Lumen Technologies, Inc. [LUMN] Filings

10-Q 1 lumn-20210930.htm 10-Q lumn-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			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)



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:

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.

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 29, 2021, there were 1,023,894,166 shares of common stock outstanding.

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	Special Note Regarding Forward-Looking Statements	3
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Statements of Operations (Unaudited)	6
	Consolidated Statements of Comprehensive Income (Unaudited)	7
	Consolidated Balance Sheets (Unaudited)	8
	Consolidated Statements of Cash Flows (Unaudited)	9
	Consolidated Statements of Stockholders' Equity (Unaudited)	10
	Notes to Consolidated Financial Statements (Unaudited)*	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	62
Part II.	Other Information
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 5.	Other Information	64
Item 6.	Exhibits	65
Signature		66

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

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Special Note Regarding Forward-Looking Statements

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, 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, operations, cash flows or financial position; 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,” “plan,” “believes,” “expects,” “anticipates,” “estimates,” “projects,” “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 to our discussion of factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-looking statements. Factors that could affect actual results 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 attain our key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems, strengthening our relationships with customers and attaining projected cost savings;

•our ability to safeguard our network, and to avoid the adverse impact of possible 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 regulation, broadband deployment, data protection, privacy and net neutrality;

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•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 the 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 operating plans and 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 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 for active and retired employees and post-employment 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;

•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 pending proposals of the Biden Administration to increase infrastructure spending and federal income tax rates;

•the effects of changes in accounting policies, practices or assumptions, including changes that could potentially require additional future impairment charges;

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•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, 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 exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geo-political 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.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LUMEN TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021	2020
	(Dollars in millions, except per share amounts, and shares in thousands)
OPERATING REVENUE	$	4,887	5,167	14,840	15,587
OPERATING EXPENSES
Cost of services and products (exclusive of depreciation and amortization)	2,151		2,236	6,402	6,703
Selling, general and administrative	654		850	2,172	2,598
Depreciation and amortization	951		1,193	3,142	3,515
Total operating expenses	3,756		4,279	11,716	12,816
OPERATING INCOME	1,131		888	3,124	2,771
OTHER (EXPENSE) INCOME
Interest expense	(377)		(409)	(1,150)	(1,272)
Other (expense) income, net	(38)		1	48	(73)
Total other expense, net	(415)		(408)	(1,102)	(1,345)
INCOME BEFORE INCOME TAXES	716		480	2,022	1,426
Income tax expense	172		114	497	369
NET INCOME	$	544	366	1,525	1,057
BASIC AND DILUTED EARNINGS PER COMMON SHARE
BASIC	$	0.51	0.34	1.42	0.98
DILUTED	$	0.51	0.34	1.41	0.98
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC	1,062,084		1,080,505	1,077,106	1,078,672
DILUTED	1,069,157		1,085,666	1,083,879	1,083,368

See accompanying notes to consolidated financial statements.

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LUMEN TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021	2020
	(Dollars in millions)
NET INCOME	$	544	366	1,525	1,057
OTHER COMPREHENSIVE INCOME (LOSS):
Items related to employee benefit plans:
Change in net actuarial loss, net of $(69), $(12), $(93) and $(37) tax	214		38	290	115
Change in net prior service cost, net of $—, $—, $(1) and $(1) tax	1		1	3	4
Curtailment loss, net of $—, $(1), $— and $(1) tax	—		3	—	3
Reclassification of realized loss on interest rate swaps to net income, net of $(5), $(5), $(15) and $(10) tax	16		15	47	31
Unrealized holding (loss) gain on interest rate swaps, net of $—, $—, $— and $28 tax	(1)		1	(1)	(87)
Foreign currency translation adjustment, net of $13, $(21), $16 and $(2) tax	(97)		49	(103)	(181)
Other comprehensive income (loss)	133		107	236	(115)
COMPREHENSIVE INCOME	$	677	473	1,761	942

See accompanying notes to consolidated financial statements.

