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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File No. 001-7784
 
394586632_ctllogo1a03.jpg
CENTURYLINK, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Louisiana
 (State or other jurisdiction of
incorporation or organization)
72-0651161
(I.R.S. Employer
Identification No.)
100 CenturyLink Drive,
Monroe, Louisiana
 (Address of principal executive offices)
71203
 (Zip Code)
(318) 388-9000
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
 (Do not check if a smaller reporting company)
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No ý
On August 3, 2018, there were 1,080,123,279 shares of common stock outstanding.
 

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TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
* All references to "Notes" in this quarterly report refer to these Notes to Consolidated Financial Statements.

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Special Note Regarding Forward-Looking Statements
All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are “forward-looking” statements, as defined by (and subject to the “safe harbor” protections under) the federal securities laws. When used herein, the words “anticipates,” “expects,” “believes,” “seeks,” “hopes,” “intends,” “plans,” “projects,” “will” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of judgments and assumptions as of the date such statements are made about future events, many of which are beyond our control. These forward-looking statements, and the assumptions on which they are based, (i) are not guarantees of future events, (ii) are inherently speculative and (iii) are subject to significant risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of certain important factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-looking statements. Factors that could cause our results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following:
•
the effects of competition from a wide variety of competitive providers, including decreased demand for our traditional wireline service offerings and increased pricing pressures;
•
the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete;
•
the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, universal service, broadband deployment, data protection and net neutrality;
•
our ability to timely realize the anticipated benefits of our recently-completed combination with Level 3, including our ability to attain anticipated cost savings, to use Level 3's net operating loss carryforwards in the amounts projected, to retain key personnel and to avoid unanticipated integration disruptions;
•
our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakage, or similar events impacting our network or the availability and quality of our services;
•
our ability to effectively adjust to changes in the communications industry, and changes in the composition of our markets and product mix;
•
possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed broadband service;
•
our ability to successfully maintain the quality and profitability of our existing product and service offerings, to provision them successfully to our customers and to introduce profitable new offerings on a timely and cost-effective basis;
•
our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments, dividends, pension contributions and other benefits payments;
•
changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;
•
our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;
•
increases in the costs of our pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations, which may in turn impact our business and liquidity;
•
adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise;
•
our ability to meet the terms and conditions of our debt obligations;
•
our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords and financial institutions;

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•
our ability to effectively manage our network buildout project and our other expansion opportunities;
•
our ability to collect our receivables from financially troubled customers;
•
any adverse developments in legal or regulatory proceedings involving us;
•
changes in tax, communications, pension, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels;
•
the effects of changes in accounting policies or practices, including potential future impairment charges;
•
the effects of adverse weather, terrorism or other natural or man-made disasters;
•
the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in general market, labor, economic or geo-political conditions, or in public policy; and
•
other risks identified in our "Risk Factors" disclosures included in our annual report on Form 10-K for the year ended December 31, 2017.
Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions, except per share amounts
and shares in thousands)
OPERATING REVENUES
$
5,902

 
4,090

 
11,847

 
8,299

OPERATING EXPENSES
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
2,730

 
1,890

 
5,533

 
3,778

Selling, general and administrative
1,115

 
884

 
2,224

 
1,694

Depreciation and amortization
1,290

 
949

 
2,573

 
1,829

Total operating expenses
5,135

 
3,723

 
10,330

 
7,301

OPERATING INCOME
767

 
367

 
1,517

 
998

OTHER (EXPENSE) INCOME
 
 
 
 
 
 
 
Interest expense
(546
)
 
(320
)
 
(1,081
)
 
(638
)
Other income (expense), net
16

 
(7
)
 
37

 
(13
)
Total other expense, net
(530
)
 
(327
)
 
(1,044
)
 
(651
)
INCOME BEFORE INCOME TAX EXPENSE
237

 
40

 
473

 
347

Income tax (benefit) expense
(55
)
 
23

 
66


167

NET INCOME
$
292

 
17

 
407

 
180

BASIC AND DILUTED EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
BASIC
$
0.27

 
0.03

 
0.38

 
0.33

DILUTED
$
0.27

 
0.03

 
0.38

 
0.33

DIVIDENDS DECLARED PER COMMON SHARE
$
0.54

 
0.54

 
1.08

 
1.08

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
BASIC
1,064,711

 
541,361

 
1,064,663

 
540,909

DILUTED
1,068,819

 
542,151

 
1,068,414

 
541,836

See accompanying notes to consolidated financial statements.

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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
NET INCOME
$
292

 
17

 
407

 
180

OTHER COMPREHENSIVE (LOSS) INCOME:
 
 
 
 
 
 
 
Items related to employee benefit plans:
 
 
 
 
 
 
 
Change in net actuarial loss, net of $(11), $(22), $(22) and $(42) tax
35

 
30

 
68

 
61

Change in net prior service costs, net of $(1), $(1), $(2) and $(2) tax
2

 
2

 
4

 
4

Foreign currency translation adjustment and other, net of $44, $—, $30 and $— tax
(239
)
 
4

 
(160
)
 
2

Other comprehensive (loss) income
(202
)
 
36

 
(88
)
 
67

COMPREHENSIVE INCOME
$
90

 
53

 
319

 
247

See accompanying notes to consolidated financial statements.

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CENTURYLINK, INC.
CONSOLIDATED BALANCE SHEETS
 
June 30, 2018 (Unaudited)
 
December 31, 2017
 
(Dollars in millions
and shares in thousands)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
700

 
551

Restricted cash and securities
5

 
5

Accounts receivable, less allowance of $160 and $164
2,471

 
2,557

Assets held for sale
15

 
140

Other
1,260

 
941

Total current assets
4,451

 
4,194

Property, plant and equipment, net of accumulated depreciation of $25,872 and $24,352
26,494

 
26,852

GOODWILL AND OTHER ASSETS
 
 
 
Goodwill
30,715

 
30,475

Restricted cash and securities
27

 
31

Customer relationships, net
9,667

 
10,876

Other intangibles, net
1,869

 
1,897

Other, net
1,123

 
1,286

Total goodwill and other assets
43,401

 
44,565

TOTAL ASSETS
$
74,346

 
75,611

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
437

 
443

Accounts payable
1,360

 
1,555

Accrued expenses and other liabilities
 
 
 
Salaries and benefits
929

 
890

Income and other taxes
344

 
370

Interest
343

 
363

Other
358

 
344

Current portion of deferred revenue
750

 
892

Total current liabilities
4,521

 
4,857

LONG-TERM DEBT
36,878

 
37,283

DEFERRED CREDITS AND OTHER LIABILITIES
 
 
 
Deferred income taxes, net
2,407

 
2,413

Benefit plan obligations, net
4,884

 
5,178

Other
2,667

 
2,389

Total deferred credits and other liabilities
9,958

 
9,980

COMMITMENTS AND CONTINGENCIES (Note 12)

 

STOCKHOLDERS' EQUITY
 
 
 
Preferred stock—non-redeemable, $25 par value, authorized 2,000 and 2,000 shares, issued and outstanding 7 and 7 shares
—

 
—

Common stock, $1.00 par value, authorized 1,600,000 and 1,600,000 shares, issued and outstanding 1,078,705 and 1,069,169 shares
1,079

 
1,069

Additional paid-in capital
23,360

 
23,314

Accumulated other comprehensive loss
(2,490
)
 
(1,995
)
Retained earnings
1,040

 
1,103

Total stockholders' equity
22,989

 
23,491

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
74,346

 
75,611

See accompanying notes to consolidated financial statements.

