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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 September 30, 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 October 31, 2022, there were 1,034,582,843 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;
•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, 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 the pending divestiture of our European, Middle Eastern and African business, to successfully and timely realize the anticipated benefits from that divestiture and our divestitures completed in 2022, and to successfully operate our retained business after such divestitures;
•changes in our operating plans, corporate strategies, or 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;
•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 development;
•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 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 changes in interest rates and inflation;
•the effects of more general factors such as changes 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 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)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Dollars in millions, except per share amounts, and shares in thousands) |
OPERATING REVENUE | $ | 4,390 | | | 4,887 | | | 13,678 | | | 14,840 | |
OPERATING EXPENSES | | | | | | | |
Cost of services and products (exclusive of depreciation and amortization) | 1,999 | | | 2,151 | | | 6,042 | | | 6,402 | |
Selling, general and administrative | 792 | | | 654 | | | 2,407 | | | 2,172 | |
Gain on sale of business | (593) | | | — | | | (593) | | | — | |
Depreciation and amortization | 808 | | | 951 | | | 2,443 | | | 3,142 | |
Total operating expenses | 3,006 | | | 3,756 | | | 10,299 | | | 11,716 | |
OPERATING INCOME | 1,384 | | | 1,131 | | | 3,379 | | | 3,124 | |
OTHER (EXPENSE) INCOME | | | | | | | |
Interest expense | (363) | | | (377) | | | (1,052) | | | (1,150) | |
Other (expense) income, net | (84) | | | (38) | | | (136) | | | 48 | |
Total other expense, net | (447) | | | (415) | | | (1,188) | | | (1,102) | |
INCOME BEFORE INCOME TAXES | 937 | | | 716 | | | 2,191 | | | 2,022 | |
Income tax expense | 359 | | | 172 | | | 670 | | | 497 | |
NET INCOME | $ | 578 | | | 544 | | | 1,521 | | | 1,525 | |
BASIC AND DILUTED EARNINGS PER COMMON SHARE | | | | | | | |
BASIC | $ | 0.57 | | | 0.51 | | | 1.50 | | | 1.42 | |
DILUTED | $ | 0.57 | | | 0.51 | | | 1.50 | | | 1.41 | |
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING | | | | | | | |
BASIC | 1,013,124 | | | 1,062,084 | | | 1,011,498 | | | 1,077,106 | |
DILUTED | 1,017,013 | | | 1,069,157 | | | 1,016,281 | | | 1,083,879 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Dollars in millions) |
NET INCOME | $ | 578 | | | 544 | | | 1,521 | | | 1,525 | |
OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | |
Items related to employee benefit plans: | | | | | | | |
Change in net actuarial loss, net of $(8), $(69), $(25) and $(93) tax | 24 | | | 214 | | | 74 | | | 290 | |
Change in net prior service cost, net of $1, $—, $1 and $(1) tax | (1) | | | 1 | | | (2) | | | 3 | |
Reclassification of realized loss on interest rate swaps to net income, net of $—, $(5), $(5) and $(15) tax | — | | | 16 | | | 17 | | | 47 | |
Unrealized holding gain (loss) on interest rate swaps, net of $—, $—, $—, and $— tax | — | | | (1) | | | — | | | (1) | |
Reclassification of realized loss on foreign currency translation to gain on sale of business, net of $—, $—, $—, and $— tax | 112 | | | — | | | 112 | | | — | |
Foreign currency translation adjustment, net of $28, $13, $70 and $16 tax | (120) | | | (97) | | | (245) | | | (103) | |
Other comprehensive income (loss) | 15 | | | 133 | | | (44) | | | 236 | |
COMPREHENSIVE INCOME | $ | 593 | | | 677 | | | 1,477 | | | 1,761 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (Dollars in millions and shares in thousands) |
ASSETS | | | |
CURRENT ASSETS | | | |
Cash and cash equivalents | $ | 252 | | | 354 | |
Accounts receivable, less allowance of $95 and $114 | 1,457 | | | 1,544 | |
Assets held for sale | 6,779 | | | 8,809 | |
Other | 894 | | | 829 | |
Total current assets | 9,382 | | | 11,536 | |
Property, plant and equipment, net of accumulated depreciation of $20,391 and $19,271 | 20,713 | | | 20,895 | |
