UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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CENTURYLINK, INC. | ||||
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2018 Notice of Annual Meeting
and 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, 201820, 2020
This proxy statement and related materials are
available atwww.envisionreports.com/ctl. www.proxyvote.com.
Dear Fellow Shareholders:
On behalf of the entire Board of Directors, I want to thank you for your support of CenturyLink.
Over the last year, we have certainly been busy. We are continuing the transformation we began a little more than two years ago with the acquisition of Level 3, responding to a continually and rapidly evolving world where our technology is key,de-risking our business by significantly improving our balance sheet, listening to and acting upon your feedback regarding corporate governance and executive compensation, and, as I write this letter, dealing with theCOVID-19 pandemic sweeping the world.
Committing to our Communities During theCOVID-19 Pandemic
As a company, we have taken many proactive steps to help “flatten the curve” of this virus. Our first priority is for the health and safety of our employees. All employees whose jobs allow them to work at home are currently doing so, approximately 75% of our global workforce, and, excluding our critical infrastructure personnel such as field technicians, close to 95% of our North American employees. Whether working from home or not, we have established strict social distancing practices, eliminated travel, and are using our own products and services to maintain a productive and engaged workforce during this period. We have also sought to mitigate the financial impact on employees. We have instituted an additional 80 hours of paid time off to be available forCOVID-19 issues and have expanded access to our short-term disability program to all U.S. employees. We are also working with our local leadership around the world to provide additional protections to ournon-U.S. employees.
Our employees’ response has been phenomenal. They recognize their efforts and our services are key components to our customers and communities combatting this disease. We are actively and urgently working with State, Local and Federal Governments around the globe to ensure they have the networking, connectivity and security capabilities they need to respond effectively. Similarly, we are working with our many Business and Consumer customers to ensure they have the capabilities to implement their own work-from-home initiatives and support their businesses. This is what our network was built to do. Our team is keeping people connected when it matters most, and I am incredibly proud of our team of employees. Their appreciation of their role with each other and their role in supporting our customers and communities across the globe has been truly remarkable.
We have also taken the FCC’s Keep America Connected Pledge, which means we will not disconnect or charge late fees to Consumer or Small Business customers experiencing hardships due toCOVID-19 and we have suspended data usage limits for these customers.
While the long-term effect of this pandemic remains to be fully understood, it is not too soon to say that secure,far-reaching and capable networks such as ours, together with the employees who bring them to life, are critical to the security and prosperity of the customers we serve around the world and the communities in which they live. We at CenturyLink are proud to be part of that.
The 4th Industrial Revolution
As the current crisis amply demonstrates, the world is more networked and more dynamic than ever. We are undergoing what has been termed the 4th Industrial Revolution, where digital technologies, Big Data and Artificial Intelligence (AI) fundamentally change the way the world and our customers engage in business and in governing.
CenturyLink’s core technologies are at the center of this new world. We believe the starting point for all communications is fiber as the fundamental transport technology. We are continually expanding what is already one of the world’s largest fiber networks (approximately 450,000 route miles), connecting new buildings (approximately 170,000 buildingson-net as ofyear-end), expanding our footprint (more than 60 countries today) and utilizing our extensive conduit systems to rapidly and economically augment with new fiber and transport technologies.
Internet Protocol (IP) is at the heart of this fiber-connected world and CenturyLink is at the heart of the IP world. Our IP network operates at incredible scale and can easily support our customers’ growing capacity needs. Work-from-home, distance learning, remote medicine and how the economy itself functions depend on IP and the services we provide. Whether you are a Content customer, Cloud Service Provider, Wholesaler, Enterprise, Small Business or one of our almost 5 million Consumer broadband customers, you rely on CenturyLink’s IP backbone.
Although compute resources are historically centralized into a few locations for each customer, we recognize that latency concerns, along with intensive bandwidth demands of Big Data and AI, require compute resources to move closer and closer to the network edge. Our fiber network and our newly launched CenturyLink Edge Compute products are meeting that need. For one global customer, we evaluated thousands of domestic U.S. locations and found that with slightly more than 100 CenturyLink edge compute facilities, we could serve 95% of those sites with less than 5 milliseconds of delay. This is a good, but not uncommon example of how ourfar-reaching fiber network and our focus on providing next generation solutions work together to solve our customers’ evolving needs.
There is a lot for us to look forward to in our business. But we also face pressures. As I regularly tell our team, we have to always “face the truth”, and the truth here is that a portion of our revenue will continue to decline. Products like legacy Consumer voice services or Enterprise private lines, which are based on technology from the early 2000’s, will continue to decline. These declines are expected to occur over long periods and are flattening, but these legacy declines will continue to put pressure on our top line.
Fiber is key even here. As an example, our fiber-based Consumer broadband services are growing. When we invest in fiber to a home, we change from an analog to a digital customer experience, with higher speeds, simpler product sets, better network performance, enhanced monitoring and even intuitive self-installs.
The bottom line is we operate one of the world’s largest, most powerful fiber networks. It is a critically valuable asset in which we will continue to invest to expand and upgrade – where we invest in fiber, we grow our business.
Financial Discipline
Many of you have heard me say that I believe growing Free Cash Flow per share is the best method for driving long-term growth in shareholder value. This principle is critical to how we run the business – focusing onprofitable revenue and disciplined financial management are essential to that end.
To drive profitable revenue, we have expanded our capabilities for businesses. As an example, operating in today’s hybrid-cloud world is complex for our customers. With services like Dynamic Connections (scalable, redirectable, instantaneous connectivity), Cloud Application Manager (where customers can control all of their cloud resources in a streamlined, seamless manner), Edge computing and Security embedded within the network itself, we greatly simplify our customers’ hybrid cloud environments.
At the beginning of 2019, we announced our digital and cost transformation efforts, with plans to achieve $800 million to $1 billion in cost transformation synergies over the next three years. During the year we made great progress, achieving approximately $430 million inrun-rate cost savings. The primary objective of our transformation efforts is to implement a digital operating model – evolving how our employees support our services and how our customers buy and consume those services. Cost efficiencies are a natural outcome of those efforts. As 2020 begins, we remain focused on streamlining and enhancing the CenturyLink customer experience.
Similarly, in early 2019 we announced our three-year plan to reduce net leverage to a range of 2.75 to 3.25 times Adjusted EBITDA. A strong balance sheet is critical to our ability to invest, pursue future growth opportunities and provide the flexibility to adapt to unforeseen events. I am pleased to say that we have made excellent progress toward this objective. We exited 2019 at 3.7x leverage – down from 4.0x at the end of 2018 and from 4.3x at the time of the Level 3 acquisition. In addition, over the last twelve months we refinanced $17 billion of debt – roughly half of our total outstanding debt, reducing interest expense and extending debt maturities. We believe our financial position is strong.
Corporate Governance and Executive Compensation
The CenturyLink Board continually reviews our Board composition, governance and executive compensation practices. During 2019, we deepened our engagement with you and listened to your feedback on these issues. In response to this feedback, we made extensive changes to our compensation plans. These changes are detailed in the proxy and included in a letter from the Chair of our Human Resources and Compensation Committee, Laurie Siegel.
Our Board of Directors continues to review our governance policies and Board composition to ensure we are aligned with the interests of all shareholders. Late last year, we announced several changes to the Board, including the retirement of Harvey Perry and Glen Post at our upcoming shareholder meeting. In addition, we recently added Hal Jones to the Board and, as you will see in the slate of Directors, Mary Landrieu has elected not to stand for reelection to the Board. With Harvey’s upcoming retirement, we are nominating Mike Glenn as Chairman of our Board. These changes reduce the size, improve the average tenure and position us to enhance important skills for our Board.
In addition, we established targets and expectations regarding key governance issues:
Average Board tenure of no more than 10 years. On this objective, I’m pleased to say that with the changes we are making to the Board, our average tenure will be nine years, compared to the12-year average last year;
All Board members except the CEO should be independent. With the proposed slate, that is now the case;
Maintaining a Board of between 10 and 12 directors. As you can see from the proxy, we are proposing an11-director slate;
Rotating Board chairs and assignments approximately every five years, which we are currently implementing; and
Strengthening oversight in key areas, such as our political contribution philosophy, ESG and gender pay equity initiatives.
Please join me in thanking Glen, Harvey and Mary for their leadership on your Board of Directors. At the time Harvey joined Glen on the Board more than 30 years ago, Century Telephone, as it was then known, had roughly $250 million in revenue, and operated primarily in small markets within 14 states. Over the years, Glen and Harvey have overseen the growth of the company into a global telecommunications leader, providing services in more than 60 countries with more than $20 billion in revenue. We are grateful to Glen, Harvey and Mary for their contributions and will miss their deep engagement and their counsel.
In the event it is not possible or advisable to hold anin-person annual meeting as currently planned, we are making arrangements to hold the meeting through virtual meeting technology. We will continue to monitor theCOVID-19 situation and will announce any alternative arrangements for the meeting as soon as possible. Please monitor our website at ir.centurylink.com and our filings with the SEC for updated information. If you are planning to attend our meeting, please check our website for updates, which will be posted no later than May 10, 2020. As always, we encourage you to vote your shares prior to the annual meeting.
Operating one of the world’s largest networks, we provide services that are extraordinarily important and relevant to the marketplace. We continue enhancing those services and the reach of our fiber network, responding to our customers’ evolving needs for ubiquitous, scalable and flexible solutions that allow them to control their own digital infrastructure and fuel their ongoing digital transformations. Whether for Content distribution, Big Data applications, AI, Cloud computing, Edge computing or Security, CenturyLink is at the heart of the 4th Industrial Revolution.
Wishing you all health, safety and strength during these trying times, and with thanks for your support.
Regards,
Jeff Storey
President and Chief Executive Officer
CenturyLink
Notice of 2020 Annual Meeting
of Shareholders
DATE AND TIME May 20, 2020 10:00 a.m. local time | PLACE CenturyLink Auditorium CenturyLink Headquarters 100 CenturyLink Drive Monroe, Louisiana |
ITEMS OF BUSINESS | ||
(1) | Elect as directors the 11 nominees named in the accompanying proxy statement | |
(2) | Ratify the appointment of KPMG LLP as our independent auditor for 2020 | |
(3) | Approve an amendment to our 2018 Equity Incentive Plan | |
(4) | Conduct anon-binding advisory vote to approve our executive compensation | |
(5) | Transact such other business as may properly come before the meeting and any adjournment |
RECORD DATE You can vote if you were a shareholder of record at the close of business on March 26, 2020.
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.
EMERGENCY CONTINGENCY PLAN As discussed further in the accompanying proxy statement, in the event existing public health concerns related toCOVID-19 persist, CenturyLink may take steps to best protect the health and welfare of all our stakeholders, including announcing alternate meeting attendance options or restrictions, or adjourning or rescheduling the meeting.
Stacey W. Goff
Secretary
April 8, 2020
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: call1-800-690-6903 | By Mail: mark, sign, date and return proxy card | In Person: attend Annual Meeting |
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ITEM NO. 2 – RATIFICATION OF KPMG AS OUR 2020 INDEPENDENT AUDITOR | 28 | |||
AUDIT COMMITTEE REPORT | 30 |
2020 Proxy Statement | i |
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FREQUENTLY ASKED QUESTIONS | 94 | |||
OTHER INFORMATION | 99 | |||
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Appendix A – Non-GAAP Reconciliations | A-1 | |||
Appendix B – Annual Financial Report | B-1 | |||
Appendix C – Amended and Restated 2018 Equity Plan | C-1 |
Forward-Looking Statements
Except for historical and factual information contained herein, matters set forth in our 2020 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.
Certain Defined Terms
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) our “executives” or “executive officers”“Voting Shares” refers collectively to our six executive officers listed in the tables beginning on page 3shares of this proxy statement,Common Stock (“Common Shares”) and shares of Series L Preferred Stock (“Preferred Shares”), (iii) “meeting” or “annual meeting” refers to the 20182020 annual meeting of our shareholders described further herein, (iv) “executives,” “executive officers,” “named executives,” “named officers,” “named executive officers” or “NEOs” refers to the six current or former executivefive officers listed in the Summary Compensation Table appearing on page 7177 of this proxy statement, (v) “senior officers” refers to our executive officers and a
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limited number of additional officers whose compensation is determined by the Compensation Committee, (vi) “Compensation Committee” refers to the Human Resources and Compensation Committee of our Board, (vi) “legacy officers” or “legacy named officers”(vii) “Nominating Committee” refers to officers who commenced service with us prior to the Level 3 Combination,Nominating and “newly named executives” refers to named officers who commenced service with us upon completionCorporate Governance Committee of the Level 3 Combination, (vii)our Board, (viii) “Embarq” refers to Embarq Corporation, which we acquired on July 1, 2009, (viii)(ix) “Qwest” refers to Qwest Communications International Inc., which we acquired on April 1, 2011, (ix)(x) “Level 3” refers to Level 3 Parent, LLC and its predecessor, 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)(xi) “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(xii) “SEC” refers to the U.S. Securities and Exchange Commission.Commission, (xiii) “ESG” refers to Environmental, Social and Governance, (xiv) “GAAP” refers to U.S. generally accepted accounting principles and (xv) “NYSE” refers to the New York Stock Exchange. Unless otherwise provided, all information is presented as of the date of this proxy statement.
CenturyLink, Inc.
100 CenturyLink Drive
Monroe, Louisiana 71203
Notice of 2018 Annual Meeting of Shareholders
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Stacey W. Goff
Secretary
April 9, 2018
2020 Proxy Statement | iii |
Key 2019 Financial Highlights
During 2019, we met or exceeded all financial outlook measures we provided at the beginning of the year, including Adjusted EBITDA, Free Cash Flow, and Capital Expenditure objectives. Specifically, we:
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– | Grew Adjusted EBITDA (excluding integration and transformation costs and special items) to $9.070 billion compared to $9.040 billion for the full year 2018 |
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– | Expanded Adjusted EBITDA (excluding integration and transformation costs and special items) margin to 40.5%, compared to 38.6% for the full year 2018 |
– | Reduced Net Debt by approximately $2.0 billion in 2019, and reduced Net Debt to Adjusted EBITDA to 3.7 times in 4Q19 from 4.0 times in 4Q18, moving closer to our three-year objective of 2.75 to 3.25 times |
– | Refinanced approximately $17.0 billion in long-term debt (pro forma for first quarter 2020 activity), significantly reducing our cost of capital, and resulting in more than $200 million in annualized interest expense savings |
For information on how ournon-GAAP metrics used above reconcile to GAAP measures, seeAppendix A. For more complete information on us and our recent performance, see the remainder of this proxy statement, includingAppendix B.
We are an international facilities-based communications company engaged primarily in providing a broad array of integrated services to our business and residential customers. We believe we are among the largest providers of communications services to domestic and global enterprise customers and the second largest enterprise wireline telecommunications company in the United States. We provide services in over 60 countries, with most of our revenue being derived in the United States.
Our Customers:
CenturyLink provides services through five customer-facing segments:
Adjusted EBITDA ($ in billions) | Leverage Net Debt to Adjusted EBITDA | Net Debt ($ in billions) |
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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:
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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 NO. 1 – ELECTION OF DIRECTORS
(Item 1 on Proxy or Voting Instruction Card)
The first proposal for consideration at the meeting is the election of each of the 1311 candidates named below as a director for aone-year term expiring at our 20192021 annual meeting of shareholders, or until his or her successor is duly elected and qualified.
We believe our Board of Directors contains the recommendationright combination of skills and experience to drive shareholder value. Over the last several years, we have overseen the transformation of CenturyLink from a relatively small rural local exchange provider to one of the premier providers of communication services to domestic and global customers. More recently, we have overseen our company’s growth in Adjusted EBITDA over the last two years, reduction of its leverage, attainment of its merger synergy goals, and the identification of and progress toward achievement of additional opportunities to create value.
We have also worked to set the tone for excellence, integrity and diversity within our Board. Our directors represent a wide array of backgrounds in areas critical to our success including telecommunications, technology, government and finance as well as gender and other types of diversity. Additionally, we believe our Board is well equipped to oversee the Company’s strategy and risk management. Except for our CEO, all of our nominees have been determined to be independent.
Our Board sets the tone for governance excellence by maintaining provisions for majority voting, annual director elections and proxy access. Our Board also takes steps to ensure that it obtains information from a range of diverse sources including, among others, through shareholder engagement, invitations to key experts outside the Company to make presentations and active engagement with employees below theC-suite level. Also, in addition to shares earned via Board service, some of our directors have also purchased shares individually.
We invite you to read the board bios that follow to appreciate our directors’ individual accomplishments, attributes and skills. Your voting support for these nominees enables us to continue representing your interests and those of our stakeholders. We believe we have the right Board, with the right skills, perspectives, and experience, to manage the next phase in CenturyLink’s transformation.
CenturyLink’s Nominating Committee recommended, and Corporate Governance Committee,the full Board nominated, the below-named 11 candidates. Other than Mr. Hal Jones, all of the nominees were elected to the Board has nominated the 13 below-named directors to stand forre-election toone-year terms at the 2019 annual meeting.
ü | Martha Bejar |
ü | Virginia Boulet |
ü | Peter Brown |
ü | General Kevin Chilton |
ü | Steven Clontz |
ü | Michael Glenn |
ü | Bruce Hanks |
ü | Hal Jones |
ü | Michael Roberts |
ü | Laurie Siegel |
ü | Jeff Storey |
THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR EACH OF THE ABOVE-NAMED NOMINEES FOR DIRECTOR |
2 | 2020 Proxy Statement |
ITEM NO. 1 – ELECTION OF DIRECTORS
Board Qualifications
Board Skills and Experience
CenturyLink’s Board of Directors provides a wide array of skills, experience and perspectives that strengthen the Board’s ability to fulfill its oversight role on behalf of CenturyLink’s shareholders. We strive to maintain a well-rounded and diverse Board that balances:
telecommunications and technology experience with other industry expertise,
the institutional knowledge of long-tenured directors with the fresh perspective of newer directors, and
in-depth knowledge of areas critical to our business, such as cybersecurity and customer experience, with broad-based executive management skills.
As summarized below, our nominees bring a variety of skills and experience to our Board, developed across a variety of industries.
DIRECTOR SKILLS AND EXPERTISE | Bejar | Boulet | Brown | Chilton | Clontz | Glenn | Hanks | Jones | Roberts | Siegel | Storey | |||||||||||
SENIOR LEADERSHIP/EXECUTIVE EXPERIENCE/INDUSTRY EXPERIENCESenior/executive level experience in complex organizations, particularly those in the communications industry or selling services to enterprise customers. | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | |||||||||||
BUSINESS AND DIGITAL TRANSFORMATIONExperience in leading or implementing transformation of a business or business unit, particularly with a focus on simplification and automation or risk management at an enterprise level. | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | |||||||||||||
RISK MANAGEMENTExperience overseeing complex enterprise risk management programs. | 🌑 | 🌑 | 🌑 | 🌑 | ||||||||||||||||||
FINANCE/PUBLIC ACCOUNTINGExperience in the oversight of internal controls and reporting of public company financial and operating results. | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | ||||||||||||||
GLOBAL BUSINESS EXPERIENCEExperience crafting, leading or implementing international business strategy and operations. | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | ||||||||||||||
CUSTOMER EXPERIENCEExperience developing strategies or leading efforts to improve and transform customer experience, particularly with respect to simplification and automation of customer platforms. | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | |||||||||||||||||
MERGERS AND ACQUISITIONS EXPERIENCEExperience navigating growth opportunities, analyzing strategic transactions and negotiating complex transactions. | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | ||||||||||||||
TECHNOLOGY AND INNOVATIONExperience developing, leading or implementing new technology and innovation initiatives on an enterprise-wide basis, including a focus on digital risk mitigation. | 🌑 | 🌑 | 🌑 | 🌑 | 🌑 | |||||||||||||||||
HUMAN RESOURCES LEADERSHIPManaged human resources and talent management functions, including executive compensation system design. | 🌑 | 🌑 | ||||||||||||||||||||
CYBERSECURITYKnowledge of the evolving landscape of data security, information technology and the transmission and storage of confidential information. | 🌑 | 🌑 | 🌑 | |||||||||||||||||||
ENVIRONMENTAL, SOCIAL AND GOVERNANCEExperience in assessing business operations in conjunction with evolving corporate governance and ESG principles to deliver responsible results to stakeholders. | 🌑 | 🌑 | 🌑 |
2020 Proxy Statement | 3 |
ITEM NO. 1 – ELECTION OF DIRECTORS
Board Qualifications
Our nominees embody tenure, gender, and professional diversity: Most of our nominees have served for four years or less. The remaining five nominees each have more than nine years of service and form the institutional knowledge backbone of the Board. More than a quarter of our nominees are women, and women hold key boardroom leadership positions including chairs of two of our four principal standing Board committees. Our commitment to gender diversity is longstanding – first electing a woman to the Board in 1995, when women in the boardroom were relatively rare. With nominees from the telecommunications and technology industries, and with leadership experience in global logistics, human capital management, the U.S. military, and international brand and franchise management – the Board’s professional experience represents a diversity of perspectives essential to effective risk management oversight.
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ITEM NO. 1 – ELECTION OF DIRECTORS
Director Biographies
Martha H. Bejar | ||
Principal Occupation: Former technology Committees: Audit; Risk and Age 58 Independent Director Director since 2016 | Telecommunications Leadership with innovation experienceasco-founder and principal of Red Bison Advisory Group, LLC, which provides business advisory services to telecommunications and enterprise technology firms, from January 2014 to June 2019. Ms. Bejar also served as Chief Executive Officer and director at Unium, Inc., aWi-Fi service provider, from December 2016 to March 2018; as Chief Executive Officer and director of Flow Mobile, Inc., a broadband wireless company, from January 2012 to December 2015; as Chief Executive Officer and Chairperson of Infocrossing, Inc. (a U.S.-based cloud services affiliate of Wipro Limited) from January 2011 to March 2012; as President of Worldwide Sales and Operations at Wipro’s information technology services affiliate from 2009 to 2011; and as Corporate Vice President for the communications sector of Microsoft Corporation from June 2007 to June 2009. Prior to then, Ms. Bejar held diverse sales, operations, engineering and R&D positions at Nortel Networks Corporation and Bellsouth/AT&T Current public company directorships: CommVault Systems; Sportsman’s Warehouse Holdings, Inc.; and Quadient SA (formerly Neopost) Previous public company directorships in last five years: Mitel Networks Corporation and Polycom, Inc. Other leadership experience:Rainer Scholars - Trustee and Board member |
Virginia Boulet | ||
Principal Occupation: Managing Director, Committees: Nominating and Age 66 Independent Director Director since 1995 | Corporate Governance and Securities expertiseas Special Counsel at Adams and Reese LLP from March 2002 to March 2014; as a Corporate and Securities Partner at Phelps Dunbar LLP from 1992 to March 2002; also served as the President and Chief Operating Officer of IMDiversity, Inc. from March 2002 to March 2004 and as an adjunct professor of securities regulation and mergers and acquisitions law at Loyola University - New Orleans College of Law, 2004 to 2018 Current public company directorships: W&T Offshore, Inc. |
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ITEM NO. 1 – ELECTION OF DIRECTORS
Director Biographies
Peter C. Brown | ||
Principal Occupation: Chairman, Grassmere Committees: Finance (Chair); Audit Age 61 Independent Director Director since 2009 | Executive Leadership, Finance, Growth and Strategic Development experienceas former Chairman and CEO of AMC Entertainment Inc. from 1999 to 2009 and its Chief Financial Officer from 1991 to 1999. Chairman of Grassmere Partners, LLC, a private investment firm, since 2009; founded EPR Properties, a NYSE-listed real estate investment trust, where he currently serves as a member of the Board of Trustees Current public company directorships: Cinedigm Corporation and EPR Properties Other leadership experience:CEC Entertainment, Inc.; National CineMedia, Inc.; Midway Games, Inc.; Lab One, Inc.; Protection One, Inc.; CORE Entertainment Holdings; Digital Cinema Implementation Partners; Movietickets.com; Swope Community Enterprises; Greater Kansas City Chamber of Commerce; The Advancement Board of the University of Kansas Medical Center and Hospital; Rockhurst High School; The Advisory Board of the University of Kansas Business School; The Kansas City Art Institute; and National Association of Theatre Owners |
Kevin P. Chilton | ||
Principal Occupation: President, Chilton & Committees: Risk and Security Age 65 Independent Director Director since 2017 | Cybersecurity, Risk Management and Scientific leadership experience as a retired General following 34 years of service in the U.S. Air Force, including service as Commander, U.S. Strategic Command, from 2007 to 2011, overseeing the U.S. Department of Defense’s nuclear, space and cyberspace operations; as Commander, U.S. Air Force, Space Command from 2006 to 2007; as a NASA Astronaut from 1987 to 1996, including three space shuttle flights; and as Deputy Program Manager of the International Space Station from 1996 to 1998; currently serves as President of Chilton & Associates, LLC Current public company directorships: AeroJet Rocketdyne Previous public company directorships in last five years: Anadarko Petroleum Corporation, Level 3 Communications, Inc., Orbital ATK Other leadership experience:Aerospace Corporation (a federally-funded R&D center); Air Force Academy Falcon Foundation; Jewish Institute for the National Security of America; Cobham Advanced Electronic Solutions; SEA Adventure Crusade, National Technology; and Engineering Solutions of Sandia, Los Alamos & Lawrence Livermore National Lab |
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ITEM NO. 1 – ELECTION OF DIRECTORS
Director Biographies
Steven “Terry” Clontz | ||
Principal Occupation: Global Corporate Committees: Human Resources Age 69 Independent Director Director since 2017 | Innovative Technologies and Global Telecommunications experience as the Chief Executive Officer of StarHub, Ltd., a Singaporean telecommunications company, from 1999 to 2010, and as the Senior Executive Vice President (International) of Singapore Technologies Telemedia Pte. Ltd. from 2010 to 2017; previously served as the Chief Executive Officer, President and a Director of IPC Information Systems from December 1995 to December 1998; Mr. Clontz held various senior executive positions (including President, Asia-Pacific) at BellSouth International, Inc. from 1987 to 1995; currently serves as a corporate advisor to ST Telemedia Pte. Ltd. since January 2018 and as a corporate advisor to Temasek International Advisors Pte. LTD. since January 2010 Current public company directorships: StarHub Ltd. Previous public company directorships in last five years: Level 3 Communications, Inc. (2012 to 2017), InterDigital Wireless, Inc. (1998 to 2015) Other leadership experience:Various positions with other communications companies, including Cloud9 Technologies LLC, PSA International Pte. Ltd.; Virgin Mobile Latin America, Inc. and STT GDC Pte. Ltd. |
T. Michael Glenn | ||
Principal Occupation: Senior Advisor, Oak Committees: Human Resources Age 64 Independent Director Director since 2017 | Market Development, Customer, Communications, Strategic, and Operational experience as the Executive Vice President of Market Development and Corporate Communications for FedEx Corp. from 1998 to December 2016; also served during this time as the President and Chief Executive Officer of FedEx Corporate Services and as a member of its five-person Executive Committee responsible for developing and implementing strategic business activities; previously held the role of Senior Vice President, Worldwide Marketing, Consumer Service and Corporate Communications for FedEx Express; currently serves as a senior advisor to Oak Hill Capital Partners, a private equity firm, since 2017 Current public company directorships: Pentair PLC Previous public company directorships in last five years: Level 3 Communications, Inc. Other leadership experience:Safe Fleet; Church Health; and Madonna Learning Center |
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ITEM NO. 1 – ELECTION OF DIRECTORS
Director Biographies
W. Bruce Hanks | ||
Principal Occupation: Consultant, Graham, Bordelon, Golson & Gilbert, Inc. Committees: Audit (Chair); Finance Age 65 Independent Director Director since 1992 | Corporate Development, Finance, Public Accounting and Telecommunications executive experienceholding various senior level roles at CenturyLink from 1980 to 2001, including the Chief Operating Officer, Senior Vice President - Corporate Development and Strategy, Chief Financial Officer and President - Telecommunication Services; served as the Athletic Director of the University of Louisiana at Monroe from 2001 to 2004; began his career as a Certified Public Accountant with Peat, Marwick & Mitchell; currently a consultant for an investment management and financial planning company based in Monroe, Louisiana Other leadership experience: Board member of the American Football Coaches Foundation and the Edward Via College of Osteopathic Medicine; National Association of Corporate Directors - Board Leadership Fellow; Advisory Board Member of IberiaBank Corporation; previous service on the executive boards of several national telecommunications industry associations, private organizations,non-profits, and other public companies not within the last five years |
Hal S. Jones | ||
Principal Occupation: Retired former accounting executive Committees: None Age 67 Independent Director Director since | Public Accounting, Financial and Controls experience as the Chief Financial Officer of Graham Holdings (formerly known as the Washington Post Company) from 2009 to 2013; as the Chief Executive Officer and President of Kaplan Professional, a subsidiary of The Washington Post from 2008 to 2009; and through various senior level positions at The Washington Post Company, from 1989 to 2008; began his career as a Certified Public Accountant at PricewaterhouseCoopers from 1977 to 1988 Current public company directorships: Playa Hotels and Resorts, N.V. Other leadership experience:Studio Theatre, a Washington, D.C.-basednon-profit theater production company |
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ITEM NO. 1 – ELECTION OF DIRECTORS
Director Biographies
Michael J. Roberts | ||
Principal Occupation: Founder and Chief Executive Officer, Westside Holdings Committees: Human Resources Nominating and Corporate Age 69 Independent Director Director since 2011 | Fortune 500 Global Executive, Marketing, and Customer experience as the President and Chief Operating Officer of McDonald’s Corporation from 2004 to 2006; previously served as the Chief Executive Officer of McDonald’s USA during 2004 and prior to that in various senior level roles at McDonald’s USA from 2001 to 2004; since 2006, currently serves as founder and chief executive officer of Westside Holdings LLC, a marketing and brand development company Current public company directorships: W. W. Grainger, Inc. |
Laurie A. Siegel | ||
Principal Occupation: Founder of LAS Advisory Services Committees: Human Resources Compensation Nominating and Corporate Age 63 Independent Director Director since 2009 | Human Resources and Executive Compensation experience as Senior Vice President of Human Resources and Internal Communication of Tyco International from 2003 to 2012; held various senior level positions at Honeywell International, Inc. from 1994 to 2002; founded in 2012 LAS Advisory Services, a business and human resources consultancy; currently serves as a Senior Advisor to the G100 and as a Chairman of the G100 Talent Consortium Current public company directorships: FactSet Research Systems, Inc., California Resources Corporation Previous public company directorships in last five years: Volt Information Sciences, Inc. Other leadership experience:Positions with variousnon-profit organizations, including Understood(non-profit); Morristown Festival of Books; and currently serves on the Board of Directors of Swoop, a venture-backed company providing enterprise solutions enablingco-workers to carpool to work |
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ITEM NO. 1 – ELECTION OF DIRECTORS
Director Biographies
Jeffrey K. Storey | ||
Principal Occupation: President and Chief Executive Officer, CenturyLink Committees: Risk and Security Age 59 Director since 2017 | Innovative Transformational Telecommunications and Cybersecurity experience as the President and Chief Executive Officer of CenturyLink since 2018; previously served as the Chief Operating Officer of CenturyLink between 2017 and 2018; previously served as the President and Chief Executive Officer of Level 3 Communications, Inc. from April 2013 to November 2017; also held the positions of President and Chief Operating Officer of Level 3 Communications, Inc. from December 2008 to April 2013; served as the President of Leucadia Telecommunications Group (Leucadia National Corporation) from 2006 to 2008; as the Chief Executive Officer and President of WilTel Communications Group Inc. from 2002 to 2005 and in various other senior level positions with WilTel or its affiliates from 1999 to 2002; held the title of Vice President of Commercial Services of Cox Communications from 1998 to 1999 and also served as a Vice President and General Manager of Cox Fibernet from 1994 to 1998; began his career in telecommunications in 1983 with Southwestern Bell Telephone where he held various engineering and operations positions Previous public company directorships in last five years: Level 3 Communications, Inc. (2013 to 2017) Other leadership experience:Member of the National Security Telecommunications Advisory Committee |
To be elected, each of the 11 nominees must receive an affirmative vote of a majority of the votes cast with respect to the election of directors. Any director failing to receive a majority of votes cast must promptly tender his or her resignation.
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-namedabove-named nominees. If you wish to give specific instructions with respect to voting for directors, you may do so by indicating your instructions on your proxy or voting instruction card.
Under our bylawBylaws 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 — Director Nomination Process.”
As discussed further under “Additional Information About the Meeting — Vote Required to Elect Directors,” to be elected each of the 13 nominees must receive an affirmative vote of a majority of the votes cast.
Nominees For Election to the Board:
Listed below is information on each of the 13 individuals nominated to stand for election to the Board.
The Board recommends that you vote “FOR” each of the following nominees:
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ITEM NO. 1 – ELECTION OF DIRECTORS |
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Executive Officers Who Are Not Directors:Directors
Executive Officers Who Are Not 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.