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LUMEN TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS


	September 30, 2021 (Unaudited)		December 31, 2020
	(Dollars in millions and shares in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	635	406
Accounts receivable, less allowance of $117 and $191	1,541		1,962
Assets held for sale	8,682		—
Other	843		808
Total current assets	11,701		3,176
Property, plant and equipment, net of accumulated depreciation of $22,027 and $31,596	20,926		26,338
GOODWILL AND OTHER ASSETS
Goodwill	15,987		18,870
Other intangible assets, net	7,160		8,219
Other, net	2,534		2,791
Total goodwill and other assets	25,681		29,880
TOTAL ASSETS	$	58,308	59,394
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	2,501	2,427
Accounts payable	829		1,134
Accrued expenses and other liabilities
Salaries and benefits	873		1,008
Income and other taxes	280		314
Current operating lease liabilities	389		379
Interest	229		291
Other	284		328
Liabilities held for sale	2,291		—
Current portion of deferred revenue	624		753
Total current liabilities	8,300		6,634
LONG-TERM DEBT	27,260		29,410
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net	3,732		3,342
Benefit plan obligations, net	3,980		4,556
Other	3,853		4,290
Total deferred credits and other liabilities	11,565		12,188
COMMITMENTS AND CONTINGENCIES (Note 15)
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 1,031,060 and 1,096,921 shares	1,031		1,097
Additional paid-in capital	19,235		20,909
Accumulated other comprehensive loss	(2,577)		(2,813)
Accumulated deficit	(6,506)		(8,031)
Total stockholders' equity	11,183		11,162
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	58,308	59,394

See accompanying notes to consolidated financial statements.

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LUMEN TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,
	2021		2020
	(Dollars in millions)
OPERATING ACTIVITIES
Net income	$	1,525	1,057
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,142		3,515
Deferred income taxes	431		315
Provision for uncollectible accounts	80		137
Net (gain) loss on early retirement of debt	(8)		78
Share-based compensation	89		120
Changes in current assets and liabilities:
Accounts receivable	20		(34)
Accounts payable	(240)		(325)
Accrued income and other taxes	7		90
Other current assets and liabilities, net	(263)		(408)
Retirement benefits	(126)		(96)
Changes in other noncurrent assets and liabilities, net	207		287
Other, net	30		106
Net cash provided by operating activities	4,894		4,842
INVESTING ACTIVITIES
Capital expenditures	(2,052)		(2,971)
Proceeds from sale of property, plant and equipment and other assets	90		119
Other, net	13		12
Net cash used in investing activities	(1,949)		(2,840)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt	1,881		3,257
Payments of long-term debt	(2,604)		(6,334)
Net (payments of) proceeds from revolving line of credit	(150)		825
Dividends paid	(834)		(837)
Repurchases of common stock	(909)		—
Other, net	(52)		(83)
Net cash used in financing activities	(2,668)		(3,172)
Net increase (decrease) in cash, cash equivalents and restricted cash	277		(1,170)
Cash, cash equivalents and restricted cash at beginning of period	427		1,717
Cash, cash equivalents and restricted cash at end of period	$	704	547
Supplemental cash flow information:
Income taxes (paid) refunded, net	$	(102)	51
Interest paid (net of capitalized interest of $39 and $60)	$	(1,144)	(1,254)
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	$	635	526
Cash and cash equivalents included in Assets held for sale	39		—
Restricted cash included in Other current assets	2		3
Restricted cash included in Other, net noncurrent assets	28		18
Total	$	704	547

See accompanying notes to consolidated financial statements.