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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended June 30,
 
2018
 
2017
 
(Dollars in millions)
OPERATING ACTIVITIES
 
 
 
Net income
$
407

 
180

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,573

 
1,829

Deferred income taxes
400

 
(126
)
Loss on the sale of data centers and colocation business
—

 
119

Impairment of assets
28

 
11

Provision for uncollectible accounts
83

 
78

Share-based compensation
95

 
43

Changes in current assets and liabilities:
 
 
 
Accounts receivable
35

 
71

Accounts payable
(173
)
 
(112
)
Accrued income and other taxes
(147
)
 
29

Other current assets and liabilities, net
(276
)
 
(306
)
Retirement benefits
(195
)
 
(56
)
Changes in other noncurrent assets and liabilities, net
400

 
(92
)
Other, net
19

 
74

Net cash provided by operating activities
3,249

 
1,742

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(1,576
)
 
(1,610
)
Proceeds from the sale of data centers and colocation business, less cash sold
—

 
1,473

Proceeds from sale of property, plant and equipment and other assets
125

 
48

Other investing, net
(61
)
 
(5
)
Net cash used in investing activities
(1,512
)
 
(94
)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of long-term debt
130

 
6,608

Proceeds from financing obligation
—

 
378

Payments of long-term debt
(123
)
 
(1,530
)
Net payments on revolving line of credit
(405
)
 
(370
)
Dividends paid
(1,156
)
 
(590
)
Other financing, net
(36
)
 
(11
)
Net cash (used in) provided by financing activities
(1,590
)
 
4,485

Effect of exchange rates on cash, cash equivalents, restricted cash and securities
(2
)
 
—

Net increase in cash, cash equivalents, restricted cash and securities
145

 
6,133

Cash, cash equivalents, restricted cash and securities at beginning of period
587

 
224

Cash, cash equivalents, restricted cash and securities at end of period
$
732

 
6,357

Supplemental cash flow information:
 
 
 
Income taxes refunded (paid), net
$
292

 
(260
)
Interest paid (net of capitalized interest of $28 and $41)
$
(1,061
)
 
(624
)
See accompanying notes to consolidated financial statements.

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CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)

 
Six Months Ended June 30,
 
2018
 
2017
 
(Dollars in millions)
COMMON STOCK
 
 
 
Balance at beginning of period
$
1,069

 
547

Issuance of common stock through dividend reinvestment, incentive and benefit plans
10

 
3

Balance at end of period
1,079

 
550

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance at beginning of period
23,314

 
14,970

Change in common stock through dividend reinvestment, incentive and benefit plans
(9
)
 
3

Shares withheld to satisfy tax withholdings
(35
)
 
(15
)
Share-based compensation and other, net
94

 
38

Dividends declared
—

 
(359
)
Acquisition of additional minority interest in a subsidiary
(4
)
 
—

Balance at end of period
23,360

 
14,637

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
Balance at beginning of period
(1,995
)
 
(2,117
)
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
(407
)
 
—

Other comprehensive (loss) income
(88
)
 
67

Balance at end of period
(2,490
)
 
(2,050
)
RETAINED EARNINGS
 
 
 
Balance at beginning of period
1,103

 
(1
)
Net income
407

 
180

Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
407

 
—

Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $101 million taxes
297

 
—

Cumulative effect of adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
—

 
3

Dividends declared
(1,174
)
 
(233
)
Balance at end of period
1,040

 
(51
)
TOTAL STOCKHOLDERS' EQUITY
$
22,989

 
13,086

See accompanying notes to consolidated financial statements.

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CENTURYLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
References in the Notes to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries, unless the context otherwise requires and except in Note 6 - Long-Term Debt and Credit Facilities, where such references refer solely to CenturyLink, Inc. References in the Notes to "Level 3" refer to Level 3 Communications, Inc. prior to our acquisition thereof and to its successor-in-interest Level 3 Parent, LLC after such acquisition, unless the context otherwise requires.
(1)     Background
General
We are an international facilities-based communications company engaged primarily in providing an integrated array of services to our residential and business customers. Our communications services include local and long-distance voice, virtual private network ("VPN") data network, private line (including special access business data services), Ethernet, network access, information technology, wavelength, broadband, colocation and data center services, managed services, professional and other services provided in connection with selling equipment, network security and various other ancillary services.
On November 1, 2017, we acquired Level 3 in a cash and stock transaction. See Note 2—Acquisition of Level 3 for additional information. On May 1, 2017, we sold our data centers and colocation business to a consortium led by BC Partners, Inc. and Medina Capital for a combination of cash and equity. See Note 3—Sale of Data Centers and Colocation Business for additional information.
Basis of Presentation
Our consolidated balance sheet as of December 31, 2017, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations and cash flows for the first six months of the year are not necessarily indicative of the consolidated results of operations and cash flows that might be expected for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2017.
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 (expense), net, (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other, net financing activities.
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenues and our segment reporting. See Note 11—Segment Information for additional information. These changes had no impact on total operating revenues, total operating expenses or net income for any period.
Income Taxes
We have not completed our accounting for the tax effects of the Tax Cuts and Jobs Act (the "Act") which was signed into law in late December 2017. In order to complete our accounting for the impact of the Act, we continue to obtain, analyze and interpret additional guidance as such guidance becomes available from the U.S. Treasury Department, the Internal Revenue Service (“IRS”), state taxing jurisdictions, the Financial Accounting Standards Board ("FASB"), and other standard-setting and regulatory bodies. Guidance issued by these bodies to date does not allow us to definitively calculate the taxes created by the Act. New guidance or interpretations may materially impact our provision for income taxes in future periods.

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Additional information that is needed to complete the analysis but is currently unavailable includes, but is not limited to, the amount of earnings of foreign subsidiaries, the final determination of certain net deferred tax assets subject to remeasurement due to purchase accounting adjustments and other matters, and the tax treatment of such provisions of the Act by various state tax authorities. We have provisionally recognized the tax impacts related to the re-measurement of deferred tax assets and liabilities. The ultimate impact may differ from our current provisional estimate due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act. The change from our current provisional estimates will be reflected in our future statements of operations and could be material. We expect to complete the accounting in the fourth quarter of 2018.
The Act reduced the U.S. corporate income tax rate from a maximum of 35% to 21% for all C corporations, effective January 1, 2018, introduced further limitations on the deductibility of interest expense, made certain changes to the tax treatment of capital expenditures and various other items, and imposed a one-time repatriation tax on certain earnings of certain foreign subsidiaries. In addition, the Act introduces additional base-broadening measures, including Global Intangible Low-Taxed Income (“GILTI”) and the Base-Erosion Anti-Abuse Tax (“BEAT”). As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we provisionally re-measured our net deferred tax liabilities at December 31, 2017 and recognized a tax benefit of approximately $1.1 billion in our consolidated statement of operations for the year ended December 31, 2017. During the first six months of 2018, we reduced this $1.1 billion tax benefit of tax reform by $76 million due to changes in certain purchase accounting adjustments related to the Level 3 acquisition, which was reflected in income tax expense. Additionally, this provisional benefit was further reduced by $208 million by the net deferred tax impact of certain tax accounting method changes filed with our 2017 Federal income tax return that significantly accelerated certain tax deductions into 2017.
During the second quarter of 2018, we continued to evaluate and analyze the tax impacts of the Act. While we have not finalized our analysis, we do not expect the provisions of the Act, exclusive of the rate reduction, to materially impact us during the remainder of 2018. However, we cannot provide any assurance that, upon completion of our analysis, the impact will not be material or that there will not be material tax impacts in future years. Accordingly, other than as noted above, we have not made any additional adjustments related to the Act in our consolidated financial statements.
As noted above, we accelerated a significant amount of tax deductions into 2017. The accelerated tax deductions resulted in a 2017 net operating loss for tax purposes, a portion of which was carried back to 2016 to generate a cash refund of $392 million. Additionally, we received a $314 million refund in the second quarter of 2018 related to 2017 federal income taxes. Because of our net operating loss carryforwards, we do not expect to experience a further material near term reduction in the amount of cash income taxes paid by us from the Act. However, we anticipate that the provisions of the Act may reduce our cash income taxes in future years.
Recently Adopted Accounting Pronouncements
In the first quarter of 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, ASU 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” and ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”.
Each of these is described further below.
Revenue Recognition
On May 28, 2014, the FASB issued ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.
We adopted the new revenue recognition standard under the modified retrospective transition method. On January 1, 2018, we recorded a cumulative catch-up adjustment that increased our retained earnings by $297 million, net of $101 million of income taxes.
Under ASU 2014-09, we are now deferring incremental contract acquisition and fulfillment costs and are recognizing (i.e. amortizing) such costs over either the initial contract (plus anticipated renewal contracts to which the costs relate) or the average customer life. Our deferred acquisition and fulfillment contract costs for our customers have average amortization periods of approximately 12 to 60 months for our business customers and 30 months for our consumer customers, and are monitored every period to reflect any significant change in assumptions.