Shaun C. Andrews | ||
Executive Vice President and Chief Marketing Officer | ||
Age: 47 | Shaun Andrews has served as Executive Vice President and Chief Marketing Officer since August 2019. He has responsibility for the Company’sgo-to-market strategy, product development, privacy, and product management. Shaun also has oversight of the Company’s global marketing organization, including managing the Company’send-to-end customer experience, brands, global messaging, digital campaigns and marketing technology. Shaun started with CenturyLink in 2017 as Executive Vice President, Product Management. Mr. Andrews previously served in several capacities at Level 3 Communications, Inc., most recently as the Senior Vice President of IP and Real-Time Communications from 2016 until the Level 3 and CenturyLink combination. Prior to that role, Mr. Andrews served as Level 3’s Senior Vice President, Global Voice Services from 2012 to 2016. Mr. Andrews has nearly 25 years of experience in the technology industry, including positions with AT&T, WilTel and SBC Communications. | |
Indraneel Dev | ||
Executive Vice President and Chief Financial Officer | ||
Age: 48 | Neel Dev has served as Chief Financial Officer since September 2018. Mr. Dev has global responsibility for managing the Company’s financial planning, accounting, tax, treasury, investor relations, real estate, procurement and supply chain functions. Mr. Dev has more than 20 years of telecommunications industry experience in both operational and financial roles. He also served as Group Vice President, Finance from February 2004 to November 2017 with Level 3 Communications, Inc. and then with CenturyLink from November 2017 to September 2018. Prior to joining Level 3, Mr. Dev held leadership positions with MCI (subsequently acquired by Verizon) and MFS Communications, with both financial and operating responsibilities. |
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ITEM NO. 1 – ELECTION OF DIRECTORS
Executive Officers Who Are Not Directors
Stacey W. Goff | ||
Executive Vice President, General Counsel and Secretary | ||
Age: 54 | Stacey Goff has practiced law for more than 25 years, and participated in our executive decision-making for several years. CenturyLink appointed him to his current role in 2009. Stacey supervises not only the Company’s legal team, but also its government relations and aviation functions. He started with CenturyLink in 1998 as Director-Corporate Legal. From November 2014 to May 2018 he served as our Chief Administrative Officer. Prior to joining CenturyLink, Stacey practiced corporate and securities law with Jones Walker LLP in New Orleans. | |
Scott A. Trezise | ||
Executive Vice President, |
Human Resources | ||
Age: 51 | Scott Trezise has served in his current position since August 2013 and | |
How 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.is Selected and Elected
Among other things, our corporate governance guidelines provide as follows:Director Nomination Process
Director Qualifications
Under our Corporate Governance Guidelines, the Nominating Committee is responsible for reviewing with the Board,assesses director candidates based on an annual basis, the requisitetheir merits, independence, diversity, character, skills, and characteristicsexperience in the context of the needs of the Board. When evaluating candidates for nomination as new directors, the Nominating Committee will consider (and will ask any search firm that it engages to provide) a pool of candidates that includes women and individuals from diverse backgrounds. Our Corporate Governance Guidelines also establish a target average director tenure of no more than ten years, set a goal of all Board members as well as(except our CEO) being independent, and express the compositionBoard’s general sense that no director should be age 75 or older prior to the next annual shareholders meeting. The Nominating Committee may, but has not formally chosen to, establish additional qualifications. The Nominating Committee evaluates each individual in the context of the Board as a whole.
Director Responsibilities
Chairman; Lead Director
CEO Evaluation and Management Succession
Recoupment of Compensation
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 one of ournon-management directors qualifies as an independent director under the standards referred to above under “— Governance Guidelines.” 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 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 an 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. 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 illustrated below, most of our directors are independent, and almost half have served on our Board for three years or less:
INDEPENDENCE
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Independent | Non-independent | 1-3 yrs | 4-9 yrs | 10+ yrs |
During 2017, the Board of Directors held 20 meetings.
During 2017, the Board’s Audit Committee held eight meetings. The Audit Committee is currently composed of four 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 Committee Report.”
The Board’s Human Resources and Compensation Committee (which in most instances is hereinafter referred to as the “Compensation Committee”) met 11 times during 2017. The Compensation Committee is currently composed of four independent directors, allof whom qualify as“non-employee directors” under Rule16b-3 promulgated under the Securities Exchange Act of 1934. The Compensation 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 four independent directors. It met six times during 2017.skill set. The Nominating Committee is responsible for, among other things, (i) recommending toand the Board nominees to serve as directorsalso evaluates on a periodic basis the effectiveness of its nominating processes and officers, (ii) monitoring the composition and size of the Board and its
committees, (iii) periodically reassessing our corporate 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.procedures. For information on how a shareholder may nominate a person for election as a director, please see the director nomination process, see “— Director Nomination Process” below.
The Board maintains a Risk Evaluation Committee, which met four times during 2017. This Committee ismandatory procedure described further below under the heading “— Risk Oversight.”
The Board has also established a Pricing Committee, which has authority to approve the terms and conditions under which we offer or sellin our securities or borrow money. This committee is comprised of Peter C. Brown, W. Bruce Hanks and Glen F. Post, III.
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 Evaluation Committee, which includes Harvey P. Perry, and the Pricing Committee, which includes Glen F. Post, III.
The table below lists the Board’s standing committees and their membership as of the date of this proxy statement:Bylaws.
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If you would like additional information on the responsibilities of the committees listed above, please refer to the committees’ respective charters, which can be obtained in the manner described below under “— Access to Information.”
During 2017, 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 then in office attended the 2017 annual shareholders’ meeting.
Director Nomination ProcessITEM NO. 1 – ELECTION OF DIRECTORS
General.Nominations for the election of directors at our annual shareholders’ meetings may be made by theHow Our 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. For the meeting this year, the Board has nominated the 13 nominees listed above under “Election of Directors” to stand for election as directors,is Selected and no shareholders submitted any nominations. 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.”Elected
Bylaw Requirements.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 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 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 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.”
Agreements to Nominate Certain Directors. – In connection with the Level 3 Combination,combination, on October 31, 2016, we entered into a Shareholder Rights Agreement (the “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 toto: (i) the fiduciary duties of the members of that committee,Committee, (ii) any applicable regulation or listing requirement of the New York Stock ExchangeNYSE, 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 toconnection with recommending Mr. Clontz as a nominee, 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’shis extensive experience in the telecommunications industry.industry and his prior contributions as a director of CenturyLink and Level 3. 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 pursuant toAdditionally, on December 30, 2019, the terms of our merger agreement with Level 3 to appoint to our Board three members ofCompany announced that effective January 1, 2020, Hal Jones would join the Level 3 Board selected by us from any of the Level 3 directors who are unaffiliated with STT Crossing. During 2017, we selected Messrs. Chilton, Glenn and Storey to serve on our Board. Under the merger agreement, we further agreed to cause such appointed directors to be nominated for electionMr. Jones was among several director candidates recommended 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 shareholders in accordance withSoutheastern Asset Management, 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. 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 needsfourth largest shareholder at the time of his appointment. With his appointment, the assessment. Board will continue to be comprised of 14 members until the 2020 Annual Shareholder Meeting.
In evaluating2019, the Nominating Committee and Board considered a wide range of factors in assessing the composition of the Board, including:
the input of our shareholders;
the critical importance of balancing the need for fresh perspectives and the continued value of institutional knowledge, particularly given the complexity of our transformation over the past10-15 years;
the current and long-term needs of the Board; and
the skillsets necessary to oversee the implementation of our business strategies, including our continued evolution to a digital technology company offering a simpler and improved customer experience.
Following these discussions, we announced in late December 2019: (i) the appointment of Hal Jones to our Board, effective January 1, 2020, (ii) the designation of Mr. Glenn as Chairman of the Board and the retention of Mr. Hanks as Vice Chairman of the Board, each effective immediately following the 2020 annual meeting, (iii) the retirement of two of our long-tenured directors, Messrs. Perry and Post, effective immediately following the 2020 annual meeting, and (iv) certain changes to our governance policies discussed elsewhere herein. Earlier this year, Ms. Landrieu advised us that she had elected not to stand for re-election at the 2020 annual meeting. Additionally, we currently plan to refresh the composition of our committees on or about the date of our annual shareholder meeting.
Our Board continues to regularly review the need for refreshment by focusing on identifying individuals whose skills and experiences will enable them to make meaningful contributions to shaping and implementing CenturyLink’s business strategies. The Nominating Committee remains engaged with third-party search firms to identify candidates with the skills and attributes necessary to further advance our board refreshment goals in 2020 and beyond.
Board Evaluation and Continuing Director Education
Recognizing that a robust and constructive performance evaluation process is an essential component of Board effectiveness, the Board performs an annual evaluation of its members, committees, and the Board as a whole to determine the skills, processes, structure, and policies necessary to attain its goals and fulfill its responsibilities. While this formal evaluation is conducted on an annual basis, directors share their perspectives, feedback, and suggestions periodically throughout the year.
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ITEM NO. 1 – ELECTION OF DIRECTORS
How Our Board is Selected and Elected
As part of its 2019 evaluation process, our Nominating Committee engaged a nationally recognized third-party governance consultant to assist with our Board and committee evaluation process. After the independent third-party distilled the information and perspectives gathered during interviews and surveys, it presented findings to the Nominating Committee and Board for review and discussion. This year’s evaluation process, combined with shareholder input and third-party guidance, led to governance changes we believe strengthened the Board and its practices, including Board and committee composition. Specifically, the Board evaluated and refined our director skills and experience qualifications criteria to meet the current and anticipated needs of the business. Results of the process, including a review of contributions and performance of each director, are used by the Nominating Committee when considering whether to nominate such director forre-election to the Board.
New directors participate in an orientation which familiarizes them with the Company’s business, operations, strategies, and corporate governance practices, and assists them in developing Company and industry knowledge to optimize their service on the Board. The onboarding process includes meetings with members of our management team to accelerate new directors’ ability to effectively and fully discharge their responsibilities.
We encourage directors to participate in continuing education programs focused on our business and industry, committee roles and responsibilities and legal and ethical responsibilities of directors. We reimburse directors for their expenses associated with this participation. We encourage our directors to participate in nationally recognized governance organizations, including the National Association of Corporate Directors (“NACD”) and G100. We provide continuing director education during Board and committee meetings and other Board discussions as part of the formal meetings which fromtime-to-time include presentations from third parties.
We believe that director independence enhances the Board’s ability to provide oversight of our strategy, long-term planning and risk oversight, among other responsibilities. As a result, our Board evaluates the independence of each director nominee on an annual basis, using standards required by the SEC, NYSE and our Corporate Governance Guidelines. Consistent with these standards, the Board reviewed all relationships between the Company and each director based upon detailed written submissions by each director nominee and the volume of business transacted by us, either as a service provider or customer, with other companies with which our directors are employed or affiliated. Following its review, the Board affirmatively determined that all of our director nominees are independent other than Mr. Storey. Mr. Storey is not independent because he is CenturyLink’s President and CEO.
The Nominating Committee periodically reviews the Board’s leadership structure and, when appropriate, recommends leadership structural changes, taking into consideration the needs of the Board and the Nominating Committee considersCompany at such time.
Mr. Perry, who announced his retirement plans in December 2019, currently serves asnon-executive Chairman of our Board and Mr. Hanks serves as our Board’s Vice Chairman and Lead Outside Director. As Chairman, Mr. Perry presides over meetings of the qualifications of incumbent directorsBoard, oversees the management, development and consults with other membersfunctioning of the Board, and senior management.performs additional duties as the Board determines. As Vice Chairman and Lead Outside Director, Mr. Hanks coordinates and develops the agenda for each meeting ofnon-management directors and serves as the conduit for information management believes is necessary for thenon-management directors to perform their duties effectively and responsibly. In addition,that regard, he also provides guidance to the Nominating Committee seeks candidates committed to representingCEO on the interestsquality, quantity, and timeliness of all shareholders and notthe flow of information, with the understanding that thenon-management directors will receive any particular constituency. The Nominating Committee believes this flexible approach enables it to respond to changes causedinformation requested on their behalf by director vacancies and industry developments.the Lead Outside Director.
In connection with assessingMr. Perry’s upcoming retirement, the needsBoard approved changes to its senior leadership structure. Effective May 20, 2020, Mr. Perry will step down from his position asnon-executive Chairman of our Board and the Board intends to appoint Mr. Glenn, one of the Company’s independent directors, asnon-executive Chairman. Our Corporate Governance Guidelines require an independent director to serve as
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ITEM NO. 1 – ELECTION OF DIRECTORS
How Our Board is Organized
Lead Outside Director if 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 service on the Board.Chairman is not an independent director. In light of our current business and operations, we believe the following skills and experience are particularly important:
In connectionBoard’s plans to replace Mr. Perry with determining the current composition ofan independent director, there will be no subsequent need to maintain a Lead Outside Director, although 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 termsintends to continue to retain Mr. Hanks 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-executiveVice 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. WhileThe Board further believes that this separate oversight has fostered additional focus on strategic planning and risk management.
As noted in our bylawsCorporate Governance Guidelines, it is the sense of the Board that the Chairman of the Board and the chairs of our committees should rotate approximately every five years. As described in our 2019 proxy statement, the Board comprehensively overhauled its committee structure in 2018, and, as noted above, plans to make additional refinements on or about May 20, 2020.
Each of our five standing Board committees supports the full Board with various risk management, governance, and strategic responsibilities.
AUDIT | ||||||
MEMBERS* | KEY RESPONSIBILITIES | 2019 MEETINGS HELD | ||||
Martha Bejar Peter Brown Kevin Chilton Michael Glenn Bruce Hanks (C) * Each is an audit committee financial expert, other than Michael Glenn | Responsible for overseeing the Company’s system of financial reporting and 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 (i) our internal control over financial reporting, (ii) our internal controls regarding information technology security, and (iii) our disclosure controls and procedures See “Audit Committee Matters—Audit Committee Report” for additional information | 9 | ||||
FINANCE | ||||||
MEMBERS | KEY RESPONSIBILITIES | 2019 MEETINGS HELD | ||||
Peter Brown (C) Bruce Hanks Harvey Perry* Glen Post* * non-independent | 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 | 4 | ||||
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ITEM NO. 1 – ELECTION OF DIRECTORS
How Our Board is Organized
HUMAN RESOURCES AND COMPENSATION | ||||||
MEMBERS | KEY RESPONSIBILITIES | 2019 MEETINGS HELD | ||||
Virginia Boulet Steven Clontz Michael Glenn Michael Roberts Laurie Siegel (C) | Responsible for establishing executive compensation Responsible, in consultation with management, for overseeing our compliance with regulations governing executive and director compensation Oversees labor relations risk See “Compensation Discussion and Analysis” for additional information | 4 | ||||
NOMINATING AND CORPORATE GOVERNANCE | ||||||
MEMBERS | KEY RESPONSIBILITIES | 2019 MEETINGS HELD | ||||
Virginia Boulet (C) Steven Clontz Mary Landrieu Michael Roberts Laurie Siegel | Recommends to the Board nominees to serve as directors and officers Oversees CEO’s annual performance evaluation Monitors and advises on ESG matters Oversees and recommends improvements to our governance principles, policies, and practices 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 Performs other governance responsibilities described under “Corporate Governance” | 7 | ||||
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ITEM NO. 1 – ELECTION OF DIRECTORS
How Our Board is Organized
RISK AND SECURITY | ||||||
MEMBERS | KEY RESPONSIBILITIES | 2019 MEETINGS HELD | ||||
Martha Bejar Kevin Chilton (C) Mary Landrieu Harvey Perry* Glen Post* JeffStorey* * non-independent | Assists the Board in fulfilling its oversight responsibilities with respect to, among others: • risks posed by cyberattacks or other casualty events • 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 | 4 |
Additional information on the roles and responsibilities of our committees is available in the committees’ respective charters, which can be obtained at our website athttp://www.CenturyLink.com/aboutus/governance.html.
Our Board’s Approach to Governance
Our Board is responsible for overseeing management, which is responsible for theday-to-day operations of the Company. The Board’s primary areas of focus includes selection of CenturyLink’s leadership, risk management oversight, strategy, long-range planning, capital allocation, corporate governance, and compliance. In addition, our Board evaluates management in its effectiveness in operating and achieving the objectives of the company. In carrying out this responsibility, our Board advises our senior management to help drive success for the long-term value creation for our shareholders. Our Board discusses and receives regular updates on a wide variety of matters affecting our business.
Corporate Governance Framework
The Board continuously reviews our governance practices and Board composition to ensure we are aligned with the interests of our shareholders and continue to take actions that will enhance our ability to oversee the execution of strategies that drive value. In 2019, the Board approved the following changes to its Corporate Governance Guidelines:
Targeting average Board tenure of no more than 10 years
Targeting to have all Board members, except our CEO, be independent
Targeting a Board size of between 10 and 12 directors
Targeting the rotation of Board committee and Board chairs approximately every five years
Our Corporate Governance Guidelines, along with other governance documents including our Code of Conduct, Bylaws, and Board committee charters and other governance policies are available on our website athttp://www.centurylink.com/aboutus/governance.html.
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ITEM NO. 1 – ELECTION OF DIRECTORS
Shareholder Engagement Program
Our formal governance engagement process includes members of management, as well as key representatives from our Board.
In 2019, our compensation program received the support of 41% of the total votes cast at our meeting. These results were disappointing and significantly below the support we have received in the past. In response to the vote, we reengaged with shareholders throughout the summer and fall, contacting shareholders representing 53% of our outstanding common stock and directly engaging with 47%, as well as the two largest proxy advisory firms. Our primary purpose for initiating these meetings was to listen to our shareholders, discuss proposed changes to our compensation plans and obtain feedback on a series of other topics, including board composition, corporate governance, strategy, performance, ESG initiatives and human capital management.
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ITEM NO. 1 – ELECTION OF DIRECTORS
Shareholder Engagement Program
During the fall of 2019, each of the shareholder and proxy advisory firm meetings was attended by the Chair of our Human Resources and Compensation Committee, and most were also attended by our Chairman, along with members of our senior management team. The input we received was shared with the members of the Board who did not directly engage in our outreach process. The chart below summarizes this feedback from our shareholders and our response:
We Listened | We Responded | |
Corporate Governance | ||
Promote board diversity | ü We adopted the “Rooney Rule” and are committed to interviewing minority candidates for open board seats. | |
Support gender equality | ü We made the “Parity Pledge” for open Vice President and higher roles, including open board seats. | |
Review board oversight/process for political contributions | ü We clarified the Board oversight role and political contributions policy, which is discussed further below under the heading “—Our Board’s Responsibilities—Commitment to Environmental, Social and Governance (ESG) Leadership.” | |
Board Composition | ||
Consider new board candidates | ü At the recommendation of a large CenturyLink shareholder, Southeastern Asset Management, we appointed a new independent director, Hal Jones, to the board effective January 1, 2020. | |
Reduce board tenure and increase independence | ü We announced the retirements of two of our longest-tenured andnon-independent directors, Chairman Harvey Perry and Glen F. Post III, effective after the Company’s 2020 Annual Shareholder Meeting. | |
Have an Independent Chairman | ü The Board intends to designate an independent director, Michael Glenn, as Chairman effective after the Company’s 2020 Annual Shareholder Meeting. | |
ESG/Sustainability | ||
Provide updated and increased disclosure on: | ü We issued our 2020 ESG report, which is discussed further below under the heading “—Our Board’s Responsibilities—Commitment to Environmental, Social and Governance (ESG) Leadership,” and implemented protocols to enhance ESG oversight by our Nominating Committee. | |
(1) Environmental topics such | ||
(2) Non-financial benefits and other ways we attract and retain employees | ||
Cybersecurity | ||
Increase disclosure on privacy and data security | ü We provided explanations of our risk mitigation strategies for cybersecurity and data privacy risks below under the heading “—Our Board’s Responsibilities—Risk Oversight.” | |
Executive Compensation* | ||
One-time awards | ü In 2019, there were noone-time awards for any of our executive officers. | |
STI and LTI plan metrics | ü We redefined our metrics under both the STI and LTI plans to enhance differentiation andpay-for-performance alignment. | |
Shorten performance period under LTI plan | ü For 2020, we returned to our normal practice of three-year cliff-vested cumulative performance periods for our 2020 Annual PBRS grant. |
* | An expanded Executive Compensation list can be found in the Compensation Discussion and Analysis section beginning on page 42. |
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ITEM NO. 1 – ELECTION OF DIRECTORS
Our Board’s Responsibilities
party consultant to develop a comprehensive succession planning strategy, and CenturyLink has retained the same consultant to continue to advise the Board and the Company’s leadership. Specific objectives were to:
Understand the external market ofCEO-ready talent and update this understanding at regular intervals over the upcoming three years
Assess the current gaps in CEO readiness of key CenturyLink executives, the probability that they will be able to close the gaps, and the executive development plans and timeframes for doing so
Ensure that key CenturyLink executives have a clear and actionable development plans and establish a transparent process for leadership and the Board to track progress against development goals as needed
Consider possible CEO succession scenarios based on individual as well as collective team strengths and gaps
In 2019, our Board approved an emergency succession plan and related communications plan.
Recognizing the importance of assuring that our business strategies are designed to create long-term, sustainable value for our shareholders, our Board regularly engages in active discussions with management to formulate and implement those strategies for the overall Company and each business segment. The Board and management routinely discuss key initiatives, transformative technologies, innovation, and corporate governance guidelines do not requireopportunities focused on driving long-term value. In addition to regular Board and committee meetings, which include presentations and discussions of tactical and strategic initiatives, the Board participates in an annualin-depth review of the Company’s overall strategy with our Chairmanmanagement team. The Board and CEO positionsour management team discuss the industry and competitive landscapes, short and long-term plans and capital allocation strategies.
The Board, along with its committees, reviews and oversees CenturyLink’s risk management processes in many ways, including receiving regular reports about our enterprise risk management (“ERM”) program, which is designed to comprehensively identify our most significant risks. Under the ERM program, management develops a response plan for prioritized risks, as well as monitoring and mitigation plans for other identified risk focus areas. Management provides regular reports on the risk portfolio and response efforts to the Risk and Security Committee. The Board also works with management to assess our keyshort-and long-term risks and mitigation efforts relating to, among other things, financial reporting, strategic plans, operations, capital budgets, corporate functions, and business units. Among others, key areas we assess include:
Cybersecurity Risks – As a communications company that transmits large amounts of information over our networks, we clearly recognize that maintaining the security and integrity of information and systems under our control is a priority among our operational risk management efforts. We view cybersecurity risk as an enterprise-wide risk subject to control and monitoring at various levels of management throughout the Company. The Risk and Security Committee reviews on at least a quarterly basis risk assessments from management with respect to cybersecurity, including the adequacy and effectiveness of the
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ITEM NO. 1 – ELECTION OF DIRECTORS
Our Board’s Responsibilities
Company’s internal controls regarding cybersecurity, emerging cybersecurity developments and threats, and the Company’s strategy to mitigate cybersecurity risks such as our contingency plans in the event of security breaches or other system disruptions and cyber insurance coverage. To mitigate risk, we have implemented a global information security management program to provide consistent mitigation, common solutions, and consistent risk assessment, which is subject to oversight by and reporting to the Risk and Security Committee. Additionally, the Company periodically engages outside cybersecurity experts to assess our exposure and enhance our controls, monitoring and mitigation activities related to these risks. |
Data Privacy Risks – In addition to protecting data transmitted across our network, we also protect the content of data CenturyLink collects, stores, uses, and distributes. Employee and customer information collected is encrypted both at rest and in transmission. We have adopted a data minimization policy designed to comply with and detect breaches of state, U.S., and other international jurisdictions’ laws and ensure appropriate protections when sharing information with third parties, including vendors. As part of the ERM process, the Risk and Security Committee receives reports on data privacy protection efforts and controls to meet and enhance legal and compliance requirements across the enterprise.
Other Risks and Information – Our Board committees oversee the other risks specified in the chart included in the preceding section “—Board Committees,” and our Board and committees further oversee the ESG and other risks discussed below under the heading “—Commitment to Environmental, Social and Governance (ESG) Leadership”.
Commitment to Environmental, Social and Governance (ESG) Leadership
Responsible corporate citizenship has long been a part of our governance and business strategy and continues to be separate,a key priority for our Board and management team. The Board and the Nominating Committee, in conjunction with designated management teams, are continually evaluating our ESG program and identifying meaningful environmental, product, consumer, financial, and other factors to develop metrics material to our business, and communication plans regarding our ESG strategy. Some of our ESG highlights are described below.
Ethics and Compliance –Our Code of Conduct sets forth the ethical expectations and standards of conduct required in all business dealings and interactions around the world and applies to all directors, officers, and employees alike. Our Ethics and Compliance team is an independent function led by the Company’s Chief Ethics and Compliance Officer who maintains full and direct access and makes regular reports to the Risk and Security Committee of the Board of Directors. Specifically, CenturyLink’s program:
Conducts mandatory Code of Conduct training annually, the scope and content of which is fashioned through risk assessments, and reinforced through localized, risk-based and targeted training and compliance strategies.
Offers employees several confidential avenues to report concerns and allegations of misconduct, including the Company’s Integrity Line, our global, multilingual, independent, and continuously staffed compliance hotline.
Maintains a strong multidisciplinary compliance program supported by internal processes and resources, including compliance analysts, attorneys and an investigations team, all of whom are fully trained to evaluate and facilitate the review of allegations and concerns.
Prohibits retaliation against any individual who raises a concern, makes a report, participates in an investigation, refuses to participate in suspected improper or wrongful activity, or exercises rights protected by law.
Protects human rights by incorporating our own principles and ethics in our business and supplier relationships, through contractual commitments and our Supplier Code of Conduct.
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ITEM NO. 1 – ELECTION OF DIRECTORS
Our Board’s Responsibilities
ESG Reporting – Since 2015, we have published an annual ESG report highlighting our efforts to track our impact on the communities in which we live and operate. Although not part of this proxy statement, our most recent ESG report can be located on our website at https://ir.centurylink.com/esg/default.aspx.
Environmental Sustainability – Our recent environmental initiatives and achievements include:
Customer Experience – We strive to continually improve the experience we provide to our customers, including their interactions with our employees. We believe that an excellent experience not only leads to satisfied customers – but also will improve our sales and revenue results, boost employee engagement and reduce costs. We have a dedicated team responsible for evaluating the best approach to the customer experience from our largest enterprise customers to our residential customers, coupled with frequent, transparent and informative communication processes.
An essential element of delivering on our commitment is listening to our customers by offering several channels for communication including voice, text, email, chat and social media, among others. In 2019 we launched CenturyLink’s inaugural customer experience (CX) event, during which we invited customers to our headquarters to collaborate directly with our management team.
While listing to customers is the best source of customer experience feedback, we believe overlaying it with employee feedback is the most effective way to continuously improve. Consequently, we regularly invite our front-line employees to provide feedback on opportunities to improve the experience and to make it easier to do their jobs.
Community Impact –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 employees. We seek to strengthen the communities in which we live and work through philanthropy, local community initiatives, and global initiatives. Among our efforts are:
In support of STEM Education, CenturyLink offers teachers an opportunity to earn grants to innovatively implement technology in their classrooms
Employees are encouraged to actively volunteer and are supported through our Dollars for Doers grants program
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ITEM NO. 1 – ELECTION OF DIRECTORS
Our Board’s Responsibilities
Employees are offered a method for continual giving to causes that matter to them, while maximizing their contribution with our corporate match
Employees are encouraged to volunteer and donate through our annual Campaign to Fight Hunger to support hunger relief efforts around the globe
Oversight of Political and Lobbying Contributions – Our Board is engaged in the oversight of our political initiatives, and reviews annually CenturyLink’s political and lobbying activities and related budgets. We strive to advocate public policy solutions that best serve our customers, our shareholders, our employees, and the communities we serve. Our semi-annual Political Contributions Report provides transparency in this process, demonstrating ethical corporate governance and promoting confidence in the democratic process. Specifically, our Report discloses our corporate political contributions and those of our political action committees in accordance with applicable federal and state campaign finance laws, and contributions to trade associations and 501(c)(4) organizations. Although not part of this proxy statement, our most recent Political Contributions Report can be located at “About Us/Company—Information/Public Policy” on our website at https://www.centurylink.com.
Human Capital Management – The Board and management know our highly competitive business requires skilled and motivated employees and leaders with the necessary expertise to execute our innovation, efficiency, and transformation strategies. Human capital management and employee engagement have always been a priority for CenturyLink, and as we integrated with Level 3, the Board focused on the risk that a shift in culture, as well as the ongoing risk we may encounter in our competitive industry’s “war for talent,” could create for retaining the talented employees who contributed to each company’s success. The Board regularly discusses with management CenturyLink’s continuous efforts to attract and retain the caliber of employee with the type of knowledge and skills necessary to realize our goals. Both the Board and management set a “tone at the top” through: participating in and promoting our “One Company, One Culture” initiative, regularly meeting with our EVP, HR to discuss culture, talent strategy, and leadership development and staying ahead of market trends by identifying early the skills needed for our future, and designing strategies to bridge any gaps by cultivating ourin-house talent to evolve critical skills or engaging third parties. Our Human Resources team applies this strategy to every layer of our Company during annual talent assessment and succession reviews by having senior officers identify from among their direct reports potential candidates for “next-layer” leadership. Additionally, as a tactic for retaining skilled,non-executive level employees, our Compensation Committee has approved special incentive programs from time to time in an effort to retain our talent.
Positive Corporate Culture – The Board and management believe that engaged and satisfied employees are important to creating shareholder value. From the Board on down, we have dedicated time and expertise to creating a thriving culture throughout the organization, particularly following the closing of the Level 3 transaction. As part of this initiative, we engaged a nationally recognized third-party consultant, to partner in the development of CenturyLink’s “One Company One Culture” program, which incorporates a wide variety of training and communication activities to promote a collaborative, engaged workplace. We measure the program’s efficacy and identify opportunities for improvements through an engagement survey distributed approximately every four months. The survey is sent to all employees within the organization, and has been a great success, receiving approximately 80% participation rate.
Promoting Diversity – To maintain and grow CenturyLink’s diverse workforce, we formed a Diversity & Inclusion Steering Committee comprised of senior leaders focused on developing and realizing our overall diversity strategy. Efforts include (i) recruiting and outreach designed to attract diverse talent and (ii) employee resource groups – some active for more than 40 years – to support employee engagement, awareness, career development, and training. Recognition for our diversity and inclusion efforts include:
Forbes, January 2020 distinguished list of the top 500 employers in the area of Diversity
The top score of 100% again for 2020 from Corporate Equality Index, a national report by the Human Rights Campaign on corporate policies and practices related to lesbian, gay, bisexual, transgender and queer workplace equality
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ITEM NO. 1 – ELECTION OF DIRECTORS
Our Board’s Responsibilities
Commitment to Pay Equity –CenturyLink recently conducted a pay equity review of our U.S.,non-union employees to determine whether male and female employees who perform similar work at the same level are receiving similar pay. When evaluating peers, we reviewed, among other factors, similar roles, company tenure, work level and performance, and identified a small group of our employees who were paid below expected levels which may have been gender related. In response, we developed a plan to achieve gender pay equity in the first quarter of 2020. Moving forward, we plan to conduct these analyses regularly to ensure we continue to pay employees fairly and equitably, regardless of gender. We plan to expand it to include other factors like race and ethnicity. We also plan to continue to review our processes and technology to ensure we are making good, equitable decisions real time for all of our employees.
Directors are expected to attend all Board meetings and meetings of committees on which they serve. Directors also are expected to attend each annual shareholders’ meeting. All current directors, except Hal Jones who joined our Board effective January 1, 2020, attended our 2019 annual shareholders’ meeting. During 2019 there were nine regular or special meetings of the Board, as well as 28 standing committee meetings. Each current director who served on the Board during 2019 attended more than 75% of the total number of the 2019 Board and respective Committee meetings on which he or she served. Our independent Board members met in executive session, chaired by our Lead Outside Director, without management andnon-independent directors present during four of its 2019 full Board meetings. Also, ournon-management Board members met in executive session without management present during four of its 2019 full Board meetings.
The Board believes that delegating responsibilities betweeneach of our Chairmannon-employee directors (whom we also refer to as outside directors ornon-management directors) should be compensated through a mix of cash and equity-based compensation. Our Compensation Committee, consisting entirely of independent directors, has primary responsibility for periodically reviewing and considering any revisions to director compensation. In recent years, the Compensation Committee has reviewed director compensation annually with assistance from its independent compensation consultant, including conducting annual benchmarking to help assess the appropriateness and competitiveness of our director compensation programs. The Board reviews the Compensation Committee’s recommendations, discusses those recommendations 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 2019. This table does not include compensation paid to our CEO has beenand President, Jeff Storey, who does not receive any additional compensation for his service as a director. Please see the appropriate leadership structure“Summary Compensation Table” below for our Companydetails regarding all compensation paid to Mr. Storey during fiscal 2019.
