging underpayment of taxes. These municipalities are seeking, among other things, (i) a declaratory judgment regarding the extent of our obligations to pay certain business license and gross receipts taxes and (ii) a monetary award of back taxes covering 2007 to the present, plus penalties and interest. In a February 2017 ruling in connection with one of these pending cases, the court entered into a final order awarding plaintiffs $4 million and broadening the tax base on a going forward basis. We filed a notice of appeal on March 3, 2017. We expect the outcome of our appeal to reduce our ultimate exposure, although we can provide no assurances to this effect. In a June 9, 2017 ruling in connection with another one of these pending cases, the court made findings which, if not overturned, will result in a tax liability to us well in excess of the contingent liability we have established. Following further proceedings at the district court, we plan to file an appeal and continue to vigorously defend against these claims. For a variety of reasons, we expect the outcome of our appeal to significantly reduce our ultimate exposure, although we can provide no assurances to this effect.
Billing Practices Suits
In June 2017, a former employee filed an employment lawsuit against us claiming that she was wrongfully terminated for alleging that we charged some of our retail customers for products and services they did not authorize. Starting shortly thereafter and continuing since then, and based in part on the allegations made by the former employee, a series of consumer and shareholder putative class actions were filed against us, and we received several shareholder derivative demands. In July 2017, the Minnesota Attorney General also filed a civil suit on behalf of the Minnesota consumers alleging that we engaged in improper sales and billing practices. The filing of additional related lawsuits is possible. The consumer putative class actions have been transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings. The shareholder putative class actions have been consolidated into a single action that currently is pending in U.S. District Court for the Western District of Louisiana. In addition, a separate, related class action was filed in U.S. District Court for the Southern District of New York purportedly on behalf of persons who purchased certain of our Senior Notes. This class action suit has been transferred to the U.S. District Court for the Western District of Louisiana.
In late June 2017, the Board of Directors formed a special committee of outside directors to investigate improper sales and billing practices and related matters. In late 2017, the special committee concluded its review and issued its key findings. Among other things, the committee found that (i) our investment in consumer sales monitoring was insufficient, (ii) our ordering and billing software contributed to customer confusion and (iii) systems and human errors contributed to inaccurate billing. In August 2017, the Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands. The investigation of the special litigation committee is ongoing.
Pending Litigation Matters Assumed in Level 3 Acquisition
Peruvian Tax Litigation
Beginning in 2005, one of Level 3’s Peruvian subsidiaries received a number of assessments for tax, penalties and interest for calendar years 2001 and 2002. Peruvian tax authorities (“SUNAT”) took the position that the Peruvian subsidiary incorrectly documented its importations resulting in additional income tax withholding and value-added taxes (“VAT”). The total amount of the asserted claims, including potential interest and penalties, was $26 million, consisting of $3 million for income tax withholding in connection with the import of services for calendar years 2001 and 2002, $7 million for VAT in connection with the import of services for calendar years 2001 and 2002, and $16 million in connection with the disallowance of VAT credits for periods beginning in 2005. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, the total amount of exposure is $15 million at December 31, 2017.
Level 3 challenged the 2002 tax period 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 tax period assessments in the government’s favor, while denying a portion of the assessment on procedural grounds. Level 3 then appealed the Tribunal’s decision to the judicial court in Peru. After further development of the record, the first judicial level decided the central issue in favor of Level 3. SUNAT and Level 3 filed cross-appeals. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, Level 3 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 year 2001 tax period assessments in the government’s favor, while denying a portion of the assessment on procedural grounds. Level 3 appealed that decision to the judicial court in Peru. After further development of the record, the first judicial court issued a ruling against Level 3. In June 2017, Level 3 filed an appeal with the court of appeal. An oral hearing took place before the court of appeals on October 18, 2017. In November 2017, the court of appeals issued a decision affirming the lower court’s decision and Level 3 filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. That appeal is pending.