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LUMEN TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)


	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021	2020
	(Dollars in millions except per share amounts)
COMMON STOCK
Balance at beginning of period	$	1,105	1,097	1,097	1,090
Issuance of common stock through incentive and benefit plans	—		—	8	7
Repurchases of common stock	(74)		—	(74)	—
Balance at end of period	1,031		1,097	1,031	1,097
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period	20,361		21,376	20,909	21,874
Repurchases of common stock	(880)		—	(880)	—
Shares withheld to satisfy tax withholdings	(2)		(4)	(44)	(39)
Share-based compensation and other, net	25		33	89	132
Dividends declared	(269)		(275)	(839)	(837)
Balance at end of period	19,235		21,130	19,235	21,130
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period	(2,710)		(2,902)	(2,813)	(2,680)
Other comprehensive income (loss)	133		107	236	(115)
Balance at end of period	(2,577)		(2,795)	(2,577)	(2,795)
ACCUMULATED DEFICIT
Balance at beginning of period	(7,050)		(6,109)	(8,031)	(6,814)
Net income	544		366	1,525	1,057
Cumulative effect of adoption of ASU 2016-13, Measurement of Credit Losses, net of $(2) tax	—		—	—	9
Other	—		—	—	5
Balance at end of period	(6,506)		(5,743)	(6,506)	(5,743)
TOTAL STOCKHOLDERS' EQUITY	$	11,183	13,689	11,183	13,689
DIVIDENDS DECLARED PER COMMON SHARE	$	0.25	0.25	0.75	0.75

See accompanying notes to consolidated financial statements.

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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 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, 2020, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to rules and regulations of the 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, 2020.

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 (expense), net, (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other, net, financing activities.

We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenue and expenses in our segment reporting. See Note 14—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, 2021 or December 31, 2020.

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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, 2020.

Assets Held for Sale

We classify assets and related liabilities as held for sale when: (i) management has committed to a plan to sell the assets, (ii) the net assets are available for immediate sale, (iii) there is an active program to locate a buyer and (iv) the sale and transfer of the net assets is probable within one year. Assets and liabilities held for sale are presented separately on our consolidated balance sheets with a valuation allowance, if necessary, to recognize the net carrying amount at the lower of cost or fair value, less costs to sell. Depreciation of property, plant and equipment and amortization of finite-lived intangible assets and right-of-use assets are not recorded while these assets are classified as held for sale. For each period that assets are classified as being held for sale, they are tested for recoverability. Unless otherwise specified, the amounts and information presented in the notes do not include assets and liabilities that have been reclassified as held for sale as of September 30, 2021. See Note 2—Planned Divestiture of the Latin American and ILEC Businesses for additional information.

Recently Adopted Accounting Pronouncements

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 paragraphs 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) - Clarifying the Interactions between Topic 321, Topic 323, and 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, 2021, we determined there was no application or discontinuation of the equity method during the reporting periods. 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, "Simplifying the Accounting for Income Taxes (Topic 740)" ("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.

Measurement of Credit Losses on Financial Instruments

We adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13") on January 1, 2020 and recognized a cumulative adjustment to our accumulated deficit as of the date of adoption of $9 million, net of tax effect of $2 million. Please refer to Note 6—Credit Losses on Financial Instruments for more information.

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Recently Issued Accounting Pronouncements

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 are effective immediately and 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 September 30, 2021, we do not expect ASU 2021-01 to have a material impact on the consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04" or "Reference Rate Reform"), designed to ease the burden of accounting for contract modifications related to the global market-wide reference rate transition period. Subject to certain criteria, ASU 2020-04 provides qualifying entities the option to apply expedients and exceptions to contract modifications and hedging accounting relationships made until December 31, 2022. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU 2020-04 provides optional 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 September 30, 2021, we do not expect ASU 2020-04 to have a material impact on the 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 expects to close the transaction in the first 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, Lumen Technologies, Inc. and certain of its wholly-owned subsidiaries entered into a definitive agreement to divest their 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, Lumen and its subsidiaries would receive $7.5 billion, subject to (i) offsets for 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). Lumen expects to close the transaction in 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 there are changes in other assumptions that impact our estimates.

