Lumen Technologies, Inc. - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2022
or
☐ | 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 | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On February 21, 2023, 1,001,303,567 shares of common stock were outstanding. The aggregate market value of the voting stock held by non-affiliates as of June 30, 2022 was $11.2 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with the 2023 annual meeting of shareholders are incorporated by reference in Part III of this report.
Auditor Name: KPMG LLP Auditor Location: Denver, Colorado Auditor Firm ID: 185
1
TABLE OF CONTENTS
2
Unless the context requires otherwise, (i) references in this report on Form 10-K, for all periods presented, to "Lumen Technologies, Inc.," "Lumen Technologies" or "Lumen,"" "we," "us," the "Company" and "our" refer to Lumen Technologies, Inc. and its consolidated subsidiaries and (ii) references in this report to "Level 3" refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc., which we acquired on November 1, 2017.
PART I
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, securities repurchase plans, leverage, capital allocation plans, financing alternatives and sources, and pricing plans;
•statements regarding how the COVID-19 pandemic and its aftermath 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 intense 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;
3
•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 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 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 successfully and timely implement our corporate strategies, including our deleveraging and buildout strategies;
•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 and transform 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 timely obtain necessary hardware, software, equipment, services, governmental permits and other items on favorable terms;
•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;
4
•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;
•our ability to use our net operating loss carryforwards in the amounts projected;
•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 and its aftermath 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.
ITEM 1. BUSINESS
Business Overview and Purpose
We are an international facilities-based technology and communications company focused on providing our business and mass markets customers with a broad array of integrated products and services necessary to fully participate in our ever-evolving digital world. We operate one of the world’s most interconnected networks. Our platform empowers our customers to swiftly adjust digital programs to meet immediate demands, create efficiencies, accelerate market access and reduce costs - allowing customers to rapidly evolve their IT programs to address dynamic changes. Our specific products and services are detailed below under the heading “Segments and Products & Services.”
We conduct our operations under the following three brands:
•"Lumen," which is our flagship brand for serving the enterprise and wholesale markets
•"Quantum Fiber," which is our brand for providing fiber-based services to residential and small business customers
5
•"CenturyLink," which is our long-standing brand for providing mass-marketed legacy copper-based services, managed for optimal cost and efficiency.
With approximately 160,000 on-net buildings and 400,000 route miles of fiber optic cable globally, we are among the largest providers of communications services to domestic and global enterprise customers. Our terrestrial and subsea fiber optic long-haul network throughout North America, Europe and Asia Pacific connects to metropolitan fiber networks that we operate. We provide services in over 60 countries, with most of our revenue being derived in the United States ("U.S.").
As further discussed immediately below under the heading “Acquisitions and Divestitures,” we sold our Latin American business and a portion of our incumbent local exchange business ("ILEC") during 2022 and have agreed to sell our business conducted in Europe, the Middle East and Africa ("EMEA").
For a discussion of certain risks applicable to our business, see “Risk Factors” in Item 1A of Part I of this report.
Acquisitions and Divestitures
General
Since being incorporated in 1968, we have grown principally through acquisitions. By 2008, we had become one of the largest providers of rural telephone services in the United States. Since then, we acquired Embarq Corporation in mid-2009, Qwest Communications International Inc. in early 2011 and Level 3 Communications, Inc. in late 2017. These acquisitions substantially changed our customer base, geographic footprint, business strategies and mix of products and services.
We regularly evaluate the possibility of acquiring additional assets or divesting assets in exchange for cash, securities or other properties, and at any given time may be engaged in discussions or negotiations regarding additional acquisitions or divestitures. We generally do not announce our acquisitions or divestitures until we have entered into a preliminary or definitive agreement.
Divestitures of the Latin American and ILEC businesses and Planned Divestiture of the EMEA 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 and on October 3, 2022, we and certain of our affiliates sold the portion of our facilities-based ILEC business primarily conducted within 20 Midwestern and Southeastern states in each case in exchange for the consideration described in Items 7 and 8 in Part II of this report.
Under agreements entered into on November 2, 2022 and February 8, 2023, affiliates of Level 3 Parent, LLC have agreed to divest certain operations in EMEA to Colt Technology Services Group Limited, a portfolio company of Fidelity Investments, in exchange for $1.8 billion in cash, subject to certain post-closing adjustments. Level 3 Parent, LLC expects to close the transaction as early as late 2023, following receipt of all requisite regulatory approvals in the U.S. and certain countries where the EMEA business operates, as well as the satisfaction of other customary conditions.
See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business to our consolidated financial statements in Item 8 of Part II of this report for additional information on these transactions.
6
Financial Highlights
The following table summarizes the results of our consolidated operations:
| Years Ended December 31, | |||||||||||||||||
2022(1) | 2021 | 2020(1) | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Operating revenue | $ | 17,478 | 19,687 | 20,712 | |||||||||||||
| Operating expenses | 17,383 | 15,402 | 19,750 | ||||||||||||||
| Operating income | $ | 95 | 4,285 | 962 | |||||||||||||
| Net (loss) income | $ | (1,548) | 2,033 | (1,232) | |||||||||||||
_______________________________________________________________________________
(1)During 2022 and 2020, we recorded non-cash, non-tax-deductible goodwill impairment charges of $3.3 billion and $2.6 billion, respectively. For additional information, see Note 3—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 8 of Part II of this report.
We estimate that during 2022, 2021 and 2020, approximately 8.6%, 9.4% and 8.7%, respectively, of our consolidated revenue was derived outside the U.S.
The following table summarizes certain selected financial information from our consolidated balance sheets:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Total assets | $ | 45,581 | 57,993 | ||||||||
Total long-term debt(1) | 20,572 | 28,982 | |||||||||
| Total stockholders' equity | 10,437 | 11,840 | |||||||||
_______________________________________________________________________________
(1)For additional information on our total long-term debt, see Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report. For information on our total obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Future Contractual Obligations" in Item 7 of Part II of this report.
The summary financial information appearing above should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and notes thereto in Item 8 of Part II of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.
7
Strategy
Our over-arching strategic goal is to digitally connect people, data, and applications quickly, securely, and effortlessly. To attain this goal, we strive to, among other things:
•strengthen our digital self-service product ordering platforms;
•expand our offering of secure edge computing services;
•create a more adaptive network;
•expand our network capacity through our Quantum Fiber buildout plan and other initiatives;
•monetize our non-core assets and deliver cost-effective operations;
•manage our non-fiber business for cash; and
•strengthen our financial position and performance through debt paydown and cost reduction efforts.
Our Stakeholders
For years, one of our core tenets has been our belief that our success depends on regular communications with our stakeholders. When our new CEO, Kate Johnson, joined us in November 2022, her first major initiative was the creation of a "North Star" team, designed to further sharpen our focus on attaining our goals through relentlessly seeking input from all of our stakeholders including our investors, employees, customers, vendors, partners and our global community.
Employees and Human Capital Resources
Lumen’s highly competitive business requires attracting, developing and retaining a motivated team inspired by leadership, engaged in meaningful work, motivated by career growth opportunities and thriving in a culture that embraces diversity, inclusion and belonging. Understanding and anticipating the priorities of our current and future employees is important to our future success. We aim to bring together the best mix of diverse talent to develop the brightest ideas to transform industries across the globe. At December 31, 2022, we had approximately 29,000 employees world-wide, including approximately 5,000 outside the U.S.
Attracting, Developing and Retaining Talent
Our recruiting, development and retention objectives focus on treating talent as a differentiator and a leading indicator of business performance. We strive to hire and retain the best talent available and provide outstanding opportunities for career advancement, starting with a fair and unbiased hiring process. We have implemented diverse interview panels, which include at least one woman or person of color, to minimize the potential for unconscious bias in our recruitment process. Establishing a framework of competency-based success profiles and fostering career progression through regular career development and training empowers our employees to pursue their professional goals and helps to improve employee engagement and retention. We invest in broad-based development for our employees in various ways such as skills-building programs, on-demand learning options, tuition reimbursement and tailored intern and mentoring programs, along with a suite of leadership development courses. In an effort to create more development opportunities for all employees, we are currently expanding our mentoring and leadership development programs, with added focus on development for diverse employees.
We believe we have made significant strides in attracting, engaging, and hiring a diverse group of early career employees through our internship program, our numerous sales and operations academies, and our "pathways in technology" program. We have also increased our focus on fostering internal mobility and providing more visibility and career advancement opportunities to our workforce through our internal communications platforms.
We gauge the efficacy of our programs, identify opportunities for improvement, and pursue solutions through tracking and analyzing data in a variety of ways, including conducting annual talent reviews and measuring our progress toward goals specified in our development, diversity and inclusion plans.
8
Diversity, Inclusion & Belonging
We believe that diversity stimulates creativity, spurs innovation and helps drive profitability, which is why we strive to create inclusive, welcoming workplaces where everyone can feel at home, be their authentic selves and thrive. Realizing greater ethnic, racial and gender diversity across all levels of an organization is, and will continue to be, an ongoing journey. Our Diversity & Inclusion Steering Committee, comprised of a cross-functional team of senior executives and led by our Chief Diversity & Inclusion Officer, oversees and champions our diversity, inclusion and belonging strategy. We aim for the highest standards of fairness and equal opportunity in recruitment, hiring, promotions, job assignments and compensation (including undertaking periodic gender and race/ethnicity pay equity studies of our U.S., non-represented employees and making pay adjustments when warranted). Inclusive recruiting and outreach programs for diverse candidates, supportive and engaging employee resource groups, and management-led listening circles are among some of Lumen’s initiatives to create greater diversity and belonging among our employees.
Positive Corporate Culture
Our employees are critical to Lumen's success and we believe creating a positive, inclusive culture is essential to attracting and retaining engaged employees. We want our employees to be proud to work with us and fully engaged to share in our purpose to further human progress through technology. Lumen’s company culture program incorporates a wide variety of communication and training activities encouraging collaboration among our colleagues around the world. We measure the program’s efficacy and identify opportunities for improvements through an engagement survey distributed approximately every six months.
Health & Wellness
We are committed to promoting the health, safety and well-being of our employees, business partners and global communities. We want all of our employees to thrive, and we regularly re-evaluate how to best support our employees’ well-being through benefits and resources. We design our current benefit and wellness programs to drive engagement that positively impacts our culture, job satisfaction, recruiting and retention programs. We offer progressive employee benefits and enhancements that recognize the diverse needs of our people and their families.
Labor Relations
At December 31, 2022, approximately 20% of our U.S. workforce was represented by a union, either the Communications Workers of America or the International Brotherhood of Electrical Workers. Employees in four countries in Europe are represented by works councils or a representative body. We recognize the critical role that our supervisors and managers play in fostering a productive and respectful work environment, and we encourage employees to work directly with their supervisors, where possible, to efficiently and effectively resolve workplace concerns. We also respect our employees’ rights to voluntarily establish and join unions and similar associations without unlawful interference. We strive to work collaboratively with the unions, councils and associations that represent our workers.
Customer Success
Our customers range from individual households to global enterprises. Whether our network supports remote education to under-served communities or a multi-national work-from-home enterprise, all customers are impacted by the quality and reliability of our products and services. Understanding how each customer accesses and uses our products and services informs the type of customer engagement to best meet their expectations. One of our new CEO's top priorities after joining us in late 2022 was reshaping our senior leadership team to further increase our focus on customer engagement. Our Customer Success organization includes dedicated teams focused on building deeper relationships and providing us the opportunity to continually improve our customers’ Lumen experience, including their interactions with our employees and systems. We believe a strong experience leads to satisfied customers and engaged employees who are encouraged to recommend creative solutions. We have a dedicated team responsible for evaluating the best approach to improving the experiences of customers, coupled with frequent, transparent and informative communication processes.
9
We highly value both customer and employee suggestions. We offer our customers several channels for communicating with us, including voice, text, email, chat and social media, among others. We are driving a digital-first culture that allows our customers to configure, order, and rapidly deploy our services through an all-digital, self-service set of tools. Since 2019, we have hosted an annual customer experience (CX) event, during which we invite customers to collaborate directly with us.
While careful listening to customers is the best source of customer experience feedback, we believe overlaying it with employee feedback is the most effective way to continuously improve. We regularly invite our front-line employees to provide feedback on opportunities to improve our capabilities.
Partners and Vendors
We seek to engage with those partners and vendors who best contribute to our customers’ success. Lumen seeks to co-innovate with a comprehensive group of strategic partners to create solutions focused exclusively on our customers' business and IT requirements. Through our open and interoperable approach, we seek to identify the optimal platform for serving our customers – whether ours or a third party’s. When necessary, Lumen incorporates market-leading technologies to optimize application performance and streamline integration throughout the IT stack to ensure seamless integration and interoperability. Lumen has collaborated with a host of technology partners, giving us the capability to tailor and fully manage scalable solutions that customers control. Lumen, by working with our network of technology partners, integrates different technologies to improve our products and services.
In light of these efforts to better serve our customers, we are materially reliant on a wide range of vendors to support our organization and partners to support our strategy. We work with, and rely on, other communications companies that lease us transmission capacity or sell us various services necessary for our current operations, as well as a wide range of software, hardware and equipment suppliers. We believe that co-innovating with other companies enables us to rapidly evolve our customer offerings.
Environmental Stewardship and Sustainability
Environmental stewardship is inherent to our mission and identity. We believe our commitment to environmental sustainability promotes the financial health of our business and strengthens our relations with our employees, communities, customers and investors.
In early 2022, we formed the Sustainability Management Committee (“SMC”) comprised of employees from across the business. The SMC designs and oversees our company-wide sustainability program, including the monitoring of climate-related issues, and is responsible for driving the sustainability agenda with the Board and senior leadership. Additionally, our Environment, Health and Safety ("EHS") team is responsible for overseeing and implementing our EHS and environmental sustainability initiatives.
The EHS program framework focuses on seven key areas:
•Environmental compliance and management: The Lumen EHS team assesses and reviews our company programs, operational facilities and waste management vendors. We monitor environmental legislative activity and collaborate with other internal groups to develop documented practices and procedures that support compliance with applicable laws and regulations.
•Energy and emissions: In an effort to reduce our carbon footprint, we continue to identify and implement energy efficiency and greenhouse gas ("GHG") emissions reduction initiatives. As we continue to track performance against our 2025 science-based targets, we remain committed to exploring ways to reduce GHG emissions through our operational, customer and employee initiatives. In January 2021, we were among the very first U.S. companies to issue sustainability-linked bonds.
•Water: Lumen uses the World Resource Institute’s Water Risk Atlas to assess which countries of operation face the highest risk of water stress. We strive to reduce our water consumption, especially in the water-stressed communities where we operate. We track our usage and closely monitor abnormalities to improve water efficiencies and reduce site discharge.
10
•Waste: We are committed to reusing and recycling products, minimizing material use and carefully managing our waste. Each year, we divert millions of pounds of electronic and communications equipment from landfills. We recycle telecommunications equipment, and our modem/router takeback program allows customers to return their equipment, which are then either reused or sent to an R2-certified recycler.
•Supplier environmental assessment: We expect our suppliers to embrace and share our commitment to compliance and sustainability efforts. As reflected in our Supplier Code of Conduct, we expect our suppliers to use reasonable efforts to employ environmentally preferred and energy-efficient services, and to work with their own suppliers to assess and address environmental and sustainability issues within their supply chains.
•Climate preparedness: We evaluate various climate change risks to our ongoing operations when we consider expanding our network or facilities. Our comprehensive business continuity program focuses on prevention, collaboration, communication, response and recovery to assist us in quickly resolving disruptive events. Weather events such as severe flooding and hurricanes can impact our ability to deliver services, so business resiliency and adaptability is key to the long-term viability of our business.
•Occupational Health and Safety: The EHS team conducts risk assessments, reviews safety incident data and monitors health and safety legislation to develop policies and procedures designed to minimize safety hazards and support compliance with applicable laws and regulations. We carry out periodic reviews to identify steps designed to improve overall safety performance.
Our Network
Our network, through which we provide most of our products and services, consists of fiber-optic and copper cables, high-speed transport equipment, electronics, voice switches, data switches, routers, and various other equipment. We operate part of our network with leased assets, and a substantial portion of our equipment with licensed software.
At December 31, 2022, our global network (owned and leased) included (i) approximately 400,000 route miles of fiber optic plant, including approximately 25,000 route miles of subsea fiber optic cable systems and (ii) multiple gateway and transmission facilities used in connection with operating our network throughout North America and Europe.
At December 31, 2022, our domestic network connected (i) approximately 160,000 on-net buildings, which we refer to as “Fiber On-net” buildings, serving our enterprise customer base and (ii) approximately 21.8 million broadband-enabled units serving our Mass Markets customer base. At December 31, 2022, approximately 3.1 million of our Mass Markets broadband-enabled units were capable of receiving services from our fiber-based infrastructure, with the remainder connected with copper-based infrastructure. Our domestic network also included at such date central office and other equipment that enables us to provide telephone service as an ILEC.
As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report and Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business to our consolidated financial statements in Item 8 of Part II of this report, we sold portions of our network during 2022 and have agreed to sell portions thereof upon receipt of various approvals.
As noted elsewhere in this report, we view our network as one of our most critical assets. We have devoted, and plan to continue to devote, substantial resources to (i) simplify and modernize our network and legacy systems and (ii) expand our network to address demand for enhanced or new products. A key element of our network expansion plan is our Quantum Fiber buildout project. Under this project, we propose over the next several years to construct additional fiber optic infrastructure to enable us to provide Quantum Fiber broadband services to several million additional urban and suburban locations in our remaining ILEC markets.
Although we own most of our network, we lease a substantial portion of our core fiber network from several other communication companies under arrangements that will periodically need to be renewed or replaced to support our current network operations.
11
Like other large communications companies, we are a constant target of cyber-attacks of various degrees, and, from time to time in the ordinary course of our business, we experience disruption in our services. We develop and maintain systems and programs designed to protect against cyber-attacks and network outages. The development, maintenance and operation of these systems and programs is costly and requires ongoing monitoring and updating as technologies change and efforts to bypass security measures become more sophisticated and evolve rapidly.
For additional information regarding our systems, network assets, network risks, capital expenditure requirements and reliance upon third parties, see “Risk Factors” in Item 1A of Part I of this report.
Competition
We compete in a dynamic and highly competitive market in which demand for high-speed, secure data services continues to grow. We expect continued intense competition from a wide variety of sources under these evolving market conditions. In addition to competition from large international communications providers, we are facing competition from a growing number of sources, including systems integrators, hyperscalers, cloud service providers, software networking companies, infrastructure companies, cable companies, wireless service providers, device providers, resellers and smaller niche providers.
Our ability to compete hinges upon effectively enhancing and better integrating our existing products, introducing new products on a timely and cost-effective basis, meeting changing customer needs, providing high-quality information security to build customer confidence and combat cyber-attacks, extending our core technology into new applications and anticipating emerging standards, business models, software delivery methods and other technological changes. Depending on the applicable market and services, competition can be intense, especially if competitors in the market have network assets better suited to customer needs, faster transmission speeds or lower prices, or, in certain overseas markets, are national or regional incumbent communications providers that have a longer history of providing service in the market.
We compete to provide services to business customers based on a variety of factors, including the comprehensiveness and reliability of our network, our data transmission speeds, price, the latency of our available network services, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service. Competition from large communications providers, systems integrators, hyperscalers and others have increased pricing pressures with respect to several key products and services that we offer to our enterprise and wholesale business customers. In particular, several hyperscalers have recently built their own data transmission facilities, which has reduced demand for our network services.
Competition to provide broadband services to our mass markets customers remains high. Market demand for our broadband services could be adversely affected by (i) advanced wireless data transmission technologies, including fixed wireless and low-earth-orbit satellite services, and (ii) continued enhancements to cable-based services, each of which generally provides faster average broadband transmission speeds than our legacy copper-based infrastructure. In addition, several established or new communications companies, infrastructure companies or municipalities have built or are building new fiber-based networks to provide high-speed broadband services in existing or unserved markets, frequently with the support of governmental subsidies. Our network expansion and innovation strategy is focused largely on addressing these competitive pressures. To meet these demands and remain competitive, we are continuing to invest in network capacity, security, reliability, flexibility and design innovations, including through our Quantum Fiber buildout initiative.
For our traditional voice services, providers of wireless voice, social networking, videoconferencing and electronic messaging services are significant competitors as many customers are increasingly relying on these providers to communicate, resulting in the long-term systemic decline we have seen in our traditional voice services. Other potential sources of competition include non-carrier systems that are capable of bypassing our local networks, either partially or completely, through various means. Developments in software have permitted new competitors to offer affordable networking products that historically required more expensive hardware investment. We anticipate that all these trends will continue to place downward pressures on the use of our voice network.
12
Additionally, the Telecommunications Act of 1996 obligates ILECs, including those operated by us, to permit competitors to interconnect their facilities to the ILEC’s network and to take various other steps that are designed to promote competition, including obligations to (i) negotiate interconnection agreements in good faith, (ii) provide nondiscriminatory “unbundled” access to specific portions of the ILEC’s network and (iii) permit competitors to physically or virtually collocate their plant on the ILEC’s property. As a result of the above-described regulatory and technological developments, we also face competition from competitive local exchange carriers ("CLECs"), particularly in densely populated areas. CLECs provide competing services through (i) reselling an ILEC’s local services, (ii) using an ILEC’s unbundled network elements, (iii) operating their own facilities or (iv) a combination thereof.
Additional information about competitive pressures is located under the heading “Risk Factors—Business Risks” in Item 1A of Part I of this report.
Sales and Marketing
Market Overview
We believe we have a comprehensive set of fiber assets that positions us to deliver a highly-competitive suite of cloud connectivity, low latency edge computing, and integrated network services.
We generally market our business services to members of in-house IT departments or other highly-sophisticated customers with deep technological experience. These individuals typically satisfy their IT requirements by contracting with us or a rapidly evolving group of competitors, or by deploying in-house solutions.
Sales Channels
Our enterprise sales and marketing approach focuses on solving complex customer problems with advanced technology and network solutions – striving to make core networks services compatible with digital tools. We also rely on our call center personnel and a variety of channel partners to promote sales of services that meet the needs of our customers. To meet the needs of different customers, our offerings include both stand-alone services and bundled services designed to provide a complete offering of integrated services.
Our business customers range from small business offices to the world’s largest global enterprise customers. Our marketing plans include marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including telecommunications agents, system integrators, value-added resellers and other telecommunications firms. We support our distribution through digital advertising, events, television advertising, website promotions and public relations. We maintain local offices in most major and secondary markets within the U.S. and many of the primary markets of the more than 60 countries in which we provide services.
Similarly, our sales and marketing approach to our mass market customers emphasizes customer-oriented sales, marketing and service with a local presence. Our approach includes marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including retailers, satellite television providers, door to door sales agents and digital marketing firms.
Segments and Products & Services
We completed an internal reorganization in January 2021 to adjust our reporting segments and customer-facing sales channels to better align with operational changes designed to better support our customers. We believe the changes provide greater transparency into how we are performing against our strategy, including focusing on growth opportunities and managing declining legacy services.
Segments
We report our financial performance using two segments, as described below:
•Business Segment: Under our Business segment, we provide our products and services under four sales channels to meet the needs of our enterprise and commercial customers; and
13
•Mass Markets Segment: Under our Mass Markets segment, we provide products and services to residential and small business customers.
The following table shows the composition of our operating revenue by segment for the years ended December 31, 2022, 2021 and 2020:
| Years Ended December 31, | Percent Change | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 vs 2021 | 2021 vs 2020 | |||||||||||||||||||||||||
| Percentage of revenue: | |||||||||||||||||||||||||||||
| Business | 75 | % | 72 | % | 71 | % | 3 | % | 1 | % | |||||||||||||||||||
| Mass Markets | 25 | % | 28 | % | 29 | % | (3) | % | (1) | % | |||||||||||||||||||
| Total operating revenue | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||
For additional information on our segment data, including information on certain centrally-managed assets and expenses not reflected in our segment results, see Note 17—Segment Information to our consolidated financial statements in Item 8 of Part II of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Reporting Segments" in Item 7 of Part II of this report.
Products & Services
At December 31, 2022, we categorized our products and services revenue among the following product categories for the Business segment:
•Compute and Application Services
◦Edge Cloud Services. We provide both public and private cloud solutions that allow our customers to optimize cost and performance by offloading workloads. Lumen’s cloud products are designed to leverage our network edge to provide low-latency secure services for our customers. Additionally, we provide cloud orchestration tools that allow customers to shift work between cloud environments dynamically;
◦IT Solutions. We craft technology solutions for our customers and often manage these solutions on an ongoing basis. These services frequently enhance equipment or networks owned, acquired, or controlled by the customer and often include our consulting or software development services;
◦Unified Communications and Collaboration ("UC&C"). We provide access to various unified communications platforms. This offering includes both individual, license-based service models and more robust options that transform a customer’s inbound and outbound calling platform;
◦Colocation and Data Center Services. We provide different options for organizations’ data center needs. Our data center services range from dedicated hosting and cloud services to more complex managed solutions, including disaster recovery, business continuity, applications management support and security services to manage mission critical applications;
◦Content Delivery. Our content delivery services provide our customers with the ability to meet their streaming video and far-reaching digital content distribution needs through our Content Delivery Network ("CDN") services and our Vyvx Broadcast Solutions; and
◦Managed Security Services. We provide enterprise security solutions that help our customers secure networks, mitigate malicious attacks and identify potential security threats. These services include DDoS mitigation, remote and premise-based firewalls, professional consulting and management services, and threat intelligence services.
14
•IP and Data Services
◦Ethernet. We deliver a robust array of networking services built on ethernet technology. Ethernet services include point-to-point and multi-point equipment configurations that facilitate data transmissions across metropolitan areas and larger enterprise-class wide area networks. Our ethernet technology is also used by wireless service providers for data transmission via our fiber-optic cables connected to their towers;
◦Internet Protocol ("IP"). Our IP services provide global internet access over a high performance, diverse network with connectivity in more than 60 countries. Our fiber network spans approximately 400,000 route miles globally with extensive off-net access solutions across North America, Europe and Asia Pacific;
◦VPN Data Networks. Built on our extensive fiber-optic network, we create private networks tailored to our customers’ needs. These technologies enable service providers, enterprises and government entities to streamline multiple networks into a single, cost-effective solution that simplifies the transmission of voice, video, and data over a single secure network; and
◦Voice Over Internet Protocol (“VoIP”). We deliver a broad range of local and enterprise voice and data services built on VoIP technology, including VoIP enhanced local service, national and multinational session initiation protocol ("SIP") trunking, hosted VoIP service, Primary Rate Interface ("PRI") service support, long distance service and toll-free service.
•Fiber Infrastructure Services
◦Dark Fiber. We control an extensive array of unlit optical fiber known as “dark fiber,” which has been laid but not yet been equipped with the equipment necessary for it to transmit data. We provide access to this unlit optical fiber to customers who are interested in building their networks with this high-bandwidth, highly secure optical technology. We also provide professional services to engineer these networks, and in some cases, manage them for customers; and
◦Optical Services. We deliver high bandwidth optical wavelength networks to customers requiring an end-to-end solution with ethernet technology for a scalable amount of bandwidth connecting sites or providing high-speed access to cloud computing resources.
•Voice and Other
◦Voice Services. We offer our customers a complete portfolio of traditional Time Division Multiplexing ("TDM") voice services including PRI service, local inbound service, switched one-plus, toll free, long distance and international services;
◦Private Line. We deliver private line services, a direct circuit or channel specifically dedicated for connecting two or more organizational sites. Private line service offers a high-speed, secure solution for frequent transmission of large amounts of data between sites, including wireless backhaul transmissions; and
◦Other Legacy Services. We continue to provide certain services based on older platforms to support our customers as they transition to newer technology. These services include Synchronous Optical Network ("SONET") based ethernet, legacy data hosting services, and conferencing services.
15
At December 31, 2022, we reported our products and services revenue among the following categories for the Mass Markets segment:
•Fiber Broadband, under which we provide high speed broadband services to residential and small business customers utilizing our fiber-based network infrastructure;
•Other Broadband, under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure; and
•Voice and Other, under which we derive revenues from (i) providing local and long-distance voice services, professional services, and other ancillary services, and (ii) federal broadband and state support payments.
Research, Development & Intellectual Property
As of December 31, 2022, we held approximately 2,900 patents and patent applications in the U.S. and other countries. We have also received licenses to use patents held by others. Patent licenses give us the freedom to operate our business without the risk of interruption from the holder of the patented technology. We plan to continue to file new patent applications as we enhance and develop products and services, and we plan to continue to seek opportunities to expand our patent portfolio through strategic acquisitions and licensing.
In addition to our patent rights, we have rights in various trade names, trademarks, copyrights and other intellectual property that we use to conduct our business. Our services often use the intellectual property of others, including licensed software. We also occasionally license our intellectual property to others as we deem appropriate.
For information on various litigation risks associated with owning and using intellectual property rights, see “Risk Factors—Business Risks” in Item 1A of Part I of this report, and Note 18—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.
Regulation of Our Business
Our domestic operations are regulated by the Federal Communications Commission (the "FCC"), by various state regulatory commissions and occasionally by local agencies. Our non-domestic operations are regulated by supranational groups (such as the European Union, or EU), national agencies and frequently state, provincial or local bodies. Generally, we must obtain and maintain operating licenses from these bodies in most areas where we offer regulated services.
Changes in the composition and leadership of the FCC, state regulatory commissions and other agencies that regulate our business could have significant impacts on our revenue, expenses, competitive position and prospects. Changes in the composition and leadership of these agencies are often difficult to predict, which makes future planning more difficult.
The following description discusses some of the major regulations affecting our operations, but others could have a substantial impact on us as well. For additional information, see “Risk Factors” in Item 1A of Part I of this report.
16
Federal Regulation of Domestic Operations
General
The FCC regulates the interstate services we provide, including the business data service charges we bill for wholesale network transmission and intercarrier compensation, including the interstate access charges that we bill other communications companies in connection with the origination and termination of interstate phone calls. Additionally, the FCC regulates several aspects of our business related to international communications services, privacy, public safety and network infrastructure, including (i) our access to and use of local telephone numbers, (ii) our provision of emergency 911 services and (iii) our use or removal (potentially on a reimbursable basis) of equipment produced by certain vendors deemed to cause potential national security risks. We could incur substantial penalties if we fail to comply with the FCC’s applicable regulations.
Many of the FCC’s regulations adopted in recent years remain subject to judicial review and additional rulemakings, thus increasing the difficulty of determining the ultimate impact of these changes on us and our competitors.
Universal Service
Between 2015 and 2021, we received approximately $500 million annually through Phase II of the FCC's Connect America Fund ("CAF II"), a program that ended on December 31, 2021. In connection with the CAF II funding, we were required to meet certain specified infrastructure buildout requirements in 33 states by the end of 2021, which required substantial capital expenditures. In the first quarter of 2022, we recognized $59 million of previously deferred revenue related to the conclusion of the CAF II program based upon our final buildout and filing submissions. The government has the right to audit our compliance with the CAF II program. The ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our reserve accruals established for these matters.
In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”), which is a federal support program designed to replace the CAF II program. On December 7, 2020, the FCC allocated in its RDOF Phase I auction $9.2 billion in support payments over 10 years to deploy high speed broadband to over 5.2 million unserved locations. We won bids to receive approximately $26 million of annual RDOF Phase I support payments, of which approximately 36% is attributable to the ILEC business we divested on October 3, 2022. Our support payments under the RDOF Phase I program commenced during the second quarter of 2022.
In November 2021, the U.S. Congress enacted legislation that appropriated $65 billion to improve broadband affordability and access, primarily through federally funded state grants. As of the date of this report, various state and federal agencies are continuing to take steps to make this funding available to eligible applicants, including us. It remains premature to speculate on the potential impact of this legislation on us.
For additional information about these programs, see (i) Note 4—Revenue Recognition to our consolidated financial statements in Item 8 of Part II of this report and (ii) "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.
17
Broadband Regulation
In February 2015, the FCC adopted an order classifying broadband internet access services (“BIAS”) under Title II of the Communications Act of 1934 and applying new regulations. In December 2017, the FCC voted to repeal the classification of BIAS as a Title II service and to preempt states from imposing substantial regulations on broadband services. Opponents of this change appealed this action in federal court. Several states have also opposed the change and have proposed, implemented or enacted laws or orders focused on state-specific Internet service regulation. In October 2019, the federal court upheld the FCC’s classification decision but vacated a part of its preemption ruling. Various courts are considering or have ruled upon the issue of the enforceability of state broadband regulation, and additional litigation and appeals are expected with respect to this issue. In addition, members of the Biden Administration and various consumer interest groups have advocated in favor of reclassifying BIAS under Title II. The ultimate impact of these pending judicial matters and calls for additional regulation are currently unknown to us, although the imposition of heightened regulation of our Internet operations could potentially hamper our ability to operate our data networks efficiently, restrict our ability to implement network management practices necessary to ensure quality service, increase the cost of operating, maintaining and upgrading our network, and otherwise negatively impact our current operations.
State Regulation of Domestic Operations
Historically ILECs, including ours, have been regulated as “common carriers,” and state regulatory commissions have generally exercised jurisdiction over intrastate voice telecommunications services and their associated facilities. In recent years, most states have reduced their regulation of ILECs. State regulatory commissions generally continue to (i) set the rates that telecommunications companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) limit ILECs’ ability to borrow and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various other service standards.
In most states, switched and business data services and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region. In addition, Voice-Over-Internet Protocol services are regulated by state regulators, but more lightly than ILEC services. State agencies also regulate certain aspects of non-ILEC communications businesses, including administering the payment of federal subsidies to support broadband infrastructure construction.
Data Privacy Regulations
Various foreign, federal and state laws govern our storage, maintenance and use of customer data, including a wide range of consumer protection, data protection, privacy, intellectual property and similar laws. Data privacy regulations are complex and vary across jurisdictions. As a company with global operations, we must comply with various jurisdictional data privacy regulations, including the General Data Protection Regulation (“GDPR”) in the EU and similar laws adopted by various other jurisdictions in certain of our domestic and overseas markets. The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction. These regulations require careful handling of personal and customer data and could have a significant impact on our business, especially if we violate any of those regulations.
Anti-Bribery and Corruption Regulations
As a company with global operations, we must comply with complex foreign and U.S. laws and regulations governing business ethics and practices, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to governmental officials and anti-competition regulations. We have compliance policies, programs and training designed to prevent non-compliance with such anti-corruption regulations in the U.S. and other jurisdictions.
Regulation of International Operations
18
Our subsidiaries operating outside of the U.S. are subject to various regulations in the markets where service is provided. The scope of regulation varies from country to country. The communications regulatory regimes in certain of our non-domestic markets are in the process of development. Many issues, including the pricing of services, have not been addressed fully, or even at all.
Our overseas operations are also subject to various other domestic or non-domestic laws or regulations, including various laws or regulations governing exports and imports of various goods or technologies and certain sanctioned business activities.
In 2020, the United Kingdom (“UK”) terminated its membership in the EU (“Brexit”) and has entered into related separation agreements with the EU regarding data sharing, financial services and other matters. We currently operate a staging facility in the UK, where certain core network elements and customer premise equipment is configured before being shipped to both UK and EU locations. The UK is currently also a central repository of our spare parts for use in our European operations. Nonetheless, only a relatively small portion of our business is conducted within the UK, and we have entered into an arrangement to sell our EMEA operations. Consequently, we do not anticipate Brexit will have a substantial impact on our business.
Other Regulations
Our networks and properties are subject to numerous federal, state and local laws and regulations, including laws and regulations governing the use, storage and disposal of hazardous materials, the release of pollutants into the environment and the remediation of contamination. Our contingent liabilities under these laws are further described in Note 18—Commitments, Contingencies and Other Items. Certain federal and state agencies, including attorneys general, monitor and exercise oversight related to consumer protection issues. We are also subject to codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate. Such regulations are enacted by municipalities, counties, state, federal or other regional governmental bodies, and can vary widely from jurisdiction to jurisdiction as a result. Such regulations may also require us to pay substantial fees.
Seasonality
Overall, our business is not materially impacted by seasonality. Our network-related operating expenses are, however, generally higher in the second and third quarters of the year. From time to time, weather related problems have resulted in increased costs to repair our network and respond to service calls in some of our markets. The amount and timing of these costs are subject to the weather patterns of any given year but have generally been highest during the third quarter and have been related to damage from severe storms, including hurricanes, tropical storms and tornadoes in our markets along the Atlantic and Gulf of Mexico coastlines.
Additional Information
From time to time, we may make investments in other communications or technology companies. For further information on regulatory, technological and competitive factors that could impact our revenue, see "Regulation" above under this Item 1, "Competition" above under this Item 1, "Risk Factors" below under Item 1A. For more information on the financial contributions of our various services, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.
19
Website Access and Important Investor Information
We were incorporated in Louisiana in 1968. Our website is www.lumen.com. We routinely post important investor information in the “Investor Relations” section of our website at ir.lumen.com. The information contained on, or that may be accessed through, our website is not part of this report or any other periodic reports that we file with the SEC. Any references to our website in this report or any other periodic reports that we file with the SEC are provided for convenience only, and are not intended to make any of our website information a part of this or such other reports. You may obtain free electronic copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K of us and two of our principal subsidiaries, and amendments to those reports, in the “Investor Relations” section of our website (ir.lumen.com) under the heading “FINANCIALS” and subheading “SEC Filings.” These reports are also available on the SEC’s website at www.sec.gov. From time to time, we also use our website to webcast our earnings calls and certain of our meetings with investors or other members of the investment community.
We have adopted a written code of conduct that serves as the code of ethics applicable to our directors, officers and employees, in accordance with applicable laws and rules promulgated by the SEC and the New York Stock Exchange. In the event that we make any changes (other than by a technical, administrative or non-substantive amendment) to, or provide any waivers from, the provisions of our code of conduct applicable to our directors or executive officers, we intend to disclose these events on our website or in a report on Form 8-K filed with the SEC. The code of conduct, as well as copies of our guidelines on significant governance issues and the charters of our key board committees, are also available in the “Governance” section of our website at www.lumen.com/en-us/about/governance or in print to any shareholder who requests them by sending a written request to our Corporate Secretary at Lumen Technologies, Inc., 100 CenturyLink Drive, Monroe, Louisiana, 71203.
In connection with filing this report, our chief executive officer and chief financial officer made the certifications regarding our financial disclosures required under the Sarbanes-Oxley Act of 2002, and its related regulations. In addition, during 2022, our chief executive officer certified to the New York Stock Exchange that she was unaware of any violations by us of the New York Stock Exchange’s corporate governance listing standards.
As a large complex organization, we are from time to time subject to litigation, disputes, governmental or internal investigations, consent decrees, service outages, security breaches or other adverse events. We typically publicly disclose these occurrences (and their ultimate outcomes) only when we determine these disclosures to be material to investors or otherwise required by applicable law.
We typically disclose material non-public information by disseminating press releases, making public filings with the SEC, or disclosing information during publicly accessible meetings or conference calls. Nonetheless, from time to time we have used, and intend to continue to use, our website and social media accounts to augment our disclosures.
Investors should also be aware that while we do, at various times, answer questions raised by securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Investors should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Unless otherwise indicated, information contained in this report and other documents filed by us under the federal securities laws concerning our views and expectations regarding the technology or communications industries are based on estimates made by us using data from industry sources and making assumptions based on our industry knowledge and experience. You should be aware that we have not independently verified data from industry or other third-party sources and cannot guarantee its accuracy or completeness.
We have defined methodologies for calculating certain of our statistical data, including route miles, broadband subscribers, broadband-enabled units, on-net buildings and similar metrics. We may calculate these amounts differently from other industry participants.
Our principal executive offices and telephone number are listed on the cover page of this report.