In December 2013, SUNAT initiated an audit of calendar year 2001. In June 2014, Level 3 was served with SUNAT’s assessments of the 2001 VAT credits declared null by the Tribunal and the corresponding fine. In July 2014, Level 3 challenged these assessments by filing administrative claims before SUNAT. In January 2015, SUNAT rejected the administrative claims, thereby confirming the assessments. Level 3 filed an appeal with the Tribunal in February 2015. In May 2015, the Tribunal notified Level 3 of its administrative resolution declaring the assessments and corresponding fines null. The time for SUNAT to appeal this resolution has closed. Under local practice, notification of an appeal can take several months. Counsel confirmed in the first quarter of 2016 that SUNAT has not filed an appeal to the resolution. Nevertheless, SUNAT retains the right to reissue the assessments declared null or start a new audit. However, Level 3 is under no obligation to provide additional information and any fine issued by SUNAT based on the same information that it has already used in the past would be declared null.
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 Level 3’s 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 Level 3 or termination of service relationships. Level 3 is vigorously defending itself against the asserted claims, which aggregate to approximately $17 million at December 31, 2017.
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 Level 3’s Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing movable properties (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. Level 3 has 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 Level 3 has appealed those decisions to the judicial courts. In October 2012 and June 2014, Level 3 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 Level 3 appealed this decision to the second administrative level.
Level 3 is vigorously contesting all such assessments in both states and, in particular, views the assessment of ICMS on revenue from leasing movable properties to be without merit. Nevertheless, Level 3 believes it is reasonably possible that these assessments could result in a loss of up to $53 million at December 31, 2017 in excess of the accruals established for these matters.
Other Level 3 Matters
Level 3 has recently been notified 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 Level 3, 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.
Level 3 is evaluating its defenses to the claims. At this time, Level 3 does not believe it is probable Level 3 will incur a material loss. If, contrary to its expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
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. Level 3 is fully cooperating in the government’s investigations in this matter.
Other Proceedings and Disputes
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third party tort actions.
We are currently defending several patent infringement lawsuits asserted against us bynon-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 that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.
Hurricane Damage
During the third quarter of 2017, multiple hurricanes struck portions of United States, which caused damage to our facilities and disruption of our services in certain areas of multiple states. We are still in the process of assessing the full extent of the damage. However, based on our current assessment, we estimate that expenditures required for the restoration of our network and physical plant may range from $20 million to $25 million, including repairs and equipment replacement. In addition, Level 3 incurred damage to certain of its facilities from multiple hurricanes, and estimate expenditures required for the restoration of their network and physical plant of $6 million, including repairs and equipment replacement. These damage estimates are subject to many uncertainties and may change materially as we complete physical surveys.
The hurricanes did not have a significant impact on our financial condition or results of operations as of and for the year ended December 31, 2017, as the majority of the capital and repair expenditures will be recorded in the future periods as we incur the costs.
The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our forward-looking statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us. For more information, see “Risk Factors—Risks Relating to Legal and Regulatory Matters—Our pending legal proceedings could have a material adverse impact on our financial condition and operating results, on the trading price of our securities and on our ability to access the capital markets” in Item 1A of our Annual Report on Form10-K for the year ended December 31, 2017.
Environmental Contingencies
In connection with our largely historical operations, we have responded to or been notified of potential environmental liability at approximately 200 properties. We are engaged in addressing or have liquidated environmental liabilities at many of those properties. We could potentially be held liable, jointly, or severally, and without regard to fault, for the costs of investigation and remediation of these sites. The discovery of additional environmental liabilities or changes in existing environmental requirements could have a material adverse effect on our business.
Capital Leases
We lease certain facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense in our consolidated statements of operations. Payments on capital leases are included in repayments of long-term debt, including current maturities in our consolidated statements of cash flows.