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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 tables below:


	Three Months Ended September 30,
	2021			2020
	Low		High	Low	High
	(Dollars in millions)
Latin American business pre-tax net income	$	59	72	36	45
ILEC business pre-tax net income	221		271	139	169
Total disposal groups pre-tax net income	$	280	343	175	214


	Nine Months Ended September 30,
	2021			2020
	Low		High	Low	High
	(Dollars in millions)
Latin American business pre-tax net income	$	131	160	108	131
ILEC business pre-tax net income	518		633	455	556
Total disposal groups pre-tax net income	$	649	793	563	687

As of September 30, 2021 in the accompanying consolidated balance sheets, 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 when we classified the disposal groups as held for sale 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, depreciation of property, plant and equipment and amortization of finite-lived intangible assets and right-of-use assets are not recorded while these assets are classified as held for sale. We estimate that we would have recorded an additional $107 million of depreciation, intangible amortization, and amortization of right-of-use assets for the three and nine months ended September 30, 2021 if the Latin American and ILEC businesses did not meet the held for sale criteria.

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 nine months ended September 30, 2021. The recoverability of each disposal group will be re-evaluated each reporting period until the closing of each transaction.

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The principal components of the held for sale assets and liabilities as of September 30, 2021 are as follows:


	September 30, 2021
	Latin American Business		ILEC Business	Total (4)
	(Dollars in millions)
Assets held for sale
Cash and cash equivalents	$	37	2	39
Accounts receivable, less allowance of $3, $21 and $24	83		230	313
Other current assets	75		46	121
Property, plant and equipment, net accumulated depreciation of $445, $10,976 and $11,421	1,545		3,386	4,931
Goodwill (1)	244		2,615	2,859
Other intangible assets, net	129		158	287
Other non-current assets	71		41	112
Total assets held for sale	$	2,184	6,478	8,662

Liabilities held for sale
Accounts payable	$	76	79	155
Salaries and benefits	22		28	50
Income and other taxes	32		31	63
Interest	—		38	38
Current portion of deferred revenue	28		90	118
Other current liabilities	10		43	53
Long-term debt, net of discounts (2)	—		1,367	1,367
Deferred income taxes, net	116		—	116
Pension and other post-retirement benefits (3)	2		56	58
Other non-current liabilities	126		147	273
Total liabilities held for sale	$	412	1,879	2,291

______________________________________________________________________

(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 includes $1.4 billion of Embarq Senior notes, $118 million of related unamortized discounts and $48 million of long-term finance lease obligations.

(3)Excludes pension obligation of approximately $2.5 billion for the ILEC business as of September 30, 2021, which will be transferred to the purchaser of the ILEC business upon closing. As of September 30, 2021, approximately $2.2 billion, or 89%, of this pension obligation is expected to be funded through the transfer of Lumen pension plan assets to the purchaser. The remaining portion of the obligation is expected to be separately funded with cash paid by Lumen at the time of closing.

(4)The totals shown here exclude $20 million of assets held for sale unrelated to these divestitures.

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(3) Goodwill, Customer Relationships and Other Intangible Assets

Goodwill, customer relationships and other intangible assets consisted of the following:


	September 30, 2021		December 31, 2020
	(Dollars in millions)
Goodwill	$	15,987	18,870
Indefinite-life intangible assets	$	9	278
Other intangible assets subject to amortization:
Customer relationships, less accumulated amortization of $11,571 and $11,060	5,535		6,344
Capitalized software, less accumulated amortization of $3,537 and $3,279	1,464		1,520
Trade names, patents and other, less accumulated amortization of $156 and $120	152		77
Total other intangible assets, net	$	7,160	8,219