GOODWILL AND OTHER ASSETS | | | |
Goodwill | 15,918 | | | 15,986 | |
Other intangible assets, net | 6,436 | | | 6,970 | |
Other, net | 2,368 | | | 2,606 | |
Total goodwill and other assets | 24,722 | | | 25,562 | |
TOTAL ASSETS | $ | 54,817 | | | 57,993 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
CURRENT LIABILITIES | | | |
Current maturities of long-term debt | $ | 3,474 | | | 1,554 | |
Accounts payable | 1,009 | | | 758 | |
Accrued expenses and other liabilities | | | |
Salaries and benefits | 788 | | | 860 | |
Income and other taxes | 275 | | | 228 | |
Current operating lease liabilities | 396 | | | 385 | |
Interest | 184 | | | 278 | |
Other | 173 | | | 232 | |
Liabilities held for sale | 1,792 | | | 2,257 | |
Current portion of deferred revenue | 624 | | | 617 | |
Total current liabilities | 8,715 | | | 7,169 | |
LONG-TERM DEBT | 21,764 | | | 27,428 | |
DEFERRED CREDITS AND OTHER LIABILITIES | | | |
Deferred income taxes, net | 4,595 | | | 4,049 | |
Benefit plan obligations, net | 3,192 | | | 3,710 | |
Other | 3,974 | | | 3,797 | |
Total deferred credits and other liabilities | 11,761 | | | 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 1,034,758 and 1,023,512 shares | 1,035 | | | 1,024 | |
Additional paid-in capital | 18,221 | | | 18,972 | |
Accumulated other comprehensive loss | (2,202) | | | (2,158) | |
Accumulated deficit | (4,477) | | | (5,998) | |
Total stockholders' equity | 12,577 | | | 11,840 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 54,817 | | | 57,993 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| (Dollars in millions) |
OPERATING ACTIVITIES | | | |
Net income | $ | 1,521 | | | 1,525 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 2,443 | | | 3,142 | |
Gain on sale of business | (593) | | | — | |
Deferred income taxes | 618 | | | 431 | |
Provision for uncollectible accounts | 99 | | | 80 | |
Net gain on early retirement of debt | (9) | | | (8) | |
Unrealized loss on investments | 197 | | | 9 | |
Stock-based compensation | 71 | | | 89 | |
Changes in current assets and liabilities: | | | |
Accounts receivable | (27) | | | 20 | |
Accounts payable | 45 | | | (240) | |
Accrued income and other taxes | 25 | | | 7 | |
Other current assets and liabilities, net | (323) | | | (263) | |
Retirement benefits | (440) | | | (126) | |
Changes in other noncurrent assets and liabilities, net | 141 | | | 207 | |
Other, net | 126 | | | 21 | |
Net cash provided by operating activities | 3,894 | | | 4,894 | |
INVESTING ACTIVITIES | | | |
Capital expenditures | (2,183) | | | (2,052) | |
Proceeds from sale of business | 2,707 | | | — | |
Proceeds from sale of property, plant and equipment, and other assets | 67 | | | 90 | |
Other, net | 3 | | | 13 | |
Net cash provided by (used in) investing activities | 594 | | | (1,949) | |
FINANCING ACTIVITIES | | | |
Net proceeds from issuance of long-term debt | — | | | 1,881 | |
Payments of long-term debt | (3,899) | | | (2,604) | |
Net proceeds from (payments on) revolving line of credit | 80 | | | (150) | |
Dividends paid | (780) | | | (834) | |
Repurchases of common stock | — | | | (909) | |
Other, net | (33) | | | (52) | |
Net cash used in financing activities | (4,632) | | | (2,668) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (144) | | | 277 | |
Cash, cash equivalents and restricted cash at beginning of period | 409 | | | 427 | |
Cash, cash equivalents and restricted cash at end of period | $ | 265 | | | 704 | |
Supplemental cash flow information: | | | |
Income taxes paid, net | $ | (58) | | | (102) | |
Interest paid (net of capitalized interest of $48 and $39) | $ | (1,092) | | | (1,144) | |
Supplemental noncash information regarding investing activities: | | | |
Sale of property, plant and equipment in exchange for note receivable | $ | — | | | 56 | |
Cash, cash equivalents and restricted cash: | | | |
Cash and cash equivalents | $ | 252 | | | 635 | |
Cash and cash equivalents included in Assets held for sale | — | | | 39 | |
Restricted cash included in Other current assets | 1 | | | 2 | |
Restricted cash included in Other, net noncurrent assets | 12 | | | 28 | |
Total | $ | 265 | | | 704 | |
See accompanying notes to consolidated financial statements.