The tables below summarize our capital lease activity:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (Dollars in millions) | ||||||||||||
Assets acquired through capital leases | $ | 35 | 45 | 17 | ||||||||
Depreciation expense | 50 | 70 | 96 | |||||||||
Cash payments towards capital leases | 48 | 58 | 89 | |||||||||
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Assets included in property, plant and equipment | $ | 342 | 705 | |||||
Accumulated depreciation | 153 | 351 | ||||||
The future annual minimum payments under capital lease arrangements as of December 31, 2017 were as follows:
| Future Minimum Payments(1) | ||||
| (Dollars in millions) | ||||
Capital lease obligations: | ||||
2018 | $ | 56 | ||
2019 | 45 | |||
2020 | 32 | |||
2021 | 25 | |||
2022 | 22 | |||
2023 and thereafter | 203 | |||
|
| |||
Total minimum payments | 383 | |||
Less: amount representing interest and executory costs | (117 | ) | ||
|
| |||
Present value of minimum payments | 266 | |||
Less: current portion | (40 | ) | ||
|
| |||
Long-term portion | $ | 226 | ||
|
| |||
Operating Leases
CenturyLink leases various equipment, office facilities, retail outlets, switching facilities and other network sites. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initialnon-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2017, 2016 and 2015, our gross rental expense was $550 million, $482 million and $467 million, respectively. We also received sublease rental income for the years ended December 31, 2017, 2016 and 2015 of $13 million, $12 million and $12 million, respectively.
At December 31, 2017, our future rental commitments for operating leases were as follows:
| Future Minimum Payments | ||||
| (Dollars in millions) | ||||
2018 | $ | 666 | ||
2019 | 533 | |||
2020 | 467 | |||
2021 | 367 | |||
2022 | 326 | |||
2023 and thereafter | 2,116 | |||
|
| |||
Total future minimum payments(1) | $ | 4,475 | ||
|
| |||
Purchase Commitments
We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $953 million at December 31, 2017. Of this amount, we expect to purchase $343 million in 2018, $265 million in 2019 through 2020, $103 million in 2021 through 2022 and $242 million in 2023 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2017.
Assets Held for Sale
Assets held for sale includes several assets that we expect to sell within the next twelve months. On January 22, 2018, we entered into an agreement to sell a block of Internet Protocol Addresses for aggregate consideration of $68 million, which is to be paid in two equal installments. In addition, the U.S. Department of Justice (“DOJ”) approved our acquisition of Level 3 subject to conditions of a consent decree on October 2, 2017, which requires the combined company to divest certain Level 3 metro network assets in the markets located in Albuquerque, New Mexico; Boise, Idaho; and Tucson, Arizona and to divest dark fiber connecting 30 specified city-pairs across the United States in the form of an Indefeasible Right of Use agreement. As of the date of our Annual Report on Form10-K for the year ended December 31, 2017, we have signed two letters of intent that the DOJ is reviewing.
Other Current Assets
The following table presents details of other current assets in our consolidated balance sheets:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Prepaid expenses | $ | 294 | 206 | |||||
Income tax receivable | 258 | 51 | ||||||
Materials, supplies and inventory | 128 | 134 | ||||||
Deferred activation and installation charges | 128 | 101 | ||||||
Other | 133 | 55 | ||||||
|
|
|
| |||||
Total other current assets | $ | 941 | 547 | |||||
|
|
|
| |||||
Selected Current Liabilities
Current liabilities reflected in our consolidated balance sheets include accounts payable and other current liabilities as follows:
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in millions) | ||||||||
Accounts payable | $ | 1,555 | 1,179 | |||||
|
|
|
| |||||
Other current liabilities: | ||||||||
Accrued rent | $ | 34 | 31 | |||||
Legal contingencies | 45 | 30 | ||||||
Other | 265 | 152 | ||||||
|
|
|
| |||||
Total other current liabilities | $ | 344 | 213 | |||||
|
|
|
| |||||
Included in accounts payable at December 31, 2017 and 2016, were (i) $36 million and $56 million, respectively, representing book overdrafts and (ii) $225 million and $196 million, respectively, associated with capital expenditures.
