10-Q 1 ctl-2013093010q.htm 10-Q CTL-2013.09.30 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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
 
CENTURYLINK, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Louisiana
 (State or other jurisdiction of
incorporation or organization)
72-0651161
(I.R.S. Employer
Identification No.)
100 CenturyLink Drive, Monroe, Louisiana
 (Address of principal executive offices)
71203
 (Zip Code)

(318) 388-9000
(Registrant's telephone number, including area code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
 (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No ý

On October 31, 2013, there were 591,070,797 shares of common stock outstanding.



TABLE OF CONTENTS


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

2


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions except per share amounts
and shares in thousands)
OPERATING REVENUES
$
4,515

 
4,571

 
13,553

 
13,793

OPERATING EXPENSES
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
1,918

 
1,943

 
5,587

 
5,732

Selling, general and administrative
1,047

 
748

 
2,679

 
2,454

Depreciation and amortization
1,135

 
1,144

 
3,375

 
3,560

Impairment of goodwill (Note 2)
1,100




1,100



Total operating expenses
5,200

 
3,835

 
12,741

 
11,746

OPERATING (LOSS) INCOME
(685
)
 
736

 
812

 
2,047

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense
(329
)
 
(326
)
 
(970
)
 
(1,004
)
Net loss on early retirement of debt



 


(194
)
Other income
9

 
12

 
52

 
27

Total other income (expense)
(320
)
 
(314
)
 
(918
)
 
(1,171
)
(LOSS) INCOME BEFORE INCOME TAX EXPENSE
(1,005
)
 
422

 
(106
)
 
876

Income tax expense
40


152


372


332

NET (LOSS) INCOME
$
(1,045
)

270


(478
)

544

BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
BASIC
$
(1.76
)

.43


(0.79
)

.88

DILUTED
$
(1.76
)

.43


(0.79
)

.87

DIVIDENDS DECLARED PER COMMON SHARE
$
.54

 
.725

 
1.62

 
2.175

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
 
 
 
BASIC
594,587

 
621,148

 
606,104

 
619,748

DILUTED
594,587

 
623,296

 
606,104

 
621,828

See accompanying notes to consolidated financial statements.

3


CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
NET (LOSS) INCOME
$
(1,045
)
 
270

 
(478
)
 
544

OTHER COMPREHENSIVE (LOSS) INCOME:
 
 
 
 
 
 
 
Items related to employee benefit plans:
 
 
 
 
 
 
 
Change in net actuarial loss, net of $(8), $(3), $(25), and $(9) tax
13

 
4

 
40

 
14

Change in net prior service credit, net of $–, $(1), $(1), and $(1) tax
1

 
2

 
2

 
2

Auction rate securities marked to market, net of $–, $–, $–, and $(2) tax

 

 

 
3

Foreign currency translation adjustment and other, net of $–, $–, $–, and $– tax
13

 
8

 
(1
)
 
9

Other comprehensive income
27

 
14

 
41

 
28

COMPREHENSIVE (LOSS) INCOME
$
(1,018
)
 
284

 
(437
)
 
572

See accompanying notes to consolidated financial statements.

4


CENTURYLINK, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2013
 
December 31, 2012
 
(Dollars in millions
and shares in thousands)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
266

 
211

Accounts receivable, less allowance of $151 and $158
1,911

 
1,917

Income tax receivable
68

 
42

Deferred income taxes, net
1,004

 
891

Other
563

 
552

Total current assets
3,812

 
3,613

NET PROPERTY, PLANT AND EQUIPMENT
 
 
 
Property, plant and equipment
33,724

 
31,933

Accumulated depreciation
(15,059
)
 
(13,024
)
Net property, plant and equipment
18,665

 
18,909

GOODWILL AND OTHER ASSETS
 
 
 
Goodwill
20,637

 
21,732

Customer relationships, less accumulated amortization of $3,370 and $2,524
6,206

 
7,052

Other intangible assets, less accumulated amortization of $1,290 and $986
1,842

 
1,918

Other
822

 
796

Total goodwill and other assets
29,507

 
31,498

TOTAL ASSETS
$
51,984

 
54,020

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
191

 
1,205

Accounts payable
1,158

 
1,207

Accrued expenses and other liabilities
 
 
 
Salaries and benefits
679

 
683

Income and other taxes
397

 
356

Interest
355

 
268

Other
498

 
234

Advance billings and customer deposits
700

 
642

Total current liabilities
3,978

 
4,595

LONG-TERM DEBT
20,391

 
19,400

DEFERRED CREDITS AND OTHER LIABILITIES
 
 
 
Deferred income taxes, net
4,125

 
3,644

Benefit plan obligations, net
5,488

 
5,844

Other
1,288

 
1,248

Total deferred credits and other liabilities
10,901

 
10,736

COMMITMENTS AND CONTINGENCIES (Note 9)

 

STOCKHOLDERS' EQUITY
 
 
 
Preferred stock—non-redeemable, $25.00 par value, authorized 2,000 shares, issued and outstanding 7 and 7 shares

 

Common stock, $1.00 par value, authorized 1,600,000 and 1,600,000 shares, issued and outstanding 593,497 and 625,658 shares
593

 
626

Additional paid-in capital
17,954

 
19,079

Accumulated other comprehensive loss
(1,660
)
 
(1,701
)
(Accumulated Deficit) Retained earnings
(173
)
 
1,285

Total stockholders' equity
16,714

 
19,289

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
51,984

 
54,020

See accompanying notes to consolidated financial statements.

5


CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended September 30,
 
2013
 
2012
 
(Dollars in millions)
OPERATING ACTIVITIES
 
 
 
Net (loss) income
$
(478
)
 
544

Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
 
 
 
Depreciation and amortization
3,375

 
3,560

Impairment of goodwill (Note 2)
1,100

 

Deferred income taxes
349

 
260

Provision for uncollectible accounts
111

 
144

Gain on sale of intangible assets
(32
)
 

Long-term debt premium amortization
(45
)
 
(71
)
Net loss on early retirement of debt

 
194

Changes in current assets and current liabilities:
 
 
 
Accounts receivable
(105
)
 
(136
)
Accounts payable

 
48

Accrued income and other taxes
30

 
65

Other current assets and other current liabilities, net
303

 
134

Retirement benefits
(288
)
 
(179
)
Changes in other noncurrent assets and liabilities, net
61

 
91

Other, net
27

 
32

Net cash provided by operating activities
4,408

 
4,686

INVESTING ACTIVITIES
 
 
 
Payments for property, plant and equipment and capitalized software
(2,211
)
 
(2,024
)
Proceeds from sale of intangible assets or property
75

 
133

Other, net
19

 
28

Net cash used in investing activities
(2,117
)
 
(1,863
)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of long-term debt
1,740

 
3,363

Payments of long-term debt
(1,169
)
 
(4,529
)
Early retirement of debt costs

 
(324
)
Net payments on credit facility
(620
)
 
3

Dividends paid
(986
)
 
(1,357
)
Net proceeds from issuance of common stock
54

 
91

Repurchase of common stock
(1,252
)
 
(20
)
Other, net
(3
)
 
14

Net cash used in financing activities
(2,236
)
 
(2,759
)
Effect of exchange rate changes on cash and cash equivalents

 
2

Net increase in cash and cash equivalents
55

 
66

Cash and cash equivalents at beginning of period
211

 
128

Cash and cash equivalents at end of period
$
266

 
194

Supplemental cash flow information:
 
 
 
Income taxes (paid), net
$
(45
)
 
(59
)
Interest (paid) (net of capitalized interest of $30 and $33)
$
(915
)
 
(997
)
See accompanying notes to consolidated financial statements.