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ITEM NO. 1 – ELECTION OF DIRECTORS
Director Compensation
2019 Compensation of Outside Directors
Name | Fees Earned or Paid in Cash | Stock Awards(1),(2) | All Other Compensation(3) | Total | ||||||||||||||||
Continuing Directors: | ||||||||||||||||||||
Martha H. Bejar | $ | 120,000 | $ | 146,472 | $ | 4,000 | $ | 270,472 | ||||||||||||
Virginia Boulet | 130,000 | 146,472 | — | 276,472 | ||||||||||||||||
Peter C. Brown | 128,375 | 146,472 | — | 274,847 | ||||||||||||||||
Kevin P. Chilton | 128,500 | 146,472 | — | 274,972 | ||||||||||||||||
Steven T. Clontz | 115,000 | 146,472 | — | 261,472 | ||||||||||||||||
T. Michael Glenn | 121,000 | 146,472 | — | 267,472 | ||||||||||||||||
W. Bruce Hanks | 244,000 | 146,472 | 17,000 | 407,472 | ||||||||||||||||
Michael J. Roberts | 114,000 | 146,472 | — | 260,472 | ||||||||||||||||
Laurie A. Siegel | 113,000 | 146,472 | — | 259,472 | ||||||||||||||||
Non-Returning Directors:(4) | ||||||||||||||||||||
Mary L. Landrieu | 113,000 | 146,472 | — | 259,472 | ||||||||||||||||
Harvey P. Perry | 309,000 | 146,472 | 15,950 | 471,422 | ||||||||||||||||
Glen F. Post, III | 109,000 | 146,472 | 4,436 | 259,908 |
(1) | For fiscal 2019, the Compensation Committee granted each outside director an award of restricted shares or restricted stock units valued at $165,000 based upon the volume-weighted average closing price of our Common Shares over a15-day trading period ending prior to the May 22, 2019, grant date. However, as required by SEC rules, the dollar value reported in this column reflects the grant date fair value of that award based upon the closing stock price of our Common Shares on the grant date in accordance with FASB ASC Topic 718. These awards vest on May 22, 2020 (subject to accelerated vesting or forfeiture in certain limited circumstances). See “—Cash and Stock Payments.” |
(2) | As of December 31, 2019, Mr. Post held 365,221 unvested shares of restricted stock (consisting of 14,706 time-based and 350,515 performance-based shares, which will vest and pay out or be forfeited in accordance with their original performance conditions) and each of our other outside directors held 14,706 unvested shares of restricted stock or unvested RSUs deferred under theNon-Employee Director Deferred Compensation Plan (the “Deferred RSUs”), which constituted the only unvested equity-based awards held by our outside directors as of such date. For further information on our directors’ stock ownership, see “Ownership of Our Securities—Executive Officers and Directors,” and for information on certain deferred fee arrangements pertaining to Mr. Roberts, see “—Other Benefits.” |
(3) | Includes (i) reimbursements for the cost of annual physical examinations and related travel of $5,000 for each of Mr. Hanks and Ms. Landrieu, $3,950 for Mr. Perry and $4,436 for Mr. Post, (ii) the payments related to the attendance of the KPMG Conference of $6,000 for Messrs. Hanks and Perry, (iii) payments related to the attendance of the NACD Global Board Leaders’ Summit of $6,000 for each of Ms. Landrieu and Messrs. Hanks and Perry and the payments related to the attendance of the G100 Conference of $4,000 for each of Ms. Bejar and Mr. Chilton. Except as otherwise noted 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 Analysis—Our Compensation Program Objectives and Components of Pay—Other Benefits—Perquisites”). |
(4) | The terms of each of these directors will end immediately following the 2020 annual shareholders meeting. |
Cash Fees – Each outside director is paid an annual fee of $75,000 plus $2,000 for attending each regular Board meeting, special Board meeting (including each day of the past decade, which have been marked by rapid growthBoard’s annual planning session), committee meeting and separate director education program.
During 2019, 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 principally in our operations and a substantial change in our product offerings and our industry. As noted above under “— Independence and Tenure,” theCorporate Governance Guidelines. See “How Our Board namedis Organized—Board Leadership Structure.”
2020 Proxy Statement | 25 |
ITEM NO. 1 – ELECTION OF DIRECTORS
Director Compensation
During 2019, W. Bruce Hanks, the Company’sin his capacity asnon-executive Vice Chairman of the Board as lead independent directorand Lead Outside Director, received supplemental Board fees of $100,000 payable in early 2018. Prior to then, Mr. Perry performed all duties assigned tocash. Under our Bylaws, the Vice Chairman is charged with the responsibility of assisting the Chairman and lead director. The responsibilitiesperforming 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 Chairmanfollowing committees as follows: (i) the chair of the Audit Committee receives $25,000, (ii) the chair of the Compensation Committee receives $25,000, (iii) the chair of the Nominating Committee receives $15,000 and (iv) the leadchair of the Risk and Security Committee receives $12,500.
Equity Grant – During 2019, the Compensation Committee awarded an annual equity grant valued at $165,000 to each outside director, with the number of shares determined by dividing this target value by the volume-weighted average closing price of our Common Shares over a15-day trading period ending prior to the grant date and rounding up to the nearest whole share.
This grant was awarded to each director in the form of time-vested shares of restricted stock unless the director made an election to defer all or a portion of the award under ourNon-Employee Directors Deferred Compensation Plan (discussed below). For those directors who elected to defer any portion of the grant, the portion deferred was issued to the director as time-vested restricted stock units. These awards are scheduled to vest on May 22, 2020 (one year after grant), with vesting accelerated in certain circumstances as described in the award agreement.
Dividends (or, for restricted stock units, dividend equivalents) on these awards are not paid currently but rather accrue from the grant date through the date of vesting (for restricted stock) or the date of issuance of the underlying shares (for restricted stock units) and are subject to the same vesting terms as the related award. Dividends on shares of restricted stock are paid to the director upon vesting while dividend equivalents on restricted stock units are paid to the director at the same time as the underlying shares are issued to him or her.
Non-Qualified Deferred Compensation
Non-Employee Director Deferred Compensation Plan – In March 2019, the Board adopted a deferred compensation plan for ournon-employee directors. Under this plan, ournon-employee directors may defer up to 100% of their cash and equity compensation, effective for (1) equity compensationgranted tonon-employee directors for service after May 17, 2019 and (2) cash compensation earned bynon-employee directors after December 31, 2019.
Participants in theNon-Employee Director Deferred Compensation Plan may elect to receive payment of their account balances in either two to five annual installments or a lump sum upon a fixed date, separation from service, or up to five years following separation from service, subject to any deferrals mandated by federal law.
All cash amounts deferred under this deferred compensation plan bynon-employee directors are allocated among deemed investments that follow the performance of a broad array of funds and are reflected in the market value of each participant’s account. Distribution amounts will include investment returns (positive or negative).
If anon-employee director elects to defer all or a portion of the director’s annual equity award under this plan, as noted above, the portion of the award subject to the deferral election will be issued as restricted stock units instead of shares of restricted stock.
Legacy Qwest Deferred Compensation Plan – Closed to New Participants and Contributions – In connection with our 2011 merger with Qwest, we assumed the Qwest Deferred Compensation Plan for Non-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 shareholders “reinvested” in additional phantom units. Plan balances attributable to amounts deferred on or after January 1, 2005, by Qwest directors who joined our Board following the merger
26 | 2020 Proxy Statement |
ITEM NO. 1 – ELECTION OF DIRECTORS
Director Compensation
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, 2019, Michael J. Roberts was the only remaining participant in this plan, with a balance of 7,521 phantom units with an aggregate value of approximately $99,353 as of such date.
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. 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 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.
For information on our stock ownership guidelines for our outside directors and executive officers, see “Stock Ownership—Stock Ownership 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 furtherFor information 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.hedging policies, see “Compensation Discussion and Analysis—Our Governance of Executive Compensation—Anti-Hedging and Anti-Pledging Policies.”
2020 Proxy Statement | 27 |
The following documents are posted on our website at www.centurylink.com:ITEM NO. 2 – RATIFICATION OF KPMG AS OUR 2020 INDEPENDENT AUDITOR
The Audit Committee of the Board has appointed KPMG LLP as our independent auditor for the fiscal year ending December 31, 2018,2020, 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 resubmitting 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 20162018 and 20172019 services identified below:
Amount Billed | Amount Billed | |||||||||||||||
2016 | 2017 | 2018 | 2019 | |||||||||||||
Audit Fees(1) | $ | 11,316,096 | $ | 12,245,495 | $ | 16,014,014 | $ | 17,639,702 | ||||||||
Audit-Related Fees(2) | 118,178 | 207,554 | 106,528 | 153,203 | ||||||||||||
Tax Fees(3) | 2,079,160 | 2,121,869 | 1,318,798 | 119,098 | ||||||||||||
Other | — | — | — | — | ||||||||||||
|
| |||||||||||||||
Total Fees | $ | 13,513,434 | $ | 14,574,918 | $ | 17,439,340 | $ | 17,912,003 | ||||||||
|
|
(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. In addition, the amount listed for 2018 includes a final billing of $785,000 that was received after we finalized our 2019 proxy statement and consequently was not reflected in the auditor fee table included in our 2019 proxy statement. |
(2) | Includes the cost of preparing agreed upon procedures reports and providing general accounting consulting services. |
(3) | Includes costs associated with |
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
28 | 2020 Proxy Statement |
ITEM NO. 2 – RATIFICATION OF KPMG AS OUR 2020 INDEPENDENT AUDITOR
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 permit us to waive thesepre-approval requirements in certain limited circumstances, the Audit Committee did not use these waiver provisions in either 20162018 or 2017.2019.
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 20182020 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.
2020 Proxy Statement | 29 |
Management is responsible forOur Audit Committee has oversight authority over CenturyLink’s financial reporting function, including our internal controls andover financial reporting (“ICFR”) and our external independent audit process. OurIn carrying out its oversight responsibilities, the Audit Committee:
Monitors management’s responsibility for fairly presenting our financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) by maintaining accurate and reliable financial information through our ICFR processes.
Appoints our independent auditor.
Regularly communicates with our independent auditor is responsible for performing an independentregarding the scope and status of its annual audit of our consolidated financial statements, including our ICFR.
As part of the Committee’s oversight of the Company’s financial statements, the Committee reviews and discusses with management, the internal audit team and the Company’s independent auditor, management’s key initiatives and programs aimed at maintaining and improving ICFR, the effectiveness of the Company’s internal and disclosure control structure, and the scope and adequacy of the Company’s internal auditing program.
The Committee met nine times in 2019 and included, whenever appropriate, executive sessions in which the Committee met separately with KPMG, our independent auditor, as well as representatives of our internal control over financial reporting,audit group 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,management. During 2019, the Committee has met and held discussions with management and our internal auditors and independent auditor for 2017, 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. The Committee also discussed with KPMGKPMG: (i) those matters required to be discussed by Auditing Standard No. 1301,Communicationsthe applicable requirements of the SEC and the Public Company Accounting Oversight Board (“PCAOB”), including the quality of the Company’s accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements; (ii) the written disclosures required by PCAOB regarding the independent auditor’s communications with Audit Committees.audit committees concerning independence; (iii) KPMG’s independence, and considered the effects that the provision ofnon-audit services may have on KPMG’s independence; and (iv) various other matters pertaining to the audit and other matters handled by KPMG.
Among other matters, over the course of the past year, the Committee also:
emphasized the continued importance of an environment supporting the integrity of the financial reporting process;
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;
reviewed a report by the independent auditor describing the independent auditor’s internal quality control procedures;
reviewed the performance of the lead engagement partner of our independent auditor;
reviewed and discussed each quarterly and annual earnings press release before issuance;issuance, including reviewing the Company’s issuance of guidance and use ofnon-GAAP financial information;
received periodicquarterly reports from the director of internal audit, including the Company’s work regarding ICFR, and met with other members of the internal audit staff;
monitored the Company’s remediation of the two material weaknesses reported in our internal audit operations;Annual report on Form10-K for the year ended December 31, 2018;
received reports on the Company’s testing of Goodwill Impairment and the recording of an impairment in the first quarter 2019;
30 | 2020 Proxy Statement |
AUDIT COMMITTEE REPORT
received periodic reports pursuant to our policy for the submission andof confidential treatment of communications from employees and others about accounting, internal controls and auditing matters;matters, and conducted certainfollow-up inquiries as necessary;
amended our disclosure controls and procedures;procedures in connection with assessing their effectiveness;
received and evaluated a report concerning the Company’s major financial risks along with the Company’s mitigating actions;
oversaw the implementation of new accounting standards, including receiving quarterly updates on the Company’s implementation of the new lease accounting standard and the appropriate related internal controls;
received detailed analyses on the Company’s accounting for income taxes and the Company’s accounting for pension assets and liabilities;
discussed our 2019 Critical Accounting Matters with KPMG, including the work performed;
met quarterly in separate executive sessions, including private sessions with the Company’s independent auditors, internal auditors and top executives;
received aan annual report with regard to any hiring of former employees of KPMG; and
coordinated with other committees of the Risk Evaluation CommitteeBoard to oversee the Company’s risk management function, especially with respect to matters that could impact the Company’s financial taxresults or financial position; and accounting risks.
KPMG also provided to
participated in the Committeeprocess of hiring the written disclosures required by the applicable requirementsCompany’s new head 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 provisioninternal audit.
Taking all ofnon-audit services may have on KPMG’s independence.
Based on and in reliance upon the these reviews and discussions referred to above,into account and subject to the limitations on the role and responsibilities of the Committee referred to in its charter, the undersigned Committee members recommended that the Board of Directors include the Company’s audited consolidated financial statements in our Annual Report on Form10-K for the year ended December 31, 2017.2019.
In addition to the Company’s corporate compliance program and hotline,integrity line, 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
2020 Proxy Statement | 31 |
PROPOSALITEM NO. 3 – APPROVAL OF AN AMENDMENT TO APPROVE THE
CENTURYLINKOUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
(Item 3 on Proxy or Voting Instruction Card)
Our Board believes that our growth depends upon the efforts of our officers, directors, employees, consultants, and advisors, and we believe that our current equity compensation plan, the proposed CenturyLink 2018 Equity Incentive Plan (the “2018 Plan”) will provide, provides an effective means of attracting, retaining, and motivating qualified key personnel while encouraging long-term focus on maximizing shareholder value. The
A maximum of 34,600,000 Common Shares were initially reserved for issuance under the 2018 Plan has been adoptedas approved by our shareholders at our 2018 annual meeting. As noted in the chart on page 39, we had 5,250,061 Common Shares available for grant under the 2018 Plan as of March 9, 2020, which we do not believe will be sufficient for future grants.
Therefore, we are proposing an amendment to increase the maximum number of Common Shares reserved for issuance under the 2018 Plan to 75,600,000, which reflects an increase of 41,000,000 Common Shares (the “Share Increase Amendment” and the 2018 Plan, after giving effect to the Share Increase Amendment, the “Amended Plan”).
We have carefully reviewed the provisions of the 2018 Plan in its entirety, and we feel that the plan still reflects good equity compensation practices and is in line with shareholder interests. We are not proposing any other changes to the terms of the 2018 Plan. The Share Increase Amendment is the only difference between the 2018 Plan and the Amended Plan.
Our Board, on the recommendation of its Human Resources and Compensation Committee, has unanimously approved the Share Increase Amendment, subject to approval by our shareholders at the annual meeting.
The principal features of the 2018Amended Plan are summarized below. However, this summary is qualified in its entirety by reference to by the full text of the 2018Amended Plan, as attached to this proxy statement asAppendix AC. 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 AC carefully before you decide how to vote on this 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 However, given 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”, asfew number of December 31, 2017, we had 43,570,576 sharesCommon Shares remaining 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. Weas noted above, we believe that adoption of the 2018 PlanShare Increase Amendment is integral to our continued ability to attract, retain, and motivate key stakeholders 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, ifIf shareholders do not approve the 2018 PlanShare Increase Amendment at the annual meeting, we will continue to use our current equity plans2018 Plan but, given the limitations on uselimited number of those plans discussed above,Common Shares remaining available for issuance, we may be required tore-evaluate our compensation structure to ensure that it remains competitive. Specifically, if the 2018 PlanShare Increase Amendment 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.
32 | 2020 Proxy Statement |
ITEM NO. 3 – APPROVAL OF AN AMENDMENT TO OUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
Summary of the 2018Amended Plan
Administration of the 2018 PlanAmended Plan..The Human Resources and Compensation Committee (or a subcommittee thereof)of this committee; in either case, the “Committee”) will generally administer the 2018Amended Plan and has the authority to make awards under the 2018Amended 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 2018Amended Plan, and to make any other determination that it
believes necessary or advisable for proper administration of the 2018Amended Plan. Subject to the limitations specified in the 2018Amended 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.Act.
EligibilityEligibility..Key employees, officers, and directors of CenturyLink and our consultants or advisors are eligible to receive awards (“Incentives”) under the 2018Amended Plan. Based on current estimates, we anticipate that approximately 2,1751,875 officers and 1110non-employee directors would be eligible to receive Incentives under the 2018Amended 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 (“Other Stock-Based Awards (as defined below)Awards”). Each of these types of Incentives is discussed in more detail in “Types of Incentives” below.
Shares Issuable under the 2018Amended Plan.A total of 34,600,00075,600,000 of our Common Shares are authorized for issuance under the 2018 Plan.Amended Plan (giving effect to the Share Increase Amendment). This figure represents approximately 3.2%7% of the outstanding Common Shares as of our record date of April 6, 2018.March 26, 2020. The closing price of a Common Share on the record date, as quoted on the NYSE, was $17.21.$9.29.
Limitations on Shares Issuable under the 2018Amended Plan.Under the 2018Amended Plan, Incentivesincentives 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 2018Amended 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 2018Amended Plan, shares that are not delivered because an Incentive is forfeited, canceled, or expired will return to the 2018Amended 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 2018Amended Plan.
Adjustments to Shares Issuable under the 2018 PlanAmended Plan..Proportionate adjustments will be made to all of the share limitations provided in the 2018Amended 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 PeriodsPeriods..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 EquivalentsEquivalents..The 2018Amended 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.
2020 Proxy Statement | 33 |
ITEM NO. 3 – APPROVAL OF AN AMENDMENT TO OUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
Summary of the Amended Plan
Amendments to the 2018 PlanAmended Plan..Our Board may amend or discontinue the 2018Amended Plan at any time. However, our shareholders must approve any amendment to the 2018Amended Plan that would:
materially increase the number of Common Shares that may be issued through the 2018 Plan,Amended Plan;
materially increase the benefits accruing to participants,participants;
materially expand the classes of persons eligible to participate,participate;
expand the types of awards available for grant,grant;
materially extend the term of the 2018 Plan,Amended Plan;
materially reduce the price at which Common Shares may be offered through the 2018 Plan,Amended Plan; or
permit the repricing of an option or stock appreciation right.
Duration of the 2018 PlanAmended Plan..No Incentives may be granted under the 2018Amended Plan after May 23, 2028.2028 (the tenth anniversary of the date on which the 2018 Plan was initially approved by our shareholders).
Types of IncentivesIncentives..Each type of Incentive that may be granted under the 2018Amended Plan is described below.
Stock Options.A. 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:
in cash or by check,check;
in Common Shares,Shares;
through a “cashless” exercise arrangement with a broker approved by CenturyLink,CenturyLink;
through a net exercise procedure if approved by the Committee,Committee; or
in any other manner authorized by the Committee.
Stock Appreciation Rights.A.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 2018Amended 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 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
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34 | 2020 Proxy Statement |
ITEM NO. 3 – APPROVAL OF AN AMENDMENT TO OUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
Summary of the Amended Plan
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 2018Amended 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 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 2018Amended 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 The Amended 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”)(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 EmploymentEmployment..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 ControlControl..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,conditions, the Committee may:
require that all outstanding Incentives be exercised by a certain date;
require the surrender to CenturyLink of some or all outstanding Incentives in exchange for a stock or cash payment for each Incentive equal in value to the per share change of control value, calculated as described in the 2018Amended Plan, over the exercise or base price;
make any equitable adjustment to outstanding Incentives as the Committee deems necessary to reflect our corporate changes; or
provide that an Incentive shall become an Incentive relating to the number and class of shares of stock or other securities or property (including cash) to which the participant would have been entitled in connection with the change of control transaction if the participant had been a shareholder.
Transferability of Incentives.No Incentives granted under the 2018Amended 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 WithholdingWithholding..We may withhold from any payments or share issuances under the 2018Amended Plan, or collect as a condition of payment, any taxes required by law to be withheld. The participant may, but is not required to,
2020 Proxy Statement | 35 |
ITEM NO. 3 – APPROVAL OF AN AMENDMENT TO OUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
Summary of the Amended Plan
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.Act.
Purchase of IncentivesIncentives..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 2018Amended Plan are summarized below. Participants who are granted Incentives under the 2018Amended Plan should consult their own tax advisors to determine the tax consequences based on their particular circumstances.
Stock OptionsOptions..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 2018Amended 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 RightsRights..Generally, a participant who is granted a stock appreciation right under the 2018Amended 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.
36 | 2020 Proxy Statement |
ITEM NO. 3 – APPROVAL OF AN AMENDMENT TO OUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
Federal Income Tax Consequences
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 StockStock..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 AwardsAwards..Generally, a participant who is granted an Other Stock-Based Award under the 2018Amended 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). 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,Under Section 162(m)’s definition of, “covered employees” includesconsist of 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 2018Amended 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 CodeCode..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 ControlControl..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
2020 Proxy Statement | 37 |
ITEM NO. 3 – APPROVAL OF AN AMENDMENT TO OUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
Federal Income Tax Consequences
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 2018Amended 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.
Approval of the 2018Amended Plan requires the affirmative vote of the holders of at least a majority of the votes cast on the proposal.proposal at the meeting.
The Board recommends that you vote FOR this proposal.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR THIS PROPOSAL |
Equity Compensation Plan Information
The following table providestables provide information as of December 31, 20172019, and March 9, 2020, about our equity compensation plans under which Common Shares are authorized for issuance.
A. As of December 31, 2019
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 | |||||||||
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Totals | 13,954,337 | 27.41 | 43,570,576 | |||||||||
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Plan Category | Number of securities to be issued upon exercise of outstanding options and rights (a) (1) | Weighted-average exercise price of outstanding options and rights (b) (2) | Number of securities (c) | ||||||||||||
Equity Compensation Plans approved by shareholders | 8,821,040 | $— | 18,784,622 | ||||||||||||
Equity Compensation Plans not approved by shareholders(3) | 3,424,930 | $ | 28.04 | — | |||||||||||
Totals | 12,245,970 | (4) | $ | 28.04 | 18,784,622 | (5) |
(1) | These amounts include restricted stock units, some of which represent the difference between the number of shares of restricted stock subject to market conditions granted at target and the maximum possible payout for these awards. Depending on performance, the actual share payout of these awards may range between0-200% of target. |
(2) | The |
(3) | These amounts represent Common Shares to be issued upon exercise or vesting of equity awards that were assumed in connection with certain acquisitions or issued under plans that were assumed in those acquisitions. |
(4) | This figure consists of 469,042 options to purchase Common Shares and 11,776,928 Common Shares subject to restricted stock units (RSUs). In addition, as of December 31, 2019, we had 17,136,454 unvested shares of restricted stock outstanding (which, when combined with the Common Shares subject to RSUs in the prior sentence, yields a total of 29,382,424 full-value awards outstanding). These were the only types of equity awards outstanding as of December 31, 2019. |
(5) | Represents the number of shares remaining available for issuance as new awards under our 2018 Plan as of December 31, 2019. |
38 | 2020 Proxy Statement |
ITEM NO. 3 – APPROVAL OF AN AMENDMENT TO OUR 2018 EQUITY INCENTIVE COMPENSATION PLAN
Equity Compensation Plan Information
B. As of March 9, 2020
Plan Category | Number of securities to be issued upon exercise of outstanding options and rights (a) (1) | Weighted-average exercise price of outstanding options and rights (b) (2) | Number of securities (c) | ||||||||||||
Equity Compensation Plans approved by shareholders | 12,752,160 | $— | 5,250,061 | ||||||||||||
Equity Compensation Plans not approved by shareholders(3) | 1,314,171 | $ | 38.15 | — | |||||||||||
Totals | 14,066,331 | (4) | $ | 38.15 | 5,250,061 | (5) |
(1) | These amounts include restricted stock units, some of which represent the difference between the number of shares of restricted stock subject to market conditions granted at target and the maximum possible payout for these awards. Depending on performance, the actual share payout of these awards may range between0-200% of target. |
(2) | The amounts in column (a) include restricted stock units, which do not have an exercise price. Consequently, those awards were excluded from the calculation of this exercise price. The weighted-average remaining term of the option awards included in this column is 0.59 years. |
(3) | These amounts represent Common Shares to be issued upon exercise or vesting of equity awards that were assumed in connection with certain acquisitions or issued under plans that were assumed in those acquisitions. |
(4) | This figure consists of 1,245 options to purchase Common Shares and 14,065,086 Common Shares subject to restricted stock units (RSUs). In addition, as of March 9, 2020, we had 19,820,297 unvested shares of restricted stock outstanding (which, when combined with the Common Shares subject to RSUs in the prior sentence, yields a total of 33,886,628 full-value awards outstanding). These were the only types of equity awards outstanding as of March 9, 2020. |
(5) | Represents the number of shares remaining available for issuance |
2020 Proxy Statement | 39 |
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).
ITEM NO. 4 – ADVISORY VOTE ON EXECUTIVE COMPENSATION
(Item 4 on Proxy or Voting Instruction Card) –“SAY-ON-PAY”
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 officersNEOs 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 Human Resources and Compensation Committee of our Board (the “Committee”) 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.
As discussed in greater detail elsewhere in this proxy statement, the Committee spends considerable time and effort to ensure that not only do we have the right leadership in place, but also 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. During 2019, this included a significant emphasis on shareholder outreach, and taking action in response to the input we received from shareholders, including making changes to our 2020 compensation programs. For additional information on our executive compensation programs generally and our recent 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
THE BOARD UNANIMOUSLY RECOMMENDS A VOTEFOR THIS PROPOSAL |
40 | 2020 Proxy Statement |
LETTER FROM THE CHAIR OF OUR COMPENSATION COMMITTEE
Fellow shareholders,
2018 was a transformative year for CenturyLink as we completed the acquisition of Level 3, made significant leadership changes including our CEO and CFO roles and undertook ambitious plans for integration and synergy realization. It was not a year of “business as usual”, and our compensation practices varied from what our shareholders have come to expect of us. In particular, significantone-time awards were utilized to effect leadership changes and some plan features were altered, such as shifting from a three-year performance period to two years in our long-term incentive plan. While we never intended for these practices to be repeated in subsequent years, our shareholders sent us a strong message of disapproval in the form of a significant drop in shareholder support for oursay-on-pay proposal. We have heard that you vote FOR the overall compensationmessage, engaged with our shareholders and benefited greatly from this engagement.
Our 2019say-on-pay proposal received only 41% support from shareholders, well below previous years and also falling well short of our namedgoals. The vote result was a clear indication that investors had reservations with how we paid our executive officers as describedteam in this proxy statement.2018. For the Board, the vote result was a clear call to action: the Committee committed to reviewing our executive compensation program from top to bottom, and making changes to improve the program.
SHAREHOLDER PROPOSALSOur review started with our shareholders. We embarked on an ambitious effort to meet directly with our shareholders to specifically seek feedback on executive compensation. We invited investors holding a total of more than half of our outstanding shares to meet with us; more than 47% of our shareholder base accepted our invitation. I participated in every one of these meetings, and our Board Chairman attended most of these meetings.
(Items 5(a) and 5(b) on Proxy or Voting Instruction Card)
We periodically receive suggestionsThe feedback from our shareholders, some as formal shareholder proposals. We give careful considerationinvestors, among other factors, led us to all suggestions,make substantial changes to our executive compensation program. For instance, we immediately discontinued the use ofone-time awards, deemphasized and assess whether they promotedifferentiated the bestuse of Adjusted EBITDA in our short- and long-term interestsincentive plans, returned to a three-year performance period and added a relative TSR modifier for our long-term incentive plan.
The impact 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 bothmany of these proposals requireschanges won’t be fully reflected in our compensation tables until the affirmativeend of 2020. The 2019 compensation program was already in place prior to our 2019say-on-pay vote ofand our subsequent shareholder engagement program. However, as you’ll see from the holders of at least asummary compensation table numbers, our CEO’s total pay fell by more than half from 2018. The majority of this reduction is due to elimination ofone-time awards and the votes castimpact of timing of changes in position for our CEO.
I express my gratitude to our shareholders who took the time to provide thoughtful and insightful input. The Committee is dedicated to structuring an executive compensation program that motivates our management team to perform and create long-term value for our shareholders. We look forward to continuing our engagement with shareholders, and we invite your input on our compensation program and the proposal at the meeting.
The Board recommends thatThank you vote AGAINST Items 5(a) and 5(b) for the reasons we give after each one below.privilege of serving you as a Director of CenturyLink.
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.Laurie Siegel
“Whereas, we believe in full disclosure of CenturyLink directDirector and indirect lobbying activitiesChair, Human Resources 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:Compensation Committee
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
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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
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, 2017 (the “investors”), unless otherwise noted.
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Executive Officers and Directors
The following table sets forth information, as of the record date, 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 | ||||||||||||
Name | Unrestricted Shares Beneficially Owned(1) | Unvested Restricted Stock(2) | Total Shares Beneficially Owned(3), (4) | |||||||||
Current Executive Officers: | ||||||||||||
Stacey W. Goff | 93,125 | 393,962 | 487,087 | |||||||||
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 | |||||||||
Outside Directors: | ||||||||||||
Martha H. Bejar | 20,109 | 5,882 | 25,991 | |||||||||
Virginia Boulet | 37,258 | 5,882 | 43,140 | |||||||||
Peter C. Brown(6) | 24,297 | 5,882 | 30,179 | |||||||||
Kevin P. Chilton | 37,562 | 4,224 | 41,786 | |||||||||
Steven T. Clontz(7) | 167,295 | 4,224 | 171,519 | |||||||||
T. Michael Glenn(8) | 71,028 | 4,224 | 75,252 | |||||||||
W. Bruce Hanks | 52,840 | 5,882 | 58,722 | |||||||||
Mary L. Landrieu | 4,859 | 5,882 | 10,741 | |||||||||
Harvey P. Perry(9) | 91,555 | 5,882 | 97,437 | |||||||||
Michael J. Roberts | 34,630 | 5,882 | 40,512 | |||||||||
Laurie A. Siegel | 32,038 | 5,882 | 37,920 | |||||||||
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 |
COMPENSATION DISCUSSION AND ANALYSIS
This CD&A section is comprised of the following subsections:
I. | Executive Summary |
II. | Shareholder Engagement and Responsiveness toSay-On-Pay Vote |
III. | Our Compensation Philosophy, Objectives and Linkage to Corporate Strategy |
IV. | Our 2019 Compensation Program and Components of Pay |
V. | Our Executive Compensation Process |
VI. | Our Use of “Benchmarking” Data |
VII. | Our Governance of Executive Compensation |
Our Business
IntroductionWe are an international facilities-based communications company engaged primarily in providing a broad array of integrated services to our business and residential customers. We believe we are among the largest providers of communications services to domestic and global enterprise customers and the second largest enterprise wireline telecommunications company in the United States. We provide services in over 60 countries, with most of our revenue being derived in the United States.
Fiscal 2017 was a transformational yearWe continue expanding the reach and capabilities of our network by investing at the edge of our world class fiber network consisting of approximately 450,000 route miles, connecting approximately 170,000 fiber-basedon-net enterprise buildings, connecting to public and private data centers and subsea networks. We are also investing in new technologies, leveraging our company’s history. extensive fiber network that provide customers with dynamic bandwidth andlow-latency edge computing services to enable their digital transformation.
Our Named Executive Officers
• Jeffrey K. Storey | Chief Executive Officer and President | |
• Indraneel Dev | Executive Vice President and Chief Financial Officer | |
• Stacey W. Goff | Executive Vice President, General Counsel and Secretary | |
• Scott A. Trezise | Executive Vice President, Human Resources | |
• Shaun C. Andrews | Executive Vice President and Chief Marketing Officer |
For additional information on each, please see “Item No. 1—Election of Directors—Executive Officers Who Are Not Directors.”
42 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
Recent Business Developments
We completed our combination with Level 3 (the “Level 3 Combination”) was completed on November 1, 2017, (the “Closing” or “Closing Date”), creatingwhich transformed our company into the second largest domestic wireline communications provider serving global enterprise customers, with enhanced capabilities to meetcustomers. By the demandsend of 2018, we had achieved $850 million of deal-related synergies ahead of our customers inthree-year target. Additionally, during 2019 we announced an increasingly competitive environment. Below are highlightsincremental $800 million to $1 billion of annualized cost savings target over a three-year period.
During 2019, we met or exceeded all financial outlook measures we provided at the beginning of the combined company’s profile:year, including Adjusted EBITDA, Free Cash Flow, and Capital Expenditure objectives. Specifically, we:
Generated greater Enterprise and iGAM revenue |
Given the dramatic increase in the Company’s scalesecond half 2019, compared to the first half 2019
Grew Adjusted EBITDA (excluding integration and geographic footprinttransformation costs and the significant changesspecial items) to corporate strategy$9.070 billion compared to $9.040 billion for full year 2018
Expanded Adjusted EBITDA (excluding integration and transformation costs and special items) margin to 40.5%, compared to 38.6% for full year 2018
Reduced Net Debt by approximately $2.0 billion in 2019, and reduced Net Debt to Adjusted EBITDA to 3.7 times in 4Q19 from 4.0 times in 4Q18, moving closer to our three-year objective of 2.75 to 3.25 times
Refinanced approximately $17.0 billion in long-term debt (pro forma for first quarter 2020 activity), significantly reducing our cost of capital, and resulting fromin more than $200 million in annualized interest expense savings
SeeAppendix A for a reconciliation of the Level 3 Combination,non-GAAP metrics above to GAAP measures.
Say-on-Pay Vote Results, Shareholder Engagement, and Compensation Program Updates
As described in greater detail below, in response to only 41% of our shareholders supporting our 2019say-on-pay proposal, our Board and its Human Resources and Compensation Committee (the “Committee”) spent considerable time and effort during 2019 conducting a robust shareholder engagement program and recalibrating our existing executive compensation programprograms to supportaddress the challenges and opportunities inherent in combiningof the two companies. As describedCompany going forward. In that program, as discussed in greater detail in subsection II below, during theone-year period between the merger announcement in October 2016our Board and the Closing,management solicited input from investors representing 53% of our outstanding shares, ultimately meeting with investors representing 47% of our outstanding shares.
As a result of that engagement process, the Committee focused on designing an executive compensation programhas approved extensive changes 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-Closing
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Approx. 450,000 Route Miles of Fiber Globally Approx. 360,000 International Transport Miles International Transport Route Miles are 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 component of that process was the implementation of previously-announced succession plans for the chief executive officer (“CEO”) and chief financial officer (“CFO”) positions, including the recruitment and incorporation of two former Level 3 executives into the CenturyLink executive management team who will succeed our long-tenured CFO and CEO.