20
ITEM 1A. RISK FACTORS
The following discussion identifies material factors that could (i) materially and adversely affect our business, financial condition, results of operations or prospects or (ii) cause our actual results to differ materially from our anticipated results, projections or other expectations. The following information should be read in conjunction with the other portions of this annual report, including “Special Note Regarding Forward-Looking Statements”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our consolidated financial statements and related notes in Item 8. All references to "Notes" in this Item 1A of Part I refer to the Notes to Consolidated Financial Statements included in Item 8 of Part II of this report. Please note the following discussion is not intended to comprehensively list all risks or uncertainties faced by us. Our operations or actual results could also be similarly impacted by additional risks and uncertainties that are not currently known to us, that we currently deem to be immaterial, that arise in the future or that are not specific to us. In addition, certain of the risks described below apply only to a part or segment of our business.
Business Risks
We may not be able to create the global digital experience expected by customers.
Our customers expect us to create and maintain a global digital experience, including (i) automation and simplification of our offerings and (ii) digital self-service access to our products, services and customer support. To do so, we must timely and successfully complete the digital transformation of our operations that is currently underway. Effective digital transformation is a complex, dynamic process requiring efficient allocation and prioritization of resources, simplification of our product portfolio, faster product deployments, retirement of obsolete systems, migration of data and corresponding workforce and system development. We cannot assure you we will be able to timely effect the successful digital transformation necessary to develop or deliver a global digital experience expected by our customers. If we are unable to do so, we could lose existing customers or fail to attract new ones, either of which could prevent us from attaining our financial goals.
Challenges with integrating or modernizing our existing applications and systems could harm our performance.
To succeed, we need to integrate, update and upgrade our existing applications and systems, including many legacy systems from past acquisitions. We cannot assure you we will be able to integrate our legacy IT systems, modernize our infrastructure, timely retire aging systems or deploy a master data management platform. These modernization efforts will require efficient allocation of resources, development capacity, greater use of artificial intelligence and other emerging technologies, access to subject-matter experts, development of a sustainable operating model and successful collaboration between legal, privacy and security personnel. Any failure to timely accomplish these initiatives may negatively affect our (i) customer and employee experiences, (ii) ability to meet regulatory, legal or contractual obligations, (iii) network stability, (iv) ability to realize anticipated efficiencies, (v) ability to timely repair infrastructure and respond to service outages or (vi) ability to deliver services to our customers at required speed and scale.
We operate in an intensely competitive industry and existing and future competitive pressures could harm our performance.
Each of our business and mass market offerings faces increasingly intense competition, with increased pressure to timely offer digitally integrated services, from a wide range of sources under evolving market conditions that have increased the number and variety of companies that compete with us. Some of our current and potential competitors: (i) offer products or services that are substitutes for our traditional wireline services, including wireless broadband, wireless voice and non-voice communication services, (ii) offer a more comprehensive range of communications products and services, (iii) have greater financial, provisioning, technical, engineering, research, development, marketing, customer relations or other resources, (iv) conduct operations or raise capital at a lower cost than we do, (v) are subject to less regulation than we are, (vi) have stronger brand names, (vii) have deeper or more long-standing relationships with key customers, (viii) might be perceived as having an ESG profile more attractive to customers or employees, or (ix) have larger operations than ours, any of which may enable them to compete more successfully for customers, strategic partners and acquisitions. In recent years, competitive pressures have commoditized pricing for some of our products and services and lowered market prices for many of our other products and services. Continued competitive pressures will likely place further downward pressure on market pricing.
21
Our ability to successfully compete could be hampered if we fail to timely develop and market innovative technology solutions that address changing customer demands.
The technology and communications industry has been and continues to be impacted by significant technological changes, which are enabling an increasing variety of companies to compete with us. Many of these technological changes are (i) displacing or reducing demand for certain of our services, (ii) enabling the development of competitive products or services, (iii) enabling customers to reduce or bypass use of our networks or (iv) reducing our profit margins. For example, as service providers continue to invest in 5G and low earth orbit satellite networks and services, their services could reduce demand for our network services. Increasingly, customers are demanding more technologically advanced products that suit their evolving needs. To remain competitive, we will need to accurately predict and respond to changes in technology, to continue developing products and services attractive to our customers, to timely provision our products and services, to maintain and expand our network to enable it to support customer demands for greater transmission capacity and speeds, and to discontinue outdated products and services on a cost-effective basis. Our ability to do so could be restricted by various factors, including limitations of our existing network, technology, capital or personnel. If we fail at that, we could lose customers or fail to attract new ones.
We may be unable to attract, develop and retain leaders and employees with the right skillsets and technical expertise.
We may be unable to attract and retain skilled and motivated leaders and employees who possess the right skillsets and technical, managerial and development expertise to execute on our plans for transformation, innovation and strategic growth. We operate in a highly competitive and expanding industry, where competition for highly skilled employees has grown increasingly intense, and we have experienced, and may continue to experience, higher than anticipated levels of employee attrition. Our competitors periodically target our employees with highly sought-after skills and will likely continue to do so in the future. Further, the increased availability of remote working arrangements, largely driven by the COVID-19 pandemic, has expanded the pool of companies that can compete for our employees and employee candidates. We believe some of our competitors with greater resources and fewer cost constraints than us have from time to time been able to offer compensation, benefits or accommodations in excess of what we are able to offer. These risks to attracting and retaining the necessary talent may be exacerbated by inflationary pressures on employee wages and benefits. As a result, we may be unable to cost-effectively hire and retain employees with market-leading skills. There is no assurance our efforts to recruit and retain qualified personnel will be successful. If we are unable to do so, such failure could have a material adverse effect on our operations and financial condition.
The COVID-19 pandemic caused us to modify our workforce practices, including having the majority of our employees work from home on a fully remote or hybrid basis. We reopened our offices in 2022 under a “hybrid” working environment, meaning that some of our employees have the flexibility to work remotely at least some of the time, for the foreseeable future. The hybrid working environment may impair our ability to maintain our collaborative and innovative culture, and may cause disruptions among our employees, including decreases in productivity, challenges in collaboration between on-site and off-site employees and, potentially, employee dissatisfaction and attrition. If our attempts to operate under a hybrid working environment are not successful, our business could be adversely impacted.
The pandemic, inflation and other events over the past couple years have increased employees’ expectations regarding compensation, workplace flexibility and work-home balance. These developments have intensified certain of our above-described challenges and made it relatively more difficult for us to attract and retain top talent. We do not expect these developments to have a material adverse impact on us, but we can provide no assurances to this effect.
We could be harmed if our reputation is damaged.
We believe our Lumen and other brand names and our reputation are important corporate assets that help us attract and retain customers and talented employees. However, our corporate reputation is susceptible to material damage by events such as disputes with customers or competitors, cyber-attacks or service outages, internal control deficiencies, delivery failures, compliance violations, government investigations or legal proceedings. Similar events impacting one of our competitors could result in negative publicity for our entire industry that indirectly harms our business. We may also experience reputational damage if customers, vendors, employees, advocacy groups,
22
regulators, investors, the media, social media influencers or others criticize our services, operations or public positions.
There is a risk that negative or inaccurate information about Lumen, even if based on rumor or misunderstanding, could adversely affect our business. Damage to our reputation could be difficult, expensive and time-consuming to repair. Damage to our reputation could also reduce the value and effectiveness of the Lumen brand name and could reduce investor confidence in us, having a material adverse impact on the value of our securities.
We could be harmed by cyber-attacks.
Our vulnerability to cyber-attacks is heightened by several features of our operations, including (i) our material reliance on our networks to conduct our operations, (ii) our transmission of large amounts of data over our systems and (iii) our processing and storage of sensitive customer data.
Cyber-attacks on our systems may stem from a variety of sources, including fraud, malice or sabotage on the part of foreign nations, third parties, vendors, or employees and attempts by outside parties to gain access to sensitive data that is stored in or transmitted across our network. Cyber-attacks can take many forms, including computer hackings, computer viruses, ransomware, worms or other destructive or disruptive software, denial of service attacks, or other malicious activities. Cyber-attacks can put at risk personally identifiable customer data or protected health information, thereby implicating stringent domestic and foreign data protection laws. These threats may also arise from failure or breaches of systems owned, operated or controlled by other unaffiliated operators to the extent we rely on them to operate our business. Various other factors could intensify these risks, including, (i) our maintenance of information in digital form stored on servers connected to the Internet, (ii) our use of open and software-defined networks, (iii) the complexity of our multi-continent network composed of legacy and acquired properties, (iv) growth in the size and sophistication of our customers and their service requirements, (v) increased use of our network due to greater demand for data services and (vi) our increased incidence of employees working from remote locations.
Like other prominent technology and communications companies, we and our customers are constant targets of cyber-attacks. The number of these attacks against us increased in 2022. Despite our efforts to prevent these events, some of these attacks have resulted in security breaches, although thus far none of these breaches has resulted in a material adverse effect on our operating results or financial condition. You should be aware, however, that the risk of breaches is likely to continue to increase due to several factors, including the increasing sophistication of cyber-attacks and the wider accessibility of cyber-attack tools. Known and newly discovered software and hardware vulnerabilities are constantly evolving, which increases the difficulty of detecting and successfully defending against them. You should be further aware that defenses against cyber-attacks currently available to U.S. companies are unlikely to prevent intrusions by a highly-determined, highly-sophisticated hacker. Consequently, you should assume we will be unable to implement security barriers or other preventative measures that repel all future cyber-attacks.
Although we maintain insurance coverage that may, subject to policy terms and conditions (including self-insured deductibles, coverage restrictions and monetary coverage caps), cover certain aspects of our cyber risks, such insurance coverage may be unavailable or insufficient to cover our losses.
Cyber-attacks could (i) disrupt the proper functioning of our networks and systems, which could in turn disrupt the operations of our customers, (ii) result in the destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive, classified or otherwise valuable information of ours, our employees, our customers or our customers’ end users, (iii) require us to notify customers, regulatory agencies or the public of data breaches, (iv) damage our reputation or result in a loss of business, (v) require us to provide credits for future service to our customers or to offer expensive incentives to retain customers; (vi) subject us to claims by our customers or regulators for damages, fines, penalties, license or permit revocations or other remedies, (vii) result in the loss of industry certifications, or (viii) require significant management attention or financial resources to remedy the resulting damages or to change our systems. Any or all of the foregoing developments could have a material adverse impact on us.
23
We could be harmed by outages in our network or various platforms, or other failures of our services.
From time to time in the ordinary course of our business, we experience outages in our network, hosting, cloud or IT platforms, or failures of our products or services (including basic and enhanced 911 emergency services) to perform in the manner anticipated. These disruptions expose us to several of the same risks listed above for cyber-attacks, including the loss of customers, the issuance of credits or refunds, and regulatory fines. We remain vulnerable to future disruptions due to several factors, including aging network elements, human error, continuous changes in our network, the introduction of new products or technologies, vulnerabilities in our vendors or supply chain, aberrant employees and hardware and software limitations. The process for remediating any interruptions, outages, delays or cessations of service could be more expensive, time-consuming, disruptive and resource intensive than planned. Delayed sales, lower margins, fines or lost customers resulting from future disruptions could have a material adverse impact on our business, reputation, results of operations, financial condition, cash flows and stock price.
Several of our services continue to experience declining revenue, and our efforts to offset these declines may not be successful.
Primarily as a result of the competitive and technological changes discussed above, we have experienced a prolonged systemic decline in our local voice, long-distance voice, network access and private line revenues. Consequently, we have experienced declining consolidated revenues (excluding acquisitions) for a prolonged period and have not been able to realize cost savings sufficient to fully offset the decline. More recently, we have experienced declines in revenue derived from a broader array of our products and services, including those marketed to our enterprise customers and customers with global locations. We have thus far been unable to reverse our annual revenue losses (excluding acquisitions). In addition, most of our more recent product and service offerings generate lower profit margins and may have shorter lifespans than our traditional communication services, and some can be expected to experience slowing or no growth in the future. Some of our new product offerings have reduced or displaced our sale of older product offerings. Accordingly, we may not be successful in attaining our goal of achieving future revenue growth.
Our operations, financial performance and liquidity are materially reliant on key suppliers, vendors and other third parties.
Our ability to conduct our operations could have a material adverse impact on us if certain of our arrangements with third parties were terminated, including those further described below.
Reliance on other communications providers. To offer certain services in certain of our markets, we must either purchase services or lease network capacity from, or interconnect our network with, the infrastructure of other communications carriers or cloud companies who typically compete against us in those markets. Our reliance on these supply or interconnection arrangements limits our control over the delivery and quality of our services. In addition, we are exposed to the risk that other carriers may be unwilling or unable to continue or renew these arrangements in the future. Those risks are heightened when the other carrier is a competitor who may benefit from terminating the agreement or imposing price increases. Additionally, several communications companies rely on our network to transmit their data or voice traffic. Their reliance on our network exposes us to the risk that they may transfer all or a portion of this traffic from our network to alternative networks owned, constructed or leased by them, thereby reducing our revenue. Certain of our hyperscaler customers have built infrastructure that has reduced their reliance on us.
Reliance on key suppliers and vendors. We depend on a limited number of suppliers and vendors to provide us, directly or through other suppliers, with equipment and services relating to our network infrastructure, including fiber optic cable, software, optronics, transmission electronics, digital switches, routing equipment, customer premise equipment, and related components. We also rely on software and service vendors or other parties to assist us with operating, maintaining and administering our business, including billing, security, provisioning and general operations. If any of these vendors experience business interruptions, security breaches, litigation or other issues that interfere with their ability to deliver their products or services on a timely basis, our operations could suffer significantly.
For a description of how the COVID-19 pandemic and its aftermath have impacted our access to supplies and labor, please see Item 7 in Part II of this report.
24
Reliance on key licensors. We rely on key technologies licensed from third parties to deliver certain of our products and services. Our agreements with these licensors may expire or be terminated, and some of the licenses may not be available to us in the future on terms acceptable to us or at all. Moreover, if we incorporate licensed technology into our network, we may have limited flexibility to deploy different technologies from alternative licensors.
Reliance on key customer contracts. We have several complex high-value national and global customer contracts. These contracts are frequently impacted by a variety of factors that could reduce or eliminate the profitability of these contracts. Moreover, we would be adversely impacted if we fail to renew major contracts upon their expiration.
Reliance on landowners. We rely on rights-of-way, colocation agreements, franchises and other authorizations granted by governmental bodies, railway companies, utilities, carriers and other third parties to locate a portion of our network equipment over, on or under their respective properties. A significant number of these authorizations are scheduled to lapse over the next five to ten years, unless we are able to extend or renew them. Further, some of our operations are subject to licensing and franchising requirements imposed by municipalities or other governmental authorities. Our operations could be adversely affected if any of these authorizations are cancelled, or otherwise terminate or lapse, or if the landowner requests price increases. Similarly, our buildout plans can be delayed if we cannot receive necessary landowner authorizations or governmental permits. We cannot assure you we will be able to successfully extend these arrangements when their terms expire, or to enter into new arrangements that may be necessary to implement our network expansion opportunities.
Climate change could disrupt our operations, cause us to incur substantial additional capital and operating costs or negatively affect our business.
A substantial number of our domestic facilities are located in coastal states, which subjects them to the risks associated with severe tropical storms, hurricanes and tornadoes, and many other of our facilities are subject to the risk of earthquakes, floods, fires, tornadoes or other similar casualty events. From time to time these events (including Hurricane Ian in 2022 in Florida) have disrupted our operations, and similar future events could cause substantial damages, including downed transmission lines, flooded facilities, power outages, fuel shortages, network congestion, delay or failure, damaged or destroyed property and equipment, and work interruptions. Due to substantial deductibles, coverage limits and exclusions, and limited availability, we have typically recovered only a portion of our losses through insurance.
Climate change may increase the frequency or severity of natural disasters and other extreme weather events in the future, which would increase our exposure to the above-cited risks and could disrupt our supply chain from our key suppliers and vendors.
Our environmental, social and governance (ESG) commitments and disclosures may expose us to reputational and legal risks.
Our brand and reputation could be impacted by our public commitments to various corporate environmental, social and governance (ESG) initiatives, including our political contributions, our advocacy positions, and our goals for sustainability, inclusion and diversity. Positions we take or do not take on ESG issues could negatively impact our ability to attract or retain customers and employees. In addition, we could be criticized for the timing, scope or nature of these initiatives, goals, or commitments, or for any revisions to them. To the extent that our required and voluntary disclosures about ESG matters increase, we could be criticized for the accuracy, adequacy, or completeness of such disclosures. Our actual or perceived failure to achieve our ESG-related initiatives, goals, commitments or mandates could negatively impact our reputation or otherwise materially harm our business.
Increasing focus on ESG matters has resulted in, and is expected to continue to result in, the adoption of legal and regulatory requirements designed to mitigate the effects of climate change on the environment, as well as legal and regulatory requirements requiring additional related disclosures. If new laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and costs to meet such obligations. In addition, our selection of voluntary disclosure frameworks and standards, and the interpretation or application of those frameworks and standards, may change from time to time or may not meet the expectations of investors or other stakeholders. Our ability to achieve our ESG commitments is subject to numerous risks, many of which are outside of our control, including: (i) evolving and potentially inconsistent regulatory requirements affecting ESG standards, measurements, methodologies and disclosures; (ii) the availability of
25
suppliers that can meet our sustainability, diversity and other standards; and (iii) our ability to recruit, develop, and retain diverse talent. Our processes and controls for reporting ESG matters across our operations and supply chain are evolving along with multiple disparate standards for identifying, measuring, and reporting ESG metrics, including enhanced ESG-related disclosures that may be required by the SEC, and other regulators. Such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future.
Any additional future acquisitions or strategic investments may not be available on attractive terms and would subject us to additional risks.
Much of our past growth is attributable to acquisitions. In an effort to implement our business strategies, we may from time to time in the future attempt to pursue other acquisition or expansion opportunities, including strategic investments. To the extent we can identify attractive opportunities, these transactions could involve acquisitions of entire businesses or investments in start-up or established companies and could take several forms. These types of transactions may present significant risks and uncertainties, including the difficulty of identifying appropriate companies to acquire or invest in on acceptable terms, potential violations of covenants in our debt instruments, insufficient revenue acquired to offset liabilities assumed, unexpected expenses, inadequate return of capital, regulatory or compliance issues, potential infringements, difficulties integrating the new properties into our operations, and other unidentified issues not discovered in due diligence. In addition, the financing of any future acquisition completed by us could adversely impact our capital structure. Except as required by law or applicable securities exchange listing standards, we do not expect to ask our shareholders to vote on any proposed acquisition.
Dispositions could have a detrimental impact on us or the holders of our securities.
In the past, we have disposed of businesses or asset groups for a variety of reasons, and currently expect to consummate within the next year a planned divestiture discussed elsewhere in this section "Item 1A. Risk Factors." In addition, we may dispose of other businesses or asset groups from time to time in the future. If we proceed with any such other divestitures of assets, we may experience operational difficulties segregating them from our retained assets and operations, which could result in disruptions to our operations or claims for damages, among other things. Moreover, such dispositions could reduce our cash flows available to support our capital expenditures, pension contributions, debt maturities or other commitments.
We face other business risks.
We face other business risks, including among others:
•the difficulties of managing and administering an organization that offers a complex set of products to a diverse range of customers across several continents; and
•the adverse effects of terrorism, rioting, vandalism or social unrest.
Legal and Regulatory Risks
We are subject to an extensive, evolving regulatory framework that could create operational or compliance costs.
As explained in greater detail elsewhere in this annual report, (i) our domestic operations are regulated by the FCC and other federal, state and local agencies and (ii) our international operations are regulated by a wide range of various foreign and international bodies. We cannot assure you we will be successful in obtaining or retaining all regulatory licenses necessary to carry out our business in our various markets. Even if we are, the prescribed service standards and conditions imposed on us under these licenses and related laws may increase our costs, limit our operational flexibility or result in third-party claims.
We are subject to numerous requirements and interpretations under various international, federal, state and local laws, rules and regulations, which are often quite detailed and occasionally in conflict with each other. Accordingly, we cannot ensure we will always be considered to be in compliance with all these requirements at any single point in time.
26
Various governmental agencies, including state attorneys general with jurisdiction over our operations, have routinely in the past investigated our business practices either in response to customer complaints or on their own initiative, and are expected to continue to do the same in the future. Certain of these investigations have resulted in substantial fines in the past. On occasion, we have resolved such matters by entering into consent decrees, which are court orders that frequently bind us to specific conduct going forward. If breached by us, these consent decrees expose us not only to contractual remedies, but also to judicial enforcement via contempt of court proceedings, any of which could have material adverse consequences. Additionally, future investigations can potentially result in enforcement actions, litigation, fines, settlements or reputational harm, or could cause us to change our sales practices or operations.
Our prior participation in the FCC's CAF II program and current participation in the FCC's RDOF program subjects us to certain financial risks. If we are not in compliance with FCC measures by the end of the CAF II and RDOF programs, we could incur substantial penalties or forfeitures, including but not limited to being suspended or disbarred from future governmental programs or contracts for a significant period of time, which could have a material adverse impact on our financial condition.
We provide products or services to various federal, state and local agencies. Our failure to comply with complex governmental regulations and laws applicable to these programs, or the terms of our governmental contracts, could result in us suffering substantial negative publicity or penalties, being suspended or debarred from future governmental programs or contracts for a significant period of time and in certain instances could lead to the revocation of our FCC licenses. Moreover, certain governmental agencies frequently reserve the right to terminate their contracts for convenience or if funding is unavailable. If our governmental contracts are terminated for any reason, or if we are suspended or debarred from governmental programs or contracts, it could have a material adverse impact on our results of operations and financial condition.
A variety of state, national, foreign and international laws and regulations apply to the collection, use, retention, protection, security, disclosure, transfer and other processing of personal and other data. The European Union and other international regulators, as well as some state governments, have recently enacted or enhanced data privacy regulations, and other governments are considering establishing similar or stronger protections. Many of these laws are complex and change frequently and often conflict with the laws in other jurisdictions. Some of our customers impose similar requirements on us that are equally or more demanding. Despite our best efforts to comply with these governmental or contractual requirements, any noncompliance could result in incurring potential substantial penalties and reputational damage.
Adapting and responding to changing regulatory requirements has historically materially impacted our operations. We believe evolving regulatory developments and regulatory uncertainty could continue to have a material impact on our business. In particular, our business could be materially impacted if the U.S. Congress amends or eliminates current federal law limitations on the liability of private network providers, such as us, against claims related to third party content stored or transmitted on private networks, as currently proposed by certain governmental officials, legislative leaders and consumer interest groups. We could also be materially affected if currently pending proposals to increase the regulation of internet service providers or to further strengthen data privacy laws are implemented. In addition, federal and state agencies that regulate the support program payments we receive or the fees that we charge for certain of our regulated services can, and from time to time do, reduce the amounts we receive or can charge. The variability of these laws could also hamper the ability of us and our customers to plan for the future or establish long-term strategies.
Third-party content stored or transmitted on our networks could result in liability or otherwise damage our reputation.
While we disclaim liability for third-party content in most of our service contracts, as a private network provider we potentially could be exposed to legal claims relating to third-party content stored or transmitted on our networks. Such claims could involve, among others, allegations of defamation, invasion of privacy, copyright infringement, or aiding and abetting restricted activities such as online gambling or pornography. Although we believe our liability for these types of claims is limited under current law, suits against other carriers have been successful and we cannot assure you that our defenses will prevail. Such third-party content could also result in adverse publicity and damage our reputation. Moreover, as noted above, pending proposals to change the law could materially heighten our legal exposure.
27
Our pending legal proceedings could have a material adverse impact on us.
There are several potentially material proceedings pending against us. Results of these legal proceedings cannot be predicted with certainty. As of any given date we could have exposure to losses under proceedings in excess of our accrued liability. For each of these reasons, any of the proceedings described in Note 18—Commitments, Contingencies and Other Items, as well as current litigation not described therein or future litigation, could have a material adverse effect on our business, reputation, financial position, operating results, the trading price of our securities and our ability to access the capital markets. We can give you no assurances as to the ultimate impact of these matters on us.
We may not be successful in protecting and enforcing our intellectual property rights.
We rely on various patents, copyrights, trade names, trademarks, service marks, trade secrets and other similar intellectual property rights, as well as confidentiality agreements and procedures, to establish and protect our proprietary rights. For a variety of reasons, however, these steps may not fully protect us, including due to inherent limitations on the ability to enforce these rights. If we are unsuccessful in protecting or enforcing our intellectual property rights, our business, competitive position, results of operations and financial condition could be adversely affected.
We have been accused of infringing the intellectual property rights of others and will likely face similar accusations in the future.
We routinely receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or are infringing their intellectual property rights. We are currently responding to several of these notices and claims and expect this industry-wide trend will continue. If these claims succeed, we could be required to pay significant monetary damages, to cease using the applicable technology or to make royalty payments to continue using the applicable technology. If we are required to take one or more of these actions, our revenues or profit margins may decline, our operations could be materially impaired or we may be required to stop selling or redesign one or more of our products or services, any of which could have a material adverse impact on our business. Similarly, from time to time, we may need to obtain the right to use certain patents or other intellectual property from third parties to be able to offer new products and services. If we cannot obtain rights to use any required technology from a third party on reasonable terms, our ability to offer new products and services may be prohibited, restricted, made more costly or delayed.
Failure to extend or renegotiate our collective bargaining agreements or work stoppages could have a material impact on us.
As of December 31, 2022, approximately 20% of our employees were members of various bargaining units represented by labor unions. Although we have agreements with these labor unions, we cannot predict the outcome of our future negotiations of these agreements. We may be unable to reach new agreements, and union employees may engage in strikes, work slowdowns or other labor actions, which could materially disrupt our ability to provide services and increase our costs. Even if we succeed in reaching new or replacement agreements, they may impose significant new costs on us that impair our competitive position.
Our international operations expose us to various regulatory, currency, tax, legal and other risks.
Our international operations are subject to U.S. and non-U.S. laws and regulations regarding operations in international jurisdictions in which we provide services. These numerous and sometimes conflicting laws and regulations include anti-corruption laws, anti-competition laws, trade restrictions, economic sanctions, tax laws, immigration laws, environmental laws, privacy laws and accounting requirements. Many of these laws are complex and change frequently. There is a risk that these laws or regulations may materially restrict our ability to deliver services in various international jurisdictions or expose us to the risk of fines, penalties or license revocations if we are determined to have violated applicable laws or regulations. Additionally, these laws or regulations may potentially impact our customers and result in foregone business or penalties to us if we fail to comply with any applicable sanctions or restrictions on our activities.
Many non-U.S. laws and regulations relating to communications services are more restrictive than U.S. laws and regulations. We are subject to the GDPR of the European Union and the United Kingdom, as well as various other laws governing privacy rights, data protection and cybersecurity laws in other regions. These laws and
28
regulations continue to proliferate and evolve, are becoming more complex and increasingly conflict among the various countries in which we operate, which has resulted in greater compliance risk and cost for us. Moreover, many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market, which could make it more difficult for us to obtain licenses and conduct our operations.
In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include: economic, social and political instability, with the attendant risks of terrorism, kidnapping, extortion, civic unrest, potential seizure or nationalization of assets; currency and exchange controls, repatriation restrictions and fluctuations in currency exchange rates, including, without limitation, the matters outlined in Note 1—Background and Summary of Significant Accounting Policies — Foreign Currency; problems collecting accounts receivable; the difficulty or inability in certain jurisdictions to enforce contract or intellectual property rights; reliance on certain third parties with whom we lack extensive experience; supply chain challenges; and challenges in securing and maintaining the necessary physical and telecommunications infrastructure.
Our operations and financial results could be impacted by changes in multilateral conventions, treaties, tariffs or other arrangements between or among sovereign nations, including most recently Brexit.
Financial Risks
Our significant debt levels expose us to a broad range of risks.
As of December 31, 2022, we had approximately $10.4 billion of outstanding consolidated secured indebtedness, $10.1 billion of outstanding consolidated unsecured indebtedness (excluding (i) finance lease obligations, (ii) unamortized premiums, net and (iii) unamortized debt issuance costs) and $2.2 billion of unused borrowing capacity under our Revolving Credit Facility.
Our significant levels of debt and related debt service obligations could adversely affect us in several respects, including:
•requiring us to dedicate a substantial portion of our cash flow from operations to the payment of interest and principal on our debt, thereby reducing the funds available to us for other purposes, including acquisitions, capital expenditures and strategic initiatives;
•hindering our ability to capitalize on business opportunities and to plan for or react to changing market, industry, competitive or economic conditions;
•making us more vulnerable to economic or industry downturns, including interest rate increases (especially with respect to our variable rate debt);
•placing us at a competitive disadvantage compared to less leveraged companies;
•adversely impacting other parties’ perception of Lumen, including but not limited to existing or potential customers, vendors, employees or creditors;
•making it more difficult or expensive for us to obtain any necessary future financing or refinancing, including the risk that this could force us to sell assets or take other less desirable actions to raise capital; and
•increasing the risk that we may not meet the financial or non-financial covenants contained in our debt agreements or timely make all required debt payments, either of which could result in the acceleration of some or all of our outstanding indebtedness.
The effects of each of these factors could be intensified if we increase our borrowings or experience any downgrade in our credit ratings or those of our affiliates. Subject to certain limitations and restrictions, the current terms of our debt instruments and our subsidiaries’ debt instruments permit us or them to incur additional indebtedness.
29
We expect to periodically require financing, and we cannot assure you we will be able to obtain such financing on terms that are acceptable to us, or at all.
We expect to periodically require financing in the future to refinance existing indebtedness and potentially for other purposes. Our ability to arrange additional financing will depend on, among other factors, our financial position, performance, credit ratings, and debt covenants, as well as prevailing market conditions and other factors beyond our control. Prevailing market conditions could be adversely affected by (i) general market conditions, such as disruptions in domestic or overseas sovereign or corporate debt markets, geo-political instabilities, trade restrictions, pandemics, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad, and (ii) specific conditions in the communications industry. Instability in the domestic or global financial markets has from time to time resulted in periodic volatility and disruptions in capital markets that have partially or severely limited the ability of leveraged companies like us to obtain debt financing. For these and other reasons, we can give no assurance additional financing for any of these purposes will be available on terms acceptable to us, or at all.
If we are unable to make required debt payments or refinance our debt, we would likely have to consider other options, such as selling assets, issuing additional securities, cutting or delaying costs or otherwise reducing our cash requirements, or negotiating with our lenders to restructure our applicable debt. Our current and future debt instruments may restrict, or market or business conditions may limit, our ability to complete some of these actions on favorable terms, or at all. For these and other reasons, we cannot assure you we could implement these steps in a sufficient or timely manner, or at all. Nor can we assure you that these steps, even if successfully implemented, would not be detrimental to our operations, financial performance or future prospects.
We have a highly complex debt structure, which could impact the rights of our investors.
Lumen Technologies, Inc. and various of its subsidiaries owe substantial sums pursuant to various debt and financing arrangements, certain of which are guaranteed by other principal subsidiaries. Over half of the debt of Lumen Technologies, Inc. is guaranteed by certain of its principal domestic subsidiaries, some of which have pledged substantially all of their assets (including certain of their respective subsidiaries) to secure their guarantees. The remainder of the debt of Lumen Technologies, Inc. is neither guaranteed nor secured. Nearly half of the debt of Level 3 Financing, Inc. is (i) secured by a pledge of substantially all of its assets and (ii) guaranteed on a secured basis by certain of its affiliates. The remainder of the debt of Level 3 Financing, Inc. is not secured by any of its assets, but is guaranteed on an unsecured basis by certain of its affiliates. As of the date of this annual report, substantial amounts of debt are also owed by two direct or indirect subsidiaries of Qwest Communications International Inc. Most of the nearly 300 subsidiaries of Lumen Technologies, Inc. have neither borrowed money nor guaranteed any of the debt of Lumen Technologies, Inc. or its affiliates. As such, investors in our consolidated debt instruments should be aware that (i) determining the priority of their rights as creditors is a complex matter which is substantially dependent upon the assets and earning power of the entities that issued or guaranteed (if any) the applicable debt and (ii) a substantial portion of such debt is structurally subordinated to all liabilities of the non-guarantor subsidiaries of Lumen Technologies, Inc. to the extent of the value of those subsidiaries that are obligors.
Our various debt agreements include restrictions and covenants that could (i) limit our ability to conduct operations or borrow additional funds, (ii) restrict our ability to engage in inter-company transactions, and (iii) lead to the acceleration of our repayment obligations in certain instances.
Under our consolidated debt and financing arrangements, the issuer of the debt is subject to various covenants and restrictions, the most restrictive of which pertain to the debt of Lumen Technologies, Inc. and Level 3 Financing, Inc.
Lumen Technologies, Inc.’s senior secured credit facilities and secured notes contain several significant limitations restricting our ability to, among other things, borrow additional money or issue guarantees; pay dividends or other distributions to shareholders; make loans; create liens on assets; sell assets; transact with its affiliates and engage in mergers, consolidations or other similar transactions. These restrictive covenants could have a material adverse impact on our ability to operate or reconfigure our business, to issue additional priority debt, to pursue acquisitions, divestitures or strategic transactions, or to otherwise pursue our plans and strategies.
The debt and financing arrangements of Level 3 Financing, Inc. contain substantially similar limitations that restrict their operations on a standalone basis as a separate restricted group. Consequently, certain of these
30
covenants may significantly restrict our ability to engage in transactions with Level 3, including receiving cash from Level 3, or distributing cash from Level 3 to other of our affiliated entities.
Lumen Technologies, Inc.’s senior secured credit facilities, as well as the term loan debt of Qwest Corporation, also contain financial maintenance covenants which are described further in Note 7—Long-Term Debt and Credit Facilities.
The failure of Lumen Technologies, Inc. or any of its subsidiaries to comply with the above-described restrictive or financial covenants could result in an event of default, which, if not cured or waived, could accelerate our debt repayment obligations. Certain of our debt instruments have cross-default or cross-acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.
Our cash flows may not adequately fund all of our cash requirements.
Each segment of our business is very capital intensive. We expect to continue to require significant capital to pursue our Quantum Fiber buildout plans and to otherwise maintain, upgrade and expand our network infrastructure, based on several factors, including (i) changes in customers’ service requirements; (ii) our continuing need to expand and improve our network to remain competitive and meet customer demand; and (iii) our regulatory commitments. Any failure to make appropriate capital expenditures could adversely impact our financial performance or prospects. We will also continue to need substantial amounts of cash to meet our fixed commitments and other business objectives, including without limitation funding our operating costs, maintenance expenses, debt repayments, tax obligations, periodic pension contributions and other benefits payments. As discussed elsewhere in this annual report, our revenues have decreased for several years, which, coupled with other factors, has placed downward pressure on our cash flows. For all these reasons, we cannot assure you our future cash flows from operating activities will be sufficient to fund all of our cash requirements in the manner currently contemplated.
As a holding company, we rely on payments from our operating companies to meet our obligations.
As a holding company, substantially all of our income and operating cash flow is dependent upon the earnings of our subsidiaries and their distribution of those earnings to us in the form of dividends, loans or other payments. As a result, we rely upon our subsidiaries to generate cash flows in amounts sufficient to fund our obligations, including the payment of our long-term debt. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts owed by us, except to the extent they have guaranteed such payments. Similarly, subject to limited exceptions for tax-sharing or cash management purposes, our subsidiaries have no obligation to make any funds available to us to repay our obligations, whether by dividends, loans or other payments. As discussed in greater detail elsewhere herein, restrictions imposed by credit instruments or other agreements applicable to Level 3 and certain of our other subsidiaries limit the amount of funds our subsidiaries are permitted to transfer to us, including the amount of dividends that may be paid to us. Moreover, our rights to receive assets of any subsidiary upon its liquidation or reorganization would be effectively subordinated to the claims of creditors of that subsidiary, including trade creditors. In addition, the laws under which our subsidiaries were organized typically restrict the amount of dividends they may pay. The ability of our subsidiaries to transfer funds could be further restricted under applicable state or federal tax laws, regulatory orders or regulations. For all these reasons, you should not assume our subsidiaries will be able in the future to generate and distribute to us cash in amounts sufficient to fund our cash requirements.
We may not be able to fully utilize our NOLs.
As of December 31, 2022, we had approximately $1.0 billion of federal net operating loss carryforwards ("NOLs"), which remain subject to limitations under Section 382 of the Internal Revenue Code and related regulations ("Section 382"). These limitations could restrict our ability to use these NOLs in the amounts we project. In an effort to safeguard our NOLs, we have maintained an NOL rights agreement which is scheduled to lapse in late 2023.
At December 31, 2022, we also had substantial state NOLs which we believe are subject to legal and practical limitations on our ability to realize their full benefit. We cannot assure you we will be able to utilize these NOLs as projected or at all.
31
Increases in costs for pension and healthcare benefits for our active and retired employees may have a material impact on us.
As of December 31, 2022, our company-sponsored benefit plans that cover our current and former U.S.-based employees had approximately 25,000 active employee participants, approximately 58,000 active and retired employees and surviving spouses eligible for post-retirement healthcare benefits, approximately 22,000 pension retirees and approximately 7,000 former employees with vested pension benefits. As of such date, our domestic pension plans and our other domestic post-retirement benefit plans were substantially underfunded from an accounting standpoint. We also maintain benefit plans for a much smaller base of our non-U.S. employees. The cost to fund the pension and healthcare benefit plans for our active and retired employees has a significant impact on our profitability. Our costs of maintaining our pension and healthcare plans, and the future funding requirements for these plans, are affected by several factors, including investment returns on funds held by our applicable plan trusts; changes in prevailing interest rates and discount rates or other factors used to calculate the funding status of our plans; increases in healthcare costs generally or claims submitted under our healthcare plans specifically; the longevity and payment elections of our plan participants; changes in plan benefits; and the impact of the continuing implementation, modification or potential repeal of current federal healthcare and pension funding laws and regulations promulgated thereunder. Increased costs under these plans could reduce our profitability and increase our funding commitments to our pension plans.
See Note 11—Employee Benefits for additional information regarding the funded status of our pension plans and our other post-retirement benefit plans.
Lapses in our disclosure controls and procedures or internal control over financial reporting could materially and adversely affect us.
We maintain (i) disclosure controls and procedures designed to provide reasonable assurances regarding the accuracy and completeness of our SEC reports and (ii) internal control over financial reporting designed to provide reasonable assurance regarding the reliability and compliance with U.S. generally accepted accounting principles (“GAAP”) of our financial statements. We cannot assure you these measures will be effective. Our management previously identified two material weaknesses that, while successfully remediated during 2019, were costly to remediate and caused us to request an extension in order to timely file our annual report on Form 10-K for the year ended December 31, 2018.
If we are required to record additional intangible asset impairments, we will be required to record a significant charge to earnings and reduce our stockholders' equity.
As of December 31, 2022, approximately 42% of our total consolidated assets reflected on the consolidated balance sheet included in this annual report consisted of goodwill, customer relationships and other intangible assets (including goodwill and other intangible assets classified as assets held for sale). From time to time, including most recently in the fourth quarter of 2022 and in the fourth quarter of 2020, we have recorded large non-cash charges to earnings in connection with required reductions of the value of our intangible assets. If our intangible assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Any such charges could, in turn, have a material adverse effect on our results of operation or financial condition.
High inflation could continue to adversely impact us.
Although inflation appears to be declining, during 2021 and 2022 our operations were impacted by the highest domestic inflation rates in decades. If inflation rates remain elevated, our operations will likely continue to be impacted. Potential impacts of high inflation include (i) lower revenue if inflationary pressures cause customers to defer, decrease or cancel their expenditures on our products and services, (ii) lower margins if we cannot offset the higher cost of our labor and supplies by raising our prices or reducing our other expenses, (iii) higher interest costs to the extent inflation places upwards pressure on prevailing interest rates and (iv) as noted above, potential difficulties retaining personnel if we do not match the salary increase expectations of our workforce.