6


CENTURYLINK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
 
Nine Months Ended September 30,
 
2013
 
2012
 
(Dollars in millions)
COMMON STOCK
 
 
 
Balance at beginning of period
$
626

 
619

Issuance of common stock through dividend reinvestment, incentive and benefit plans
2

 
5

Repurchase of common stock
(35
)
 

Shares withheld to satisfy tax withholdings

 
(1
)
Balance at end of period
593

 
623

ADDITIONAL PAID-IN CAPITAL
 
 
 
Balance at beginning of period
19,079

 
18,901

Issuance of common stock through dividend reinvestment, incentive and benefit plans
50

 
86

Repurchase of common stock
(1,219
)
 

Shares withheld to satisfy tax withholdings
(16
)
 
(17
)
Share-based compensation and other, net
60

 
82

Balance at end of period
17,954

 
19,052

ACCUMULATED OTHER COMPREHENSIVE (LOSS)
 
 
 
Balance at beginning of period
(1,701
)
 
(1,012
)
Other comprehensive income
41

 
28

Balance at end of period
(1,660
)
 
(984
)
(ACCUMULATED DEFICIT) RETAINED EARNINGS
 
 
 
Balance at beginning of period
1,285

 
2,319

Net (loss) income
(478
)
 
544

Dividends declared
(980
)
 
(1,357
)
Balance at end of period
(173
)
 
1,506

TOTAL STOCKHOLDERS' EQUITY
$
16,714

 
20,197

See accompanying notes to consolidated financial statements.

7


CENTURYLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
        Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries.
(1)   Basis of Presentation
We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line (including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security monitoring.
Our consolidated balance sheet as of December 31, 2012, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations for the first nine months of the year are not necessarily indicative of the consolidated results of operations that might be expected for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise control. All intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.
To simplify the overall presentation of our consolidated financial statements, we report immaterial amounts attributable to noncontrolling interests in certain of our subsidiaries as follows: (i) income attributable to noncontrolling interests in other income (expense), (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other financing activities.
We have reclassified certain prior year balance sheet amounts presented in our Annual Report on Form 10-K for the year ended December 31, 2012 to conform to the current period presentation. Specifically, we have reclassified $123 million in software development costs, net of $30 million in accumulated amortization, from property, plant and equipment to other intangibles assets on our consolidated balance sheet as of December 31, 2012.
We also have reclassified certain other prior period amounts to conform to the current period presentation, including the categorization of our segment reporting. See Note 8—Segment Information for additional information. These changes had no impact on total revenues, total operating expenses or net (loss) income for any period.











8


(2)   Goodwill
During the first quarter of 2013, we reorganized our operating segments to support our new operating structure. As a result, we reassigned goodwill to our segments using a relative fair value allocation approach. In the table below we have reclassified $170 million from our data hosting segment to our business segment compared to the amounts disclosed in our prior 2013 quarterly reports. We determined that there was an error in the calculation used to reallocate goodwill related to our January 3, 2013 segment reorganization and we have revised our goodwill allocation relative to the fair values reflective of the segment changes at that date. This revision does not change the total amount of goodwill recorded on our consolidated balance sheet as of any prior period and would not have resulted in an impairment in a prior period.
 
 
As of
January 3, 2013
 
 
(Dollars in millions)
Consumer
 
$
10,379

Business
 
6,413

Wholesale
 
3,283

Data hosting
 
1,657

Total goodwill
 
$
21,732

For additional information on the reorganization of our segments, see Note 8—Segment Information.
We test our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our testing determines the recorded amount of goodwill exceeds the fair value. Our annual measurement date for testing goodwill impairment is September 30, at which date we test our reporting units, which are our four operating segments (consumer, business, wholesale and data hosting).
Our reporting units, which we refer to as our segments, are not discrete legal entities with discrete financial statements. Our assets and liabilities are employed in and relate to the operations of multiple reporting units. For each segment, we compare its estimated fair value to the carrying value of the assets that we attribute to the segment. If the estimated fair value of the segment is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the segment is less than the carrying value, a second calculation is required in which the implied fair value of goodwill is compared to the carrying value of goodwill that we attribute to the segment. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value.
At September 30, 2013, as a result of the January 2013 internal reorganization of our four segments, we did not have a baseline valuation upon which to perform a qualitative assessment. Additionally, our stock price and total company forecasted cash flows declined since our previous quantitative assessment. Therefore, we are in the process of completing our goodwill impairment testing by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the segments beyond the cash flows from the discrete projection period.
We have not yet completed our impairment testing. However, based on our analysis performed thus far with respect to these segments as described above, we believe that the goodwill related to the wholesale, consumer and business segments was not impaired as of September 30, 2013, but we believe that the goodwill for the data hosting segment was impaired as of September 30, 2013. The data hosting segment is experiencing slower than previously projected revenue and margin growth and greater than anticipated competitive pressures. As a result, we have estimated that the fair value of our data hosting segment is less than its carrying value.
We have not finalized our impairment estimate for the data hosting segment due to the limited time period from the testing date to the filing date for this report, as well as the time required to estimate the fair values of certain assets and liabilities for this segment. Although our analysis is incomplete, we recorded our best estimate of a non-cash, non-tax-deductible goodwill impairment charge of $1.1 billion during the third quarter of 2013 for goodwill attributed to our data hosting segment. We expect to complete our impairment analysis prior to reporting our financial results for the fourth quarter of 2013 and will record an adjustment, which could be material, to our preliminary estimate at that time.

9


As of September 30, 2013, we attributed our aggregate goodwill balance, after recording the above-described impairment to our data hosting segment, to our four segments as follows:
 
 
As of
September 30, 2013
 
 
(Dollars in millions)
Consumer
 
$
10,379

Business
 
6,413

Wholesale
 
3,283

Data hosting (1)
 
562

Total goodwill
 
$
20,637

_______________________________________________________________________________
(1) Data hosting includes an adjustment to goodwill for an immaterial acquisition in the second quarter of 2013.
 (3) Long-Term Debt and Credit Facilities
Long-term debt, including unamortized discounts and premiums, is as follows:
 
Interest Rates
 
Maturities
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
(Dollars in millions)
CenturyLink, Inc.
 
 
 
 
 
 
 
Senior notes
5.000% - 7.650%
 
2015 - 2042
 
$
7,075

 
6,250

Credit facility(1)
4.250%
 
2017
 
200

 
820

Term loan
2.430%
 
2019
 
407

 
424

Subsidiaries
 
 
 
 
 
 
 
Qwest
 
 
 
 
 
 
 
Senior notes
6.125% - 8.375%
 
2014 - 2053
 
9,192

 
9,168

Embarq
 
 
 
 
 
 
 
Senior notes
7.082% - 7.995%
 
2016 - 2036
 
2,669

 
2,669

First mortgage bonds
7.125% - 8.770%
 
2014 - 2025
 
262

 
322

Other
9.000%
 
2019
 
150

 
200

Capital lease and other obligations
Various
 
Various
 
653

 
734

Unamortized (discounts) premiums and other, net
 
 
 
 
(26
)
 
18

Total long-term debt
 
 
 
 
20,582

 
20,605

Less current maturities
 
 
 
 
(191
)
 
(1,205
)
Long-term debt, excluding current maturities
 
 
 
 
$
20,391

 
19,400

______________________________________________________________________________ 
(1) 
The outstanding amount of our Credit Facility borrowings at September 30, 2013 was $200 million with an interest rate of 4.250%. These amounts change on a regular basis.
New Issuances
On May 23, 2013, Qwest Corporation ("QC") issued $775 million aggregate principal amount of 6.125% Notes due 2053, including $25 million principal amount that was sold pursuant to an over-allotment option granted to the underwriters for the offering, in exchange for net proceeds, after deducting underwriting discounts and expenses, of approximately $752 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after June 1, 2018 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
On March 21, 2013, CenturyLink, Inc. issued $1 billion aggregate principal amount of 5.625% Notes due 2020 in exchange for net proceeds, after deducting underwriting discounts and expenses, of approximately $988 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, at any time at a redemption price equal to the greater of par or