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Dollars in millions except per share amounts) |
COMMON STOCK | | | | | | | |
Balance at beginning of period | $ | 1,032 | | | 1,105 | | | 1,024 | | | 1,097 | |
Issuance of common stock through incentive and benefit plans | 3 | | | — | | | 11 | | | 8 | |
Repurchases of common stock | — | | | (74) | | | — | | | (74) | |
Balance at end of period | 1,035 | | | 1,031 | | | 1,035 | | | 1,031 | |
ADDITIONAL PAID-IN CAPITAL | | | | | | | |
Balance at beginning of period | 18,459 | | | 20,361 | | | 18,972 | | | 20,909 | |
Repurchases of common stock | — | | | (880) | | | — | | | (880) | |
Shares withheld to satisfy tax withholdings | (1) | | | (2) | | | (30) | | | (44) | |
Stock-based compensation | 23 | | | 25 | | | 71 | | | 89 | |
Dividends declared | (260) | | | (269) | | | (792) | | | (839) | |
Balance at end of period | 18,221 | | | 19,235 | | | 18,221 | | | 19,235 | |
ACCUMULATED OTHER COMPREHENSIVE LOSS | | | | | | | |
Balance at beginning of period | (2,217) | | | (2,710) | | | (2,158) | | | (2,813) | |
Other comprehensive income (loss) | 15 | | | 133 | | | (44) | | | 236 | |
Balance at end of period | (2,202) | | | (2,577) | | | (2,202) | | | (2,577) | |
ACCUMULATED DEFICIT | | | | | | | |
Balance at beginning of period | (5,055) | | | (7,050) | | | (5,998) | | | (8,031) | |
Net income | 578 | | | 544 | | | 1,521 | | | 1,525 | |
| | | | | | | |
Balance at end of period | (4,477) | | | (6,506) | | | (4,477) | | | (6,506) | |
TOTAL STOCKHOLDERS' EQUITY | $ | 12,577 | | | 11,183 | | | 12,577 | | | 11,183 | |
DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.25 | | | 0.25 | | | 0.75 | | | 0.75 | |
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 nine 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 (expense) 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 September 30, 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) provides guidance with respect to net investments by lessors under operating leases and other related topics. 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 September 30, 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 September 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-04, “Liabilities-Supplier Finance Program (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations” (“ASU 2022-04”). These amendments require that a company that uses a supplier finance program in connection with the purchase of goods or services disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, program activity during the period, changes from period to period and potential magnitude of program transactions. ASU 2022-04 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of September 30, 2022, we are reviewing our supplier finance agreements to determine the impact to disclosures in our consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”). These amendments clarify that a contractual restriction on the sales of an investment in equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of September 30, 2022, we do not expect ASU 2022-03 to have an impact to our consolidated financial statements.
In March 2022, the 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, enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of September 30, 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 2022-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of September 30, 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 September 30, 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 optional expedients 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 September 30, 2022, ASU 2021-01 does not have a material impact to our consolidated financial statements.
(2) Recently Completed Divestitures of the Latin American and ILEC Businesses
Latin American Business
On August 1, 2022, affiliates of Level 3 Parent, LLC, an indirect wholly-owned subsidiary of Lumen Technologies, Inc., sold Lumen’s Latin American business pursuant to a definitive agreement dated July 25, 2021 for pre-tax cash proceeds of approximately $2.7 billion, subject to certain post-closing adjustments.
During both the three and nine months ended September 30, 2022, we recorded a $593 million pre-tax gain on disposal associated with the sale of our Latin American business. This gain is reflected as operating income within the consolidated statements of operations.
In connection with the sale, we entered into a transition services agreement under which we will provide to the purchaser various support services. In addition, Lumen and the purchaser entered into commercial agreements whereby they will provide each other various network and other commercial services. In addition, we agreed to indemnify the purchaser for certain matters for which future cash payments by Lumen could be required. Lumen has estimated the fair value of these indemnifications to be $86 million, which is included in other long-term liabilities in our consolidated balance sheet and has reduced our gain on the sale accordingly.
The Latin American business was included in our continuing operations and classified as assets and liabilities held for sale on our consolidated balance sheets through the closing of the transaction on August 1, 2022. As a result of closing the transaction, we derecognized net assets of $1.9 billion, primarily made up of property, plant and equipment, net of accumulated depreciation, of $1.7 billion, goodwill of $245 million, other intangible assets, net of accumulated amortization, of $140 million, and deferred income tax liabilities, net, of $154 million.
ILEC Business
On October 3, 2022, we and certain of our affiliates closed the sale of our incumbent local exchange ("ILEC") business primarily conducted within 20 Midwestern and Southeastern states pursuant to a definitive agreement dated August 3, 2021, as amended and supplemented to date. See Note 17—Subsequent Events for additional information regarding this divestiture.