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See Note 5—Revenue Recognition for additional information.
Comprehensive Income
ASU 2018-02 provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. If an entity elects to reclassify the income tax effects of the Tax Cuts and Jobs Act, the amount of that reclassification shall include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Cuts and Jobs Act related to items remaining in accumulated other comprehensive income. The effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included. ASU 2018-02 is effective January 1, 2019, but early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We early adopted and applied ASU 2018-02 in the first quarter of 2018. The adoption of ASU 2018-02 resulted in a $407 million increase to retained earnings and in accumulated other comprehensive loss. See Note 14—Accumulated Other Comprehensive Loss for additional information.
Income Taxes
ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries. Prospectively, the income tax effects associated with these asset transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or over the remaining useful life of the asset. Our adoption of ASU 2016-16 did not have a material impact to our consolidated financial statements.
Recently Issued Accounting Pronouncements
Goodwill Impairment
On January 26, 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the impairment testing for goodwill by changing the measurement for goodwill impairment. Under current rules, we are required to compute the implied fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value. Under ASU 2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned to the reporting unit.
We are required to adopt the provisions of ASU 2017-04 for any goodwill impairment tests, including our required annual test, occurring after January 1, 2020, but have the option to early adopt it for any impairment test that we are required to perform. We have not determined if we will elect to early adopt the provisions of ASU 2017-04. The provisions of ASU 2017-04 would not have affected our last goodwill impairment assessment, but no assurance can be provided that the simplified testing methodology will not affect our goodwill impairment assessment in the future.
Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.
We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020, but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption. As of the date of this report, we have not yet determined the date we will adopt ASU 2016-13.
Leases
On February 25, 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which under GAAP are currently not required to be reflected on their balance sheets.

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ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply.
On January 25, 2018, the FASB issued ASU 2018-01, “Leases: Land Easement Practical Expedient for Transition to ASU 2016-02" ("ASU 2018-01"). ASU 2018-01 permits reporting companies to elect to forego reassessments of land easements that exist or expire before the entity’s adoption of ASU 2016-02 and that were not previously accounted for as leases. We plan to adopt ASU 2018-01 at the same time we adopt ASU 2016-02.
On July 30, 2018, the FASB issued ASU 2018-11, "Leases: Targeted Improvements". ("ASU 2018-11") provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have not yet determined whether we will use the newly permitted adoption method.
We are in the process of implementing a new lease administration and accounting system. We plan to adopt ASU 2016-02 and ASU 2018-01 effective January 1, 2019. The adoption of ASU 2016-02 will result in our recognition of right of use assets and lease liabilities that we have not previously recorded. Although we believe it is premature as of the date of this report to provide any estimate of the impact of adopting ASU 2016-02, we do expect that it will have a material impact on our consolidated financial statements. Additionally, upon implementing ASU 2016-02, accounting for the failed-sale-leaseback transaction described in Note 3—Sale of Data Centers and Colocation Business will no longer be applicable based on our facts and circumstances, and the real estate assets and corresponding financing obligation described therein will be derecognized from our consolidated financial statements.
(2)    Acquisition of Level 3
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.
As of June 30, 2018, our preliminary estimated amount of aggregate consideration was $19.6 billion.
We have recognized the assets and liabilities of Level 3 based on CenturyLink’s preliminary estimates of the fair value of the acquired tangible and intangible assets and assumed liabilities of Level 3 as of November 1, 2017, the consummation date of the acquisition, with the excess aggregate consideration recorded as goodwill. The final determination of the allocation of the aggregate consideration paid by CenturyLink in the combination will be based on the fair value of such assets and liabilities as of the acquisition date with any excess aggregate consideration to be recorded as goodwill. The estimation of such fair values and the estimation of lives of depreciable tangible assets and amortizable intangible assets require significant judgment. We are reviewing our valuation analysis and calculations of the estimates of the fair value of Level 3’s assets acquired and liabilities assumed, along with the related allocation to goodwill. We expect to complete our final fair value determinations prior to the anniversary date of the acquisition. Our final fair value determinations may be significantly different than those reflected in our consolidated financial statements at June 30, 2018.
The U.S. Department of Justice approved the acquisition subject to conditions of a consent decree on October 2, 2017, which requires us to divest (i) certain Level 3 metro network assets in three markets. and (ii) 24 strands of dark fiber connecting 30 specified city-pairs across the United States in the form of an indefeasible right of use agreement. During the second quarter of 2018, we sold network assets in Boise and Albuquerque, and entered into an indefeasible right of use agreement for the dark fiber, and recognized no book gain or loss in connection therewith. The proceeds from the sales are included in the proceeds from sale of property, plant and equipment and other assets on our consolidated statements of cash flows. We continue to pursue the divestiture in Tucson, Arizona. All of the metro network assets were classified as assets held for sale on our consolidated balance sheet as of December 31, 2017. The Tucson assets continue to be classified as assets held for sale on our consolidated balance sheet as of June 30, 2018.
Level 3's results of operations have been included in our consolidated results of operations beginning November 1, 2017.
Based solely on our preliminary estimates through June 30, 2018, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $11.1 billion, which we have recognized as goodwill. The goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.

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As of June 30, 2018, the following is our updated assignment of the preliminary estimated aggregate consideration:
 
Adjusted November 1, 2017 Balance as of December 31, 2017
 
Purchase Price Adjustments (3)
 
Adjusted November 1, 2017 Balance as of June 30, 2018
 
(Dollars in millions)
Cash, accounts receivable and other current assets (1)
$
3,317

 
(14
)
 
3,303

Property, plant and equipment
9,311

 
113

 
9,424

Identifiable intangible assets (2)
 
 
 
 


Customer relationships
8,964

 
(476
)
 
8,488

Other
391

 
(13
)
 
378

Other noncurrent assets
782

 
184

 
966

Current liabilities, excluding current maturities of long-term debt
(1,461
)
 
(20
)
 
(1,481
)
Current maturities of long-term debt
(7
)
 
—

 
(7
)
Long-term debt
(10,888
)
 
—

 
(10,888
)
Deferred revenue and other liabilities
(1,629
)
 
(85
)
 
(1,714
)
Goodwill
10,837

 
306

 
11,143

Total estimated aggregate consideration
$
19,617

 
(5
)
 
19,612

____________________________________________________________________________________________________________                
(1) 
Includes a preliminary estimated fair value of $861 million for accounts receivable, which had a gross contractual value of $884 million on November 1, 2017. The $23 million difference between the gross contractual value and the preliminary estimated fair value assigned represents our best estimate as of November 1, 2017 of contractual cash flows that will not be collected.
(2) 
The preliminary estimate of the weighted-average amortization period for the acquired intangible assets is approximately 12.0 years.
(3) 
All purchase price adjustments occurred during the six months ended June 30, 2018.
On the acquisition date, we assumed Level 3’s contingencies. For more information on our contingencies, see Note 12—Commitments and Contingencies.
Acquisition-Related Expenses
We have incurred acquisition-related expenses related to our acquisition of Level 3. The table below summarizes our acquisition-related expenses, which consist of integration-related expenses, including severance and retention compensation expenses, and transaction-related expenses:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
Transaction-related expenses
$
—

 
7

 
1

 
17

Integration-related expenses
162

 
11

 
232

 
11

Total acquisition-related expenses
$
162

 
18

 
233

 
28

Through June 30, 2018, we had incurred cumulative acquisition-related expenses of $555 million for Level 3. The total amounts of these expenses have been included in our selling, general and administrative expenses beginning in the fourth quarter of 2016.
Level 3 incurred transaction-related expenses of $47 million on the date of acquisition. This amount is not included in our results of operations.
References to Acquired Businesses
In the discussion that follows, we refer to the incremental business activities that we now operate as a result of the Level 3 acquisition as “Legacy Level 3”. References to “Legacy CenturyLink”, when used to compare our consolidated results for the three and six months ended June 30, 2018 and 2017, mean the business we operated prior to the Level 3 acquisition.