As of December 31, 2017, approximately 28% of our employees were members of various bargaining units represented by the Communication Workers of America (“CWA”) and the International Brotherhood of Electrical Workers (“IBEW”). We believe that relations with our employees continue to be generally good. Less than 1,000 of our employees were subject to collective bargaining agreements that expired in 2017 and, as of December 31, 2017, were being renegotiated. Inmid-2017, we reached new agreements with the CWA District 7 and IBEW Local 206, which represented at December 31, 2017 approximately 10,000, or 71%, of our represented employees. The new agreements were effective June 18, 2017 and will expire on March 8, 2020 and include terms substantially similar to those contained in the prior agreements. Approximately 1,000 of our employees are subject to collective bargaining agreements that are scheduled to expire in 2018.
(19) Accumulated Other Comprehensive Loss
Information Relating to 2017
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheet by component for the year ended December 31, 2017:
| Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Balance at December 31, 2016 | $ | (1,895 | ) | (162 | ) | (60 | ) | (2,117 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss) before reclassifications | 39 | (86 | ) | 31 | (16 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive income | 125 | 13 | — | 138 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net current-period other comprehensive income (loss) | 164 | (73 | ) | 31 | 122 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2017 | $ | (1,731 | ) | (235 | ) | (29 | ) | (1,995 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the year ended December 31, 2017:
Year Ended December 31, 2017 | Decrease (Increase) in Net Income | Affected Line Item in Consolidated Statement of Operations | ||||||
| (Dollars in millions) | ||||||||
Amortization of pension & post-retirement plans(1) | ||||||||
Net actuarial loss | $ | 205 | Other income (expense), net | |||||
Prior service cost | 12 | Other income (expense), net | ||||||
|
| |||||||
Total before tax | 217 | |||||||
Income tax benefit | (79 | ) | Income tax expense | |||||
|
| |||||||
Net of tax | $ | 138 | ||||||
|
| |||||||
Information Relating to 2016
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheet by component for the year ended December 31, 2016:
| Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Total | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
Balance at December 31, 2015 | $ | (1,715 | ) | (180 | ) | (39 | ) | (1,934 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
Other comprehensive income (loss) before reclassifications | (280 | ) | 6 | (22 | ) | (296 | ) | |||||||||
Amounts reclassified from accumulated other comprehensive income | 100 | 12 | 1 | 113 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net current-period other comprehensive income (loss) | (180 | ) | 18 | (21 | ) | (183 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2016 | $ | (1,895 | ) | (162 | ) | (60 | ) | (2,117 | ) | |||||||
|
|
|
|
|
|
|
| |||||||||
The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the year ended December 31, 2016:
Year Ended December 31, 2016 | Decrease (Increase) in Net Loss | Affected Line Item in Consolidated Statement of Operations | ||||||
| (Dollars in millions) | ||||||||
Amortization of pension & post-retirement plans(1) | ||||||||
Net actuarial loss | $ | 175 | Other income (expense), net | |||||
Prior service cost | 12 | Other income (expense), net | ||||||
|
| |||||||
Total before tax | 187 | |||||||
Income tax benefit | (75 | ) | Income tax expense | |||||
Insignificant items | $ | 1 | ||||||
|
| |||||||
Net of tax | $ | 113 | ||||||
|
| |||||||
Our Board of Directors declared the following dividends payable in 2017 and 2016:
Date Declared | Record Date | Dividend Per Share | Total Amount | Payment Date | ||||||||||||
| (in millions) | ||||||||||||||||
November 14, 2017 | 11/27/2017 | $ | 0.540 | $ | 577 | 12/11/2017 | ||||||||||
August 22, 2017 | 9/5/2017 | 0.540 | 296 | 9/15/2017 | ||||||||||||
May 24, 2017 | 6/5/2017 | 0.540 | 297 | 6/16/2017 | ||||||||||||
February 21, 2017 | 3/3/2017 | 0.540 | 295 | 3/17/2017 | ||||||||||||
November 15, 2016 | 11/28/2016 | 0.540 | 294 | 12/12/2016 | ||||||||||||
August 23, 2016 | 9/2/2016 | 0.540 | 295 | 9/16/2016 | ||||||||||||
May 18, 2016 | 5/31/2016 | 0.540 | 294 | 6/14/2016 | ||||||||||||
February 23, 2016 | 3/4/2016 | 0.540 | 295 | 3/18/2016 | ||||||||||||
The declaration of dividends is solely at the discretion of our Board of Directors, which may change or terminate our dividend practice at any time for any reason without prior notice. On February 21, 2018, our Board of Directors declared a dividend of $0.54 per share.