10


a "make-whole" rate specified in the Notes, plus accrued and unpaid interest to the redemption date. In addition, at any time on or prior to April 1, 2016, we may redeem up to 35% of the principal amount of the Notes at a redemption price equal to 105.625% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings. Under certain circumstances, we will be required to make an offer to repurchase the Notes at a price of 101% of their aggregate principal amount plus accrued and unpaid interest to the repurchase date.
Repayments
On August 15, 2013, a subsidiary of Embarq Corporation ("Embarq") paid at maturity the $50 million principal amount of its 6.75% Notes.
On July 15, 2013, a subsidiary of Embarq paid at maturity the $59 million principal amount of its 6.875% Notes.
On June 17, 2013, QC paid at maturity the $750 million principal amount of its floating rate Notes.
On April 1, 2013, CenturyLink, Inc. paid at maturity the $176 million principal amount of its 5.50% Notes.
Covenants
As of September 30, 2013, we believe we were in compliance with the provisions and covenants contained in our Credit Facility and other debt agreements.
(4)   Severance and Leased Real Estate
Periodically, we have reductions in our workforce and have accrued liabilities for the related severance costs. These workforce reductions resulted primarily from the progression or completion of our integration plans, increased competitive pressures and reduced workload demands due to the loss of access lines.
We report severance liabilities within accrued expenses and other liabilities-salaries and benefits in our consolidated balance sheets and report severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations. We have not allocated any severance expense to our consumer, business and wholesale segments.
We report the current portion of liabilities for real estate leases that we have ceased using in accrued expenses and other liabilities and report the noncurrent portion in other noncurrent liabilities under deferred credits and other liabilities in our consolidated balance sheets. We report the related expenses in selling, general and administrative expenses in our consolidated statements of operations. At September 30, 2013, the current and noncurrent portions of our leased real estate accrual were $18 million and $99 million, respectively. The remaining lease terms range from 0.3 to 12.3 years, with a weighted average of 8.7 years.
Changes in our accrued liabilities for severance expenses and leased real estate were as follows:
 
Severance
 
Real Estate
 
(Dollars in millions)
Balance at December 31, 2012
$
17

 
131

Accrued to expense
17

 

Payments, net
(23
)
 
(12
)
Reversals and adjustments

 
(2
)
Balance at September 30, 2013
$
11

 
117


11


(5)   Employee Benefits
Net periodic pension benefit expense (income) included the following components:
 
Pension Plans
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
Service cost
$
22

 
23

 
70

 
68

Interest cost
137

 
156

 
407

 
468

Expected return on plan assets
(224
)
 
(212
)
 
(672
)
 
(636
)
Recognition of prior service cost
1

 
1

 
4

 
3

Recognition of actuarial loss
20

 
7

 
61

 
22

Net periodic pension benefit expense (income)
$
(44
)
 
(25
)
 
(130
)
 
(75
)
Net periodic post-retirement benefit expense (income) included the following components:
 
Post-Retirement Benefit Plans
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
Service cost
$
6

 
5

 
18

 
16

Interest cost
35

 
44

 
105

 
131

Expected return on plan assets
(10
)
 
(11
)
 
(30
)
 
(33
)
Recognition of actuarial loss
1

 

 
3

 

Net periodic post-retirement benefit expense (income)
$
32

 
38

 
96

 
114

We report net periodic benefit expense (income) for our qualified pension, non-qualified pension and post-retirement benefit plans in cost of services and products and selling, general and administrative expenses on our consolidated statements of operations.

12


(6)   (Loss) Earnings per Common Share
Basic and diluted (loss) earnings per common share for the three and nine months ended September 30, 2013 and 2012 were calculated as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions, except per share amounts, shares in thousands)
(Loss) Income (Numerator):
 
 
 
 
 
 
 
Net (loss) income
$
(1,045
)
 
270

 
(478
)
 
544

Earnings applicable to non-vested restricted stock

 

 

 
(1
)
Net (loss) income applicable to common stock for computing basic (loss) earnings per common share
(1,045
)
 
270

 
(478
)
 
543

Net (loss) income as adjusted for purposes of computing diluted (loss) earnings per common share
$
(1,045
)
 
270

 
(478
)
 
543

Shares (Denominator):
 
 
 
 
 
 
 
Weighted average number of shares:
 
 
 
 
 
 
 
Outstanding during period
598,350

 
622,769

 
609,542

 
621,370

Non-vested restricted stock
(3,763
)
 
(2,541
)
 
(3,438
)
 
(2,582
)
Non-vested restricted stock units

 
920

 

 
960

Weighted average shares outstanding for computing basic (loss) earnings per common share
594,587

 
621,148

 
606,104

 
619,748

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

 
13

 

 
13

Shares issuable under incentive compensation plans

 
2,135

 

 
2,067

Number of shares as adjusted for purposes of computing diluted (loss) earnings per common share
594,587

 
623,296

 
606,104

 
621,828

Basic (loss) earnings per common share
$
(1.76
)
 
0.43

 
(0.79
)
 
0.88

Diluted (loss) earnings per common share (1)
$
(1.76
)
 
0.43

 
(0.79
)
 
0.87

______________________________________________________________________ 
(1) For the three and nine months ended September 30, 2013, we excluded from the calculation of diluted loss per share 1.16 million shares and 1.37 million shares, respectively, potentially issuable under incentive compensation plans or convertible securities, as their effect, if included, would have been anti-dilutive.
Our calculation of diluted (loss) 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 during the period. Such potentially issuable shares totaled 2.7 million and 2.0 million for the three months ended September 30, 2013 and 2012, respectively, and 2.5 million and 2.2 million for the nine months ended September 30, 2013 and 2012.
(7)   Fair Value Disclosure
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt, excluding capital lease obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable and accounts payable approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of

13


unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the Financial Accounting Standards Board ("FASB").
We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
Input Level
 
    Description of Input
Level 1
 
Observable inputs such as quoted market prices in active markets.
Level 2
 
Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3
 
Unobservable inputs in which little or no market data exists.
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease obligations, as well as the input level used to determine the fair values:
 
 
 
September 30, 2013
 
December 31, 2012
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(Dollars in millions)
 
 
Liabilities—Long-term debt, excluding capital lease obligations
2
 
$
19,929

 
20,124

 
19,871

 
21,457

(8)   Segment Information
During the first quarter of 2013, we announced a reorganization of our operating segments. Consequently, since the first quarter of 2013, we have reported the following four segments in our consolidated financial statements: consumer, business, wholesale and data hosting. The primary purpose of the reorganization was to strengthen our focus on the business market while continuing our commitment to our wholesale, hosting and consumer customers. The reorganization combined business sales and operations functions that formerly resided in the enterprise markets—network segment and the regional markets segment into the new unified business segment. The remaining customers formerly serviced by the regional markets segment became the new consumer segment. Each of the current segments are described further below:
Consumer. Consists generally of providing strategic and legacy products and services to residential consumers. Our strategic products and services offered to these customers include our broadband, wireless and video services, including our Prism TV services. Our legacy services offered to these customers include local and long-distance service.
Business. Consists generally of providing strategic and legacy products and services to commercial, enterprise, global and governmental customers. Our strategic products and services offered to these customers include our private line, broadband, Ethernet, Multiprotocol Label Switching ("MPLS"), Voice over Internet Protocol ("VoIP"), and network management services. Our legacy services offered to these customers include local and long-distance service.
Wholesale. Consists generally of providing strategic and legacy products and services to other communications providers. Our strategic products and services offered to these customers are mainly private line (including special access), dedicated internet access, digital subscriber line ("DSL") and MPLS. Our legacy services offered to these customers include resale of our services, unbundled network elements ("UNEs") which allow our wholesale customers the use of our network or a combination of our network and their own networks to provide voice and data services to their customers, long-distance and switched access services and other services, including billing and collection, pole rental, floor space and database services.
Data hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to commercial, enterprise, global and governmental customers.