32
We face other financial risks.
We face other financial risks, including among others the risk that:
•downgrades in our credit ratings or unfavorable financial analyst reports regarding us or our industry could adversely impact the liquidity or market prices of our outstanding debt or equity securities;
•a change of control of us or certain of our affiliates could accelerate a substantial portion of our outstanding indebtedness in an amount that we might not be able to repay;
•the tax provisions contained in the Inflation Reduction Act of 2022, including the 1% excise tax on net stock repurchases and the 15% corporate book minimum tax, might increase our federal taxes; and
•ongoing attempts of the United States, various foreign countries and supranational or international organizations to reform taxes or identify new tax sources could materially impact our taxes, or that one or more of our ongoing tax audits or examinations could result in tax liabilities that differ materially from those we have recognized in our consolidated financial statements.
Divestiture Risks
The completion of our planned EMEA divestiture is subject to several conditions.
As described further in Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business we have agreed to divest our EMEA business. The completion of the divestiture is subject to receipt of all requisite regulatory approvals in the U.S. and certain countries where the EMEA business operates, as well as the satisfaction of other customary conditions. We cannot assure you that this divestiture will be completed in the timeframes anticipated by us or at all.
The pendency of the EMEA divestiture could adversely affect our business.
The pendency of our EMEA divestiture could impact us in several ways, including (i) impacting relationships with our customers and vendors, (ii) restricting our operations due to certain specified operating covenants in the purchase agreement, (iii) diverting management’s attention from operating our business in the ordinary course, and (iv) diminishing our ability to retain or attract employees due to concerns over future job security or responsibilities.
We may be unable to successfully separate our divested businesses from our retained business and realize the anticipated benefits of our recently completed and planned divestitures.
In connection with our planned EMEA divestiture, we have agreed to (i) complete certain restructuring transactions to segregate the divested business from our retained business, (ii) provide certain post-closing transition and commercial services to the purchasers, and (iii) receive certain post-closing services from the purchaser designed to ensure the continuity of services to our retained customers. Similarly, in connection with the 2022 divestitures of our Latin American business and a portion of our ILEC business, we completed internal restructurings and entered into multi-year agreements with the purchasers to provide certain transitional services and to provide or receive certain commercial services.
We anticipate that it will be challenging and time-consuming to segregate the businesses and provide transition services to the purchaser of our EMEA business, and to continue to support the businesses that we sold in 2022. Even if we successfully complete the EMEA divestiture and continue to successfully support the divested businesses, we may incur or experience (i) greater tax or other costs or realize fewer benefits than anticipated under our pre- and post-closing agreements with the purchasers, (ii) operational or commercial difficulties segregating the divested assets from our retained assets, (iii) disputes with the purchasers regarding the nature and sufficiency of the transition services we provide or the terms and conditions of our commercial agreements with the purchasers, (iv) potential disputes with creditors concerning the transactions or use of the proceeds therefrom, (v) higher vendor costs due to reduced economies of scale or other similar dis-synergies, (vi) lower productivity to the extent segregation of the divested businesses distracts or diverts personnel from the operation, digitization, and transformation of our retained business, (vii) losses or increased inefficiencies from stranded or underutilized assets, (viii) the loss of any customers dissatisfied with our services post-closing, (ix) challenges in retaining and
33
attracting personnel or (x) the loss of vendors or customers due to our inability to assign contracts with their consent.
The divestitures will reduce our future cash flows. If our remaining business fails to perform as expected, the divestitures could exacerbate certain of the other financial risks specified in this Item 1A, including our ability to fund all of our current cash requirements.
General Risk Factors
An outbreak of disease or similar public health threat, such as the recent COVID-19 pandemic, could have a material adverse impact on us.
An outbreak of disease or similar public health threat, such as the recent COVID-19 pandemic and its attendant detrimental impact on the worldwide economy, could have a material adverse impact on our operating results and financial condition. Even as efforts to contain the COVID-19 pandemic, including vaccinations, have fostered progress and eased governmental restrictions, new variants of the virus have continued to cause outbreaks and uncertainties. Variants of the virus continue to pose the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities at expected levels through established processes. Future events regarding the pandemic, which are unpredictable and beyond our control, could continue impacting our operations. Accordingly, COVID-19, or any other future major public health crisis, may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate.
Moreover, to the extent any of these risks and uncertainties adversely impact us, they may also have the effect of heightening many of the other risks described in this section “Item 1A. Risk Factors.”
Unfavorable general economic, societal or environmental conditions could negatively impact us.
Unfavorable general economic, societal or environmental conditions, including unstable economic and credit markets, or depressed economic activity caused by trade wars, epidemics, pandemics, wars, societal unrest, rioting, civic disturbances, natural disasters, terrorist attacks, environmental disasters, political instability or other factors, could negatively affect our business or operations. While it is difficult to predict the ultimate impact of these general economic, societal or environmental conditions, they could adversely affect demand for some of our products and services and could cause customers to shift to lower-priced products and services or to delay or forego purchases of our products and services for a variety of reasons. Any one or more of these circumstances could continue to depress our revenue. Also, our customers may encounter financial hardships which could negatively impact their ability to make timely payments to us or to continuing doing business with us.
We currently do not pay dividends to our common shareholders and any decision to adopt or continue a stock repurchase plan is entirely discretionary.
We discontinued paying dividends to our holders of common stock in the fourth quarter of 2022, and have no current plans to pay dividends in respect of our common stock for the foreseeable future.
From time to time we adopt share repurchase plans. Holders of our common stock should be aware that repurchases of our common stock under any such plans are completely discretionary and may be suspended or discontinued at any time and for any reason without prior notice.
Shareholder or debtholder activism efforts could cause a material disruption to our business.
While we always welcome constructive input from our shareholders and regularly engage in dialogue with our shareholders to that end, activist shareholders may from time to time engage in proxy solicitations, advance shareholder proposals or otherwise attempt to effect changes or acquire control over us. Responding to these actions can be costly and time-consuming and may disrupt our operations and divert the attention of our board and management. These adverse impacts could be intensified if activist shareholders advocate actions that are not supported by other shareholders, our board or management. The recent increase in the activism of debtholders could increase the risk of claims being made under our debt agreements.
34
Our agreements and organizational documents and applicable law could similarly limit another party’s ability to acquire us.
A number of provisions in our organizational documents and various provisions of applicable law or our Section 382 rights agreement may delay, defer or prevent a future takeover of us unless the takeover is approved by our board. These provisions (which are described further in our Registration Statement on Form 8-A/A filed with the SEC on March 2, 2015) could deprive our shareholders of any related takeover premium.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our property, plant and equipment consists principally of fiber-optic and metallic cables, high-speed transport equipment, electronics, switches, routers, cable landing stations, central office equipment, land and buildings related to our operations. Our gross property, plant and equipment consisted of the following components:
| As of December 31, | |||||||||||
2022(5) | 2021(5) | ||||||||||
| Land | 2 | % | 2 | % | |||||||
Fiber, conduit and other outside plant(1) | 37 | % | 38 | % | |||||||
Central office and other network electronics(2) | 39 | % | 38 | % | |||||||
Support assets(3) | 17 | % | 18 | % | |||||||
Construction in progress(4) | 5 | % | 4 | % | |||||||
| Gross property, plant and equipment | 100 | % | 100 | % | |||||||
_______________________________________________________________________________
(1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.
(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.
(3)Support assets consist of buildings, cable landing stations, data centers, computers and other administrative and support equipment.
(4)Construction in progress includes inventory held for construction and property of the aforementioned categories that is under construction and has not yet been placed in service.
(5)These values exclude assets classified as held for sale.
We own a substantial portion of our telecommunications equipment required for our business. However, we also lease from third parties certain facilities, plant and equipment under various finance and operating lease arrangements when the leasing arrangements are more favorable to us than owning the assets. We also own and lease administrative offices in major metropolitan locations both in the United States and internationally, and own or lease domestic or overseas cable landing stations related to undersea and terrestrial cable systems. Substantially all of our network electronics equipment is located in buildings or on land that we own or lease, typically within our local service area. Outside of our local service area, our assets are generally located on real property pursuant to an agreement with the property owner or another person with rights to the property. It is possible that we may lose our rights under one or more of these agreements, due to their termination or expiration or in connection with legal challenges to our rights under such agreements.
Our net property, plant and equipment was approximately $19.2 billion and $20.9 billion at December 31, 2022 and 2021, respectively, excluding assets held for sale. Substantial portions of our property, plant and equipment are pledged to secure the long-term debt of our subsidiaries or the guarantee obligations of our subsidiary guarantors. For additional information, see Note 9—Property, Plant and Equipment to our consolidated financial statements in Item 8 of Part II of this report.
We have entered into various agreements regarding our unused office and technical space to reduce our ongoing operating expenses regarding such space.
35
ITEM 3. LEGAL PROCEEDINGS
The information contained under the subheadings "Principal Proceedings" and "Other Proceedings, Disputes and Contingencies" in Note 18—Commitments, Contingencies and Other Items to our consolidated financial statements included in Item 8 of Part II of this report is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
36
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange ("NYSE") and the Berlin Stock Exchange and is traded under the symbol LUMN and CYTH, respectively.
At February 21, 2023, there were approximately 81,600 stockholders of record, although there were significantly more beneficial holders of our common stock.
Issuer Purchases of Equity Securities
Effective November 2, 2022, our Board of Directors authorized a new two-year program to repurchase up to an aggregate of $1.5 billion of our outstanding common stock. During the three months ended December 31, 2022, we repurchased 33 million shares of our outstanding common stock in the open market. These shares were repurchased for an aggregate market price of $200 million, or an average purchase price of $6.07 per share. All repurchased common stock has been retired. For additional information, see Note 20—Repurchases of Lumen Common Stock to our consolidated financial statements included in Item 8 of Part II of this report.
The following table contains information about shares of our previously-issued common stock that were repurchased under our above-described Stock Repurchase Program:
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||
| Period | |||||||||||||||||||||||
| November 2022 | 28,413,768 | $ | 6.16 | 28,413,768 | $ | 1,325,011,442 | |||||||||||||||||
| December 2022 | 4,559,200 | $ | 5.48 | 4,559,200 | $ | 1,300,012,827 | |||||||||||||||||
The following table contains information about shares of our previously-issued common stock that we withheld from employees upon vesting of their stock-based awards during the fourth quarter of 2022 to satisfy the related tax withholding obligations:
| Total Number of Shares Withheld for Taxes | Average Price Paid Per Share | ||||||||||
| Period | |||||||||||
| October 2022 | 50,287 | $ | 7.02 | ||||||||
| November 2022 | 10,629 | 6.04 | |||||||||
| December 2022 | 24,553 | 5.58 | |||||||||
| Total | 85,469 | ||||||||||
Equity Compensation Plan Information
See Item 12 of this report.
ITEM 6. [Reserved]
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to "Notes" in this Item 7 of Part II refer to the Notes to Consolidated Financial Statements included in Item 8 of Part II of this report. Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" immediately prior to Item 1 of Part I of this report for factors relating to these statements and "Risk Factors" in Item 1A of Part I of this report for a discussion of certain risk factors applicable to our business, financial condition, results of operations, liquidity or prospects.
Overview
We are an international facilities-based technology and communications company focused on providing our business and mass markets customers with a broad array of integrated products and services necessary to fully participate in our rapidly evolving digital world. We operate one of the world's most interconnected networks. Our platform empowers our customers to rapidly adjust digital programs to meet immediate demands, create efficiencies, accelerate market access, and reduce costs – allowing customers to rapidly evolve their IT programs to address dynamic changes. With approximately 160,000 on-net buildings and 400,000 route miles of fiber optic cable globally, we are among the largest providers of communications services to domestic and global enterprise customers. Our terrestrial and subsea fiber optic long-haul network throughout North America, Europe and Asia Pacific connects to metropolitan fiber networks that we operate. We provide services in over 60 countries, with most of our revenue being derived in the United States.
Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA 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 for pre-tax cash proceeds of approximately $2.7 billion.
On October 3, 2022, we and certain of our affiliates sold the portion of our ILEC business conducted primarily within 20 Midwestern and Southeastern states. In exchange, we received $7.5 billion of consideration, which was reduced by approximately $0.4 billion of closing adjustments and partially paid through purchaser's assumption of approximately $1.5 billion of our long-term consolidated indebtedness, resulting in pre-tax cash proceeds of approximately $5.6 billion, subject to certain post-closing adjustments and indemnities.
Under agreements entered into on November 2, 2022 and February 8, 2023, affiliates of Level 3 Parent, LLC, have agreed to divest certain operations in EMEA to Colt Technology Services Group Limited, a portfolio company of Fidelity Investments, in exchange for $1.8 billion in cash, subject to certain post-closing adjustments. Level 3 Parent, LLC expects to close the transaction as early as late 2023, following receipt of all requisite regulatory approvals in the U.S. and certain countries where the EMEA business operates, as well as the satisfaction of other customary conditions. The actual amount of our net after-tax proceeds from this divestiture could vary substantially from the amounts we currently estimate, particularly if we experience delays in completing the transaction or any of our other assumptions prove to be incorrect.
For more information, see (i) Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business to our consolidated financial statements in Item 8 of Part II of this report and (ii) the risk factors included in Item 1A of Part I of this report.
38
Impact of COVID-19 Pandemic and the Macroeconomic Environment
Societal, governmental and macroeconomic changes arising out of the COVID-19 pandemic have impacted us, our customers and our business in several ways since March 2020. Beginning in the second half of 2020 and continuing into 2022, we rationalized our leased footprint and ceased using 39 leased property locations that were underutilized. We did not further rationalize our lease footprint or incur material accelerated lease costs during the year ended December 31, 2022. However, in conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and expect to incur additional accelerated lease costs in future periods.
Additionally, as discussed further elsewhere herein, the pandemic and macroeconomic changes arising therefrom have resulted in (i) increases in certain revenue streams and decreases in others, (ii) increases in overtime expenses during 2020 and 2021, (iii) operational challenges resulting from shortages of certain components and other supplies that we use in our business, (iv) delays in our cost transformation initiatives, and (v) delayed decision-making by certain of our customers. None of these effects, individually or in the aggregate, have to date materially impacted our financial performance or financial position.
The COVID-19 pandemic and other factors have led to increased fiber construction demand combined with increased construction labor rates that have reduced the number of fiber buildout projects that met our internal payback requirement. Thus far, we believe these factors have contributed to a delay in our Quantum Fiber buildouts, but otherwise have not had a significant impact on our business results.
We reopened our offices in April 2022 under a "hybrid" working environment, which will permit some of our employees the flexibility to work remotely at least some of the time for the foreseeable future.
If any of the above-listed factors intensify, our financial results could be materially impacted in a variety of ways, including by increasing our expenses, decreasing our revenues, further delaying our network expansion plans or otherwise interfering with our ability to deliver products and services. For additional information on the impacts of the pandemic, see (i) the remainder of this item, including "—Liquidity and Capital Resources—Overview of Sources and Uses of Cash" and (ii) Item 1A of this report.
Reporting Segments
Our reporting segments are currently organized as follows, by customer focus:
•Business Segment: Under our Business segment, we provide our products and services under four sales channels:
◦International and Global Accounts ("IGAM"): Our IGAM sales channel includes multinational and enterprise customers. We provide our products and services to global enterprise customers and carriers.
◦Large Enterprise: Under our large enterprise sales channel, we provide our products and services to large enterprises and the public sector, including the U.S. Federal government, state and local governments and research and education institutions.
◦Mid-Market Enterprise: Under our mid-market enterprise sales channel, we provide our products and services to medium-sized enterprises directly and through our indirect channel partners.
◦Wholesale: Under our wholesale sales channel, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors.
As we have previously disclosed, we plan to update these sales channels beginning with our first quarterly report filed after this annual report.
•Mass Markets Segment. Under our Mass Markets segment, we provide products and services to residential and small business customers. At December 31, 2022, we served 3.0 million broadband subscribers under our Mass Markets segment.
39
See Note 17—Segment Information to our consolidated financial statements in Item 8 of Part II of this report for additional information.
We categorize our Business segment revenue among the following products and services categories:
•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.
We categorize our Mass Markets products and services revenue among the following categories:
•Fiber Broadband, under which we provide high speed services to residential and small business customers utilizing our fiber-based network infrastructure;
•Other Broadband, under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure; and
•Voice and Other, under which we derive revenues from (i) providing local and long-distance services, professional services, and other ancillary services, and (ii) federal broadband and state support payments.
Trends Impacting Our Operations
In addition to the above-described impact of the pandemic and its aftermath, our consolidated operations have been, and will continue to be, impacted by the following company-wide trends:
•Customers’ demand for automated products and services and competitive pressures will require that we continue to invest in new technologies and automated processes to improve the customer experience and reduce our operating expenses.
•The increasingly digital environment and the growth in online video and gaming require robust, scalable network services. We are continuing to enhance our product capabilities and simplify our product portfolio based on demand and profitability to enable customers to have access to greater bandwidth.
•Businesses continue to adopt distributed, global operating models. We are expanding and enhancing our fiber network, connecting more buildings to our network to generate revenue opportunities and reducing our reliance upon other carriers.
•Changes in customer preferences and in the regulatory, technological and competitive environment are (i) significantly reducing demand for our more mature service offerings, commoditizing certain of our other offerings, or resulting in volume or rate reductions for other of our offerings and (ii) also creating certain opportunities for us arising out of increased demand for lower latency provided by Edge computing and for faster and more secure data transmissions.
•The operating margins of several of our newer, more technologically advanced services, some of which may connect to customers through other carriers, are lower than the operating margins on our traditional, on-net wireline services.
•Our expenses will be impacted by higher vendor costs, reduced economies of scale and other dis-synergies due to our 2022 divestitures.
40
•Declines in our traditional wireline services and other more mature offerings have necessitated right-sizing our cost structures to remain competitive.
The amount of support payments we receive from governmental agencies has decreased substantially since December 31, 2021. Inflation during 2021 and 2022 placed downward pressure on our margins and likely contributed to delayed decision-making by certain of our customers, which are trends that will likely continue to impact us as long as inflation rates remain elevated. These and other developments and trends impacting our operations are discussed elsewhere in this Item 7.
Results of Operations
In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In "Segment Results" we review the performance of our two reporting segments in more detail. Results in this section include the results of our Latin American and ILEC businesses prior to their sale on August 1, 2022 and October 3, 2022, respectively.
Revenue
The following table summarizes our consolidated operating revenue recorded under each of our two segments and in our four revenue sales channels within the Business segment described above:
| Years Ended December 31, | 2022 vs 2021 % Change | 2021 vs 2020 % Change | |||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Business Segment: | |||||||||||||||||||||||||||||
| International & Global Accounts | $ | 3,645 | 4,083 | 4,137 | (11) | % | (1) | % | |||||||||||||||||||||
| Large Enterprise | 3,409 | 3,771 | 3,961 | (10) | % | (5) | % | ||||||||||||||||||||||
| Mid-Market Enterprise | 2,465 | 2,649 | 2,901 | (7) | % | (9) | % | ||||||||||||||||||||||
| Wholesale | 3,520 | 3,616 | 3,809 | (3) | % | (5) | % | ||||||||||||||||||||||
| Business Segment Revenue | 13,039 | 14,119 | 14,808 | (8) | % | (5) | % | ||||||||||||||||||||||
| Mass Markets Segment Revenue | 4,439 | 5,568 | 5,904 | (20) | % | (6) | % | ||||||||||||||||||||||
| Total operating revenue | $ | 17,478 | 19,687 | 20,712 | (11) | % | (5) | % | |||||||||||||||||||||
Our consolidated operating revenue decreased by $2.2 billion for the year ended December 31, 2022 as compared to the year ended December 31, 2021 due to revenue declines in all of our revenue categories listed above, in addition to the sale of our Latin American and ILEC businesses as of August 1, 2022 and October 3, 2022, respectively. Our consolidated revenue decreased by $1.0 billion for the year ended December 31, 2021 compared to the year ended December 31, 2020 due to revenue declines in all of our revenue categories listed above. See our segment results below for additional information.
41
Operating Expenses
The following table summarizes our operating expenses for the year ended December 31, 2022 and 2021. For information regarding expenses for the year ended December 31, 2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of our Annual Report Form 10-K for the year ended December 31, 2021.
| Years Ended December 31, | % Change | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Cost of services and products (exclusive of depreciation and amortization) | $ | 7,868 | 8,488 | (7) | % | ||||||||||||
| Selling, general and administrative | 3,078 | 2,895 | 6 | % | |||||||||||||
| Gain on sale of businesses | (773) | — | nm | ||||||||||||||
| Loss on disposal groups held for sale | 700 | — | nm | ||||||||||||||
| Depreciation and amortization | 3,239 | 4,019 | (19) | % | |||||||||||||
| Goodwill impairment | 3,271 | — | nm | ||||||||||||||
| Total operating expenses | $ | 17,383 | 15,402 | 13 | % | ||||||||||||
nm Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
Cost of Services and Products (exclusive of depreciation and amortization)
Cost of services and products (exclusive of depreciation and amortization) decreased by $620 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This decrease was primarily due to the sale of the Latin American and ILEC businesses, as well as reductions in employee-related expense from lower headcount and lower facility costs and network expenses.
Selling, General and Administrative
Selling, general and administrative expenses increased by $183 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase in selling, general and administrative expenses was primarily due to gains on sales of assets during the year ended December 31, 2021 as well as higher professional fees during the year ended December 31, 2022 associated with facilitating the divestitures of our Latin American and ILEC businesses. These increases were partially offset by lower expenses due to the sale of the Latin American and ILEC businesses.
Gain on Sale of Businesses and Loss on Disposal Groups Held for Sale
For a discussion of the gain on the sale of the Latin American and ILEC businesses and the loss on disposal groups held for sale that we recognized for the year ended December 31, 2022, see Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
Depreciation and Amortization
The following table provides detail of our depreciation and amortization expense:
| Years Ended December 31, | % Change | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Depreciation | $ | 2,133 | 2,671 | (20) | % | ||||||||||||
| Amortization | 1,106 | 1,348 | (18) | % | |||||||||||||
| Total depreciation and amortization | $ | 3,239 | 4,019 | (19) | % | ||||||||||||
42
Depreciation expense decreased by $538 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to the discontinuation during the third quarter of 2021 of the depreciation of the tangible assets of our recently divested Latin American and ILEC businesses and the discontinuation during the fourth quarter of 2022 of the depreciation of the tangible assets of our planned divestiture of our EMEA business, resulting in an aggregate decrease of $359 million of depreciation expense during the year ended December 31, 2022 as compared to the year ended December 31, 2021. In addition, depreciation expense decreased $193 million due to the early retirement of certain copper-based infrastructure during the fourth quarter of 2021 and $38 million due to the impact of annual rate depreciable life changes, which was partially offset by higher depreciation expense of $61 million associated with net growth in depreciable assets.
Amortization expense decreased by $242 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease was primarily due to a decrease of $119 million resulting from certain customer relationship intangible assets becoming fully amortized at the end of the first quarter 2021, a decrease of $50 million associated with net reductions in amortizable assets, a decrease of $42 million due to the discontinuation during third quarter of 2021 of the amortization of the intangible assets of our recently divested Latin American and ILEC businesses and the discontinuation during the fourth quarter of 2022 of the amortization of the intangible assets of our planned divestiture of our EMEA business and a $16 million decrease due to accelerated amortization for decommissioned applications.
Further analysis of our segment operating expenses by segment is provided below in "Segment Results."
Goodwill Impairments
We are required to perform impairment tests related to our goodwill annually, which we perform as of October 31, or sooner if an indicator of impairment occurs.
We report under two segments: Business and Mass Markets. As of December 31, 2022, we have three reporting units for goodwill impairment testing, which are (i) Mass Markets, (ii) North America Business ("NA Business") and (iii) Asia Pacific ("APAC") region. Prior to the planned divestiture of the EMEA business, the EMEA region was also a reporting unit and was tested for impairment in the pre-classification test as of October 31, 2022 discussed below. Prior to its August 1, 2022 divestiture, the Latin American ("LATAM") region was also a reporting unit.
When we performed our impairment tests during the fourth quarter of 2022, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of our testing date. As a result, we recorded non-cash, non-tax-deductible goodwill impairment charges aggregating to $3.3 billion in the fourth quarter of 2022. When we performed our annual impairment test in the fourth quarter of 2021, 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. Therefore, we concluded no impairment existed as of our annual assessment date in the fourth quarter of 2021. When we performed our impairment tests during the fourth quarter of 2020, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of our testing date. As a result, we recorded non-cash, non-tax-deductible goodwill impairment charges aggregating to $2.6 billion in the fourth quarter of 2020.
See Note 3—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 8 of Part II of this report for further details on these tests and impairment charges.
43
Other Consolidated Results
The following tables summarize our total other expense, net and income tax expense:
| Years Ended December 31, | % Change | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Interest expense | $ | (1,332) | (1,522) | (12) | % | ||||||||||||
| Other income (expense), net | 246 | (62) | nm | ||||||||||||||
| Total other expense, net | $ | (1,086) | (1,584) | (31) | % | ||||||||||||
| Income tax expense | $ | 557 | 668 | (17) | % | ||||||||||||
Interest Expense
Interest expense decreased by $190 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The decrease was primarily due to the decrease in average long-term debt from $30.4 billion to $24.8 billion, which was partially offset by the increase in the average interest rate of 4.82% to 5.14%.
Other Income (Expense), Net
Other income (expense), net reflects certain items not directly related to our core operations, including (i) gains and losses on extinguishments of debt, (ii) components of net periodic pension and post-retirement benefit costs, (iii) foreign currency gains and losses, (iv) our share of income from partnerships we do not control, (v) interest income, (vi) gains and losses from non-operating asset dispositions, (vii) income from transition and separation services provided by us to the purchasers of our Latin American business and ILEC business, and (viii) other non-core items.
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Net gain on extinguishment of debt | $ | 214 | 8 | ||||||||
| Pension and post-retirement net periodic income (expense) | 1 | (295) | |||||||||
| Foreign currency gain (loss) | 12 | (28) | |||||||||
| (Loss) gain on investment in limited partnership | (83) | 138 | |||||||||
| Loss on investment in equity securities | (109) | — | |||||||||
| Transition and separation services | 152 | — | |||||||||
| Other | 59 | 115 | |||||||||
| Total other income (expense), net | $ | 246 | (62) | ||||||||
The change of $296 million in pension and post-retirement net periodic income (expense) for the year ended December 31, 2022 as compared to the year ended December 31, 2021 is primarily driven by settlement charges in 2021 associated with the acceleration of the recognition of a portion of previously unrecognized actuarial losses in the Lumen Combined Pension Plan. Other income (expense), net for the year ended December 31, 2021 also included a distribution from a previously dissolved captive insurance company and other non-core items. See Note 14—Fair Value of Financial Instruments to our consolidated financial statements in Item 8 of Part II of this report for more information regarding the losses for the year ended December 31, 2022 and the gain for the year ended December 31, 2021 recognized on the investment in a limited partnership and investment in equity securities. The net gain on extinguishment of debt for the year ended December 31, 2022 was a result of multiple transactions in which our debt was reacquired below its carrying value. See Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report for more information regarding our net gains on extinguishment of debt.
44
Income Tax Expense
For the years ended December 31, 2022 and 2021, our effective income tax rate was (56.2)% and 24.7%, respectively. The effective tax rate for the year ended December 31, 2022 includes a $682 million unfavorable impact of a non-deductible goodwill impairment and a $128 million unfavorable impact as a result of the sale of our Latin American business. See Note 16—Income Taxes to our consolidated financial statements in Item 8 of Part II of this report and "Critical Accounting Policies and Estimates—Income Taxes" below for additional information.
45
Segment Results
General
Reconciliation of segment revenue to total operating revenue is below. The results presented in this section include results of our Latin American and ILEC businesses prior to their sale on August 1, 2022 and October 3, 2022, respectively:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Operating revenue | |||||||||||||||||
| Business | $ | 13,039 | 14,119 | 14,808 | |||||||||||||
| Mass Markets | 4,439 | 5,568 | 5,904 | ||||||||||||||
| Total operating revenue | $ | 17,478 | 19,687 | 20,712 | |||||||||||||
Reconciliation of segment EBITDA to total adjusted EBITDA is below:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Adjusted EBITDA | |||||||||||||||||
| Business | $ | 8,678 | 9,453 | 9,885 | |||||||||||||
| Mass Markets | 3,754 | 4,876 | 5,122 | ||||||||||||||
| Total segment EBITDA | 12,432 | 14,329 | 15,007 | ||||||||||||||
| Operations and Other EBITDA | (5,729) | (5,905) | (6,518) | ||||||||||||||
| Total adjusted EBITDA | $ | 6,703 | 8,424 | 8,489 | |||||||||||||
For additional information on our reportable segments and product and services categories, see Note 4—Revenue Recognition and Note 17—Segment Information to our consolidated financial statements in Item 8 of Part II of this report.
Business Segment
| Years Ended December 31, | Percent Change | |||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 vs 2021 | 2021 vs 2020 | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
| Business Segment Product Categories: | ||||||||||||||||||||||||||
| Compute and Application Services | $ | 1,665 | 1,742 | 1,735 | (4) | % | — | % | ||||||||||||||||||
| IP and Data Services | 5,771 | 6,207 | 6,422 | (7) | % | (3) | % | |||||||||||||||||||
| Fiber Infrastructure Services | 2,152 | 2,258 | 2,277 | (5) | % | (1) | % | |||||||||||||||||||
| Voice and Other | 3,451 | 3,912 | 4,374 | (12) | % | (11) | % | |||||||||||||||||||
| Total Business Segment Revenue | 13,039 | 14,119 | 14,808 | (8) | % | (5) | % | |||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Total expense | 4,361 | 4,666 | 4,923 | (7) | % | (5) | % | |||||||||||||||||||
| Total adjusted EBITDA | $ | 8,678 | 9,453 | 9,885 | (8) | % | (4) | % | ||||||||||||||||||
46
Year ended December 31, 2022 compared to the years ended December 31, 2021 and December 31, 2020
Business segment revenue decreased $1.1 billion for the year ended December 31, 2022 compared to December 31, 2021 and decreased $689 million for the year ended December 31, 2021 compared to December 31, 2020. The 2022 changes in all product categories were impacted negatively by both the sale of the Latin American business on August 1, 2022 and the sale of the ILEC business on October 3, 2022. In addition to the impact of these divestitures, the changes reflected in the table above were primarily due to the following factors:
•Compute and Application Services decreased for the year ended December 31, 2022 compared to December 31, 2021 due to a contract ending in the Public Sector within our Large Enterprise sales channel and lower colocation revenue in our Wholesale sales channel, which were partially offset by higher IT Solutions revenue in our Wholesale sales channel.
•Compute and Application Services increased for the year ended December 31, 2021 compared to December 31, 2020 driven by growth in Managed Security and IT Solutions services to Public Sector customers and an increase in colocation and data center services in our IGAM sales channel. These increases were partially offset by a large customer disconnect for IT Solutions, lower rates for content delivery network services within our IGAM sales channel and a decrease in Cloud Services within our Large Enterprise and IGAM sales channels.
•IP and Data Services decreased during both periods due to declines in traditional VPN networks and continued declines in Ethernet revenue across all our sales channels, partially offset by an increase in IP services across multiple sales channels.
•Fiber Infrastructure Services decreased for the year ended December 31, 2022 compared to December 31, 2021 due to lower equipment and dark fiber revenue in our Large Enterprise sales channel and lower wavelengths revenue in our IGAM sales channel, partially offset by growth in wavelengths revenue in our Wholesale sales channel.
•Fiber Infrastructure Services decreased for the year ended December 31, 2021 compared to December 31, 2020 due to lower equipment revenue in our Large Enterprise sales channel and lower broadband revenue in all sales channels, partially offset by growth in dark fiber and wavelengths revenue primarily from our IGAM and Wholesale sales channels.
•Voice and Other decreased during both periods due to continued decline of legacy voice, private line and other services to customers across all of our sales channels. Additionally, voice services revenue decreased for the year ended December 31, 2021 compared to December 31, 2020, which had in-part benefited from higher COVID-related demand.
The decrease in Business segment revenue for the year ended December 31, 2022 was also driven by $54 million of unfavorable foreign currency adjustments as compared to December 31, 2021. The decrease in Business segment revenue for the year ended December 31, 2021 was slightly offset by $16 million of favorable foreign currency adjustments for the year ended December 31, 2021 as compared to December 31, 2020.
Business segment expense decreased by $305 million for the year ended December 31, 2022 compared to December 31, 2021 primarily due to lower cost of sales and external commissions both due to the decline in revenue, lower employee costs from lower headcount and a decrease in expenses primarily from the divestiture of the Latin American business. Business segment expenses decreased by $257 million for the year ended December 31, 2021 compared to December 31, 2020, primarily due to lower cost of sales due to the decline in revenue and lower employee-related costs from lower headcount.
Business segment adjusted EBITDA as a percentage of revenue was 67% for the years ended December 31, 2022, 2021 and 2020.
47
Mass Markets Segment
| Years Ended December 31, | Percent Change | |||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 vs 2021 | 2021 vs 2020 | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
| Mass Markets Product Categories: | ||||||||||||||||||||||||||
| Fiber Broadband | $ | 604 | 524 | 427 | 15 | % | 23 | % | ||||||||||||||||||
| Other Broadband | 2,163 | 2,507 | 2,639 | (14) | % | (5) | % | |||||||||||||||||||
| Voice and Other | 1,672 | 2,537 | 2,838 | (34) | % | (11) | % | |||||||||||||||||||
| Total Mass Markets Segment Revenue | 4,439 | 5,568 | 5,904 | (20) | % | (6) | % | |||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Total expense | 685 | 692 | 782 | (1) | % | (12) | % | |||||||||||||||||||
| Total adjusted EBITDA | $ | 3,754 | 4,876 | 5,122 | (23) | % | (5) | % | ||||||||||||||||||
Year ended December 31, 2022 compared to the years ended December 31, 2021 and December 31, 2020
Mass Markets segment revenue decreased by $1.1 billion for the year ended December 31, 2022 compared to December 31, 2021 and decreased $336 million for the year ended December 31, 2021 compared to December 31, 2020. The 2022 changes in all product categories were impacted negatively by the sale of the ILEC business. In addition to the impact of this divestiture, the changes reflected in the table above were primarily due to the following factors:
•Fiber Broadband revenue increased for the year ended December 31, 2022 compared to December 31, 2021 and increased for the year ended December 31, 2021 compared to year ended December 31, 2020 driven by growth in fiber customers associated with our continued increase in enabled units from our Quantum Fiber buildout.
•Other Broadband revenue decreased during both periods as a result of customer losses in our lower speed copper-based broadband services.
•Voice and Other decreased for the year ended December 31, 2022 compared to December 31, 2021 due to (i) a net reduction in CAF II revenue due to the conclusion of the CAF II program on December 31, 2021 and (ii) the continued loss of legacy voice customers. The decrease for the year ended December 31, 2021 compared to year ended December 31, 2020 were primarily due to continued losses of legacy voice customers and our exit of the Prism video product.
Mass Markets segment expense decreased by $7 million for the year ended December 31, 2022 compared to December 31, 2021 and decreased $90 million for the year ended December 31, 2021 compared to December 31, 2020. Decreases in expenses for the year ended December 31, 2022 compared to December 31, 2021 were primarily due to the divestiture of the ILEC business and lower employee costs, offset by higher bad debt expense. Decreases for the year ended December 31, 2021 compared to December 31, 2020 were primarily due to lower employee-related costs from lower headcount, lower costs of sales driven by the decrease in Prism operating costs and lower overall revenue, and higher bad debt expense for the year ended December 31, 2020 due to the COVID-19 induced economic slowdown. These decreases were partially offset by higher network-related expenses for the year ended December 31, 2021.
Mass Markets segment adjusted EBITDA as a percentage of revenue was 85%, 88% and 87% for the years ended December 31, 2022, 2021 and 2020, respectively.
48
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenue and expenses. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations related to (i) goodwill, customer relationships and other intangible assets; (ii) pension and post-retirement benefits; (iii) loss contingencies and litigation reserves and (iv) income taxes. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions or estimates. We believe that our estimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made. However, actual results may differ from those estimates, and these differences may be material.
Goodwill, Customer Relationships and Other Intangible Assets
We have a significant amount of goodwill and indefinite-lived intangible assets that are assessed at least annually for impairment. At December 31, 2022, goodwill and intangible assets totaled $18.8 billion (excluding goodwill and other intangible assets classified as assets held for sale), or 41%, of our total assets. The impairment analyses of these assets are considered critical because of their significance to us and our segments and the subjective nature of certain assumptions used to estimate fair value.
We have assigned our goodwill balance to our segments at December 31, 2022 as follows:
| Business | Mass Markets | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
As of December 31, 2022 | $ | 7,906 | 4,751 | 12,657 | |||||||||||||
Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and tradenames, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 7 to 14 years, using the straight-line method, depending on the customer. Certain customer relationship intangible assets became fully amortized at the end of the first quarter 2021 using the sum-of-years-digits method, which is no longer used for any of our remaining intangible assets. We amortize capitalized software using the straight-line method primarily over estimated lives ranging up to 7 years. We amortize our other intangible assets using the straight-line method over an estimated life of 9 to 20 years. Other intangible assets not arising from business combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite-lived and such intangible assets are not amortized.
Our long-lived intangible assets, other than goodwill, with indefinite lives are assessed for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be an impairment. These assets are carried at the estimated fair value at the time of acquisition and assets not acquired in acquisitions are recorded at historical cost. However, if their estimated fair value is less than their carrying amount, we recognize an impairment charge for the amount by which the carrying amount of these assets exceeds their estimated fair value.
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired.
49
We are required to reassign goodwill to reporting units whenever reorganizations of our internal reporting structure changes the composition of our reporting units. Goodwill is reassigned to the reporting units using a relative fair value approach. When the fair value of a reporting unit is available, we allocate goodwill based on the relative fair value of the reporting units. When fair value is not available, we utilize an alternative allocation methodology that we believe represents a reasonable approximation of the fair value of the operations being reorganized. For additional information on our segments, see Note 17—Segment Information to our consolidated financial statements in Item 8 of Part II of this report.
We are required to assess our goodwill for impairment annually, or more frequently if an event occurs or circumstances change that indicates it is more likely than not the fair values of any of our reporting units were less than their carrying values. In assessing goodwill for impairment, we may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
Our annual impairment assessment date for goodwill is October 31, at which date we assess our reporting units. We report two segments: Business and Mass Markets. At October 31, 2022, under these segments, we had four reporting units for goodwill impairment testing, which are (i) Mass Markets (ii) North America Business ("NA Business"), (iii) Europe, Middle East and Africa ("EMEA") region and (iv) Asia Pacific ("APAC") region. Prior to its August 1, 2022 divestiture, the Latin American ("LATAM") region was also a reporting unit. At October 31, 2020, we used eight reporting units for goodwill impairment testing, which were consumer, small and medium business, enterprise, wholesale, North American global accounts ("NA GAM"), EMEA, LATAM and APAC.