For 2017, our named executive officers were:
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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”).
This2020 incentive programs. To help you understand these changes, this Compensation Discussion and Analysis (the “CD&A”) is organizedaddresses our executive compensation for 2019, which were made before our 2019say-on-pay vote, as well as previewing program changes that have been implemented for 2020 in response to shareholder input.
During 2020, we have transitioned into four subsections:the operational phase of our long-term strategy. Following discussions with our shareholders, an internal review process and consultation with the Committee’s independent compensation consultants, we have made significant changes to our 2020 incentive programs as follows:
We discontinued the use ofone-time awards.
We confirmed our target pay relative to market pay.
In our short-term incentive (“STI”) plan:
o | We deemphasized EBITDA; |
o | We added Revenue as a metric; and |
o | We added a cap on the individual performance adjustment. |
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COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
As described further below,
In our long-term incentive (“LTI”) plan:
o | We returned to a three-year performance period; |
o | We transitioned from atwo-year Adjusted EBITDA Run Rate metric to a three-year cumulative Adjusted EBITDA target; and |
o | We added a relative total shareholder return (“TSR”) Modifier. |
While we have made significant changes to our 2020 incentive plans following our shareholder outreach, our 2019 incentive plans remained unchanged from 2018 (other than the central goalsdiscontinuance ofone-time awards). The 2019 compensation program was in place prior to the 2019 Annual Meeting, and the Committee did not have the benefit of the latest shareholder feedback before formulating the 2019 program.
Additional details of our executive2019 compensation programs and 2020 program changes are to incentivize our executives to attain objectivesdescribed in the sections that follow.
2019 Performance Highlights
During 2019, we believemet and exceeded several financial and operational goals that the Committee had previously selected as short-term and equity compensation targets and made tough decisions that will create shareholder value, to reward performance that contributes to the execution of our business strategies, and to attract and retain the right executives for our business.
2017 Business Highlights. In addition to successfully completing the Level 3 Combination, we achieved several other significant accomplishments during 2017, including the following:
Improved 2019 revenue performance:
o | Met our objective to grow second half 2019 revenue compared to first half 2019 for two of our business segments, Enterprise and iGAM |
o | Maintained our focus on profitable growth |
Grew Adjusted EBITDA and expanded Adjusted EBITDA margins
Invested in our network to improve transmission speed availability across our broadband service footprint, resulting in the growth of the percent of addressable units receiving service with transmission speeds of 100 megabits per second (Mbps) or higher and 1 gigabit per second (Gbps) or higher by 34% and 24%, respectively. We ended the year with 4.4 million addressable units capable of speeds of 100 Mbps or higher and approximately 1.7 million addressable units capable of 1 Gbps or higher.transformation initiatives, enabling us to:
o | Enhance the customer experience |
o | Achieve $430 million in annualizedrun-rate cost savings as of the end of 2019, one year into the three-year program that we announced in early 2019 |
o | Reduced debt outstanding by over $2 billion |
o | Refinanced over $17 billion in debt (pro forma for first quarter 2020 activity) |
o | Reducednet-cash interest expense |
o | Reduced our Net Debt to Adjusted EBITDA leverage ratio to 3.7x as of the end of 2019, from 4.0x as of the end of 2018 |
o | Invested in our business, increasing capital expenditures by more than $450 million in 2019 compared to 2018 |
o | Continued to return more than $1 billion in cash to shareholders via dividends |
2017 Executive Compensation HighlightsPay for Performance Orientation.Throughout 2017, the Committee took steps to (i) attract and appropriately compensate newly-hired executives with skills tailored to the combined company, (ii) retain, reward and adequately incentivize our legacy named executives in connection with their integration efforts before and after the Closing and (iii) begin development of
Our executive compensation programs suitable for the combined company. In the course of these actions, we continued to focus on maintaining a strong linkage between executive paybe heavily performance-based and our performance and strategic goals and developing executive compensation packages designed to be competitive with our market for executive talent.
Our recent key executive compensation decisions and highlights are summarized below.
In June 2017, the Company announced a CEO succession plan, which initially envisioned Mr. Post, 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 recently
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Assessment of “Say on Pay” Voting Results and Shareholder Outreach
In May 2015, 2016 and 2017, our shareholders cast approximately 95%, 89% and 87% respectively, of their votes in favor of our “say on pay” proposal. The Committee takes 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, our senior management continued our shareholder outreach program with our top institutional investors that 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 expect to continue to engage in outreach efforts in the future.
II. Our Compensation Philosophy and Linkage to Pay for Performance
Our Compensation Philosophy
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:
Overview of Pay Elements and Linkage to Compensation Philosophy and Objectives
We believe the following core elements of our compensation program help us to realize our compensation philosophy and objectives:
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The Committee believes our incentive programs supported our strategic and cultural priorities for 2017 as described below:
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
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 2017our current CEO and named executive officers (shown as “CEO” and “2019 NEOs,” respectively, below) between elements that are fixed and variable or performance-based pay that is “at risk”:
A fixed annual salary (“base”) represents 10% of our CEO’s total target compensation and 15%20% of our other NEOs’ average target total compensation.
Variable pay is comprised of a short-term incentive (“STI”) bonus, time-vested restricted stock awards (“RSA”TBRS”) and performance-based restricted stock (“PBRS”) awards, (“PSA”), which represents 90% of our CEO’s total target compensation and 85%80% 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 Ownership2019 Compensation Highlights.Stock ownership guidelines further align executives
Total CEO Pay, as reported in the Summary Compensation Table appearing below, was reduced by over 50%, from 2018 to 2019, by returning to traditional pay practices. As in prior years, the Committee set challenging performance targets under our incentive programs designed to ensure that payouts track corporate performance and, shareholders while focusingover the 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:long term, shareholder value creation.
During 2019, we achieved 97% of target ownership level of six times base salary.
Pay-For-Performance Alignment
As illustrated by the data below, we believe our compensation over the past several years has remained in alignment with our performance.
Short-Term Incentive Performance.The Committee sets target levels of performance 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 incentive program (our “STI program”) for each of the past three years as a percentage of the target opportunity set for him or her by the Committee for that performance year.
Performance Year | Actual Payout as a % of Target Opportunity | |||
2015 | 77.6 | % | ||
2016 | 80.2 | % | ||
2017 | 73.0 | %(1) | ||
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3-year Average | 76.9 | % |
Substantially met our target for |
Long-Term Incentive Performance. For several years, our annual long-term incentive grants (our “LTI program”) have consisted of shares of restricted stock, vesting of a portion of which is 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
o | Met our target for Free Cash Flow, comprising 25% of our STI plan, at a 100.6% attainment level; and |
o | Partially met our Customer Experience goals, comprising 10% of our STI plan, resulting in our 80% attainment level. |
PBRS awards accounted for 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 shares 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 the three-year performance period.
The payout percentages in the tables below represent the percentage of the target number of performance-based restricted stockoriginally granted to our senior officers in 2017 and 2018 which completed their respective performance periods on December 31, 2019.
For our 2017 annual grant of PBRS, approximately 84.6% of the target shares vested based upon our actual performance over the three-year performance period ending December 31, 2019 based on two equally weighted metrics:
o | We achieved $57.9 billion of our $58.6 billion target for three-year cumulative Core Revenue, for a 83.4% payout and |
o | We achieved the 43rd percentile for three-year Relative TSR, for an 85.7% payout. |
2020 Proxy Statement | 45 |
COMPENSATION DISCUSSION AND ANALYSIS
I. Executive Summary
For our 2018 annual grant of PBRS, approximately 157.1% of the shares vested based upon our actual performance over thetwo-year performance period ending December 31, 2019, based on:
o | Adjusted EBITDA Run Rate Growth of 7.6% compared to target of 6.8%, for atwo-year Adjusted EBITDA Run Rate payout of 157.1%. Half of these shares remain subject to a continued service requirement and will vest on February 19, 2021. |
II. Shareholder Engagement and Responsiveness toSay-On-Pay Vote
In 2017, 2018 and 2019, our shareholders cast approximately 88%, 79% and 41%, respectively, of their votes, excluding abstentions, in favor of our“say-on-pay” proposal.
We took our unfavorable 2019 vote very seriously and conducted an enhanced shareholder engagement process, review and recalibration of our existing executive compensation programs during the remainder of 2019.
Enhanced Shareholder Engagement Program
In order for management and the Board to better understand and consider shareholders’ perspectives, we regularly communicate with our shareholders, including to solicit and discuss their views on governance, executive compensation and other matters. We believe our regular engagement has been productive and permits an open exchange of ideas and perspectives between us and our shareholders.
We are committed to providing our shareholders with an opportunity for open dialogue on compensation matters and other issues relevant to our business.
During 2019, the Chairman of our Board of Directors, the Chair of our Compensation Committee, and members of management instituted an expanded shareholder engagement process in two phases (prior to and after our 2019say-on-pay vote), soliciting input from our top institutional investors representing 53% of outstanding shares, ultimately meeting with investors representing 47% of our outstanding shares.
The Board of Directors and the Compensation Committee value the opinions of our shareholders and when making compensation decisions for our executive officers we will continue to consider the voting outcome of futuresay-on-pay proposals and investor feedback received during our annual shareholder engagement program.
46 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
II. Shareholder Engagement and Responsiveness toSay-On-Pay Vote
Shareholder Feedback and Our Responses
Our 2019 shareholder engagement meetings covered a wide range of important executive compensation, corporate governance, environmental and social stewardship, and public policy issues, and we shared the input we received with our full Board or its key committees. The chart below summarizes the executive compensation feedback from our shareholders and our response:
We Listened | We Responded | |
Use of one-time awards | ü In 2019, there were noone-time awards for any of our executive officers. | |
Similar metrics used in STI and LTI plans | ü In 2020, we reduced and differentiated the emphasis of Adjusted EBITDA, which is a metric in both our STI and LTI plans, by: (i) reducing the portion of our STI plan measured on Adjusted EBITDA (from 65% to 50%) and (ii) differentiating the time horizon and target setting process for Adjusted EBITDA in our STI and LTI plans (our STI plan is based onone-year targets and our LTI plan is based on a three-year cumulative target, which in each case are based on our annual and long-range plans that are reviewed and approved by our Board of Directors) ü We made further changes to our LTI plan to further differentiate the metrics used between our STI and LTI plans, as described further below: ü We added a Relative TSR Modifier to our LTI plan ü We added Revenue for 15% weighting to our STI plan ü We added to our STI plan a 20% cap for individual performance adjustments for our NEOs (starting with our 2019 bonus payouts) | |
Shortened performance period under LTI plan | ü For 2020, we returned to our normal practice of3-year cumulative performance periods for our 2020 Annual PBRS grant. This change also extends the vesting to 100% at the end of 3 years. | |
No relative metrics under LTI plan | ü In order to strengthen shareholder alignment and to further diversify the metrices used in our incentive plans, we added to our LTI plan a Relative TSR Modifier performance measure over three-years. The results of our3-year TSR could result in a positive or negative adjustment (+/- 20%) to our 2020 annual performance-based restricted stock grant for senior officers. There will be no positive adjustment if CenturyLink’s TSR is negative over the3-year period. | |
CEO Pay not aligned with company performance | ü For 2018, total CEO pay was impacted byone-time items and timing of transitional changes that added additional complexity topay-for-performance analyses ü Through our realizable pay analysis (see subsection III below), we will continue to provide additional disclosure that demonstrates how performance and “realized” and “realizable” pay are appropriately aligned with Company performance ü We believe the 2020 STI and LTI plan changes described further above will continue to strengthen future pay for performance alignment and are consistent with our Company strategy of profitable growth |
2020 Proxy Statement | 47 |
COMPENSATION DISCUSSION AND ANALYSIS
II. Shareholder Engagement and Responsiveness toSay-On-Pay Vote
We believe the input we received from our shareholders has strengthened our compensation plans and look forward to continuing the dialogue with our shareholders regarding how best to align our executive compensation practices with shareholder interests.
III. Our Compensation Philosophy, Objectives and Linkage to Corporate Strategy
We compensate our senior officers 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. |
Overview of Pay Elements and Link to Compensation Philosophy and Corporate Strategy
The Committee believes the following core elements and performance metrics of our compensation programs help us to realize our compensation philosophy and objectives and support our strategic and cultural priorities for 2019 as described below:
Characteristics, Compensation Philosophy and Objectives | Corporate Strategy | |||||||
Base Salary | Characteristics: Annual fixed cash compensation Compensation Philosophy & Objectives: Provides a competitive and stable component of income to our executives | Attract and retain key talent |
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COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Philosophy, Objectives and Linkage to Corporate Strategy
Characteristics, Compensation Philosophy and Objectives | Corporate Strategy | |||||||
Short-Term Incentive Bonus | Characteristics: Annual variable cash compensation based on the achievement of annual performance measures Compensation Philosophy and Objectives: Provides competitive short-term incentive opportunities for our executives to earn annual cash bonuses based 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 metrics were selected to align to our corporate strategy forprofitable growth: 2019 STI Plan: Adjusted EBITDA(1) (65% of STI plan) - measures the operational performance and profitability of our businesses and commonly used with industry investors to evaluate our total enterprise value. Free Cash Flow(2) (25% of STI plan) - comprehensive measure of the company’s overall financing position Customer Experience(3) (10% of STI plan) - critical to maintain and grow our revenue base. 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 - for our NEOs, the individual performance adjustment is capped at 20% positive adjustment from calculated STI payout Preview of 2020 STI Plan: Same metrics as our 2019 STI with reduced weighting for Adjusted EBITDA to 50% and added revenue as an additional metric. Revenue (15% of STI plan) - generation of revenue is critical to our goal of stabilizing, and ultimately increasing, our consolidated revenues with a view to attain strategic revenue growth sufficient to offset our continuing legacy revenue losses | ||||||
Long-Term Incentive Awards | Characteristics: Annual long-term variable equity awards that vest over three years from the date of grant with 60% based on the achievement measured againstpre-established performance measures and 40% based on three years of service. Compensation Philosophy and Objectives: 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 value | Performance-Based Restricted Shares (60% of LTI grant value) 2019 LTI Plan: - Due to the complex and urgent nature of integration and transformation following the Level 3 combination, our 2019 LTI plan’s performance metric and period was: -Adjusted EBITDA Run Rate target over atwo-year period, which aligns to our corporate strategy for profitable growth (50% vests after thetwo-year period and remaining 50% vests after one additional year of service) Preview of 2020 LTI Plan: - For 2020, we have transitioned into the operation phase of our long-term strategy and we have returned to normal LTI practice and our 2020 LTI plan’s performance metrics and period are: -Cumulative Adjusted EBITDA target to reward for achieving profitable growth over a three-year period; and -Relative TSR Modifier to reward for achieving stock price growth relative to TSR peer group over a three-year period Time-Vested Restricted Shares (40% of LTI grant value) 2019 and 2020 LTI Plans: - amount of time-vested restricted share compensation that is ultimately realized depends on how well we successfully execute our strategic plans and overall our stock performance |
2020 Proxy Statement | 49 |
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Philosophy, Objectives and Linkage to Corporate Strategy
(1) | Adjusted EBITDA - measures the operational performance and profitability of our businesses, excluding certainnon-operating andnon-cash expenses, and cash availability prior to servicing debt and pension commitments, returning cash to shareholders, and capital investments to grow and maintain company assets |
(2) | Free Cash Flow - measures cash flow available to debt and equity shareholders after the company has paid all operating costs including interest payments on debt and pension commitments, capital expenditures, and working capital; comprehensive measure of the company’s overall financing position taking into account expenses such as interest payments, tax payments, and capital expenses. |
(3) | Customer Experience - measure includes operational goals and metrics that measure how well we are serving our customers as well as their perceptions of our service |
Following our November 1, 2017, combination with Level 3, under Mr. Storey’s leadership and with the support of the Board, we defined a long-term strategy that ultimately vested, with all remaining shares being forfeited. To further enhanceincludes a multi-year approach focusing on integration in 2018, transformation in 2019 and operation of the combined company in 2020.
Our Strategy, Objectives and 2019 Imperatives
During the integration and transformation phases of our long-term strategy, in 2018 and 2019, our STI and LTI plans included the following performance metrics to support our strategic priorities and align the pay for our NEOs with performance linkage, any dividends granted on these shares are not paid currently, but rather accumulate during the restricted periodas discussed below and vest or are forfeitedfurther in tandem with the related shares.
Actual Payouts of TSR Performance-Based Restricted Stockthis CD&A:
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 | % | ||||||||||||||||
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| ||||||||||||||||||||||
3-year average |
| 16.7 | % |
Actual Payouts
2020 Incentive Plan Enhancements. For 2020, we have transitioned into the operation phase of Absolute Revenue Performance-Based Restricted Stockour long-term strategy. As discussed further in this
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 | % | ||||||||||||||
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| ||||||||||||||||||||||
3-year average |
| 86.0 | % |
Stock Performance.As mentioned throughout this section, our LTI program is designed to align the interests of the executivesCD&A, following an internal review process, extensive discussions with our shareholders and therefore reward and incent superior performance. Since these awards are grants of restricted stock,consultation with our executive compensation consultants, we revised the actual value of LTI awards (both time-vested and performance-based shares of restricted stock) fluctuates with the change in stock price. In making LTI grants,design for our Committee typically approves a target LTI value and the actual number of shares in each grant is determined by dividing that target value by the volume-weighted average closing price of a share of2020 incentive programs to support 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, and 2017 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, 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.
Stock performance through December 31, 2017strategic priorities as described below:
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) | |||||||||||||||||||||||
02/23/15 | $ | 38.74 | $ | 29.25 | $ | 24.71 | $ | 16.68 | -57 | % | ||||||||||||||||||
02/23/16 | $ | 26.09 | $ | 24.71 | — | $ | 16.68 | -36 | % | |||||||||||||||||||
02/21/17 | $ | 25.12 | — | — | $ | 16.68 | -34 | % |
50 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Philosophy, Objectives and Linkage to Corporate Strategy
Short-Term Incentive Plan | ||||
Strategy | Integrate and Transform | Operate | ||
Metrics | 2018 & 2019 Weighting | 2020 Weighting | ||
Adjusted EBITDA | 65% | 50% | ||
Free Cash Flow | 25% | 25% | ||
Revenue | — | 15% | ||
Customer Experience | 10% | 10% |
Long-Term Incentive Plan | ||||
Strategy | Integrate and Transform | Operate | ||
Metrics | 2018 & 2019 Weighting | 2020 Weighting | ||
Adjusted EBITDA Run Rate (2 year) | 100% | — | ||
Cumulative Adjusted EBITDA (3 year) | — | 100% | ||
Relative TSR Modifier (3 year) | — | +/-20% |
Pay Outcome Alignment with Performance
Over the last three- and five-years, ourpay-for-performance alignment reflects actual performance against our STI and LTI targets, with realized (or realizable) equity compensation impacted by stock performance for the same periods. As summarized in the chart below, the average realizable pay, excludingone-time items, for our CEO (Mr. Post from 2015 to 2017 and Mr. Storey from 2018 to 2019) was 84.4% and 71.6% of target pay for last three- and five-years, respectively.
For 2015 to 2017, realized pay was significantly below target which reflects the below target STI and LTI plan performance and declining stock performance for those years. For further information on our incentive plan performance for these years, please see our 2016, 2017 and 2018 proxy statements.
Following our combination with Level 3, we have seen positive improvement in the execution against our STI and LTI targets. Specifically, during 2018 and we achieved strong financial performance, driving STI payout of 107.0% and the Adjusted EBITDA Run Rate payout of 157.1% for thetwo-year performance period that ended on December 31, 2019. Our overall stock performance has declined approximately 26% since our 2018 annual LTI award, which has offset the 157.1% PBRS payout, and in combination with STI performance, resulted in estimated realizable pay of 101.7% for 2018.
During 2019, we achieved solid financial performance by substantially meeting our STI targets, for a 97.0% payout. For purpose of realizable pay, we are assuming target level performance with respect to our Adjusted EBITDA Run Rate two-year performance period and actual stock performance through the first vesting date for estimated realizable pay of 93.0% for 2019.
Some of the changes to our STI and LTI plans outlined above were not implemented until late 2019 or early 2020 and we anticipate seeingpay-for-performance alignment to become increasingly clear in future years.
2020 Proxy Statement | 51 |
Realizable Pay for our CEO.
COMPENSATION DISCUSSION AND ANALYSIS
III. Our Compensation Philosophy, Objectives and Linkage to Corporate Strategy
The chart below illustrates the realizable pay for 2015, 2016 and 2017 for our CEO, most90% of which was “at risk” variable compensation. We calculatecompensation (STI, TBRS and PBRS), with each year’s realized and realizable pay for a given year by adding togetherillustrated in 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 RSAstable and PSAs that vested during the year and (iv) the value of RSAs and PSAs that are projected to vest based on actual performance through the end of the year, valuing the shares based on the closing price of our common stock on the last business day of the year.
5 Year Realized and Realizable Pay | ||||||||
2015 | 2016 | 2017 | 2018 | 2019 | ||||
STI – Payout 77.6% | STI – Payout 80.2% | STI – Payout 73.0% | STI – Payout 107.0% | STI – Payout 97.0% | ||||
TBRS – Realized 62.1% | TBRS – Realized 71.7% | TBRS – Realized 58.4% | TBRS – Realized 75.4% | TBRS – Realized 90.8% | ||||
PBRS – Realized 17.9%
• 3 Year Performance Period
• Core Revenue – 76.2%
• Relative TSR – 0% | PBRS – Realized 40.1%
• 3 Year Performance Period
• Core Revenue – 82.4%
• Relative TSR – 76.2% | PBRS – Realized 42.9%
• 3 Year Performance Period
• Core Revenue – 83.4%
• Relative TSR – 85.7% | PBRS – Realized 115.8% (half) and Realizable
• 2 Year Performance Period
• Adjusted EBITDA Run Rate – 157.1% | PBRS – Realizable 90.8%
• 2 Year Performance Period
• Adjusted EBITDA RunRate - TBD (assume target for this purpose) | ||||
2015 Realized Pay(1) 49.2% | 2016 Realized Pay(1) 62.2% | 2017 Realized Pay(1) 58.4% | 2018 Realizable Pay(2) 101.7% | 2019 Realizable Pay(2) 93.0% |
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.”
III. Our Compensation Program Objectives and Components of Pay
Our Compensation Practices
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…
(1) | Realized Pay - measures the actual pay realized, excludingone-time awards, for our former CEO Mr. Post, for a given year by adding together the (i) actual salary paid during the year, (ii) STI bonus that was ultimately paid during the year and (iii) the value of time- and performance-based |
(2) | Realizable Pay - measures the actual pay realized and realizable, excludingone-time awards, for Mr. Storey, for a given year by adding together the (i) actual salary paid during the year, (ii) STI bonus that was ultimately paid during the year, (iii) the value of time- and performance-based LTI that vested and (iv) the value of unvested time- and performance-based LTI, at “target” levels, based on stock price as of February 28, 2020. |
Pay
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…
Summary of 20172019 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 we compete to hire continuously constricts, 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 and now include candidates from software and other technology-focused companies.
The remaining sections outline why we believe the core principlescompensation 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 IV2019, see further discussion under the headingsheading “—Our Executive Compensation Decision-Making Process” and “—Use of ‘Benchmarking’ Data — ‘Benchmarking Data—Compensation Benchmarking.”Benchmarking” in Subsections V and VI below.
52 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation paidProgram and Components of Pay
As of December 31, 2019, the total target compensation opportunities for our NEOs are shown in the table below.
Total Target Compensation(1) | ||||||||||||||
Named Officer | Salary | STI Target Bonus Percentage | STI Target Bonus Opportunity | Total Target Cash | LTI Target(2) | Total Target Compensation | ||||||||
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 | $ 500,011 | 90% | $ 450,010 | $ 950,021 | $ 800,000 | $ 1,750,021 (4) | ||||||||
Shaun C. Andrews | $ 525,000 | 100% | $ 525,000 | $1,050,000 | $ 1,400,000 | $ 2,450,000 (5) |
(1) | For more complete information presented in accordance with the SEC’s rules, see the Summary Compensation Table below. |
(2) | The LTI target in this table represents the value of the target levels of equity awards to be granted as of December 31, 2019, which differ from amounts reported in the Summary Compensation Table, which are calculated in accordance with FASB ASC Topic 718. As described further below, two of our NEOs received changes to their LTI targets and grants in February 2020 may differ from amounts above. |
(3) | The Total Target Compensation for Mr. Storey is between the 50th and 75th percentiles of our compensation benchmarking data. |
(4) | The Total Target Compensation for Messrs. Dev and Trezise is between the 25th and 50th percentile of our compensation benchmarking data. |
(5) | The Total Target Compensation for Messrs. Goff and Andrews is near the 50th percentile of our compensation benchmarking data. |
Mr. Storey is an experienced executive in the telecommunications industry, as discussed in detail under “Election of Directors—Our Director Nominees” and his total target compensation is competitive compared to CEOs in our peer group. Mr. Ewing, whose employment ended onDev was appointed as our CFO in November 17, 2017,2018 and his total target compensation between the 25th and 50th percentile of our compensation benchmarking data is commensurate with his experience compared to CFOs in our peer group. As discussed further below, the Committee reviewed the compensation benchmarking data for all executive officers in this Subsection underFebruary 2020 and increased the heading “— Compensation Paid tobase salary, STI target bonus, and the LTI target bonus for Mr. Dev after completing another year as our Former Executive Officer.”CFO. Following Mr. Dev’s pay increase in February 2020, the ratio of Mr. Storey’s total target compensation is approximately 3.2 times more than Mr. Dev’s total target compensation, which aligns with market benchmarks.
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, see further discussion under the heading “— Our Compensation Decision-Making Process” and “— Use of ‘Benchmarking’ Data — Compensation Benchmarking” in Subsection IV below.
Annual Review Process (February 2017)2019). InDuring its annual review of executive compensation in February 2017,2019, the Committee reviewed the compensation benchmarking data for each senior officer, comparing the officer’s pay to our peer group for the combined company. Following this review and discussion, the Committee increased Mr. Trezise’s annual salary to $500,011 and left unchanged the salary for our other NEOs.
pre-combinationMid-Year Salary Adjustments. After its annual review process, one of our senior officers resigned, who previously lead our marketing function, and the Company consolidated our product management and marketing functions under Mr. Andrews. The Board appointed Mr. Andrews Chief Marketing Officer effective August 21, 2019. In conjunction with this appointment, his base salary was increased from $425,006 to $525,000.
Recent Actions (February 2020).In February 2020, the Committee reviewed the compensation benchmarking data for all executive officers and awarded aincreased Mr. Dev’s annual salary increase of 10% for Mr. Hussainto $750,000, in recognitionlight of his position to market and performance and market position,as CFO, and left unchanged the salary for our other named executive officers.NEOs.
Salary Adjustments Effective upon Closing (November 1, 2017). After its annual review process, the Committee conducted an additional compensation benchmarking assessment mid-year in anticipation
2020 Proxy Statement | 53 |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of the Level 3 Combination. The Committee’s review of this data informed its decisions with respect to initial 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, all of which were contingent and effective upon the Closing. Effective upon Closing, Mr. Storey was named President and COO with an annual salary of $1,500,000 and Mr. Patel became our 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 effective on the Closing.Pay
Recent Actions.In February 2018, the Committee reviewed the updated compensation benchmarking data for all executive officers and left unchanged the salary for our named executive officers. See further discussion under the heading “— Use of ‘Benchmarking’ Data — Compensation Benchmarking” in Subsection IV below.
General.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 approvesevaluates 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 2019, the Committee reaffirmed its decision fromapproved the prior two yearsSTI performance objectives for our 2019 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,align with the Committee added Customer Experience as an additional performance objective for 2017. corporate strategy.
◾ | Adjusted EBITDA. As used in our 2019 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 2019 corporate objective of focusing on our operations and profitable growth. |
◾ | Free Cash Flow. Free Cash Flow, weighted at 25%, is anon-GAAP measure of net cash from operating activities less capital expenditures and before dividends. Free Cash Flow performance similarly aligns with our 2019 corporate objective of focusing on profitable growth. |
◾ | Customer Experience. Improving our customer experience is critical to maintain and grow our revenue base. This performance measure, weighted at 10%, includes operational goals and metrics that measure how well we are serving our customers as well as their perceptions of our service. CenturyLink is committed to meeting the needs of all our customers, improving customer satisfaction and service scores, reducing customer inconveniences and decreasing repair times. |
◾ | 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 the year and reserves the right to increase or decrease the bonus payout level based on these assessments. In response to shareholder feedback, effective with our 2019 STI plan, the Committee has added a cap of 20% for positive adjustments to payout levels for our NEOs. 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, “—2019 Performance Results and “— 2017 Performance Results”Calculation of Bonuses” below.
CenturyLink STI PlanTarget Setting Process. Similar to prior years, in 2019, 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 2019 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 2019, 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 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 under2019. Based on shareholder feedback during our management performance rating system.
Legacy Level 3 Discretionary Bonus Program.Given that the Level 3 Combination occurred very late in our fiscal year,expanded 2019 shareholder engagement process, the Committee agreedwill implement a cap, of no more than 20%, to determine bonuses payable toincrease the bonus of 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
54 | 2020 Proxy Statement |
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COMPENSATION DISCUSSION AND ANALYSIS IV. Our 2019 Compensation Program and Components of Pay |
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 adjustments2019.
2019 Performance Results and Calculation of Bonuses. During 2019, 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 2020, the Committee reviewed post-combinationinternal audited results of the Company’s performance as compared to the financial performance targets established for 2019 and certified the achieved company performance composite score. As explained below, the Committee determined that the calculated company performance was 97% of the target bonus opportunity for our NEOs.
The table below illustrates the weighting of each performance objective, the target and achieved performance for stand-alone Level 3 financial2019. For a more detailed description of our performance under each of the performance objectives, please see “—Calculation of Bonuses” under this section.
2019 STI Plan and operationalPerformance Results
Financial Performance Objectives (90% Weighting) | Weighted Score Achieved 89%(1) | |||||||||||||||||
Financial Targets ($ in Millions) | Threshold | Target | Maximum | Weighting | Achieved(1) | |||||||||||||
Adjusted EBITDA | $8,800 | $9,100 | $9,600 | 65% | $9,070 | |||||||||||||
Performance Payout % | 50% | 100% | 200% | 98.6% | ||||||||||||||
Free Cash Flow | $2,608 | $3,260 | $3,912 | 25% | $3,276 | |||||||||||||
Performance Payout % | 50% | 100% | 150% | 100.6% | ||||||||||||||
Customer Experience Performance (10% Weighting) | Weighted Score Achieved 8%(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 2019. Based on these results, the Committee awarded 80% for the customer experience performance objective. |
| 10% | 80% |
2019 Overall STI Company Performance | Achieved 97% |
(1) | The achieved payout percentage is calculated for each financial performance objective based on a corresponding payout scale approved by the Committee. 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 a maximum of 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. |
Customer Experience Performance. Our overall customer satisfaction performance objectives.for 2019 showed year over year improvement in our Business relationship net promotor scores and our consumer relationship net promotor scores were up slightly, and we saw improvement in strategic focus areas. As a result of these results, the Committee awarded 80% for the customer experience performance objective. Customer experience research suggests increased promotor scores will drive increase in customer spend within 24 months.
2020 Proxy Statement | 55 |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
Calculation of Bonuses under the CenturyLink STI Plan. For 2017,2019, the STI bonus payments were calculated using the performance objectives, payout scale, and other criteria approved by the Committee in the first quarter of the year and immediately prior to Closing. 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-steptwo-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 described in the 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. |
• | step two, the Committee authorized actual STI bonuses for our NEOs, which were consistent with Committee approved company payout level, which includes certain discretionary adjustments for individual performance as discussed below. |
Committee Discretion on Company-Wide Performance. For 2019, the Committee determineddid not elect to use its discretion to adjust the calculated company-wide performance STI payout.
The Committee believes that we had exceededexercising discretion (positive and negative) is an important supplemental component of our Section 162(m) targetpay-for-performance philosophy, which is designed to reach balanced compensation decisions that are consistent with our strategy and adjust compensation 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 cash flow return on average assetsenvironment, and therefore, eachother significant factors that may affect the long-term performance of our legacy named executives qualified for potential annual bonuses up to a fixed maximum amount defined as a percentagebusiness that are not directly reflected in the year’s financial results. The use of the executive’s 2017 salary. In step two,discretion also allows the Committee calculated bonusesto adjust compensation based on factors that would not be appropriately reflected by measuringa strictly formulaic approach, such as reducing risk or championing company values. Notwithstanding the company’s performanceforegoing, 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.
Discretionary Adjustment for Individual Performance. The Committee discussed at great length the financial accomplishments achieved in 2019, including Adjusted EBITDA and Free Cash Flow results against theguidance outlook and internal targets, and placed emphasis on below financial and operational accomplishments in support of their election to make individual performance objectives described above under the heading “— 2017 Performance Results.” In stepadjustments for three theof our NEOs.
The Committee authorized actual 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 receivedrewarded each of Messrs. Dev, Trezise and Andrews with a 10% discretionary adjustment for individual performance.
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 financialindividual performance described above underfurther below.
Mr. Dev’s leadership and fiscal oversight was pivotal to reducing our outstanding debt by over $2 billion, refinancing over $17 billion in debt, reduction in interest expense by over $200 million on an annualized basis, reduction in our Net Debt to Adjusted EBITDA leverage ratio and, in addition, Mr. Dev successfully oversaw the heading “— 2017 Performance Results”.remediation of two material weaknesses.