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Combined Pro Forma Operating Results (Unaudited)
For the three and six months ended June 30, 2018, CenturyLink's results of operations included operating revenues (net of intercompany eliminations) attributable to Level 3 of $2.025 billion and $4.087 billion, respectively.
The following unaudited pro forma financial information presents the combined results of CenturyLink as if the Level 3 acquisition had been consummated as of January 1, 2017:
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
(Dollars in millions, except per share amounts)
Operating revenues
$
6,091

 
12,285

Net income
93

 
265

Basic earnings per common share
0.09

 
0.25

Diluted earnings per common share
0.09

 
0.25

This pro forma information reflects certain adjustments to previously-reported operating results, consisting primarily but not exclusively of:
•
decreased operating revenues and expenses due to the elimination of transactions among CenturyLink and Level 3 that are now subject to intercompany elimination and the elimination of deferred revenues associated with installation activities that were preliminarily assigned no value at the acquisition date;
•
increased amortization expense related to identifiable intangible assets, net of decreased depreciation expense to reflect the preliminary fair value of property, plant and equipment;
•
increased interest expense resulting from (i) interest on the new debt to finance the combination and amortization of the related debt discount and debt issuance costs, (ii) the elimination of Level 3’s historical amortization of debt discount and debt issuance costs and (iii) a reduction in interest expense due to the accretion of an adjustment to reflect the increased preliminary fair value of the long-term debt of Level 3 recognized on the acquisition date; and
•
the related income tax effects.
The pro forma information is presented for illustrative purposes only and does not necessarily reflect the actual results of operations had the Level 3 acquisition been consummated at January 1, 2017, nor is it necessarily indicative of future operating results. The pro forma information excludes transaction costs incurred by us and Level 3 during the quarterly periods presented above (which are further described above in this note) and does not reflect integration costs to be incurred by us in future periods. In addition, the pro forma information does not give effect to any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition (other than those actually realized in our historical consolidated financial statements after November 1, 2017).
As a result of the acquisition of Level 3's net operating losses ("NOL"s), we expect to significantly reduce our federal cash taxes for the next several years.
(3)    Sale of Data Centers and Colocation Business
On May 1, 2017, we sold our data centers and colocation business to a consortium led by BC Partners, Inc. and Medina Capital in exchange for cash and a minority stake in the limited partnership that owns the consortium's newly-formed global secure infrastructure company, Cyxtera Technologies ("Cyxtera").
We received pre-tax cash proceeds of $1.8 billion, and we have valued our minority stake at $150 million, which was based upon the total equity contribution to the limited partnership on the date made.

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In connection with our sale of the data centers and colocation business to Cyxtera, we agreed to lease back from Cyxtera a portion of the data center space to provide data hosting services to our customers. Because we have continuing involvement in the business through our minority stake in Cyxtera's parent, we do not meet the requirements for a sale-leaseback transaction as described in ASC 840-40, Leases - Sale-Leaseback Transactions. Under the failed-sale-leaseback accounting model, we are deemed under GAAP to still own certain real estate assets sold to Cyxtera, which we must continue to reflect on our consolidated balance sheets and depreciate over the assets' remaining useful life. Under this accounting model, we must also treat a certain amount of the pre-tax cash proceeds from the sale of the assets as though it were the result of a financing obligation on our consolidated balance sheets, and our consolidated results of operations must include imputed revenue associated with the portion of the real estate assets that we have not leased back and imputed interest expense on the financing obligation. A portion of the rent payments required under our leaseback arrangement with Cyxtera are recognized as reductions of the financing obligation, resulting in lower recognized rent expense than the amounts actually paid each period. At the end of the lease term, the remaining imputed financing obligation and the remaining net book value of the real estate assets will be derecognized. Please see "Leases" (ASU 2016-02) in Note 1—Background for additional information on the impact the new lease standard will have on the accounting for the failed-sale-leaseback.
The following table reflects the assets sold to and the liabilities assumed by Cyxtera on May 1, 2017, including our estimate of the impact of failed-sale-leaseback:
 
Dollars in millions
Goodwill
$
1,142

Property, plant and equipment
1,051

Other intangible assets
249

Other assets
66

Less assets recorded as part of the failed-sale-leaseback
(526
)
Total net amount of assets derecognized
$
1,982

 
 
Capital lease obligations
$
294

Other liabilities
274

Less imputed financing obligations from the failed-sale-leaseback
(628
)
Total net imputed liabilities recognized
$
(60
)
We evaluated our minority stake in the limited partnership and determined that we were not the primary beneficiary of the entity. As a result, we classified our $150 million investment in the limited partnership in other assets on our consolidated balance sheet as of June 30, 2018.
(4)    Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
 
June 30, 2018
 
December 31, 2017
 
(Dollars in millions)
Goodwill
$
30,715

 
30,475

Customer relationships, less accumulated amortization of $7,803 and $7,096
$
9,667

 
10,876

Indefinite-life intangible assets
$
269

 
269

Other intangible assets subject to amortization:
 
 
 
Capitalized software, less accumulated amortization of $2,447 and $2,294
1,454

 
1,469

Trade names and patents, less accumulated amortization of $46 and $31
146

 
159

Total other intangible assets, net
$
1,869

 
1,897

Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired (including the acquisition described in Note 2—Acquisition of Level 3). At June 30, 2018 and December 31, 2017, the net carrying amounts of goodwill, customer relationships and other intangibles assets included preliminary estimates of $19.5 billion and $20.1 billion, respectively, as a result of our Level 3 acquisition.

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Total amortization expense for intangible assets for the three and six months ended June 30, 2018 totaled $447 million and $890 million, respectively, and for the three and six months ended June 30, 2017 totaled $276 million and $551 million, respectively. As of June 30, 2018, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $52.5 billion.
We estimate that total amortization expense for intangible assets (which include preliminary estimates for the intangible assets acquired from Level 3) for the years ending December 31, 2018 through 2022 will be as follows:
 
(Dollars in millions)
2018 (remaining six months)
$
889

2019
1,691

2020
1,588

2021
1,156

2022
979

The following table shows the rollforward of goodwill assigned to our reportable segments from December 31, 2017 through June 30, 2018:
 
Business
 
Consumer
 
Total
 
(Dollars in millions)
As of December 31, 2017
$
20,197

 
10,278

 
30,475

Purchase accounting and other adjustments
306

 
—

 
306

Effect of foreign currency rate change
(66
)
 
—

 
(66
)
As of June 30, 2018
$
20,437

 
10,278

 
30,715

As of June 30, 2018, the $20.4 billion of goodwill assigned to our business reportable segment had not been allocated to our expected future reporting units ((i) medium and small business, (ii) enterprise, (iii) international and global accounts, (iv) wholesale and indirect and (v) consumer) as we had not completed our valuation analysis and calculation.
(5)     Revenue Recognition
We earn most of our consolidated revenue from contracts with customers, primarily through the provision of telecommunications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606, which we adopted on January 1, 2018 using the modified retrospective approach. We also earn revenues from leasing arrangements (primarily fiber capacity agreements) and governmental subsidiary payments, neither of which are accounted for under ASC 606.
Under ASC 606, revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. Revenue is recognized based on the following five-step model:
•Identification of the contract with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and,
•Recognition of revenue when, or as, we satisfy a performance obligation.
We provide an array of communications services, including local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers, as well as residential customers. Certain contracts also include the sale of equipment, which is not significant to our business.