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 and are allocated to individual reporting units based on their relative revenue or earnings before interest, taxes depreciation and amortization ("EBITDA"). 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 its 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 charge 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 multiples of publicly-traded companies whose services are comparable to ours. With respect to our analysis using the discounted cash flow method, the timing and amount of projected cash flows under these forecasts require estimates developed from our long-range plan, which is informed by wireline industry trends, the competitive landscape, product lifecycles, operational initiatives, capital allocation plans and other company-specific and external factors that influence our business. These projected cash flows consider recent historical results and are consistent with the Company's short-term financial forecasts and long-term business strategies. The development of these projected cash flows, and the discount rate applied to such cash flows, is subject to inherent uncertainties, and actual results could vary significantly from such estimates. Our determination of the discount rate is based on a weighted average cost of capital approach, which uses a market participant’s cost of equity and after-tax cost of debt and reflects certain risks inherent in the projected cash flows. With respect to our analysis using the market approach, the fair value of a reporting unit is estimated based upon a market multiple applied to the reporting unit’s revenue and EBITDA, adjusted for an appropriate control premium based on recent market transactions. The fair value of reporting units estimated using revenue and EBITDA market multiples are weighted depending on the characteristics of the individual reporting unit to determine the estimated fair value under the market approach. We also reconcile the estimated fair values of the reporting units to our market capitalization to conclude whether the indicated control premium is reasonable in comparison to recent transactions in the marketplace. Declines in our stock price have in the past caused an impairment of our goodwill, and future declines in our stock price could potentially cause additional impairments of our goodwill. Changes in the underlying assumptions that we use in allocating the assets and liabilities to reporting units under either the discounted cash flow or market approach method can result in materially different determinations of fair value. We performed sensitivity analyses that considered a range of discount rates and a range of EBITDA market multiples and we believe the estimates, judgments, assumptions and allocation methods used by us are reasonable, but changes in any of them can significantly affect whether we must incur impairment charges, as well as the size of such charges.
50
For additional information on our goodwill balances by segment and results of our impairment analyses, see Note 3—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 8 of Part II of this report.
Pension and Post-retirement Benefits
We sponsor a noncontributory qualified defined benefit pension plan (referred to herein as our qualified pension plan, the "Lumen Combined Pension Plan" or the "Combined Pension Plan") for a substantial portion of our current and former employees in the United States. As of January 1, 2022, we spun off a new pension plan (the "Lumen Pension Plan") from the Combined Pension Plan in anticipation of the sale of the ILEC business on October 3, 2022. We recognized pension costs related to both plans through the sale of the ILEC business, at which time balances related to the Lumen Pension Plan were reflected in the calculation of our gain on the sale of the ILEC business and the pension obligation and assets of the Lumen Pension Plan were transferred to the purchaser. We also maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees.
In addition to the Lumen Combined Pension Plan, we also maintain several non-qualified pension plans for certain eligible highly compensated employees. Due to the insignificant impact of these non-qualified plans on our consolidated financial statements, we have excluded them from the following pension and post-retirement benefits disclosures for 2022, 2021 and 2020. See Note 11—Employee Benefits for additional information.
In 2022, approximately 62% of the Combined Pension Plan's January 1, 2022 net actuarial loss balance of $2.2 billion was subject to amortization as a component of net periodic expense over the average remaining service period of 14 years for participating employees expected to receive benefits under the plan. The other 38% of the Combined Pension Plan's beginning net actuarial loss balance was treated as indefinitely deferred during 2022. Additionally, upon the sale of the ILEC business on October 3, 2022, we recognized $564 million of net actuarial loss, pre-tax, related to the Lumen Pension Plan, offsetting our gain on the sale of the business. The entire beginning net actuarial loss of $217 million for the post-retirement benefit plans was treated as indefinitely deferred during 2022.
As of January 1, 2021, our qualified pension plan had a net actuarial loss balance of approximately $3.0 billion. A portion of this balance was subject to amortization as a component of net periodic expense over the average remaining service period for participating employees expected to receive benefits under the plan. During 2021, our lump sum pension settlement payments exceeded the settlement threshold and as a result we recognized a non-cash settlement charge of $383 million, accelerating previously unrecognized actuarial losses from our net actuarial loss balance. For our post-retirement benefit plans, the majority of the beginning net actuarial loss balance of $346 million continued to be deferred during 2021.
In 2020, approximately 59% of the qualified pension plan's January 1, 2020 net actuarial loss balance of $3.0 billion was subject to amortization as a component of net periodic expense over the average remaining service period of 9 years for participating employees expected to receive benefits under the plan. The other 41% of the qualified pension plan's beginning net actuarial loss balance was treated as indefinitely deferred during 2020. The entire beginning net actuarial loss of $175 million for the post-retirement benefit plans was treated as indefinitely deferred during 2020.
In computing our pension and post-retirement health care and life insurance benefit obligations, our most significant assumptions are the discount rate and mortality rates. In computing our periodic pension expense, our most significant assumptions are the discount rate and the expected rate of return on plan assets. In computing our post-retirement benefit expense, our most significant assumption is the discount rate.
The discount rate for each plan is the rate at which we believe we could effectively settle the plan's benefit obligations as of the end of the year. We selected each plan's discount rate based on a cash flow matching analysis using hypothetical yield curves from high-quality U.S. corporate bonds and projections of the future benefit payments that constitute the projected benefit obligation for the plans. This process establishes the uniform discount rate that produces the same present value of the estimated future benefit payments as is generated by discounting each year's benefit payments by a spot rate applicable to that year. The spot rates used in this process were derived from a yield curve created from yields on the 60th to 90th percentile of U.S. high quality bonds.
51
The impacts of a hypothetical change in the discount rate on the benefit obligation for the qualified pension plan and the post-retirement benefit plans obligation are detailed in the table below.
| Percentage point change | Increase/(decrease) at December 31, 2022 | |||||||
| (Dollars in millions) | ||||||||
| Combined Pension Plan discount rate | 1 | % | $ | (377) | ||||
| (1) | % | 458 | ||||||
| Post-retirement benefit plans discount rate | 1 | % | (163) | |||||
| (1) | % | 163 | ||||||
Published mortality rates help predict the expected life of plan participants and are based on historical demographic studies by the Society of Actuaries ("SOA"). The SOA publishes new mortality rates (mortality tables and projection scales) on a regular basis which reflect updates to projected life expectancies in North America. Historically, we have adopted the new projection tables immediately after publication. The SOA did not release any revised mortality tables or projection scales in 2022.
The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans' assets in the future, net of administrative expenses paid from plan assets. The rate of return is determined by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysis of the long-term expectations of various third-party investment management organizations, to which we then add a factor of 50 basis points to reflect the benefit we expect to result from our active management of the assets. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy.
Changes in any of the above factors could significantly impact operating expenses in our consolidated statements of operations and other comprehensive loss in our consolidated statements of comprehensive income (loss), as well as the value of the liability and accumulated other comprehensive loss of stockholders' equity on our consolidated balance sheets.
Loss Contingencies and Litigation Reserves
We are involved in several potentially material legal proceedings, as described in more detail in Note 18—Commitments, Contingencies and Other Items. On a quarterly basis, we assess potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the differences are material, our consolidated financial statements could be materially impacted.
For matters related to income taxes, if we determine in our judgment that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize in our financial statements a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if we determine in our judgment that the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous, particularly in certain of the non-U.S. jurisdictions in which we operate. Because of this, whether a tax position will ultimately be sustained may be uncertain.
52
Income Taxes
Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to (i) tax credit carryforwards, (ii) differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities and (iii) tax NOLs. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect of a change in tax rate on deferred income tax assets and liabilities is recognized in earnings in the period that includes the enactment date.
The measurement of deferred taxes often involves the exercise of considerable judgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the states in which we operate. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.
In connection with recording deferred income tax assets and liabilities, we establish valuation allowances when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be realized. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowances are appropriate in light of changes in facts or circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings. We also rely on our forecasts of future earnings and the nature and timing of future deductions and benefits represented by the deferred tax assets, all of which involve the exercise of significant judgment. At December 31, 2022, we established a valuation allowance of $550 million primarily related to state NOLs, based on our determination that it was more likely than not that this amount of these NOLs would expire unused. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that existing valuation allowances must be revised or eliminated or new valuation allowances created, any of which could materially impact our financial condition or results of operations. See Note 16—Income Taxes to our consolidated financial statements in Item 8 of Part II of this report.
Liquidity and Capital Resources
Overview of Sources and Uses of Cash
We are a holding company that is dependent on the capital resources of our subsidiaries to satisfy our parent company liquidity requirements. Several of our significant operating subsidiaries have borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries or affiliates. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries may be limited by tax, legal and other considerations.
At December 31, 2022, we held cash and cash equivalents of $1.3 billion, a small portion of which is classified as held for sale, and we also had $2.2 billion of borrowing capacity available under our revolving credit facility. We typically use our revolving credit facility as a source of liquidity for operating activities and our other cash requirements. We had approximately $97 million of cash and cash equivalents outside the United States at December 31, 2022. We currently believe that there are no material restrictions on our ability to repatriate cash and cash equivalents into the United States, and that we may do so without paying or accruing U.S. taxes. Other than transactions related to our EMEA divestiture, we do not currently intend to repatriate to the United States any of our foreign cash and cash equivalents from operating entities.
53
In response to COVID-19, the U.S. Congress passed the CARES Act on March 27, 2020. Under the CARES Act, we deferred $134 million of our 2020 payroll taxes, $61 million of which were repaid in 2022 and $67 million of which were repaid in 2021. We transferred $6 million of this deferred payment obligation to the purchasers of our ILEC business on October 3, 2022.
Our executive officers and our Board of Directors review our sources and potential uses of cash in connection with our annual budgeting process and whenever circumstances warrant. Generally speaking, our principal funding source is cash from operating activities, and our principal cash requirements include operating expenses, capital expenditures, income taxes, debt repayments, periodic securities repurchases, periodic pension contributions and other benefits payments. The impact of the sale of our Latin American and ILEC businesses and pending sale of the EMEA business is further described below.
Based on our current capital allocation objectives, during 2023 we project expending approximately $2.9 billion to $3.1 billion of capital expenditures.
For the 12 month period ending December 31, 2023, we project that our fixed commitments will include (i) $125 million of scheduled term loan amortization payments and (ii) $32 million of finance lease and other fixed payments (which includes $3 million of finance lease obligations that have been classified as held for sale).
We will continue to monitor our future sources and uses of cash, and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors. We may also draw on our revolving credit facility as a source of liquidity for operating activities and to give us additional flexibility to finance our capital investments, repayments of debt, pension contributions and other cash requirements.
For additional information, see "Risk Factors—Financial Risks" in Item 1A of Part I of this report.
Impact of the Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business
As discussed in Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business to our consolidated financial statements in Item 8 of Part II of this report, we sold our Latin American and ILEC Businesses on August 1, 2022 and October 3, 2022, respectively. Additionally, we have agreed to divest our EMEA business subject to the receipt of various approvals and the satisfaction of other customary conditions. As further described elsewhere herein, these transactions have provided or are expected to provide us with a substantial amount of cash proceeds, but ultimately will reduce our base of income-generating assets that generate our recurring cash from operating activities. As a result of these divestitures, we have utilized all of our NOLs available for use in 2022. The estimated amount of cash taxes related to our 2022 divestitures is $900 million to $1 billion. See " —Net Operating Loss Carryforwards" below.
Capital Expenditures
We incur capital expenditures on an ongoing basis to expand and improve our service offerings, enhance and modernize our networks and compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes, regulatory considerations (such as governmentally-mandated infrastructure buildout requirements) and the availability of requisite supplies, labor and permits.
Our capital expenditures continue to be focused on enhancing network operating efficiencies, supporting new service developments, and expanding our fiber network, including our Quantum Fiber buildout plan. A portion of our 2023 capital expenditures will also be focused on restoring network assets destroyed or damaged by Hurricane Ian in Florida during 2022. For more information on our capital spending, see (i) "—Overview of Sources and Uses of Cash" above, (ii) "Cash Flow Activities—Investing Activities" below and (iii) Item 1 of Part 1 of this report.
54
Debt Instruments and Financing Arrangements
Debt Instruments
At December 31, 2022, we had $10.4 billion of outstanding consolidated secured indebtedness, $10.1 billion of outstanding consolidated unsecured indebtedness (excluding (i) finance lease obligations, (ii) unamortized premiums, net and (iii) unamortized debt issuance costs) and $2.2 billion of unused borrowing capacity under our revolving credit facility, as discussed further below.
Under our amended and restated credit agreement dated as of January 31, 2020 (the “Amended Credit Agreement”), we maintained at December 31, 2022 (i) a $2.2 billion senior secured revolving credit facility, under which we owed nothing as of such date, and (ii) $5.2 billion of senior secured term loan facilities. For additional information, see (i) "—Overview of Sources and Uses of Cash," and (ii) Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report.
At December 31, 2022, we had $33 million of letters of credit outstanding under our $225 million uncommitted letter of credit facility. Additionally, under separate facilities, we had outstanding letters of credit, or other similar obligations, of approximately $61 million as of December 31, 2022, of which $3 million is collateralized by cash that is reflected on our consolidated balance sheets as restricted cash within other assets.
In addition to its indebtedness under our Amended Credit Agreement, Lumen Technologies is indebted under its outstanding senior notes, and several of its subsidiaries are indebted under separate credit facilities or senior notes. For information on the terms and conditions of other debt instruments of ours and our subsidiaries, including financial and operating covenants, see (i) Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report and (ii) "—Other Matters" below.
Future Financings and Debt Reduction Transactions
Subject to market conditions, we expect to continue to issue debt securities from time to time in the future to refinance a substantial portion of our maturing debt, including issuing debt securities of certain of our subsidiaries to refinance their maturing debt to the extent permitted under our debt covenants and consistent with our capital allocation strategies. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned by credit rating agencies, among other factors.
As of the filing date of this report, the credit ratings for the senior secured and unsecured debt of Lumen Technologies, Inc., Level 3 Financing, Inc. and Qwest Corporation were as follows:
| Borrower | Moody's Investors Service, Inc. | Standard & Poor's | Fitch Ratings | |||||||||||||||||
| Lumen Technologies, Inc.: | ||||||||||||||||||||
| Unsecured | B2 | B | BB | |||||||||||||||||
| Secured | Ba3 | BB | BB+ | |||||||||||||||||
| Level 3 Financing, Inc.: | ||||||||||||||||||||
| Unsecured | Ba3 | B+ | BB | |||||||||||||||||
| Secured | Ba1 | BB | BBB- | |||||||||||||||||
| Qwest Corporation: | ||||||||||||||||||||
| Unsecured | Ba2 | BB | BB | |||||||||||||||||
Our credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future changes in the senior unsecured or secured debt ratings of us or our subsidiaries could impact our access to capital or borrowing costs. With the recent downgrade of certain of our credit ratings we may find it more difficult to borrow on favorable terms, or at all. See "Risk Factors—Financial Risks" in Item 1A of Part I of this report.
55
From time to time over the past couple of years, we have engaged in various refinancings, redemptions, tender offers, open market purchases and other transactions designed to reduce our consolidated indebtedness, lower our interest costs, improve our financial flexibility or otherwise enhance our debt profile. We plan to continue to pursue similar transactions in the future. Whether and when we implement any additional such transactions depends on a wide variety of factors, including without limitation market conditions, our upcoming debt maturities, and our cash requirements. There is no guarantee that we will be successful in implementing any such transactions or attaining our stated objectives. We may not disclose these transactions in advance, unless required by applicable law or material in nature or amount. See Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report for additional information.
Net Operating Loss Carryforwards
As of December 31, 2022, Lumen Technologies had approximately $1.0 billion of federal net operating loss carryforwards ("NOLs"), which for U.S. federal income tax purposes can be used to offset future taxable income. These NOLs are primarily related to federal NOLs we acquired through the Level 3 acquisition on November 1, 2017 and are subject to limitations under Section 382. We maintain a Section 382 rights agreement designed to safeguard through late 2023 our ability to use those NOLs. We have utilized a substantial portion of our available NOLs to offset taxable gains generated by the completion of our 2022 divestitures. As a result, we anticipate that our cash income tax liabilities will increase substantially in future periods. The amounts of our near-term future tax payments will depend upon many factors, including our future earnings and tax circumstances and the impact of any corporate tax reform or taxable transactions. Based on current laws and our current assumptions and projections, we estimate our cash federal income tax liability related to the 2023 tax year will range from $200 million to $300 million.
Although we expect to use substantially all of our remaining NOLs in future periods in accordance with Section 382's annual limitations, we cannot assure this. See "Risk Factors—Financial Risks—We may not be able to fully utilize our NOLs" in Item 1A of Part I of this report.
Dividends
Between the first quarter of 2019 and the third quarter of 2022, our Board of Directors declared quarterly cash dividends of $0.25 per share of our outstanding common stock. On November 2, 2022, we announced that our Board had terminated our quarterly cash dividend program. Under this revised capital allocation policy, the company plans to continue to invest in growth initiatives.
56
Stock Repurchases
Effective November 2, 2022, our Board of Directors authorized a new two-year program to repurchase up to an aggregate of $1.5 billion of our outstanding common stock (the "November 2022 stock repurchase program"). During the year ended December 31, 2022, we repurchased 33 million shares of our outstanding common stock in the open market for an aggregate market price of $200 million, or an average purchase price of $6.07 per share. All repurchased common stock has been retired. We expect repurchases made in 2023 and beyond to be subject to a non-deductible 1% excise tax on the fair market value of the stock under the Inflation Reduction Act of 2022.
Pension and Post-retirement Benefit Obligations
We are subject to material obligations under our existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2022, the accounting unfunded status of our qualified and non-qualified defined benefit pension plans and our qualified post-retirement benefit plans was $615 million and $2.0 billion, respectively. For additional information about our pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates—Pension and Post-retirement Benefits" in Item 7 of Part II of this report and Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report.
On October 19, 2021, we, as sponsor of the Lumen Combined Pension Plan ("Combined Pension Plan"), along with the Plan’s independent fiduciary, entered into an agreement committing the Plan to use a portion of its plan assets to purchase an annuity from an insurance company (the "Insurer") to transfer $1.4 billion of the Plan’s pension liabilities. This agreement irrevocably transferred to the Insurer future Plan benefit obligations for approximately 22,600 U.S. Lumen participants ("Transferred Participants") effective on December 31, 2021. This annuity transaction was funded entirely by existing Plan assets and is intended to provide equivalent benefits to the Transferred Participants. The Insurer is committed to assume responsibility for administrative and customer service support, including distribution of payments to the Transferred Participants.
As of January 1, 2022, we spun off the Lumen Pension Plan from the Combined Pension Plan in anticipation of the sale of the ILEC business, as described further in Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business to our consolidated financial statements in Item 1 of Part I of this report. At the time of the spin-off we transferred $2.5 billion of pension benefit obligation and $2.2 billion of plan assets to the Lumen Pension Plan. Following a revaluation of the pension obligation and pension assets for the Lumen Pension Plan in preparation for the closing of the ILEC business divestiture, we contributed approximately $319 million of cash in September 2022 to satisfy our contractual obligations to the purchaser of the divested business. This plan was subsequently assumed by the purchaser as part of our divestiture of our ILEC business on October 3, 2022. Upon sale of the ILEC business, we recognized $403 million of net actuarial loss and prior service cost, net of tax impact, related to the Lumen Pension Plan, which offset our gain on sale of the business.
Benefits paid by our Combined Pension Plan are paid through the trust that holds the Combined Pension Plan's assets. Based on current laws and circumstances, we do not expect any contributions to be required for our Combined Pension Plan during 2023. The amount of required contributions to our Combined Pension Plan in 2024 and beyond will depend on a variety of factors, most of which are beyond our control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. We occasionally make voluntary contributions to our plans in addition to required contributions and reserve the right to do so in the future. We last made a voluntary contribution to the trust for our Combined Pension Plan during 2018. We currently do not expect to make a voluntary contribution in 2023.
Substantially all of our post-retirement health care and life insurance benefits plans are unfunded and are paid by us with available cash. As described further in Note 11—Employee Benefits, aggregate benefits paid by us under these plans (net of participant contributions and direct subsidy receipts) were $210 million, $203 million and $211 million for the years ended December 31, 2022, 2021 and 2020, respectively. For additional information on our expected future benefits payments for our post-retirement benefit plans, see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of this report.
For 2022, our expected annual long-term rate of return on the pension plan assets, net of administrative expenses, was 5.5%. For 2023, our expected annual long-term rate of return on these assets is 6.5%. However, actual returns could be substantially different.
57
Our pension plan contains provisions that allow us, from time to time, to offer lump sum payment options to certain former employees in settlement of their future retirement benefits. We record an accounting settlement charge, consisting of the recognition of certain deferred costs of the pension plan, associated with these lump sum payments only if, in the aggregate, they exceed the sum of the annual service and interest costs for the plan’s net periodic pension benefit cost, which represents the settlement accounting threshold. As of December 31, 2021, lump sum pension settlement payments exceeded the settlement threshold. As a result, for the year ended December 31, 2021 we recognized a non-cash settlement charge of $383 million to accelerate the recognition of a portion of the previously unrecognized actuarial losses in the qualified pension plan, which was allocated and reflected in other income (expense), net in our consolidated statement of operations for the year ended December 31, 2021. The settlement threshold was not exceeded for the year ended December 31, 2022. The amount of any future non-cash settlement charges will be dependent on several factors, including the total amount of our future lump sum benefit payments.
Future Contractual Obligations
Our estimated future obligations as of December 31, 2022 include both current and long term obligations. These amounts include liabilities that have been classified as liabilities held for sale on our consolidated balance sheet. We have a current obligation of $157 million and a long-term obligation of $20.6 billion of long-term debt (excluding unamortized premiums, net and unamortized debt issuance costs, inclusive of obligations that have been classified as held for sale). Under our operating leases, we have a current obligation of $449 million and a long-term obligation of $1.5 billion (inclusive of operating lease obligations classified as held for sale). We have current obligations related to right-of-way agreements and purchase commitments of $829 million and a long-term obligation of $1.7 billion. Additionally, we have a current obligation for asset retirement obligation of $30 million and a long-term obligation of $156 million. Finally, our pension and post-retirement benefit plans have an unfunded benefit obligation, of which $215 million is classified as current and $2.4 billion is classified as long-term. For additional information, see Note 7—Long-Term Debt and Credit Facilities, Note 5—Leases, Note 18—Commitments, Contingencies and Other Items, Note 9—Property, Plant and Equipment and Note 11—Employee Benefits, respectively.
Federal Broadband Support Programs
Between 2015 and 2021, we received approximately $500 million annually through the CAF II program, a program that ended on December 31, 2021. In connection with the CAF II funding, we were required to meet certain specified infrastructure buildout requirements in 33 states by the end of 2021, which required substantial capital expenditures. In the first quarter of 2022, we recognized $59 million of previously deferred revenue related to the conclusion of the CAF II program based upon our final buildout and filing submissions. The government has the right to audit our compliance with the CAF II program. The ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our reserve accruals established for these matters.
In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”), which is a federal support program designed to replace the CAF II program. On December 7, 2020, the FCC allocated in its RDOF Phase I auction $9.2 billion in support payments over 10 years to deploy high speed broadband to over 5.2 million unserved locations. We won bids to receive approximately $26 million of annual RDOF Phase I support payments approximately 36% of which is attributable to the ILEC business we divested on October 3, 2022. Our support payments under the RDOF Phase I program commenced during the second quarter of 2022.
For additional information on these programs, see (i) Note 4—Revenue Recognition to our consolidated financial statements in Item 8 of Part II of this report, (ii) "Business—Regulation of Our Business" in Item 1 of Part I of this report and (iii) "Risk Factors—Legal and Regulatory Risks" in Item 1A of Part I of this report.
Federal officials have proposed changes to current programs and laws that could impact us, including proposals designed to increase broadband access, increase competition among broadband providers, lower broadband costs and re-adopt "net neutrality" rules similar to those adopted under the Obama Administration. In November 2021, the U.S. Congress enacted legislation that appropriated $65 billion to improve broadband affordability and access, primarily through federally funded state grants. As of the date of this report, various state and federal agencies are continuing to take steps to make this funding available to eligible applicants, including us. It remains premature to speculate on the ultimate impact of this legislation on us.
58
Cash Flow Activities
The following table summarizes our consolidated cash flow activities for the year ended December 31, 2022 and 2021. For information regarding cash flow activities for the year ended December 31, 2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of our Annual Report Form 10-K for the year ended December 31, 2021.
| Years Ended December 31, | (Decrease) / Increase | ||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Net cash provided by operating activities | $ | 4,735 | 6,501 | (1,766) | |||||||||||||
| Net cash provided by (used in) investing activities | 5,476 | (2,712) | 8,188 | ||||||||||||||
| Net cash used in financing activities | (9,313) | (3,807) | 5,506 | ||||||||||||||
Operating Activities
Net cash provided by operating activities decreased by $1.8 billion for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to lower net income adjusted for non-cash expenses and gains, as well as our pension contribution made in preparation for the closing of the ILEC business divestiture. Cash provided by operating activities is subject to variability period over period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, income taxes and bonuses.
For additional information about our operating results, see "Results of Operations" above.
Investing Activities
Net cash provided by (used in) investing activities increased by $8.2 billion for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to pre-tax cash proceeds from the sales of our Latin American and ILEC businesses, which was partially offset by an increase in capital expenditures.
Financing Activities
Net cash used in financing activities increased by $5.5 billion for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to substantially higher debt repayments and proceeds from the issuance of long-term debt in the prior year, partially offset by higher repurchases of common stock and payments of dividends in the prior year.
See Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of this report for additional information on our outstanding debt securities.
Other Matters
We have cash management and loan arrangements with a majority of our income-generating subsidiaries, in which a substantial portion of the aggregate cash of those subsidiaries' is periodically advanced or loaned to us or our service company affiliate. Although we periodically repay these advances to fund the subsidiaries' cash requirements throughout the year, at any given point in time we may owe a substantial sum to our subsidiaries under these arrangements. In accordance with generally accepted accounting principles, these arrangements are reflected in the balance sheets of our subsidiaries, but are eliminated in consolidation and therefore not recognized on our consolidated balance sheets.
We are also involved in various legal proceedings that could substantially impact our financial position. See Note 18—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report for additional information.
59
Market Risk
As of December 31, 2022, we are exposed to market risk from changes in interest rates on our variable rate long-term debt obligations and fluctuations in certain foreign currencies.
Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure. From time to time, we have used derivative instruments to swap our exposure to variable interest rates for fixed interest rates. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. As of December 31, 2022, we did not hold or issue derivative financial instruments for trading or speculative purposes.
As of December 31, 2022, we had approximately $7.8 billion floating rate debt, none of which is currently hedged. A hypothetical increase of 100 basis points in LIBOR relating to our $7.8 billion of unhedged floating rate debt would, among other things, decrease our annual pre-tax earnings by approximately $78 million. Additionally, our credit agreements contain language about a possible change from LIBOR to an alternative index.
We conduct a portion of our business in currencies other than the U.S. dollar, the currency in which our consolidated financial statements are reported. Our European subsidiaries use, and prior to the August 1, 2022 divestiture of our Latin American business, certain of our former Latin American subsidiaries used the local currency as their functional currency, as the majority of their sales and purchases are or were transacted in their local currencies. Although we continue to evaluate strategies to mitigate risks related to the effect of fluctuations in currency exchange rates, we will likely recognize gains or losses from international transactions. Accordingly, changes in foreign currency rates relative to the U.S. dollar could positively or negatively impact our operating results.
Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those disclosed by us from time to time if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at December 31, 2022.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk" in Item 7 of Part II of this report is incorporated herein by reference.
60
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Lumen Technologies, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lumen Technologies, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Testing of revenue
As discussed in Note 4 to the consolidated financial statements, the Company recorded $17.5 billion of operating revenues for the year ended December 31, 2022. The processing and recording of revenue are reliant upon multiple information technology (IT) systems.
We identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter. Complex auditor judgment was required in evaluating the sufficiency of audit evidence over revenue due to the large volume of data and the number and complexity of the revenue accounting systems. Specialized skills and knowledge were needed to test the IT systems used for the processing and recording of revenue.
61
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the processing and recording of revenue, including the IT systems tested. We evaluated the design and tested the operating effectiveness of certain internal controls related to the processing and recording of revenue. This included manual and automated controls over the IT systems used for the processing and recording of revenue. For a selection of transactions, we compared the amount of revenue recorded to a combination of Company internal data, executed contracts, and other relevant third-party data. In addition, we involved IT professionals with specialized skills and knowledge who assisted in the design and performance of audit procedures related to certain IT systems used by the Company for the processing and recording of revenue. We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the relevance and reliability of evidence obtained.
Goodwill impairment of North America Business reporting unit
As discussed in Note 3 to the consolidated financial statements, the goodwill balance at December 31, 2022 was $12.7 billion. The Company assesses goodwill for impairment at least annually, or more frequently, if events or circumstances indicate the carrying value of a reporting unit likely exceeds its fair value. On the annual goodwill impairment assessment date, the Company estimated the fair value of its reporting units by considering both a discounted cash flow method and a market approach. The annual impairment test determined the carrying value of the North America Business reporting unit exceeded its estimated fair value. As a result, the Company recorded a non-cash impairment charge of $3.2 billion to reduce the carrying value of goodwill for the North America Business reporting unit.
We identified the assessment of the Company’s annual impairment testing related to the carrying value of goodwill of the North America Business reporting unit as a critical audit matter. Subjective auditor judgment was required in evaluating certain assumptions used to estimate the fair value of the reporting unit. Those assumptions included: projected cash flows, the discount rate, and the earnings before interest, taxes, depreciation, and amortization ("EBITDA") market multiple. The evaluation of these assumptions was challenging due to their subjective nature. Additionally, differences in judgment used to determine these assumptions could have had a significant effect on the reporting unit’s estimated fair value. Specialized skills and knowledge were required in the assessment of the discount rate and the EBITDA market multiple.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the annual impairment testing of goodwill. This included controls related to the Company’s development of projected cash flows, and the determination of the discount rate and the EBITDA market multiple. We performed a sensitivity analysis over the projected cash flow assumptions to assess the impact on the Company’s estimate of the fair value of the North America Business reporting unit. We assessed the Company’s ability to accurately project cash flows by comparing the Company’s historical projected cash flows to actual results. We also evaluated the Company’s North America Business reporting unit’s projected cash flows by comparing them to the Company’s underlying business strategies, historic trends, and publicly available industry and analyst reports. We involved valuation professionals with specialized skills and knowledge, who assisted in:
•evaluating the discount rate by independently developing a discount rate range using publicly available market data for comparable entities
•evaluating the EBITDA market multiple by comparing to EBITDA market multiple range developed using publicly available market data for comparable entities
•performing sensitivity analyses that considered a range of discount rates and a range of EBITDA market multiples.
/s/ KPMG LLP
We have served as the Company’s auditor since 1977.
Denver, Colorado
February 23, 2023
62
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors Lumen Technologies, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Lumen Technologies, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Denver, Colorado
February 23, 2023
63
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions, except per share amounts, and shares in thousands) | |||||||||||||||||
| OPERATING REVENUE | $ | 17,478 | 19,687 | 20,712 | |||||||||||||
| OPERATING EXPENSES | |||||||||||||||||
| Cost of services and products (exclusive of depreciation and amortization) | 7,868 | 8,488 | 8,934 | ||||||||||||||
| Selling, general and administrative | 3,078 | 2,895 | 3,464 | ||||||||||||||
| Gain on sale of businesses | (773) | — | — | ||||||||||||||
| Loss on disposal groups held for sale | 700 | — | — | ||||||||||||||
| Depreciation and amortization | 3,239 | 4,019 | 4,710 | ||||||||||||||
| Goodwill impairment | 3,271 | — | 2,642 | ||||||||||||||
| Total operating expenses | 17,383 | 15,402 | 19,750 | ||||||||||||||
| OPERATING INCOME | 95 | 4,285 | 962 | ||||||||||||||
| OTHER EXPENSE | |||||||||||||||||
| Interest expense | (1,332) | (1,522) | (1,668) | ||||||||||||||
| Other income (expense), net | 246 | (62) | (76) | ||||||||||||||
| Total other expense, net | (1,086) | (1,584) | (1,744) | ||||||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (991) | 2,701 | (782) | ||||||||||||||
| Income tax expense | 557 | 668 | 450 | ||||||||||||||
| NET (LOSS) INCOME | $ | (1,548) | 2,033 | (1,232) | |||||||||||||
| BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE | |||||||||||||||||
| BASIC | $ | (1.54) | 1.92 | (1.14) | |||||||||||||
| DILUTED | $ | (1.54) | 1.91 | (1.14) | |||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | |||||||||||||||||
| BASIC | 1,007,517 | 1,059,541 | 1,079,130 | ||||||||||||||
| DILUTED | 1,007,517 | 1,066,778 | 1,079,130 | ||||||||||||||
See accompanying notes to consolidated financial statements.
64
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| NET (LOSS) INCOME | $ | (1,548) | 2,033 | (1,232) | |||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS): | |||||||||||||||||
| Items related to employee benefit plans: | |||||||||||||||||
Change in net actuarial loss, net of $(205), $(134) and $26 tax | 631 | 424 | (92) | ||||||||||||||
Reclassification of net actuarial loss to gain on the sale of business, net of $(142), $— and $— tax | 422 | — | — | ||||||||||||||
Settlement charges recognized in net income (loss), net of $—, $(93) and $— tax | — | 290 | — | ||||||||||||||
Change in net prior service cost, net of $(9), $(5) and $(12) tax | 30 | 14 | 33 | ||||||||||||||
Reclassification of prior service credit to gain on the sale of business, net of $6, $— and $— tax | (19) | — | — | ||||||||||||||
Curtailment loss, net of $—, $— and $(1) tax | — | — | 3 | ||||||||||||||
Reclassification of realized loss on interest rate swaps to net (loss) income, net of $(5), $(20) and $(16) tax | 17 | 63 | 46 | ||||||||||||||
Unrealized holding loss on interest rate swaps, net of $—, $— and $29 tax | — | (1) | (86) | ||||||||||||||
Reclassification of realized loss on foreign currency translation to gain on the sale of business, net of $—, $— and $— tax | 112 | — | — | ||||||||||||||
Foreign currency translation adjustment, net of $58, $30 and $(43) tax | (134) | (135) | (37) | ||||||||||||||
| Other comprehensive income (loss) | 1,059 | 655 | (133) | ||||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | (489) | 2,688 | (1,365) | |||||||||||||
See accompanying notes to consolidated financial statements.
65
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions and shares in thousands) | |||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS | |||||||||||
| Cash and cash equivalents | $ | 1,251 | 354 | ||||||||
Accounts receivable, less allowance of $85 and $114 | 1,477 | 1,544 | |||||||||
| Assets held for sale | 1,889 | 8,809 | |||||||||
| Other | 803 | 829 | |||||||||
| Total current assets | 5,420 | 11,536 | |||||||||
Property, plant and equipment, net of accumulated depreciation of $19,886 and $19,271 | 19,166 | 20,895 | |||||||||
| GOODWILL AND OTHER ASSETS | |||||||||||
| Goodwill | 12,657 | 15,986 | |||||||||
| Other intangible assets, net | 6,166 | 6,970 | |||||||||
| Other, net | 2,172 | 2,606 | |||||||||
| Total goodwill and other assets | 20,995 | 25,562 | |||||||||
| TOTAL ASSETS | $ | 45,581 | 57,993 | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| CURRENT LIABILITIES | |||||||||||
| Current maturities of long-term debt | $ | 154 | 1,554 | ||||||||
| Accounts payable | 950 | 758 | |||||||||
| Accrued expenses and other liabilities | |||||||||||
| Salaries and benefits | 692 | 860 | |||||||||
| Income and other taxes | 1,158 | 228 | |||||||||
| Current operating lease liabilities | 344 | 385 | |||||||||
| Interest | 181 | 278 | |||||||||
| Other | 277 | 232 | |||||||||
| Liabilities held for sale | 451 | 2,257 | |||||||||
| Current portion of deferred revenue | 596 | 617 | |||||||||
| Total current liabilities | 4,803 | 7,169 | |||||||||
| LONG-TERM DEBT | 20,418 | 27,428 | |||||||||
| DEFERRED CREDITS AND OTHER LIABILITIES | |||||||||||
| Deferred income taxes, net | 3,163 | 4,049 | |||||||||
| Benefit plan obligations, net | 2,391 | 3,710 | |||||||||
| Other | 4,369 | 3,797 | |||||||||
| Total deferred credits and other liabilities | 9,923 | 11,556 | |||||||||
COMMITMENTS AND CONTINGENCIES (Note 18) | |||||||||||
| 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 1,001,688 and 1,023,512 shares | 1,002 | 1,024 | |||||||||
| Additional paid-in capital | 18,080 | 18,972 | |||||||||
| Accumulated other comprehensive loss | (1,099) | (2,158) | |||||||||
| Accumulated deficit | (7,546) | (5,998) | |||||||||
| Total stockholders' equity | 10,437 | 11,840 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 45,581 | 57,993 | ||||||||
See accompanying notes to consolidated financial statements.
66
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||
| Net (loss) income | $ | (1,548) | 2,033 | (1,232) | |||||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 3,239 | 4,019 | 4,710 | ||||||||||||||
| Gain on sale of businesses | (773) | — | — | ||||||||||||||
| Loss on disposal groups held for sale | 700 | — | — | ||||||||||||||
| Goodwill impairment | 3,271 | — | 2,642 | ||||||||||||||
| Deferred income taxes | (1,230) | 598 | 366 | ||||||||||||||
| Provision for uncollectible accounts | 133 | 105 | 189 | ||||||||||||||
| Net (gain) loss on early retirement and modification of debt | (214) | (8) | 105 | ||||||||||||||
| Unrealized loss (gain) on investments | 191 | (138) | — | ||||||||||||||
| Stock-based compensation | 98 | 120 | 175 | ||||||||||||||
| Changes in current assets and liabilities: | |||||||||||||||||
| Accounts receivable | (158) | (8) | 115 | ||||||||||||||
| Accounts payable | 98 | (261) | (543) | ||||||||||||||
| Accrued income and other taxes | 972 | (69) | 27 | ||||||||||||||
| Other current assets and liabilities, net | (372) | (353) | (262) | ||||||||||||||
| Retirement benefits | 46 | 163 | (111) | ||||||||||||||
| Changes in other noncurrent assets and liabilities, net | 258 | 283 | 246 | ||||||||||||||
| Other, net | 24 | 17 | 97 | ||||||||||||||
| Net cash provided by operating activities | 4,735 | 6,501 | 6,524 | ||||||||||||||
| INVESTING ACTIVITIES | |||||||||||||||||
| Capital expenditures | (3,016) | (2,900) | (3,729) | ||||||||||||||
| Proceeds from sale of businesses | 8,369 | — | — | ||||||||||||||
| Proceeds from sale of property, plant and equipment and other assets | 120 | 135 | 153 | ||||||||||||||
| Other, net | 3 | 53 | 12 | ||||||||||||||
| Net cash provided by (used in) investing activities | 5,476 | (2,712) | (3,564) | ||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||
| Net proceeds from issuance of long-term debt | — | 1,881 | 4,361 | ||||||||||||||
| Payments of long-term debt | (8,093) | (3,598) | (7,315) | ||||||||||||||
| Net (payments of) proceeds from revolving line of credit | (200) | 50 | (100) | ||||||||||||||
| Dividends paid | (780) | (1,087) | (1,109) | ||||||||||||||
| Repurchases of common stock | (200) | (1,000) | — | ||||||||||||||
| Other, net | (40) | (53) | (87) | ||||||||||||||
| Net cash used in financing activities | (9,313) | (3,807) | (4,250) | ||||||||||||||
67
| Net increase (decrease) in cash, cash equivalents and restricted cash | 898 | (18) | (1,290) | ||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 409 | 427 | 1,717 | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,307 | 409 | 427 | |||||||||||||
| Supplemental cash flow information: | |||||||||||||||||
| Income taxes (paid) refunded, net | $ | (76) | (112) | 28 | |||||||||||||
Interest paid (net of capitalized interest of $66, $53 and $75) | $ | (1,365) | (1,487) | (1,627) | |||||||||||||
| Supplemental non-cash information regarding investing activities: | |||||||||||||||||
| Sale of property, plant and equipment in exchange for note receivable | — | 56 | — | ||||||||||||||
| Supplemental non-cash information regarding financing activities: | |||||||||||||||||
| Purchase of software subscription in exchange for installment debt | — | 77 | — | ||||||||||||||
| Cash, cash equivalents and restricted cash: | |||||||||||||||||
| Cash and cash equivalents | $ | 1,251 | 354 | 406 | |||||||||||||
| Cash and cash equivalents and restricted cash included in Assets held for sale | 44 | 40 | — | ||||||||||||||
| Restricted cash included in Other current assets | — | 2 | 3 | ||||||||||||||
| Restricted cash included in Other, net noncurrent assets | 12 | 13 | 18 | ||||||||||||||
| Total | $ | 1,307 | 409 | 427 | |||||||||||||
See accompanying notes to consolidated financial statements.
