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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
or
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☐ | 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
LUMEN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Louisiana | 72-0651161 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
100 CenturyLink Drive, | |
Monroe, | Louisiana | 71203 |
(Address of principal executive offices) | (Zip Code) |
(318) 388-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common Stock, par value $1.00 per share | | LUMN | | New York Stock Exchange |
Preferred Stock Purchase Rights | | N/A | | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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.
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Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | | | | | Emerging Growth Company | ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On April 29, 2022, there were 1,033,055,343 shares of common stock outstanding.
TABLE OF CONTENTS
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* All references to "Notes" in this quarterly report refer to these Notes to Consolidated Financial Statements. |
Special Note Regarding Forward-Looking Statements
This report and other documents filed by us under the federal securities law include, and future oral or written statements or press releases by us and our management may include, forward-looking statements about our business, financial condition, operating results or prospects. These "forward-looking" statements are defined by, and are subject to the "safe harbor" protections under the federal securities laws. These statements include, among others:
•forecasts of our anticipated future results of operations, cash flows or financial position;
•statements concerning the anticipated impact of our transactions, investments, product development, participation in government programs, Quantum Fiber buildout plans, and other initiatives, including synergies or costs associated with these initiatives;
•statements about our liquidity, profitability, profit margins, tax position, tax assets, tax rates, asset values, contingent liabilities, growth opportunities, growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, dividend and securities repurchase plans, leverage, capital allocation plans, financing alternatives and sources, and pricing plans;
•statements regarding how the health and economic challenges raised by the COVID-19 pandemic may impact our business, financial position, operating results or prospects; and
•other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts, many of which are highlighted by words such as “may,” “will,” “would,” “could,” “should,” “plans,” “believes,” “expects,” “anticipates,” “estimates,” "forecasts," “projects,” "proposes," "targets," “intends,” “likely,” “seeks,” “hopes,” or variations or similar expressions with respect to the future.
These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are based, (i) are not guarantees of future results, (ii) are inherently speculative and (iii) are subject to a number of 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 below to factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-looking statements. These factors include but are not limited to:
•the effects of competition from a wide variety of competitive providers, including decreased demand for our more mature 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;
•our ability to successfully and timely attain our key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems, attaining our Quantum Fiber buildout plans, strengthening our relationships with customers and attaining projected cost savings;
•our ability to safeguard our network, and to avoid the adverse impact of possible cyber-attacks, security breaches, service outages, system failures, or similar events impacting our network or the availability and quality of our services;
•the effects of ongoing changes in the regulation of the communications industry, including the outcome of legislative, regulatory or judicial proceedings relating to content liability standards, intercarrier compensation, universal service, service standards, broadband deployment, data protection, privacy and net neutrality;
•our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;
•possible changes in customer demand for our products and services, including increased demand for high-speed data transmission services;
•our ability to successfully maintain the quality and profitability of our existing product and service offerings 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;
•our ability to successfully and timely implement our corporate strategies, including our deleveraging strategy;
•our ability to successfully and timely consummate our pending divestitures on the terms proposed, to realize the anticipated benefits therefrom and to operate our retained business successfully thereafter;
•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 or regulatory conditions, or otherwise;
•the impact of any future material acquisitions or divestitures that we may transact;
•the negative impact of increases in the costs of our pension, healthcare, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations;
•the potential negative impact of customer complaints, government investigations, security breaches or service outages impacting us or our industry;
•adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower credit ratings, unstable markets or otherwise;
•our ability to meet the terms and conditions of our debt obligations and covenants, including our ability to make transfers of cash in compliance therewith;
•our ability to maintain favorable relations with our security holders, key business partners, suppliers, vendors, landlords and financial institutions;
•our ability to meet evolving environmental, social and governance ("ESG") expectations and benchmarks, and effectively communicate and implement our ESG strategies;
•our ability to collect our receivables from, or continue to do business with, financially-troubled customers, including, but not limited to, those adversely impacted by the economic dislocations caused by the COVID-19 pandemic;
•our ability to use our net operating loss carryforwards in the amounts projected;
•our ability to continue to use or renew intellectual property used to conduct our operations;
•any adverse developments in legal or regulatory proceedings involving us;
•changes in tax, pension, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels, including those arising from recently enacted legislation promoting broadband spending;
•the effects of changes in accounting policies, practices or assumptions, including changes that could potentially require additional future impairment charges;
•continuing uncertainties regarding the impact that COVID-19 disruptions and vaccination policies could have on our business, operations, cash flows and corporate initiatives;
•the effects of adverse weather, terrorism, epidemics, pandemics, rioting, vandalism, societal unrest, or other natural or man-made disasters or disturbances;
•the potential adverse effects if our internal controls over financial reporting have weaknesses or deficiencies, or otherwise fail to operate as intended;
•the effects of more general factors such as changes in interest rates, in inflation, in exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geopolitical conditions; and
•other risks referenced in the "Risk Factors" section or other portions of this report or other of our filings with the U.S. Securities and Exchange Commission (the "SEC").
Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
| | | | | (Dollars in millions, except per share amounts, and shares in thousands) |
OPERATING REVENUE | | | | | $ | 4,676 | | | 5,029 | |
OPERATING EXPENSES | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | | | | | 1,985 | | | 2,136 | |
Selling, general and administrative | | | | | 800 | | | 756 | |
Depreciation and amortization | | | | | 808 | | | 1,150 | |
Total operating expenses | | | | | 3,593 | | | 4,042 | |
OPERATING INCOME | | | | | 1,083 | | | 987 | |
OTHER (EXPENSE) INCOME | | | | | | | |
Interest expense | | | | | (352) | | | (389) | |
Other income, net | | | | | 70 | | | 34 | |
Total other expense, net | | | | | (282) | | | (355) | |
INCOME BEFORE INCOME TAXES | | | | | 801 | | | 632 | |
Income tax expense | | | | | 202 | | | 157 | |
NET INCOME | | | | | $ | 599 | | | 475 | |
BASIC AND DILUTED EARNINGS PER COMMON SHARE | | | | | | | |
BASIC | | | | | $ | 0.59 | | | 0.44 | |
DILUTED | | | | | $ | 0.59 | | | 0.44 | |
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | | | | | |
BASIC | | | | | 1,008,430 | | | 1,082,474 | |
DILUTED | | | | | 1,015,215 | | | 1,091,586 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
| | | | | (Dollars in millions) |
NET INCOME | | | | | $ | 599 | | | 475 | |
OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | |
Items related to employee benefit plans: | | | | | | | |
Change in net actuarial loss, net of $(9) and $(12) tax | | | | | 28 | | | 38 | |
Change in net prior service cost, net of $— and $(1) tax | | | | | (1) | | | 1 | |
| | | | | | | |
Reclassification of realized loss on interest rate swaps to net income, net of $(5) and $(5) tax | | | | | 17 | | | 15 | |
| | | | | | | |
Foreign currency translation adjustment, net of $10 and $7 tax | | | | | 67 | | | (86) | |
Other comprehensive income (loss) | | | | | 111 | | | (32) | |
COMPREHENSIVE INCOME | | | | | $ | 710 | | | 443 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Dollars in millions and shares in thousands) |
ASSETS | | | |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 366 | | | 354 | |
Accounts receivable, less allowance of $111 and $114 | 1,419 | | | 1,544 | |
Assets held for sale | 9,025 | | | 8,809 | |
Other | 962 | | | 829 | |
Total current assets | 11,772 | | | 11,536 | |
Property, plant and equipment, net of accumulated depreciation of $19,635 and $19,271 | 20,829 | | | 20,895 | |
GOODWILL AND OTHER ASSETS | | | |
Goodwill | 15,976 | | | 15,986 | |
Other intangible assets, net | 6,785 | | | 6,970 | |
Other, net | 2,675 | | | 2,606 | |
Total goodwill and other assets | 25,436 | | | 25,562 | |
TOTAL ASSETS | $ | 58,037 | | | 57,993 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
CURRENT LIABILITIES | | | |
Current maturities of long-term debt | $ | 156 | | | 1,554 | |
Accounts payable | 902 | | | 758 | |
Accrued expenses and other liabilities | | | |
Salaries and benefits | 687 | | | 860 | |
Income and other taxes | 244 | | | 228 | |
Current operating lease liabilities | 383 | | | 385 | |
Interest | 207 | | | 278 | |
Other | 184 | | | 232 | |
Liabilities held for sale | 2,250 | | | 2,257 | |
Current portion of deferred revenue | 642 | | | 617 | |
Total current liabilities | 5,655 | | | 7,169 | |
LONG-TERM DEBT | 28,397 | | | 27,428 | |
DEFERRED CREDITS AND OTHER LIABILITIES | | | |
Deferred income taxes, net | 4,222 | | | 4,049 | |
Benefit plan obligations, net | 3,634 | | | 3,710 | |
Other | 3,847 | | | 3,797 | |
Total deferred credits and other liabilities | 11,703 | | | 11,556 | |
COMMITMENTS AND CONTINGENCIES (Note 13) | | | |
STOCKHOLDERS' EQUITY | | | |
Preferred stock—non-redeemable, $25.00 par value, authorized 2,000 and 2,000 shares, issued and outstanding 7 and 7 shares | — | | | — | |
Common stock, $1.00 par value, authorized 2,200,000 and 2,200,000 shares, issued and outstanding 1,032,909 and 1,023,512 shares | 1,033 | | | 1,024 | |
Additional paid-in capital | 18,695 | | | 18,972 | |
Accumulated other comprehensive loss | (2,047) | | | (2,158) | |
Accumulated deficit | (5,399) | | | (5,998) | |