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For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage, installation and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis. To the extent certain products or services are discounted as a part of a bundle arrangement, the bundle discounts are included in our calculation of the total transaction price with the customer, which is allocated to the various services in the bundle offering based on the estimated selling price of services included in each bundle combination.
Under ASC 606, we recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize as revenue over the actual or expected contract term using historical experience, which ranges from one year to seven 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.
Promotional or performance-based incentive payments are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. In certain cases, customers may be permitted to modify their contracts without incurring a penalty. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract. The impact of contract modifications is not significant to our results.
Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned. The portion of any advance payment allocated to the service based upon its relative selling price is recognized ratably over the contract term.
We periodically sell optical capacity on our network. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 to 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity and fiber assets and on all of the other elements deliverable under an IRU as non-ASC 606 lease revenue, which we recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other non-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. Based on our agreement with DIRECTV, we offer this service through a sales agency relationship which we report on a net basis.
We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a reduction to revenues in the period that the service level commitment was not met.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. For certain products or services and customer types, payment is required before products or services are provided.

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Comparative Results
The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
 
Three Months Ended June 30, 2018
 
(Dollars in millions, except per share amounts
and shares in thousands)
 
Reported Balances as of June 30, 2018
 
Impact of ASC 606
 
ASC 605
Historical Adjusted Balances
Operating revenues
$
5,902

 
11

 
$
5,913

Cost of services and products (exclusive of depreciation and amortization)
2,730

 
3

 
2,733

Selling, general and administrative
1,115

 
10

 
1,125

Income tax benefit
(55
)
 
—

 
(55
)
Net income
$
292

 
(2
)
 
$
290

 
 
 
 
 
 
BASIC AND DILUTED EARNINGS PER COMMON SHARE
 
 
 
 
 
BASIC
$
0.27

 
—

 
$
0.27

DILUTED
$
0.27

 
—

 
$
0.27

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
BASIC
1,064,711

 
—

 
1,064,711

DILUTED
1,068,819

 
—

 
1,068,819

 
Six Months Ended June 30, 2018
 
(Dollars in millions, except per share amounts
and shares in thousands)
 
Reported Balances as of June 30, 2018
 
Impact of ASC 606
 
ASC 605
Historical Adjusted Balances
Operating revenues
$
11,847

 
26

 
$
11,873

Cost of services and products (exclusive of depreciation and amortization)
5,533

 
10

 
5,543

Selling, general and administrative
2,224

 
26

 
2,250

Income tax expense
66

 
(2
)
 
64

Net income
$
407

 
(8
)
 
$
399

 
 
 
 
 
 
BASIC AND DILUTED EARNINGS PER COMMON SHARE
 
 
 
 
 
BASIC
$
0.38

 
—

 
$
0.38

DILUTED
$
0.38

 
—

 
$
0.38

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
 
 

 

BASIC
1,064,663

 
—

 
1,064,663

DILUTED
1,068,414

 
—

 
1,068,414


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The following table presents a reconciliation of certain consolidated balance sheet captions under ASC 606 to the balance sheet results using the historical accounting method:
 
As of June 30, 2018
 
(Dollars in millions)
 
Reported Balances as of June 30, 2018
 
Impact of ASC 606
 
ASC 605
Historical Adjusted Balances
Other current assets
$
1,260

 
(125
)
 
$
1,135

Other long-term assets, net
1,123

 
(103
)
 
1,020

Deferred revenue
2,379

 
132

 
2,511

Deferred income taxes, net
2,407

 
(102
)
 
2,305

Other long-term liabilities
2,667

 
49

 
2,716

Retained earnings
1,040

 
(307
)
 
733



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Disaggregated Revenue by Service Offering
The following tables provide disaggregation of revenue from contracts with customers based on service offerings for the three and six ended June 30, 2018, respectively. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.
 
Three Months Ended June 30, 2018
 
(Dollars in millions)
 
Total Revenue
 
Adjustments for Non-ASC 606 Revenue (8)
 
Total Revenue from Contracts with Customers
Business segment
 
 
 
 
 
IP & Data Services (1)
$
1,748

 
—

 
$
1,748

Transport & Infrastructure (2)
1,342

 
(80
)
 
1,262

Voice & Collaboration (3)
1,111

 
—

 
1,111

IT & Managed Services (4)
164

 
—

 
164

Total business segment revenues
4,365

 
(80
)
 
4,285

 
 
 
 
 
 
Consumer segment
 
 
 
 
 
Voice & Collaboration (3)
545

 
—

 
545

IP & Data Services (5)
85

 
(7
)
 
78

Transport & Infrastructure (6)
722

 
(53
)
 
669

Total consumer segment revenues
1,352

 
(60
)
 
1,292

 
 
 
 
 
 
Non-segment revenues


 


 


Regulatory revenues (7)
185

 
(185
)
 
—

Total non-segment revenues
185

 
(185
)
 
—

 
 
 
 
 
 
Total revenues
$
5,902

 
(325
)
 
$
5,577

 
 
 
 
 
 
Timing of Revenue
 
 
 
 
 
Goods transferred at a point in time
 
 
 
 
$
42

Services performed over time
 
 
 
 
5,535

Total revenues from contracts with customers
 
 
 
 
$
5,577

(1
)
Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
(2
)
Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.
(3
)
Includes local, long-distance and other ancillary revenues.
(4
)
Includes IT services and managed services revenues.
(5
)
Includes retail video revenues (including our facilities-based video revenues).
(6
)
Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength, equipment sales and professional and ancillary revenues.
(7
)
Includes CAF Phase I, CAF Phase 2, federal and state USF support revenue, sublease rental income and failed-sale leaseback income.
(8
)
Includes regulatory revenues, lease revenues, sublease rental income, revenue from fiber capacity lease arrangements and failed sale leaseback income, which are not within the scope of ASC 606.

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Six Months Ended June 30, 2018
 
(Dollars in millions)
 
Total Revenue
 
Adjustments for Non-ASC 606 Revenue (8)
 
Total Revenue from Contracts with Customers
Business segment
 
 
 
 
 
IP & Data Services (1)
$
3,485

 
—

 
$
3,485

Transport & Infrastructure (2)
2,691

 
(147
)
 
2,544

Voice & Collaboration (3)
2,247

 
—

 
2,247

IT & Managed Services (4)
325

 
—

 
325

Total business segment revenues
8,748

 
(147
)
 
8,601

 
 
 
 
 
 
Consumer segment
 
 
 
 
 
Voice & Collaboration (3)
1,101

 
—

 
1,101

IP & Data Services (5)
179

 
(16
)
 
163

Transport & Infrastructure (6)
1,451

 
(105
)
 
1,346

Total consumer segment revenues
2,731

 
(121
)
 
2,610

 
 
 
 
 
 
Non-segment revenues
 
 
 
 
 
Regulatory revenues (7)
368

 
(368
)
 
—

Total non-segment revenues
368

 
(368
)
 
—

 
 
 
 
 
 
Total revenues
$
11,847

 
(636
)
 
$
11,211

 
 
 
 
 
 
Timing of Revenue
 
 
 
 
 
Goods transferred at a point in time
 
 
 
 
$
81

Services performed over time
 
 
 
 
11,130

Total revenues from contracts with customers
 
 
 