When we acquired Embarq Corporation ("Embarq") in 2009, we acquired certain right-of-way assets and, because there were no legal, regulatory, contractual or other factors that would reasonably limit the useful life of these assets, we classified them as indefinite-lived and, as such, these assets were not amortized. However, as we leverage our fiber infrastructure assets, our reliance on the legacy infrastructure (largely copper-based) acquired from Embarq is diminishing. Our recent digital transformation efforts have prompted management to reassess and ultimately change the accounting treatment of these indefinite-lived assets to align with our focus on growth products versus our declining products. As a result, during the first quarter of 2021, we reclassified an indefinite-lived intangible asset to finite-lived intangible asset. As of January 1, 2021 we began amortizing the $268 million asset over its estimated nine-year remaining life. On August 3, 2021, upon entering into a definitive agreement to divest our ILEC business, we reclassified $158 million of the $268 million asset as held for sale. At this time, we discontinued recording amortization on the portion of the finite-lived intangible assets that had been reclassified as held for sale (see Note 2—Planned Divestiture of the Latin American and ILEC Businesses for more information). The above-described change in the estimated remaining economic life of these assets, as modified by the subsequent reclassification of a portion thereof, resulted in an increase in amortization expense of approximately $5 million and $20 million, respectively, for the three and nine months ended September 30, 2021, and is expected to increase amortization expense by approximately $23 million for the year ending December 31, 2021. The increase in amortization expense, net of tax, (i) reduced consolidated net income by approximately $4 million and $15 million, respectively, for the three and nine month periods ending September 30, 2021, with no impact per basic and diluted common share for the three months ended September 30, 2021 and a $0.01 reduction per basic and diluted common share for the nine months ended September 30, 2021 and (ii) is expected to reduce consolidated net income by approximately $17 million, or $0.02 per basic and diluted common share, for the year ending December 31, 2021.

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.

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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 an 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 represents the value of 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.

We completed an internal reorganization in January 2021. We now, as a result, report two segments: Business and Mass Markets. The following table shows the rollforward of goodwill assigned to our reportable segments, including the reorganization, from December 31, 2020 through September 30, 2021:


	International and Global Accounts		Enterprise	Small and Medium Business	Wholesale	Consumer	Business	Mass Markets	Total
	(Dollars in millions)
As of December 31, 2020(1)	$	2,555	4,738	2,808	3,114	5,655	—	—	18,870
January 2021 reorganization	(2,555)		(4,738)	(2,808)	(3,114)	(5,655)	12,173	6,697	—
Reclassified as held for sale(2)	—		—	—	—	—	(918)	(1,946)	(2,864)
Effect of foreign currency exchange rate change and other	—		—	—	—	—	(19)	—	(19)
As of September 30, 2021(1)	$	—	—	—	—	—	11,236	4,751	15,987

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(1)Goodwill at September 30, 2021 and December 31, 2020 is net of accumulated impairment losses of $7.7 billion and $12.9 billion, respectively. The change in accumulated impairment losses at September 30, 2021 is a result of amounts reclassified as held for sale related to our planned divestitures.

(2)Includes $2.9 billion of goodwill, net of accumulated impairment loss reclassified as held for sale related to our pending divestitures. See Note 2—Planned Divestiture of the Latin American and ILEC Businesses.

In January 2021, we began reporting under two segments: Business and Mass Markets. See Note 14—Segment Information for more information on these segments and the underlying sales channels. Since effecting this reorganization, we have used five reporting units for goodwill impairment testing, which are (i) Mass Markets, (ii) North America ("NA") Business (iii) Europe, Middle East and Africa region ("EMEA"), (iv) Asia Pacific region ("APAC") and (v) Latin America region ("LATAM"). Our January 2021 reorganization was considered an event or change in circumstance which required an assessment of our goodwill for impairment. We performed a qualitative impairment assessment in the first quarter of 2021 and concluded it is more likely than not that the fair value of each of our reporting units exceeded the carrying value of equity of our reporting units at January 31, 2021. Therefore, we concluded no impairment existed as of our assessment date.