Total stockholders' equity | 12,282 | | | 11,840 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 58,037 | | | 57,993 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
OPERATING ACTIVITIES | | | |
Net income | $ | 599 | | | 475 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 808 | | | 1,150 | |
Deferred income taxes | 179 | | | 131 | |
Provision for uncollectible accounts | 25 | | | 27 | |
Net gain on early retirement of debt | — | | | (8) | |
Stock-based compensation | 23 | | | 20 | |
Changes in current assets and liabilities: | | | |
Accounts receivable | 131 | | | 45 | |
Accounts payable | (38) | | | (93) | |
Accrued income and other taxes | 34 | | | 31 | |
Other current assets and liabilities, net | (376) | | | (272) | |
Retirement benefits | (38) | | | (71) | |
Changes in other noncurrent assets and liabilities, net | (27) | | | 66 | |
Other, net | 55 | | | 24 | |
Net cash provided by operating activities | 1,375 | | | 1,525 | |
INVESTING ACTIVITIES | | | |
Capital expenditures | (577) | | | (716) | |
Proceeds from sale of property, plant and equipment and other assets | 6 | | | 35 | |
Other, net | 2 | | | 6 | |
Net cash used in investing activities | (569) | | | (675) | |
FINANCING ACTIVITIES | | | |
Net proceeds from issuance of long-term debt | — | | | 891 | |
Payments of long-term debt | (1,474) | | | (1,176) | |
Net proceeds from (payments on) revolving line of credit | 1,000 | | | (150) | |
Dividends paid | (271) | | | (294) | |
| | | |
Other, net | (31) | | | (45) | |
Net cash used in financing activities | (776) | | | (774) | |
Net increase in cash, cash equivalents and restricted cash | 30 | | | 76 | |
Cash, cash equivalents and restricted cash at beginning of period | 409 | | | 427 | |
Cash, cash equivalents and restricted cash at end of period | $ | 439 | | | 503 | |
Supplemental cash flow information: | | | |
Income taxes paid, net | $ | (10) | | | (21) | |
Interest paid (net of capitalized interest of $16 and $13) | $ | (386) | | | (387) | |
| | | |
| | | |
Cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 366 | | | 486 | |
Cash and cash equivalents included in Assets held for sale | 59 | | | — | |
Restricted cash included in Other current assets | 2 | | | 2 | |
Restricted cash included in Other, net noncurrent assets | 12 | | | 15 | |
Total | $ | 439 | | | 503 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
| | | | | (Dollars in millions except per share amounts) |
COMMON STOCK | | | | | | | |
Balance at beginning of period | | | | | $ | 1,024 | | | 1,097 | |
Issuance of common stock through incentive and benefit plans | | | | | 9 | | | 9 | |
| | | | | | | |
Balance at end of period | | | | | 1,033 | | | 1,106 | |
ADDITIONAL PAID-IN CAPITAL | | | | | | | |
Balance at beginning of period | | | | | 18,972 | | | 20,909 | |
| | | | | | | |
Shares withheld to satisfy tax withholdings | | | | | (28) | | | (39) | |
Stock-based compensation and other, net | | | | | 23 | | | 20 | |
Dividends declared | | | | | (272) | | | (292) | |
Balance at end of period | | | | | 18,695 | | | 20,598 | |
ACCUMULATED OTHER COMPREHENSIVE LOSS | | | | | | | |
Balance at beginning of period | | | | | (2,158) | | | (2,813) | |
Other comprehensive income (loss) | | | | | 111 | | | (32) | |
Balance at end of period | | | | | (2,047) | | | (2,845) | |
ACCUMULATED DEFICIT | | | | | | | |
Balance at beginning of period | | | | | (5,998) | | | (8,031) | |
Net income | | | | | 599 | | | 475 | |
| | | | | | | |
Balance at end of period | | | | | (5,399) | | | (7,556) | |
TOTAL STOCKHOLDERS' EQUITY | | | | | $ | 12,282 | | | 11,303 | |
DIVIDENDS DECLARED PER COMMON SHARE | | | | | $ | 0.25 | | | 0.25 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
References in the Notes to "Lumen Technologies" or "Lumen," "we," "us," the "Company," and "our" refer to Lumen Technologies, Inc. and its consolidated subsidiaries, unless the context otherwise requires. References in the Notes to "Level 3" refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc., which we acquired on November 1, 2017.