68
LUMEN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions except per share amounts) | |||||||||||||||||
| COMMON STOCK | |||||||||||||||||
| Balance at beginning of period | $ | 1,024 | 1,097 | 1,090 | |||||||||||||
| Issuance of common stock through dividend reinvestment, incentive and benefit plans | 11 | 8 | 7 | ||||||||||||||
| Repurchases of common stock | (33) | (81) | — | ||||||||||||||
| Balance at end of period | 1,002 | 1,024 | 1,097 | ||||||||||||||
| ADDITIONAL PAID-IN CAPITAL | |||||||||||||||||
| Balance at beginning of period | 18,972 | 20,909 | 21,874 | ||||||||||||||
| Repurchases of common stock | (167) | (919) | — | ||||||||||||||
| Shares withheld to satisfy tax withholdings | (30) | (45) | (40) | ||||||||||||||
| Stock-based compensation and other, net | 96 | 122 | 187 | ||||||||||||||
| Dividends declared | (791) | (1,095) | (1,112) | ||||||||||||||
| Balance at end of period | 18,080 | 18,972 | 20,909 | ||||||||||||||
| ACCUMULATED OTHER COMPREHENSIVE LOSS | |||||||||||||||||
| Balance at beginning of period | (2,158) | (2,813) | (2,680) | ||||||||||||||
| Other comprehensive income (loss) | 1,059 | 655 | (133) | ||||||||||||||
| Balance at end of period | (1,099) | (2,158) | (2,813) | ||||||||||||||
| ACCUMULATED DEFICIT | |||||||||||||||||
| Balance at beginning of period | (5,998) | (8,031) | (6,814) | ||||||||||||||
| Net (loss) income | (1,548) | 2,033 | (1,232) | ||||||||||||||
Cumulative effect of adoption of , Measurement of Credit Losses, net of $(2) tax | — | — | 9 | ||||||||||||||
| Other | — | — | 6 | ||||||||||||||
| Balance at end of period | (7,546) | (5,998) | (8,031) | ||||||||||||||
| TOTAL STOCKHOLDERS' EQUITY | $ | 10,437 | 11,840 | 11,162 | |||||||||||||
| DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.75 | 1.00 | 1.00 | |||||||||||||
See accompanying notes to consolidated financial statements.
69
LUMEN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and Summary of Significant Accounting Policies
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
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 recategorization of our Mass Markets revenue by product category in our segment reporting for 2022, 2021 and 2020. See Note 17—Segment Information for additional information. These changes had no impact on total operating revenue, total operating expenses or net (loss) income for any period.
Operating Expenses
Our current definitions of operating expenses are as follows:
•Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which include third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as data integration and modem expenses); and other expenses directly related to our operations; and
•Selling, general and administrative expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; property and other operating taxes and fees; external commissions; litigation expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses.
These expense classifications may not be comparable to those of other companies.
70
Summary of Significant Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for specific items and matters are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can materially affect the reported amounts of assets, liabilities and components of stockholders' equity as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our other consolidated financial statements. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 16—Income Taxes and Note 18—Commitments, Contingencies and Other Items for additional information.
For matters not related to income taxes, if a loss contingency is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.
For all of these and other matters, actual results could differ materially from our estimates.
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 classified as held for sale as of December 31, 2022. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business for additional information.
Revenue Recognition
We earn most of our consolidated revenue from contracts with customers, primarily through the provision of communications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606. We also earn revenue from leasing arrangements (primarily fiber capacity and colocation agreements) and governmental subsidy payments, which are not accounted for under ASC 606.
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:
•Identification of the contract with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
71
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, we satisfy a performance obligation.
We provide an array of communications services to business and residential customers, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global, enterprise, wholesale, government, and small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.
We recognize revenue for services when we provide the applicable service or when control of a product is transferred. Recognition of certain payments received in advance of services being provided is deferred. These advance payments may include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which typically ranges from to five years depending on the service. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.
For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis.
In certain cases, customers may be permitted to modify their contracts. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract.
Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned.
We periodically sell transmission capacity on our network. These transactions are generally structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years. In most cases, we account for the cash consideration received on transfers of transmission capacity as ASC 606 revenue which is adjusted for the time value of money and is recognized ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our transmission capacity assets for other non-owned transmission capacity assets.
In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction.
We have service level commitments pursuant to contracts with certain of our customers. To the extent that we determine that such service levels were not achieved or may not have been achieved, we estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met or may not be met.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.
72
We defer (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life. Our deferred contract costs for our customers have average amortization periods of approximately 32 months for mass markets customers and 30 months for business customers. These deferred costs are periodically monitored to reflect any significant change in assumptions.
See Note 4—Revenue Recognition for additional information.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Our advertising expense was $62 million, $56 million and $56 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. Subject to certain exceptions, we expense these costs as the related services are received.
Income Taxes
We file a consolidated federal income tax return with our eligible subsidiaries. The provision for income taxes reflects taxes currently payable, tax consequences deferred to future periods and adjustments to our liabilities for uncertain tax positions. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax net operating loss carryforwards ("NOLs"), tax credit carryforwards and differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain or adjust each valuation allowance on our deferred tax assets. See Note 16—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. In evaluating investments for classification as cash equivalents, we require that individual securities have original maturities of ninety days or less and that individual investment funds have dollar-weighted average maturities of ninety days or less. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.
Book overdrafts occur when we have issued checks but they have not yet been presented to our controlled disbursement bank accounts for payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheets. This activity is included in the operating activities section in our consolidated statements of cash flows. There were no book overdrafts included in accounts payable at December 31, 2022 or 2021.
73
Restricted Cash
Restricted cash consists primarily of cash and investments that collateralize our outstanding letters of credit and certain performance and operating obligations. Restricted cash and securities are recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists. Restricted securities are stated at cost which approximated their fair value as of December 31, 2022 and 2021.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables, less an allowance for credit losses. We use a loss rate method to estimate our allowance for credit losses. For more information on our methodology for estimating our allowance for credit losses, see Note 6—Credit Losses on Financial Instruments.
We generally consider our accounts past due if they are outstanding over 30 days. Our past due accounts are written off against our allowance for credit losses when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for credit losses approximates fair value. Accounts receivable balances acquired in a business combination are recorded at fair value for all balances receivable at the acquisition date and at the invoiced amount for those amounts invoiced after the acquisition date.
Property, Plant and Equipment
We record property, plant and equipment acquired in connection with our acquisitions based on its estimated fair value as of its acquisition date plus the estimated value of any associated legally or contractually required retirement obligations. We record purchased and constructed property, plant and equipment at cost, plus the estimated value of any associated legally or contractually required retirement obligations. We depreciate the majority of our property, plant and equipment using the straight-line group method over the estimated useful lives of groups of assets, but depreciate certain of our assets using the straight-line method over the estimated useful lives of the specific asset. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. The equal life group procedure is used to establish each pool's average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. During the construction phase of network and other internal-use capital projects, we capitalize related employee and interest costs. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items which are carried at actual cost.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments evaluate the possible loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers reduce their use of the asset. However, the asset is not retired until all customers no longer utilize the asset and we determine there is no alternative use for the asset.
We have asset retirement obligations associated with the legally or contractually required removal of a limited group of property, plant and equipment assets from leased properties and the disposal of certain hazardous materials present in our owned properties. When an asset retirement obligation is identified, usually in association with the acquisition of the asset, we record the fair value of the obligation as a liability. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset. Where the removal obligation is not legally binding, the net cost to remove assets is expensed in the period in which the costs are actually incurred.
74
We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest identifiable level for which we generate cash flows independently of other groups of assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its estimated fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and trade names, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 7 to 14 years, using the straight-line method, depending on the type of customer. Certain customer relationship intangible assets became fully amortized at the end of the first quarter 2021 using the sum-of-years-digits method, which is no longer used for any of our remaining intangible assets. We amortize capitalized software using the straight-line method primarily over estimated lives ranging up to 7 years. We amortize our other intangible assets using the straight-line method over an estimated life of 9 to 20 years. Other intangible assets not arising from business combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite-lived and such intangible assets are not amortized.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoted to software development and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
Our long-lived intangible assets, other than goodwill, with indefinite lives are assessed for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be an impairment. These assets are carried at the estimated fair value at the time of acquisition and assets not acquired in acquisitions are recorded at historical cost. However, if their estimated fair value is less than the carrying amount, we recognize an impairment charge for the amount by which the carrying amount of these assets exceeds their estimated fair value.
We are required to assess our goodwill for impairment annually, or more frequently if an event occurs or circumstances change that indicates it is more likely than not the fair values of any of our reporting units were less than their carrying values. We are required to write-down the value of goodwill of our reporting units in periods in which the recorded carrying value of any such unit exceeds its fair value of equity. Our reporting units are not discrete legal entities with discrete full financial statements. Therefore, the equity carrying value and future cash flows are assessed each time a goodwill impairment assessment is performed on a reporting unit. To do so, we assign our assets, liabilities and cash flows to reporting units using allocation methodologies which we believe are reasonable and consistent. This process entails various estimates, judgments and assumptions.
We are required to reassign goodwill to reporting units whenever reorganizations of our internal reporting structure changes the composition of our reporting units. Goodwill is reassigned to the reporting units using a relative fair value approach. When the fair value of a reporting unit is available, we allocate goodwill based on the relative fair value of the reporting units. When fair value is not available, we utilize an alternative allocation methodology that we believe represents a reasonable approximation of the fair value of the operations being reorganized.
For more information, see Note 3—Goodwill, Customer Relationships and Other Intangible Assets.
75
Derivatives and Hedging
From time to time we have used derivative instruments to hedge exposure to interest rate risks arising from fluctuation in interest rates. We account for derivative instruments in accordance with ASC 815, Derivatives and Hedging, which establishes accounting and reporting standards for derivative instruments. We do not use derivative financial instruments for speculative purposes.
Derivatives are recognized in the consolidated balance sheets at their fair values. When we become a party to a derivative instrument and intend to apply hedge accounting, we formally document the hedge relationship and the risk management objective for undertaking the hedge, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge.
As of December 31, 2022, we held no swap agreements since all of our variable-to-fixed interest rate swap agreements in place at the beginning of the year expired during the first half of 2022. While we held these agreements, we evaluated the effectiveness as described in Note 15—Derivative Financial Instruments (designated as cash-flow hedges) qualitatively on a quarterly basis. The change in the fair value of the interest rate swaps was reflected in accumulated other comprehensive loss and subsequently reclassified into earnings in the period the hedged transaction affects earnings, by virtue of qualifying as effective cash flow hedges. For more information see Note 15—Derivative Financial Instruments.
Pension and Post-Retirement Benefits
We recognize the funded status of our defined benefit and post-retirement plans as an asset or a liability on our consolidated balance sheets. Each year's actuarial gains or losses are a component of our other comprehensive income (loss), which is then included in our accumulated other comprehensive loss. Pension and post-retirement benefit expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits. We make significant assumptions (including the discount rate, expected rate of return on plan assets, mortality and health care trend rates) in computing the pension and post-retirement benefits expense and obligations. See Note 11—Employee Benefits for additional information.
Foreign Currency
Local currencies of our foreign subsidiaries are the functional currencies for financial reporting purposes except for certain foreign subsidiaries, primarily in Latin America prior to the August 1, 2022 sale of our Latin American business. For operations outside the United States that have functional currencies other than the U.S. dollar, assets and liabilities are translated to U.S. dollars at period-end exchange rates, and revenue, expenses and cash flows are translated using average monthly exchange rates. A significant portion of our non-United States subsidiaries use either the British pound or the Euro, or used, prior to the August 1, 2022 sale of our Latin American business, the Brazilian Real, as their functional currency, each of which experienced significant fluctuations against the U.S. dollar during the years ended December 31, 2022, 2021 and 2020. We recognize foreign currency translation gains and losses as a component of accumulated other comprehensive loss in stockholders' equity and in our consolidated statements of comprehensive (loss) income in accordance with accounting guidance for foreign currency translation. Prior to the announcement of our divestitures as discussed in Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business, we considered the majority of our investments in our foreign subsidiaries to be long-term in nature. Our foreign currency transaction gains (losses), including where transactions with our non-United States subsidiaries are not considered to be long-term in nature, are included within other income (expense), net on our consolidated statements of operations. See the description of our Assets Held for Sale policy above for more information on assets in foreign subsidiaries to be divested.
Common Stock
As of December 31, 2022, we had 19 million shares authorized for future issuance under our equity incentive plans.
Preferred Stock
Holders of outstanding Lumen Technologies preferred stock are entitled to receive cumulative dividends, receive preferential distributions equal to $25 per share plus unpaid dividends upon Lumen's liquidation and vote as a single class with the holders of common stock.
76
Section 382 Rights Plan
We maintain a Section 382 Rights Plan to protect our U.S. federal net operating loss carryforwards from certain Internal Revenue Code Section 382 limitations. Under the plan, one preferred stock purchase right was distributed for each share of our outstanding common stock as of the close of business on February 25, 2019, and those rights currently trade in tandem with the common stock until they expire or detach under the plan. This plan was designed to deter trading that would result in a change of control (as defined in Code Section 382), and therefore protect our ability to use our historical federal NOLs in the future. The plan is scheduled to lapse in late 2023.
Dividends
The declaration and payment of dividends is at the discretion of our Board of Directors. On November 2, 2022, we announced that our Board had terminated our quarterly cash dividend program. Under this revised capital allocation policy, the company plans to continue to invest in growth initiatives.
Recently Adopted Accounting Pronouncements
During 2022, we adopted Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”) and ASU 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments” (“ASU 2021-05”). During 2021, we adopted ASU 2020-09, "Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762" ("ASU 2020-09"), 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"), and ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)" ("ASU 2019-12"). During 2020, we adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13").
Each of these is described further below.
Government Assistance
On January 1, 2022, we adopted ASU 2021-10. This ASU requires business entities to disclose information about certain types of government assistance they receive. Please refer to Note 4—Revenue Recognition for more information.
Leases
On January 1, 2022, we adopted 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. 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.
77
Investments
On January 1, 2021, we adopted 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 December 31, 2022, we determined there was no application or discontinuation of the equity method during the reporting periods covered in 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. 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 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.
Recently Issued Accounting Pronouncements
In December 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-06, “Reference Rate Reform (Topic 848) – Deferral of the Sunset Date of Topic 848" ("ASU 2022-06"). These amendments extend the period of time preparers can utilize the reference rate reform relief guidance in Topic 848, which defers the sunset date from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. ASU 2022-06 is effective upon issuance. Based on our review of our key material contracts through December 31, 2022, ASU 2022-06 does not have a material impact to our consolidated financial statements.
In September 2022, the 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. As of December 31, 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 December 31, 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 December 31, 2022, we do not expect ASU 2022-02 to have an impact to our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method” ("ASU 2022-01"). The ASU expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method. ASU 2022-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of December 31, 2022, we do not expect ASU 2022-01 to have an impact to our consolidated financial statements.
78
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 December 31, 2022, we do not expect ASU 2021-08 to have an impact to our consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. These amendments may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU 2021-01 provides 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 December 31, 2022, ASU 2021-01 will not have a material impact to our 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 December 31, 2022, we do not expect ASU 2020-04 to have a material impact on the consolidated financial statements.
(2) Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business
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.
For the year ended December 31, 2022, we recorded a $597 million net 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 provide the purchaser various support services. In addition, Lumen and the purchaser entered into commercial agreements whereby they 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 (i) property, plant and equipment, net of accumulated depreciation, of $1.7 billion, (ii) goodwill of $245 million, (iii) other intangible assets, net of accumulated amortization, of $140 million, and (iv) deferred income tax liabilities, net, of $154 million. In addition, we reclassified $112 million of realized loss on foreign currency translation, net of tax, to partially offset the gain on sale of our Latin American business.
79
ILEC Business
On October 3, 2022, we and certain of our affiliates sold the portion of our incumbent local exchange ("ILEC") business primarily conducted within 20 Midwestern and Southeastern states to affiliates of funds advised by Apollo Global Management, Inc. In exchange, we received $7.5 billion of consideration, which was reduced by approximately $0.4 billion of closing adjustments and partially paid through purchaser's assumption of approximately $1.5 billion of our long-term consolidated indebtedness, resulting in pre-tax cash proceeds of approximately $5.6 billion, subject to certain post-closing adjustments and indemnities.
For the year ended December 31, 2022, we recorded a $176 million net pre-tax gain on disposal associated with the sale of our ILEC business. This gain is reflected as operating income within the consolidated statements of operations.
In connection with the sale, we have entered into a transition services agreement under which we provide the purchaser various support services. In addition, Lumen and the purchaser entered into commercial agreements whereby they provide each other various network and other commercial services. Under these agreements, we have committed to ordering services of approximately $373 million from the purchaser over a period of three years and the purchaser has committed to ordering services of approximately $67 million from us over a period of three years. We also agreed to indemnify the purchaser for certain matters for which future cash payments by Lumen are expected. Lumen has estimated the fair value of these indemnifications to be $89 million, which is included in other current liabilities in our consolidated balance sheet and has increased our income tax expense accordingly.
The ILEC 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 October 3, 2022. As a result of closing the transaction, we derecognized net assets of $4.8 billion, primarily made up of (i) property, plant and equipment, net of accumulated depreciation, of $3.6 billion, (ii) goodwill of $2.6 billion and (iii) long-term debt, net of discounts, of $1.4 billion. In addition, we reclassified $403 million of net actuarial loss and prior service credit related to the Lumen Pension Plan, net of tax, conveyed to the purchaser to partially offset the gain on the sale of our ILEC business.
EMEA Business
On November 2, 2022, affiliates of Level 3 Parent, LLC, an indirect wholly-owned subsidiary of Lumen Technologies, Inc., granted an option to Colt Technology Services Group Limited, a portfolio company of Fidelity Investments, to purchase certain of their operations in Europe, the Middle East and Africa (the "EMEA business"), in exchange for $1.8 billion in cash, subject to certain working capital and other purchase price adjustments. Following the completion of a French consultative process, Colt exercised its option and on February 8, 2023, the parties entered into a definitive purchase agreement, which contains various customary covenants for transactions of this type including various indemnities. Level 3 Parent, LLC expects to close the transaction as early as late 2023, following receipt of all requisite regulatory approvals in the U.S. and certain countries where the EMEA business operates, as well as the satisfaction of other customary conditions.
The actual amount of our net after-tax proceeds from this divestiture could vary substantially from the amounts we currently estimate, particularly if we experience delays in completing the transaction or if any of our other assumptions prove to be incorrect.
We do not believe these divestiture transactions represent a strategic shift for Lumen. Therefore, neither of the divested businesses discussed above, nor the planned divestiture of the EMEA business meet the criteria to be classified as discontinued operations. As a result, we continued to report our operating results for the Latin American and ILEC businesses in our consolidated operating results through their respective disposal dates of August 1, 2022 and October 3, 2022, and we will continue to report our operating results for the EMEA business (the "disposal group") in our consolidated operating results until the transaction is closed.
80
As of December 31, 2022 in the accompanying consolidated balance sheet, the assets and liabilities of our EMEA business are classified as held for sale and measured at the lower of (i) the carrying value when we classified the disposal group as held for sale and (ii) the fair value of the disposal group, less costs to sell. Effective with the designation of the disposal group as held for sale on November 2, 2022, 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 $51 million of depreciation, intangible amortization, and amortization of right-of-use assets for the year ended December 31, 2022 if the EMEA business did not meet the held for sale criteria.
The classification of the EMEA business as held for sale was considered an event or change in circumstance which required an assessment of our goodwill for impairment. We performed a pre-classification and post-classification goodwill impairment test as described further in Note 3—Goodwill, Customer Relationships and Other Intangible Assets. As a result of our impairment tests, we determined the EMEA business disposal group was impaired resulting in a non-cash, non-tax-deductible goodwill impairment charge of $43 million. 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 recorded an estimated loss on disposal of $660 million during the year ended December 31, 2022 in the consolidated statement of operations and a valuation allowance included in assets held for sale on the consolidated balance sheet. We will perform this evaluation each reporting period until disposal and, based on subsequent remeasurements, we will adjust the valuation allowance in assets held for sale (including any gain, limited to the original value).
81
The principal components of the held for sale assets and liabilities of the EMEA business are as follows:
| December 31, 2022 | |||||
| EMEA Business | |||||
| (Dollars in millions) | |||||
| Assets held for sale | |||||
| Cash and cash equivalents | $ | 43 | |||
Accounts receivable, less allowance of $5 | 76 | ||||
| Other current assets | 59 | ||||
Property, plant and equipment, net accumulated depreciation of $1,033 | 1,873 | ||||
Goodwill(1) | — | ||||
| Customer relationships and other intangibles, net | 100 | ||||
| Operating lease assets | 156 | ||||
Valuation allowance on assets held for sale(2) | (660) | ||||
| Deferred tax assets | 138 | ||||
| Other non-current assets | 38 | ||||
| Total assets held for sale | $ | 1,823 | |||
| Liabilities held for sale | |||||
| Accounts payable | $ | 78 | |||
| Salaries and benefits | 23 | ||||
| Current portion of deferred revenue | 28 | ||||
| Current operating lease liabilities | 33 | ||||
| Other current liabilities | 28 | ||||
| Deferred income taxes | 38 | ||||
| Asset retirement obligations | 30 | ||||
| Deferred revenue, non-current | 85 | ||||
| Operating lease liabilities, non-current | 103 | ||||
| Total liabilities held for sale | $ | 446 | |||
______________________________________________________________________
(1)The assignment of goodwill was based on the relative fair value of the applicable reporting unit prior to being classified as held for sale. Prior to classification as held for sale, the goodwill was fully impaired as described in Note 3—Goodwill, Customer Relationships and Other Intangible Assets.
(2)Includes the impact of $365 million, primarily related to loss on foreign currency translation, expected to be reclassified out of accumulated other comprehensive loss upon close of the sale.
82
(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
| As of December 31, | |||||||||||
2022(1) | 2021(1) | ||||||||||
| (Dollars in millions) | |||||||||||
| Goodwill | $ | 12,657 | 15,986 | ||||||||
| Indefinite-lived intangible assets | $ | 9 | 9 | ||||||||
| Other intangible assets subject to amortization: | |||||||||||
Customer relationships, less accumulated amortization of $3,606 and $11,740(2) | 4,574 | 5,365 | |||||||||
Capitalized software, less accumulated amortization of $3,895 and $3,624 | 1,482 | 1,459 | |||||||||
Trade names, patents and other, less accumulated amortization of $188 and $160 | 101 | 137 | |||||||||
| Total other intangible assets, net | $ | 6,166 | 6,970 | ||||||||
(1)These values exclude assets classified as held for sale.
(2)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 December 31, 2022, the gross carrying amount of goodwill, customer relationships, indefinite-lived and other intangible assets was $26.5 billion.
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired.
We are required to 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. Our annual impairment assessment date for indefinite-lived intangible assets other than goodwill is December 31. We completed our qualitative assessment of our indefinite-lived intangible assets other than goodwill as of December 31, 2022 and 2021 and concluded it is more likely than not that our indefinite-lived intangible assets are not impaired; thus, no impairment charge for these assets was recorded in 2022 or 2021. 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.
We report our results within two segments: Business and Mass Markets. See Note 17—Segment Information for more information on these segments and the underlying sales channels. As of December 31, 2022, we had three reporting units for goodwill impairment testing, which are (i) Mass Markets, (ii) North America Business ("NA Business") and (iii) Asia Pacific ("APAC") region. Prior to the planned divestiture of the EMEA business, the EMEA region was also a reporting unit and was tested for impairment in the pre-classification test as of October 31, 2022 discussed below. Prior to its August 1, 2022 divestiture, the Latin American ("LATAM") region was also a reporting unit. At October 31, 2020 we used eight reporting units for goodwill impairment testing, which were consumer, small and medium business, enterprise, wholesale, North American global accounts ("NA GAM"), EMEA, LATAM and APAC.
83
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 charge 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.
2022 Goodwill Impairment Analyses
As of October 31, 2022, we estimated the fair value of our four above-mentioned reporting units by considering both a market approach and a discounted cash flow method. We discounted the projected cash flows for our Mass Markets, NA Business, EMEA and APAC reporting units using a rate that represented their weighted average cost of capital as of the assessment date, which comprised an after-tax cost of debt and a cost of equity, as disclosed in the table below. We utilized company comparisons and analyst reports within the telecommunications industry which at the time of assessment supported a range of fair values derived from annualized revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples between 1.8x and 4.6x and 4.7x and 10.8x, respectively. We selected a revenue and EBITDA multiple for each of our reporting units, resulting in an overall company revenue and EBITDA multiple of 2.5x and 5.5x, respectively. We also reconciled the estimated fair values of the reporting units to our market capitalization as of October 31, 2022 and concluded that the indicated control premium of approximately 59% was reasonable based on recent market transactions, including our divestitures, and our depressed stock price. Due to the depressed trading price of our stock at October 31, 2022, and our assessment performed with respect to the reporting units described above, we concluded that the estimated fair value of our NA Business reporting unit was less than our carrying value of equity for that reporting unit, resulting in a non-cash, non-tax-deductible goodwill impairment charge of approximately $3.2 billion. See the goodwill rollforward by segment table below for the impairment charges by segment. As of October 31, 2022, the estimated fair value of equity exceeded the carrying value of equity for our Mass Markets, EMEA and APAC reporting units by 97%, 171% and 101%, respectively. Based on our assessments performed, we concluded that the goodwill assigned to our Mass Markets, EMEA and APAC reporting units was not impaired at October 31, 2022.
| As of October 31, 2022 | |||||||||||||||||||||||
| Reporting Units | |||||||||||||||||||||||
| Mass Markets | NA Business | EMEA | APAC | ||||||||||||||||||||
| Weighted average cost of capital | 9.4 | % | 9.4 | % | 9.8 | % | 11.3 | % | |||||||||||||||
| After-tax cost of debt | 4.7 | % | 4.7 | % | 5.1 | % | 6.3 | % | |||||||||||||||
| Cost of equity | 14.0 | % | 14.0 | % | 14.4 | % | 16.2 | % | |||||||||||||||
The classification of held for sale related to the EMEA business as described in Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business was considered an event or change in circumstance which required an assessment of our goodwill for impairment as of October 31, 2022. We performed a pre-announcement goodwill impairment test described above to determine whether there was an impairment prior to the classification of these assets as held for sale and to determine the November 2, 2022, fair values to be utilized for goodwill allocation regarding the disposal group to be classified as assets held for sale. We also performed a post-announcement goodwill impairment test using our estimated post-divestiture cash flows and carrying value of equity to evaluate whether the fair value of our NA Business, Mass Markets and APAC reporting units that will remain following the divestiture exceeds the carrying value of the equity of such reporting units after classification of assets held for sale. We concluded no impairment existed of our reporting units that remain following the divestiture.
84
Separate from the annual, pre-announcement and post-announcement goodwill assessments discussed above, we performed an assessment of our EMEA business disposal group for impairment using the purchase price compared to the carrying value of the EMEA business net assets. As a result, the EMEA business disposal group was impaired, resulting in a non-cash, non-tax-deductible goodwill impairment charge of $43 million. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business for additional information regarding the purchase price, carrying value, and impairment for goodwill of the EMEA business. See the goodwill rollforward by segment table below for the impairment charges by segment.
2021 Goodwill Impairment Analyses
At October 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. As of October 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 277%, 8%, 57%, 100% and 125%, 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 those reporting units at October 31, 2022. Therefore, we concluded no impairment existed as of our assessment date.
Our classification of held for sale assets related to the divestitures of the Latin American and ILEC businesses on August 1, 2022 and October 3, 2022, respectively, as described in Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business, 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-classification goodwill impairment test to determine whether there was an impairment prior to the classification of these assets and to determine the July 31, 2021 fair values to be utilized for goodwill allocation regarding the Latin American and ILEC businesses classified 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 those reporting units at July 31, 2021. We also performed a post-classification 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 would remain following the divestitures exceeded the carrying value of the equity of such reporting units after classification of assets held for sale. 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. 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.
The January 2021 internal reorganization of our reporting structure 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 was more likely than not that the fair value of each of our reporting units exceeded the carrying value of equity of those reporting units at January 31, 2021. Therefore, we concluded no impairment existed as of our assessment date.
85
2020 Goodwill Impairment Analyses
At October 31, 2020, we estimated the fair value of our eight above-mentioned reporting units (prior to the January 2021 reorganization) by considering both a market approach and a discounted cash flow method. We discounted the projected cash flows for our consumer, enterprise, wholesale, small and medium business, NA GAM, EMEA, LATAM and APAC reporting units using a rate that represented their weighted average cost of capital as of the assessment date, which comprised an after-tax cost of debt and a cost of equity, as disclosed in the table below. We utilized company comparisons and analyst reports within the telecommunications industry which at the time of assessment supported a range of fair values derived from annualized revenue and EBITDA multiples between 2.0x and 5.5x and 4.8x and 12.5x, respectively. We selected a revenue and EBITDA multiple for each of our reporting units, resulting in an overall company revenue and EBITDA multiple of 2.3x and 5.7x, respectively. We also reconciled the estimated fair values of the reporting units to our market capitalization as of October 31, 2020 and concluded that the indicated control premium of approximately 33% was reasonable based on recent market transactions. Due to the depressed trading price of our stock at October 31, 2020 and our assessment performed with respect to the reporting units described above, we concluded that the estimated fair value of our consumer, wholesale, small and medium business and EMEA reporting units was less than our carrying value of equity for those reporting units. As a result, these reporting units were impaired, resulting in a non-cash, non-tax-deductible goodwill impairment charge of approximately $2.6 billion. As of October 31, 2020, the estimated fair value of equity exceeded the carrying value of equity for our enterprise, NA GAM, LATAM and APAC reporting units by 2%, 46%, 74% and 23%, respectively. Based on our assessments performed, we concluded that the goodwill assigned to our enterprise, NA GAM, LATAM and APAC reporting units was not impaired at October 31, 2020.
| As of October 31, 2020 | |||||||||||||||||||||||
| Reporting Units | |||||||||||||||||||||||
| Consumer, Enterprise, Wholesale, Small and medium business, and NA GAM | EMEA | LATAM | APAC | ||||||||||||||||||||
| Weighted average cost of capital | 7.6 | % | 8.0 | % | 14.3 | % | 10.1 | % | |||||||||||||||
| After-tax cost of debt | 2.5 | % | 2.9 | % | 6.9 | % | 3.9 | % | |||||||||||||||
| Cost of equity | 10.7 | % | 11.2 | % | 18.8 | % | 14.0 | % | |||||||||||||||
86
The following table shows the rollforward of goodwill assigned to our reportable segments (including the January 2021 reorganization discussed above) from December 31, 2020 through December 31, 2022.
| 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 | — | ||||||||||||||||||
| Classified as held for sale | — | — | — | — | — | (913) | (1,946) | (2,859) | ||||||||||||||||||
| Effect of foreign currency exchange rate change and other | — | — | — | — | — | (25) | — | (25) | ||||||||||||||||||
As of December 31, 2021(1) | $ | — | — | — | — | — | 11,235 | 4,751 | 15,986 | |||||||||||||||||
| Business | Mass Markets | Total | |||||||||
| (Dollars in millions) | |||||||||||
As of December 31, 2021(1) | $ | 11,235 | 4,751 | 15,986 | |||||||
| Effect of foreign currency exchange rate change and other | (58) | — | (58) | ||||||||
| Impairment | (3,271) | — | (3,271) | ||||||||
As of December 31, 2022(1) | $ | 7,906 | 4,751 | 12,657 | |||||||
______________________________________________________________________
(1)Goodwill at December 31, 2022, December 31, 2021 and December 31, 2020 is net of accumulated impairment losses of $11.0 billion, $7.7 billion and $12.9 billion, respectively. The change in accumulated impairment losses at December 31, 2021 is the result of amounts classified as held for sale related to the divestitures of our Latin American and ILEC business on August 1, 2022 and October 3, 2022, respectively. The change in accumulated impairment losses at December 31, 2022 is the result of the impairments discussed above.
For additional information on our segments, see Note 17—Segment Information.
As of December 31, 2022, the weighted average remaining useful lives of our finite-lived intangible assets were approximately 7 years in total, approximately 8 years for customer relationships and 4 years for capitalized software.
Total amortization expense for finite-lived intangible assets for the years ended December 31, 2022, 2021 and 2020 was $1.1 billion, $1.3 billion and $1.7 billion, respectively.
We estimate that total amortization expense for finite-lived intangible assets for the years ending December 31, 2023 through 2027 will be as provided in the table below. As a result of classifying our EMEA business as being held for sale on our December 31, 2022 consolidated balance sheet, the amounts presented below do not include future amortization expense for intangible assets of the business to be divested. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business for more information.
| (Dollars in millions) | |||||
| 2023 | $ | 941 | |||
| 2024 | 871 | ||||
| 2025 | 810 | ||||
| 2026 | 765 | ||||
| 2027 | 687 | ||||
87
(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.
We categorize our products and services revenue among the following categories for the Mass Markets segment:
•Fiber Broadband, under which we provide high speed broadband services to residential and small business customers utilizing our fiber-based network infrastructure;
•Other Broadband, under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure; and
•Voice and Other, under which we derive 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 and ILEC businesses revenues prior to their sales on August 1, 2022 and October 3, 2022, respectively:
88
| Year Ended December 31, 2022 | |||||||||||||||||
| 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 | $ | 667 | (227) | 440 | |||||||||||||
| IP and Data Services | 1,510 | — | 1,510 | ||||||||||||||
| Fiber Infrastructure | 830 | (136) | 694 | ||||||||||||||
| Voice and Other | 638 | — | 638 | ||||||||||||||
| Total IGAM Revenue | 3,645 | (363) | 3,282 | ||||||||||||||
| Large Enterprise | |||||||||||||||||
| Compute and Application Services | 621 | (60) | 561 | ||||||||||||||
| IP and Data Services | 1,517 | — | 1,517 | ||||||||||||||
| Fiber Infrastructure | 478 | (46) | 432 | ||||||||||||||
| Voice and Other | 793 | — | 793 | ||||||||||||||
| Total Large Enterprise Revenue | 3,409 | (106) | 3,303 | ||||||||||||||
| Mid-Market Enterprise | |||||||||||||||||
| Compute and Application Services | 135 | (29) | 106 | ||||||||||||||
| IP and Data Services | 1,629 | (4) | 1,625 | ||||||||||||||
| Fiber Infrastructure | 192 | (7) | 185 | ||||||||||||||
| Voice and Other | 509 | — | 509 | ||||||||||||||
| Total Mid-Market Enterprise Revenue | 2,465 | (40) | 2,425 | ||||||||||||||
| Wholesale | |||||||||||||||||
| Compute and Application Services | 242 | (157) | 85 | ||||||||||||||
| IP and Data Services | 1,115 | — | 1,115 | ||||||||||||||
| Fiber Infrastructure | 652 | (113) | 539 | ||||||||||||||
| Voice and Other | 1,511 | (239) | 1,272 | ||||||||||||||
| Total Wholesale Revenue | 3,520 | (509) | 3,011 | ||||||||||||||
| Business Segment by Product Category | |||||||||||||||||
| Compute and Application Services | 1,665 | (473) | 1,192 | ||||||||||||||
| IP and Data Services | 5,771 | (4) | 5,767 | ||||||||||||||
| Fiber Infrastructure | 2,152 | (302) | 1,850 | ||||||||||||||
| Voice and Other | 3,451 | (239) | 3,212 | ||||||||||||||
| Total Business Segment Revenue | 13,039 | (1,018) | 12,021 | ||||||||||||||
| Mass Markets Segment by Product Category | |||||||||||||||||
| Fiber Broadband | 604 | (18) | 586 | ||||||||||||||
| Other Broadband | 2,163 | (200) | 1,963 | ||||||||||||||
| Voice and Other | 1,672 | (134) | 1,538 | ||||||||||||||
| Total Mass Markets Revenue | 4,439 | (352) | 4,087 | ||||||||||||||
| Total Revenue | $ | 17,478 | (1,370) | 16,108 | |||||||||||||
| Timing of revenue | |||||||||||||||||
| Goods and services transferred at a point in time | $ | 154 | |||||||||||||||
| Services performed over time | 15,954 | ||||||||||||||||
| Total revenue from contracts with customers | $ | 16,108 | |||||||||||||||
89
| Year Ended December 31, 2021 | |||||||||||||||||
| 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 | $ | 731 | (279) | 452 | |||||||||||||
| IP and Data Services | 1,716 | (1) | 1,715 | ||||||||||||||
| Fiber Infrastructure | 889 | (129) | 760 | ||||||||||||||
| Voice and Other | 747 | — | 747 | ||||||||||||||
| Total IGAM Revenue | 4,083 | (409) | 3,674 | ||||||||||||||
| Large Enterprise | |||||||||||||||||
| Compute and Application Services | 696 | (62) | 634 | ||||||||||||||
| IP and Data Services | 1,583 | — | 1,583 | ||||||||||||||
| Fiber Infrastructure | 540 | (50) | 490 | ||||||||||||||
| Voice and Other | 952 | (1) | 951 | ||||||||||||||
| Total Large Enterprise Revenue | 3,771 | (113) | 3,658 | ||||||||||||||
| Mid-Market Enterprise | |||||||||||||||||
| Compute and Application Services | 127 | (30) | 97 | ||||||||||||||
| IP and Data Services | 1,710 | (6) | 1,704 | ||||||||||||||
| Fiber Infrastructure | 207 | (8) | 199 | ||||||||||||||
| Voice and Other | 605 | — | 605 | ||||||||||||||
| Total Mid-Market Enterprise Revenue | 2,649 | (44) | 2,605 | ||||||||||||||
| Wholesale | |||||||||||||||||
| Compute and Application Services | 188 | (159) | 29 | ||||||||||||||
| IP and Data Services | 1,198 | — | 1,198 | ||||||||||||||
| Fiber Infrastructure | 622 | (118) | 504 | ||||||||||||||
| Voice and Other | 1,608 | (252) | 1,356 | ||||||||||||||
| Total Wholesale Revenue | 3,616 | (529) | 3,087 | ||||||||||||||
| Business Segment by Product Category | |||||||||||||||||
| Compute and Application Services | 1,742 | (530) | 1,212 | ||||||||||||||
| IP and Data Services | 6,207 | (7) | 6,200 | ||||||||||||||
| Fiber Infrastructure | 2,258 | (305) | 1,953 | ||||||||||||||
| Voice and Other | 3,912 | (253) | 3,659 | ||||||||||||||
| Total Business Segment Revenue | 14,119 | (1,095) | 13,024 | ||||||||||||||
| Mass Markets Segment by Product Category | |||||||||||||||||
| Fiber Broadband | 524 | — | 524 | ||||||||||||||
| Other Broadband | 2,507 | (227) | 2,280 | ||||||||||||||
| Voice and Other | 2,537 | (570) | 1,967 | ||||||||||||||
| Total Mass Markets Revenue | 5,568 | (797) | 4,771 | ||||||||||||||
| Total Revenue | $ | 19,687 | (1,892) | 17,795 | |||||||||||||
| Timing of revenue | |||||||||||||||||
| Goods and services transferred at a point in time | $ | 138 | |||||||||||||||
| Services performed over time | 17,657 | ||||||||||||||||
| Total revenue from contracts with customers | $ | 17,795 | |||||||||||||||
90
| Year Ended December 31, 2020 | |||||||||||||||||
| 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 | $ | 759 | (265) | 494 | |||||||||||||
| IP and Data Services | 1,736 | — | 1,736 | ||||||||||||||
| Fiber Infrastructure | 846 | (110) | 736 | ||||||||||||||
| Voice and Other | 796 | — | 796 | ||||||||||||||
| Total IGAM Revenue | 4,137 | (375) | 3,762 | ||||||||||||||
| Large Enterprise | |||||||||||||||||
| Compute and Application Services | 665 | (82) | 583 | ||||||||||||||
| IP and Data Services | 1,628 | (2) | 1,626 | ||||||||||||||
| Fiber Infrastructure | 601 | (46) | 555 | ||||||||||||||
| Voice and Other | 1,067 | (2) | 1,065 | ||||||||||||||
| Total Large Enterprise Revenue | 3,961 | (132) | 3,829 | ||||||||||||||
| Mid-Market Enterprise | |||||||||||||||||
| Compute and Application Services | 127 | (16) | 111 | ||||||||||||||
| IP and Data Services | 1,809 | (6) | 1,803 | ||||||||||||||
| Fiber Infrastructure | 212 | (9) | 203 | ||||||||||||||
| Voice and Other | 753 | — | 753 | ||||||||||||||
| Total Mid-Market Enterprise Revenue | 2,901 | (31) | 2,870 | ||||||||||||||
| Wholesale | |||||||||||||||||
| Compute and Application Services | 184 | (161) | 23 | ||||||||||||||
| IP and Data Services | 1,249 | — | 1,249 | ||||||||||||||
| Fiber Infrastructure | 618 | (121) | 497 | ||||||||||||||
| Voice and Other | 1,758 | (258) | 1,500 | ||||||||||||||
| Total Wholesale Revenue | 3,809 | (540) | 3,269 | ||||||||||||||
| Business Segment by Product Category | |||||||||||||||||
| Compute and Application Services | 1,735 | (524) | 1,211 | ||||||||||||||
| IP and Data Services | 6,422 | (8) | 6,414 | ||||||||||||||
| Fiber Infrastructure | 2,277 | (286) | 1,991 | ||||||||||||||
| Voice and Other | 4,374 | (260) | 4,114 | ||||||||||||||
| Total Business Segment Revenue | 14,808 | (1,078) | 13,730 | ||||||||||||||
| Mass Markets Segment by Product Category | |||||||||||||||||
| Fiber Broadband | 427 | — | 427 | ||||||||||||||
| Other Broadband | 2,639 | (236) | 2,403 | ||||||||||||||
| Voice and Other | 2,838 | (601) | 2,237 | ||||||||||||||
| Total Mass Markets Revenue | 5,904 | (837) | 5,067 | ||||||||||||||
| Total Revenue | $ | 20,712 | (1,915) | 18,797 | |||||||||||||
| Timing of revenue | |||||||||||||||||
| Goods and services transferred at a point in time | $ | 250 | |||||||||||||||
| Services performed over time | 18,547 | ||||||||||||||||
| Total revenue from contracts with customers | $ | 18,797 | |||||||||||||||
91
______________________________________________________________________
(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.