14


We have restated previously reported segment results for the three and nine months ended September 30, 2012, due to the above-described restructuring of our business. Segment results are summarized below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
Total segment revenues
$
4,267

 
4,314

 
12,799

 
13,004

Total segment expenses
2,105

 
2,071

 
6,112

 
6,154

Total segment income
$
2,162

 
2,243

 
6,687

 
6,850

Total margin percentage
50.7
%
 
52.0
%
 
52.2
%
 
52.7
%
Consumer:
 
 
 
 
 
 
 
Revenues
$
1,503

 
1,536

 
4,508

 
4,640

Expenses
580

 
585

 
1,657

 
1,720

Income
$
923

 
951

 
2,851

 
2,920

Margin percentage
61.4
%
 
61.9
%
 
63.2
%
 
62.9
%
Business:
 
 
 
 
 
 
 
Revenues
$
1,544

 
1,541

 
4,573

 
4,586

Expenses
958

 
936

 
2,776

 
2,789

Income
$
586

 
605

 
1,797

 
1,797

Margin percentage
38.0
%
 
39.3
%
 
39.3
%
 
39.2
%
Wholesale:
 
 
 
 
 
 
 
Revenues
$
878

 
910

 
2,695

 
2,818

Expenses
293

 
304

 
868

 
929

Income
$
585

 
606

 
1,827

 
1,889

Margin percentage
66.6
%
 
66.6
%
 
67.8
%
 
67.0
%
Data hosting:
 
 
 
 
 
 
 
Revenues
$
342

 
327

 
1,023

 
960

Expenses
274

 
246

 
811

 
716

Income
$
68

 
81

 
212

 
244

Margin percentage
19.9
%
 
24.8
%
 
20.7
%
 
25.4
%
We categorize our products and services into the following four categories:
Strategic services, which include primarily broadband, private line (including special access which we market to wholesale and business customers), MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including resold satellite and our facilities-based video services), VoIP and Verizon Wireless services;
Legacy services, which include primarily local, long-distance, switched access, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations);
Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers; and
Other revenues, which consist primarily of Universal Service Fund ("USF") revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues.

15


Our operating revenues for our products and services consisted of the following categories:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
Strategic services
$
2,189

 
2,101

 
6,495

 
6,237

Legacy services
1,915

 
2,045

 
5,834

 
6,284

Data integration
163

 
168

 
470

 
483

Other
248

 
257

 
754

 
789

Total operating revenues
$
4,515

 
4,571

 
13,553

 
13,793

Other operating revenues include revenues from universal service funds which allow us to recover a portion of our costs under federal and state cost recovery mechanisms and certain surcharges to our customers, including billings for our required contributions to several USF programs. These surcharge billings to our customers are reflected on a gross basis in our statements of operations (included in equal amounts in both operating revenues and expenses) and aggregated approximately $368 million and $398 million for the nine months ended September 30, 2013 and 2012, respectively. We also generate other operating revenues from leasing and subleasing of space in our office buildings, warehouses and other properties. We centrally manage the activities that generate these other operating revenues and consequently these revenues are not included in any of our four segments presented in the segment results table above.
Our segment revenues include all revenues from our strategic, legacy and data integration operations as described in more detail above. Segment revenues are based upon each customer's classification to an individual segment. We report our segment revenues based upon all services provided to that segment's customers, with the exception of data hosting revenue generated from business and wholesale customers, which is reported as data hosting segment revenues. We report our segment expenses for our four segments as follows:
Direct expenses, which primarily are specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities; and
Allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses.
We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed. Similarly, severance expenses, restructuring expenses and, subject to an exception for our data hosting segment, 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 total company basis and have not allocated assets or debt to specific segments. Other income (expense) does not relate to our segment operations and is therefore excluded from our segment results. In addition, our assets and capital expenditures are not monitored by or reported to the chief operating decision maker ("CODM") by segment.
The following table reconciles segment income to net (loss) income:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
Total segment income
$
2,162

 
2,243

 
6,687

 
6,850

Other operating revenues
248

 
257

 
754

 
789

Depreciation and amortization
(1,135
)
 
(1,144
)
 
(3,375
)
 
(3,560
)
Impairment of goodwill (Note 2)
(1,100
)
 

 
(1,100
)
 

Other unassigned operating expenses
(860
)
 
(620
)
 
(2,154
)
 
(2,032
)
Other income (expense), net
(320
)
 
(314
)
 
(918
)
 
(1,171
)
Income tax expense
(40
)
 
(152
)
 
(372
)
 
(332
)
Net (loss) income
$
(1,045
)
 
270

 
(478
)
 
544


16


(9)   Commitments and Contingencies
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. Until and unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent.
We have established accrued liabilities only for the matters described below where losses are deemed probable and reasonably estimable.
We are vigorously defending against all of the matters described below. As a matter of course, we are prepared both to litigate the matters to judgment, as well as to evaluate and consider all settlement opportunities.
Litigation Matters Relating to CenturyLink and Embarq
In December 2009, subsidiaries of CenturyLink filed two lawsuits against subsidiaries of Sprint Nextel to recover terminating access charges for VoIP traffic owed under various interconnection agreements and tariffs which presently approximate $34 million in the aggregate. The lawsuits allege that Sprint Nextel has breached contracts, violated tariffs, and violated the Federal Communications Act by failing to pay these charges. One lawsuit, filed on behalf of all legacy Embarq operating entities, was tried in federal court in Virginia in August 2010 and, in March 2011, a ruling was issued in our favor and against Sprint Nextel. That ruling was affirmed on appeal, and Sprint's petition for further review by the U.S. Supreme Court has been denied. As a result, this lawsuit is concluded and, as of September 30, 2013, Sprint has paid us approximately $24 million in connection with this lawsuit. The other lawsuit, filed on behalf of all Legacy CenturyLink operating entities, is pending in federal court in Louisiana. In that case, in early 2011 the Court dismissed certain of CenturyLink's claims, referred other claims to the FCC, and stayed the litigation. In April 2012, Sprint Nextel filed a petition with the FCC, seeking a declaratory ruling that CenturyLink's access charges do not apply to VoIP originated calls. We have not deferred revenue related to these matters because we do not believe an adverse outcome is probable based upon current circumstances.
In William Douglas Fulghum, et al. v. Embarq Corporation, et al., filed on December 28, 2007 in the United States District Court for the District of Kansas, a group of retirees filed a putative class action lawsuit challenging the decision to make certain modifications in retiree benefits programs relating to life insurance, medical insurance and prescription drug benefits, generally effective January 1, 2006 and January 1, 2008 (which, at the time of the modifications, was expected to reduce estimated future expenses for the subject benefits by more than $300 million). Defendants include Embarq, certain of its benefit plans, its Employee Benefits Committee and the individual plan administrator of certain of its benefits plans. Additional defendants include Sprint Nextel and certain of its benefit plans. The Court certified a class on certain of plaintiffs' claims, but rejected class certification as to other claims. Embarq and other defendants continue to vigorously contest these claims and charges. On October 14, 2011, the Fulghum lawyers filed a new, related lawsuit, Abbott et al. v. Sprint Nextel et al. CenturyLink/Embarq is not named a defendant in the lawsuit. In Abbott, approximately 1,500 plaintiffs allege breach of fiduciary duty in connection with the changes in retiree benefits that also are at issue in the Fulghum case. The Abbott plaintiffs are all members of the class that was certified in Fulghum on claims for allegedly vested benefits (Counts I and III), and the Abbott claims are similar to the Fulghum breach of fiduciary duty claim (Count II), on which the Fulghum court denied class certification. The Court has stayed proceedings in Abbott indefinitely. On February 14, 2013, the Fulghum court dismissed the majority of the plaintiffs' claims in that case. On July 16, 2013, the Fulghum court granted plaintiffs' request to seek interlocutory review by the United States Court of Appeals for the Tenth Circuit. Embarq and the other defendants will defend the appeal, continue to vigorously contest any remaining claims in Fulghum and seek to have the claims in the Abbott case dismissed on similar grounds. We have not accrued a liability for these matters because we believe it is premature (i) to determine whether an accrual is warranted and, (ii) if so, to determine a reasonable estimate of probable liability.
Litigation Matters Relating to Qwest
On July 16, 2013, Comcast MO Group, Inc. ("Comcast") filed a lawsuit in Colorado state court against Qwest Communications International, Inc. ("Qwest"). Comcast alleges Qwest breached the parties' 1998 tax sharing agreement ("TSA") when it refused to partially indemnify Comcast for a tax liability settlement Comcast reached with the Commonwealth of Massachusetts in a dispute to which we were not a party. Comcast seeks approximately $80 million in damages, excluding interest. Qwest and Comcast are parties to the TSA in their capacities as successors to the TSA's original parties, U S WEST, Inc., a telecommunications company, and MediaOne Group, Inc., a cable television company, respectively. We have not accrued a liability for this matter because we do not believe that liability is probable.
On September 29, 2010, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which Qwest was a major shareholder) filed a lawsuit in the District Court of Haarlem, the Netherlands, alleging tort and mismanagement claims under Dutch law. Qwest and Koninklijke KPN N.V. ("KPN") are defendants in this lawsuit along with a number of former KPNQwest supervisory board members and a former officer of KPNQwest, some of whom were formerly affiliated with