Under Mr. Trezise’s individual performance and leadership we had the following achievements in human resources and talent areas, specifically: successful labor negotiations ahead of schedule for cost savings of approximately $45M, transformed our HR operating model driving efficiency and cost savings, implemented artificial intelligence tools, strong talent acquisition performance, positive trending for employee engagement scores, completed first pay equity review, enhanced focus on skills transformation for our employees and achieved overall budget savings targets.
Mr. Andrews exceeded expectations for delivery of industry leading functionality and experiences across several of our key products. Through his leadership and collaboration with sales leaders for our Business segment, we successfully turned iGAM and GEAR from decline to growth in the second half of 2019. Mr. Andrews transformed our sales overlay function, consolidated our marketing and product organizations and created a public sector ecosystem, all of which drove increased sales results and improved alignment and operational efficiencies across multiple functions.
56 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
Actual STI Bonus Amounts Authorized.The actual amounts of the named executive officers’ 2017NEOs’ 2019 bonuses were calculated as follows:
Named Officer | Target Bonus Opportunity(1) | x | Earned Company Performance %(2) | + | Discretionary Adjustment for Individual Performance(3) | = | Bonus(4) | |||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||
Glen F. Post, III | $ | 2,187,500 | 73 | % | $ | 0 | $ | 1,596,675 | ||||||||||||||||||||
Jeffrey K. Storey | 432,517 | 100 | % | 0 | 432,517 | |||||||||||||||||||||||
Sunit S. Patel | 147,475 | 100 | % | 0 | 147,475 | |||||||||||||||||||||||
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 |
2019 STI Bonus Amounts | ||||||||||||||||||||||||||||
Named Officer | Target Bonus Opportunity(1) | X | Company Performance %(2) | X | Discretionary Adjustment for Individual Performance(3) | = | STI Bonus Amount | |||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||
Jeffrey K. Storey | $3,600,022 | 97% | 100% | $ | 3,492,021 | |||||||||||||||||||||||
Indraneel Dev | 780,000 | 97% | 110% | 832,260 | ||||||||||||||||||||||||
Stacey W. Goff | 720,021 | 97% | 100% | 698,420 | ||||||||||||||||||||||||
Scott A. Trezise | 439,654 | 97% | 110% | 469,111 | ||||||||||||||||||||||||
Shaun C. Andrews | 461,442 | 97% | 110% | 492,359 |
(1) | Determined |
a) | Target Bonus Opportunity for Mr. Storey reflects his salary earned during 2019 of $1,800,011 and a STI target bonus percentage of 200%. |
b) | Target Bonus Opportunity for Mr. Dev reflects his salary earned during 2019 of $650,000 and a STI target bonus percentage of 120%. |
c) | Target Bonus Opportunity for Mr. Goff reflects his salary earned during 2019 of $600,018 and a STI target bonus percentage of 120%. |
d) | Target Bonus Opportunity for Mr. Trezise reflects his salary earned during 2019 with a salary increase, from $475,010 to $500,011, effective on February 23, 2019, and an increase of STI target bonus percentage from 80% to 90%, also effective on February 23, 2019. |
e) | Target Bonus Opportunity for Mr. Andrews reflects his salary earned during 2019 with a salary increase, from $425,006 to $525,000, effective on August 21, 2019, and a STI target bonus percentage of 100%. |
(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 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 Actions (February 2020).Effective January 1, 2018, our newly named executives participate in the CenturyLink STI program with our legacy named executives. In connection with establishing targets for the 20182020 STI program, the Committee increased Mr. Dev’s STI Target Bonus Percentage to 125%, in light of his position to market and performance as CFO, and made no changes to the target bonus percentage for any of our named executives. However, the Committee revised the financial and operational performance objectives used in the 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.other NEOs.
Annual Grants of Long-Term Incentive Compensation
General.Our long-term incentive (“LTI”) 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 ten years, the Committee has elected to grant all of our LTI awards in the form of restricted stock for a variety of reasons, including:
Consistent with this practice, in February 2017, the Committee granted 60% of our legacy named executives’ 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’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.
Performance Benchmarks.On an annual basis, over the course of several meetings, the Committee evaluates our LTI program and reviews the relevance of our LTI plans and performance benchmarks for alignment with our long-term strategic plan. In connectionAs described in more detail below, CenturyLink has a long-standing practice of granting 60% of LTI compensation for our executives, which is the largest component of pay for our senior officers at 42% and average of 35% for our CEO and Other NEOs’ total target compensation, respectively, in PBRS or units that is measured on metrics that are aligned with making annual LTI grants to our legacy named executives in February 2017, the Committee elected to keep the same two performance benchmarks, relative TSRlong-term strategy 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.will drive shareholder value.
An overview of ourTSR performance-based restricted shares granted in early 2017 is outlined below.
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COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
Below is an overview that summarizes to the history and evolution of our LTI plans:
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|
the |
An overview of ourabsolute revenue performance-based restricted shares granted in early 2017 is outlined below.
the benefit of providing shareholder alignment through the use of shares, |
◾ | the Committee’s desire to minimize the dilution associated with our LTI awards, and |
◾ | the retentive value of restricted stock under varying market conditions. |
Because Mr. Storey is retirement eligible, his annual LTI awards (2018 and 2019) were in the form of RSUs rather than shares of restricted stock. |
◾ | LTI Performance Mix: Since 2010, the Committee has elected to include performance-based restricted stock or RSUs (“PBRS”) as part of our annual LTI grants with the weighting of PBRS increasing from 50% to 60% in 2014, and the remaining portion in the form of time-based restricted stock or RSUs (“TBRS”). |
◾ | LTI Performance and Vesting Period: In 2010 through 2017, our annual grants of performance-based restricted stock were based on a 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, for our 2018 and 2019 grants, the Committee believed that atwo-year performance period was most appropriate to achieve our business goals with 50% vesting at the end of two years and remaining 50% at three years. For our 2020 grant, we have returned to three-year performance period with cliff vesting at the end of three years. |
◾ | LTI Performance Benchmark: The ultimate number of our PBRS that have or will vest are contingent upon the Company’s performance as measured against certainpre-established criteria, including: |
◾ | Relative TSR in 2010 through 2012, |
◾ | Cumulative Core Revenue and Relative TSR in 2013 through 2017, |
◾ | Adjusted EBITDA Run Rate in 2018 and 2019, and |
◾ | Cumulative Adjusted EBITDA and Relative TSR in 2020. |
◾ | LTI Performance Target and Payout: In order to further align our pay with performance, our PBRS 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. |
2019 LTI Performance Objectives and Target Setting Process.Our annual LTI grants to our named executives consisted of a combination of PBRS awards (60% of the target grant value) and TBRS awards (40% of the target grant value).
LTI Performance Objectives. In 2019, similar to 2018, the PBRS granted to senior officers is measured on an absolute Adjusted EBITDA Run Rateperformance benchmark, described in further detail below:
◾ | 2019 Performance Benchmark:Our benchmark is an absolute |
2019 Performance Period:January 1, |
58 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
2019 Vesting Dates: The PBRS earned under the 2019 PBRS will vest in two equal installments on March 1 of each of 2021 and 2022 based on attainment during the performance period of an Adjusted EBITDA Run Rate target of 0.0%, subject to continued employment through the applicable vesting date. |
◾ | 2019 Performance |
Absolute Revenue | ||||||||||||||||||
Performance Level | Company’s Performance(1) | Payout as % of Target Award(2) | Adjusted EBITDA Run Rate(1) | Payout as % of Target Award(2) | ||||||||||||||
Maximum | ³ 103.5% | 200% | ³ 2.8% | 200% | ||||||||||||||
Target | 100.0% | 100% | 0.0% | 100% | ||||||||||||||
Threshold | 96.5% | 50% | (2.8)% | 50% | ||||||||||||||
Below Threshold | < 96.5% | 0% | < (2.8)% | 0% |
(1) | Determined by dividing (i) the |
(2) | Linear interpolation is used when our |
For additional informationLTI Performance Target Setting Process. Similar to prior years, in 2019, the Company employed a rigorous process to establish its annual budget and long-range plan, which directly supported the Company’s long-term strategic objectives and was the basis for developing the Adjusted EBITDA Run Ratethreshold,target and maximum amounts, as illustrated in the table above.
First, the annual budget and long-range plan was “built up” from business unit and department levels to create a consolidated corporate budget and long-range plan reviewed and approved by the Board.
In February 2019, the Committee approved the previously-described LTI performance objectives including threshold, target, and maximum performance levels derived from the Board-approved budget and long-range financial plan. The long-range financial plans are informed by the Company’s strategic planning process, where capital allocation strategy, go to market, operational and transformation plans are discussed with the Board of Directors. The strategic and financial plans are informed by wireline industry trends, competitive landscape, product lifecycle, operational initiatives, capital allocation priorities and several other company specific and external factors that influence our business. As a result, our Committee determined that our LTI performance objectives were based on rigorous performance requirements designed to motivate executives to achieve Company financial results that generate shareholder value.
Upon completion of the performance period, our actual financial 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 above-described grants, see “Executive Compensation — Incentive Compensation and Other Awards.”date the performance goals were established.
20172019 Annual LTI Grants.Following its deliberations in February 2017, the Committee formally approved an increase in target annual LTI compensation Except for Mr. Hussain to $1,600,000. This increase was primarily the result of the Committee’s recognition of Mr. Hussain’s overall leadershipMessrs. Dev, Trezise 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,Andrews, the Committee granted annual LTI awards to our other legacy named executives on terms and in February 2019 at amounts substantially similar to the awards granted to them in 2016.
2018. 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. Mr. Andrews’ 2019 LTI target was increased to $750,000, as previously approved by the Committee following a review of compensation benchmarking in November 2018. In February 2017,2019, 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.
On February 28, 2019, the Committee granted to each of our legacy 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”shares or RSUs”), (ii) performance-based restricted shares or RSUs that will vest in February two equal
2020 Proxy Statement | 59 |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
installments on March 1 of each of 2021 and 2022 based on our relative total shareholder returnattainment during the 2019 Performance Period, as defined above, of an Adjusted EBITDA Run Rate target of 0.0% (the “TSR performance-based restricted shares”“Performance-Vested Shares or RSUs”) and (iii) performance-based restricted shares that will vest in February 2020 principally based on our attainment of absolute revenue targets over the above-described three-year performance period (the “absolute revenue performance-based restricted shares”):
2017 Annual LTI Grants (Excluding Special Grants), as described further above:
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 |
2019 Annual LTI Grants | ||||||||||||||||||||||||||||
Time-vested Restricted Shares or RSUs | Performance-based Restricted Shares or RSUs | |||||||||||||||||||||||||||
Named Officer | No. of Shares(1)(3) | Grant Value(1) | No. of Shares(2)(3) | Grant Value(4) | Total Grant Value(4) | |||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||
Jeffrey K. Storey(5) |
| 358,884 |
|
| $5,040,000 |
|
| 538,328 |
|
| $7,560,000 |
|
| $12,600,000 |
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Indraneel Dev |
| 76,904 |
|
| 1,080,000 |
|
| 115,356 |
|
| 1,620,000 |
|
| 2,700,000 |
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Stacey W. Goff |
| 56,966 |
|
| 800,000 |
|
| 85,449 |
|
| 1,200,000 |
|
| 2,000,000 |
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Scott A. Trezise |
| 22,786 |
|
| 320,000 |
|
| 34,180 |
|
| 480,000 |
|
| 800,000 |
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Shaun. C. Andrews | 21,362 | 300,000 | 32,043 | 450,000 | 750,000 |
(1) | Represents the number of restricted shares or RSUs granted in 2019. |
(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 while unvested, but will accrue and paid or be forfeited in tandem with the vesting of 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 |
(5) | Mr. Storey’s annual grant was in the form of RSUs. |
Recent Actions (February 2020).At Except for Messrs. Dev, Trezise, and Andrews, the Committee granted annual LTI awards to our named executives in February 2020 at amounts substantially similar to the awards granted to them in 2019. Mr. Andrews’ 2020 LTI target was increased to $1,400,000 in August 2019, following his promotion to Chief Marketing Officer and the Committee’s review of compensation benchmarking data. In February 2020, the Committee reviewed the compensation benchmarking data for all executive officers and increased Mr. Dev’s LTI target to $4,000,000 and Mr. Trezise’s LTI target to $1,000,000 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.
As discussed earlier in this CD&A, at its February 20182020 meeting, the Committee changed the metrics and returned to a three-year performance period for our 2020 LTI plan. The vesting of the 2020 PBRS is contingent upon achievement of a three-year Cumulative Adjusted EBITDA target and Relative TSR modifier over the three-year performance period, each of which is described in further detail below and will cliff vest at the end of three years. Consistent with past practice, the Committee granted LTI awards to our senior officers with a similarthe same mix of 60% performance-basedPBRS and 40% time-vested restricted stock awards. However, the performance measureTBRS.
◾ | 2020 Performance Benchmarks:As described further under “performance vesting” below, ourtwo-step process utilizes two performance metrics in order to determine the ultimate payout. |
◾ | Absolute Cumulative Adjusted EBITDA:Our primary metric is an absolute Cumulative Adjusted EBITDA target over the below-described three-year performance period (2020-2022). “Adjusted EBITDA” is defined each year in a manner designed to correspond to our annual guidance as reported in our earnings release for consolidated earnings before interest, taxes, and depreciation and amortization, excluding Connect |
60 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and performance period were changed to an adjusted EBITDA run rate for atwo-year period that will vest over three years. Components of Pay
America Fund and Rural Digital Opportunity Fund revenue, applying the same adjustments that were approved in setting the target (which include the exclusion of certain transformation, integration and transaction costs, inclusion of synergy savings, exclusion of stock based compensation, adjustments to reflect a 100% bonus accrual, foreign currency, and adjustments for other material non-operational driven charges or credits). |
◾ | Relative TSR Modifier:Our second metric is our percentile rank versus a 17 company TSR peer group that provides an opportunity to earn up to 20% above or below Cumulative Adjusted EBITDA performance as described further below. See further discussion under the heading “—Use of ‘Benchmarking’ Data—Performance Benchmarking Peer Group” in Subsection VI below. |
◾ | 2020 Performance Period: January 1, 2020 through December 31, 2022. |
◾ | Vesting Dates: The ultimate number of our performance-based restricted shares will vest in full on March 1, 2023, three years from the grant date, subject to our senior officers’ continued employment through such date and the Committee’s certification of the results. |
◾ | 2020 Performance Target and Payout: The ultimate number of our performance-based restricted shares that vest will be determined on atwo-step payout calculation, with the ultimate payout ranging from0-200% as illustrated in the table below: |
Step 1—Absolute Cumulative Adjusted EBITDA:
◾ | From 0% to 200% of the target number of performance-based restricted shares may be earned based on Cumulative Adjusted EBITDA for the three-year performance period. |
Performance Achievement Level | Step 1: Absolute Cumulative | Payout as % of Target Number of Performance-Based Restricted Shares(1) | ||
Maximum | Maximum Amount | 200% | ||
Target | Target Amount(2) | 100% | ||
Threshold | Threshold Amount | 50% | ||
Below Threshold | < Threshold | 0% |
(1) | Payouts interpolated between defined performance levels / minimum, target and maximum levels. |
(2) | We do not feel it is appropriate to disclose our Cumulative Adjusted EBTIDA target as it would constitute forward-looking guidance. The Company employed a rigorous process to establish its annual budget and long-range plan for the same three-year period when setting the threshold, target and maximum amounts which directly support the Company’s long-term strategic objectives. |
Step 2—Relative TSR Modifier:
◾ | Provided that the Cumulative Adjusted EBITDA target exceeds threshold, our senior officers have an opportunity to earn up to 20% above or below the achieved number of the target number of PBRS, determined under Step 1, 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 if our TSR is negative. Maximum payout under Steps 1 and 2 cannot exceed 200%. |
For each ofinformation regarding 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). SeeTSR peer group, see further discussion under the heading “—Use“-Use of ‘Benchmarking’ Data — CompensationBenchmarkingData-TSR Performance Benchmarking” in Subsection IVVI 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 conditionsLong-Term Incentive Performance Update and (iii) the vesting upon retirement of the equity portion of Mr. Post’s 2017 special integration award at a 100%Outcomes.The payout rate. The Committee also authorized Mr. Post to receive full vesting of all time-vested restricted shares
granted to him before 2018 and to retain, subject to their original performance conditions, all performance-based restricted shares granted to him before 2018.
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%percentages in the form of cash and 50% intables below represent 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%percentage 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 awards 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 werePBRS granted to our named executivessenior officers that ultimately vested, with all remaining shares being forfeited. To further enhance the pay for performance linkage, any dividends paid on these shares of PBRS (or dividend equivalents on performance-based RSUs) are not paid while unrestricted, but rather accumulate during the restricted period and vest or are forfeited in connectiontandem with the Level 3 Combination are summarized in the “2017 Acquisition-Related Stock Awards” table below.
2017 Acquisition-Related Stock Awardsrelated shares or
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 |
2020 Proxy Statement | 61 |
COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
units. The average target number of PBRS that ultimately vested for the four annual LTI grants from 2015 through 2018 (with performance periods ending on December 31, 2017, 2018 and 2019) is 89.8%.
LTI Grant Year, Performance Period and Performance Metric | Attainment Level for LTI Grant Year(1)
| Total Payout Percentage(2) | ||||||||||||||||||||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||||||||||||||||||||
2015 Annual LTI Grant (2015-2017) | ||||||||||||||||||||||||||||||||||||||||
Cumulative Core Revenue (50% weighting) | 76.2% | 38.1 | % | |||||||||||||||||||||||||||||||||||||
Relative TSR (50% weighting) | 0% | 0.0 | % | |||||||||||||||||||||||||||||||||||||
Total | 38.1 | % | ||||||||||||||||||||||||||||||||||||||
2016 Annual LTI Grant (2016-2018) | ||||||||||||||||||||||||||||||||||||||||
Cumulative Core Revenue (50% weighting) | 82.4% | 41.2 | % | |||||||||||||||||||||||||||||||||||||
Relative TSR (50% weighting) | 76.2% | 38.1 | % | |||||||||||||||||||||||||||||||||||||
Total | 79.3 | % | ||||||||||||||||||||||||||||||||||||||
2017 Annual LTI Grant (2017-2019) | ||||||||||||||||||||||||||||||||||||||||
Cumulative Core Revenue (50% weighting) | 83.4%(3) | 41.7 | % | |||||||||||||||||||||||||||||||||||||
Relative TSR (50% weighting) | 85.7%(4) | 42.9 | % | |||||||||||||||||||||||||||||||||||||
Total | 84.6 | % | ||||||||||||||||||||||||||||||||||||||
2017 Special Grant for Mr. Storey (2018) | ||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA Run Rate (100% weighting) | 200% | 200.0 | % | |||||||||||||||||||||||||||||||||||||
2018 Annual LTI Grant (2018-2019) | ||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA Run Rate (100% weighting) | 157.1%(5) | 157.1 | % | |||||||||||||||||||||||||||||||||||||
2018 Promotion Grant for Mr. Storey (2018-2020) | ||||||||||||||||||||||||||||||||||||||||
Cumulative Adjusted EBITDA (0-100% payout) | TBD | TBD | ||||||||||||||||||||||||||||||||||||||
Relative TSR (101-200% payout) | TBD | TBD | ||||||||||||||||||||||||||||||||||||||
Total | TBD | |||||||||||||||||||||||||||||||||||||||
2019 Annual LTI Grant (2019-2020) | ||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA Run Rate (100% weighting) | TBD | TBD | ||||||||||||||||||||||||||||||||||||||
2020 Annual LTI Grant (2020-2022) | ||||||||||||||||||||||||||||||||||||||||
Cumulative Adjusted EBITDA (100% weighting) | TBD | TBD | ||||||||||||||||||||||||||||||||||||||
Relative TSR Modifier(+/-20% modifier) | TBD | TBD | ||||||||||||||||||||||||||||||||||||||
Total | TBD |
(1) | “TBD” means to be determined upon completion of |
(2) | The achieved payout percentage is calculated for each performance metric based on a corresponding payout scale. If the threshold performance level with respect to any particular performance metric under our LTI program is not attained, the target number of |
(3) | The three-year performance period was completed on December 31, 2019 for the Cumulative Core Revenue PBRS stock granted to our senior officers in 2017. The table below outlines the |
Cumulative Core Revenue | Target | Company’s Performance | Actual Payout % | |||||||||
Maximum | $ | 60.6 billion | ||||||||||
Target | $ | 58.6 billion | $ | 57.9 billion | 83.4 | % | ||||||
Threshold | $ | 56.5 billion |
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COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
(4) | The three-year performance period was completed on December 31, 2019 for the Relative TSR PBRS granted to |
Relative TSR | Target | Company’s TSR Performance | Actual Payout % | |||||||||
Maximum | 75th Percentile Rank | |||||||||||
Target | 50th Percentile Rank | -22.96%; 43rd Percentile Rank | 85.7 | % | ||||||||
Threshold | 25th Percentile Rank |
(5) | The performance period was completed on December 31, 2019 for the Adjusted EBITDA Run Rate PBRS granted to our senior officers in 2018. 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. |
Compensation Paid to our Former Executive
Adjusted EBITDA Run Rate | Target | Company’s Performance | Actual Payout % | |||||||||
Maximum | 8.2% | |||||||||||
Target | 6.8% | 7.6% | 157.1 | % | ||||||||
Threshold | 5.4% |
As noted previously, the CFO succession plan was negotiated in conjunction with the Level 3 Combination and Mr. Ewing, who served as our Executive Vice President and Chief Financial Officer prior to the Level 3 Combination, agreed to step down from all executive positions at the Closing. After a short transition period, Mr. Ewing fully retired from the Company on November 17, 2017.
In addition to the compensation Mr. Ewing earned while an employee and amounts or broad-based benefits paid or payable to him under our existing programs, the Committee made certain supplemental compensation awards. Because Mr. Ewing was willing and able to continue serving as our CFO after the Closing if not for the CFO succession plan, 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. Ewing ($1,399,158), increased by another 52 weeks at the Committee’s discretion ($1,399,158), for a total cash severance payable 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. Ewing earned apro-rated annual bonus for 2017 based on actual performance. The Committee also approved certain changes to his outstanding equity awards. Specifically, the Committee accelerated the vesting of his fiscal 2015, 2016 and 2017 shares of time-vested restricted stock (5,369, 15,946 and 24,842 shares, respectively) effective on his retirement date. With respect to his 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 case subject to their original performance conditions. The Committee also approved a special discretionary cash bonus of $1,000,000. In approving the additional severance benefits, accelerated vesting of his outstanding stock awards and special cash bonus, the Committee considered a range of factors, including (i) the critical role 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’s agreement to, among other things, waive any claims against us and refrain from competing against us for a year.
Other Benefits
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 PlansPlans.. 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-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 ArrangementsArrangements..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.
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COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
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 — Compensation—Potential Termination Payments — 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 BenefitsBenefits..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 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.
PaymentsThe table below shows (i) the multiple of salary and bonus payment and (ii) years of welfare benefits to which officers will be entitled if a senior officersofficer is involuntarily terminated by us without cause in connection withthe absence of a change of control are separately governed by the change of control arrangements discussed immediately above under the heading “— Change of Control Arrangements.”control:
Multiple of Annual Cash Compensation | Years of Welfare Benefits | |||||||||
CEO | 2 times | 2 years | ||||||||
Other Executives and Senior Officers | 1 time | 1 year |
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 Combination, including the Level 3 Key Executive Severance Plan (the “KESP”). The KESP will remain in effect through thetwo-year anniversary of the Closing and certain employees who joined us in connection with the Level 3 Combination will continue to participate in it during thattwo-year period. Following thetwo-year period, 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 are currently participants 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 of termination with respect to Messrs. Storey and Patel.
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 BenefitsBenefits..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, threeone of our current or former senior officers hold(Mr. Goff) holds 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.2016. 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 remaining grandfathered plan participants.
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COMPENSATION DISCUSSION AND ANALYSIS
IV. Our 2019 Compensation Program and Components of Pay
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 advance 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.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 implementedutilized 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 boardBoard 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
V. Our Executive Compensation Process
Allocation of Responsibilities
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” 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 maintainestablishes, 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 supplemental disability plan designedcompensation 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.
2020 Proxy Statement | 65 |
COMPENSATION DISCUSSION AND ANALYSIS
V. Our Executive Compensation Process
For 2019, the Committee engaged Meridian Compensation Partners, LLC (“Meridian”) as its independent compensation consultant. For 2019, 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, has no prior relationship with any of our NEOs. 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.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 metrics 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 disability paymentsthat the Committee is provided with appropriate information to discharge its responsibilities.
Non-Senior Officers.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-seniorofficers, acting under authority delegated to him by the Committee in the event payments are unavailable fromaccordance with our disability insurer.shareholder-approved equity plans.
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COMPENSATION DISCUSSION AND ANALYSIS
V. Our Policies, Processes and Guidelines Related to Executive Compensation Process
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 | 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 |
2020 Proxy Statement | 67 |
Role of Human Resources andCOMPENSATION DISCUSSION AND ANALYSIS
V. Our Executive 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:Process
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, 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.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.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:
Timing of Long-Term Incentive Awards.
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 officersofficer 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 “negative discretion”“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.
VI. Our Use of “Benchmarking” Data
Each year, with assistance from its independent consultant, the Committee reviews “peer groups” of other companies comparable to CenturyLink for purposes of assessing the compensation for our comparative compensationNEOs and senior officers and, as applicable, our total shareholder return 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,
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COMPENSATION DISCUSSION AND ANALYSIS
VI. Our Use of “Benchmarking” Data
Compensation Benchmarking Peer Group
The competitive market analyses of compensation for our NEOs and senior officers is compiled and reviewed during 2017,atwo-step process in the second half of each year. 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.
In the first step, the Committee conducted supplemental analyses in connection with preparingreviews and approves the list of companies that comprise our peer group for the changesuse in the sizecompetitive market analyses of compensation for our NEOs and charactersenior officers (“Compensation Benchmarking Peer Group”). We do not believe many companies compete directly with us and are also similarly sized. To address the limited number of direct peers, our compensation consultant completes an evaluation process to identify and screen relevant public companies that have one or more of the Company resulting fromfollowing attributes with the Level 3 Combination.desired result of fifteen to twenty peer companies. After the initial similar industry screen, the Committee considered revenue as the criterion with the highest relevance in selecting peer companies. The following attributes were reviewed and screened:
Compensation Benchmarking.The
Similar Industry and Technology Focus that includes telecommunications services, cable & satellite and various technology industries within our Global Industry Classification Standards (“GICS”) industry andsub-industry;
Revenues betweenone-half and two times our revenue;
Reasonably sized enterprise value;
Reasonably sized assets;
Market Capitalization betweenone-fourth and three andone-half times our market cap;
Peer of peers and reverse peers; and
Peer groups used by proxy advisors.
During the second half of 2018, the Committee, based on input from its compensation consultant, reviewed the results from the above-described screening process for the compensation benchmarking peer groups from prior year and consolidated the primary and high-tech peer groups discussed in our 2019 proxy statement. As part of this consolidation, the Committee added four companies from last year’s high-tech peer group (Cognizent Technology Solutions, Oracle, Seagate Technology and Western Digital) to last year’s primary peer group and survey dataremoved one company (AT&T Inc. due to its significant larger size than CenturyLink). The Committee believes that the continued inclusion of Verizon Communications Inc. is appropriate, as they continue to be aligned to many aspects of our business, notwithstanding being considerably larger than us.
2020 Proxy Statement | 69 |
COMPENSATION DISCUSSION AND ANALYSIS
VI. Our Use of “Benchmarking” Data
As compared to the Compensation Benchmarking Peer Group, we are ranked below the 25th percentile of market capitalization, at the 50th percentile of enterprise value, at the 54th percentile of revenue and at the 68th percentile of assets, each as illustrated below.
The Committee believes the resulting 19 company peer group listed below, that comprises our “Compensation Benchmarking Peer Group,” provides a meaningful gauge of current pay practices and levels as well as overall compensation trends among companies engaged in the different aspects of the Company’s business. This Compensation Benchmarking Peer Group was used in support of pay decisions for our NEOs and senior officers in order to benchmark2019.
Telecommunication Services | ◾ BCE Inc. | ◾ TELUS Corporation | ||
◾ Frontier Communications Corp. | ◾T-Mobile US Inc. | |||
◾ Sprint Corporation | ◾ Verizon Communications Inc. | |||
Cable & Satellite | ◾ Charter Communications, Inc. | ◾ DISH Network Corporation | ||
◾ Comcast Corporation | ◾ Liberty Global plc | |||
Various Technology Industries | ◾ CISCO Systems Inc. | ◾ Oracle Corporation | ||
◾ Cognizant Technology Solutions Corp. | ◾ Seagate Technology plc | |||
◾ DXC Technology Company | ◾ QUALCOMM Incorporated | |||
◾ HP Inc. | ◾ Western Digital Corporation | |||
◾ Motorola Solutions, Inc |
In the second step, the Committee’s compensation levelsconsultant prepares competitive market analyses of compensation for our executives against peer executives at companies that are comparable to ours based on revenue size,NEOs and senior officers. The competitive market cap, industrydata for our NEOs and business model.senior officers is
For our named executive officers, our compensation consultant compiled
70 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
VI. Our Use of “Benchmarking” Data
comprised of the compensation data publicly disclosed by the companies included within the peer groups identified below. During 2017, when making our overall compensation pay decisions, ourpre-combination 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 resulting revised peer group labeled below as the“Pre-CombinationCompensation Benchmarking Peer Group determined in step one and, for 2017 Compensation Benchmarking.” The Committee and its consultant used thispre-combination peer group for purposes of
assessing the reasonableness of ourexecutive positions where publicly disclosed compensation prior to the Level 3 Combination. In selecting the companies included in this peer group, the Committee focused principally on telecommunications, cable and other communications companies that were generally comparable to us, prior to the Combination, in terms of size, markets and operations.
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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.
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In order to provide the Committee with additional information in support of their compensation decisions, a secondary “High Tech” peer group was developed. It includes companies across all aspects of high tech in such areas as IT services, Software, Hardware, Consulting, Distributors and Semiconductors. This group serves as a supplement to the revised peer group and provides an additional perspective on pay levels and practices for the technology industry sector.
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In addition to thepre- and post-combination compensation peer groups described above, the Committee’s compensation consultant utilized, to a lesser degree,is not available, survey data containing compensation information for companies in the telecommunications industry and general industry that are generally similar in size to usus.
During the second half of 2019, the Committee, based on input from its compensation consultant, reviewed the compensation benchmarking peer groups outlined above and made no changes to the Compensation Benchmarking Peer Group in support of pay decisions for executive positions where needed.our senior officers in 2020.
For additional information about how we setthe Committee utilizes the competitive market analyses in support of pay levels,decisions for our NEOs and senior officers, see “— Our Compensation Decision-Making Process.”
Performance Benchmarking.With the aid of its compensation consultant, the Committee annually reviews the broad industry peer group that it introduced in 2013 for purposes of benchmarking our relative performance based upon our historical three-year TSR. This peer group Peer Group
Our Compensation Benchmarking 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 2017 peer groups for compensation benchmarking were somewhat constrained by the number of companies, and revenue, enterprise value and market cap size. In contrast, the peer group forused to determine our relative total shareholder return performance benchmarking(“TSR Peer Group”) is comprised of a broader universe of companies we believe investors are considering when they decide whether to invest in us or our industry.industry and company size is less important with business similarity and risk profile being much more important.
Our compensation consultant leads an evaluation process to identify and screen relevant public companies to determine our TSR Peer Group, with the desired result of at least fifteen to twenty peer companies, as follows:
◾ | Start with a robust universe of potential peers in similar industry and technology focus that includes telecommunications services, cable and satellite and various technology industries within our GICS industry andsub-industry |
◾ | Conduct a historical stock price correlation between CenturyLink and a potential peer universe based on the industry sectors identified |
◾ | Perform back-testing on historical stock performance (i.e. TSR and Beta and impacts of macroeconomic factors that would impact all companies similarly) |
As discussed earlier in this CD&A, over the last two years we have been focusing on integration and transformation following the Level 3 combination. In light of this, and unpredictable stock performance during this time, the Committee stepped back from our historical practice (2010-2017) of awarding at least half of our performance-based LTI in Relative TSR. At its February 2020 meeting, the Committee changed the metrics and performance period for our 2020 LTI plan, which included the addition of a Relative TSR Modifier over three-year performance period.
During the second half of 2019, in preparation for the upcoming 2020 annual LTI grant, the Committee reviewed the TSR Peer Group described in our 2019 proxy statement for Mr. Storey’sone-time promotion grant that was granted to him in 2018. A primary consideration when selecting our TSR Peer Group for 2020 was the need to have peers with similar industry, business and risk profile as CenturyLink.