In the accompanying consolidated balance sheet as of September 30, 2022, the assets and liabilities of our ILEC business are classified as held for sale and are measured at the lower of (i) the carrying value of the disposal group and (ii) the fair value of the disposal group, less costs to sell. Effective with the designation of the ILEC business as held for sale on August 3, 2021, 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 $114 million and $350 million of depreciation, intangible amortization, and amortization of right-of-use assets for the three and nine months ended September 30, 2022, respectively, and an additional $81 million of depreciation, intangible amortization, and amortization of right-of-use assets for the three and nine months ended September 30, 2021 if the ILEC business did not meet the held for sale criteria.
The principal components of the held for sale assets and liabilities of the ILEC business as of the dates below are as follows:
| | | | | | | | | | | | | |
| September 30, 2022 | December 31, 2021 |
| ILEC Business | | |
| (Dollars in millions) |
Assets held for sale(1) | | | | | |
Cash and cash equivalents | $ | — | | | 1 | | | |
Accounts receivable, less allowance of $19 and $21 | 195 | | | 227 | | | |
Other current assets | 52 | | | 45 | | | |
Property, plant and equipment, net accumulated depreciation of $8,170 and $8,303 | 3,651 | | | 3,491 | | | |
Goodwill(2) | 2,581 | | | 2,615 | | | |
Other intangible assets, net | 158 | | | 158 | | | |
Other non-current assets | 38 | | | 38 | | | |
Total assets held for sale | $ | 6,675 | | | 6,575 | | | |
| | | | | |
Liabilities held for sale(1) | | | | | |
Accounts payable | $ | 56 | | | 64 | | | |
Salaries and benefits | 32 | | | 25 | | | |
Income and other taxes | 30 | | | 24 | | | |
Interest | 38 | | | 10 | | | |
Current portion of deferred revenue | 87 | | | 90 | | | |
Other current liabilities | 47 | | | 35 | | | |
Long-term debt, net of discounts(3) | 1,400 | | | 1,377 | | | |
Pension and other post-retirement benefits(4) | 27 | | | 56 | | | |
Other non-current liabilities | 71 | | | 141 | | | |
Total liabilities held for sale | $ | 1,788 | | | 1,822 | | | |
______________________________________________________________________
(1)As a result of the above-described sale of our Latin American business on August 1, 2022, this table excludes $2.2 billion of assets and $435 million of liabilities relating to the Latin American business. The net assets of the Latin American business were classified as held for sale on our accompanying balance sheet as of December 31, 2021.
(2)The assignment of goodwill was based on the relative fair value of the applicable reporting units prior to being classified as held for sale.
(3)Long-term debt, net of discounts, as of September 30, 2022 and December 31, 2021 includes (i) $1.4 billion aggregate principal amount of 7.995% Embarq senior notes maturing in 2036, (ii) $114 million and $117 million of related unamortized discounts, respectively, and (iii) $76 million and $57 million of long-term finance lease obligations, respectively.
(4)Excludes pension obligation of approximately $2.5 billion for the ILEC business as of both September 30, 2022 and December 31, 2021, which we transferred to the purchaser of the ILEC business upon closing. As of January 1, 2022, we spun off a new pension plan (the "Lumen Pension Plan") in anticipation of this transfer. Along with the transfer of the $2.5 billion pension benefit obligation, we allocated $2.2 billion of assets to the new plan in January 2022 and contributed $319 million of additional cash to the new plan's trust in September 2022 to fully fund the pension plan. See Note 8—Employee Benefits for additional information.
As a result of our evaluation of the recoverability of the carrying value of the ILEC 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 nine months ended September 30, 2022. For information on the October 3, 2022 disposal of the ILEC business, see Note 17—Subsequent Events.