17


Qwest. Plaintiffs allege, among other things, that defendants' actions were a cause of the bankruptcy of KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest, which is claimed to be approximately €4.2 billion (or approximately $5.7 billion based on the exchange rate on September 30, 2013), plus statutory interest. Two lawsuits asserting similar claims were previously filed against Qwest and others in federal courts in New Jersey in 2004 and Colorado in 2009; those courts dismissed the lawsuits without prejudice on the grounds that the claims should not be litigated in the United States.
In October 2013 following a confidential mediation, Qwest, KPN, and the trustees reached a tentative oral agreement on the principal financial terms of a potential settlement. The potential settlement terms include Qwest's payment of €172 million (or approximately $233 million based on the exchange rate on September 30, 2013) to the KPNQwest bankruptcy estate pursuant to its indemnification obligations, discussed below. The tentative settlement is subject to several conditions, including the negotiation and execution of a definitive settlement agreement acceptable to the plaintiffs and various other defendants and the approval of the Dutch bankruptcy court.
On September 13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, the Netherlands, against Qwest, KPN, KPN Telecom B.V., and other former officers, employees or supervisory board members of KPNQwest, some of whom were formerly affiliated with Qwest. The lawsuit alleges that defendants misrepresented KPNQwest's financial and business condition in connection with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately €219 million (or approximately $296 million based on the exchange rate on September 30, 2013). The value of this claim will be reduced to the degree plaintiffs receive recovery from the tentative trustee settlement described above. While we expect the plaintiffs would receive proceeds from any such trustee settlement, the amounts of such expected recovery are not yet known. On April 25, 2012, the court issued its judgment denying the claims asserted by Cargill and Citibank in their lawsuit. Cargill and Citibank are appealing that decision.
Regarding the 2010 proceeding filed by the trustees, we have accrued a liability in the third quarter of 2013 in the pre-tax amount of €172 million (or approximately $233 million reflected in our accompanying consolidated financial statements based on the exchange rate on September 30, 2013) which equals Qwest's proposed contribution under the terms of the tentative settlement. In the event that a settlement is not finalized, we will continue to defend against the matter vigorously. Regarding the 2006 suit brought by Cargill Financial Markets, Plc and Citibank. N.A., we do not believe that liability is probable and will continue to defend against the matter vigorously.
The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate Qwest to indemnify its former directors, officers or employees with respect to certain of the matters described above, and Qwest has been advancing legal fees and costs to certain former directors, officers or employees in connection with certain matters described above.
Several putative class actions relating to the installation of fiber optic cable in certain rights-of-way were filed against Qwest on behalf of landowners on various dates and in courts located in 34 states in which Qwest has such cable (Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, and Wisconsin.) For the most part, the complaints challenge our right to install our fiber optic cable in railroad rights-of-way. The complaints allege that the railroads own the right-of-way as an easement that did not include the right to permit us to install our cable in the right-of-way without the plaintiffs' consent. Most of the currently pending actions purport to be brought on behalf of state-wide classes in the named plaintiffs' respective states, although one action pending before the Illinois Court of Appeals purports to be brought on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. In general, the complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. After previous attempts to enter into a single nationwide settlement in a single court proved unsuccessful, the parties proceeded to seek court approval of settlements on a state-by-state basis. To date, the parties have received final approval of such settlements in 29 states (Alabama, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia and Wisconsin), have received only preliminary approval of the settlement in one state (Kentucky), and have not yet received either preliminary or final approval in one state where an action is pending (Texas) and three states where actions were at one time, but are not currently, pending (Arizona, Massachusetts, and New Mexico). We have accrued an amount that we believe is probable for these matters; however, the amount is not material to our consolidated financial statements.
Securities Actions
CenturyLink and certain of its affiliates are defendants in two securities and four shareholder derivative actions. The securities actions are pending in federal court in the Southern District of New York and the derivative actions are pending in

18


federal court in the Eastern and Western Districts of Louisiana, and Louisiana state court. Plaintiffs in these actions have variously alleged, among other things, that CenturyLink and certain of its current and former officers and directors violated federal securities laws and/or breached fiduciary duties owed to the Company and its shareholders. Plaintiffs' complaints focus on alleged material misstatements or omissions concerning CenturyLink's financial condition and changes in CenturyLink's capital allocation strategy in early 2013.
The matters are in preliminary phases and the Company intends to defend against the filed actions vigorously. We have not accrued a liability for these matters as it is premature (i) to determine whether an accrual is warranted and (ii) if so, to determine a reasonable estimate of probable liability.
Other Matters
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to rate making, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies, and miscellaneous third party tort actions. The outcome of these other proceedings is not predictable. However, based on current circumstances we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and insurance coverage, will have a material adverse effect on our financial position, results of operations or cash flows.
(10) Other Financial Information
Other Current Assets
Other current assets reflected on our consolidated balance sheets consisted of the following:
 
September 30, 2013
 
December 31, 2012
 
(Dollars in millions)
Prepaid expenses
$
277

 
257

Materials, supplies and inventory
172

 
125

Assets held for sale

 
96

Deferred activation and installation charges
69

 
53

Other
45

 
21

Total other current assets
$
563

 
552

In January 2013, we sold $43 million of our wireless spectrum assets held for sale. The sale resulted in a gain of $32 million, which is recorded as other income on our consolidated statements of operations. During the quarter ended June 30, 2013, we reclassified our remaining $53 million of wireless spectrum assets from held for sale to other intangible assets on our consolidated balance sheet. Although we continue to pursue selling our remaining spectrum assets, we no longer expect to reach agreements with purchasers within the coming twelve months.
Selected Current Liabilities
Current liabilities reflected in our consolidated balance sheets include accounts payable and other current liabilities as follows:
 
September 30, 2013
 
December 31, 2012
 
(Dollars in millions)
Accounts payable
$
1,158

 
1,207

Other current liabilities:
 
 
 
Accrued rent
$
46

 
48

Legal reserves
266

 
39

Unsettled repurchased common shares
18

 

Other
168

 
147

Total other current liabilities
$
498

 
234


19


We had approximately $132 million and $132 million in book overdrafts included in accounts payable at September 30, 2013 and December 31, 2012, respectively.
(11) Labor Union Contracts
Approximately 37% of our employees are members of various bargaining units represented by the Communications Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). Approximately 12,000, or 26%, of our employees are subject to collective bargaining agreements that expired October 6, 2012, and an additional 1,600 or 4% of our employees are subject to additional collective bargaining agreement that have expired since then. Since the expirations, we have been negotiating the terms of new agreements. Recently, we reached conditional agreements with CWA District 7 and IBEW Local 206 for a four-year collective bargaining agreement covering approximately 12,000 of our employees. After rejecting the initial agreements, the CWA and IBEW members approved the second agreements, and they became effective on October 25, 2013. The new agreements will expire on October 7, 2017.
(12) Repurchase of CenturyLink Common Stock
In February 2013, the board of directors authorized us to repurchase up to $2 billion of our outstanding common stock. During the nine months ended September 30, 2013, we repurchased 35.2 million shares of our outstanding common stock in the open market. These shares were repurchased for an aggregate market price of $1.24 billion, or an average purchase price of $35.09 per share. The repurchased common stock has been retired. As of September 30, 2013, we had approximately $764 million in stock remaining available for repurchase under the Stock Repurchase Program. The figures set forth above exclude shares that, as of September 30, 2013, we had agreed to purchase under the program for $18 million, or an average purchase price of $31.76 per share, in transactions that settled early in the fourth quarter of 2013.
(13) Other Comprehensive Earnings
The tables below summarize changes in our accumulated other comprehensive income (loss) recorded on our consolidated balance sheet by component for the three and nine months ended September 30, 2013, respectively:
 