(1) Background
General
We are an international facilities-based technology and communications company engaged primarily in providing a broad array of integrated products and services to our business and mass markets customers. Our specific products and services are detailed in Note 4—Revenue Recognition.
Basis of Presentation
Our consolidated balance sheet as of December 31, 2021, 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 note 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 U.S. Securities and Exchange Commission ("SEC"). However, in our opinion, the disclosures made therein are adequate to make the information presented not misleading. We believe 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 three 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 and the accompanying notes 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, 2021.
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. 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, 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 recategorization of our Mass Markets revenue by product category in our segment reporting. See Note 12—Segment Information for additional information. These changes had no impact on total operating revenue, total operating expenses or net income for any period.
Operating lease assets are included in other, net under goodwill and other assets on our consolidated balance sheets. Noncurrent operating lease liabilities are included in other under deferred credits and other liabilities on our consolidated balance sheets.
There were no book overdrafts included in accounts payable at March 31, 2022 or December 31, 2021.
Summary of Significant Accounting Policies
Refer to the significant accounting policies described in Note 1— Background and Summary of Significant Accounting Policies to the consolidated financial statements and accompanying notes in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Adopted Accounting Pronouncements
Government Assistance
On January 1, 2022, we adopted Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2020-10”). This ASU increases transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance they receive. The ASU only impacts annual financial statement note disclosures. Therefore, the adoption of ASU 2021-10 did not have a material impact to our consolidated financial statements.
Leases
On January 1, 2022, we adopted ASU 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments” (“ASU 2021-05”). This ASU (i) amends the lease classification requirements for lessors to align them with practice under ASC Topic 840, (ii) provides criteria for lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease; and (iii) when a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The adoption of ASU 2021-05 did not have a material impact to our consolidated financial statements.
Debt
On January 1, 2021, we adopted ASU 2020-09, “Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762” (“ASU 2020-09”). This ASU amends and supersedes various SEC guidance to reflect SEC Release No. 33-10762, which includes amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The adoption of ASU 2020-09 did not have a material impact to our consolidated financial statements.
Investments
On January 1, 2021, we adopted ASU 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)” (ASU 2020-01”). This ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments - Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. As of March 31, 2022, we determined there was no application or discontinuation of the equity method during the reporting periods covered by this report. The adoption of ASU 2020-01 did not have a material impact to our consolidated financial statements.
Income Taxes
On January 1, 2021, we adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). This ASU removes certain exceptions for investments, intra-period allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. The adoption of ASU 2019-12 did not have a material impact to our consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures” (“ASU 2022-02”). These amendments eliminate the TDR recognition and measurement guidance and enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2020-02 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of March 31, 2022, we do not expect ASU 2022-02 to have an impact to our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method” (ASU 2022-01). The ASU expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method. ASU 2020-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of March 31, 2022, we do not expect ASU 2022-01 to have an impact to our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of March 31, 2022, we do not expect ASU 2021-08 to have an impact to our consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. These amendments may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU 2021-01 provides option guidance for a limited time to ease the potential burden in accounting for reference rate reform. Based on our review of our key material contracts through March 31, 2022, we do not expect ASU 2021-01 to have a material impact to our consolidated financial statements.