Customer Receivables and Contract Balances
The following table provides balances of customer receivables, contract assets and contract liabilities, net of amounts classified as held for sale, as of December 31, 2022 and 2021:
| December 31, 2022 | December 31, 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
Customer receivables(1) | $ | 1,424 | 1,493 | ||||||||
Contract assets(2) | 34 | 73 | |||||||||
Contract liabilities(3) | 656 | 680 | |||||||||
______________________________________________________________________
(1)Reflects gross customer receivables of $1.5 billion and $1.6 billion, net of allowance for credit losses of $73 million and $102 million, at December 31, 2022 and December 31, 2021, respectively. These amounts exclude customer receivables, net, classified as held for sale of $76 million at December 31, 2022 (related to the EMEA business) and $288 million at December 31, 2021 (related to both the Latin American business and the ILEC business).
(2)These amounts exclude contract assets classified as held for sale of $16 million at December 31, 2022 (related to the EMEA business) and $9 million at December 31, 2021 (related to both the Latin American business and the ILEC business).
(3)These amounts exclude contract liabilities classified as held for sale of $59 million at December 31, 2022 (related to the EMEA business) and $161 million at December 31, 2021 (related to both the Latin American business and the ILEC business).
Contract liabilities are consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets. During the years ended December 31, 2022 and December 31, 2021, we recognized $539 million and $605 million, respectively, of revenue that was included in contract liabilities of $841 million and $950 million as of January 1, 2022 and 2021, respectively, including contract liabilities that were classified as held for sale.
Performance Obligations
As of December 31, 2022, we expect to recognize approximately $7.4 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. We expect to recognize approximately 75% of this revenue through 2025, with the balance recognized thereafter.
These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), (ii) contracts that are classified as leasing arrangements or government assistance that are not subject to ASC 606 and (iii) the value of unsatisfied performance obligations for contracts which relate to our planned divestiture of the EMEA business.
92
Contract Costs
The following tables provide changes in our contract acquisition costs and fulfillment costs:
| Year Ended December 31, 2022 | |||||||||||
| Acquisition Costs | Fulfillment Costs | ||||||||||
| (Dollars in millions) | |||||||||||
| Beginning of period balance | $ | 222 | 186 | ||||||||
| Costs incurred | 172 | 158 | |||||||||
| Amortization | (192) | (149) | |||||||||
Classified as held for sale(1) | — | (3) | |||||||||
| End of period balance | $ | 202 | 192 | ||||||||
| Year Ended December 31, 2021 | |||||||||||
| Acquisition Costs | Fulfillment Costs | ||||||||||
| (Dollars in millions) | |||||||||||
| Beginning of period balance | $ | 289 | 216 | ||||||||
| Costs incurred | 176 | 151 | |||||||||
| Amortization | (209) | (149) | |||||||||
Classified as held for sale(2) | (34) | (32) | |||||||||
| End of period balance | $ | 222 | $ | 186 | |||||||
______________________________________________________________________
(1)Represents changes in amounts classified as held for sale related to the divestitures of our Latin American and ILEC businesses on August 1, 2022 and October 3, 2022, respectively, and $6 million acquisition costs and no fulfillment costs classified as held for sale as of December 31, 2022 related to the planned divestiture of the EMEA business. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
(2)Represents the amounts classified as held for sale related to the divestitures of our Latin American and ILEC businesses on August 1, 2022 and October 3, 2022, respectively. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of services to customers, including labor and materials consumed for these activities.
93
Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average contract life of approximately 32 months for mass markets customers and 30 months for business customers. Amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next 12 months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next twelve months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.
Governmental Funding
Lumen participates in various U.S. federal and state programs under which government support payments are received to offset costs associated with providing services in targeted locations such as unserved or underserved high-cost or rural areas, or for certain types of customers, including non-profit organizations, educational institutions and local governmental bodies. Support payments may be conditioned on specified infrastructure buildouts by milestone deadlines or provision of services at specified locations and speed requirements. Commitments may be made annually, on a multi-year basis ranging from one to ten years or be on-going subject to periodic change or termination. Consistent with customary practice and as referenced in ASC 832 Government Assistance, Lumen applies a grant model of accounting by which it accounts for these transactions as non-ASC 606 revenue over the periods in which the costs for which the funding is intended to compensate are incurred. This non-ASC 606 revenue is included in operating revenue in our consolidated statements of operations. Corresponding receivables are recorded when services have been provided to the customers and costs incurred, but the cash has not been received. These amounts are included in our accounts receivable, less allowance in our consolidated balance sheets. Certain programs are subject to audits of compliance with program commitments and, subject to the outcomes of those assessments, Lumen may be required to reimburse the government entity for cash previously received, or, in some cases, pay a penalty. Lumen evaluates each program and establishes a liability under the principles of ASC 450 if it is probable support payments will be recaptured or a penalty will be imposed.
For the year ended December 31, 2022, Lumen recorded of $190 million under government assistance programs, of which 31% was associated with state universal service fund support programs.
Between 2015 and 2021, we received approximately $500 million annually through the FCC's Connect America Fund II ("CAF II"), a federal multi-year recurring subsidy program for more extensive broadband deployment in price-cap ILEC territories. For this program, which ended on December 31, 2021, we were required to meet certain specified infrastructure buildout requirements in 33 states by the end of 2021, which required substantial capital expenditures. In the first quarter of 2022, we recognized $59 million of previously deferred revenue related to the conclusion of the CAF II program based upon our final buildout and filing submissions. The government has the right to audit our compliance with the CAF II program and the ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our reserve accruals established for these matters.
In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”), which is a federal support program designed to replace the CAF II program. On December 7, 2020, the FCC allocated in its RDOF Phase I auction $9.2 billion in support payments over 10 years to deploy high speed broadband to over 5.2 million unserved locations. We won bids to receive approximately $26 million of annual RDOF Phase I support payments approximately 36% of which is attributable to the ILEC business we divested on October 3, 2022. Our support payments under the RDOF Phase I program commenced during the second quarter of 2022.
Lumen participates in multiple state sponsored programs for broadband deployment in unserved and underserved areas for which the states have state universal service funds sourced from fees levied on telecommunications providers and passed on to consumers. During the year ending December 31, 2022, Lumen participated in these types of programs primarily in the states of Arkansas, California, Colorado, Maine, Nebraska, New Mexico, Oregon, Utah, Vermont, and Wisconsin.
94
(5) Leases
We primarily lease to or from third parties various office facilities, colocation facilities, equipment and transmission capacity. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. 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.
Some of our lease arrangements contain lease components, non-lease components (including common-area maintenance costs) and executory costs (including real estate taxes and insurance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component.
Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless we determine that we are reasonably certain of renewing the lease. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not generally contain any material residual value guarantees or material restrictive covenants.
Lease expense consisted of the following:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Operating and short-term lease cost | $ | 451 | 535 | 729 | |||||||||||||
| Finance lease cost: | |||||||||||||||||
| Amortization of right-of-use assets | 37 | 37 | 36 | ||||||||||||||
| Interest on lease liability | 15 | 16 | 12 | ||||||||||||||
| Total finance lease cost | 52 | 53 | 48 | ||||||||||||||
| Total lease cost | $ | 503 | 588 | 777 | |||||||||||||
We primarily lease from third parties various equipment, office facilities, retail outlets, switching facilities and other network sites or components. These leases, with few exceptions, provide for renewal options and rent escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that we believe are reasonably assured.
95
During the years ended December 31, 2021 and 2020, we rationalized our lease footprint and ceased using 23 and 16 underutilized leased property locations, respectively. We determined that we no longer needed the leased space and, due to the limited remaining term on the contracts, concluded that we had neither the intent nor ability to sublease the properties. For the years ended December 31, 2021 and 2020, we incurred accelerated lease costs of approximately $35 million and $41 million, respectively. We did not further rationalize our lease footprint or incur material accelerated lease costs during the year ended December 31, 2022. However, in conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and expect to incur additional accelerated lease costs in future periods.
For the years ended December 31, 2022, 2021 and 2020, our gross rental expense, including the accelerated lease costs discussed above, was $503 million, $588 million and $777 million, respectively. We also received sublease rental income of $25 million for each of the years ended December 31, 2022, 2021 and 2020.
Supplemental consolidated balance sheet information and other information related to leases is included below:
| As of December 31, | ||||||||||||||
| Leases (Dollars in millions) | Classification on the Balance Sheet | 2022 | 2021 | |||||||||||
| Assets | ||||||||||||||
| Operating lease assets | $ | 1,340 | 1,451 | |||||||||||
| Finance lease assets | 317 | 314 | ||||||||||||
| Total leased assets | $ | 1,657 | 1,765 | |||||||||||
| Liabilities | ||||||||||||||
| Current | ||||||||||||||
| Operating | Current operating lease liabilities | $ | 344 | 385 | ||||||||||
| Finance | 16 | 19 | ||||||||||||
| Noncurrent | ||||||||||||||
| Operating | 1,088 | 1,171 | ||||||||||||
| Finance | 234 | 251 | ||||||||||||
| Total lease liabilities | $ | 1,682 | 1,826 | |||||||||||
| Weighted-average remaining lease term (years) | ||||||||||||||
| Operating leases | 7.7 | 6.8 | ||||||||||||
| Finance leases | 12.0 | 13.1 | ||||||||||||
| Weighted-average discount rate | ||||||||||||||
| Operating leases | 5.98 | % | 5.54 | % | ||||||||||
| Finance leases | 4.96 | % | 4.89 | % | ||||||||||
At December 31, 2022, we classified certain operating and finance lease assets and liabilities related to the EMEA business as held for sale and discontinued recording amortization on the related right-of-use assets upon this classification. These operating and finance lease assets and liabilities held for sale are not reflected in the above or throughout the disclosures within this note. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business for more information.
96
Supplemental consolidated cash flow statement information related to leases is included below:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases | $ | 462 | 525 | ||||||||
| Operating cash flows for finance leases | 15 | 15 | |||||||||
| Financing cash flows for finance leases | 89 | 52 | |||||||||
| Supplemental lease cash flow disclosures: | |||||||||||
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | $ | 381 | 165 | ||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | 94 | 94 | |||||||||
As of December 31, 2022, maturities of lease liabilities were as follows:
| Operating Leases | Finance Leases | ||||||||||
| (Dollars in millions) | |||||||||||
| 2023 | $ | 416 | 28 | ||||||||
| 2024 | 282 | 27 | |||||||||
| 2025 | 223 | 28 | |||||||||
| 2026 | 174 | 28 | |||||||||
| 2027 | 130 | 29 | |||||||||
| Thereafter | 611 | 194 | |||||||||
| Total lease payments | 1,836 | 334 | |||||||||
| Less: interest | (404) | (84) | |||||||||
| Total | 1,432 | 250 | |||||||||
| Less: current portion | (344) | (16) | |||||||||
| Long-term portion | $ | 1,088 | 234 | ||||||||
As of December 31, 2022, we had no material operating or finance leases that had not yet commenced.
Operating Lease Income
Lumen Technologies leases various dark fiber, office facilities, colocation facilities, switching facilities, other network sites and service equipment to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations. See "Revenue Recognition" in Note 1—Background and Summary of Significant Accounting Policies.
For the years ended December 31, 2022, 2021 and 2020, our was $1.2 billion, $1.2 billion and $1.3 billion, respectively, which represents 7%, 6% and 6% respectively, of our operating revenue for the years ended December 31, 2022, 2021 and 2020.
(6) Credit Losses on Financial Instruments
To assess our expected credit losses on financial instruments, we aggregate financial assets with similar risk characteristics to monitor their credit quality or deterioration over the life of such assets. We periodically monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors change. We separately evaluate financial assets that do not share risk characteristics with other financial assets. Our financial assets measured at amortized cost primarily consist of accounts receivable.
97
We use a loss rate method to estimate our allowance for credit losses. Our determination of the current expected credit loss rate begins with our review of historical loss experience as a percentage of accounts receivable. We measure our historical loss period based on the average days to recognize accounts receivable as credit losses. When asset specific characteristics and current conditions change from those in the historical period, due to changes in our credit and collections strategy, certain classes of aged balances, or credit loss and recovery policies, we perform a qualitative and quantitative assessment to adjust our historical loss rate. We use regression analysis to develop an expected loss rate using historical experience and economic data over a forecast period. We measure our forecast period based on the average days to collect payment on billed accounts receivable. To determine our current allowance for credit losses, we combine the historical and expected credit loss rates and apply them to our period end accounts receivable.
If there is an unexpected deterioration of a customer's financial condition or an unexpected change in economic conditions, including macroeconomic events, we assess the need to adjust the allowance for credit losses. Any such resulting adjustments would affect earnings in the period that adjustments are made.
The assessment of the correlation between historical observed default rates, current conditions and forecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding our allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customers' actual default experience in the future, and we may use methodologies that differ from those used by other companies.
The following table presents the activity of our allowance for credit losses by accounts receivable portfolio for the years ended December 31, 2022 and December 31, 2021:
| Business | Mass Markets | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
Balance at January 1, 2021(1) | $ | 109 | 82 | 191 | |||||||||||||
| Provision for expected losses | 50 | 55 | 105 | ||||||||||||||
| Write-offs charged against the allowance | (76) | (101) | (177) | ||||||||||||||
| Recoveries collected | 13 | 6 | 19 | ||||||||||||||
Classified as assets held for sale(2) | (8) | (16) | (24) | ||||||||||||||
| Balance at December 31, 2021 | $ | 88 | 26 | 114 | |||||||||||||
| Provision for expected losses | 25 | 108 | 133 | ||||||||||||||
| Write-offs charged against the allowance | (61) | (114) | (175) | ||||||||||||||
| Recoveries collected | 10 | 6 | 16 | ||||||||||||||
Change in allowance in assets held for sale(3) | (5) | 2 | (3) | ||||||||||||||
Balance at December 31, 2022 | $ | 57 | 28 | 85 | |||||||||||||
______________________________________________________________________
(1)We completed an internal reorganization in January 2021. As a result of this change, the allowance for credit losses previously included in the Consumer and Business portfolio of $70 million related to consumer and $12 million related to our small business group, respectively, were reclassified to the Mass Markets allowance for credit losses on January 1, 2021.
(2)Represents the amounts classified as held for sale related to the divestitures of our Latin American and ILEC businesses on August 1, 2022 and October 3, 2022, respectively. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
(3)Represents changes in amounts classified as held for sale related to the divestitures of our Latin American and ILEC businesses on August 1, 2022 and October 3, 2022, respectively, and the inclusion of a $5 million allowance for credit losses classified as held for sale as of December 31, 2022 related to the planned divestiture of the EMEA business. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
For the year ended December 31, 2022, we decreased our allowance for credit losses for our business and mass markets accounts receivable portfolios primarily due to releasing COVID-19 related reserves during 2022.
98
For the year ended December 31, 2021, we decreased our allowance for credit losses for our business and mass markets accounts receivable portfolios primarily due to higher write-off activity during 2021, along with the easing of prior delays due to COVID-19 related restrictions from 2020 and lower receivable balances.
(7) Long-Term Debt and Credit Facilities
The following table reflects the consolidated long-term debt of Lumen Technologies, Inc. and its subsidiaries as of the dates indicated below, including unamortized discounts and premiums and unamortized debt issuance costs:
| As of December 31, | |||||||||||||||||||||||
Interest Rates(1) | Maturities(1) | 2022 | 2021 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
Senior Secured Debt: (2) | |||||||||||||||||||||||
| Lumen Technologies, Inc. | |||||||||||||||||||||||
Revolving Credit Facility(3) | LIBOR + 2.00% | 2025 | $ | — | 200 | ||||||||||||||||||
Term Loan A(4) | LIBOR + 2.00% | 2025 | 991 | 1,050 | |||||||||||||||||||
Term Loan A-1(4) | LIBOR + 2.00% | 2025 | 283 | 300 | |||||||||||||||||||
Term Loan B(5) | LIBOR + 2.25% | 2027 | 3,941 | 4,900 | |||||||||||||||||||
| Senior notes | 4.000% | 2027 | 1,250 | 1,250 | |||||||||||||||||||
| Subsidiaries: | |||||||||||||||||||||||
| Level 3 Financing, Inc. | |||||||||||||||||||||||
Tranche B 2027 Term Loan(6) | LIBOR + 1.75% | 2027 | 2,411 | 3,111 | |||||||||||||||||||
| Senior notes | 3.400% - 3.875% | 2027 - 2029 | 1,500 | 1,500 | |||||||||||||||||||
| Embarq Corporation subsidiaries | |||||||||||||||||||||||
| First mortgage bonds | N/A | N/A | — | 138 | |||||||||||||||||||
Senior Notes and Other Debt:(7) | |||||||||||||||||||||||
| Lumen Technologies, Inc. | |||||||||||||||||||||||
| Senior notes | 4.500% - 7.650% | 2023 - 2042 | 3,722 | 8,414 | |||||||||||||||||||
| Subsidiaries: | |||||||||||||||||||||||
| Level 3 Financing, Inc. | |||||||||||||||||||||||
| Senior notes | 3.625% - 4.625% | 2027 - 2029 | 3,940 | 5,515 | |||||||||||||||||||
| Qwest Corporation | |||||||||||||||||||||||
| Senior notes | 6.500% - 7.750% | 2025 - 2057 | 1,986 | 1,986 | |||||||||||||||||||
Term loan(8) | LIBOR + 2.25% | 2027 | 215 | 215 | |||||||||||||||||||
| Qwest Capital Funding, Inc. | |||||||||||||||||||||||
| Senior notes | 6.875% - 7.750% | 2028 - 2031 | 192 | 255 | |||||||||||||||||||
Finance lease and other obligations(9) | Various | Various | 317 | 347 | |||||||||||||||||||
| Unamortized (discounts) premiums, net | (7) | 21 | |||||||||||||||||||||
| Unamortized debt issuance costs | (169) | (220) | |||||||||||||||||||||
| Total long-term debt | 20,572 | 28,982 | |||||||||||||||||||||
| Less current maturities | (154) | (1,554) | |||||||||||||||||||||
| Long-term debt, excluding current maturities | $ | 20,418 | 27,428 | ||||||||||||||||||||
_______________________________________________________________________________
(1)As of December 31, 2022.
(2)See the remainder of this Note for a description of certain parent or subsidiary guarantees and liens securing this debt.
(3)The Revolving Credit Facility had an interest rate of 2.103% as of December 31, 2021.
(4)Term Loans A and A-1 had interest rates of 6.384% and 2.104% as of December 31, 2022 and December 31, 2021, respectively.
99
(5)Term Loan B had interest rates of 6.634% and 2.354% as of December 31, 2022 and December 31, 2021, respectively.
(6)The Level 3 Tranche B 2027 Term Loan had interest rates of 6.134% and 1.854% as of December 31, 2022 and December 31, 2021, respectively.
(7)The table excludes $1.4 billion of indebtedness under Embarq Corporation's 7.995% senior notes maturing in 2036 that was classified as held for sale as of December 31, 2021 and was transferred as of October 3, 2022 concurrent with the sale of the ILEC business. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
(8)The Qwest Corporation Term Loan had interest rates of 6.640% and 2.110% as of December 31, 2022 and December 31, 2021, respectively.
(9)The table excludes finance lease obligations that were classified as held for sale as of December 31, 2022 and December 31, 2021. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt as of December 31, 2022 (excluding unamortized (discounts) premiums, net, and unamortized debt issuance costs) maturing during the following years. As a result of classifying our EMEA business as held for sale on our December 31, 2022 consolidated balance sheet, the amounts presented below do not include maturities of the finance lease obligations of that business. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
| (Dollars in millions) | |||||
| 2023 | $ | 154 | |||
| 2024 | 158 | ||||
| 2025 | 1,743 | ||||
| 2026 | 806 | ||||
| 2027 | 9,387 | ||||
| 2028 and thereafter | 8,500 | ||||
| Total long-term debt | $ | 20,748 | |||
Debt of Lumen Technologies, Inc. and its Subsidiaries
At December 31, 2022, most of our outstanding consolidated debt had been incurred by Lumen Technologies, Inc. or one of the following three other primary borrowers or “borrowing groups,” each of which has borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries:
•Level 3 Financing, Inc., including its parent guarantor Level 3 Parent, LLC, and one or more subsidiary guarantors;
•Qwest Corporation; and
•Qwest Capital Funding, Inc., including its parent guarantor, Qwest Communications International Inc.
Each of these borrowers or borrowing groups has entered into one or more credit agreements with certain financial institutions or other institutional lenders, or issued senior notes. Certain of these debt instruments are described further below.
100
Amended and Restated Credit Agreement
On January 31, 2020, we amended and restated our credit agreement dated June 19, 2017 (as so amended and restated, the "Amended Credit Agreement"). At December 31, 2022, the Amended Credit Agreement consisted of the following facilities:
•a $2.2 billion senior secured revolving credit facility (“the Revolving Credit Facility”);
•a $991 million senior secured Term Loan A credit facility;
•a $283 million senior secured Term Loan A-1 credit facility with CoBank, ACB; and
•a $3.9 billion senior secured Term Loan B credit facility (the term loan facilities and the Revolving Credit Facility being referred to collectively as the "Amended Secured Credit Facilities").
Loans under the Term Loan A and A-1 facilities and the Revolving Credit Facility bear interest at a rate equal to, at our option, the Eurodollar rate or the alternative base rate (each as defined in the Amended Credit Agreement) plus an applicable margin between 1.50% to 2.25% per annum for Eurodollar loans and 0.50% to 1.25% per annum for alternative base rate loans, depending on our then current total leverage ratio. Loans under the Term Loan B facility bear interest at the Eurodollar rate plus 2.25% per annum or the alternative base rate plus 1.25% per annum. Loans under each of the term loan facilities require certain specified quarterly amortization payments and certain specified mandatory prepayments in connection with certain asset sales and debt issuances and out of excess cash flow, among other things, subject in each case to certain significant exceptions.
Borrowings under the Revolving Credit Facility and the Term Loan A and A-1 facilities mature on January 31, 2025. Borrowings under the Term Loan B facility mature on March 15, 2027.
All of Lumen's obligations under the Amended Secured Credit Facilities are guaranteed by certain of its subsidiaries. The guarantees by certain of those guarantors are secured by a first priority security interest in substantially all assets (including certain subsidiaries stock) directly owned by them, subject to certain exceptions and limitations.
A portion of the Revolving Credit Facility in an amount not to exceed $250 million is available for swingline loans, and a portion in an amount not to exceed $800 million is available for the issuance of letters of credit.
Lumen Technologies is permitted under the Amended Credit Agreement to request certain incremental borrowings subject to the satisfaction of various conditions and to certain other limitations. Any incremental borrowings would be subject to the same terms and conditions under the Amended Credit Agreement.
Term Loans and Certain Other Debt of Subsidiaries
Qwest Corporation
On October 23, 2020, Qwest Corporation borrowed $215 million under a variable-rate term loan with CoBank ACB. The outstanding unpaid principal amount of this term loan plus any accrued and unpaid interest is due on October 23, 2027. Interest is paid at least quarterly based upon either the London Interbank Offered Rate ("LIBOR") or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for base rate loans depending on Qwest Corporation's then current senior unsecured long-term debt rating.
Level 3 Financing, Inc.
At December 31, 2022, Level 3 Financing, Inc. owed $2.4 billion under a senior secured Tranche B 2027 Term Loan, which matures on March 1, 2027. The Tranche B 2027 Term Loan carries an interest rate, in the case of base rate borrowings, equal to (i) the greater of the Prime Rate, the Federal Funds Effective Rate plus 50 basis points, or LIBOR plus 100 basis points (with all such terms and calculations as defined or further specified in the credit agreement) plus (ii) 0.75% per annum. Any Eurodollar borrowings under the Tranche B 2027 Term Loan bear interest at LIBOR plus 1.75% per annum.
101
The Tranche B 2027 Term Loan requires certain specified mandatory prepayments in connection with certain asset sales and other transactions, subject to certain significant exceptions. The obligations of Level 3 Financing, Inc. under the Tranche B 2027 Term Loan are, subject to certain exceptions, secured by certain assets of Level 3 Parent, LLC and certain of its material domestic telecommunication subsidiaries. Also, Level 3 Parent, LLC and certain of its subsidiaries have guaranteed the obligations of Level 3 Financing, Inc. under the Tranche B 2027 Term Loan.
Revolving Letters of Credit
We use various financial instruments in the normal course of business. These instruments include letters of credit, which are conditional commitments issued on our behalf in accordance with specified terms and conditions. Lumen Technologies maintains an uncommitted $225 million revolving letter of credit facility separate from the letter of credit facility included in the Revolving Credit Facility noted above. Letters of credit issued under this uncommitted facility are backed by credit enhancements in the form of secured guarantees issued by certain of our subsidiaries. As of December 31, 2022 and 2021, we had (i) $94 million and $88 million, respectively, of letters of credit outstanding under our committed facility and various other facilities and (ii) no letters of credit outstanding under our Revolving Credit Facility.
Senior Notes
Lumen's consolidated indebtedness at December 31, 2022 included (i) senior secured notes issued by Lumen Technologies, Inc. and Level 3 Financing, Inc. and (ii) senior unsecured notes issued by Lumen Technologies, Inc., Level 3 Financing, Inc., Qwest Corporation, and Qwest Capital Funding, Inc. All of these notes carry fixed interest rates and all principal is due on the notes’ respective maturity dates, which rates and maturity dates are summarized in the table above. The Lumen Technologies, Inc. secured senior notes are guaranteed by the same domestic subsidiaries that guarantee the Amended Credit Agreement on substantially the same terms and conditions that govern the guarantees of the Amended Credit Agreement. The Level 3 Financing, Inc. secured senior notes are secured by a pledge of substantially all of its assets and guaranteed on a secured basis by the same domestic subsidiaries that guarantee its Term B 2027 Term Loan. The remaining senior notes issued by Level 3 Financing, Inc. are guaranteed on an unsecured basis by its parent, Level 3 Parent, LLC, and one of its subsidiaries. The senior notes issued by Qwest Capital Funding, Inc. are guaranteed by its parent, Qwest Communications International Inc. Except for a limited number of senior notes issued by Qwest Corporation, the issuer generally can redeem the notes, at its option, in whole or in part, (i) pursuant to a fixed schedule of pre-established redemption prices, (ii) pursuant to a “make whole” redemption price or (iii) under certain other specified limited conditions. Under certain circumstances in connection with a “change of control” of Lumen Technologies, it will be required to make an offer to repurchase each series of these senior notes (other than two of its older series of notes) at a price of 101% of the principal amount redeemed, plus accrued and unpaid interest. Also, under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC or Level 3 Financing, Inc., Level 3 Financing will be required to make an offer to repurchase each series of its outstanding senior notes at a price of 101% of the principal amount redeemed, plus accrued and unpaid interest.
Borrowings and Repayments
2022
During 2022, Lumen borrowed $2.4 billion from, and made repayments of $2.6 billion to, its Revolving Credit Facility. We used our net revolving credit draws and available cash to repay the following aggregate principal amounts of indebtedness through a combination of tender offers, redemptions, prepayments, amortization payments and payments at maturity. These transactions resulted in a net gain on the extinguishment of debt of $214 million.
102
| Debt | Period of Repayment | (Dollars in millions) | ||||||
| Lumen Technologies, Inc. | ||||||||
5.800% Senior Notes due 2022 (at maturity) | Q1 2022 | $ | 1,400 | |||||
6.750% Senior Notes, Series W, due 2023 | Q4 2022 | 750 | ||||||
7.500% Senior Notes, Series Y, due 2024 | Q4 2022 | 982 | ||||||
7.500% Senior Notes, Series Y, due 2024 | Q3 2022 | 18 | ||||||
5.625% Senior Notes, Series X, due 2025 | Q4 2022 | 286 | ||||||
7.200% Senior Notes, Series D, due 2025 | Q4 2022 | 34 | ||||||
5.125% Senior Notes due 2026 | Q4 2022 | 520 | ||||||
5.125% Senior Notes due 2026 | Q3 2022 | 11 | ||||||
6.875% Debentures, Series G, due 2028 | Q4 2022 | 130 | ||||||
5.375% Senior Notes due 2029 | Q4 2022 | 494 | ||||||
| Term Loan B prepayment | Q4 2022 | 909 | ||||||
| Scheduled term loan payments | Multiple | 125 | ||||||
| Level 3 Financing, Inc. | ||||||||
| Tranche B 2027 Term Loan | Q3 2022 | 700 | ||||||
5.375% Senior Notes due 2025 | Q3 2022 | 800 | ||||||
5.250% Senior Notes due 2026 | Q3 2022 | 775 | ||||||
| Embarq Corporation Subsidiaries | ||||||||
| First Mortgage Bonds | Q4 2022 | 137 | ||||||
| Qwest Capital Funding, Inc. | ||||||||
| Senior Notes | Q4 2022 | 63 | ||||||
| Other | Q4 2022 | 68 | ||||||
| Total Debt Repayments | $ | 8,202 | ||||||
2021
During 2021, Lumen borrowed $400 million from, and made repayments of $350 million to, its Revolving Credit Facility. We also used available cash (including funds from the debt issuances mentioned below) to repay the following aggregate principal amounts of indebtedness through a combination of redemptions, prepayments, amortization payments and payments at maturity. These transactions resulted in a net gain on the extinguishment of debt of $8 million.
| Debt | Period of Repayment | (Dollars in millions) | ||||||
| Lumen Technologies, Inc. | ||||||||
6.450% Senior Notes, Series S, due 2021 (at maturity) | Q2 2021 | $ | 1,231 | |||||
| Scheduled term loan payments | Multiple | 125 | ||||||
| Level 3 Financing, Inc. | ||||||||
5.375% Senior Notes due 2024 | Q1 2021 | 900 | ||||||
| Qwest Corporation, Inc. | ||||||||
6.750% Senior Notes (at maturity) | Q4 2021 | 950 | ||||||
7.000% Senior Notes due 2056 | Q1 2021 | 235 | ||||||
| Qwest Capital Funding, Inc. | ||||||||
| Senior Notes (at maturity) | Q3 2021 | 97 | ||||||
| Total Debt Repayments | $ | 3,538 | ||||||
103
On June 15, 2021, Lumen Technologies, Inc. issued $1.0 billion aggregate principal amount of 5.375% Senior Notes due 2029. The net proceeds were used, together with cash on hand, to repay at maturity our outstanding $1.2 billion 6.450% Senior Notes, Series S, due 2021, shown in the table above.
On January 13, 2021, Level 3 Financing, Inc. issued $900 million aggregate principal amount of 3.750% Sustainability-Linked Senior Notes due 2029 (the "Sustainability-Linked Notes"). The net proceeds were used, together with cash on hand, to redeem $900 million of our outstanding senior note indebtedness, shown in the table above. The Sustainability-Linked Notes are guaranteed by Level 3 Parent, LLC and Level 3 Communications, LLC.
Interest Expense
Interest expense includes interest on total long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Interest expense: | |||||||||||||||||
| Gross interest expense | $ | 1,398 | 1,575 | 1,743 | |||||||||||||
| Capitalized interest | (66) | (53) | (75) | ||||||||||||||
| Total interest expense | $ | 1,332 | 1,522 | 1,668 | |||||||||||||
Covenants
Lumen Technologies, Inc.
With respect to the Term Loan A and A-1 facilities and the Revolving Credit Facility, the Amended Credit Agreement requires us to maintain (i) a maximum total leverage ratio of not more than 4.75 to 1.00 and (ii) a minimum consolidated interest coverage ratio of at least 2.00 to 1.00, with such ratios being determined and calculated in the manner described in the Amended Credit Agreement.
The Amended Secured Credit Facilities contain various representations and warranties and extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on our ability to declare or pay dividends, repurchase stock, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with our affiliates, dispose of assets and merge or consolidate with any other person.
The senior unsecured notes of Lumen Technologies, Inc. were issued under four separate indentures. These indentures restrict our ability to (i) incur, issue or create liens upon the property of Lumen Technologies, Inc. and (ii) consolidate with or merge into, or transfer or lease all or substantially all of our assets to any other party. These indentures do not contain any provisions that restrict the incurrence of additional indebtedness. The senior secured notes of Lumen Technologies, Inc. were issued under a separate indenture that contains a more restrictive set of covenants. As indicated above under "Senior Notes", Lumen Technologies, Inc. will be required to offer to purchase certain of its long-term debt securities issued under its indentures under certain circumstances in connection with a "change of control" of Lumen Technologies, Inc.
104
Level 3 Companies
The term loan, senior secured notes and senior unsecured notes of Level 3 Financing, Inc. contain various representations and extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. Also, as indicated above under "Senior Notes", Level 3 Financing, Inc. will be required to offer to repurchase or repay certain of its long-term debt under certain circumstances in connection with a "change of control" of Level 3 Financing or Level 3 Parent, LLC.
Qwest Companies
Under its term loan, Qwest Corporation must maintain a debt to EBITDA ratio of not more than 2.85 to 1.00, as determined and calculated in the manner described in the applicable term loan documentation. The term loan also contains a negative pledge covenant, which generally requires Qwest Corporation to secure equally and ratably any advances under the term loan if it pledges assets or permits liens on its property for the benefit of other debtholders.
The senior notes of Qwest Corporation were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures contain restrictions on the incurrence of liens and the consummation of certain transactions substantially similar to the above-described covenants in Lumen's indentures (but contain no mandatory repurchase provisions). The senior notes of Qwest Capital Funding, Inc. were issued under an indenture dated June 29, 1998 containing terms substantially similar to those set forth in Qwest Corporation's indentures.
Impact of Covenants
The debt covenants applicable to Lumen Technologies, Inc. and its subsidiaries could have a material adverse impact on their ability to operate or expand their respective businesses, to pursue strategic transactions, or to otherwise pursue their plans and strategies. The covenants of the Level 3 companies may significantly restrict the ability of Lumen Technologies, Inc. to receive cash from the Level 3 companies, to distribute cash from the Level 3 companies to other of Lumen’s affiliated entities, or to enter into other transactions among Lumen’s wholly-owned entities.
Certain of the debt instruments of Lumen Technologies, Inc. and its subsidiaries contain cross payment default or cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.
The ability of Lumen Technologies, Inc. and its subsidiaries to comply with the financial covenants in their respective debt instruments could be adversely impacted by a wide variety of events, including unforeseen contingencies, many of which are beyond their control.
Compliance
As of December 31, 2022, Lumen Technologies, Inc. believes it and its subsidiaries were in compliance with the provisions and financial covenants in their respective material debt agreements in all material respects.
Guarantees
Lumen Technologies does not guarantee the debt of any unaffiliated parties, but, as noted above, as of December 31, 2022 certain of its largest subsidiaries guaranteed (i) its debt outstanding under its Amended Secured Credit Facilities, its senior secured notes and its $225 million letter of credit facility and (ii) the outstanding term loans or senior notes issued by certain other subsidiaries. As further noted above, several of the subsidiaries guaranteeing these obligations have pledged substantially all of their assets to secure certain of their respective guarantees.
105
(8) Accounts Receivable
The following table presents details of our accounts receivable balances:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Trade and purchased receivables | $ | 1,288 | 1,281 | ||||||||
| Earned and unbilled receivables | 209 | 315 | |||||||||
| Other | 65 | 62 | |||||||||
| Total accounts receivable | 1,562 | 1,658 | |||||||||
| Less: allowance for credit losses | (85) | (114) | |||||||||
| Accounts receivable, less allowance | $ | 1,477 | 1,544 | ||||||||
We are exposed to concentrations of credit risk from our customers. We generally do not require collateral to secure our receivable balances. We have agreements with other communications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other communications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for credit losses accounts:
| Beginning Balance | Additions | Deductions | Ending Balance | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| 2022 | $ | 114 | 133 | (162) | 85 | ||||||||||||||||||
| 2021 | 191 | 105 | (182) | 114 | |||||||||||||||||||
2020(1) | 106 | 189 | (104) | 191 | |||||||||||||||||||
_______________________________________________________________________________
(1)On January 1, 2020, we adopted ASU 2016-13 "Measurement of Credit Losses on Financial Instruments" and recognized a cumulative adjustment to our accumulated deficit as of the date of adoption of $9 million, net of a $2 million tax effect. This adjustment is included within "Deductions." See Note 6—Credit Losses on Financial Instruments for more information.