Pension Plans
 
Post-Retirement
Benefit Plans
 
Foreign Currency
Translation
Adjustment
and Other
 
Total
 
(Dollars in millions)
Balance at June 30, 2013
$
(1,372
)
 
(288
)
 
(27
)
 
(1,687
)
Other comprehensive (loss) income before reclassifications

 

 
13

 
13

Amounts reclassified from accumulated other comprehensive income
13

 
1

 

 
14

Net current-period other comprehensive income (loss)
13

 
1

 
13

 
27

Balance at September 30, 2013
$
(1,359
)
 
(287
)
 
(14
)
 
(1,660
)
 
Pension Plans
 
Post-Retirement
Benefit Plans
 
Foreign Currency
Translation
Adjustment
and Other
 
Total
 
(Dollars in millions)
Balance at December 31, 2012
$
(1,399
)
 
(289
)
 
(13
)
 
(1,701
)
Other comprehensive (loss) income before reclassifications

 

 
(1
)
 
(1
)
Amounts reclassified from accumulated other comprehensive income
40

 
2

 

 
42

Net current-period other comprehensive income (loss)
40

 
2

 
(1
)
 
41

Balance at September 30, 2013
$
(1,359
)
 
(287
)
 
(14
)
 
(1,660
)

20


The tables below present information about our reclassifications out of accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2013, respectively:
Three Months Ended September 30, 2013
 
Decrease (Increase)
in Net Loss
 
Affected Line Item in Consolidated Statement of
Operations or Footnote Where Additional
Information is Presented If The Amount is not
Recognized in Net Income in Total
 
 
(Dollars in millions)
 
 
Amortization of pension & post-retirement plans
 
 
 
 
Net actuarial loss
 
$
(21
)
 
See Note 5-Employee Benefits
Prior service cost
 
(1
)
 
See Note 5-Employee Benefits
Total before tax
 
(22
)
 
 
Income tax expense (benefit)
 
8

 
Income tax expense
Net of tax
 
$
(14
)
 
 

Nine Months Ended September 30, 2013
 
Decrease (Increase)
in Net Loss
 
Affected Line Item in Consolidated Statement of
Operations or Footnote Where Additional
Information is Presented If The Amount is not
Recognized in Net Income in Total
 
 
(Dollars in millions)
 
 
Amortization of pension & post-retirement plans
 
 
 
 
Net actuarial loss
 
$
(64
)
 
See Note 5-Employee Benefits
Prior service cost
 
(4
)
 
See Note 5-Employee Benefits
Total before tax
 
(68
)
 
 
Income tax expense (benefit)
 
26

 
Income tax expense
Net of tax
 
$
(42
)
 
 


21


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries.
All references to "Notes" in this Item 2 refer to the Notes to Consolidated Financial Statements included in Item 1 of this report.
Certain statements in this report constitute forward-looking statements. See the last paragraph of this Item 2 and "Risk Factors" in Item 1A of Part II of this report for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects.
Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2012, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year.
We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line (including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless, and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security monitoring. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.
At September 30, 2013, we operated 13.2 million access lines in 37 states, served approximately 5.9 million broadband subscribers, and operated 55 data centers throughout North America, Europe and Asia. Our methodology for counting access lines may not be comparable to those of other companies.
During the first quarter of 2013, we announced a reorganization of our operating segments. Consequently, we now report the following four segments in our consolidated financial statements:
Consumer. Consists generally of providing strategic and legacy products and services to residential consumers. Our strategic products and services offered to these customers include our broadband, wireless and video services, including our Prism TV services. Our legacy services offered to these customers include local and long-distance service;

Business. Consists generally of providing strategic and legacy products and services to commercial, enterprise, global and governmental customers. Our strategic products and services offered to these customers include our private line, broadband, Ethernet, Multiprotocol Label Switching ("MPLS"), Voice over Internet Protocol ("VoIP"), and network management services. Our legacy services offered to these customers include local and long-distance service;

Wholesale. Consists generally of providing strategic and legacy products and services to other communications providers. Our strategic products and services offered to these customers are mainly private line (including special access), dedicated internet access, digital subscriber line ("DSL") and MPLS. Our legacy services offered to these customers include resale of our services, unbundled network elements ("UNEs") which allow our wholesale customers the use of our network or a combination of our network and their own networks to provide voice and data services to their customers, long-distance and switched access services and other services, including billing and collection, pole rental, floor space and database services; and

Data hosting. Consists primarily of providing colocation, managed hosting and cloud hosting services to commercial, enterprise, global and governmental customers.
Our segment information does not include capital expenditures, total assets, or certain revenues and expenses that we manage on a centralized basis and are only reviewed by our chief operating decision maker ("CODM") on a consolidated basis. Our segment results are not necessarily indicative of the results of operations that our segments would have achieved had they operated as stand-alone entities during the periods presented. For additional information about our segments, see Note 8—

22


Segment Information to our consolidated financial statements in Item 1 of Part I of this report and "Results of Operations—Segment Results" below.
Results of Operations
The following table summarizes the results of our consolidated operations for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions except per share amounts)
Operating revenues
$
4,515

 
4,571

 
13,553

 
13,793

Operating expenses
5,200

 
3,835

 
12,741

 
11,746

Operating (loss) income
(685
)
 
736

 
812

 
2,047

Other income (expense)
(320
)
 
(314
)
 
(918
)
 
(1,171
)
Income tax expense
40

 
152

 
372

 
332

Net (loss) income
$
(1,045
)
 
270

 
(478
)
 
544

Basic (loss) earnings per common share
$
(1.76
)
 
0.43

 
(0.79
)
 
0.88

Diluted (loss) earnings per common share
$
(1.76
)
 
0.43

 
(0.79
)
 
0.87

The following table summarizes certain of our selected operational metrics:
 
As of September 30,
 
 
 
 
 
Increase /
(Decrease)
 
% Change
 
2013
 
2012(1)
 
 
(in thousands)
 
 
 
 
Broadband subscribers(1)
5,942

 
5,810

 
132

 
2.3
 %
Access lines(1)
13,150

 
13,950

 
(800
)
 
(5.7
)%
Employees
46.7

 
46.5

 
0.2
 
0.4
 %
______________________________________________________________________ 
(1) The prior year numbers have been adjusted to include the operational metrics of our wholly owned subsidiary, El Paso County Telephone Company, which had been previously excluded. The increase (in thousands) related to Broadband subscribers and Access lines attributable to El Paso County Telephone Company's inclusion is approximately 3 and 4, respectively.
During the last several years, we have experienced revenue declines (excluding the impact of acquisitions) primarily due to declines in access lines, intrastate access rates and minutes of use. To mitigate these declines, we remain focused on efforts to, among other things:
promote long-term relationships with our customers through bundling of integrated services;
provide new services, such as video, cloud hosting, managed hosting, colocation and other additional services that may become available in the future due to, among other things, advances in technology or improvements in our infrastructure;
provide our broadband and premium services to a higher percentage of our customers;
pursue acquisitions of additional assets if available at attractive prices;
increase usage of our networks; and
market our products and services to new customers.