* * * * * * * * * *
q IF YOU HAVE NOT VOTED VIA THE INTERNETOR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q
Preliminary Proxy — CENTURYLINK, INC.Materials
dated March 25, 2019;
Subject to Completion
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting: The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com E68739-P17214 CENTURYLINK, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Glen F. Post, IIIJeffrey K. Storey and Stacey W. Goff, or either of them, proxies for the undersigned, with full power of substitution, to represent the undersigned and to vote all of the shares of common stock and voting preferred stock (collectively, the “Voting Shares”) of CenturyLink, Inc. (the “Company”) that the undersigned is entitled to vote at the annual meeting of shareholders of the Company to be held on May 23, 2018,22, 2019, and at any and all adjournments thereof (the “Meeting”).
In addition to serving as a Proxy, this card will also serve as instructions to Computershare Investor Services L.L.C. (the “Agent”) to vote in the manner designated on the reverse side hereof the shares of the Company’s common stock held as of April 6, 2018March 28, 2019 in the name of the Agent and credited to any plan account of the undersigned in accordance with the Company’s dividend reinvestment plan. Upon the Company’s timely receipt of this Proxy, properly executed, all of your Voting Shares, including any held in the name of the Agent, will be voted as specified.
With respect to each matter listed on the reverse side, the Board of Directors recommends that you vote (i) FOR Items 1 through 4,5, and (ii) AGAINST Items 5(a) and 5(b),Item 6, each of which is described more fully in the Company’s proxy statement for the Meeting. If you properly execute and return this Proxy but fail to provide specific directions with respect to any of the matters listed on the reverse side, all of your votes will be voted in accordance with these recommendations with respect to such matters.
(Please (Please See Reverse Side)
|
Electronic Voting Instructions
Available 24 hours a day, 7 days a week!
Instead of mailing your proxy, you may choose one ofSCAN TO VIEW MATERIALS & VOTE w CENTURYLINK, INC. VOTE BY INTERNET - www.proxyvote.com or scan the voting methods outlined below to vote your proxy.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted byQR Barcode above 100 CENTURYLINK DRIVE Use the Internet or telephone must be receivedto transmit your voting instructions and for electronic delivery of information. Vote MONROE, LA 71203 by 1:00 a.m., Central11:59 p.m. Eastern Time on May 23, 2018.