 
$
11,211

(1
)
Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
(2
)
Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.
(3
)
Includes local, long-distance and other ancillary revenues.
(4
)
Includes IT services and managed services revenues.
(5
)
Includes retail video revenues (including our facilities-based video revenues).
(6
)
Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength, equipment sales and professional and ancillary revenues.
(7
)
Includes CAF Phase I, CAF Phase 2, federal and state USF support revenue, sublease rental income and failed-sale leaseback income.
(8
)
Includes regulatory revenues, lease revenues, sublease rental income, revenue from fiber capacity lease arrangements and failed sale leaseback income, which are not within the scope of ASC 606.
Customer Receivables and Contract Balances
The following table provides balances of customer receivables, contract assets and contract liabilities as of June 30, 2018 and January 1, 2018:
 
June 30, 2018
 
January 1, 2018
 
(Dollars in millions)
Customer receivables(1)
$
2,414

 
2,504

Contract liabilities
553

 
623

Contract assets
158

 
255


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(1) Gross customer receivables of $2.6 billion and $2.7 billion, net of allowance for doubtful accounts of $160 million and $155 million, at June 30, 2018 and January 1, 2018, respectively.
Contract liabilities are consideration we have received from our customers in advance of providing goods or services promised in the future. We defer 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 ranges from one to seven years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheet.
Performance Obligations
A performance obligation is a promise in a contract with a customer to provide a good or service to the customer. We recognize revenue for services when we satisfy our performance obligation as services are provided.
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 or non-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606.
As of June 30, 2018, 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 $10.0 billion. We expect to recognize approximately 73% of this revenue through 2020, with the balance recognized thereafter.
Contract Costs
The following table provides changes in our contract acquisition costs and fulfillment costs:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
(Dollars in millions)
 
Acquisition Costs
 
Fulfillment Costs
 
Acquisition Costs
 
Fulfillment Costs
Beginning of period balance
$
280

 
105

 
268

 
88

Costs incurred
47

 
29

 
99

 
59

Amortization
(41
)
 
(18
)
 
(81
)
 
(31
)
End of period balance
$
286

 
116

 
286

 
116

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 commissions and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average customer life of 30 months to 49 months. The amounts 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. We recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets is less than one year. The amount of deferred costs expected to be amortized beyond the next twelve months is included in other assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.

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(6) Long-Term Debt and Credit Facilities
The following chart reflects the consolidated long-term debt of CenturyLink, Inc. and its subsidiaries, including unamortized discounts and premiums and unamortized debt issuance costs, but excluding intercompany debt:
 
Interest Rates(1)
 
Maturities
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(Dollars in millions)
Senior Secured Debt:
 
 
 
 
 
 
 
CenturyLink, Inc.
 
 
 
 
 
 
 
2017 Revolving Credit Facility(2)
4.844%
 
2022
 
$
—

 
405

Term Loan A
4.844%
 
2022
 
1,664

 
1,575

Term Loan A-1
4.844%
 
2022
 
361

 
370

Term Loan B
4.844%
 
2025
 
5,970

 
6,000

Subsidiaries:
 
 
 
 
 
 
 
Level 3 Financing, Inc.
 
 
 
 
 
 
 
Tranche B 2024 Term Loan (3)
LIBOR + 2.25%
 
2024
 
4,611

 
4,611

Embarq Corporation subsidiaries
 
 
 
 
 
 
 
First mortgage bonds
7.125% - 8.375%
 
2023 - 2025
 
138

 
151

Senior Notes and Other Debt:
 
 
 
 
 
 
 
CenturyLink, Inc.
 
 
 
 
 
 
 
Senior notes
5.625% - 7.650%
 
2019 - 2042
 
8,125

 
8,125

Subsidiaries:
 
 
 
 
 
 
 
Level 3 Financing, Inc.
 
 
 
 
 
 
 
Senior notes
5.125% - 6.125%
 
2021 - 2026
 
5,315

 
5,315

Level 3 Parent, LLC
 
 
 
 
 
 
 
Senior notes
5.750%
 
2022
 
600

 
600

Qwest Corporation
 
 
 
 
 
 
 
Senior notes
6.125% - 7.750%
 
2021 - 2057
 
7,294

 
7,294

Term loan
4.100%
 
2025
 
100

 
100

Qwest Capital Funding, Inc.
 
 
 
 
 
 
 
Senior notes
6.5% - 7.750%
 
2018 - 2031
 
981

 
981

Embarq Corporation and subsidiary
 
 
 
 
 
 
 
Senior note
7.995%
 
2036
 
1,485

 
1,485

Other
9.000%
 
2019
 
150

 
150

Capital lease and other obligations
Various
 
Various
 
844

 
891

Unamortized premiums and other, net
 
 
 
 
11

 
23

Unamortized debt issuance costs
 
 
 
 
(334
)
 
(350
)
Total long-term debt
 
 
 
 
37,315

 
37,726

Less current maturities
 
 
 
 
(437
)
 
(443
)
Long-term debt, excluding current maturities
 
 
 
 
$
36,878

 
37,283

______________________________________________________________________ 
(1)
As of June 30, 2018.
(2)
The aggregate amount outstanding on our revolving line of credit borrowings at December 31, 2017 was $405 million, with a weighted-average interest rate of 4.186%. At June 30, 2018, we had no borrowings outstanding under our revolving line of credit. These amounts typically change on a regular basis.
(3)
The Tranche B 2024 Term Loan is a secured obligation and is guaranteed by Level 3 Parent, LLC and certain other subsidiaries. The Tranche B 2024 Term Loan had an interest rate of 4.3341% as of June 30, 2018 and 3.557% as of December 31, 2017. The interest rate on the Tranche B 2024 Term Loan is set with a minimum London Interbank Offered Rate ("LIBOR") of zero percent.

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Table of Contents

Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized discounts, net and unamortized debt issuance costs) maturing during the following years:
 
(Dollars in millions)(1)(2)
2018 (remaining six months)
$
303

2019
638

2020
1,194

2021
3,110

2022
4,757

2023 and thereafter
27,136

Total long-term debt
$
37,138

_______________________________________________________________________________
(1)
In Note 3—Sale of Data Centers and Colocation Business, we describe an imputed financing obligation. The amount outstanding on that imputed financing obligation at June 30, 2018 was $578 million. The aggregate maturities of long-term debt do not include $499 million of this obligation, which prior to the end of the lease term on April 30, 2020, will be derecognized along with the remaining net book value of the associated real estate assets.
(2)
Actual principal paid in any year may differ due to the possible future refinancing of outstanding debt or the issuance of new debt. The projected amounts in the table also exclude any impacts from any further acquisitions.
Covenants
Certain debt instruments of CenturyLink, Inc. and its subsidiaries contain affirmative and negative covenants.  Debt at CenturyLink, Inc., Level 3 Parent, LLC, and Level 3 Financing, Inc. contain more extensive covenants including, among other things and subject to certain exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates including CenturyLink and its other subsidiaries, dispose of assets and merge or consolidate with any other person. Also, Level 3 Parent, LLC, as well as Level 3 Financing, Inc., will be required to offer to purchase certain of its long-term debt securities under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC.
Certain of the debt instruments of CenturyLink, Inc. and its subsidiaries contain cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.
Compliance
As of June 30, 2018, we believe we were in compliance with the provisions and financial covenants in our material debt agreements.
For additional information on our long-term debt and credit facilities, see Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2017.
(7)  Severance and Leased Real Estate
Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workload demands due to the loss of customers purchasing certain services.
We have recognized liabilities to reflect our estimates of the fair values of the existing lease obligations for real estate which we have ceased using, net of estimated sublease rentals. At June 30, 2018, the current and noncurrent portions of our leased real estate accrual were $21 million and $92 million, respectively. The remaining lease terms range from 0.26 years to 12.5 years, with a weighted-average of 7.2 years.