23


Operating Revenues
We currently categorize our products, services and revenues among the following four categories:
Strategic services, which include primarily broadband, private line (including special access, which we market to wholesale and business customers), MPLS (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including our facilities-based video services, which we now offer in twelve markets, and our resold satellite), VoIP and Verizon Wireless services;
Legacy services, which include primarily local, long-distance, switched access, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations);
Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers; and
Other revenues, which consists primarily of USF revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues.
The following tables summarize our operating revenues under our current revenue categorization:
 
Three Months Ended September 30,
 
 
 
 
 
Increase /
(Decrease)
 
% Change 
 
2013
 
2012
 
 
(Dollars in millions)
Strategic services
$
2,189

 
2,101

 
88

 
4
 %
Legacy services
1,915

 
2,045

 
(130
)
 
(6
)%
Data integration
163

 
168

 
(5
)
 
(3
)%
Other
248

 
257

 
(9
)
 
(4
)%
Total operating revenues
$
4,515

 
4,571

 
(56
)
 
(1
)%

 
Nine Months Ended September 30,
 
 
 
 
 
Increase /
(Decrease)
 
% Change 
 
2013
 
2012
 
 
(Dollars in millions)
Strategic services
$
6,495

 
6,237

 
258

 
4
 %
Legacy services
5,834

 
6,284

 
(450
)
 
(7
)%
Data integration
470

 
483

 
(13
)
 
(3
)%
Other
754

 
789

 
(35
)
 
(4
)%
Total operating revenues
$
13,553

 
13,793

 
(240
)
 
(2
)%
Operating revenues decreased $56 million and $240 million, or 1% and 2%, during the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012. This decrease was primarily attributable to declines in legacy services revenues, which reflected the continuing loss of access lines, loss of access associated with internet substitution and wireless substitution in our markets. We believe the decline in the number of access lines was primarily due to the displacement of traditional wireline telephone services by other competitive products and services. We estimate that our access lines loss will be between 5.7% and 6.1% in 2013. Our legacy services revenues were also negatively impacted in 2013 by the continued migration of customers to bundled service offerings at lower effective rates. The decreases in our legacy services revenues were partially offset by higher revenues from strategic services revenues. Growth in our broadband, Ethernet, MPLS, facilities-based video and colocation customers accounted for a majority of the growth in strategic services revenues.
Further analysis of our operating revenues by segment is provided below in "Segment Results."


24


Operating Expenses
Our operating expenses increased $1,365 million, or 36%, for the three months ended September 30, 2013 as compared to September 30, 2012 and operating expenses increased $995 million, or 8%, for the nine months ended September 30, 2013 as compared to September 30, 2012.
The following tables summarize our operating expenses:
 
Three Months Ended September 30,
 
 
 
 
 
Increase /
(Decrease)
 
% Change 
 
2013
 
2012
 
 
(Dollars in millions)
Cost of services and products (exclusive of depreciation and amortization)
$
1,918

 
1,943

 
(25
)
 
(1
)%
Selling, general and administrative
1,047

 
748

 
299

 
40
 %
Depreciation and amortization
1,135

 
1,144

 
(9
)
 
(1
)%
Impairment of goodwill
1,100

 

 
1,100

 
 %
Total operating expenses
$
5,200

 
3,835

 
1,365

 
36
 %

 
Nine Months Ended September 30,
 
 
 
 
 
Increase /
(Decrease)
 
 % Change
 
2013
 
2012
 
 
(Dollars in millions)
Cost of services and products (exclusive of depreciation and amortization)
$
5,587

 
5,732

 
(145
)
 
(3
)%
Selling, general and administrative
2,679

 
2,454

 
225

 
9
 %
Depreciation and amortization
3,375

 
3,560

 
(185
)
 
(5
)%
Impairment of goodwill
1,100

 

 
1,100

 
 %
Total operating expenses
$
12,741

 
11,746

 
995

 
8
 %
Cost of services and products (exclusive of depreciation and amortization) decreased slightly for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 primarily due to a decrease in real estate and power, maintenance costs and employee benefits costs. These decreases were partially offset by increases in facility cost, network expense and professional fees. Cost of services and products (exclusive of depreciation and amortization) decreased for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 primarily due to decreases in salaries and wages costs associated with the reduction in headcount, reduction in severance costs related to our recent acquisitions, and decreases in employee benefits costs, professional fees, data integration costs and access expenses. The decreases were partially offset by increases in facility cost, network expense and real estate and power cost. We expect our salaries, wages and employee benefits expenses will increase during the remainder of 2013 as we hire additional personnel in connection with our growth initiatives.
Selling, general and administrative expenses increased for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 primarily due to a charge of $233 million in connection with a tentative settlement in a litigation matter. The increase was also attributable to increases in salaries and wages cost, facilities cost, external commission and marketing and advertising costs, which were partially offset by a decrease in professional fees. Selling, general and administrative expenses increased for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 primarily due to the $233 million charge for the above-referenced tentative litigation settlement. The increase was also attributable to increases in professional fees and marketing and advertising costs, which were offset by a reduction in salaries and wages costs associated with the reduction in headcount.
Depreciation expense decreased for the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012 primarily due to depreciation rate changes of certain telecommunications equipment. The rate changes were the result of our aged investment in plant becoming fully depreciated or retired at a faster rate than the acquisition of new plant. Amortization expense decreased for the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012 partially due to the use of accelerated amortization for a

25


portion of the customer relationship assets. In addition, amortization of capitalized software was lower due to our software investments becoming fully amortized faster than new software was acquired.
Goodwill Impairment
During the first quarter of 2013, we reorganized our operating segments to support our new operating structure. Goodwill is reassigned to the segments using a relative fair value allocation approach. We utilize the earnings before interest, tax and depreciation as our allocation methodology as it represents a reasonable proxy for the fair value of the operations being reorganized. For additional information on the first quarter 2013 reorganization of our segments, see Note 8—Segment Information to the consolidated financial statements in Item 1 of Part I of this report.
As of September, 30, 2013, we test our reporting units, which are our four operating segments (consumer, business, wholesale and data hosting) for goodwill impairment and as of the date of this report, we have not yet completed our impairment testing. However, based on our analysis performed thus far with respect to these segments as described above, we believe that the goodwill related to the wholesale, consumer and business segments was not impaired as of September 30, 2013, but we believe that the goodwill for the data hosting segment was impaired as of September 30, 2013. The data hosting segment is experiencing slower than previously projected revenue and margin growth and greater than anticipated competitive pressures. As a result, we have estimated that the fair value of our data hosting segment is less than its carrying value.
We have not finalized our impairment estimate for the data hosting segment due to the limited time period from the testing date to the filing date for this report, as well as the time required to estimate the fair values of certain assets and liabilities for this segment. Although our analysis is incomplete, we recorded our best estimate of a non-cash, non-tax-deductible goodwill impairment charge of $1.1 billion during the third quarter of 2013 for goodwill attributable to our data hosting segment. We expect to complete our impairment analysis prior to reporting our financial results for the fourth quarter of 2013 and will record an adjustment, which could be material, to our preliminary estimate at that time. See Note 2—Goodwill to the consolidated financial statements in Item 1 of part I of this report.
We may be required to assess our goodwill for impairment before our next required testing date of September 30, 2014 under certain circumstances, including any failure of our future operating results to meet forecasted expectations or any significant increases in our weighted average cost of capital. In addition, we cannot assure that adverse conditions will not trigger future goodwill impairment testing or an impairment charge. A number of factors, many of which we have no ability to control, could affect our financial condition, operating results and business prospects and could cause our actual results to differ from the estimates and assumptions we employed in our goodwill impairment testing. These factors include, but are not limited to, (i) further weakening in the overall economy; (ii) a significant decline in our stock price and resulting market capitalization; (iii) changes in the discount rate we use in our testing; (iv) successful efforts by our competitors to gain market share in our markets; (v) adverse changes as a result of regulatory or legislative actions; (vi) a significant adverse change in legal factors or in the overall business climate; and (vii) recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of our segments. For additional information, see "Risk Factors" in Item 1A of Part II of this report. We will continue to monitor certain events that impact our operations to determine if an interim assessment of goodwill impairment should be performed prior to the next required testing date of September 30, 2014.
Further analysis of our operating expenses by segment is provided below in "Segment Results."