(2) Planned Divestiture of the Latin American and ILEC Businesses
On July 25, 2021, affiliates of Level 3 Parent, LLC, an indirect wholly-owned subsidiary of Lumen Technologies, Inc., entered into a definitive agreement to divest Lumen’s Latin American business to an affiliate of a fund advised by Stonepeak Partners LP in exchange for $2.7 billion cash, subject to certain working capital, other purchase price adjustments and related transaction expenses (estimated to be approximately $50 million). Level 3 Parent, LLC anticipates closing the transaction during the second half of 2022, upon receipt of all requisite regulatory approvals in the U.S. and certain countries where the Latin American business operates, as well as the satisfaction of other customary conditions.
On August 3, 2021, we and certain of our affiliates entered into a definitive agreement to divest our incumbent local exchange ("ILEC") business conducted within 20 Midwestern and Southern states to an affiliate of funds advised by Apollo Global Management, Inc. In exchange, we would receive $7.5 billion, subject to offsets for (i) assumed indebtedness (expected to be approximately $1.4 billion) and (ii) certain purchaser’s transaction expenses along with working capital, tax, other customary purchase price adjustments and related transaction expenses (estimated to be approximately $1.7 billion). We anticipate closing the transaction during the second half of 2022 upon receipt of all regulatory approvals and the satisfaction of other customary closing conditions.
The actual amount of our net after-tax proceeds from these divestitures could vary substantially from the amounts we currently estimate, particularly if we experience delays in completing the transactions or if any of our other assumptions prove to be incorrect.
We do not believe these divestiture transactions represent a strategic shift for Lumen. Therefore, neither divested business meets the criteria to be classified as a discontinued operation. As a result, we will continue to report our operating results for the Latin American and ILEC businesses (the "disposal groups") in our consolidated operating results until the transactions are closed. The pre-tax net income of the disposal groups is estimated to be as follows in the table below:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Latin American business pre-tax net income | $ | 83 | | | 28 | |
ILEC business pre-tax net income | 255 | | | 149 | |
Total disposal groups pre-tax net income | $ | 338 | | | 177 | |
As of March 31, 2022 in the accompanying consolidated balance sheet, the assets and liabilities of our Latin American and ILEC businesses are classified as held for sale and are measured at the lower of (i) the carrying value of the disposal groups and (ii) the fair value of the disposal groups, less costs to sell. Effective with the designation of both disposal groups as held for sale on July 25, 2021 and August 3, 2021, respectively, we suspended recording depreciation of property, plant and equipment and amortization of finite-lived intangible assets and right-of-use assets while these assets are classified as held for sale. We estimate that we would have recorded an additional $170 million of depreciation, intangible amortization, and amortization of right-of-use assets for the three months ended March 31, 2022 if the Latin American and ILEC businesses did not meet the held for sale criteria, of which $49 million and $121 million relates to the Latin American business and ILEC business, respectively.
As a result of our evaluation of the recoverability of the carrying value of the assets and liabilities held for sale relative to the agreed upon sales price, adjusted for costs to sell, we did not record any estimated loss on disposal during the three months ended March 31, 2022. The recoverability of each disposal group will be re-evaluated each reporting period until the closing of each transaction.