106
(9) Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
| Depreciable Lives | As of December 31, | ||||||||||||||||
2022(5) | 2021(5) | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Land | N/A | $ | 651 | 751 | |||||||||||||
Fiber, conduit and other outside plant (1) | 15-45 years | 14,451 | 15,366 | ||||||||||||||
Central office and other network electronics(2) | 3-10 years | 15,077 | 15,394 | ||||||||||||||
Support assets(3) | 3-30 years | 6,863 | 7,181 | ||||||||||||||
Construction in progress(4) | N/A | 2,010 | 1,474 | ||||||||||||||
| Gross property, plant and equipment | 39,052 | 40,166 | |||||||||||||||
| Accumulated depreciation | (19,886) | (19,271) | |||||||||||||||
| Net property, plant and equipment | $ | 19,166 | 20,895 | ||||||||||||||
_______________________________________________________________________________
(1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.
(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.
(3)Support assets consist of buildings, cable landing stations, data centers, computers and other administrative and support equipment.
(4)Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction.
(5)These values exclude assets classified as held for sale.
At December 31, 2022, we classified $1.9 billion of certain property, plant and equipment, net related to our EMEA business as held for sale and discontinued recording depreciation on this disposal group as of November 2, 2022. At December 31, 2021, we had $5.1 billion of certain property, plant and equipment, net related to our Latin American and ILEC businesses sold on August 1, 2022 and October 3, 2022, respectively, classified as held for sale and discontinued recording depreciation on these disposal groups during their classification as assets held for sale. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business for more information.
We recorded depreciation expense of $2.1 billion, $2.7 billion and $3.0 billion for the years ended December 31, 2022, 2021 and 2020, respectively.
Asset Retirement Obligations
As of December 31, 2022 and 2021, our asset retirement obligations balance was primarily related to estimated future costs of removing equipment from leased properties and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing buildings. Asset retirement obligations are included in other long-term liabilities on our consolidated balance sheets.
Our fair value estimates were determined using the discounted cash flow method.
107
The following table provides asset retirement obligation activity:
| Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Balance at beginning of year | $ | 182 | 199 | ||||||||
| Accretion expense | 10 | 10 | |||||||||
| Liabilities settled | (10) | (13) | |||||||||
| Change in estimate | 4 | (2) | |||||||||
Classified as held for sale(1) | (30) | (12) | |||||||||
| Balance at end of year | $ | 156 | 182 | ||||||||
_______________________________________________________________________________
(1)Represents the amounts classified as held for sale related to our divestitures. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business.
The changes in estimate referred to in the table above were offset against gross property, plant and equipment.
(10) Severance
Periodically, we reduce our workforce and accrue liabilities for the related severance costs. These workforce reductions result primarily from the progression or completion of our post-acquisition integration plans, increased competitive pressures, cost reduction initiatives, process improvements through automation and reduced workloads due to reduced demand for certain services.
We report severance liabilities within accrued expenses and other liabilities - salaries and benefits in our consolidated balance sheets and report severance expenses in selling, general and administrative expenses in our consolidated statements of operations. As described in Note 17—Segment Information, we do not allocate these severance expenses to our segments.
Changes in our accrued liabilities for severance expenses were as follows:
| Severance | |||||
| (Dollars in millions) | |||||
| Balance at December 31, 2020 | $ | 103 | |||
| Accrued to expense | 3 | ||||
| Payments, net | (70) | ||||
| Balance at December 31, 2021 | 36 | ||||
| Accrued to expense | 12 | ||||
| Payments, net | (37) | ||||
| Balance at December 31, 2022 | $ | 11 | |||
108
(11) Employee Benefits
Pension, Post-Retirement and Other Post-Employment Benefits
We sponsor various defined benefit pension plans (qualified and non-qualified) which, in the aggregate, cover a substantial portion of our employees. Pension benefits for participants of the Lumen Combined Pension Plan ("Combined Pension Plan") and, through the October 3, 2022 sale of the ILEC business, the Lumen Pension Plan, who are represented by a collective bargaining agreement are based on negotiated schedules. All other participants' pension benefits are based on each individual participant's years of service and compensation. We also maintain non-qualified pension plans for certain current and former highly compensated employees. We maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. We also provide other post-employment benefits for certain eligible former employees. We use a December 31 measurement date for all our plans.
On October 19, 2021, we, as sponsor of the Combined Pension Plan, along with the Plan’s independent fiduciary, entered into an agreement committing the Plan to use a portion of its plan assets to purchase an annuity from an insurance company (the "Insurer") to transfer approximately $1.4 billion of the Plan’s pension liabilities. This agreement irrevocably transferred to the Insurer future Plan benefit obligations for approximately 22,600 U.S. Lumen participants (“Transferred Participants”) effective on December 31, 2021. This annuity transaction was funded entirely by existing Plan assets. The Insurer assumed responsibility for administrative and customer service support, including distribution of payments to the Transferred Participants. Transferred Participants’ benefits were not reduced as a result of this transaction.
As of January 1, 2022, we spun off the Lumen Pension Plan from the Lumen Combined Pension Plan in anticipation of the sale of the ILEC business, as described further in Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business. At the time of the spin-off, the Lumen Pension Plan covered approximately 2,500 active plan participants along with 19,000 other participants. At the time of the spin-off, the Lumen Pension Plan had a pension benefit obligation of $2.5 billion and assets of $2.2 billion. In addition, the December 31, 2021 actuarial (loss) gain and prior service cost included in accumulated other comprehensive loss was allocated between the Lumen Pension Plan and the Lumen Combined Pension Plan. Following a revaluation of the pension obligation and pension assets for the Lumen Pension Plan, in preparation for the closing of the sale of the ILEC business, we contributed approximately $319 million of Lumen's cash to the Lumen Pension Plan trust to fully fund the pension plan in September 2022. The amounts allocated to the Lumen Pension Plan were subject to adjustment up to the closing of the sale of the ILEC business on October 3, 2022, at which time the plan was transferred along with the rest of the assets and liabilities of the ILEC business. We recognized pension costs related to both plans through the sale of the ILEC business, at which time balances related to the Lumen Pension Plan were reflected in the calculation of our gain on the sale of the business.
Pension Benefits
United States funding laws require a company with a pension shortfall to fund the annual cost of benefits earned in addition to a seven-year amortization of the shortfall. Our funding policy for our Combined Pension Plan is to make contributions with the objective of accumulating ample assets to pay all qualified pension benefits when due under the terms of the plan. The accounting unfunded status of the Combined Pension Plan was $580 million and $1.1 billion as of December 31, 2022 and 2021, respectively.
We made no voluntary cash contributions to the Combined Pension Plan in 2022 or 2021. As discussed above, we contributed approximately $319 million of cash to the Lumen Pension Plan trust to fully fund the pension plan in September 2022 in preparation for the closing of the sale of the ILEC business. We paid $5 million of benefits directly to participants of our non-qualified pension plans in both 2022 and 2021.
Benefits paid by the Combined Pension Plan are paid through a trust that holds all of the Plan's assets. The amount of required contributions to the Combined Pension Plan in 2023 and beyond will depend on a variety of factors, most of which are beyond our control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. Based on current laws and circumstances, we do not believe we are required to make any contributions to the Combined Pension Plan in 2023 and we do not expect to make voluntary contributions to the trust for the Combined Pension Plan in 2023. We estimate that in 2023 we will pay $5 million of benefits directly to participants of our non-qualified pension plans.
109
We recognize in our consolidated balance sheets the funded status of the legacy Level 3 defined benefit post-retirement plans. These plans were fully funded as of December 31, 2022. The net unfunded status of these plans was $17 million, as of December 31, 2021. Additionally, as previously mentioned, we sponsor unfunded non-qualified pension plans for certain current and former highly-compensated employees. The net unfunded status of our non-qualified pension plans was $35 million and $46 million for the years ended December 31, 2022 and 2021, respectively. Due to the insignificant impact of these pension plans on our consolidated financial statements, we have predominantly excluded them from the remaining employee benefit disclosures in this Note, unless otherwise specifically stated.
Post-Retirement Benefits
Our post-retirement benefit plans provide post-retirement benefits to qualified retirees and allow (i) eligible employees retiring before certain dates to receive benefits at no or reduced cost and (ii) eligible employees retiring after certain dates to receive benefits on a shared cost basis. The post-retirement benefits not paid by the trusts are funded by us and we expect to continue funding these post-retirement obligations as benefits are paid. The accounting unfunded status of our qualified post-retirement benefit plan was $2.0 billion and $2.8 billion as of December 31, 2022 and 2021, respectively.
Assets in the post-retirement trusts were substantially depleted as of December 31, 2016; as of December 31, 2019 the Company ceased to pay certain post-retirement benefits through the trusts. No contributions were made to the post-retirement trusts in 2022 nor 2021. Benefits are paid directly by us with available cash. In 2022, we paid $210 million of post-retirement benefits, net of participant contributions and direct subsidies. In 2023, we currently expect to pay directly $210 million of post-retirement benefits, net of participant contributions and direct subsidies.
We expect our expected health care cost trend to range from 5.00% to 7.20% in 2023 and grading to 4.50% by 2030. Our post-retirement benefit cost, for certain eligible legacy Qwest retirees and certain eligible legacy CenturyLink retirees, is capped at a set dollar amount. Therefore, those health care benefit obligations are not subject to increasing health care trends after the effective date of the caps.
Expected Cash Flows
The Combined Pension Plan payments, post-retirement health care benefit payments and premiums, and life insurance premium payments are either distributed from plan assets or paid by us. The estimated benefit payments provided below are based on actuarial assumptions using the demographics of the employee and retiree populations and have been reduced by estimated participant contributions.
| Combined Pension Plan | Post-Retirement Benefit Plans | Medicare Part D Subsidy Receipts | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Estimated future benefit payments: | |||||||||||||||||
| 2023 | $ | 566 | 213 | (3) | |||||||||||||
| 2024 | 514 | 205 | (3) | ||||||||||||||
| 2025 | 500 | 198 | (2) | ||||||||||||||
| 2026 | 482 | 191 | (2) | ||||||||||||||
| 2027 | 463 | 184 | (2) | ||||||||||||||
| 2028 - 2032 | 2,065 | 805 | (7) | ||||||||||||||
110
Net Periodic Benefit Expense (Income)
We utilize a full yield curve approach in connection with estimating the service and interest components of net periodic benefit expense by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flow.
The actuarial assumptions used to compute the net periodic benefit expense for our Combined Pension Plan and post-retirement benefit plans are based upon information available as of the beginning of the year, as presented in the following table.
| Combined Pension Plan | Post-Retirement Benefit Plans | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||
| Actuarial assumptions at beginning of year: | |||||||||||||||||||||||||||||||||||
| Discount rate | 2.29% - 3.12% | 1.70% - 2.88% | 2.79% - 3.55% | 2.19% - 5.78% | 1.58% - 2.60% | 1.69% - 3.35% | |||||||||||||||||||||||||||||
| Rate of compensation increase | 3.25 | % | 3.25 | % | 3.25 | % | N/A | N/A | N/A | ||||||||||||||||||||||||||
Expected long-term rate of return on plan assets(1) | 5.50 | % | 5.50 | % | 6.50 | % | 4.00 | % | 4.00 | % | 4.00 | % | |||||||||||||||||||||||
| Initial health care cost trend rate | N/A | N/A | N/A | 5.00% / 5.75% | 6.25% / 5.00% | 6.50% / 5.00% | |||||||||||||||||||||||||||||
| Ultimate health care cost trend rate | N/A | N/A | N/A | 4.50 | % | 4.50 | % | 4.50 | % | ||||||||||||||||||||||||||
| Year ultimate trend rate is reached | N/A | N/A | N/A | 2025 | 2025 | 2025 | |||||||||||||||||||||||||||||
_______________________________________________________________________________
N/A - Not applicable
(1)Rates are presented net of projected fees and administrative costs.
Prior to the sale of the ILEC business on October 3, 2022, we realized pension costs related to the Lumen Pension Plan. Net periodic benefit expense (income) for our Combined Pension Plan and the Lumen Pension Plan (together the "Pension Plans") includes the following components:
| Pension Plans Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Service cost | $ | 44 | 56 | 59 | |||||||||||||
| Interest cost | 194 | 201 | 324 | ||||||||||||||
| Expected return on plan assets | (385) | (535) | (593) | ||||||||||||||
| Settlement charges | — | 383 | — | ||||||||||||||
| Realized to gain on sale of businesses | 546 | — | — | ||||||||||||||
| Special termination benefits charge | — | 6 | 13 | ||||||||||||||
| Recognition of prior service credit | (10) | (9) | (9) | ||||||||||||||
| Recognition of actuarial loss | 122 | 184 | 202 | ||||||||||||||
| Net periodic pension expense (income) | $ | 511 | 286 | (4) | |||||||||||||
111
Net periodic benefit expense for our post-retirement benefit plans includes the following components:
| Post-Retirement Plans Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Service cost | $ | 10 | 14 | 14 | |||||||||||||
| Interest cost | 72 | 47 | 69 | ||||||||||||||
| Expected return on plan assets | — | — | (1) | ||||||||||||||
| Realized to gain on sale of businesses | (32) | — | — | ||||||||||||||
| Recognition of prior service cost | 8 | 15 | 16 | ||||||||||||||
| Recognition of actuarial loss | (4) | 4 | — | ||||||||||||||
| Curtailment loss | — | — | 8 | ||||||||||||||
| Net periodic post-retirement benefit expense | $ | 54 | 80 | 106 | |||||||||||||
Service costs for our Combined Pension Plan and post-retirement benefit plans are included in the cost of services and products and selling, general and administrative line items on our consolidated statements of operations and all other costs listed above, except for amounts realized as part of the net gain on sale of businesses, are included in other income (expense), net on our consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020. Additionally, a portion of the service cost is also allocated to certain assets under construction, which are capitalized and reflected as part of property, plant and equipment in our consolidated balance sheets. As a result of ongoing efforts to reduce our workforce, we recognized one-time charges in 2021 of $6 million and in 2020 of $21 million for curtailment and special termination benefit enhancements paid to certain eligible employees upon voluntary retirement.
Our pension plan contains provisions that allow us, from time to time, to offer lump sum payment options to certain former employees in settlement of their future retirement benefits. We record an accounting settlement charge, consisting of the recognition of certain deferred costs of the pension plan associated with these lump sum payments only if, in the aggregate, they exceed or are probable to exceed the sum of the annual service and interest costs for the plan’s net periodic pension benefit cost, which represents the settlement accounting threshold. The lump sum pension settlement payments for 2021 exceeded the settlement threshold. In addition, during the fourth quarter of 2021, we executed an annuity purchase contract with a third party insurer that triggered additional settlement activity (see discussion above for further information). As a result, we recognized a non-cash settlement charge of $383 million as of December 31, 2021 to accelerate the recognition of a portion of the previously unrecognized actuarial losses in the qualified pension plan, which is reflected in other income (expense), net in our consolidated statement of operations for the year ended December 31, 2021. This non-cash charge increased our recorded net loss and increased our recorded accumulated deficit, with an offset to accumulated other comprehensive loss in shareholders' equity for the year ended December 31, 2021. The amount of any future non-cash settlement charges will be dependent on several factors, including the total amount of our future lump sum benefit payments.
112
Benefit Obligations
The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2022 and 2021 and are as follows:
| Combined Pension Plan | Post-Retirement Benefit Plans | ||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Actuarial assumptions at end of year: | |||||||||||||||||||||||
| Discount rate | 5.56 | % | 2.85 | % | 5.55 | % | 2.84 | % | |||||||||||||||
| Rate of compensation increase | 3.25 | % | 3.25 | % | N/A | N/A | |||||||||||||||||
| Initial health care cost trend rate | N/A | N/A | 7.20% / 5.00% | 5.75% / 5.00% | |||||||||||||||||||
| Ultimate health care cost trend rate | N/A | N/A | 4.50 | % | 4.50 | % | |||||||||||||||||
| Year ultimate trend rate is reached | N/A | N/A | 2030 | 2025 | |||||||||||||||||||
_______________________________________________________________________________
N/A - Not applicable
In 2021 and 2020, we adopted the revised mortality tables and projection scales released by the Society of Actuaries, which increased the projected benefit obligation of our benefit plans by $37 million for 2021, and decreased the projected benefit obligation of our benefit plans by $3 million for 2020. The Society of Actuaries did not release any revised mortality tables or projection scales in 2022.
The short-term and long-term interest crediting rates during 2022 for cash balance components of the Combined Pension Plan were 3.75% and 3.5%, respectively.
The following tables summarize the change in the benefit obligations for the Combined Pension Plan and post-retirement benefit plans:
| Combined Pension Plan Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Change in benefit obligation | |||||||||||||||||
| Benefit obligation at beginning of year | $ | 9,678 | 12,202 | 12,217 | |||||||||||||
| Plan spin-off | (2,552) | — | — | ||||||||||||||
| Service cost | 37 | 56 | 59 | ||||||||||||||
| Interest cost | 154 | 201 | 324 | ||||||||||||||
| Plan amendments | — | (13) | (3) | ||||||||||||||
| Special termination benefits charge | — | 6 | 13 | ||||||||||||||
| Actuarial (gain) loss | (1,432) | (337) | 749 | ||||||||||||||
| Benefits paid from plan assets | (590) | (766) | (1,157) | ||||||||||||||
| Settlement payments and annuity purchase | — | (1,671) | — | ||||||||||||||
| Benefit obligation at end of year | $ | 5,295 | 9,678 | 12,202 | |||||||||||||
113
| Post-Retirement Benefit Plans Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Change in benefit obligation | |||||||||||||||||
| Benefit obligation at beginning of year | $ | 2,781 | 3,048 | 3,037 | |||||||||||||
| Benefit obligation transferred to purchaser upon sale of business | (26) | — | — | ||||||||||||||
| Service cost | 10 | 14 | 14 | ||||||||||||||
| Interest cost | 72 | 47 | 69 | ||||||||||||||
| Participant contributions | 37 | 41 | 46 | ||||||||||||||
| Direct subsidy receipts | 2 | 3 | 6 | ||||||||||||||
| Plan amendments | (41) | — | — | ||||||||||||||
| Actuarial (gain) loss | (591) | (125) | 134 | ||||||||||||||
| Curtailment loss | — | — | 4 | ||||||||||||||
| Benefits paid by company | (249) | (247) | (255) | ||||||||||||||
| Benefits paid from plan assets | — | — | (7) | ||||||||||||||
| Benefit obligation at end of year | $ | 1,995 | 2,781 | 3,048 | |||||||||||||
Plan Assets
We maintain plan assets for our Combined Pension Plan and certain post-retirement benefit plans. As previously noted, assets in the post-retirement benefit plan trusts were substantially depleted as of December 31, 2016. The fair value of post-retirement benefit plan assets was $5 million at December 31, 2022, 2021 and 2020. Due to the insignificance of these assets on our consolidated financial statements, we have predominantly excluded them from the disclosures of plan assets in this Note, unless otherwise indicated.
The following table summarizes the change in the fair value of plan assets for the Combined Pension Plan:
| Combined Pension Plan Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Change in plan assets | |||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 8,531 | 10,546 | 10,493 | |||||||||||||
| Plan spin-off | (2,239) | — | — | ||||||||||||||
| Return on plan assets | (987) | 422 | 1,210 | ||||||||||||||
| Benefits paid from plan assets | (590) | (766) | (1,157) | ||||||||||||||
| Settlement payments and annuity purchase | — | (1,671) | — | ||||||||||||||
| Fair value of plan assets at end of year | $ | 4,715 | 8,531 | 10,546 | |||||||||||||
The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plan's assets, net of administrative expenses paid from plan assets. It is determined annually based on the strategic asset allocation and the long-term risk and return forecast for each asset class.
114
Our investment objective for the Combined Pension Plan assets is to achieve an attractive risk-adjusted return over time that will provide for the payment of benefits and minimize the risk of large losses. We employ a liability-aware investment strategy designed to reduce the volatility of pension assets relative to pension liabilities. This strategy is evaluated frequently and is expected to evolve over time with changes in the funded status and other factors. Approximately 55% of plan assets is targeted to long-duration investment grade bonds and interest rate sensitive derivatives and 45% is targeted to diversified equity, fixed income and private market investments that are expected to outperform the liability with moderate funded status risk. At the beginning of 2023, our expected annual long-term rate of return on pension assets before consideration of administrative expenses is assumed to be 7.0%. Administrative expenses, including projected PBGC (Pension Benefit Guaranty Corporation) premiums, reduce the annual long-term expected return, net of administrative expenses, to 6.5%.
Permitted investments: Plan assets are managed consistent with the restrictions set forth by the Employee Retirement Income Security Act of 1974, as amended.
Fair Value Measurements: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. For additional information on the fair value hierarchy, see Note 14—Fair Value of Financial Instruments.
At December 31, 2022, we used the following valuation techniques to measure fair value for assets. There were no changes to these methodologies during 2022:
•Level 1—Assets were valued using the closing price reported in the active market in which the individual security was traded. U.S. Treasury securities are valued at the bid price reported in an active market in which the security is traded. Variation margin due from/(to) brokers is valued at the expected next day cash settlement amount.
•Level 2—Assets were valued using quoted prices in markets that are not active, broker dealer quotations, and other methods by which all significant inputs were observable at the measurement date. Fixed income securities primarily utilize observable market information and are based on a spread to U.S. Treasury securities and consider yields available on comparable securities of issuers with similar credit ratings, the new issue market for similar securities, secondary trading markets and dealer quotes. Option adjusted spread models are utilized to evaluate fixed income securities that have early redemption features. Derivative securities traded over the counter are valued based on gains or losses due to fluctuations in indices, interest rates, foreign currency exchange rates, security prices or other underlying factors. Repurchase agreements are valued based on expected settlement per the contract terms.
•Level 3—Assets were valued using unobservable inputs in which little or no market data exists as reported by the respective institutions at the measurement date. Valuation methods may consider a range of factors, including estimates based on the assumptions of the investment entity or actuarial assumptions of insurers for valuing Group Annuity Contracts.
The Combined Pension Plan's assets are invested in various asset categories utilizing multiple strategies and investment managers. Interests in commingled funds are fair valued using a practical expedient to the net asset value ("NAV") per unit (or its equivalent) of each fund. The NAV reported by the fund manager is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding. Commingled funds can be redeemed at NAV, with a frequency that includes daily, monthly, quarterly, semi-annually and annually. These commingled funds include redemption notice periods between same day and 180 days. Investments in private funds, primarily limited partnerships, represent long-term commitments with a fixed maturity date and are also valued at NAV. The plan has unfunded commitments related to certain private fund investments, which in aggregate are not material to the plan. Valuation inputs for these private fund interests are generally based on assumptions and other information not observable in the market. Underlying investments held in funds are aggregated and are classified based on the fund mandate. Investments held in separate accounts are individually classified.
115
The table below presents the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2022. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivables, pending trades and accrued expenses.
| Fair Value of Combined Pension Plan Assets at December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investment grade bonds (a) | $ | 446 | 1,720 | — | 2,166 | ||||||||||||||||||
| High yield bonds (b) | — | 48 | 4 | 52 | |||||||||||||||||||
| Emerging market bonds (c) | 49 | 78 | — | 127 | |||||||||||||||||||
| U.S. stocks (d) | 214 | — | 1 | 215 | |||||||||||||||||||
| Non-U.S. stocks (e) | 149 | 1 | — | 150 | |||||||||||||||||||
| Multi-asset strategies (l) | 25 | — | — | 25 | |||||||||||||||||||
| Cash equivalents and short-term investments (o) | — | 1 | — | 1 | |||||||||||||||||||
| Total investments, excluding investments valued at NAV | $ | 883 | 1,848 | 5 | 2,736 | ||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Repurchase agreements (n) | $ | — | (269) | — | (269) | ||||||||||||||||||
| Derivatives (m) | (1) | (10) | — | (11) | |||||||||||||||||||
| Investments valued at NAV | 2,259 | ||||||||||||||||||||||
| Total pension plan assets | $ | 4,715 | |||||||||||||||||||||
The table below presents the fair value of plan assets by category and the input levels used to determine those fair values at December 31, 2021. It is important to note that the asset allocations do not include market exposures that are gained with derivatives. Investments include dividend and interest receivable, pending trades and accrued expenses.
| Fair Value of Combined Pension Plan Assets at December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investment grade bonds (a) | $ | 862 | 3,744 | — | 4,606 | ||||||||||||||||||
| High yield bonds (b) | — | 172 | 6 | 178 | |||||||||||||||||||
| Emerging market bonds (c) | 64 | 169 | — | 233 | |||||||||||||||||||
| U.S. stocks (d) | 330 | 3 | 5 | 338 | |||||||||||||||||||
| Non-U.S. stocks (e) | 256 | — | — | 256 | |||||||||||||||||||
| Multi-asset strategies (l) | 41 | — | — | 41 | |||||||||||||||||||
| Derivatives (m) | — | 1 | — | 1 | |||||||||||||||||||
| Cash equivalents and short-term investments (o) | 2 | 379 | — | 381 | |||||||||||||||||||
| Total investments, excluding investments valued at NAV | $ | 1,555 | 4,468 | 11 | 6,034 | ||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Repurchase agreements (n) | $ | — | (193) | — | (193) | ||||||||||||||||||
| Investments valued at NAV | 2,690 | ||||||||||||||||||||||
| Total pension plan assets | $ | 8,531 | |||||||||||||||||||||
116
The table below presents the fair value of plan assets valued at NAV by category for our Combined Pension Plan at December 31, 2022 and 2021.
| Fair Value of Plan Assets Valued at NAV | |||||||||||
| Combined Pension Plan at December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Investment grade bonds (a) | $ | 99 | 127 | ||||||||
| High yield bonds (b) | 81 | 70 | |||||||||
| U.S. stocks (d) | 79 | 71 | |||||||||
| Non-U.S. stocks (e) | 270 | 398 | |||||||||
| Emerging market stocks (f) | 15 | 11 | |||||||||
| Private equity (g) | 326 | 348 | |||||||||
| Private debt (h) | 438 | 495 | |||||||||
| Market neutral hedge funds (i) | 135 | 141 | |||||||||
| Directional hedge funds (j) | 166 | 241 | |||||||||
| Real estate (k) | 333 | 420 | |||||||||
| Multi-asset strategies (l) | 24 | 38 | |||||||||
| Cash equivalents and short-term investments (o) | 293 | 330 | |||||||||
| Total investments valued at NAV | $ | 2,259 | 2,690 | ||||||||
Below is an overview of the asset categories and the underlying strategies used in the preceding tables:
(a) Investment grade bonds represent investments in fixed income securities as well as commingled bond funds comprised of U.S. Treasury securities, agencies, corporate bonds, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.
(b) High yield bonds represent investments in below investment grade fixed income securities as well as commingled high yield bond funds.
(c) Emerging market bonds represent investments in securities issued by governments and other entities located in emerging countries as well as registered mutual funds and commingled emerging market bond funds.
(d) U.S. stocks represent investments in stocks of U.S. based companies as well as commingled U.S. stock funds.
(e) Non-U.S. stocks represent investments in stocks of companies based in developed countries outside the U.S. as well as commingled funds.
(f) Emerging market stocks represent investments in commingled funds comprised of stocks of companies located in emerging markets.
(g) Private equity represents non-public investments in domestic and foreign buy out and venture capital funds. Private equity funds are primarily structured as limited partnerships and are valued according to the valuation policy of each partnership, subject to prevailing accounting and other regulatory guidelines.
(h) Private debt represents non-public investments in distressed or mezzanine debt funds and pension group insurance contracts.
(i) Market neutral hedge funds hold investments in a diversified mix of instruments that are intended in combination to exhibit low correlations to market fluctuations. These investments are typically combined with futures to achieve uncorrelated excess returns over various markets.
117
(j) Directional hedge funds—This asset category represents investments that may exhibit somewhat higher correlations to market fluctuations than the market neutral hedge funds. Investments in hedge funds include both direct investments and investments in diversified funds of funds.
(k) Real estate represents investments in commingled funds and limited partnerships that invest in a diversified portfolio of real estate properties.
(l) Multi-asset strategies represent broadly diversified strategies that have the flexibility to tactically adjust exposures to different asset classes through time.
(m) Derivatives include exchange traded futures contracts as well as privately negotiated over the counter contracts. The market values represent gains or losses that occur due to differences between stated contract terms and fluctuations in underlying market instruments.
(n) Repurchase Agreements includes contracts where the security owner sells a security with the agreement to buy it back at a future date and price.
(o) Cash equivalents and short-term investments represent investments that are used in conjunction with derivatives positions or are used to provide liquidity for the payment of benefits or other purposes.
Derivative instruments: Derivative instruments are used to reduce risk as well as provide return. The gross notional exposure of the derivative instruments directly held by the Combined Pension Plan is shown below. The notional amount of the derivatives corresponds to market exposure but does not represent an actual cash investment.
| Gross Notional Exposure | |||||||||||
| Combined Pension Plan Years Ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Derivative instruments: | |||||||||||
| Exchange-traded U.S. equity futures | $ | 70 | 108 | ||||||||
| Exchange-traded Treasury and other interest rate futures | 1,256 | 1,688 | |||||||||
| Exchange-traded Foreign currency futures | 2 | 11 | |||||||||
| Exchange-traded EURO futures | — | 5 | |||||||||
| Interest rate swaps | 82 | 127 | |||||||||
| Credit default swaps | 139 | 132 | |||||||||
| Index swaps | 90 | 1,036 | |||||||||
| Foreign exchange forwards | 50 | 93 | |||||||||
| Options | 251 | 654 | |||||||||
Concentrations of Risk: Investments, in general, are exposed to various risks, such as significant world events, interest rate, credit, foreign currency and overall market volatility risk. These risks are managed by broadly diversifying assets across numerous asset classes and strategies with differing expected returns, volatilities and correlations. Risk is also broadly diversified across numerous market sectors and individual companies. Financial instruments that potentially subject the plans to concentrations of counterparty risk consist principally of investment contracts with high quality financial institutions. These investment contracts are typically collateralized obligations and/or are actively managed, limiting the amount of counterparty exposure to any one financial institution. Although the investments are well diversified, the value of plan assets could change materially depending upon the overall market volatility, which could affect the funded status of the plan.
118
The table below presents a rollforward of the Combined Pension Plan assets valued using Level 3 inputs:
| Combined Pension Plan Assets Valued Using Level 3 Inputs | |||||||||||||||||
| High Yield Bonds | U.S. Stocks | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Balance at December 31, 2020 | $ | 6 | 2 | 8 | |||||||||||||
| Actual return on plan assets | — | 3 | 3 | ||||||||||||||
| Balance at December 31, 2021 | 6 | 5 | 11 | ||||||||||||||
| Dispositions | (1) | (4) | (5) | ||||||||||||||
| Actual return on plan assets | (1) | — | (1) | ||||||||||||||
| Balance at December 31, 2022 | $ | 4 | 1 | 5 | |||||||||||||
Certain gains and losses are allocated between assets sold during the year and assets still held at year-end based on transactions and changes in valuations that occurred during the year. These allocations also impact our calculation of net acquisitions and dispositions.
For the year ended December 31, 2022, the investment program produced actual losses on Combined Pension Plan assets of $987 million as compared to expected returns of $329 million, for a difference of $1.3 billion. For the year ended December 31, 2021, the investment program produced actual gains on Combined Pension Plan assets of $422 million as compared to the of $535 million, for a difference of $113 million. The short-term annual returns on plan assets will almost always be different from the expected long-term returns and the plans could experience net gains or losses, due primarily to the volatility occurring in the financial markets during any given year.
Unfunded Status
The following table presents the unfunded status of the Combined Pension Plan and post-retirement benefit plans:
| Combined Pension Plan | Post-Retirement Benefit Plans | ||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Benefit obligation | $ | (5,295) | (9,678) | (1,995) | (2,781) | ||||||||||||||||||
| Fair value of plan assets | 4,715 | 8,531 | 5 | 5 | |||||||||||||||||||
| Unfunded status | (580) | (1,147) | (1,990) | (2,776) | |||||||||||||||||||
| Current portion of unfunded status | — | — | (210) | (212) | |||||||||||||||||||
| Non-current portion of unfunded status | $ | (580) | (1,147) | (1,780) | (2,564) | ||||||||||||||||||
The current portion of our post-retirement benefit obligations is recorded on our consolidated balance sheets in accrued expenses and other current liabilities-salaries and benefits.
119
Accumulated Other Comprehensive Loss-Recognition and Deferrals
The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2021, items recognized as a component of net periodic benefits expense in 2022, additional items deferred during 2022 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2022. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
| As of and for the Years Ended December 31, | |||||||||||||||||||||||||||||
| 2021 | Recognition of Net Periodic Benefits Expense | Deferrals | Net Change in AOCL | 2022 | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Accumulated other comprehensive (loss) income | |||||||||||||||||||||||||||||
| Pension plans: | |||||||||||||||||||||||||||||
| Net actuarial (loss) gain | $ | (2,564) | 688 | 124 | 812 | (1,752) | |||||||||||||||||||||||
| Settlement charge | 383 | — | — | — | 383 | ||||||||||||||||||||||||
| Prior service benefit (cost) | 45 | (28) | — | (28) | 17 | ||||||||||||||||||||||||
| Deferred income tax benefit (expense) | 559 | (166) | (26) | (192) | 367 | ||||||||||||||||||||||||
| Total pension plans | (1,577) | 494 | 98 | 592 | (985) | ||||||||||||||||||||||||
| Post-retirement benefit plans: | |||||||||||||||||||||||||||||
| Net actuarial (loss) gain | (217) | (3) | 591 | 588 | 371 | ||||||||||||||||||||||||
| Prior service (cost) benefit | (5) | 1 | 41 | 42 | 37 | ||||||||||||||||||||||||
| Curtailment loss | 4 | — | — | — | 4 | ||||||||||||||||||||||||
| Deferred income tax benefit (expense) | 54 | 1 | (159) | (158) | (104) | ||||||||||||||||||||||||
| Total post-retirement benefit plans | (164) | (1) | 473 | 472 | 308 | ||||||||||||||||||||||||
| Total accumulated other comprehensive (loss) income | $ | (1,741) | 493 | 571 | 1,064 | (677) | |||||||||||||||||||||||
120
The following table presents cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2020, items recognized as a component of net periodic benefits expense in 2021, additional items deferred during 2021 and cumulative items not recognized as a component of net periodic benefits expense as of December 31, 2020. The items not recognized as a component of net periodic benefits expense have been recorded on our consolidated balance sheets in accumulated other comprehensive loss:
| As of and for the Years Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | Recognition of Net Periodic Benefits Expense | Deferrals | Net Change in AOCL | 2021 | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Accumulated other comprehensive (loss) income | |||||||||||||||||||||||||||||
| Pension plans: | |||||||||||||||||||||||||||||
| Net actuarial (loss) gain | $ | (2,993) | 186 | 243 | 429 | (2,564) | |||||||||||||||||||||||
| Settlement charge | — | 383 | — | 383 | 383 | ||||||||||||||||||||||||
| Prior service benefit (cost) | 41 | (9) | 13 | 4 | 45 | ||||||||||||||||||||||||
| Deferred income tax benefit (expense) | 755 | (137) | (59) | (196) | 559 | ||||||||||||||||||||||||
| Total pension plans | (2,197) | 423 | 197 | 620 | (1,577) | ||||||||||||||||||||||||
| Post-retirement benefit plans: | |||||||||||||||||||||||||||||
| Net actuarial (loss) gain | (346) | 4 | 125 | 129 | (217) | ||||||||||||||||||||||||
| Prior service (cost) benefit | (20) | 15 | — | 15 | (5) | ||||||||||||||||||||||||
| Curtailment loss | 4 | — | — | — | 4 | ||||||||||||||||||||||||
| Deferred income tax benefit (expense) | 90 | (5) | (31) | (36) | 54 | ||||||||||||||||||||||||
| Total post-retirement benefit plans | (272) | 14 | 94 | 108 | (164) | ||||||||||||||||||||||||
| Total accumulated other comprehensive (loss) income | $ | (2,469) | 437 | 291 | 728 | (1,741) | |||||||||||||||||||||||
Medicare Prescription Drug, Improvement and Modernization Act of 2003
We sponsor post-retirement health care plans with several benefit options that provide prescription drug benefits that we deem actuarially equivalent to or exceeding Medicare Part D. We recognize the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of our post-retirement benefit obligation and net periodic post-retirement benefit expense.
Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expense for current employees was $296 million, $309 million and $307 million for the years ended December 31, 2022, 2021 and 2020, respectively. Union-represented employee benefits are based on negotiated collective bargaining agreements. Employees contributed $101 million, $120 million, $133 million for the years ended December 31, 2022, 2021 and 2020, respectively. Our group basic life insurance plans are fully insured and the premiums are paid by us.
121
401(k) Plans
We sponsor a qualified defined contribution plan covering substantially all of our U.S. employees. Under this plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plan and by the Internal Revenue Service. Currently, we match a percentage of employee contributions in cash. At December 31, 2022 and 2021, the assets of the plan included approximately 10 million shares of our common stock, all of which were the result of the combination of previous employer match and participant directed contributions. We recognized expenses related to this plan of $91 million, $96 million and $101 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Deferred Compensation Plans
We sponsor non-qualified deferred compensation plans for various groups that included certain of our current and former highly compensated employees. The value of liabilities related to these plans was not significant.
(12) Stock-based Compensation
We maintain an equity incentive program that allows our Board of Directors (through its Compensation Committee or a senior officer acting under delegated authority) to grant incentives to certain employees and outside directors in one or more forms, including: incentive and non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and market and performance shares. Stock options generally expire ten years from the date of grant. There were no outstanding stock options as of December 31, 2022.
Restricted Stock Awards and Restricted Stock Unit Awards
For equity based restricted stock and restricted stock unit awards that contain only service conditions for vesting (time-based awards), we calculate the award fair value based on the closing price of our common stock on the accounting grant date. We also grant equity-based awards that contain additional market or performance conditions, as well as service conditions. For awards having both service and market conditions, the award fair value is calculated using Monte-Carlo simulations. Awards with service as well as performance conditions specify a target number of shares for the award, although each recipient ultimately has the opportunity to receive between 0% and 200% of the target number of shares. For awards with service and market conditions, the percentage received is typically based on our total shareholder return over the up to three-year service period versus that of selected peer companies. For awards with service and performance conditions, the percentage received depends upon the attainment of one or more performance targets during the - or three-year service period.
The following table summarizes activity involving restricted stock and restricted stock unit awards for the year ended December 31, 2022:
| Number of Shares | Weighted- Average Grant Date Fair Value | ||||||||||
| (in thousands) | |||||||||||
Non-vested at December 31, 2021 | 22,427 | $ | 12.74 | ||||||||
| Granted | 18,788 | 11.47 | |||||||||
| Vested | (9,412) | 12.03 | |||||||||
| Forfeited | (4,524) | 12.65 | |||||||||
Non-vested at December 31, 2022 | 27,279 | 12.13 | |||||||||
During 2022, we granted 18.8 million shares of restricted stock and restricted stock unit awards at a weighted-average price of $11.47. During 2021, we granted 13.9 million shares of restricted stock and restricted stock unit awards at a weighted-average price of $13.95. During 2020, we granted 17.8 million shares of restricted stock and restricted stock unit awards at a weighted-average price of $12.08. The total fair value of restricted stock and restricted stock unit awards that vested during 2022, 2021 and 2020, was $98 million, $139 million and $126 million, respectively. We do not estimate forfeitures, but recognize them as they occur.