26


Other Consolidated Results
The following tables summarize our total other income (expense) and income tax expense:
 
Three Months Ended September 30,
 
 
 
 
 
Increase /
(Decrease)
 
% Change
 
2013
 
2012
 
 
(Dollars in millions)
Interest expense
$
(329
)
 
(326
)
 
3

 
1
 %
Other income (expense)
9

 
12

 
(3
)
 
(25
)%
Total other income (expense)
$
(320
)
 
(314
)
 
(6
)
 
(2
)%
Income tax expense
$
40

 
152

 
(112
)
 
(74
)%

 
Nine Months Ended September 30,
 
 
 
 
 
Increase /
(Decrease)
 
% Change 
 
2013
 
2012
 
 
(Dollars in millions)
Interest expense
$
(970
)
 
(1,004
)
 
(34
)
 
(3
)%
Net (loss) on early retirement of debt

 
(194
)
 
(194
)
 
(100
)%
Other income (expense)
52

 
27

 
25

 
93
 %
Total other income (expense)
$
(918
)
 
(1,171
)
 
(253
)
 
(22
)%
Income tax expense
$
372

 
332

 
40

 
12
 %
Interest Expense
Interest expense increased for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 primarily due to a reduction in amortization of debt premiums. Interest expense decreased for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 primarily due to a lower amount of debt outstanding along with lower interest rates, which were partially offset by a reduction in the amortization of debt premiums. See Note 3—Long-term Debt and Credit Facilities and "Liquidity and Capital Resources" below for additional information about our debt.
Other Income (Expense)
Other income reflects certain items not directly related to our core operations, including gains and losses from non-operating asset dispositions and impairments, our share of income from our 49% interest in a cellular partnership, interest income and foreign currency gains and losses. Other income for the three months ended September 30, 2013 decreased as compared to the three months ended September 30, 2012 due to a gain on sale of auction securities in 2012. This difference was partially offset by a reduction in foreign currency losses. Other income increased $25 million for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 primarily due to a $32 million gain on the sale of wireless spectrum in January 2013, which was partially offset by a reduction of gain on sale of auction securities in 2013 compared to 2012.
Income Tax Expense
The effective tax rate for the three months ended September 30, 2013 was (4.0)% compared to 36.0% for the comparative prior year period, which reflects the non-deductibility of the goodwill impairment for income tax purposes. The effective tax rate for the nine months ended September 30, 2013 was (350.9)% compared to 37.9% for the comparative prior year period. The 2013 year-to-date effective tax rate reflects the net impact of the $1.1 billion non-deductible goodwill impairment recorded in the third quarter, a favorable settlement with the Internal Revenue Service of $33 million recorded in the second quarter, and an unfavorable accounting adjustment for non-deductible life insurance costs recorded in the first quarter, while the 2012 year-to-date effective tax rate reflects the reversal of a valuation allowance related to the auction rate securities.

27


Segment Results
General
We have restated previously reported segment results due to the above-described first quarter 2013 reorganization of our business. Segment results are summarized below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in millions)
Total segment revenues
$
4,267

 
4,314

 
12,799

 
13,004

Total segment expenses
2,105

 
2,071

 
6,112

 
6,154

Total segment income
$
2,162

 
2,243

 
6,687

 
6,850

Total margin percentage
50.7
%
 
52.0
%
 
52.2
%
 
52.7
%
Consumer:
 
 
 
 
 
 
 
Revenues
$
1,503

 
1,536

 
4,508

 
4,640

Expenses
580

 
585

 
1,657

 
1,720

Income
$
923

 
951

 
2,851

 
2,920

Margin percentage
61.4
%
 
61.9
%
 
63.2
%
 
62.9
%
Business:
 
 
 
 
 
 
 
Revenues
$
1,544

 
1,541

 
4,573

 
4,586

Expenses
958

 
936

 
2,776

 
2,789

Income
$
586

 
605

 
1,797

 
1,797

Margin percentage
38.0
%
 
39.3
%
 
39.3
%
 
39.2
%
Wholesale:
 
 
 
 
 
 
 
Revenues
$
878

 
910

 
2,695

 
2,818

Expenses
293

 
304

 
868

 
929

Income
$
585

 
606

 
1,827

 
1,889

Margin percentage
66.6
%
 
66.6
%
 
67.8
%
 
67.0
%
Data hosting:
 
 
 
 
 
 
 
Revenues
$
342

 
327

 
1,023

 
960

Expenses
274

 
246

 
811

 
716

Income
$
68

 
81

 
212

 
244

Margin percentage
19.9
%
 
24.8
%
 
20.7
%
 
25.4
%
Our segment revenues include all revenues from our strategic services, legacy services and data integration as described in more detail above. Segment revenues are based upon each customer's classification to an individual segment. We report our segment revenues based upon all services provided to that segment's customers, with the exception of data hosting revenue generated from business and wholesale customers, which is reported in data hosting segment revenues. We report our segment expenses for our four segments as follows:
Direct expenses, which primarily are specific expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities; and
Allocated expenses, which include network expenses, facilities expenses and other expenses such as fleet and real estate expenses.
We do not assign depreciation and amortization expense or impairments to our segments, as the related assets and capital expenditures are centrally managed and are not monitored by or reported to the CODM by segment. Similarly, severance expenses, restructuring expenses and, subject to an exception for our data hosting segment, 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 total company basis

28


and have not allocated assets or debt to specific segments. Other income (expense) does not relate to our segment operations and is therefore excluded from our segment results.
Consumer
The operations of our consumer segment have been impacted by several significant trends, including those described below:
Strategic services. We continue to focus on increasing subscribers of our broadband services in our consumer segment. In order to remain competitive, we believe it is important to continually increase our broadband network's scope and connection speeds. As a result, we continue to invest in our broadband network, which allows for the delivery of higher speed broadband services to a greater number of customers. In addition, we continue to refine our broadband marketing efforts as we compete in a maturing market in which most consumers already have broadband services. We also continue to expand our strategic product offerings, including facilities-based video services. The expansion of our facilities-based video service infrastructure requires us to incur start-up expenses in advance of the revenue that this service is expected to generate. Although, over time, we expect that our revenue for facilities-based video services will offset the expenses incurred, the timing of this revenue growth is uncertain. We believe these efforts will improve our ability to compete and increase our strategic revenues;
Legacy services. Our voice revenues have been, and we expect they will continue to be, adversely affected by access line losses. Intense competition and product substitution continue to drive our access line losses. For example, many consumers are substituting cable and wireless voice and electronic mail, texting and social networking services for traditional voice telecommunications services. We expect that these factors will continue to negatively impact our business. As a result of the expected loss of revenues associated with access lines, we continue to offer our customers service bundling and other product promotions to help mitigate this trend, as described below;
Service bundling and product promotions. We offer our customers the ability to bundle multiple products and services. These customers can bundle local services with other services such as broadband, video, long-distance and wireless. While we believe our bundled service offerings can help retain customers, they also tend to lower our profit margins in the consumer segment; and
Operating efficiencies. We continue to evaluate our operating structure and focus. This involves balancing our segment workforce in response to our workload requirements, productivity improvements and changes in industry, competitive, technological and regulatory conditions.
The following tables summarize the results of operations from our consumer segment:
 
Consumer Segment
 
Three Months Ended September 30,
 
 
 
 
 
Increase /
(Decrease)
 
% Change
 
2013
 
2012
 
 
(Dollars in millions)
Segment revenues:
 
 
 
 
 
 
 
Strategic services
$
644

 
603

 
41

 
7
 %
Legacy services
858

 
933

 
(75
)
 
(8
)%
Data integration
1

 

 
1

 
 %
Total revenues
1,503

 
1,536

 
(33
)
 
(2
)%
Segment expenses:
 
 
 
 
 
 
 
Direct
456

 
458

 
(2
)
 
 %
Allocated
124

 
127

 
(3
)
 
(2
)%
Total expenses
580