|
21, 2019 for shares held directly. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions. Vote by telephone
q IF YOU HAVE NOT VOTED VIA THE INTERNETmeeting, go to the “Register for Meeting” link at www.proxyvote.com. TO VOTE, MARK BLOCKS BELOW IN BLUE OR TELEPHONE, FOLD ALONG THE PERFORATION, BLACK INK AS FOLLOWS: E68738-P17214 KEEP THIS PORTION FOR YOUR RECORDS THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. DETACH AND RETURN THE BOTTOMTHIS PORTION IN THE ENCLOSED ENVELOPE. qONLY CENTURYLINK, INC. The Board of Directors recommends you vote FOR the following: For Against Abstain 1. Elect 13 directors. 1a. Martha H. Bejar 1b. Virginia Boulet The Board of Directors recommends you vote FOR proposals 2, For Against Abstain 3, 4 and 5. 1c. Peter C. Brown 2. Ratify the appointment of KPMG LLP as our independent auditor for 2019. 1d. Kevin P. Chilton 3. Amend our Articles of Incorporation to increase our authorized shares of common stock. 1e. Steven T. Clontz 4. Ratify our NOL Rights Plan. 1f. T. Michael Glenn 5. Advisory vote to approve our executive compensation. 1g. W. Bruce Hanks The Board of Directors recommends you vote AGAINST proposal 6. For Against Abstain 1h. Mary L. Landrieu 6. Shareholder proposal regarding our lobbying activities, if properly presented at the meeting. 1i. Harvey P. Perry FOR YOUR VOTE TO BE COUNTED UNDER THIS PROXY CARD, WE MUST RECEIVE THIS CARD, PROPERLY COMPLETED, BY 11:59 P.M. 1j. Glen F. Post, III EASTERN TIME ON MAY 21, 2019. NOTE: Such other business as may properly come before the meeting or 1k. Michael J. Roberts any adjournment thereof. If you plan to attend the meeting and would like directions, please visit our website, http://ir.centurylink.com. 1l. Laurie A. Siegel 1m. Jeffrey K. Storey Please sign exactly as name appears on the certificate or certificates representing shares to be voted by this proxy. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date
| ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||
|
| For | Against | Abstain | For | Against | Abstain | |||||||||||||||
| 2. | Ratify the appointment of KPMG LLP as our independent auditor for 2018. | ☐ | ☐ | ☐ | 3. | Approve our 2018 Equity Incentive Plan. | ☐ | ☐ | ☐ | |||||||||||
| 4. | Advisory vote to approve our executive compensation. | ☐ | ☐ | ☐ | 5(a). | Shareholder proposal regarding our lobbying activities. | ☐ | ☐ | ☐ | |||||||||||
| 5(b). | Shareholder proposal regarding our billing practices. | ☐ | ☐ | ☐ | 6. | In their discretion to vote upon such other business as may properly come before the Meeting. | ||||||||||||||
q IF YOU HAVE NOT VOTED VIA THE INTERNETOR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q
Voting Instruction Card — CENTURYLINK, INC.
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting: The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com E68737-Z74760 CENTURYLINK DOLLARS & SENSE 401(k) PLAN
CENTURYLINK UNION 401(k) PLAN
VOTING INSTRUCTIONS The undersigned, acting as a participant and a “named fiduciary” in either of the above-referenced retirement plans (collectively, the “Plans”), hereby directs The Northern Trust Company (the “Trustee”), as directed trustee of the Plans’ trust (the “Trust”), to vote at the annual meeting of shareholders of CenturyLink, Inc. (the “Company”) to be held on May 23, 2018,22, 2019, and any and all adjournments thereof (the “Meeting”), in the manner designated herein, the number of shares of the Company’s common stock credited to the account of the undersigned maintained under either of the Plans on the matters set forth on the reverse side hereof and more fully described in the Company’s proxy statement for the Meeting. If no instructions are furnished by the undersigned, the Trustee will vote unvoted shares and unallocated shares, if any, held in the Trust (collectively, “Undirected Shares”) in the same proportion as voted shares regarding each of the matters set forth on the reverse side hereof, except as otherwise provided in accordance with applicable law. Under the Trust, plan participants are deemed to act as “named fiduciaries” to the extent of their authority to direct the voting of shares held in their accounts and their proportionate share of Undirected Shares.
The undersigned hereby directs the Trustee to authorize the Company’s proxies to vote in their discretion upon such other business as may properly come before the Meeting. With respect to each matter listed on the reverse side, the Board of Directors of the Company recommends that you vote (i) FOR Items 1 through 5, and (ii) AGAINST Item 6 listed on the reverse side, each of which is described more fully in the Company’s proxy statement for the Meeting. Upon the Trustee’s timely receipt of these instructions, properly executed, the undersigned’s shares will be voted in the manner directed. If the undersigned properly executes and returns these instructions but fails to provide specific directions with respect to any of the matters listed on the reverse side, the undersigned’s shares will be voted in accordance with the Board’s recommendations with respect to such matters.