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Changes in our accrued liabilities for severance expenses and leased real estate were as follows:
 
Severance
 
Real Estate
 
(Dollars in millions)
Balance at December 31, 2017
$
33

 
64

Accrued to expense
111

 
57

Payments, net
(107
)
 
(8
)
Balance at June 30, 2018
$
37

 
113

(8)  Employee Benefits
Net periodic benefit (income) expense for our qualified and non-qualified pension plans included the following components:
 
Pension Plans
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
Service cost
$
16

 
14

 
32

 
31

Interest cost
98

 
105

 
197

 
206

Expected return on plan assets
(171
)
 
(167
)
 
(342
)
 
(333
)
Recognition of prior service credit
(2
)
 
(2
)
 
(4
)
 
(4
)
Recognition of actuarial loss
46

 
52

 
90

 
103

Net periodic pension benefit (income) expense
$
(13
)
 
2

 
(27
)
 
3

Net periodic benefit expense for our post-retirement benefit plans included the following components:
 
Post-Retirement Benefit Plans
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
Service cost
$
5

 
5

 
9

 
9

Interest cost
25

 
25

 
49

 
50

Expected return on plan assets
—

 
(1
)
 
—

 
(1
)
Recognition of prior service cost
5

 
5

 
10

 
10

Net periodic post-retirement benefit expense
$
35

 
34

 
68

 
68

Benefits paid by our qualified pension plan are paid through a trust that holds all plan assets. Based on current laws and circumstances, we do not expect any contributions to be required for our qualified pension plan during the remainder of 2018. However, we made a voluntary contribution of $100 million to the trust for our qualified pension plan in June 2018, and made an additional voluntary contribution of $400 million during the third quarter of 2018.


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(9)  Earnings Per Common Share
Basic and diluted earnings per common share were calculated as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions, except per share amounts, shares in thousands)
Income (Numerator):
 
 
 
 
 
 
 
Net income
$
292

 
17

 
407

 
180

Earnings applicable to non-vested restricted stock
—

 
—

 
—

 
—

Net income applicable to common stock for computing basic earnings per common share
292

 
17

 
407

 
180

Net income as adjusted for purposes of computing diluted earnings per common share
$
292

 
17

 
407

 
180

Shares (Denominator):
 
 
 
 
 
 
 
Weighted-average number of shares:
 
 
 
 
 
 
 
Outstanding during period
1,078,986

 
549,100

 
1,076,273

 
548,359

Non-vested restricted stock
(14,275
)
 
(7,739
)
 
(11,610
)
 
(7,450
)
Weighted-average shares outstanding for computing basic earnings per common share
1,064,711

 
541,361

 
1,064,663

 
540,909

Incremental common shares attributable to dilutive securities:
 
 
 
 
 
 
 
Shares issuable under convertible securities
10

 
10

 
10

 
10

Shares issuable under incentive compensation plans
4,098

 
780

 
3,741

 
917

Number of shares as adjusted for purposes of computing diluted earnings per common share
1,068,819

 
542,151

 
1,068,414

 
541,836

Basic earnings per common share
$
0.27

 
0.03

 
0.38

 
0.33

Diluted earnings per common share
$
0.27

 
0.03

 
0.38

 
0.33

Our calculation of diluted earnings per common share excludes shares of common stock that are issuable upon exercise of stock options when the exercise price is greater than the average market price of our common stock. We also exclude unvested restricted stock awards that are anti-dilutive as a result of unrecognized compensation cost. Such shares averaged 3.1 million and 3.1 million for the three months ended June 30, 2018 and 2017, respectively, and averaged 3.7 million and 3.7 million for the six months ended June 30, 2018 and 2017, respectively.
(10)  Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values indicated below:
 
 
 
June 30, 2018
 
December 31, 2017
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(Dollars in millions)
Liabilities—Long-term debt, excluding capital lease and other obligations
2
 
$
36,471

 
35,671

 
36,835

 
36,402



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Table of Contents

(11)  Segment Information
Segment Data
In connection with our acquisition of Level 3 (discussed further in Note 2—Acquisition of Level 3), effective November 1, 2017, we implemented a new organization structure and began managing our operations in two segments: business and consumer. Our consumer segment remains substantially unchanged under this reorganization, and our newly reorganized business segment includes the Legacy CenturyLink enterprise segment operations and the Legacy Level 3 operations. In addition, we reassigned our information technology, managed hosting, cloud hosting and hosting area network operations back into the business segment, thereby eliminating a former non-reportable operating segment. At June 30, 2018, we had the following two reportable segments:
•
Business Segment. This segment consists generally of providing products and services to small, medium and enterprise business, wholesale and government customers, including other communication providers. Our products and services offered to these customers include our local and long-distance voice, VPN data network, private line (including business data services), Ethernet, information technology, wavelength, broadband, colocation and data center services, managed services, professional and other services provided in connection with selling equipment, network security and various other ancillary services, all of which are described further under "Products and Services Categories"; and
•
Consumer Segment. This segment consists generally of providing products and services to residential customers. Our products and services offered to these customers include our broadband, local and long-distance voice, video and other ancillary services.
The results of our two reportable segments, business and consumer, are summarized below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018

2017
 
(Dollars in millions)
Total reportable segment revenues
$
5,717

 
3,907

 
11,479

 
7,944

Total reportable segment expenses
3,093

 
2,169

 
6,275

 
4,375

Total reportable segment adjusted EBITDA
$
2,624

 
1,738

 
5,204

 
3,569

Total margin percentage
46
%
 
44
%
 
45
%
 
45
%
 
 
 
 
 
 
 
 
Business segment:
 
 
 
 
 
 
 
Revenues
$
4,365

 
2,470

 
8,748

 
5,060

Expenses
2,524

 
1,538

 
5,094

 
3,104

Adjusted EBITDA
$
1,841

 
932

 
3,654

 
1,956

Margin percentage
42
%
 
38
%
 
42
%
 
39
%
Consumer segment:
 
 
 
 
 
 
 
Revenues
$
1,352

 
1,437

 
2,731

 
2,884

Expenses
569

 
631

 
1,181

 
1,271

Adjusted EBITDA
$
783

 
806

 
1,550

 
1,613

Margin percentage
58
%
 
56
%
 
57
%
 
56
%
Product and Service Categories
We categorize our products, services and revenues among the following five categories:
•
IP and data services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;
•
Transport and infrastructure, which include broadband, private line (including business data services), data center facilities and services, including cloud, hosting and application management solutions, wavelength, equipment sales and professional services, network security services, dark fiber services and other ancillary services;
•
Voice and collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary service;

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Table of Contents

•
IT and managed services, which include information technology services and managed services, which may be purchased in conjunction with our other network services; and
•
Regulatory revenues, which consists of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenues. We receive federal support payments from both federal and state USF programs and from the federal CAF program. The USF and CAF support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services. We generate other operating revenues from the leasing and subleasing of space in our office buildings, warehouses and other properties and from rental income associated with the failed-sale-leaseback. Because we centrally manage the activities that generate these regulatory revenues, these revenues are not included in our segment revenues.
Our operating revenue detail for our products and services consisted of the following categories:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
Business segment
 
 
 
 
 
 
 
IP and data services (1)
$
1,748

 
744

 
3,485

 
1,501

Transport and infrastructure (2)
1,342

 
797

 
2,691

 
1,691

Voice and collaboration (3)
1,111

 
767

 
2,247

 
1,554

IT and managed services (4)
164

 
162

 
325

 
314

Total business segment revenues
4,365

 
2,470

 
8,748

 
5,060

 
 
 
 
 
 
 
 
Consumer segment
 
 
 
 
 
 
 
IP and data services (1)
85

 
107

 
179

 
210

Transport and infrastructure (2)
722

 
683

 
1,451

 
1,366

Voice and collaboration (3)
545

 
647

 
1,101

 
1,308

Total consumer segment revenues
1,352

 
1,437

 
2,731

 
2,884

 
 
 
 
 
 
 
 
Non-segment revenues
 
 
 
 
 
 
 
Regulatory revenues (7)
185

 
183

 
368

 
355

Total non-segment revenues
185

 
183

 
368

 
355

 
 
 
 
 
 
 
 
Total revenues
$
5,902

 
4,090

 
11,847

 
8,299

______________________________________________________________________ 
(1)
Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
(2)
Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.
(3)
Includes local, long-distance and other ancillary revenues.
(4)
Includes IT services and managed services revenues.
(5)
Includes retail video revenues (including our facilities-based video revenues).
(6)
Includes primarily broadband and equipment sales and professional services revenues.
(7)
Includes CAF Phase I, CAF Phase 2, federal and state USF support revenue, sublease rental income and failed-sale leaseback income.
We recognize revenues in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenues aggregated $229 million and $133 million for the three months ended June 30, 2018 and 2017, respectively, and $476 million and $263 million for the six months ended June 30, 2018 and 2017, respectively. These USF surcharges, where we record revenue, and transaction taxes are assigned to the products and services categories of each segments based on the underlying revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.