Following an extensive internal review process with our executive compensation consultants, the Committee reviewed the results from the above-described screening process and approved the following 17 company TSR Peer Group, at its February 2020 meeting, that includes 14 of the 16 TSR peers used in Mr. Storey’sone-time promotion grant (Mitel was acquired and Windstream filed for bankruptcy), supplemented by three large, international integrated telecom companies based outside the U.S. (BT Group plc, Orange S.A. and Telefonica
| 2020 Proxy Statement | 71 |
COMPENSATION DISCUSSION AND ANALYSIS
VI. Our Use of “Benchmarking” Data
S.A.). The threenon-U.S. companies were selected to maintain a robust sample of peers (of at least fifteen to twenty peer companies) and because the companies are large, complex and provide similar services as CenturyLink. The TSR Peer Group for the 2020 annual LTI grant is as follows:
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| ◾Telephone | |||
| ◾ BT Group plc | ◾ TELUS Corporation | ||
◾ Frontier Communications Corp. | ◾United States Cellular Corporation | |||
| ◾ Orange S.A. | ◾ Verizon Communications | ||
◾ Telefonica S.A. | ||||
Cable and Satellite | ◾ Liberty Global plc | |||
◾ DISH Network Corporation | ||||
Industries | ◾ Viasat, Inc. | |||
◾ Motorola Solutions, Inc | ◾ Zayo Group Holdings, Inc. |
72 | 2020 Proxy Statement |
COMPENSATION DISCUSSION AND ANALYSIS
VII. Our Governance of Executive Compensation
VII. Our Governance of Executive Compensation
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 | Focus on performance-based compensation weighted heavily towards long-term incentive awards | ||||
ü | Benchmark generally against 50th percentile peer compensation levels | |||||
ü | Maintain robust stock ownership guidelines applicable to our executive officers and outside directors | |||||
ü | Annually review our compensation programs to avoid encouraging excessive risk taking | |||||
ü | Conduct annual succession planning process for our CEO | |||||
ü | Conduct annual“say-on-pay” votes | |||||
ü | Discuss our executive compensation program during shareholder engagement | |||||
ü | Maintain a compensation “clawback” policy | |||||
ü | Impose compensation forfeiture covenants broader than those mandated by law | |||||
ü | Review the composition of our peer groups at least annually | |||||
ü | Conduct independent 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 | Require shareholders to approve any future severance agreements valued at more than 2.99 times the executive’s target cash compensation | |||||
What We Don’t Do... | × | Maintain a supplemental executive retirement plan | ||||
× | Permit our directors or employees to hedge our stock, or our directors or senior officers to pledge our stock | |||||
× | Pay dividends on unvested restricted stock | |||||
× | Permit the Committee’s compensation 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 benefits. |
2020 Proxy Statement | 73 |
COMPENSATION DISCUSSION AND ANALYSIS
VII. Our Governance of Executive Compensation
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.
Stock Ownership Guidelines
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.
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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, 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. In connection with the Level 3 Combination, we entered into anofficers, some of which include future commitments on our part. Mr. Storey’s offer letter, with each of our newly named executives, Messrs. Storeyas amended and Patel.restated in 2018, does contain future commitments by the Company, as described in greater detail under “Potential Termination Payments.”
We do not provide taxgross-up benefits in any offor our executive compensation programs. However, ourprograms; however, there are a few broad-based relocation policy providescompensation programs in which we provide for a taxgross-upgross-ups. to any employee who qualifies for relocation expense reimbursement. 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 (including, but not limited to, financial instruments such as prepaid variable forward contracts, equity swaps, collars and exchange funds). |
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.
Robust Stock Ownership Guidelines
Stock ownership guidelines further align the interests of executives and shareholders while focusing our 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, 2019:
◾ | Mr. Storey held more than $54 million in stock, total of 4,087,993 total shares (comprised of directly held restricted shares and unvested restricted shares or units and target shares of unvested performance-based restricted stock units), which was 30 times his base salary and 5 times greater than his target ownership level of six times base salary. |
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COMPENSATION DISCUSSION AND ANALYSIS
VII. Our Governance of Executive Compensation
◾ | Our other current NEOs held an aggregate of more than $17.5 million in stock (comprised of directly held restricted shares and unvested restricted shares or units), which was, on average, 7.4 times their respective base salaries and—2.5 times greater than their respective target ownership levels of three times base salary. |
Even though our CEO and other NEOs already exceeded their stock ownership guidelines, Mr. Storey purchased 83,000 and 50,000 shares in March and May 2019, respectively, and Mr. Dev purchased 50,000, 15,000 and 30,000 shares in March 2019, May 2019 and March 2020, respectively, which demonstrates their commitment to the Company and alignment with shareholders.
For additional information, see “Stock Ownership—Stock Ownership Guidelines.”
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.
2020 Proxy Statement | 75 |
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, 2017.2019.
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
76 | 2020 Proxy Statement |
OverviewSummary Compensation Table
The following table sets forth certain information regarding the compensation of (i) our principal executive officer, (ii) our current and former principal financial officersofficer, and (iii) each of ourthe three most highly compensatedother individuals who were serving as executive officers other than our principal executive and financial officers.at the end of 2019. 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 |
Summary Compensation Table | ||||||||||||||||||||||||||||||||||||||||
Name and Principle Position | Year | Salary | Bonus | Stock Awards(1) | Non-equity Incentive Plan Compensation(2) | Change in Pension Value(3) | All Other Compensation(4) | Total | ||||||||||||||||||||||||||||||||
Jeffrey K. Storey | 2019 | $ | 1,800,011 | $ | 0 | $ | 11,834,226 | $ | 3,492,021 | $ | 0 | $ | 108,850 | $ | 17,235,108 | |||||||||||||||||||||||||
2018 | 1,683,299 | 5,842,000 | 24,262,040 | 3,790,772 | 0 | 77,535 | 35,655,646 | |||||||||||||||||||||||||||||||||
2017 | 248,219 | 3,732,517 | 6,952,604 | 0 | 0 | 11,589 | 10,944,929 | |||||||||||||||||||||||||||||||||
Indraneel Dev | 2019 | $ | 650,000 | $ | 0 | $ | 2,535,909 | $ | 832,260 | $ | 0 | $ | 11,200 | $ | 4,029,369 | |||||||||||||||||||||||||
2018 | 463,770 | 227,027 | 1,588,732 | 438,427 | 0 | 11,000 | 2,728,956 | |||||||||||||||||||||||||||||||||
Stacey W. Goff | 2019 | $ | 600,018 | $ | 0 | $ | 1,878,454 | $ | 698,420 | $ | 251,876 | $ | 17,189 | $ | 3,445,957 | |||||||||||||||||||||||||
2018 | 600,018 | 0 | 2,070,386 | 847,465 | 0 | 57,586 | 3,575,455 | |||||||||||||||||||||||||||||||||
2017 | 550,662 | 275,000 | 6,373,228 | 449,502 | 54,643 | 59,528 | 7,762,563 | |||||||||||||||||||||||||||||||||
Scott A. Trezise | 2019 | $ | 496,312 | $ | 0 | $ | 751,382 | $ | 469,111 | $ | 0 | $ | 14,350 | $ | 1,731,155 | |||||||||||||||||||||||||
2018 | 475,010 | 0 | 724,646 | 467,600 | 0 | 194,048 | 1,861,304 | |||||||||||||||||||||||||||||||||
Shaun C. Andrews | 2019 | $ | 461,442 | $ | 0 | $ | 704,412 | $ | 492,359 | $ | 0 | $ | 19,095 | $ | 1,677,308 |
(1) | For 2019, the amounts shown in this column |
For additional information about these cash awards,equity grants, see “Compensation Discussion and Analysis – Analysis—Our Compensation Program Objectives and Components of Pay – Short Term Incentive Bonuses” and “– Awards Related to Level 3 Combination.”
For additional information about the equity grants made during 2017 and the acceleration of the RSUs held by our newly named executives, see “Compensation Discussion and Analysis – Our Compensation Program Objectives and Components of Pay – Annual Pay—Grants of Long-Term Incentive Compensation” and “– Awards Related to Level 3 Combination.Compensation.”
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:
grant.
The aggregate value of the restricted stockequity awards granted to theseeach named executivesexecutive in 2017,2019, 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. Post, $14,977,994,Storey, $18,934,773, Mr. Patel, $1,202,679, Mr. Hussain, $6,462,460,Dev, $4,057,455, Mr. Goff, $7,138,620,$3,005,526, Mr. Storey, $3,874,093,Trezise, $1,202,216, and Mr. Ewing, $2,451,507.Andrews, $1,127,059. See Note 1012 titled “Share-based Compensation” of the notes to our audited financial statements included inAppendix B our Annual Report on Form10-K for the fiscal year ended December 31, 2019 for an explanation of material assumptions that we used to calculate the fair value of these stock awards.
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 |
Reflects the net change during each of the years reflected in the present value of |
2020 Proxy Statement | 77 |
EXECUTIVE COMPENSATION TABLES
Summary Compensation Table
For fiscal 2019, the amounts shown in this column are comprised of (i) reimbursements for the cost of an annual physical |
Name | Physical Exam | Aircraft Use | Contributions to Plans | Insurance Premiums | Total | |||||||||||||||
Mr. Storey | $ 0 | $ | 97,650 | $11,200 | $ 0 | $ | 108,850 | |||||||||||||
Mr. Dev | 0 | 0 | 11,200 | 0 | 11,200 | |||||||||||||||
Mr. Goff | 0 | 0 | 10,692 | 6,497 | 17,189 | |||||||||||||||
Mr. Trezise | 3,150 | 0 | 11,200 | 0 | 14,350 | |||||||||||||||
Mr. Andrews | 0 | 0 | 19,095 | 0 | 19,095 |
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 2019 Compensation Program Objectives and Components of Pay – Pay—Other Benefits –Perquisites.Benefits—Perquisites.”
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Incentive Compensation and Other Awards
The table and discussion below summarize:
the range of potential cash payouts to each of our legacy named executives under our short-term incentive program with respect to performance during 2017;2019; and
grants of long-term compensation awarded to each named officer on the dates indicated below, consistingincluding the type of (i)equity award and whether the number of shares of time-vested restricted stock awarded, (ii) the range of potential share payouts under relative performance-based restricted stock awards and (iii) the range of potential share payouts under absolute performance-based restricted stock awards, which for purposes of the table below are referred to as the time-vested awards, the relative performance awards and the absolute performance awards, respectively.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 ($)(6) | |||||||||||||||||||||||||||||
Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||||||||||||
Glen F. Post, III | Annual Bonus | $ | 1,093,750 | $ | 2,187,500 | $ | 4,375,000 | — | — | — | — | $ | — | |||||||||||||||||||||
Annual TVRS | — | — | — | — | — | — | 135,361 | 3,339,356 | ||||||||||||||||||||||||||
AnnualPBRS-R | — | — | — | 50,761 | 101,521 | 203,042 | — | 3,161,364 | ||||||||||||||||||||||||||
AnnualPBRS-A | — | — | — | 50,761 | 101,522 | 203,044 | — | 1,693,387 | ||||||||||||||||||||||||||
Integration RS | — | — | — | — | — | — | 62,640 | 1,620,497 | ||||||||||||||||||||||||||
Sunit S. Patel | Signing TVRS | — | — | — | — | — | — | 67,377 | 1,202,679 | |||||||||||||||||||||||||
Aamir Hussain | Annual Bonus | 285,377 | 570,755 | 1,141,510 | — | — | — | — | — | |||||||||||||||||||||||||
Annual TVRS | — | — | — | — | — | — | 25,480 | 628,592 | ||||||||||||||||||||||||||
AnnualPBRS-R | — | — | — | 9,555 | 19,110 | 38,220 | — | 595,085 | ||||||||||||||||||||||||||
AnnualPBRS-A | — | — | — | 9,555 | 19,110 | 38,220 | — | 318,755 | ||||||||||||||||||||||||||
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 TVRS | — | — | — | — | — | — | 20,065 | 495,004 | ||||||||||||||||||||||||||
AnnualPBRS-R | — | — | — | 7,525 | 15,049 | 30,098 | — | 468,626 | ||||||||||||||||||||||||||
AnnualPBRS-A | — | — | — | 7,525 | 15,049 | 30,098 | — | 251,017 | ||||||||||||||||||||||||||
Retention TVRS | — | — | — | — | — | — | 187,920 | 4,861,490 | ||||||||||||||||||||||||||
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 | — | — | — | — | — | |||||||||||||||||||||||||
Annual TVRS | — | — | — | — | — | — | 24,842 | 612,852 | ||||||||||||||||||||||||||
AnnualPBRS-R | — | — | — | 9,316 | 18,632 | 37,264 | — | 580,200 | ||||||||||||||||||||||||||
AnnualPBRS-A | — | — | — | 9,317 | 18,633 | 37,266 | — | 310,798 |
Grants of Plan-Based Awards | |||||||||||||||||||||||||||||||||||||||||||||
Type of Award and Grant | Range of Payouts Under Non-Equity Incentive Plan Awards(2) | Estimated Future Share Payouts Under Equity Incentive Plan Awards | All other Stock Awards: Unvested | Grant Date Fair Value | |||||||||||||||||||||||||||||||||||||||||
Name | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | |||||||||||||||||||||||||||||||||||||||
Mr. Storey | Annual Bonus | $ | 1,800,011 | $ | 3,600,022 | $ | 7,200,044 | ||||||||||||||||||||||||||||||||||||||
Annual TVRS | 358,884 | $ | 4,733,680 | ||||||||||||||||||||||||||||||||||||||||||
Annual PVRS | 269,164 | 538,328 | 1,076,656 | 7,100,546 | |||||||||||||||||||||||||||||||||||||||||
$ | 11,834,226 | ||||||||||||||||||||||||||||||||||||||||||||
Mr. Dev | Annual Bonus | $ | 390,000 | $ | 780,000 | $ | 1,560,000 | ||||||||||||||||||||||||||||||||||||||
Annual TVRS | 76,904 | $ | 1,014,364 | ||||||||||||||||||||||||||||||||||||||||||
Annual PVRS | 57,678 | 115,356 | 230,712 | 1,521,546 | |||||||||||||||||||||||||||||||||||||||||
$ | 2,535,909 | ||||||||||||||||||||||||||||||||||||||||||||
Mr. Goff | Annual Bonus | $ | 360,011 | $ | 720,021 | $ | 1,440,042 | ||||||||||||||||||||||||||||||||||||||
Annual TVRS | 56,966 | $ | 751,382 | ||||||||||||||||||||||||||||||||||||||||||
Annual PVRS | 42,725 | 85,449 | 170,898 | 1,127,072 | |||||||||||||||||||||||||||||||||||||||||
$ | 1,878,454 | ||||||||||||||||||||||||||||||||||||||||||||
Mr. Trezise | Annual Bonus | $ | 219,827 | $ | 439,654 | $ | 879,308 | ||||||||||||||||||||||||||||||||||||||
Annual TVRS | 22,786 | $ | 300,547 | ||||||||||||||||||||||||||||||||||||||||||
Annual PVRS | 17,090 | 34,180 | 68,360 | 450,834 | |||||||||||||||||||||||||||||||||||||||||
$ | 751,382 | ||||||||||||||||||||||||||||||||||||||||||||
Mr. Andrews | Annual Bonus | $ | 230,721 | $ | 461,442 | $ | 922,884 | ||||||||||||||||||||||||||||||||||||||
Annual TVRS | 21,362 | $ | 281,765 | ||||||||||||||||||||||||||||||||||||||||||
Annual PVRS | 16,022 | 32,043 | 64,086 | 422,647 | |||||||||||||||||||||||||||||||||||||||||
$ | 704,412 |
78 | 2020 Proxy Statement |
EXECUTIVE COMPENSATION TABLES
Incentive Compensation Awards
(1) |
|
For purposes of this column: |
◾ | “Annual Bonus” means the bonuses that our named executives were eligible to earn under our STI Program for 2019; |
◾ | “Annual TVRS” means our time-vested restricted stock or restricted stock units awarded under our annual long-term incentive program to each named executives on February 28, 2019; and |
◾ | “Annual PBRS” means our performance-based restricted stock or restricted stock units awarded under our annual long-term incentive program to each named executives on February 28, 2019; |
For more information on these awards, see “Compensation Discussion and Analysis — Analysis—Our 2019 Compensation Program Objectives and Components of Pay — Pay—Short-Term Incentive Bonuses,” “ — Annual and “—Grants of Long-Term Incentive Compensation,Compensation.” and “ — Awards Related to Level 3 Combination.”
These columns provide information on the potential payouts under the annual bonus program for |
Calculated in accordance with FASB ASC Topic 718 in the manner described in Note 1 to the Summary Compensation Table above. |
Short-Term Incentive Compensation.Our legacy named executives participated in the CenturyLink short-term incentiveShort-Term Incentive (“STI”) 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.2019. 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 2017,2019, each of our legacy named executives waswere granted both time- and performance-based shares of restricted stock, under this program.although all of the time-vested and performance-vested grants to Mr. Storey were in the form of restricted stock units. The time-vested sharesawards will vestone-third per year over the first three anniversaries of the date of grant and the performance-based sharesawards will vest in February 2020,two equal installments on March 1 of 2021 and 2022, depending upon our attainmentachievement of two separate performance metrics 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).two-year Adjusted EBITDA Run Rate target. For more information, see “Compensation Discussion and Analysis — Analysis—Our 2019 Compensation Program Objectives and Components of Pay — Annual Pay—Grants of Long-Term Incentive Compensation.”
Awards Related to Level 3 Combination.We granted a combination of integration and retention awards to certain legacy named executives, For information regarding LTI grants made in order to retain and incentivize them throughprior years, see the closing ofdisclosure in our proxy statement for the Level 3 Combination and the critical post-Closing integration period. In addition, we granted certain cash and equity awards to our newly named executives in order to incentivize them to join our senior leadership teamyear following the Level 3 Combination. For more information on these programs, see “Compensation Discussion and Analysis — Our Compensation Program Objectives and Componentsdate of Pay — Awards Related to Level 3 Combination.grant.
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 also2019 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. 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 or issuance of such shares.shares or units. Unless and until forfeited, theseany shares of restricted stock may be voted by the named executive officers.NEOs. 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.”
2020 Proxy Statement | 79 |
Outstanding Equity Awards at December 31, 2017(1)2019.
Stock Awards | Equity Incentive Awards(2) | |||||||||||||||||||
Name | Grant Date | Number of Unvested Shares or Units (#) | Market Value of Unvested Shares or Units ($) | Number of Unvested Shares or Units (#) | Market Value of Unvested Shares or Units ($) | |||||||||||||||
Current Executives: | ||||||||||||||||||||
Glen F. Post, III | 2/23/2015 | 29,254 | (3) | $ | 487,957 | 131,640 | (12) | $ | 2,195,755 | |||||||||||
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 | |||||||||||||||
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 | — | — | |||||||||||||||
Aamir Hussain | 2/23/2015 | 4,818 | (6) | 80,364 | 21,682 | (12) | 361,656 | |||||||||||||
2/23/2016 | 21,466 | (7) | 358,053 | 48,298 | 805,611 | |||||||||||||||
2/21/2017 | 25,480 | (8) | 425,006 | 38,220 | 637,510 | |||||||||||||||
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 | 12,880 | (7) | 214,838 | 28,979 | 483,370 | |||||||||||||||
2/21/2017 | 20,065 | (8) | 334,684 | 30,098 | 502,035 | |||||||||||||||
6/1/2017 | 11,484 | (9) | 191,553 | — | — | |||||||||||||||
6/1/2017 | 187,920 | (10) | 3,134,506 | — | — | |||||||||||||||
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 |
Outstanding Awards at December 31, 2019(1) | ||||||||||||||||||||||||||||||
Stock Awards | Equity Incentive Awards(2) | |||||||||||||||||||||||||||||
Name | Grant Date | Number of Unvested Shares or Units (#) | Market Value of Shares that Have Not Vested ($) | Number of Unvested Shares or Units (#) | Market Value of Unvested Shares or Units ($) | |||||||||||||||||||||||||
Mr. Storey | 3/1/2017 | 108,920 | (3) | $ | 1,438,833 | — | $ | — | ||||||||||||||||||||||
5/24/2018 | 178,069 | (4) | 2,352,291 | 400,655 | (8) | 5,292,653 | ||||||||||||||||||||||||
5/24/2018 | 104,580 | (5) | 1,381,502 | 235,306 | (9) | 3,108,392 | ||||||||||||||||||||||||
2/28/2019 | 358,884 | (4) | 4,740,858 | 538,328 | (12) | 7,111,313 | ||||||||||||||||||||||||
Mr. Dev | 7/1/2016 | 3,994 | (3) | 52,761 | — | — | ||||||||||||||||||||||||
3/1/2017 | 11,136 | (3) | 147,107 | — | — | |||||||||||||||||||||||||
11/1/2017 | 17,276 | (6) | 228,216 | — | — | |||||||||||||||||||||||||
2/19/2018 | 13,185 | (4) | 174,174 | 19,777 | (8) | 261,254 | ||||||||||||||||||||||||
8/7/2018 | — | — | 45,063 | (10) | 595,282 | |||||||||||||||||||||||||
2/28/2019 | 76,904 | (4) | 1,015,902 | 115,356 | (12) | 1,523,853 | ||||||||||||||||||||||||
Mr. Goff | 2/21/2017 | 6,689 | (4) | 88,362 | 30,098 | (11) | 397,595 | |||||||||||||||||||||||
6/1/2017 | 62,640 | (7) | 827,474 | — | — | |||||||||||||||||||||||||
2/21/2018 | 30,844 | (4) | 407,449 | 69,399 | (8) | 916,761 | ||||||||||||||||||||||||
2/28/2019 | 56,966 | (4) | 752,521 | 85,449 | (12) | 1,128,781 | ||||||||||||||||||||||||
Mr. Trezise | 2/21/2017 | 3,451 | (4) | 45,588 | 15,527 | (11) | 205,112 | |||||||||||||||||||||||
6/1/2017 | 48,720 | (7) | 643,591 | — | — | |||||||||||||||||||||||||
2/21/2018 | 10,796 | (4) | 142,615 | 24,290 | (8) | 320,871 | ||||||||||||||||||||||||
2/28/2019 | 22,786 | (4) | 301,003 | 34,180 | (12) | 451,518 | ||||||||||||||||||||||||
Mr. Andrews | 7/1/2016 | 2,058 | (3) | 27,186 | — | — | ||||||||||||||||||||||||
3/1/2017 | 4,586 | (3) | 60,581 | — | — | |||||||||||||||||||||||||
2/21/2018 | 7,711 | (4) | 101,862 | 17,350 | (8) | 229,194 | ||||||||||||||||||||||||
2/28/2019 | 21,362 | (4) | 282,192 | 32,043 | (12) | 423,288 |
(1) | All information presented in this table is as of December 31, |
(2) | Represents performance-based |
(3) |
Represents restricted stock units, originally granted to |
(4) | Represents an annual grant of time-vested restricted stock (for Messrs. Dev, Goff, Trezise and Andrews) or restricted stock units (for Mr. Storey) that will vest in three equal installments on the first three years following the grant date subject to the executive’s continued employment through the applicable vesting date. |
Grant Date | Vesting Date | |
February 19, 2018 | February 19, 2020 for Mr. Dev | |
February 21, 2018 | Two equal installments on February 21 of 2020 and 2021 for Messrs. Goff and Trezise | |
May 24, 2018 | Two equal installments on May 24 of 2020 and 2021 for Mr. Storey | |
February 28, 2019 | Three equal installments on March 1 of |
80 | 2020 Proxy Statement |
EXECUTIVE COMPENSATION TABLES
Incentive Compensation Awards
(5) | Represents a promotion grant of time-vested restricted stock granted to Mr. Storey that will vest in three equal installments on the first three anniversaries of the grant date (May 24 of 2018), subject to the executive’s continued employment through the applicable vesting date. |
(6) | These shares of time-vested restricted stock will vest on November 1, 2020, subject to the executive’s continued employment through the applicable vesting date. |
(7) |
Represents shares of restricted stock granted under a retention award program to certain legacy named executives. These awards will vest |
(8) | 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, subject to continued employment through the applicable vesting date. Based on our performance from 2018 to 2019, 151.1% of the first installment of the performance-based restricted stock or units paid out and vested in February 2020. |
(9) | 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. |
(10) | 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 LTI grants and covers fiscal years 2019 and 2020 (vesting date of August 7, 2021). Based on our performance from 2018 to 2019, 151.1% of the performance-based restricted stock for the first tranche vested in February 2020. |
(11) | Represents the |
Represents the performance-based portion of our 2019 annual restricted stock or restricted stock unit awards. These awards |
Vesting of Equity Awards During 2017. 2019
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 there2019. 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.
Stock Vested During 2017during 2019.
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 |
Stock Vested During 2019 | ||||||||||
Name | Number of Shares Acquired on Vesting(1) | Value Realized on Vesting(2) | ||||||||
Mr. Storey | 1,063,929 | $ | 13,479,617 | |||||||
Mr. Dev | 55,490 | 749,737 | ||||||||
Mr. Goff | 114,167 | 1,338,934 | ||||||||
Mr. Trezise | 71,576 | 812,600 | ||||||||
Mr. Andrews | 16,678 | 221,859 |
(1) | Represents both time-vested and performance-based equity awards that vested during 2019. For |
(2) | Based on the closing trading price of the Common Shares on the applicable vesting date. |
EXECUTIVE COMPENSATION TABLES
Pension Benefits
The following table and discussion summarize pension benefits payable to theone of our 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)
|
Pension Benefits | ||||||||
Name(1) | Plan Name | Number of Years of Credited Service | Present Value of Accumulated Benefit(2) | Payments During Last Fiscal Year | ||||
Stacey W. Goff | Qualified Plan | 21 | $785,641 | — | ||||
Supplemental Plan | 21 | $602,503 | — |
(1) | None of Messrs. |
(2) | These figures represent accumulated benefits as of December 31, |
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 PlanPension Plans 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.
82 | 2020 Proxy Statement |
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.EXECUTIVE COMPENSATION TABLES
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 arrangementsarrangement 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,Mr. Storey, which areis described in more detail above under “- Vesting of Equity Awards During 2017” and in the text following the table below.
Non-Qualified Deferred Compensation
Name(1) | 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 | ||||||||||||||||||
Current Executives: | ||||||||||||||||||||||||
Glen F. Post, III | $ | 4,314,074 | $ | 256,207 | $ | 96,740 | $ | 572,097 | — | $ | 5,239,118 | |||||||||||||
Sunit S. Patel | — | 6,915,750 | — | — | — | 6,915,750 | ||||||||||||||||||
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 |
Supplemental Dollars & Sense Plan 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 Deferred
EXECUTIVE COMPENSATION TABLES Potential Termination Payments Potential Termination Payments The materials below discuss payments and benefits that our officers are eligible to receive if 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 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:
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:
None of the benefits listed immediately above are payable if the employee resigns or is terminated for Payments Made Upon Retirement.Employees who retire in conformity with our retirement plans and policies are entitled, subject to certain conditions, to:
EXECUTIVE COMPENSATION TABLES Potential Termination Payments In addition, the Committee has discretion to accelerate the vesting of all, or a portion of, unvested time-vested Payments Made Upon Death or Disability.Upon death or disability, officers (or their estates) are generally entitled to (without duplication of benefits):
Equity Acceleration Provisions of Mr. Storey’s Amended and Restated Offer Letter.In conjunction with appointing Mr. Storey as our CEO in 2018, 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 vesting conditions. Payments Made Upon a Change of Control.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 receive (i) Under CenturyLink’s above-referenced agreements, a “change in control” of CenturyLink would be deemed to occur 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
EXECUTIVE COMPENSATION TABLES Potential Termination Payments 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 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 We believe the above-described change of control benefits enhance shareholder value because:
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.
EXECUTIVE COMPENSATION TABLES Potential Termination Payments
EXECUTIVE COMPENSATION TABLES Potential Termination Payments
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
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 ours.
Common Stock Ownership of Principal Shareholders 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, 2019 (the “investors”), unless otherwise noted.
Ownership of Executive Officers and Directors The following table sets forth information, as of the record date, regarding the beneficial ownership of our common stock 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.
STOCK OWNERSHIP Ownership of Executive Officers and Directors
Each executive officer and
As of December 31,
CenturyLink Performance History The graph below compares the cumulative total shareholder return on
OTHER MATTERS Compensation Committee Interlocks and Insider Participation
During the last fiscal year, our Compensation Committee included
During During 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 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.
Why am I receiving these proxy materials? Our Board of Directors is soliciting your proxy to vote at our 2020 annual meeting of shareholders because you owned shares of our stock at the close of business on March 26, 2020, 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 9, 2020. This proxy statement summarizes information regarding matters to be considered at the meeting. For additional information on our proxy materials, see “Other Information—Proxy Materials” appearing below. When and where will the meeting be held? The If public health concerns related toCOVID-19 persist, we might elect to implement alternative meeting attendance options or restrictions, or to adjourn or reschedule the meeting. If so, we would broadly announce these changes, including through a press release, website posting, and
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 1,097,900,481 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
FREQUENTLY ASKED QUESTIONS 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
If 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: call1-800-690-6903and 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 If you Please note that you may not vote by telephone or the Internet after 11:59 p.m. Eastern Time on May 19, 2020. If I am a beneficial owner of shares As the beneficial owner, you have the right to instruct your broker, bank or nominee
If you beneficially own any of our Common Shares by virtue of participating in any retirement plan of CenturyLink, then you will receive these shares. 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.
(ii) proof of ownership of our common stock as of the
FREQUENTLY ASKED QUESTIONS What is the quorum requirement for the meeting? Our Bylaws provide that the presence at the meeting, in person or by proxy, of 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. Could other matters be
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 nor will you be permitted to make any audio or visual recordings during 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.
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. What is the deadline to propose actions for consideration at the 2021 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. Other Proposals and Nominations.In addition, our Our above-described advance notice Proxies granted by a shareholder will give discretionary authority to the proxy holders to vote on any matters introduced pursuant to the above-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 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
FREQUENTLY ASKED QUESTIONS 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 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 11 directors constituting our Board immediately following the meeting, two is the maximum number of proxy access candidates that we would be required to include in our 2021 proxy materials for the 2021 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 2021 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 Information.”
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
Appendix B includes our
to Proxy Statement Non-GAAP Reconciliations Description ofNon-GAAP Metrics Pursuant to Regulation G, we are hereby providing definitions ofnon-GAAP financial metrics and reconciliations to the most directly comparable GAAP measures. The following describes and reconciles those financial measures as reported under accounting principles generally accepted in the United States (GAAP) with those financial measures as adjusted by the items detailed below. These calculations are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP. We use the term special items as anon-GAAP measure to describe items that impacted a period’s statement of operations for which investors may want to give special consideration due to their magnitude, nature or both. We do not call these itemsnon-recurring because, while some are infrequent, others may recur in future periods. Adjusted EBITDA ($) is defined as net income (loss) from the statements of operations before income tax (expense) benefit, total other income (expense), depreciation and amortization, share-based compensation expense and impairments. Adjusted EBITDA Margin (%) is defined as Adjusted EBITDA divided by total revenue. Management believes that Adjusted EBITDA and Adjusted EBITDA Margin are relevant and useful metrics to provide to investors, as they are an important part of our
There are material limitations to using Adjusted EBITDA as a financial measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from CenturyLink’s calculations. Additionally, this financial measure does not include certain significant items such as interest income, interest expense, income taxes, depreciation and amortization,non-cash stock compensation expense, the gain (or loss) on extinguishment and modification of debt and net other income (expense). Adjusted EBITDA and Adjusted EBITDA Margin (either with or without integration and transformation costs adjustments and special items) should not be considered a substitute for other measures of financial performance reported in accordance with GAAP. Free Cash Flow is defined as net cash provided by (used in) operating activities less capital expenditures as disclosed in our Statements of Cash Flows. Management believes that Free Cash Flow is a relevant metric to provide to investors, as it is an indicator of our ability to generate cash to service our debt. Free Cash Flow excludes cash used for acquisitions, principal repayments and the impact of exchange rate changes on cash and cash equivalents balances.
There are material limitations to using Free Cash Flow to measure CenturyLink’s performance as it excludes certain material items such as principal payments on and repurchases of long-term debt and cash used to fund acquisitions. Comparisons of CenturyLink’s Free Cash Flow to that of some of its competitors may be of limited usefulness since CenturyLink does not currently pay a significant amount of income taxes due to net operating loss carryforwards, and therefore, generates higher cash flow than a comparable business that does pay income taxes. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to interest expense, accounts receivable, accounts payable, payroll and capital expenditures. Free Cash Flow should not be used as a substitute for net change in cash and cash equivalents on our Consolidated Statements of Cash Flows. Gross Debt is defined as total long-term debt, less unamortized discounts, premiums and other, net and unamortized debt issuance costs. Net Debt to Adjusted EBITDA Ratio is defined as Gross Debt, reduced by cash and cash equivalents and divided by Adjusted EBITDA. Non-GAAP Integration and Transformation Costs and Special Items (UNAUDITED) ($ in millions)
Adjusted EBITDANon-GAAP Reconciliation (UNAUDITED) ($ in millions)
Net Debt to Adjusted EBITDA Ratio (UNAUDITED) ($ in millions)
to Proxy Statement CENTURYLINK, INC.
INDEX TO ANNUAL FINANCIAL REPORT December 31, 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,
Our common stock is listed on the New York Stock Exchange (“NYSE”) and the Berlin Stock Exchange and is traded under the symbol CTL and CYT, respectively.
As described in greater detail in “Risk Factors” in Item 1A of
The following table contains information about shares of our
Equity Compensation Plan Information See Item 12 of this report. ITEM 6. SELECTED FINANCIAL DATA 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 of Part II and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of The tables of selected financial data shown below are derived from our audited consolidated financial statements, which include the operating results, cash flows and The following table summarizes selected financial information from our consolidated statements of operations.
Selected financial information from our consolidated balance sheets is as follows:
Selected financial information from our consolidated statements of cash flows is as follows:
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references to “Notes” in this Item 7 of Part II refer to the Notes to Consolidated Financial Statements included in Item 8 of Part II of this report. Certain statements in
We are an international facilities-based communications company engaged primarily in providing
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. During the year ended December 31, 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 determinations In the discussion that follows, we refer to the business that we operated prior to the Level 3 acquisition as “Legacy CenturyLink”, and we refer to the incremental business activities that we now operate as a result of the Level 3 acquisition as “Legacy Level 3.” For additional information about our acquisition of Level 3, see (i) Note 2—Acquisition of Level 3 to our consolidated financial statements in Item 8 of Sale of Data Centers and Colocation Business On May 1, 2017, we sold a portion of our data centers and colocation business to a consortium led by BC Partners, Inc. and Medina Capital (“the Purchaser”) in exchange forpre-tax cash proceeds of $1.8 billion and a minority stake in the limited partnership that owns the consortium’s Our colocation business generated This transaction did not meet the accounting requirements for a sale-leaseback transaction as described in ASC840-40, After factoring in the costs to sell the data centers and colocation business, excluding the impacts from the failed-sale-leaseback accounting treatment, the sale resulted in a $20 million gain as a result of the aggregate value of the consideration 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 is included in selling, general and administrative expenses in our consolidated statement of operations for the year ended December 31, 2017.