The principal components of the held for sale assets and liabilities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Latin American Business | | ILEC Business | | Total | | Latin American Business | | ILEC Business | | Total |
| (Dollars in millions) |
Assets held for sale | | | | | | | | | | | |
Cash and cash equivalents | $ | 58 | | | 1 | | | 59 | | | 39 | | | 1 | | | 40 | |
Accounts receivable, less allowance of $3, $18, $21, $3, $21 and $24 | 93 | | | 191 | | | 284 | | | 83 | | | 227 | | | 310 | |
Other current assets | 83 | | | 40 | | | 123 | | | 81 | | | 45 | | | 126 | |
Property, plant and equipment, net accumulated depreciation of $456, $8,379, $8,835, $434, $8,303 and $8,737 | 1,704 | | | 3,565 | | | 5,269 | | | 1,591 | | | 3,491 | | | 5,082 | |
Goodwill(1) | 259 | | | 2,615 | | | 2,874 | | | 239 | | | 2,615 | | | 2,854 | |
Other intangible assets, net | 138 | | | 158 | | | 296 | | | 126 | | | 158 | | | 284 | |
Other non-current assets | 83 | | | 37 | | | 120 | | | 75 | | | 38 | | | 113 | |
Total assets held for sale | $ | 2,418 | | | 6,607 | | | 9,025 | | | 2,234 | | | 6,575 | | | 8,809 | |
| | | | | | | | | | | |
Liabilities held for sale | | | | | | | | | | | |
Accounts payable | $ | 90 | | | 50 | | | 140 | | | 101 | | | 64 | | | 165 | |
Salaries and benefits | 25 | | | 25 | | | 50 | | | 23 | | | 25 | | | 48 | |
Income and other taxes | 34 | | | 30 | | | 64 | | | 27 | | | 24 | | | 51 | |
Interest | — | | | 38 | | | 38 | | | — | | | 10 | | | 10 | |
Current portion of deferred revenue | 26 | | | 82 | | | 108 | | | 26 | | | 90 | | | 116 | |
Other current liabilities | 7 | | | 23 | | | 30 | | | 7 | | | 35 | | | 42 | |
Long-term debt, net of discounts(2) | — | | | 1,387 | | | 1,387 | | | — | | | 1,377 | | | 1,377 | |
Deferred income taxes, net | 148 | | | — | | | 148 | | | 129 | | | — | | | 129 | |
Pension and other post-retirement benefits(3) | 2 | | | 56 | | | 58 | | | 2 | | | 56 | | | 58 | |
Other non-current liabilities | 132 | | | 95 | | | 227 | | | 120 | | | 141 | | | 261 | |
Total liabilities held for sale | $ | 464 | | | 1,786 | | | 2,250 | | | 435 | | | 1,822 | | | 2,257 | |
______________________________________________________________________
(1)The assignment of goodwill was based on the relative fair values of the applicable reporting units prior to being reclassified as held for sale.
(2)Long-term debt, net of discounts, as of March 31, 2022 and December 31, 2021 includes (i) $1.4 billion for both periods of 7.995% Embarq senior notes maturing in 2036, (ii) $116 million and $117 million of related unamortized discounts, respectively, and (iii) $66 million and $57 million of long-term finance lease obligations, respectively.
(3)Excludes pension obligation of approximately $2.5 billion for the ILEC business as of March 31, 2022 and December 31, 2021, which will be transferred to the purchaser of the ILEC business upon closing. As of January 1, 2022, a new pension plan (the "Lumen Pension Plan") was spun off in anticipation of this transfer. Along with the transfer of the $2.5 billion pension benefit obligation, $2.2 billion of assets were allocated to the new plan. The remaining portion of the obligation is expected to be separately funded with cash paid by Lumen at the time of closing. See Note 8—Employee Benefits for additional information.
(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Dollars in millions) |
Goodwill | $ | 15,976 | | | 15,986 | |
Indefinite-lived intangible assets | $ | 9 | | | 9 | |
Other intangible assets subject to amortization: | | | |
Customer relationships, less accumulated amortization of $3,268 and $11,740(1) | 5,180 | | | 5,365 | |
Capitalized software, less accumulated amortization of $3,656 and $3,624 | 1,469 | | | 1,459 | |
Trade names, patents and other, less accumulated amortization of $162 and $160 | 127 | | | 137 | |
Total other intangible assets, net | $ | 6,785 | | | 6,970 | |
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(1) Certain customer relationships with a gross carrying value of $8.7 billion became fully amortized during 2021 and were retired during the first quarter of 2022.
As of March 31, 2022, the gross carrying amount of goodwill, customer relationships, indefinite-lived and other intangible assets was $29.8 billion.
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired.
We assess our goodwill and other indefinite-lived intangible assets for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of any of our reporting units exceeds its fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assess our reporting units. Our annual impairment assessment date for indefinite-lived intangible assets other than goodwill is December 31.
Our reporting units are not discrete legal entities with discrete full financial statements. Our assets and liabilities are employed in and relate to the operations of multiple reporting units. For each reporting unit, we compare its estimated fair value of equity to its carrying value of equity that we assign to the reporting unit. If the estimated fair value of the reporting unit is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, we record a non-cash impairment equal to the excess amount. Depending on the facts and circumstances, we typically estimate the fair value of our reporting units by considering either or both of (i) a discounted cash flow method, which is based on the present value of projected cash flows over a discrete projection period and a terminal value, which is based on the expected normalized cash flows of the reporting units following the discrete projection period, and (ii) a market approach, which includes the use of market multiples of publicly-traded companies whose services are comparable to ours.