Other
We do not believe either of these divestitures represent a strategic shift for Lumen. Therefore, neither of the divested businesses meet the criteria to be classified as a discontinued operation. As a result, we continued to report our operating results for the Latin American and ILEC businesses (the "disposal groups") in our consolidated operating results through their disposal dates of August 1, 2022 and October 3, 2022, respectively (see Note 17—Subsequent Events for additional information regarding the close of the sale of the ILEC business). The pre-tax net income of the ILEC business is estimated to be as follows in the tables below:
| | | | | | | | | | | |
| ILEC business pre-tax net income |
| 2022 | | 2021 |
| (Dollars in millions) |
Three Months Ended September 30, | $ | 164 | | | 234 | |
Nine Months Ended September 30, | $ | 576 | | | 528 | |
(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (Dollars in millions) |
Goodwill | $ | 15,918 | | | 15,986 | |
Indefinite-lived intangible assets | $ | 9 | | | 9 | |
Other intangible assets subject to amortization: | | | |
Customer relationships, less accumulated amortization of $3,579 and $11,740(1) | 4,822 | | | 5,365 | |
Capitalized software, less accumulated amortization of $3,832 and $3,624 | 1,498 | | | 1,459 | |
Trade names, patents and other, less accumulated amortization of $183 and $160 | 107 | | | 137 | |
Total other intangible assets, net | $ | 6,436 | | | 6,970 | |
______________________________________________________________________
(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 September 30, 2022, the gross carrying amount of goodwill, customer relationships, indefinite-lived and other intangible assets was $29.9 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 September 30, 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 | (68) | | — | | (68) | |
As of September 30, 2022(1)(3) | $ | 11,167 | | 4,751 | | 15,918 | |
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(1)Goodwill at September 30, 2022 and December 31, 2021 is net of accumulated impairment losses of $7.7 billion.
(2)As of December 31, 2021 these amounts excluded $2.9 billion of goodwill classified as held for sale primarily related to the August 1, 2022 divestiture of the Latin American business and the October 3, 2022 divestiture of the ILEC business. See Note 2—Recently Completed Divestitures of the Latin American and ILEC Businesses for additional information.
(3)As of September 30, 2022 these amounts excluded $2.6 billion of goodwill classified as held for sale related to the October 3, 2022 divestiture of the ILEC business. See Note 2—Recently Completed Divestitures of the Latin American and ILEC Businesses and Note 17—Subsequent Events for additional information.
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. As of September 30, 2022, we have four reporting units for goodwill impairment testing, which are (i) Mass Markets, (ii) North America Business (iii) Europe, Middle East and Africa region, and (iv) Asia Pacific region. Prior to its August 1, 2022 divestiture, the Latin American region was also considered to be a reporting unit.
Total amortization expense for finite-lived intangible assets for the three months ended September 30, 2022 and 2021 totaled $279 million and $306 million, respectively, and for the nine months ended September 30, 2022 and 2021, totaled $830 million and $1.0 billion, 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. The amounts presented in the table below do not include future amortization expense for intangible assets of the ILEC business that was classified as held for sale on September 30, 2022 and sold on October 3, 2022. See Note 2—Recently Completed Divestitures of the Latin American and ILEC Businesses for more information.
| | | | | |
| (Dollars in millions) |
2022 (remaining three months) | $ | 261 | |
2023 | 978 | |
2024 | 906 | |
2025 | 839 | |
2026 | 762 | |
(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.
Since 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 tables provide total revenue by segment, sales channel and product category. They also provide 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. The amounts in the tables below include the Latin American business revenues prior to it being sold on August 1, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 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 | $ | 154 | | (47) | | 107 | | | 183 | | (71) | | 112 | |
IP and Data Services | 350 | | — | | 350 | | | 431 | | — | | 431 | |
Fiber Infrastructure | 199 | | (33) | | 166 | | | 231 | | (33) | | 198 | |
Voice and Other | 150 | | — | | 150 | | | 182 | | — | | 182 | |
Total IGAM Revenue | 853 | | (80) | | 773 | | | 1,027 | | (104) | | 923 | |
| | | | | | | |
Large Enterprise | | | | | | | |
Compute and Application Services | 148 | | (16) | | 132 | | | 172 | | (15) | | 157 | |
IP and Data Services | 378 | | — | | 378 | | | 394 | | — | | 394 | |
Fiber Infrastructure | 117 | | (11) | | 106 | | | 143 | | (11) | | 132 | |
Voice and Other | 201 | | — | | 201 | | | 233 | | — | | 233 | |
Total Large Enterprise Revenue | 844 | | (27) | | 817 | | | 942 | | (26) | | 916 | |
| | | | | | | |
Mid-Market Enterprise | | | | | | | |
Compute and Application Services | 35 | | (7) | | 28 | | | 30 | | (8) | | 22 | |
IP and Data Services | 406 | | (1) | | 405 | | | 421 | | (1) | | 420 | |
Fiber Infrastructure | 49 | | (2) | | 47 | | | 50 | | (2) | | 48 | |
Voice and Other | 128 | | — | | 128 | | | 147 | | — | | 147 | |
Total Mid-Market Enterprise Revenue | 618 | | ( |