See Note 3—Sale of Data Centers and Colocation Business for additional information on the sale and Note 1—Background And Summary Of Significant Accounting Policies for discussion of the impact of implementing ASU2016-02to our consolidated financial statements in Item 8 of
Reporting Segments Our reporting segments
We categorize our
We categorize revenue among the following four categories that we sell to residential customers:
Trends Impacting Our Operations Our consolidated operations have been, and are expected to continue to be, impacted by the following company-wide trends: Customers’ demand for automated products and services and competitive pressures will require that we continue to invest in new technologies and automated processes to improve the customer experience and reduce our operating expenses. The increasingly digital environment and the growth in online video require robust, scalable network services. We are continuing to enhance our product capabilities and simplify our product portfolio based on demand and profitability to enable customers to have access to greater bandwidth. Businesses continue to adopt distributed, global operating models. We are expanding and densifying our fiber network, connecting more buildings to our network to generate revenue opportunities and reduce our costs associated with leasing networks from other carriers. Industry consolidation, coupled with changes in regulation, technology and customer preferences, are significantly reducing demand for our traditional voice services and are pressuring some other revenue streams, while other advances, such as the need for lower latency provided by Edge computing or the implementation of 5G networks, are expected to create opportunities. The operating margins of several of our newer, more technologically advanced services, some of which may connect to customers through other carriers, are lower than the operating margins on our traditional,on-net wireline services. Additional trends impacting our segments are discussed elsewhere in this Item 7. Results of Operations In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In “Segment Results of Operations” we review the performance of our five reporting segments in more detail.
These expense classifications may not be comparable to those of other companies. The following tables summarize our operating expenses:
Cost of Services and Products (exclusive of depreciation and amortization) Cost of services and products (exclusive of depreciation and amortization) decreased by $785 million, or 7%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The decrease in costs of services and products (exclusive of depreciation and amortization) was primarily due to reductions in (i) salaries and wages and employee-related expenses from lower headcount directly related to operating and maintaining our network, (ii) network expenses and voice usage costs, (iii) customer premises equipment costs from lower sales, in (iv) content costs from Prism TV, and (v) lower space and power expenses. These reductions were partially offset by increases in direct taxes and fees, USF rates, professional services, customer installation costs and right of way and dark fiber expenses. Cost of services and products (exclusive of depreciation and amortization) increased by Selling, General and Selling, general and
Selling, general and administrative expenses increased by administrative expenses was Depreciation and Amortization The following tables provide detail of our depreciation and amortization expense:
Depreciation expense decreased by $250 million, or 7%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to the impact of the full depreciation Depreciation expense increased by Amortization expense decreased by
Amortization expense increased by Goodwill Impairments We are required to perform impairment tests related to our goodwill annually, which we perform as of October 31, or sooner if an indicator of impairment occurs. Both our January 2019 internal reorganization and the decline in our stock price triggered impairment testing in the first quarter of 2019. Consequently, we evaluated our goodwill in January 2019 and again as of March 31, 2019. When we performed our annual impairment test in the fourth quarter of 2019 the results indicated we did not have any impairment charges. When we performed our impairment tests during the first quarter of 2019, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of the date of each of our triggering events during the first quarter of 2019. As a result, we recordednon-cash,non-tax-deductible goodwill impairment charges aggregating to $6.5 billion in the quarter ended March 31, 2019. Additionally, when we performed our annual impairment test in the fourth quarter of 2018 we concluded that the estimated fair value of our consumer reporting unit was less than our carrying value of equity for such reporting unit and we recorded anon-cashnon-tax-deductible goodwill impairment charge of approximately $2.7 billion in the fourth quarter of 2018. See Note 4—Goodwill, Customer Relationships and Other Intangible Assets for further details on these tests and impairment charges. Other Consolidated Results The following tables summarize our total other expense, net and income tax expense (benefit)
Interest Expense Interest expense Interest expense increased by $696 million, or 47%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The increase in interest expense was primarily due to
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 (loss) income, Other income, net increased by $32 million, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This increase in other income, net was primarily due to a Income Tax Expense (Benefit) For the years ended December 31, 2019, 2018 and 2017, our effective income tax rate was (10.6)%, (10.9)%, and (157.2)%, respectively. The
factor contributing to our recognition of an $849 million income tax benefit for 2017. The 2017 Segment Results General Reconciliation of segment revenue to total operating revenue is below:
Reconciliation of segment EBITDA to total adjusted EBITDA is below:
For additional information on our reportable segments and product and services categories, see Note 17—Segment Information to our consolidated financial statements in Item 8 of Part II of this report. International and Global Accounts Management Segment
Year Ended December 31, 2019 Compared to the same periods Ended December 31, 2018 and December 31, 2017 Segment
IT and managed services revenue declined due to a IP and data services revenue declined mostly due to reduced rates and lower voice and transport and infrastructure revenue increased due to expanded services Segment
Segment expenses line with lower revenue. Segment
Segment adjusted EBITDA as a percentage of revenue was 64%, 64% and 59% for the year ended December 31, Enterprise Segment
Year Ended December 31, 2019 Compared to the same periods Ended December 31, 2018 and December 31, 2017 Segment revenue remained unchanged for the year ended December 31, 2019 compared to December 31, 2018 and increased $1.9 billion or 47% for the year ended December 31, 2018 compared to December 31, 2017, due to the following factors: For the year ended 2019 compared to 2018, IP and data services revenue increased, primarily driven by an increase in rates, and for the period ended 2018 compared to 2017, the increase was driven mainly by the acquisition of Level 3; for both periods, IT and managed services revenue declined mainly due to churn in legacy managed services contracts; for the year ended 2019 compared to 2018, voice and collaboration revenue decreased as customers continue to disconnect traditional voice TDM service and transition to newer (low cost) products such as VoIP, and for the year ended 2018 compared to 2017, voice and collaboration revenue increased due to the Level 3 acquisition partially offset by migration from traditional TDM services to VoIP; and for the year ended 2019 compared to 2018, transport and infrastructure revenue decreased due to our deemphasis oflow-margin equipment and lower professional services, and for the year ended 2018 compared to 2017, transport and infrastructure increased due to the Level 3 acquisition partially offset by lower equipment sales. Segment expenses increased by $32 million or 1% for the year ended December 31, 2019 compared to December 31, 2018 and $881 million or 51% for the year ended December 31, 2018 compared to December 31, 2017, primarily due to: For the year ended 2019 compared to 2018, selling, general and administrative costs decreased due to lower headcount related costs and external commissions, and for the year ended 2018 compared to 2017, selling, general and administrative costs increased due to the Level 3 acquisition; and for the year ended 2018 compared to 2017, cost of services and products increased primarily driven by the higher revenues from the Level 3 acquisition, increased rates and higher offnet costs. Segment adjusted EBITDA as a percentage of revenue was 57%, 57% and 59% for the year ended December 31, 2019, 2018 and 2017, respectively. Small and Medium Business Segment
Year Ended December 31, 2019 Compared to the same periods Ended December 31, 2018 and December 31, 2017 Segment revenue decreased $188 million or 6% for the year ended December 31, 2019 compared to December 31, 2018 and increased $726 million, or 30% for the year ended December 31, 2018 compared to December 31, 2017, primarily due to the For the year ended 2019 compared to 2018, voice and collaboration revenue decreased due to continued decline in for the year ended 2019 compared to 2018, transport and infrastructure revenue decreased primarily due to lower equipment sales as we continue to focus on driving profitable growth, and for the year ended 2018 compared to 2017, transport and infrastructure increased due to the Level 3 acquisition, partially offset byde-emphasis of Customer Premises Equipment (“CPE”) sales; and for the year ended 2018 compared to 2017, IP and data services increased due to the Level 3 acquisition and VPN revenue growth as we continue to experience good momentum in this product within our small and medium business Segment expenses decreased by For the year ended 2019 compared to 2018, expenses decreased due to lower network cost driven by declines in customer demand, and network expense synergies; and for the year ended 2018 compared to 2017, expenses increased due to the Level 3 acquisition. Segment adjusted EBITDA as a percentage of revenue was 63%, 64% and 65% for the year ended December 31, 2019, 2018 and 2017, respectively. Wholesale Segment
Year Ended December 31, 2019 Compared to the same periods Ended December 31, 2018 and December 31, 2017 Segment revenue decreased $323 million or 7% for the year ended December 31, 2019 compared to December 31, 2018 and increased $1.4 billion or 45% for the year ended December 31, 2018 compared to December 31, 2017, primarily due to the following factors: For the year ended 2019 compared to 2018, transport and infrastructure revenue decreased due to continued declines in legacy private line and customer network consolidation and grooming efforts, and for the year ended 2018 compared to 2017 transport and infrastructure increased due to the Level 3 acquisition; for the year ended 2019 compared to 2018, voice and collaboration revenue decreased due to a combination of market rate compression, customer volume losses resulting from insourcing and industry consolidation, and for the year ended 2018 compared to 2017 voice and collaboration increased due to the Level 3 acquisition; and for the year ended 2018 compared to 2017 IP and data services revenue increased due to the Level 3 acquisition. Segment expenses decreased by $84 million, or 11%, for the year ended December 31,
increased
Segment adjusted EBITDA as a percentage of revenue was 84%, 83% and Consumer Segment
Year Ended December 31, 2019 Compared to the Segment
For both periods, decreases in for both periods, an increase in Segment
For both periods, reduction in personnel; for both periods, decreased marketing expenses; and lower TV content costs for both periods. Segment adjusted EBITDA as a percentage of revenue was 87%, 83% and 80% for the year ended December 31,
Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, judgments, assumptions or estimates. We believe that the estimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made. However, Business Combination We have accounted for our acquisition 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 Goodwill, Customer Relationships and Other Intangible Assets Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and tradenames, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 7 to 15 years, using either the Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired. We are required to reassign goodwill to reporting units
We are required to Our reporting units are not discrete legal entities with discrete full 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 equal or 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, we record an impairment equal to the difference. Depending on the facts and circumstances, we typically estimate the fair value of our reporting At October 31, 2019, we estimated the fair value of our 31, 2019 and concluded that the indicated control premium of approximately 44.7% was reasonable based on recent market transactions. As of October 31, Both our January 2019 internal reorganization and the decline in our stock price triggered impairment testing in the first quarter of 2019. Consequently, we evaluated our goodwill in January 2019 and again as of March 31, 2019. Because our low stock price was a key trigger for impairment testing in early 2019, we estimated the fair value of our At October 31, 2018, we estimated the fair value of our then five reporting units, which we determined to be consumer, medium and small business, enterprise, We believe the estimates, judgments, assumptions and 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
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 specific unit or group method using class or overall group Normal retirements of property, plant and equipment are charged against accumulated depreciation under the group method, 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 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 In 2019, approximately 60% of the qualified pension plan’s January 1, 2019 net actuarial loss balance of $3.0 billion was subject to amortization as a component of net periodic expense over the average remaining service period of 9 years for participating employees expected to receive benefits for the plan. The other 40% of the qualified pension plan’s beginning net actuarial loss balance was treated as indefinitely deferred during 2019. The entire beginning net actuarial loss of $26 million for the post-retirement benefit plans was treated as indefinitely deferred during 2019. In 2018, approximately 55% of the qualified pension plan’s January 1, 2018 net actuarial loss balance of $2.9 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 45% of the qualified pension plan’s beginning net actuarial loss balance was treated as indefinitely deferred during 2018. The entire beginning net actuarial loss of $248 million for the post-retirement benefit plans was treated as indefinitely deferred during 2018. In 2017, approximately 58% of the qualified pension plan’s January 1, 2017 net actuarial loss balance of
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 obligations as of the end of the year. We selected each plan’s discount rate based on a cash flow matching analysis using hypothetical yield curves from U.S. corporate bonds rated high quality and projections of the future benefit payments that constitute the projected benefit obligation for the plans. This process establishes the uniform discount rate that produces the same present value 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 on the 60th to 90th percentile of U.S. high quality bonds.
Mortality rates help predict the expected life of plan participants and are based on historical demographic studies by the Society of Actuaries (“SOA”). The SOA publishes new mortality rates (mortality tables 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 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 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 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. Loss Contingencies and Litigation Reserves We are involved in several material legal proceedings, as described in more detail in Note For matters related to income taxes, if we determine in our judgment 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 in our financial statements 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 we determine in our judgment that the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often
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 (i) tax credit carryforwards, (ii) differences between the financial statement carrying value of assets and liabilities and the tax 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 income among the states in which we operate. Any changes in our practices 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 represented by the deferred tax assets, all which involve the exercise of significant judgment. At December 31,
Liquidity and Capital Resources Overview of Sources and Uses of Cash We are a holding company that is dependent on the capital resources of our subsidiaries to satisfy our parent company liquidity requirements. Several of our significant operating subsidiaries have borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries or affiliates. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries may be limited by tax and legal considerations and other factors. At December 31,
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. Based on our current capital allocation objectives, during We will continue to monitor our future sources and uses of cash and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors. We typically use our revolving credit facility as a source of liquidity for operating activities and our other cash requirements. For additional information, see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources” Capital Expenditures We incur capital expenditures on an ongoing basis Our capital expenditures continue to be focused on Debt and Other Financing Arrangements Subject to market conditions, we expect to continue to issue debt securities from time to time in the future to refinance a substantial portion of our maturing debt, including issuing
As of the date of
Our credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future downgrades of the senior unsecured or secured debt ratings of us or our subsidiaries could impact our access to debt capital or further raise our borrowing costs. See “Risk Factors—Risks Affecting our Liquidity and Capital Resources” in Item 1A of Net Operating Loss Carryforwards As of December 31, We cannot assure you that we will be able to use these NOL carryforwards fully. See “Risk Factors—Risks amounts we will be able to use 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. Revolving Facilities and Other Debt Instruments To substantially fund our
In addition to its indebtedness under the 2017 CenturyLink Credit Agreement, CenturyLink is indebted under its outstanding senior notes, and several of its subsidiaries are indebted under separate credit facilities or senior notes. For information on the terms and conditions of these other debt instruments of ours and our subsidiaries, including financial and operating covenants, see Note Future Contractual Obligations The following table summarizes our estimated future contractual obligations as of December 31,
contingent liabilities;
our open purchase orders as of December 31, 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 years 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
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 to 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.
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 additional information on 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, 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 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, 2019, assets in the post-retirement trusts had been substantially depleted and had a fair value of For Connect America Fund As a result of accepting CAF Phase For additional information on the FCC’s CAF Historical Information The following tables summarize our consolidated cash flow activities:
Operating Activities Net cash provided by operating activities decreased by loss after adjusting fornon-cash items, 2017 primarily due to Investing Activities Net cash used in investing activities increased by Financing Activities Net cash used in
revolving line of credit. Net cash
See Note Other Matters
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
As of December 31, 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, 2019, we had approximately $11.2 billion floating rate debt potentially subject to the
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,
As of the date of ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” in Item 7 of Part II of this report is incorporated herein by reference.
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, 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, Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases. 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 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 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 statements 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 disclosures 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Testing of revenue As discussed in Notes 1 and 5 to the 2019 consolidated financial statements, the Company recorded $22.4 billion of operating revenues. The processing and recording of revenue is reliant upon multiple information technology (IT) systems used to process large volumes of customer billing data. We identified the testing of revenue as a critical audit matter due to the large volume of data and the number and complexity of the revenue accounting systems. Specialized skills and knowledge were needed to test the IT systems used for the processing and recording of revenue. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls related to the processing and recording of revenue, including manual and automated controls over the IT systems used for the processing and recording of revenue. For a selection of transactions, we compared the amount of revenue recorded to a combination of Company internal data, executed contracts, and other relevant and reliable third-party data. In addition, we involved IT professionals with specialized skills and knowledge who assisted in the identification and testing of certain IT systems, including the design of audit procedures, used by the Company for the processing and recording of revenue. Assessment of the goodwill impairment charge As discussed in Notes 1 and 4 to the consolidated financial statements, the Company recorded goodwill impairment charges aggregating to $6.5 billion during 2019. The Company used the market multiples approach to estimate the fair value of the reporting units. The Company recorded impairment charges equal to the amount by which the carrying value of each reporting unit exceeded its fair value. We identified the assessment of the Company’s impairment charges recorded in 2019 as a critical audit matter. Subjective auditor judgment was required in assessing the market multiple assumptions for revenue and EBITDA used to estimate the fair value of the reporting units. The evaluation of these assumptions was challenging due to the subjective nature of the assumptions. Additionally, differences in judgment used to determine these assumptions could have a significant effect on each reporting unit’s estimated fair value and the resulting impairment charges. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate each reporting unit’s fair value, including controls related to the determination of the market multiple assumptions for revenue and EBITDA for each reporting unit. We involved a valuation professional with specialized skill and knowledge, who assisted in a) comparing the selected market multiples for revenue and EBITDA for each reporting unit based on their relative revenue growth and EBITDA margin and b) reconciling the fair value of the reporting units to the Company’s total fair value. Assessment of the Company’s annual impairment testing related to the carrying value of goodwill As discussed in Notes 1 and 4 to the consolidated financial statements, the goodwill balance at December 31, 2019 was $21.5 billion. On the annual goodwill impairment assessment date, the Company tested the carrying value of goodwill for impairment by considering both a discounted cash flow method and a market multiples approach to estimate the fair value of the reporting units. We identified the assessment of the Company’s annual impairment testing related to the carrying value of goodwill as a critical audit matter because subjective auditor judgment was required in performing procedures over certain assumptions used to estimate the fair value of the reporting units. Those assumptions included: projected revenues, long term growth rate (LTGR), and market multiples for revenue and EBITDA. The evaluation of these assumptions was challenging due to the subjective nature of the assumptions. Additionally, differences in judgment used to determine these assumptions could have a significant effect on each reporting unit’s estimated fair value. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate each reporting unit’s fair value, including controls related to the development of revenue projections, and the determination of the LTGR and the market multiples for revenue and EBITDA for each reporting unit. We performed sensitivity analyses over the projected revenue assumption to assess the impact on the Company’s estimate of the fair value of each reporting unit. We compared the Company’s revenue projection to the Company’s historic revenue trends. We assessed the Company’s ability to accurately project revenues by comparing the Company’s historical revenue projections to actual results. We involved a valuation professional with specialized skill and knowledge, who assisted in: a) comparing the selected revenue and EBITDA market multiples to peer companies’ results; and b) comparing the selected LTGR for each reporting unit to the Company’s historic trends and growth expectations developed using publicly available industry and analyst reports. Assessment of the estimate of the fair value of private fund interests valued using net asset value As discussed in Notes 1 and 11 to the consolidated financial statements, the fair value of pension plan assets at December 31, 2019 was $10.5 billion. Of this amount, the fair value of $3.9 billion represents private fund interests, which were estimated by the Company using net asset value (NAV). Valuation inputs for these private fund interests are generally based on assumptions and other information not observable in the market. We identified the assessment of the estimate of the fair value of private fund interests estimated using NAV as a critical audit matter because auditor judgment was required in the application and performance of procedures to assess their fair value. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to monitor and record the estimated fair value of the pension plan assets. For a selection of private fund interests, we compared the rates of return to relevant, publicly available market indices and we compared the estimated fair values of NAV to confirmations with third parties. We compared the Company’s previous estimates of fair value of NAV to the NAVs audited by third parties for a selection of private fund interests to assess the Company’s process to accurately estimate fair value. We involved valuation professionals with specialized skill and knowledge who assisted in our risk assessment and the design of procedures performed for private fund interests. With respect to private fund interest selections for testing, the valuation professionals assessed the procedures performed and the results of our procedures. /s/ KPMG LLP We have served as the Company’s auditor since 1977.
February 28,
CenturyLink, Inc.: Opinion on Internal Control Over Financial Reporting We have audited CenturyLink, Inc. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company
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
February 28, CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS References in the Notes to “CenturyLink,” “we,” “us”, the “Company”, and “our” refer to CenturyLink, Inc. and its consolidated subsidiaries, unless the content otherwise requires and except in Note (1) Background and Summary of Significant Accounting Policies General We are an international facilities-based communications company engaged primarily in providing On November 1, 2017, we acquired Level 3
Our
In connection with recording deferred income tax assets and liabilities, we establish valuation allowances when necessary to reduce deferred income tax assets to
Liquidity and
We are a holding company that At December 31, 2019, we held cash and cash equivalents Our executive officers and
Based on our current capital allocation objectives, during 2020 we project expending approximately $3.6 billion to $3.9 billion (excluding integration and transformation capital) of cash for
We will continue to For additional information, see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources”. Capital Expenditures We incur capital expenditures on an ongoing basis to expand and improve our service offerings, enhance and modernize our networks and compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as our CAF Phase II infrastructure buildout requirements). Our capital expenditures continue to be focused on enhancing network operating efficiencies and supporting new service developments. For more information on our capital spending, see “Historical Information—Investing Activities” below and Item 1 of Part 1 of this report. Debt and Other Financing Arrangements Subject to market conditions, we expect to continue to issue debt securities from time to time in the future to refinance a substantial portion of our maturing debt, including issuing debt securities of certain of our subsidiaries to refinance their maturing debt to the extent feasible. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned by credit rating agencies, among other factors. As of the date of this report, the credit ratings for the senior secured and unsecured debt of CenturyLink, Inc., Qwest Corporation and Level 3 Financing, Inc. were as follows:
Our credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future downgrades of the senior unsecured or secured debt ratings of us or our subsidiaries could impact our access to debt capital or further raise our borrowing costs. See “Risk Factors—Risks Affecting our Liquidity and Capital Resources” in Item 1A of Part I of this report. Net Operating Loss Carryforwards As of December 31, 2019, CenturyLink had approximately $6.2 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 limitations under Section 382 of the Internal Revenue Code (“Code”) and related U.S. Treasury Department regulations. In the first half of 2019, we entered into and subsequently restated a Section 382 rights agreement designed to safeguard our ability to use those NOLs. Assuming that we can continue using these NOLs in the amounts projected, we expect to significantly reduce our federal cash taxes for the next several years. 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 2020 earnings, we estimate our cash income tax liability related to 2020 will be approximately $100 million. We cannot assure you that we will be able to use these NOL carryforwards fully. See “Risk Factors—Risks Affecting Our Liquidity and Capital Resources—We cannot assure you, whether, when or in what amounts we will be able to use our net operating loss carryforwards, or when they will be depleted” in Item 1A of Part I of this report. 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 Revolving Facilities and Other Debt Instruments To substantially fund our acquisition of Level 3, on June 19, 2017, one of our affiliates entered into a credit agreement (the “2017 CenturyLink Credit Agreement”) providing initially for $10.2 billion in senior secured credit facilities, consisting initially of a In addition to its indebtedness under the 2017 CenturyLink Credit Agreement, CenturyLink is indebted under its outstanding senior notes, and several of its subsidiaries are indebted under separate credit facilities or senior notes. For information on the terms and conditions of these other debt instruments of ours and our subsidiaries, including financial and operating covenants, see Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report. Future Contractual Obligations The following table summarizes our estimated future contractual obligations as of December 31, 2019:
contingent liabilities; our open purchase orders as of December 31, 2019. 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 years 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 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report; 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 to 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. 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 additional information on our obligations, see the notes to our consolidated financial statements in Item 8 of Part II of this report. Pension and Post-retirement Benefit Obligations We are subject to material obligations under our existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2019, the accounting unfunded status of our qualified andnon-qualified defined benefit pension plans and our qualified post-retirement benefit plans was $1.8 billion and $3.0 billion, respectively. See Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report for additional information about our pension and post-retirement benefit arrangements. Benefits paid by our qualified pension plan are paid through a 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, 2019, assets in the post-retirement trusts had been substantially depleted and had a fair value of only $13 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. Benefits not paid from the trusts are expected to be paid directly by us with available cash. As described further in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report, aggregate benefits paid by us under these plans (net of participant contributions and direct subsidy receipts) were $241 million, $249 million and $237 million for the years ended December 31, 2019, 2018 and 2017, respectively, while the amounts paid from the trust were $4 million, $4 million and $31 million, respectively. For additional information on our expected future benefits payments for our post-retirement benefit plans, please see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II in this report. For 2019, our expected annual long-term rates of return were 6.5% and 4% for the pension plan trust assets and post-retirement plans’ trust assets based on the assets held and net of expected fees and administrative costs. For 2020, our expected annual long-term rates of return on these assets are 6% and 4%, respectively. However, actual returns could be substantially different. Connect America Fund As a result of accepting CAF Phase II support payments, we are receiving substantial support payments under a program that will soon lapse. Moreover, we must meet certain specified infrastructure buildout requirements in 33 states. 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 program and a proposed replacement program, see “Business—Regulation” in Item 1 of Part I of this report and see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources” in Item 1A of Part I of this report. Historical Information The following tables summarize our consolidated cash flow activities:
Operating Activities Net cash provided by operating activities decreased by $352 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to an increase in net loss after adjusting fornon-cash items, a decrease in accounts payable and other noncurrent liabilities and an increase to prepaid assets partially offset by a decrease in retirement benefit contributions. Net cash provided by operating activities increased by $3.2 billion for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due to $2.4 billion in cash generated by Level 3 in addition to a positive variance in net (loss) income after adjusting fornon-cash items for impairment of goodwill and other assets and depreciation, deferred income taxes and tax refunds of $674 million received in 2018, partially offset with a pension funding contribution of $500 million. Cash provided by operating activities is subject to variability period over period as a result of the Investing Activities Net cash used in investing activities increased by $492 million for
Financing Activities Net cash used in financing activities decreased by $2.1 billion for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to net proceeds from the issuance of long-term debt and the decrease in dividends paid partially offset by higher levels of payments on our long-term debt and revolving line of credit. Net cash used in financing activities increased by $9.4 billion for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due cash received from net proceeds from issuance of new debt in 2017 relating to the acquisition of Level 3. See Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report, for information regarding indebtedness incurred or repaid by CenturyLink or its affiliates on our outstanding debt securities. Other Matters We have cash management arrangements with certain of our principal subsidiaries, in which substantial portions of the We Market Risk As of December 31, 2019, 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
In February 2019, we executed swap transactions that reduced our exposure to floating rates with respect to $2.5 billion principal amount of floating rate debt. In June 2019, we executed swap transactions that reduced our
As of December 31, 2019, we had approximately $11.2 billion floating rate debt potentially subject to the London Inter-Bank Offered Rate (LIBOR), $4.0 billion of which was subject to the above-described hedging arrangements. A hypothetical increase of 100 basis points in LIBOR relating to our $7.2 billion of unhedged floating rate debt would, among other things, decrease our annualpre-tax earnings by approximately $72 million. We
Certain shortcomings are inherent in
Off-Balance Sheet Arrangements As of the date of this report, we ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” in Item 7 of Part II of this report is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm To 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.