The following table shows the rollforward of goodwill assigned to our reportable segments from December 31, 2021 through March 31, 2022:
| | | | | | | | | | | |
| Business | Mass Markets | Total |
| (Dollars in millions) |
As of December 31, 2021(1)(2) | $ | 11,235 | | 4,751 | | 15,986 | |
| | | |
Effect of foreign currency exchange rate change and other | (10) | | — | | (10) | |
As of March 31, 2022(1)(2) | $ | 11,225 | | 4,751 | | 15,976 | |
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(1)Goodwill at March 31, 2022 and December 31, 2021 is net of accumulated impairment losses of $7.7 billion.
(2)As of March 31, 2022 and December 31, 2021, these amounts exclude goodwill classified as held for sale of $2.9 billion. See Note 2—Planned Divestiture of the Latin American and ILEC Businesses.
We report our results within two segments: Business and Mass Markets. See Note 12—Segment Information for more information on these segments and the underlying sales channels. We have five reporting units for goodwill impairment testing, which are (i) Mass Markets, (ii) North America Business (iii) Europe, Middle East and Africa region, (iv) Asia Pacific region and (v) Latin America region.
Total amortization expense for finite-lived intangible assets for the three months ended March 31, 2022 and 2021 totaled $274 million and $425 million, respectively.
We estimate that total amortization expense for finite-lived intangible assets for the years ending December 31, 2022 through 2026 will be as provided in the table below. As a result of reclassifying our Latin American and ILEC businesses as being held for sale on our March 31, 2022 consolidated balance sheet, the amounts presented below do not include future amortization expense for intangible assets of the businesses to be divested. See Note 2—Planned Divestiture of the Latin American and ILEC Businesses for more information.
| | | | | |
| (Dollars in millions) |
2022 (remaining nine months) | $ | 770 | |
2023 | 948 | |
2024 | 878 | |
2025 | 811 | |
2026 | 735 | |
(4) Revenue Recognition
Product and Service Categories
We categorize our products and services revenue among the following categories for the Business segment:
•Compute and Application Services, which include our Edge Cloud services, IT solutions, Unified Communications and Collaboration ("UC&C"), data center, content delivery network ("CDN") and Managed Security services;
•IP and Data Services, which include Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;
•Fiber Infrastructure Services, which include dark fiber, optical services and equipment; and
•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services.
Beginning in the first quarter of 2022, we have categorized our products and services revenue among the following categories for the Mass Markets segment:
•Fiber Broadband, which includes high speed fiber-based broadband services to residential and small business customers;
•Other Broadband, which primarily includes lower speed copper-based broadband services to residential and small business customers; and
•Voice and Other, which includes revenues from (i) providing local and long-distance services, professional services, and other ancillary services, and (ii) federal broadband and state support payments.