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Table of Contents

Allocations of Revenues and Expenses
Our segment revenues include all revenues from our business and consumer segments as described in more detail above. Our segment revenues are based upon each customer's classification. We report our segment revenues based upon all services provided to that segment's customers. Our segment expenses include specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are (i) directly associated with specific segment customers or activities and (ii) allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses. We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the chief operating decision maker ("CODM") by segment. Generally speaking, severance expenses, restructuring expenses and certain centrally managed administrative functions (such as finance, information technology, legal and human resources) are not assigned to our segments. Interest expense is also excluded from segment results because we manage our financing on a consolidated basis and have not allocated assets or debt to specific segments. Other income and expense items are not monitored as a part of our segment operations and are therefore excluded from our segment results.
The following table reconciles total reportable segment adjusted EBITDA to net income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars in millions)
Total reportable segment adjusted EBITDA
$
2,624

 
1,738

 
5,204

 
3,569

Regulatory revenues
185

 
183

 
368

 
355

Depreciation and amortization
(1,290
)
 
(949
)
 
(2,573
)
 
(1,829
)
Other operating expenses
(752
)
 
(605
)
 
(1,482
)
 
(1,097
)
Total other expense, net
(530
)
 
(327
)
 
(1,044
)
 
(651
)
Income before income tax expense
237

 
40

 
473

 
347

Income tax (benefit) expense
(55
)
 
23

 
66

 
167

Net income
$
292

 
17

 
407

 
180

(12) Commitments and Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for such contingencies at June 30, 2018 aggregate to approximately $138 million and are included in “Other” current liabilities and “Other Liabilities” in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.
In this Note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter.

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Shareholder Class Action Suit
CenturyLink and certain members of the CenturyLink Board of Directors have been named as defendants in a putative shareholder class action lawsuit filed on January 11, 2017 in the 4th Judicial District Court of the State of Louisiana, Ouachita Parish, captioned Jeffery Tomasulo v. CenturyLink, Inc., et al. The complaint asserts, among other things, that the members of CenturyLink’s Board allegedly breached their fiduciary duties to the CenturyLink shareholders in approving the Level 3 merger agreement and, more particularly, that: the consideration that CenturyLink agreed to pay to Level 3 stockholders in the transaction is allegedly unfairly high; the CenturyLink directors allegedly had conflicts of interest in negotiating and approving the transaction; and the disclosures set forth in our preliminary joint proxy statement/prospectus filed in December 2016 are insufficient in that they allegedly fail to contain material information concerning the transaction. The complaint seeks, among other things, a declaration that the members of the CenturyLink Board have breached their fiduciary duties, corrective disclosure, rescissory or other damages and equitable relief, including rescission of the transaction. On February 13, 2017, the parties entered into a memorandum of understanding providing for the settlement of the lawsuit. The proposed settlement is subject to court approval, among other conditions, and the amount of the settlement is not material to our consolidated financial statements.
Switched Access Disputes
Subsidiaries of CenturyLink, Inc. are among hundreds of companies involved in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated as In Re: IntraMTA Switched Access Charges Litigation, in the United States District Court for the Northern District of Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services. In the lawsuits, various IXCs assert that LECs are prohibited from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices. Some of these IXCs seek refunds for access charges previously paid and declaratory relief from future access charges.
In November 2015, the court rejected the IXCs' claims under federal law and entered final judgments against the IXCs on the LECs' claims for unpaid access charges and for late payment charges. The cases are now on appeal before the U.S. Court of Appeals for the Fifth Circuit. Separately, some of the defendants have petitioned the FCC to address these issues on an industry-wide basis.
As both an IXC and a LEC, we both pay and assess significant amounts of the charges in question. The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, could affect our financial results and are currently not predictable.
State Tax Suits
Several Missouri municipalities have, beginning in May 2012, asserted claims alleging underpayment of taxes against CenturyLink, Inc. and several of its subsidiaries in a number of proceedings filed in the Circuit Court of St. Louis County, Missouri. These municipalities are seeking, among other things, declaratory relief regarding the application of business license and gross receipts taxes and back taxes from 2007 to the present, plus penalties and interest. In a February 2017 ruling in connection with one of these pending cases, the court entered an order awarding plaintiffs $4 million and broadening the tax base on a going-forward basis. We have appealed that ruling. In a June 2017 ruling in connection with another one of these pending cases, the court made findings which, if not overturned, will result in a tax liability to us well in excess of the contingent liability we have established. In due course, we plan to appeal that decision. We continue to vigorously defend against these claims.
Billing Practices Suits
In June 2017, a former employee filed an employment lawsuit against us claiming that she was wrongfully terminated for alleging that we charged some of our retail customers for products and services they did not authorize. Starting shortly thereafter and continuing since then, and based in part on the allegations made by the former employee, several legal proceedings have been filed.

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In June 2017, McLeod v. CenturyLink, a putative consumer class action, was filed against us in the U.S. District Court for the Central District of California alleging that we charged some of our retail customers for products and services they did not authorize. A number of other complaints asserting similar claims have been filed in other federal and state courts, as well. The lawsuits assert claims including fraud, unfair competition, and unjust enrichment. Also in June 2017, Craig. v. CenturyLink, Inc., et al., a putative securities investor class action, was filed in U.S. District Court for the Southern District of New York, alleging that we failed to disclose material information regarding improper sales practices, and asserting federal securities law claims. A number of other cases asserting similar claims have also been filed. Both the putative consumer class actions and the putative securities investor class actions have been transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation.
Beginning June 2017, we also received several shareholder derivative demands addressing related topics. In August 2017, the Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands. In April 2018, the special litigation committee concluded its review of the derivative demands and declined to take further action. Since then, six derivative cases were filed. Two of these cases, Castagna v. Post and Pinsly v. Post, were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita; four others, Ault v. Post, Barbree v. Post, Flanders v. Post, and Palkon v. Boulet, were filed in Louisiana federal court in the Monroe Division of the Western District of Louisiana. These cases have been brought on behalf of CenturyLink against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.
In July 2017, the Minnesota state attorney general filed State of Minnesota v. CenturyTel Broadband Services LLC, et al. in the Asoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices. The suit seeks an order of restitution on behalf of all CenturyLink customers, civil penalties, injunctive relief, and costs and fees. Additionally, we have received and responded to information requests and inquiries from other states.
Peruvian Tax Litigation
In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one of our Peruvian subsidiaries asserting $26 million, of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, the total amount of exposure is $13 million at June 30, 2018.
We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the Tribunal) decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. That appeal is pending.
In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. That appeal is pending.
Employee Severance and Contractor Termination Disputes
A number of former employees and third-party contractors have asserted a variety of claims in litigation against certain of Level 3’s Latin American subsidiaries for separation pay, severance, commissions, pension benefits, unpaid vacation pay, breach of employment contracts, unpaid performance bonuses, property damages, moral damages and related statutory penalties, fines, costs and expenses (including accrued interest, attorneys' fees and statutorily mandated inflation adjustments) as a result of their separation from Level 3 or termination of service relationships. Level 3 is vigorou