Basis for Opinion These consolidated financial statements are the responsibility of the We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the
As discussed in Notes 1 and 5 to the We identified the The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls related to the processing and recording of revenue, including manual and automated controls over the IT systems used for the processing and recording of revenue. For a selection of transactions, we compared the amount of revenue recorded to a combination of Company internal data, executed contracts, and other relevant and reliable third-party data. In addition, we involved IT professionals with specialized skills and knowledge who assisted in the identification and testing of certain IT systems, including the design of audit procedures, used by the Company for the processing and recording of revenue. Assessment of the goodwill impairment charge As discussed in Notes 1 and 4 to the consolidated financial statements, the Company recorded goodwill impairment charges aggregating to $6.5 billion during 2019. The Company used the market multiples approach to estimate the fair value of the reporting units. The Company recorded impairment charges equal to the amount by which the carrying value of each reporting unit exceeded its fair value. We identified the assessment of the Company’s impairment charges recorded in 2019 as a critical audit matter. Subjective auditor judgment was required in assessing the market multiple assumptions for revenue and EBITDA used to estimate the fair value of the reporting units. The evaluation of these assumptions was challenging due to the subjective nature of the assumptions. Additionally, differences in judgment used to determine these assumptions could have a significant effect on each reporting unit’s estimated fair value and the resulting impairment charges. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate each reporting unit’s fair value, including controls related to the determination of the market multiple assumptions for revenue and EBITDA for each reporting unit. We involved a valuation professional with specialized skill and knowledge, who assisted in a) comparing the selected market multiples for revenue and EBITDA for each reporting unit based on their relative revenue growth and EBITDA margin and b) reconciling the fair value of the reporting units to the Company’s total fair value. Assessment of the Company’s annual impairment testing related to the carrying value of goodwill As discussed in Notes 1 and 4 to the consolidated financial statements, the goodwill balance at December 31, 2019 was $21.5 billion. On the annual goodwill impairment assessment date, the Company tested the carrying value of goodwill for impairment by considering both a discounted cash flow method and a market multiples approach to estimate the fair value of the reporting units. We identified the assessment of the Company’s annual impairment testing related to the carrying value of goodwill as a critical audit matter because subjective auditor judgment was required in performing procedures over certain assumptions used to estimate the fair value of the reporting units. Those assumptions included: projected revenues, long term growth rate (LTGR), and market multiples for revenue and EBITDA. The evaluation of these assumptions was challenging due to the subjective nature of the assumptions. Additionally, differences in judgment used to determine these assumptions could have a significant effect on each reporting unit’s estimated fair value. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate each reporting unit’s fair value, including controls related to the development of revenue projections, and the determination of the LTGR and the market multiples for revenue and EBITDA for each reporting unit. We performed sensitivity analyses over the projected revenue assumption to assess the impact on the Company’s estimate of the fair value of each reporting unit. We compared the Company’s revenue projection to the Company’s historic revenue trends. We assessed the Company’s ability to accurately project revenues by comparing the Company’s historical revenue projections to actual results. We involved a valuation professional with specialized skill and knowledge, who assisted in: a) comparing the selected revenue and EBITDA market multiples to peer companies’ results; and b) comparing the selected LTGR for each reporting unit to the Company’s historic trends and growth expectations developed using publicly available industry and analyst reports. Assessment of the estimate of the fair value of private fund interests valued using net asset value As discussed in Notes 1 and 11 to the consolidated financial statements, the fair value of pension plan assets at December 31, 2019 was $10.5 billion. Of this amount, the fair value of $3.9 billion represents private fund interests, which were estimated by the Company using net asset value (NAV). Valuation inputs for these private fund interests are generally based on assumptions and other information not observable in the market. We identified the assessment of the estimate of the fair value of private fund interests estimated using NAV as a critical audit matter because auditor judgment was required in the application and performance of procedures to assess their fair value. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to monitor and record the estimated fair value of the pension plan assets. For a selection of private fund interests, we compared the rates of return to relevant, publicly available market indices and we compared the estimated fair values of NAV to confirmations with third parties. We compared the Company’s previous estimates of fair value of NAV to the NAVs audited by third parties for a selection of private fund interests to assess the Company’s process to accurately estimate fair value. We involved valuation professionals with specialized skill and knowledge who assisted in our risk assessment and the design of procedures performed for private fund interests. With respect to private fund interest selections for testing, the valuation professionals assessed the procedures performed and the results of our procedures. /s/ KPMG LLP We have served as the Company’s auditor since 1977. Denver, Colorado February 28, 2020 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors CenturyLink, Inc.: Opinion on Internal Control Over Financial Reporting We have audited CenturyLink, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established inInternal 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, 2019, based on criteria established inInternal 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 sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2020 expressed an unqualified opinion on those consolidated financial statements. 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,
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
/s/ KPMG LLP Denver, Colorado February 28, 2020 CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS References in the Notes to “CenturyLink,” “we,” “us”, the “Company”, and “our” refer to CenturyLink, Inc. and its consolidated subsidiaries, unless the content otherwise requires and except in Note 6, where such references refer solely to CenturyLink, Inc. References in the Notes to “Level 3” refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc., which we acquired on November 1, 2017. (1) Background and Summary of General We are On November 1, 2017, we acquired Level 3 in a cash and stock transaction. See Note 2—Acquisition of 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 (i) tax credit carryforwards, (ii) differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities and (iii) 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 income among the states in which we operate. Any changes in our practices 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 represented by the deferred tax assets, all which involve the exercise of significant judgment. At December 31, 2019, we established a valuation allowance of $1.3 billion primarily related to foreign and state NOLs, based on our determination that it was more likely than not that these NOLs would 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 existing valuation allowances must be updated or new valuation allowances created, any of which could materially impact our financial condition or results of operations. See Note 16—Income Taxes to our consolidated financial statements in Item 8 of Part II of this report 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 or as part of a separate restricted group with certain of its subsidiaries or affiliates. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries may be limited by tax and legal considerations and other factors. At December 31, 2019, we held cash and cash equivalents of $1.7 billion, a significant portion of which was held to redeem debt securities inmid-January 2020. At December 31, 2019, we also had approximately $1.9 billion of borrowing capacity available under our revolving credit facility. We had approximately $108 million of cash and cash equivalents outside the United States at December 31, 2019. We currently believe that there are no material restrictions on our ability to repatriate cash and cash equivalents into the United States, and that we may do so without paying or accruing U.S. taxes. We do not currently intend to repatriate to the United States any of our foreign cash and cash equivalents from operating entities outside of Latin America. 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. Based on our current capital allocation objectives, during 2020 we project expending approximately $3.6 billion to $3.9 billion (excluding integration and transformation capital) of cash for capital investment in property, plant and equipment and approximately $1.1 billion of cash for dividends on our common stock (based on the assumptions described below under “Dividends”). At December 31, 2019, we had debt maturities of $1.0 billion, scheduled debt principal payments of $1.3 billion and finance lease and other fixed payments of $36 million, each due during 2020. Each of the expenditures is described further below. We will continue to monitor our future sources and uses of cash and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors. We typically use our revolving credit facility as a source of liquidity for operating activities and our other cash requirements. For additional information, see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources”. Capital Expenditures We incur capital expenditures on an ongoing basis to expand and improve our service offerings, enhance and modernize our networks and compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as our CAF Phase II infrastructure buildout requirements). Our capital expenditures continue to be focused on enhancing network operating efficiencies and supporting new service developments. For more information on our capital spending, see “Historical Information—Investing Activities” below and Item 1 of Part 1 of this report. Debt and Other Financing Arrangements Subject to market conditions, we expect to continue to issue debt securities from time to time in the future to refinance a substantial portion of our maturing debt, including issuing debt securities of certain of our subsidiaries to refinance their maturing debt to the extent feasible. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned by credit rating agencies, among other factors. As of the date of this report, the credit ratings for the senior secured and unsecured debt of CenturyLink, Inc., Qwest Corporation and Level 3 Financing, Inc. were as follows:
Our credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future downgrades of the senior unsecured or secured debt ratings of us or our subsidiaries could impact our access to debt capital or further raise our borrowing costs. See “Risk Factors—Risks Affecting our Liquidity and Capital Resources” in Item 1A of Part I of this report. Net Operating Loss Carryforwards As of December 31, 2019, CenturyLink had approximately $6.2 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 limitations under Section 382 of the Internal Revenue Code (“Code”) and related U.S. Treasury Department regulations. In the first half of 2019, we entered into and subsequently restated a Section 382 rights agreement designed to safeguard our ability to use those NOLs. Assuming that we can continue using these NOLs in the amounts projected, we expect to significantly reduce our federal cash taxes for the next several years. 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 2020 earnings, we estimate our cash income tax liability related to 2020 will be approximately $100 million. We cannot assure you that we will be able to use these NOL carryforwards fully. See “Risk Factors—Risks Affecting Our Liquidity and Capital Resources—We cannot assure you, whether, when or in what amounts we will be able to use our net operating loss carryforwards, or when they will be depleted” in Item 1A of Part I of this report. 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. Following a reduction announced on February 13, 2019, our current quarterly common stock dividend rate is $0.25 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, investing in the business,de-leveraging our balance sheet and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2020 at this rate of $0.25 per share, our average total dividend paid each quarter would be approximately $275 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 Part I of this report. Revolving Facilities and Other Debt Instruments To substantially fund our acquisition of Level 3, on June 19, 2017, one of our affiliates entered into a credit agreement (the “2017 CenturyLink Credit Agreement”) providing initially for $10.2 billion in senior secured credit facilities, consisting initially of a $2.0 billion revolving credit facility (which replaced our 2012 credit facility upon consummation of the Level 3 acquisition) and approximately $7.9 billion of term loan facilities. On In addition to its indebtedness under the 2017 CenturyLink Credit Agreement, CenturyLink is indebted under its outstanding senior notes, and several of its subsidiaries are indebted under separate credit facilities or senior notes. For information on the terms and conditions of these other debt instruments of ours and our subsidiaries, including financial and operating covenants, see Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report. Future Contractual Obligations The following table summarizes our estimated future contractual obligations as of December 31, 2019:
contingent liabilities; our open purchase orders as of December 31, 2019. 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 years 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 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report; 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 to 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. 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 additional information on our obligations, see the notes to our consolidated financial statements in Item 8 of Part II of this report. Pension and Post-retirement Benefit Obligations We are subject to material obligations under our existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2019, the accounting unfunded status of our qualified andnon-qualified defined benefit pension plans and our qualified post-retirement benefit plans was $1.8 billion and $3.0 billion, respectively. See Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report 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 2020. The amount of required contributions to our qualified pension plan in 2021 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 last made a voluntary contribution to the trust for our qualified pension plan during 2018. Based on current circumstances, we do not anticipate making a voluntary contribution to the trust for our qualified pension plan in 2020. 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, 2019, assets in the post-retirement trusts had been substantially depleted and had a fair value of only $13 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. Benefits not paid from the trusts are expected to be paid directly by us with available cash. As described further in Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report, aggregate benefits paid by us under these plans (net of participant contributions and direct subsidy receipts) were $241 million, $249 million and $237 million for the years ended December 31, 2019, 2018 and 2017, respectively, while the amounts paid from the trust were $4 million, $4 million and $31 million, respectively. For additional information on our expected future benefits payments for our post-retirement benefit plans, please see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II in this report. For 2019, our expected annual long-term rates of return were 6.5% and 4% for the pension plan trust assets and post-retirement plans’ trust assets based on the assets held and net of expected fees and administrative costs. For 2020, our expected annual long-term rates of return on these assets are 6% and 4%, respectively. However, actual returns could be substantially different. Connect America Fund As a result of accepting CAF Phase II support payments, we are receiving substantial support payments under a program that will soon lapse. Moreover, we must meet certain specified infrastructure buildout requirements in 33 states. 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 program and a proposed replacement program, see “Business—Regulation” in Item 1 of Part I of this report and see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources” in Item 1A of Part I of this report. Historical Information The following tables summarize our consolidated cash flow activities:
Operating Activities Net cash provided by operating activities decreased by $352 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to an increase in net loss after adjusting fornon-cash items, a decrease in accounts payable and other noncurrent liabilities and an increase to prepaid assets partially offset by a decrease in retirement benefit contributions. Net cash provided by operating activities increased by $3.2 billion for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due to $2.4 billion in cash generated by Level 3 in addition to a positive variance in net (loss) income after adjusting fornon-cash items for impairment of goodwill and other assets and depreciation, deferred income taxes and tax refunds of $674 million received in 2018, partially offset with a pension funding contribution of $500 million. Cash provided by operating activities is subject to variability period over period as a result of the timing of the collection of receivables and payments related to interest expense, accounts payable, payroll and bonuses. For additional information about our operating results, see “Results of Operations” above. Investing Activities Net cash used in investing activities increased by $492 million for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to increased capital expenditures on property, plant and equipment partially offset by decreased proceeds from the sale of property, plant and equipment and other assets. Net cash used in investing activities decreased by $5.8 billion for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The change in investing activities is 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 a portion of our data centers and colocation business. Financing Activities Net cash used in financing activities decreased by $2.1 billion for the year ended December 31, 2019 as compared to the year ended December 31, 2018 primarily due to net proceeds from the issuance of long-term debt and the decrease in dividends paid partially offset by higher levels of payments on our long-term debt and revolving line of credit. Net cash used in financing activities increased by $9.4 billion for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due cash received from net proceeds from issuance of new debt in 2017 relating to the acquisition of Level 3. See Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report, for information regarding indebtedness incurred or repaid by CenturyLink or its affiliates on our outstanding debt securities. Other Matters 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 19—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report for the current status of such legal proceedings. Market Risk As of December 31, 2019, 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. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. As of December 31, 2019, we did not hold or issue derivative financial instruments for trading or speculative purposes. In February 2019, we executed swap transactions that reduced our exposure to floating rates with respect to $2.5 billion principal amount of floating rate debt. In June 2019, we executed swap transactions that reduced our exposure to floating rates with respect to $1.5 billion principal amount of floating rate debt. See Note 15—Derivative Financial Instruments to our consolidated financial statements in Item 1 of Part I of this report for additional disclosure regarding our hedging arrangements. As of December 31, 2019, we had approximately $11.2 billion floating rate debt potentially subject to the London Inter-Bank Offered Rate (LIBOR), $4.0 billion of which was subject to the above-described hedging arrangements. A hypothetical increase of 100 basis points in LIBOR relating to our $7.2 billion of unhedged floating rate debt would, among other things, decrease our annualpre-tax earnings by approximately $72 million. We conduct a portion of our business in currencies other than the U.S. dollar, the currency in which our consolidated financial statements are reported. Accordingly, our operating results could be adversely affected by foreign currency exchange rate volatility relative to the U.S. dollar. Our European subsidiaries and certain Latin American subsidiaries use the local currency as their functional currency, as the majority of their revenue and purchases are transacted in their local currencies. Certain Latin American countries previously designated as highly inflationary economies use the U.S. dollar as their functional currency. Although we continue to evaluate strategies to mitigate risks related to the effect of fluctuations in currency exchange rates, we will likely recognize gains or losses from international transactions. Changes in foreign currency rates could adversely affect our operating results. 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, 2019. Off-Balance Sheet Arrangements As of the date of this report, 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 19—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report, or in the Future Contractual Obligations table included in this Item 7 of Part II above, or (iii) discussed under the heading “Market Risk” above. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” in Item 7 of Part II of this report is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm To 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, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, 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, 2019, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases. 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 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 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 statements 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 disclosures 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. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Testing of revenue As discussed in Notes 1 and 5 to the 2019 consolidated financial statements, the Company recorded $22.4 billion of operating revenues. The processing and recording of revenue is reliant upon multiple information technology (IT) systems used to process large volumes of customer billing data. We identified the testing of revenue as a critical audit matter due to the large volume of data and the number and complexity of the revenue accounting systems. Specialized skills and knowledge were needed to test the IT systems used for the processing and recording of revenue. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls related to the processing and recording of revenue, including manual and automated controls over the IT systems used for the processing and recording of revenue. For a selection of transactions, we compared the amount of revenue recorded to a combination of Company internal data, executed contracts, and other relevant and reliable third-party data. In addition, we involved IT professionals with specialized skills and knowledge who assisted in the identification and testing of certain IT systems, including the design of audit procedures, used by the Company for the processing and recording of revenue. Assessment of the goodwill impairment charge As discussed in Notes 1 and 4 to the consolidated financial statements, the Company recorded goodwill impairment charges aggregating to $6.5 billion during 2019. The Company used the market multiples approach to estimate the fair value of the reporting units. The Company recorded impairment charges equal to the amount by which the carrying value of each reporting unit exceeded its fair value. We identified the assessment of the Company’s impairment charges recorded in 2019 as a critical audit matter. Subjective auditor judgment was required in assessing the market multiple assumptions for revenue and EBITDA used to estimate the fair value of the reporting units. The evaluation of these assumptions was challenging due to the subjective nature of the assumptions. Additionally, differences in judgment used to determine these assumptions could have a significant effect on each reporting unit’s estimated fair value and the resulting impairment charges. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate each reporting unit’s fair value, including controls related to the determination of the market multiple assumptions for revenue and EBITDA for each reporting unit. We involved a valuation professional with specialized skill and knowledge, who assisted in a) comparing the selected market multiples for revenue and EBITDA for each reporting unit based on their relative revenue growth and EBITDA margin and b) reconciling the fair value of the reporting units to the Company’s total fair value. Assessment of the Company’s annual impairment testing related to the carrying value of goodwill As discussed in Notes 1 and 4 to the consolidated financial statements, the goodwill balance at December 31, 2019 was $21.5 billion. On the annual goodwill impairment assessment date, the Company tested the carrying value of goodwill for impairment by considering both a discounted cash flow method and a market multiples approach to estimate the fair value of the reporting units. We identified the assessment of the Company’s annual impairment testing related to the carrying value of goodwill as a critical audit matter because subjective auditor judgment was required in performing procedures over certain assumptions used to estimate the fair value of the reporting units. Those assumptions included: projected revenues, long term growth rate (LTGR), and market multiples for revenue and EBITDA. The evaluation of these assumptions was challenging due to the subjective nature of the assumptions. Additionally, differences in judgment used to determine these assumptions could have a significant effect on each reporting unit’s estimated fair value. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate each reporting unit’s fair value, including controls related to the development of revenue projections, and the determination of the LTGR and the market multiples for revenue and EBITDA for each reporting unit. We performed sensitivity analyses over the projected revenue assumption to assess the impact on the Company’s estimate of the fair value of each reporting unit. We compared the Company’s revenue projection to the Company’s historic revenue trends. We assessed the Company’s ability to accurately project revenues by comparing the Company’s historical revenue projections to actual results. We involved a valuation professional with specialized skill and knowledge, who assisted in: a) comparing the selected revenue and EBITDA market multiples to peer companies’ results; and b) comparing the selected LTGR for each reporting unit to the Company’s historic trends and growth expectations developed using publicly available industry and analyst reports. Assessment of the estimate of the fair value of private fund interests valued using net asset value As discussed in Notes 1 and 11 to the consolidated financial statements, the fair value of pension plan assets at December 31, 2019 was $10.5 billion. Of this amount, the fair value of $3.9 billion represents private fund interests, which were estimated by the Company using net asset value (NAV). Valuation inputs for these private fund interests are generally based on assumptions and other information not observable in the market. We identified the assessment of the estimate of the fair value of private fund interests estimated using NAV as a critical audit matter because auditor judgment was required in the application and performance of procedures to assess their fair value. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to monitor and record the estimated fair value of the pension plan assets. For a selection of private fund interests, we compared the rates of return to relevant, publicly available market indices and we compared the estimated fair values of NAV to confirmations with third parties. We compared the Company’s previous estimates of fair value of NAV to the NAVs audited by third parties for a selection of private fund interests to assess the Company’s process to accurately estimate fair value. We involved valuation professionals with specialized skill and knowledge who assisted in our risk assessment and the design of procedures performed for private fund interests. With respect to private fund interest selections for testing, the valuation professionals assessed the procedures performed and the results of our procedures. /s/ KPMG LLP We have served as the Company’s auditor since 1977. Denver, Colorado February 28, 2020 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors CenturyLink, Inc.: Opinion on Internal Control Over Financial Reporting We have audited CenturyLink, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established inInternal 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, 2019, based on criteria established inInternal 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 sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2020 expressed an unqualified opinion on those consolidated financial statements. 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 Denver, Colorado February 28, 2020 CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS References in the Notes to “CenturyLink,” “we,” “us”, the “Company”, and “our” refer to CenturyLink, Inc. and its consolidated subsidiaries, unless the content otherwise requires and except in Note 6, where such references refer solely to CenturyLink, Inc. References in the Notes to “Level 3” refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc., which we acquired on November 1, 2017. (1) Background and Summary of Significant Accounting Policies General We are an international facilities-based communications company engaged primarily in providing a broad array of integrated services to our business and residential customers. On November 1, 2017, we acquired Level 3 in a cash and stock transaction. See Note 2—Acquisition of Level 3 for additional information. On May 1, 2017, we sold a portion of our data centers and colocation business to a consortium of private equity purchasers 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 in which we have a controlling interest. 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 this subsidiary’s assets. 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, 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 revenue and our segment reporting for 2019, 2018 and 2017. See Note 17—Segment Information for additional information. These changes had no impact on total operating revenue, total operating expenses or net (loss) income for any period. Operating Expenses Our current definitions of operating expenses are as follows:
These expense classifications may not be comparable to those of other companies. 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, revenue recognition, revenue reserves, network access costs, network access cost dispute reserves, pension plan assets, 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 revenue, 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 16—Income Taxes and Note 19—Commitments, Contingencies and Other Items 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 earn most of our consolidated revenue from contracts with customers, primarily through the provision of communications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification (“ASC”) 606. We also earn revenue from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606. Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model: Identification of the contract with a customer; Identification of the performance obligations in the contract; Determination of the transaction price; Allocation of the transaction price to the performance obligations in the contract; and Recognition of revenue when, or as, we satisfy a performance obligation. We provide an array of communications services to business and residential customers, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business. We recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred. These advance payments include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one year to five years depending on the service. 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. For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer’s receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In certain cases, customers may be permitted to modify their contracts. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract. Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned. We periodically sell optical capacity on our network. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 to 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue which is adjusted for the time value of money and is recognized ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for asnon-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for othernon-owned optical capacity assets. In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction. We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met. Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. We defer (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life. Our deferred contract costs for our customers have average amortization periods of approximately 30 months for consumer and up to 49 months for business. These deferred costs are monitored every period to reflect any significant change in assumptions. See Note 5—Revenue Recognition for additional information. USF Surcharges, Gross Receipts Taxes and Other Surcharges In determining whether to include in our revenue 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 revenue 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 revenue 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 $62 million, $98 million and $218 million for the years ended December 31, 2019, 2018 and 2017, 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 basis 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 16—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. Restricted Cash Restricted cash consists primarily of cash and investments that serve to collateralize our outstanding letters of credit and certain performance and operating obligations. Restricted cash and securities are recorded as current ornon-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists. Restricted securities are stated at cost which approximates fair value as of December 31, 2019 and 2018. Accounts Receivable and Allowance for Doubtful Accounts 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. Accounts receivable balances acquired in a business combination are recorded at fair value for all balances receivable at the acquisition date and at the invoiced amount for those amounts invoiced after the acquisition date. 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 of the specific asset. 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 assess the possible loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers reduce their use of the asset. 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 estimated 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, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value. 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-years-digits or the straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method primarily over estimated lives ranging up to 7 years. We amortize our other intangible assets using thesum-of-years-digits or straight-line 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, we recognize an impairment charge for the amount by which the carrying amount of these assets exceeds their estimated fair value. 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 carrying value of equity exceeds the fair value of equity. Our reporting units are not discrete legal entities with discrete full financial statements. Therefore, the equity carrying value and future cash flows are assessed each time a goodwill impairment assessment is performed on a reporting unit. To do so, we assign our assets, liabilities and cash flows to reporting units using reasonable and consistent allocation methodologies, which entail various estimates, judgments and assumptions. 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 whenever reorganizations of our internal reporting structure changes the composition of our reporting units. Goodwill is reassigned to the reporting units using a relative fair value approach. When the fair value of a reporting unit is available, we allocate goodwill based on the relative fair value of the reporting units. When fair value is not available, we utilize an alternative allocation methodology that represents a reasonable proxy for the fair value of the operations being reorganized. For more information, see Note 4—Goodwill, Customer Relationships and Other Intangible Assets. Derivatives and Hedging We may use derivative instruments to hedge exposure to interest rate risks arising from fluctuation in interest rates. We account for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments. We do not use derivative financial instruments for speculative purposes. Derivatives are recognized in the consolidated balance sheets at their fair values. When we become a party to a derivative instrument and intend to apply hedge accounting, we formally document the hedge relationship and the risk management objective for undertaking the hedge which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. We entered into fivevariable-to-fixed interest rate swap agreements during the first quarter 2019 and sixvariable-to-fixed interest rate swap agreements during the second quarter 2019, which we designated as cash-flow hedges. We evaluate the effectiveness of these hedges qualitatively on a quarterly basis. The change in the fair value of the interest rate swaps is reflected in Accumulated Other Comprehensive Loss (“AOCI”) and is subsequently reclassified into earnings in the period the hedged transaction affects earnings, by virtue of qualifying as effective cash flow hedges. For more information see Note 15—Derivative Financial Instruments. 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. Note 11—Employee Benefits for additional information. Foreign Currency Local currencies of foreign subsidiaries are the functional currencies for financial reporting purposes except for certain foreign subsidiaries, primarily in Latin America. For operations outside the United States that have functional currencies other than the U.S. dollar, assets and liabilities are translated to U.S. dollars atperiod-end exchange rates, and revenue, expenses and cash flows are translated using average monthly exchange rates. A significant portion of ournon-United States subsidiaries use either the British pound, the Euro or the Brazilian Real as their functional currency, each of which experienced significant fluctuations against the U.S. dollar during the years ended December 31, 2019, 2018 and 2017. Foreign currency translation gains and losses are recognized as a component of accumulated other comprehensive loss in stockholders’ equity and in the consolidated statements of comprehensive income (loss) in accordance with accounting guidance for foreign currency translation. We consider the majority of our investments in our foreign subsidiaries to be long-term in nature. Our foreign currency transaction gains (losses), including where transactions with ournon-United States subsidiaries are not considered to be long-term in nature, are included within other income, net on the consolidated statements of operations. Common Stock At December 31, 2019, we had 17 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. Section 382 Rights Plan During the first half of 2019, we adopted and subsequently restated a Section 382 Rights Plan to protect our U.S. federal net operating loss carryforwards from certain Internal Revenue Code Section 382 limitations. Under the plan, one preferred stock purchase right was distributed for each share of our outstanding common stock as of the close of business on February 25, 2019, and those rights currently trade in tandem with the common stock until they expire or detach under the plan. This plan was designed to deter trading that would result in a change of control (as defined in Code Section 382), and therefore protect our ability to use our historical federal net operating losses in the future. Dividends The declaration and payment of dividends is at the discretion of our Board of Directors. Recently Adopted Accounting Pronouncements During 2019, we adopted Accounting Standards Update (“ASU”)2016-02, “Leases (ASC 842”). During 2018, we adopted ASU2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General:Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans”, ASU2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” and ASU2014-09, “Revenue from Contracts with Customers”. During 2017, we adopted ASU2017-04, “Simplifying the Test for Goodwill Impairment.” Each of these is described further below. Leases We adopted Accounting Standards Update (“ASU”)2016-02,“Leases (ASC 842)”, as of January 1, 2019, using thenon-comparative transition option pursuant to ASU2018-11. Therefore, we have not restated comparative period financial information for the effects of ASC 842, and we will not make the new required lease disclosures for comparative periods beginning before January 1, 2019. Instead, we recognized ASC 842’s cumulative effect transition adjustment (discussed below) as of January 1, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things (i) allowed us to carry forward the historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases under the new definition of a lease; and (iii) did not require us to reassess whether previously capitalized initial direct costs for any existing leases would qualify for capitalization under ASC 842. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment ofright-of-use assets for existing leases. On March 5, 2019, the Financial Accounting Standards Board (“FASB”) issued Adoption of the new standards resulted in the recording of operating lease assets and operating lease liabilities of approximately $2.1 billion and $2.2 billion, respectively, as of January 1, 2019. The difference is driven principally by the netting of our existing real estate restructure reserve against the corresponding operating lease right of use asset. In addition, we recorded a $96 million cumulative adjustment (net of tax) to accumulated deficit as of January 1, 2019, for the impact of the new accounting standards. The adjustment to accumulated deficit was driven by the derecognition of our prior failed sale leaseback transaction discussed in Note 3—Sale of Data Centers and Colocation Business. Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. The standards did not materially impact our consolidated net earnings or our cash flows in the year ended December 31, 2019. Retirement Benefits In August 2018, the FASB issued ASU2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General:Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU
Revenue Recognition
Goodwill Impairment In January 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 prior rules, we were required to compute the 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
We elected to early adopt the provisions of ASU2017-04 as of October 1, 2018. We applied ASU2017-04 to determine the impairment of $6.5 billion recorded during the fourth quarter of 2018. See Note 4—Goodwill, Customer Relationships and Other Intangible Assets for additional information. Recently Issued Accounting Pronouncements Financial Instruments In June 2016, the FASB issued ASU2016-13, “Measurement of Credit Losses on Financial Instruments”. 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 We are in the process of implementing The cumulative effect of initially applying the new (2) Acquisition of
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, 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”). See Note 12—Share-based Compensation for further details on these share-based compensation awards. The
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;
a combination of (i) 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 (iii) 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;
our assumption at closing 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 We
As of October 31, 2018, the aggregate consideration The following is our
On the acquisition date, we assumed Level 3’s contingencies. For more information on our contingencies, see Note 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
At December 31, Level 3 incurred transaction-related expenses of $47 million on the date of acquisition. This amount is not included in our results of operations.
On May 1, 2017, we sold a portion of 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”).
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
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.
Effective November 3, 2016, which is the date we entered into the agreement to sell a portion of 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. Upon adopting ASU2016-02, accounting for the failed sale leaseback is no longer applicable based on our facts and circumstances, and the real estate assets and corresponding financing obligation were derecognized from our consolidated financial statements. Please see “Leases” (ASU2016-02) in Note 1— Background and Summary of Significant Accounting Policies for additional information on the impact the new lease standard will have on the accounting for the failed-sale-leaseback. (4) Goodwill, Customer Relationships and Other Intangible Assets Goodwill, customer relationships and other intangible assets consisted of the following:
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). Total amortization expense for intangible assets for the years ended December 31, 2019, 2018 and 2017 We estimate that total amortization expense for intangible assets
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 Our reporting units are not discrete legal entities with discrete full 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,
At October 31, 2019, we estimated the fair value of our eight above-mentioned reporting units by considering both a market approach and a discounted cash flow method. We reconciled the estimated fair values of the reporting units to our market capitalization as of October 31, Both our January 2019 internal reorganization and the decline in our stock price triggered impairment testing in the first quarter of 2019. Because our low stock price was a key trigger for impairment testing during the first quarter of 2019, we estimated the fair value of our operations in such quarter using only the market approach. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which have historically supported a range of fair values derived from annualized revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples between 2.1x and 4.9x and 4.9x and 9.8x, respectively. We selected a revenue and EBITDA multiple for each of our reporting units within this range. We reconciled the estimated fair values of the reporting units to our market capitalization as of the date of each of our triggering events during the first quarter of 2019 and concluded that the indicated control premium of approximately 4.5% and 4.1% was reasonable based on recent market transactions. In the quarter ended March 31, 2019, based on our assessments performed with respect to the reporting units as described above, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of the date of each of our triggering events during the first quarter. As a result, we recordednon-cash,non-tax-deductible goodwill impairment charges aggregating to $6.5 billion in the quarter ended March 31, 2019. See the table below for the impairment charges by segment. The market multiples approach that we used in the quarter ended March 31, 2019 incorporated significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain cost synergies. In developing the market multiple, we also considered observed trends of our industry participants. Our assessment included many qualitative factors that required significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the size of our impairments. At October 31, 2018, we estimated the fair value of our then five reporting units which were consumer, medium and small business, enterprise, international and global accounts, and wholesale and indirect by considering both a market approach and a discounted cash flow method. We reconciled the estimated fair values of the reporting units to our market capitalization as of October 31, 2018 and concluded that the indicated control premium of approximately 0.1% was reasonable based on recent market transactions. As of October 31, 2018, based on our assessment performed with respect to these reporting units as described above, we concluded that the estimated fair value of our consumer reporting unit was less than our carrying value of equity by approximately $2.7 billion. As a result, we recorded anon-cash,non-tax-deductible goodwill impairment charge of $2.7 billion for goodwill assigned to our consumer reporting unit during the fourth quarter of 2018. In addition, based on our assessments performed, we concluded that the goodwill for our We completed our qualitative assessment of our indefinite-lived intangible assets other than goodwill as of December 31, 2019 and 2018 and concluded it is more likely than not that The following
For additional information on our segments, see Note
(5) Revenue Recognition The following tables present our
Reconciliation of The following tables provide disaggregation of revenue from contracts with customers based on reporting segments and service offerings for the years ended December 31, 2019 and 2018. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.
Customer Receivables and Contract Balances The following table provides balances of customer receivables, contract assets
Contract liabilities are consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheet. During the years ended December 31, 2019 and December 31, 2018, we recognized $630 million and $295 million, respectively, of revenue that was included in contract liabilities as of January 1, 2019 and January 1, 2018, respectively. Performance Obligations As of December 31, 2019, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially satisfied) is approximately $6.0 billion. We expect to recognize approximately 92% of this revenue through 2022, with the balance recognized thereafter. We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage ornon-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606. Contract Costs The following table provides changes in our contract acquisition costs and fulfillment costs:
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of telecommunications services to customers, including labor and materials consumed for these activities. Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average customer life of 30 months for consumer customers and 12 to 60 months for business customers and amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next twelve months is included in othernon-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis. (6) Leases Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new accounting guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance, as discussed in Note 1— Background and Summary of Significant Accounting Policies. We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, orright-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Some of our lease arrangements contain lease components (including fixed payments, such as rent, real estate taxes and insurance costs) andnon-lease components (including common-area maintenance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease andnon-lease components as a single lease component. Many of our lease agreements contain renewal options; however, we do not recognizeright-of-use assets or lease liabilities for renewal periods unless it is Lease expense consisted of the following:
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, 2019, 2018 and 2017, our Supplemental consolidated balance sheet information and other information related to leases:
Supplemental consolidated cash flow statement information related to leases:
As of
As of December 31, 2019, we had no material operating or finance leases that had not yet commenced. Operating Lease Income CenturyLink leases various IRUs, office facilities, switching facilities and For the years ended December 31, 2019, 2018 and 2017, our gross rental income was $1.4 billion, $882 million and $766 million, respectively, which represents 6%, 4% and 4% respectively, of our operating revenue for the years ended December 31, 2019, 2018 and 2017. Disclosures under ASC 840 We adopted ASU2016-02 on The future annual minimum payments under capital lease agreements as of
At December 31, 2018, our future rental commitments for operating leases were as follows:
(7) Long-Term Debt and Credit Facilities The following chart reflects the consolidated long-term debt of CenturyLink, Inc. and its subsidiaries as of the dates indicated below, including unamortized discounts and premiums and unamortized debt issuance costs, but excluding intercompany
Debt of CenturyLink, Inc. and its Subsidiaries At December 31,
Qwest Corporation;
Qwest Capital Funding, Inc. (including its parent guarantor, Qwest Communications International Inc.);
Embarq Corporation; and
Level 3 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.
N.A., as administrative agent and collateral agent,
a
a
a $370 million senior secured Term LoanA-1 credit facility with CoBank,
a
All of CenturyLink, Inc.
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. Changes to Agreement, as described further under “Subsequent Events,” in January 2020 we effected certain refinancing transactions that among other things, changed the maturity dates of the 2017 Senior Secured Credit Facilities, lowered the interest rates payable thereunder, and changed the allocations of amounts owed under each of the facilities. Term Loans and Certain Other Debt of Subsidiaries Qwest Corporation In 2015, Qwest Corporation entered into a variable rate 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 Level 3 Financing, Inc. At The Tranche B The net proceeds from the Embarq Subsidiaries At December 31, Revolving Letters of Credit We use various financial instruments in the normal course of business. These instruments include letters of credit, which are conditional commitments issued on our behalf in accordance with specified terms and conditions. CenturyLink, Inc. maintains an uncommitted $225 million revolving letter of credit facility separate from the letter of credit facility included in the 2017 Revolving Credit Facility noted above. As of December 31, Senior Notes CenturyLink, Inc., Level 3 Financing, Inc., interest rates and all principal is due on the notes’ respective maturity dates, which rates and maturity dates are summarized in the table above. None of the senior notes issued by CenturyLink that were outstanding as of December 31, 2019 are guaranteed by any of its subsidiaries. The senior notes issued by Level 3 Financing, Inc. are guaranteed by its parent, Level 3 Parent, LLC and New Issuances
On November 29, 2019, Level 3 Financing, Inc. issued $750 million of 3.400% Senior Secured Notes due 2027 and $750 million of 3.875% Senior Secured Notes due 2029. The proceeds from the
credit agreement to incur $3.111 billion in aggregate borrowings under the agreement through the Tranche B 2027 Term Loan discussed above. On
Repayments 2019 Including the redemptions noted above under “New Issuances”, during 2019, CenturyLink and its affiliates repurchased approximately $3.6 billion of their respective debt securities, which primarily included approximately $2.3 billion of Level 3 Financing, Inc. senior notes and term loan, $600 million of Level 3 Parent, LLC senior notes, $345 million of Qwest Capital Funding senior notes, $340 million of CenturyLink, Inc. senior notes, which resulted in an
Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized discounts and premiums, net and unamortized debt issuance costs) maturing during the following
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:
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 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 Level 3 Companies The term loan, senior secured notes and senior unsecured notes of 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 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 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, Guarantees CenturyLink, Inc. does not guarantee the debt of any unaffiliated parties, but, as noted above, as of December 31, 2019 certain of its largest subsidiaries Subsequent Events Amended and Restated Credit Agreement On January
The Amended Credit Agreement, among other things, (i) extended the maturity date of (a) the Term Loan A, Term Loan B facility from January 31, 2025 to March 15, 2027, and (ii) lowered the interest rate applicable to loans made under each of the Amended Senior Secured Credit Facilities. As so amended, (i) loans under the Term Loan A, Term LoanA-1 and Revolving Credit facilities will bear interest at a rate equal to, at CenturyLink’s option, the Eurodollar rate or the alternative base rate (each as defined in the Amended Credit Agreement) plus an applicable margin between 1.50% to 2.25% per annum for Eurodollar loans and 0.50% to 1.25% per annum for alternative base rate loans, depending on CenturyLink’s then current total leverage ratio, and (ii) loans under the Term Loan B facility will bear interest at the rate equal to, at CenturyLink’s option, the Eurodollar rate plus 2.25% per annum or the alternative base rate plus 1.25% per annum. The subsidiary guarantor and collateral provisions and the financial covenants contained in the Amended Credit Agreement are unchanged from the 2017 CenturyLink Credit Agreement. New Bond Issuance On January 24, 2020, CenturyLink issued $1.25 billion aggregate principal amount of its 4.000% Senior Secured Notes due 2027 (the “2027 Notes”). CenturyLink used Redemption On January 15, 2020, Qwest Corporation fully redeemed all $850 million aggregate principal amount of its outstanding 6.875% senior notes due 2033 and all $250 million aggregate principal amount of its outstanding 7.125% senior notes due 2043. (8) Accounts Receivable The following table presents details of our accounts receivable balances:
We are exposed to concentrations of credit risk from residential and business The following table presents details of our allowance for doubtful accounts:
(9) Property, Plant and Equipment Net property, plant and equipment is composed of the following:
We recorded depreciation expense of Asset Retirement Obligations At December 31, As of the Level 3 acquisition date, we recorded liabilities to reflect our The following table provides asset retirement obligation activity:
The 2019, 2018 and 2017 change in estimates (10) Severance and Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from 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
Changes in our accrued liabilities for severance expenses
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