Reconciliation of Total Revenue to Revenue from Contracts with Customers
The following table provides total revenue by segment, sales channel and product category. It also provides the amount of revenue that is not subject to ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), but is instead governed by other accounting standards:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
| Total revenue | Adjustments for non-ASC 606 revenue (1) | Total revenue from contracts with customers | | Total revenue | Adjustments for non-ASC 606 revenue (1) | Total revenue from contracts with customers |
| (Dollars in millions) |
Business Segment by Sales Channel and Product Category | | | | | | | |
International and Global Accounts ("IGAM") | | | | | | | |
Compute and Application Services | $ | 183 | | (73) | | 110 | | | 183 | | (69) | | 114 | |
IP and Data Services | 423 | | — | | 423 | | | 429 | | — | | 429 | |
Fiber Infrastructure | 219 | | (34) | | 185 | | | 217 | | (30) | | 187 | |
Voice and Other | 174 | | — | | 174 | | | 191 | | — | | 191 | |
Total IGAM Revenue | 999 | | (107) | | 892 | | | 1,020 | | (99) | | 921 | |
| | | | | | | |
Large Enterprise | | | | | | | |
Compute and Application Services | 163 | | (14) | | 149 | | | 169 | | (15) | | 154 | |
IP and Data Services | 388 | | — | | 388 | | | 402 | | — | | 402 | |
Fiber Infrastructure | 113 | | (13) | | 100 | | | 130 | | (15) | | 115 | |
Voice and Other | 213 | | — | | 213 | | | 252 | | — | | 252 | |
Total Large Enterprise Revenue | 877 | | (27) | | 850 | | | 953 | | (30) | | 923 | |
| | | | | | | |
Mid-Market Enterprise | | | | | | | |
Compute and Application Services | 33 | | (7) | | 26 | | | 32 | | (8) | | 24 | |
IP and Data Services | 415 | | (1) | | 414 | | | 442 | | (1) | | 441 | |
Fiber Infrastructure | 49 | | (2) | | 47 | | | 56 | | (2) | | 54 | |
Voice and Other | 139 | | — | | 139 | | | 163 | | — | | 163 | |
Total Mid-Market Enterprise Revenue | 636 | | (10) | | 626 | | | 693 | | (11) | | 682 | |
| | | | | | | |
Wholesale | | | | | | | |
Compute and Application Services | 48 | | (40) | | 8 | | | 47 | | (40) | | 7 | |
IP and Data Services | 296 | | — | | 296 | | | 305 | | — | | 305 | |
Fiber Infrastructure | 154 | | (27) | | 127 | | | 154 | | (31) | | 123 | |
Voice and Other | 391 | | (64) | | 327 | | | 423 | | (63) | | 360 | |
Total Wholesale Revenue | 889 | | (131) | | 758 | | | 929 | | (134) | | 795 | |
| | | | | | | |
Business Segment by Product Category | | | | | | | |
Compute and Application Services | 427 | | (134) | | 293 | | | 431 | | (132) | | 299 | |
IP and Data Services | 1,522 | | (1) | | 1,521 | | | 1,578 | | (1) | | 1,577 | |
Fiber Infrastructure | 535 | | (76) | | 459 | | | 557 | | (78) | | 479 | |
Voice and Other | 917 | | (64) | | 853 | | | 1,029 | | (63) | | 966 | |
Total Business Segment Revenue | 3,401 | | (275) | | 3,126 | | | 3,595 | | (274) | | 3,321 | |
| | | | | | | |
Mass Markets Segment by Product Category | | | | | | | |
Fiber Broadband | 145 | | (5) | | 140 | | | 122 | | — | | 122 | |
Other Broadband | 610 | | (56) | | 554 | | | 648 | | (55) | | 593 | |
Voice and Other | 520 | | (79) | | 441 | | | 664 | | (145) | | 519 | |
Total Mass Markets Revenue | 1,275 | | (140) | | 1,135 | | | 1,434 | | (200) | | 1,234 | |
| | | | | | | |
Total Revenue | $ | 4,676 | | (415) | | 4,261 | | | 5,029 | | (474) | | 4,555 | |
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(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.
Operating Lease Income
Lumen Technologies leases various dark fiber, office facilities, colocation facilities, switching facilities, other network sites and service equipment to third parties under operating leases. Lease and sublease income are included in operating revenue in our consolidated statements of operations.
For the three months ended March 31, 2022 and 2021, our gross rental income was $337 million and $332 million, respectively, which represents approximately 7% of our operating revenue for both the three months ended March 31, 2022 and 2021.
Customer Receivables and Contract Balances
The following table provides balances of customer receivables, contract assets and contract liabilities, net of amounts reclassified as held for sale, as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Dollars in millions) |
Customer receivables(1) | $ | 1,365 | | | 1,493 | |
Contract assets(2) | 70 | | | 73 | |
Contract liabilities(3) | 671 | | | 680 | |
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(1)Reflects gross customer receivables of $1.5 billion and $1.6 billion, net of allowance for credit losses of $99 million and $102 million, at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, these amounts exclude customer receivables, net reclassified as held for sale of $260 million and $288 million, respectively.
(2)As of March 31, 2022 and December 31, 2021, these amounts exclude contract assets reclassified as held for sale of $9 million as of both periods.
(3)As of March 31, 2022 and December 31, 2021, these amounts exclude contract liabilities reclassified as held for sale of $154 million and $161 million, respectively.
Contract liabilities are consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from one to five years depending on