SCAN TO VIEW MATERIALS & VOTE w CENTURYLINK, INC. VOTE BY INTERNET - www.proxyvote.com or scan the QR Barcode above 100 CENTURYLINK DRIVE Use the Internet to transmit your voting instructions and for electronic delivery of information. Vote MONROE, LA 71203 by 11:59 p.m. Eastern Time on May 19, 2019 for shares held in a Plan. Have your voting instruction card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, voting instruction cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions. Vote by 11:59 p.m. Eastern Time on May 19, 2019 for shares held in a Plan. Have your voting instruction card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your voting instruction card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. SHAREHOLDER MEETING REGISTRATION To vote and/or attend the meeting, go to the “Register for Meeting” link at www.proxyvote.com. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: E68736-Z74760 KEEP THIS PORTION FOR YOUR RECORDS THIS VOTING INSTRUCTION CARD IS VALID ONLY WHEN SIGNED AND DATED. DETACH AND RETURN THIS PORTION ONLY CENTURYLINK, INC. The Board of Directors recommends you vote FOR the following: 1. Elect 13 directors. For Against Abstain 1a. Martha H. Bejar 1b. Virginia Boulet The Board of Directors recommends you vote FOR proposals 2, For Against Abstain 3, 4 and 5. 1c. Peter C. Brown 2. Ratify the appointment of KPMG LLP as our independent auditor for 2019. 1d. Kevin P. Chilton 3. Amend our Articles of Incorporation to increase our authorized shares of common stock. 1e. Steven T. Clontz 4. Ratify our NOL Rights Plan. 1f. T. Michael Glenn 5. Advisory vote to approve our executive compensation. 1g. W. Bruce Hanks The Board of Directors recommends you vote AGAINST proposal 6. For Against Abstain 1h. Mary L. Landrieu 6. Shareholder proposal regarding our lobbying activities, if properly presented at the meeting. 1i. Harvey P. Perry NOTE: Such other business as may properly come before the meeting or any adjournment thereof. If you plan to attend the meeting and would like directions, please visit our website, http://ir.centurylink.com. 1j. Glen F. Post, III TO BE COUNTED, THE TRUSTEE MUST RECEIVE THIS CARD, 1k. Michael J. Roberts PROPERLY COMPLETED, BY 1:00 A.M. CENTRAL11:59 P.M. EASTERN TIME ON MAY 21, 2018.
(19, 2019. 1l. Laurie A. Siegel Please See Reverse Side)mark, sign, date and return these instructions promptly using the enclosed envelope. 1m. Jeffrey K. Storey Please sign exactly as name appears on the certificate or certificates representing shares to be voted by this proxy. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized persons. Signature of Participant Date
|
Electronic Voting Instructions
Available 24 hours a day, 7 days a week!
Instead of mailing your proxy, you may choose one of the voting methods outlined below to vote your proxy.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Voting instructions submitted by the Internet or telephone must be received by 1:00 a.m., Central Time, on May 21, 2018.
|
Vote by telephone
q IF YOU HAVE NOT VOTED VIA THE INTERNETOR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q
| ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||
|
| For | Against | Abstain | For | Against | Abstain | |||||||||||||||
| 2. | Ratify the appointment of KPMG LLP as our independent auditor for 2018. | ☐ | ☐ | ☐ | 3. | Approve our 2018 Equity Incentive Plan. | ☐ | ☐ | ☐ | |||||||||||
| 4. | Advisory vote to approve our executive compensation. | ☐ | ☐ | ☐ | 5(a). | Shareholder proposal regarding our lobbying activities. | ☐ | ☐ | ☐ | |||||||||||
| 5(b). | Shareholder proposal regarding our billing practices. | ☐ | ☐ | ☐ | 6. | In their discretion to vote upon such other business as may properly come before the Meeting. | ||||||||||||||