The reclassification of held for sale assets, as described in Note 2—Planned Divestiture of the Latin American and ILEC Businesses, was considered an event or change in circumstance which required an assessment of our goodwill for impairment as of July 31, 2021. We performed a pre-reclassification goodwill impairment test to determine whether there was an impairment prior to the reclassification of these assets and to determine the July 31, 2021 fair values to be utilized for goodwill allocation regarding the disposal groups to be reclassified as assets held for sale. We concluded it was more likely than not that the fair value of each of our reporting units exceeded the carrying value of equity of our reporting units at July 31, 2021. We also performed a post-reclassification goodwill impairment test using our estimated post-divestiture cash flows and carrying value of equity to evaluate whether the fair value of our reporting units that will remain following the divestitures exceeds the carrying value of the equity of such reporting units after reclassification of assets held for sale.

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At July 31, 2021, we estimated the fair value of our five above-mentioned reporting units by considering both a market approach and a discounted cash flow method. We discounted the projected cash flows of our Mass Markets and Business segments using a rate that represents our weighted average cost of capital, which we determined to be approximately 6.8% as of the assessment date (which comprised an after-tax cost of debt of 2.3% and a cost of equity of 9.7%). We discounted the projected cash flows of our EMEA, LATAM and APAC reporting units using a rate that represents their estimated weighted average cost of capital, which we determined to be approximately 7.2%, 11.2% and 8.6%, respectively, as of the measurement date (which was comprised of an after-tax cost of debt of 2.6%, 5.3% and 3.6% and a cost of equity of 10.1%, 15.0% and 11.9%, respectively). We utilized company comparisons and analyst reports within the telecommunications industry which have historically supported a range of fair values derived from annualized revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples between 2.1x and 5.8x and 4.8x and 14.8x, respectively. We selected a revenue and EBITDA multiple for each of our reporting units resulting in an overall company revenue and EBITDA multiple of 2.8x and 6.3x, respectively. We also reconciled the estimated fair values of the reporting units to our market capitalization as of July 31, 2021 and concluded that the indicated implied control premium of approximately 32% was reasonable based on recent market transactions. As of July 31, 2021, we determined that the estimated fair value of equity exceeded the carrying value of equity for our Mass Markets, NA Business, EMEA, LATAM and APAC reporting units by 150%, 24%, 58%, 100% and 134%, respectively. Based on our assessments performed, we concluded it was more likely than not that the fair value of each of our reporting units exceeded the carrying value of equity of our reporting units at July 31, 2021. Therefore, we concluded no impairment existed as of our assessment date.

Total amortization expense for intangible assets for the three months ended September 30, 2021 and 2020 totaled $306 million and $443 million, respectively, and for the nine months ended September 30, 2021 and 2020 totaled $1.0 billion and $1.3 billion, respectively. As of September 30, 2021, the gross carrying amount of goodwill, customer relationships, capitalized software, indefinite-life and other intangible assets was $38.4 billion.

We estimate that total amortization expense for intangible assets for the years ending December 31, 2021 through 2025 will be as provided in the table below. As a result of reclassifying our disposal groups as being held for sale on our September 30, 2021 consolidated balance sheet, the amounts presented below do not include future amortization expense for intangible assets of those disposal groups. See Note 2—Planned Divestiture of the Latin American and ILEC Businesses for more information.


	(Dollars in millions)
2021 (remaining three months)	$	286
2022	1,027
2023	932
2024	842
2025	801

(4) Revenue Recognition

Product and Service Categories

Since the first quarter of 2021, we have categorized 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

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•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services.

Since the first quarter of 2021, we have categorized our products and services revenue among the following categories for the Mass Markets segment:

•Consumer Broadband, which includes high speed fiber-based and lower speed DSL-based broadband services to residential customers;

•Small Business Group ("SBG") Broadband, which includes high speed fiber-based and lower speed DSL-based broadband services to small businesses;

•Voice and Other, which include primarily local and long-distance services, retail video services (including our linear and TV services), professional services and other ancillary services; and

•Connect America Fund ("CAF") II, which consists of Connect America Fund Phase II payments through the end of 2021 to support voice and broadband in FCC-designated high-cost areas.

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:

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

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

178