122
Compensation Expense and Tax Benefit
For time-based awards that vest ratably over the service period, we recognize compensation expense on a straight-line basis over the requisite service period for the entire award. For our performance stock-based awards, we recognize compensation expense over the service period and based upon the expected performance outcome, until the final performance outcome is determined. Total compensation expense for all stock-based payment arrangements for the years ended December 31, 2022, 2021 and 2020, was $98 million, $120 million and $175 million, respectively. Our tax benefit recognized in the consolidated statements of operations for our stock-based payment arrangements for the years ended December 31, 2022, 2021 and 2020, was $25 million, $29 million and $43 million, respectively. At December 31, 2022, there was $162 million of total unrecognized compensation expense related to our stock-based payment arrangements, which we expect to recognize over a weighted-average period of 1.5 years.
(13) Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per common share for the years ended December 31, 2022, 2021 and 2020 were calculated as follows:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions, except per share amounts, shares in thousands) | |||||||||||||||||
| (Loss) income (numerator) | |||||||||||||||||
| Net (loss) income | $ | (1,548) | 2,033 | (1,232) | |||||||||||||
| Net (loss) income applicable to common stock for computing basic (loss) earnings per common share | (1,548) | 2,033 | (1,232) | ||||||||||||||
| Net (loss) income as adjusted for purposes of computing diluted (loss) earnings per common share | $ | (1,548) | 2,033 | (1,232) | |||||||||||||
| Shares (denominator): | |||||||||||||||||
| Weighted average number of shares: | |||||||||||||||||
| Outstanding during period | 1,028,069 | 1,077,393 | 1,096,284 | ||||||||||||||
| Non-vested restricted stock | (20,552) | (17,852) | (17,154) | ||||||||||||||
| Weighted average shares outstanding for computing basic (loss) earnings per common share | 1,007,517 | 1,059,541 | 1,079,130 | ||||||||||||||
| Incremental common shares attributable to dilutive securities: | |||||||||||||||||
| Shares issuable under convertible securities | — | 10 | — | ||||||||||||||
| Shares issuable under incentive compensation plans | — | 7,227 | — | ||||||||||||||
| Number of shares as adjusted for purposes of computing diluted (loss) earnings per common share | 1,007,517 | 1,066,778 | 1,079,130 | ||||||||||||||
| Basic (loss) earnings per common share | $ | (1.54) | 1.92 | (1.14) | |||||||||||||
Diluted earnings (loss) per common share(1) | $ | (1.54) | 1.91 | (1.14) | |||||||||||||
______________________________________________________________________________
(1)For the years ended December 31, 2022 and December 31, 2020, we excluded from the calculation of diluted loss per share 3.8 million and 5.3 million shares, respectively, potentially issuable under incentive compensation plans or convertible securities, as their effect, if included, would have been anti-dilutive.
Our calculation of diluted (loss) earnings per common share excludes shares of common stock that are issuable upon exercise of stock options when the exercise price is greater than the average market price of our common stock. We also exclude unvested restricted stock awards that are antidilutive as a result of unrecognized compensation cost. Such shares were 13.8 million, 3.2 million and 3.2 million for 2022, 2021 and 2020, respectively.
123
(14) Fair Value of Financial Instruments
Our financial instruments consist of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, long-term debt (excluding finance lease and other obligations), interest rate swap contracts, certain equity investments and certain indemnification obligations. Due primarily to their short-term nature, the carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy.
We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on inputs other than quoted market prices in active markets that are either directly or indirectly observable such as discounted future cash flows using current market interest rates.
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
| Input Level | Description of Input | |||||||
| Level 1 | Observable inputs such as quoted market prices in active markets. | |||||||
| Level 2 | Inputs other than quoted prices in active markets that are either directly or indirectly observable. | |||||||
| Level 3 | Unobservable inputs in which little or no market data exists. | |||||||
The following table presents the carrying amounts and estimated fair values of our financial assets and liabilities as of December 31, 2022:
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||
| Input Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
Equity securities(1) | 1 | $ | 22 | 22 | — | — | ||||||||||||||||||||||||||
Long-term debt, excluding finance lease and other obligations(2) | 2 | $ | 20,255 | 17,309 | 28,635 | 29,221 | ||||||||||||||||||||||||||
Interest rate swap contracts (see Note 15) | 2 | — | — | 25 | 25 | |||||||||||||||||||||||||||
| Indemnifications related to the sale of the Latin American business | 3 | 86 | 86 | — | — | |||||||||||||||||||||||||||
(1)For the year ended December 31, 2022, we recognized $109 million of loss on equity securities in other (expense) income, net in our consolidated statements of operations.
(2)As of December 31, 2021, these amounts excluded $1.4 billion of carrying amount and $1.6 billion of fair value of debt that had been classified as held for sale related to our divestiture of the ILEC business on October 3, 2022. See Note 2—Divestitures of the Latin American and ILEC Businesses and Planned Divestiture of the EMEA Business for more information.
124
Investment Held at Net Asset Value
We hold an investment in a limited partnership created as a holding company for various investments, including a portion of the colocation and data center business that we divested in 2017. The limited partnership has sole discretion as to the amount and timing of distributions of the underlying assets. As of December 31, 2022, the underlying investments held by the limited partnership are traded in active markets and, as such, we account for our investment in the limited partnership using NAV. The investments held by the limited partnership were subject to lock-up agreements that restricted the sale or distribution of certain underlying assets prior to July 2022 and October 2022. The restrictions on one of the investments held by the limited partnership expired on July 29, 2022, and we received a distribution of 11.5 million shares of publicly-traded common stock, which are reflected in our fair value table as of December 31, 2022, as seen above. The restriction on the remaining underlying investment expired on October 12, 2022. No shares have been distributed to date. Subject to restrictions imposed by law and other provisions of the limited partnership agreement, the general partner has the sole discretion as to the amounts and timing of distributions of partnership assets to partners. The following table summarizes the net asset value of our investment in this limited partnership.
| As of December 31, 2022 | As of December 31, 2021 | ||||||||||
| Net Asset Value | |||||||||||
| (Dollars in millions) | |||||||||||
Investment in limited partnership(1) | $ | 85 | 299 | ||||||||
______________________________________________________________________
(1)For the years ended December 31, 2022 and December 31, 2021, we recognized $83 million of loss on investment and $138 million of gain on investment, respectively, reflected in other income (expense), net in our consolidated statement of operations.
(15) Derivative Financial Instruments
From time to time, we use derivative financial instruments, primarily interest rate swaps, to manage our exposure to fluctuations in interest rates. Our primary objective in managing interest rate risk is to decrease the volatility of our earnings and cash flows affected by changes in the underlying rates. We have floating rate long-term debt (see Note 7—Long-Term Debt and Credit Facilities). These obligations expose us to variability in interest payments due to changes in interest rates. If interest rates increase, our interest expense increases. Conversely, if interest rates decrease, our interest expense also decreases. Through their expiration on June 30, 2022, we designated the interest rate swap agreements described below as cash flow hedges. Under these hedges, we received variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the lives of the agreements without exchange of the underlying notional amount. The change in the fair value of the interest rate swap agreements was reflected in accumulated other comprehensive loss and was subsequently reclassified into earnings in the period that the hedged transaction affected earnings by virtue of qualifying as effective cash flow hedges. We do not use derivative financial instruments for speculative purposes.
In 2019, we entered into variable-to-fixed interest rate swap agreements to hedge the interest on $4.0 billion notional amount of floating rate debt. As of December 31, 2021 and 2020, we evaluated the effectiveness of our remaining hedges quantitatively and determined that hedges in effect on such dates qualified as effective hedge relationships.
We may be exposed to credit-related losses in the event of non-performance by counterparties. The counterparties to any of the financial derivatives we enter into are major institutions with investment grade credit ratings. We evaluate counterparty credit risk before entering into any hedge transaction and continue to closely monitor the financial markets and the risk that our counterparties will default on their obligations as part of our quarterly qualitative effectiveness evaluation.
Amounts accumulated in accumulated other comprehensive loss related to derivatives are indirectly recognized in earnings as periodic settlement payments are made throughout the term of the swaps.
125
The table below presents the fair value of our derivative financial instruments as well as their classification on the consolidated balance sheets at December 31, 2022 and December 31, 2021 as follows (in millions):
| December 31, 2022 | December 31, 2021 | |||||||||||||
| Derivatives designated as | Balance Sheet Location | Fair Value | ||||||||||||
| Cash flow hedging contracts | Other current and noncurrent liabilities | $ | — | 25 | ||||||||||
The amount of unrealized losses recognized in accumulated other comprehensive loss consists of the following (in millions):
| Derivatives designated as hedging instruments | 2022 | 2021 | 2020 | ||||||||||||||
| Cash flow hedging contracts | |||||||||||||||||
| Years Ended December 31, | $ | — | 1 | 115 | |||||||||||||
The amount of realized losses reclassified from accumulated other comprehensive loss to the statement of operations consists of the following (in millions):
| Derivatives designated as hedging instruments | 2022 | 2021 | 2020 | ||||||||||||||
| Cash flow hedging contracts | |||||||||||||||||
| Years Ended December 31, | $ | 22 | 83 | 62 | |||||||||||||
Amounts included in accumulated other comprehensive loss at the beginning of the period were reclassified into earnings upon the settlement of the cash flow hedging contracts on March 31, 2022 and June 30, 2022. During the year ended December 31, 2022, $19 million of net losses on the interest rate swaps have been reflected in our consolidated statements of operations upon settlement of the agreements in the first half of 2022.
(16) Income Taxes
The components of the income tax expense are as follows:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Income tax expense: | |||||||||||||||||
| Federal | |||||||||||||||||
| Current | $ | 838 | 5 | 5 | |||||||||||||
| Deferred | (332) | 514 | 338 | ||||||||||||||
| State | |||||||||||||||||
| Current | 283 | 42 | 50 | ||||||||||||||
| Deferred | (191) | 72 | 55 | ||||||||||||||
| Foreign | |||||||||||||||||
| Current | 32 | 23 | 29 | ||||||||||||||
| Deferred | (73) | 12 | (27) | ||||||||||||||
| Total income tax expense | $ | 557 | 668 | 450 | |||||||||||||
126
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Income tax expense was allocated as follows: | |||||||||||||||||
| Income tax expense in the consolidated statements of operations: | |||||||||||||||||
| Attributable to income | $ | 557 | 668 | 450 | |||||||||||||
| Stockholders' equity: | |||||||||||||||||
| Tax effect of the change in accumulated other comprehensive loss | $ | 297 | 222 | 17 | |||||||||||||
The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Percentage of pre-tax (loss) income) | |||||||||||||||||
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
| State income taxes, net of federal income tax benefit | (8.8) | % | 3.3 | % | (10.8) | % | |||||||||||
| Goodwill impairment | (68.9) | % | — | % | (71.0) | % | |||||||||||
| Change in liability for unrecognized tax position | (0.2) | % | 0.1 | % | (0.6) | % | |||||||||||
| Legislative changes to Global Intangible Low-Taxes Income ("GILTI") | — | % | — | % | 1.8 | % | |||||||||||
| Nondeductible executive stock compensation | (0.1) | % | 0.2 | % | (1.6) | % | |||||||||||
| Change in valuation allowance | 0.9 | % | — | % | 2.6 | % | |||||||||||
| Net foreign income taxes | 3.0 | % | 0.6 | % | (0.6) | % | |||||||||||
| Research and development credits | 1.1 | % | (0.5) | % | 1.6 | % | |||||||||||
Divestitures of businesses(1) | (4.0) | % | — | % | — | % | |||||||||||
| Other, net | (0.2) | % | — | % | 0.1 | % | |||||||||||
| Effective income tax rate | (56.2) | % | 24.7 | % | (57.5) | % | |||||||||||
(1)Includes GILTI incurred as a result of the sale of our Latin American business.
The effective tax rate for the year ended December 31, 2022 includes a $682 million unfavorable impact of non-deductible goodwill impairments and $128 million unfavorable impact related to incurring GILTI as a result of the sale of our Latin American business. The effective tax rate for the year ended December 31, 2020 includes a $555 million unfavorable impact of non-deductible goodwill impairments, a $14 million favorable impact in tax regulations passed in 2020 allowing a high tax exception related to our tax exposure of to GILTI, as well as a $20 million benefit related to the release of previously established valuation allowances against capital losses.
127
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
| As of December 31, | |||||||||||
2022(1) | 2021(1) | ||||||||||
| (Dollars in millions) | |||||||||||
| Deferred tax assets | |||||||||||
| Post-retirement and pension benefit costs | $ | 725 | 978 | ||||||||
| Net operating loss carryforwards | 871 | 2,463 | |||||||||
| Other employee benefits | 85 | 96 | |||||||||
| Other | 519 | 554 | |||||||||
| Gross deferred tax assets | 2,200 | 4,091 | |||||||||
| Less valuation allowance | (550) | (1,566) | |||||||||
| Net deferred tax assets | 1,650 | 2,525 | |||||||||
| Deferred tax liabilities | |||||||||||
| Property, plant and equipment, primarily due to depreciation differences | (3,046) | (3,941) | |||||||||
| Goodwill and other intangible assets | (1,634) | (2,473) | |||||||||
| Gross deferred tax liabilities | (4,680) | (6,414) | |||||||||
| Net deferred tax liability | $ | (3,030) | (3,889) | ||||||||
(1)Excludes $138 million of deferred tax assets and $38 million of deferred tax liabilities related to the EMEA business that were classified as held for sale as of December 31, 2022. Excludes $46 million of deferred tax assets and $129 million of deferred tax liabilities related to the Latin American business sold on August 1, 2022 that were classified as held for sale as of December 31, 2021. There were no material deferred tax amounts classified as held for sale related to the ILEC business.
Of the $3.0 billion and $3.9 billion net deferred tax liability at December 31, 2022 and 2021, respectively, $3.2 billion and $4.0 billion is reflected as a long-term liability and $133 million and $160 million is reflected as a net noncurrent deferred tax asset, in other, net on our consolidated balance sheets at December 31, 2022 and 2021, respectively.
Income taxes payable as of December 31, 2022 and 2021 were $943 million and $3 million, respectively. The increase to our payable in the current period is primarily driven by the sale of our Latin American and ILEC businesses.
128
At December 31, 2022, we had federal NOLs of $1.0 billion, net of expirations from Section 382 limitations and uncertain tax positions, for U.S. federal income tax purposes. We expect to use substantially all of these tax attributes to reduce our future federal tax liabilities, although the timing of that use will depend upon our future earnings and future tax circumstances. Our ability to use these NOLs is subject to annual limits imposed by Section 382. As a result, we anticipate that our cash income tax liabilities will increase substantially in future periods. If unused, the NOLs will expire between 2028 and 2033. The federal NOLs will expire as follows:
| Expiring | Amount | ||||
| December 31, | (Dollars in millions) | ||||
| 2028 | 572 | ||||
| 2029 | 645 | ||||
| 2030 | 668 | ||||
| 2031 | 733 | ||||
| 2032 | 348 | ||||
| 2033 | 238 | ||||
| NOLs per return | 3,204 | ||||
| Uncertain tax positions | (2,190) | ||||
| Financial NOLs | $ | 1,014 | |||
At December 31, 2022 we had state net operating loss carryforwards of $13 billion (net of uncertain tax positions). Our acquisitions of Level 3, Qwest and SAVVIS, Inc. caused "ownership changes" within the meaning of Section 382 for the acquired companies. As a result, our ability to use these NOLs and tax credits are subject to annual limits imposed by Section 382.
We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2022, a valuation allowance of $550 million was established as it is more likely than not that this amount of net operating loss, capital loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance at December 31, 2022 and 2021 is primarily related to NOL carryforwards. This valuation allowance decreased by $1.0 billion during 2022, primarily due to the impact of adjustments related to the planned divestiture of our EMEA business, including classification of a portion of the valuation allowance as held for sale.
129
A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2022 and 2021 is as follows:
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Unrecognized tax benefits at beginning of year | $ | 1,375 | 1,474 | ||||||||
| Increase in tax positions of the current year netted against deferred tax assets | — | 1 | |||||||||
| Increase in tax positions of prior periods netted against deferred tax assets | — | — | |||||||||
| Decrease in tax positions of the current year netted against deferred tax assets | — | (101) | |||||||||
| Decrease in tax positions of prior periods netted against deferred tax assets | (661) | (1) | |||||||||
| Increase in tax positions taken in the current year | 634 | 4 | |||||||||
| (Decrease) increase in tax positions taken in the prior year | (3) | 2 | |||||||||
| Decrease due to payments/settlements | — | (3) | |||||||||
| Decrease from the lapse of statute of limitations | — | (1) | |||||||||
| Decrease related to divestitures of businesses | $ | (27) | — | ||||||||
| Unrecognized tax benefits at end of year | $ | 1,318 | $ | 1,375 | |||||||
The total amount (including both interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $847 million and $273 million at December 31, 2022 and 2021, respectively.
Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $26 million and $24 million at December 31, 2022 and 2021, respectively.
We, or at least one of our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.
Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may decrease by up to $1 million within the next 12 months. The actual amount of such decrease, if any, will depend on several future developments and events, many of which are outside our control.
130
(17) Segment Information
We report our results within two segments: Business and Mass Markets.
Under our Business segment we provide products and services to meet the needs of our enterprise and wholesale customers under four distinct sales channels: International and Global Accounts, Large Enterprise, Mid-Market Enterprise and Wholesale. As previously disclosed, we plan to update these sales channels beginning with our first quarterly report filed after this annual report. For Business segment revenue, we report the following product categories: Compute and Application Services, IP and Data Services, Fiber Infrastructure Services and Voice and Other, in each case through the sales channels outlined above. The Business segment included the results of our Latin American business prior to it being sold on August 1, 2022.
Under our Mass Markets Segment, we provide products and services to residential and small business customers. Following the completion of the CAF II program at December 31, 2021, we recategorized our products used to report our Mass Markets segment revenue and currently use the following categories: Fiber Broadband, Other Broadband and Voice and Other. See detailed descriptions of these product and service categories in Note 4—Revenue Recognition.
As described in more detail below, our segments are managed based on the direct costs of providing services to their customers and directly associated selling, general and administrative costs (primarily salaries and commissions). Shared costs are managed separately and included in "Operations and Other" in the tables below. As referenced above, we reclassified certain prior period amounts to conform to the current period presentation. See Note 1—Background and Summary of Significant Accounting Policies for additional detail on these changes.
The following tables summarize our segment results for 2022, 2021 and 2020 based on the segment categorization we were operating under at December 31, 2022.
| Year Ended December 31, 2022 | |||||||||||||||||||||||||||||
| Business | Mass Markets | Total Segments | Operations and Other | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Revenue: | $ | 13,039 | 4,439 | 17,478 | — | 17,478 | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||
| Cost of services and products | 3,260 | 123 | 3,383 | 4,485 | 7,868 | ||||||||||||||||||||||||
| Selling, general and administrative | 1,101 | 562 | 1,663 | 1,415 | 3,078 | ||||||||||||||||||||||||
| Gain on sale of businesses | — | — | — | (773) | (773) | ||||||||||||||||||||||||
| Loss on disposal groups held for sale | — | — | — | 700 | 700 | ||||||||||||||||||||||||
| Less: stock-based compensation | — | — | — | (98) | (98) | ||||||||||||||||||||||||
| Total expense | 4,361 | 685 | 5,046 | 5,729 | 10,775 | ||||||||||||||||||||||||
| Total adjusted EBITDA | $ | 8,678 | 3,754 | 12,432 | (5,729) | 6,703 | |||||||||||||||||||||||
| Year Ended December 31, 2021 | |||||||||||||||||||||||||||||
| Business | Mass Markets | Total Segments | Operations and Other | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Revenue: | $ | 14,119 | 5,568 | 19,687 | — | 19,687 | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||
| Cost of services and products | 3,488 | 153 | 3,641 | 4,847 | 8,488 | ||||||||||||||||||||||||
| Selling, general and administrative | 1,178 | 539 | 1,717 | 1,178 | 2,895 | ||||||||||||||||||||||||
| Less: stock-based compensation | — | — | — | (120) | (120) | ||||||||||||||||||||||||
| Total expense | 4,666 | 692 | 5,358 | 5,905 | 11,263 | ||||||||||||||||||||||||
| Total adjusted EBITDA | $ | 9,453 | 4,876 | 14,329 | (5,905) | 8,424 | |||||||||||||||||||||||
131
| Year Ended December 31, 2020 | |||||||||||||||||||||||||||||
| Business | Mass Markets | Total Segments | Operations and Other | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Revenue: | $ | 14,808 | 5,904 | 20,712 | — | 20,712 | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||
| Cost of services and products | 3,661 | 201 | 3,862 | 5,072 | 8,934 | ||||||||||||||||||||||||
| Selling, general and administrative | 1,262 | 581 | 1,843 | 1,621 | 3,464 | ||||||||||||||||||||||||
| Less: stock-based compensation | — | — | — | (175) | (175) | ||||||||||||||||||||||||
| Total expense | 4,923 | 782 | 5,705 | 6,518 | 12,223 | ||||||||||||||||||||||||
| Total adjusted EBITDA | $ | 9,885 | 5,122 | 15,007 | (6,518) | 8,489 | |||||||||||||||||||||||
Revenue and Expenses
Our segment revenue includes all revenue from our two segments as described in more detail above. Our segment revenue is based upon each customer's classification. We report our segment revenue based upon all services provided to that segment's customers. Our segment expenses include specific cost of service expenses incurred as a direct result of providing services and products to segment customers, along with selling, general and administrative expenses that are directly associated with specific segment customers or activities. We have not allocated assets or debt to specific segments.
The following items are excluded from our segment results, because they are centrally managed and not monitored by or reported to our chief operating decision maker by segment:
•network expenses not incurred as a direct result of providing services and products to segment customers and centrally managed expenses such as Finance, Human Resources, Legal, Marketing, Product Management and IT, all of which are reported as "Operations and Other" in the tables above, and "Operations and other expenses" in the table below;
•depreciation and amortization expense;
•goodwill or other impairments;
•interest expense;
•stock-based compensation; and
•other income and expense items.
132
The following table reconciles total segment adjusted EBITDA to net (loss) income for the years ended December 31, 2022, 2021 and 2020:
| Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Total segment adjusted EBITDA | $ | 12,432 | 14,329 | 15,007 | |||||||||||||
| Depreciation and amortization | (3,239) | (4,019) | (4,710) | ||||||||||||||
| Goodwill impairment | (3,271) | — | (2,642) | ||||||||||||||
| Operations and other expenses | (5,729) | (5,905) | (6,518) | ||||||||||||||
| Stock-based compensation | (98) | (120) | (175) | ||||||||||||||
| Operating income | 95 | 4,285 | 962 | ||||||||||||||
| Total other expense, net | (1,086) | (1,584) | (1,744) | ||||||||||||||
| (Loss) income before income taxes | (991) | 2,701 | (782) | ||||||||||||||
| Income tax expense | 557 | 668 | 450 | ||||||||||||||
| Net (loss) income | $ | (1,548) | 2,033 | (1,232) | |||||||||||||
We do not have any single customer that comprises more than 10% of our consolidated total operating revenue.
The assets we hold outside of the U.S. represent less than 10% of our total assets. Revenue from sources outside of the U.S. comprises less than 10% of our total operating revenue.
(18) Commitments, Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation and non-income tax contingencies at December 31, 2022 and December 31, 2021 aggregated to approximately $88 million and $103 million, respectively, and are included in other current liabilities, other liabilities, or liabilities held for sale in our consolidated balance sheets as of such dates. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.
In this Note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified, in that matter.
133
Principal Proceedings
Shareholder Class Action Suit
Lumen and certain Lumen Board of Directors members and officers were named as defendants in a putative shareholder class action lawsuit filed on June 12, 2018 in the Boulder County District Court of the state of Colorado, captioned Houser et al. v. CenturyLink, et al. The complaint asserted claims on behalf of a putative class of former Level 3 shareholders who became CenturyLink, Inc. shareholders as a result of our acquisition of Level 3. It alleged that the proxy statement provided to the Level 3 shareholders failed to disclose various material information of several kinds, including information about strategic revenue, customer loss rates, and customer account issues, among other items. The complaint seeks damages, costs and fees, rescission, rescissory damages, and other equitable relief. In May 2020, the court dismissed the complaint. Plaintiffs appealed that decision, and in March 2022, the appellate court affirmed the district court's order in part and reversed it in part. It then remanded the case to the district court for further proceedings.
State Tax Suits
Since 2012, a number of Missouri municipalities have asserted claims in the Circuit Court of St. Louis County, Missouri, alleging that we and several of our subsidiaries have underpaid taxes. These municipalities are seeking, among other things, declaratory relief regarding the application of business license and gross receipts taxes and back taxes from 2007 to the present, plus penalties and interest. In a February 2017 ruling in connection with one of these pending cases, the court entered an order awarding the plaintiffs $4 million and broadening the tax base on a going-forward basis. We appealed that decision to the Missouri Supreme Court. In December 2019, it affirmed the circuit court's order in some respects and reversed it in others, remanding the case to the circuit court for further proceedings. The Missouri Supreme Court's decision reduced our exposure in the case. In a June 2021 ruling in one of the pending cases, another trial court awarded the cities of Columbia and Joplin approximately $55 million, plus statutory interest. On appeal, the Missouri Court of Appeals affirmed in part and reversed in part, vacated the judgment and remanded the case to the trial court with instructions for further proceedings consistent with the Missouri Supreme Court's decision. We continue to vigorously defend against these claims.
Billing Practices Suits
In June 2017, a former employee filed an employment lawsuit against us claiming that she was wrongfully terminated for alleging that we charged some of our retail customers for products and services they did not authorize. Thereafter, based in part on the allegations made by the former employee, several legal proceedings were filed, including consumer class actions in federal and state courts, a series of securities investor class actions in federal courts and several shareholder derivative actions in federal and Louisiana state courts. The derivative cases were brought on behalf of CenturyLink, Inc. against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.
The consumer class actions, the securities investor class actions, and the federal derivative actions were transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation. We have settled the consumer and securities investor class actions. Those settlements are final. The derivative actions remain pending.
We have engaged in discussions regarding related claims with a number of state attorneys general, and have entered into agreements settling certain of the consumer practices claims asserted by state attorneys general. While we do not agree with allegations raised in these matters, we have been willing to consider reasonable settlements where appropriate.
December 2018 Outage Proceedings
We experienced an outage on one of our transport networks that impacted voice, IP, 911, and transport services for some of our customers between the 27th and 29th of December 2018. We believe that the outage was caused by a faulty network management card from a third-party equipment vendor.
134
The FCC and four states (both Washington Utilities and Transportation Commission ("WUTC") and the Washington Attorney General; the Montana Public Service Commission; the Nebraska Public Service Commission; and the Wyoming Public Service Commission) initiated formal investigations. In November 2020, following the FCC's release of a public report on the outage, we negotiated a settlement which was released by the FCC in December 2020. The amount of the settlement was not material to our financial statements.
In December 2020, the Staff of the WUTC filed a complaint against us based on the December 2018 outage, seeking penalties owed for alleged violations of Washington regulations and laws. The matter was tried before the WUTC in December 2022 and we await a decision by the WUTC.
AT&T Proceedings
In August 2022, certain of our subsidiaries filed a complaint in federal district court in Colorado captioned Central Telephone Company of Virginia, et al, v. AT&T Corp., et al. The suit seeks relief and damages for AT&T’s failure to pay amounts for services it receives. AT&T disputes those claims and has asserted counterclaims alleging breach of contract and seeking declaratory relief. It has requested the court to enjoin the plaintiffs from terminating services for failure to pay, and it has requested the court transfer the case to federal court in the southern district of New York for further proceedings. Also in August 2022, AT&T filed a separate lawsuit in federal court in the western district of Louisiana against Central Telephone Company of Virginia and other of our subsidiaries alleging, among other claims, breach of contract provisions pertaining to network architecture. The Lumen plaintiff entities dispute AT&T’s claims.
Latin American Tax Litigation and Claims
In connection with the recent divestiture of our Latin American business, the purchaser assumed responsibility for the Peruvian tax litigation and Brazilian tax claims described in our prior periodic reports filed with the SEC. We have agreed to indemnify the purchaser for amounts paid in respect of the Brazilian tax claims. The value of this indemnification is included in the indemnification amount as disclosed in Note 14—Fair Value of Financial Instruments.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, regulatory hearings relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions or commercial disputes.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial within the next twelve months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various foreign, federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $300,000 in fines and penalties.
The outcome of these other proceedings described under this heading is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us.
The matters listed in this Note do not reflect all of our contingencies. The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us.
135
Right-of-Way
At December 31, 2022, our future rental commitments and Right-of-Way ("ROW") agreements were as follows:
| Future Rental Commitments and ROW Agreements | |||||
| (Dollars in millions) | |||||
| 2023 | $ | 183 | |||
| 2024 | 76 | ||||
| 2025 | 66 | ||||
| 2026 | 62 | ||||
| 2027 | 60 | ||||
| 2028 and thereafter | 667 | ||||
| Total future minimum payments | $ | 1,114 | |||
Purchase Commitments
We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $1.4 billion at December 31, 2022. Of this amount, we expect to purchase $646 million in 2023, $513 million in 2024 through 2025, $90 million in 2026 through 2027 and $153 million in 2028 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2022.
Amounts included in the Right-of-Way table and in the purchase commitments disclosed above are inclusive of contractual obligations related to our EMEA business to be divested.
136
(19) Other Financial Information
Other Current Assets
The following table presents details of other current assets reflected in our consolidated balance sheets:
| As of December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| Prepaid expenses | $ | 319 | 295 | ||||||||
| Income tax receivable | — | 22 | |||||||||
| Materials, supplies and inventory | 236 | 96 | |||||||||
| Contract assets | 20 | 45 | |||||||||
| Contract acquisition costs | 123 | 142 | |||||||||
| Contract fulfillment costs | 100 | 106 | |||||||||
| Note receivable | — | 56 | |||||||||
| Receivable for sale of land | — | 56 | |||||||||
| Other | 5 | 11 | |||||||||
Total other current assets(1) | $ | 803 | 829 | ||||||||
(1)Excludes $59 million of other current assets related to the EMEA business that were classified as held for sale as of December 31, 2022. Excludes $126 million of other current assets related to the Latin American and ILEC businesses sold on August 1, 2022 and October 3, 2022, respectively, that were classified as held for sale as of December 31, 2021.
Included in accounts payable at December 31, 2022 and 2021 were $265 million and $248 million, respectively, associated with capital expenditures.
(20) Repurchases of Lumen Common Stock
Effective November 2, 2022, our Board of Directors authorized a new two-year program to repurchase up to an aggregate of $1.5 billion of our outstanding common stock. During the year ended December 31, 2022, we repurchased under this program 33 million shares of our outstanding common stock in the open market for an aggregate market price of $200 million, or an average purchase price of $6.07 per share. All repurchased common stock has been retired. As a result, common stock and additional paid-in capital were reduced as of December 31, 2022 by $33 million and $167 million, respectively.
On August 3, 2021, our Board of Directors authorized a 24-month program to repurchase up to an aggregate of $1.0 billion of our outstanding common stock. During the year ended December 31, 2021, we repurchased under this program 80.9 million shares of our outstanding common stock in the open market for an aggregate market price of $1.0 billion, or an average purchase price of $12.36 per share, thereby fully exhausting the program. All repurchased common stock has been retired. As a result, common stock and additional paid-in capital were reduced as of December 31, 2021 by $81 million and $919 million, respectively.
We expect repurchases made in 2023 and beyond to be subject to a non-deductible 1% excise tax on the fair market value of the stock under the Inflation Reduction Act of 2022.
137
(21) Accumulated Other Comprehensive Loss
Information Relating to 2022
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheet by component for the year ended December 31, 2022:
| Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Interest Rate Swap | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | (1,577) | (164) | (400) | (17) | (2,158) | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 98 | 473 | (134) | — | 437 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 494 | (1) | 112 | 17 | 622 | ||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | 592 | 472 | (22) | 17 | 1,059 | ||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | (985) | 308 | (422) | — | (1,099) | |||||||||||||||||||||||
The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the year ended December 31, 2022:
| Year Ended December 31, 2022 | Decrease (Increase) in Net Income | Affected Line Item in Consolidated Statement of Operations | ||||||||||||
| (Dollars in millions) | ||||||||||||||
| Interest rate swaps | $ | 22 | Interest expense | |||||||||||
| Income tax benefit | (5) | Income tax expense | ||||||||||||
| Net of tax | $ | 17 | ||||||||||||
Amortization of pension & post-retirement plans (1) | ||||||||||||||
| Net actuarial loss | $ | 121 | Other income (expense), net | |||||||||||
| Prior service cost | (2) | Other income (expense), net | ||||||||||||
| Reclassification of net actuarial loss and prior service credit to gain on the sale of business | 539 | Gain on sale of businesses | ||||||||||||
| Total before tax | 658 | |||||||||||||
| Income tax benefit | (165) | Income tax expense | ||||||||||||
| Net of tax | $ | 493 | ||||||||||||
| Reclassification of realized loss on foreign currency translation to gain on the sale of business | $ | 112 | Gain on sale of businesses | |||||||||||
| Income tax benefit | — | Income tax expense | ||||||||||||
| Net of tax | $ | 112 | ||||||||||||
________________________________________________________________________
(1)See Note 11—Employee Benefits for additional information on our net periodic benefit (expense) income related to our pension and post-retirement plans.
138
Information Relating to 2021
The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheet by component for the year ended December 31, 2021:
| Pension Plans | Post-Retirement Benefit Plans | Foreign Currency Translation Adjustment and Other | Interest Rate Swap | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | (2,197) | (272) | (265) | (79) | (2,813) | |||||||||||||||||||||||
| Other comprehensive loss before reclassifications | 197 | 94 | (135) | (1) | 155 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 423 | 14 | — | 63 | 500 | ||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | 620 | 108 | (135) | 62 | 655 | ||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | (1,577) | (164) | (400) | (17) | (2,158) | |||||||||||||||||||||||
The table below presents further information about our reclassifications out of accumulated other comprehensive loss by component for the year ended December 31, 2021:
| Year Ended December 31, 2021 | (Decrease) Increase in Net Loss | Affected Line Item in Consolidated Statement of Operations | ||||||||||||
| (Dollars in millions) | ||||||||||||||
| Interest rate swap | $ | 83 | Interest expense | |||||||||||
| Income tax benefit | (20) | Income tax expense | ||||||||||||
| Net of tax | $ | 63 | ||||||||||||
Amortization of pension & post-retirement plans (1) | ||||||||||||||
| Net actuarial loss | $ | 190 | Other income (expense), net | |||||||||||
| Settlement charge | 383 | Other income (expense), net | ||||||||||||
| Prior service cost | 6 | Other income (expense), net | ||||||||||||
| Total before tax | 579 | |||||||||||||
| Income tax benefit | (142) | Income tax expense | ||||||||||||
| Net of tax | $ | 437 | ||||||||||||
________________________________________________________________________
(1)See Note 11—Employee Benefits for additional information on our net periodic benefit (expense) income related to our pension and post-retirement plans.
(22) Labor Union Contracts
As of December 31, 2022, approximately 20% of our employees were represented by the Communication Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). None of our collective bargaining agreements were in expired status as of December 31, 2022. Approximately 9% of our represented employees are subject to collective bargaining agreements that are scheduled to expire over the 12 month period ending December 31, 2023.
139
(23) Dividends
Our Board of Directors declared the following dividends payable in 2022 and 2021:
| Date Declared | Record Date | Dividend Per Share | Total Amount | Payment Date | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| August 18, 2022 | 8/30/2022 | $ | 0.25 | $ | 253 | 9/9/2022 | ||||||||||||||||||||
| May 19, 2022 | 5/31/2022 | 0.25 | 253 | 6/10/2022 | ||||||||||||||||||||||
| February 24, 2022 | 3/8/2022 | 0.25 | 253 | 3/18/2022 | ||||||||||||||||||||||
| November 18, 2021 | 11/29/2021 | 0.25 | 251 | 12/10/2021 | ||||||||||||||||||||||
| August 19, 2021 | 8/30/2021 | 0.25 | 264 | 9/10/2021 | ||||||||||||||||||||||
| May 20, 2021 | 6/1/2021 | 0.25 | 272 | 6/11/2021 | ||||||||||||||||||||||
| February 25, 2021 | 3/8/2021 | 0.25 | 276 | 3/19/2021 | ||||||||||||||||||||||
The declaration of dividends is solely at the discretion of our Board of Directors. On November 2, 2022, we announced that our Board had terminated our quarterly cash dividend program. Under this revised capital allocation policy, the company plans to continue to invest in growth initiatives.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or furnish under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure this information is accumulated and communicated to our senior management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of our President and Chief Executive Officer, Kate Johnson, and our Executive Vice President and Chief Financial Officer, Chris Stansbury, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective, as of December 31, 2022, in providing reasonable assurance the information required to be disclosed by us in this report was accumulated and communicated in the manner provided above.
Changes in Internal Control Over Financial Reporting
Other than the implementation of controls over accounting and reporting for the completed divestitures of our Latin American and ILEC businesses and the planned divestiture of our EMEA business, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management's control objectives.
140
Internal Control Over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act), a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework of COSO, management concluded that our internal control over financial reporting was effective at December 31, 2022. The effectiveness of our internal control over financial reporting at December 31, 2022 has been audited by KPMG LLP, as stated in their report entitled "Opinion on Internal Control Over Financial Reporting" appearing in Item 8, which is incorporated into this item by reference.
Management’s Report on the Consolidated Financial Statements
Management has prepared and is responsible for the integrity and objectivity of our consolidated financial statements for the year ended December 31, 2022. The consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States and necessarily include amounts determined using our best judgments and estimates.
Our consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, who have expressed an unqualified opinion on the consolidated financial statements. Their audit was conducted in accordance with standards of the Public Company Accounting Oversight Board (United States).
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
141
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the Proxy Statement.
142
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table provides information as of December 31, 2022 about our equity compensation plans under which Common Shares are authorized for issuance:
| Number of securities to be issued upon exercise of outstanding options and rights (a) | Weighted-average exercise price of outstanding options and rights (b) | Number of securities remaining available for future issuance under plans (excluding securities reflected in column (a)) (c) | |||||||||||||||
| Equity compensation plans approved by shareholders | 16,264,108 | (1) | $ | — | (2) | 18,548,542 | |||||||||||
| Equity compensation plans not approved by shareholders | — | — | — | ||||||||||||||
| Totals | 16,264,108 | (1) | $ | — | (2) | 18,548,542 | |||||||||||
_______________________________________________________________________________
(1)These amounts represent restricted stock units, some of which represent the difference between the number of shares of restricted stock subject to market conditions granted at target and the maximum possible payout for these awards. Depending on performance, the actual share payout of these awards may range between 0-200% of target.
(2)The amounts in column (a) represent restricted stock units, which do not have an exercise price.
The balance of the information required by Item 12 is incorporated by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the Proxy Statement.
143
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.
| Exhibit Number | Description | ||||||||||
| 2.1 | |||||||||||
| 2.2* | |||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 4.1* | |||||||||||
| 4.2 | |||||||||||
| 4.3 | |||||||||||
| a. | |||||||||||
| 4.4 | Instruments relating to CenturyLink, Inc.'s Senior Secured Credit Facilities. | ||||||||||
| a. | |||||||||||
| b. | |||||||||||
| 4.5 | Instruments relating to CenturyLink, Inc.'s public senior debt.(1) | ||||||||||
| a. | |||||||||||
144
145
146
| Exhibit Number | Description | ||||||||||
| (i). | |||||||||||
| (ii). | |||||||||||
| b. | |||||||||||
| (i). | |||||||||||
| c. | |||||||||||
| (i). | |||||||||||
| d. | |||||||||||
147
148
| Exhibit Number | Description | ||||||||||
| (ii). | |||||||||||
| g. | |||||||||||
| 10.1+ | |||||||||||
| (i). | |||||||||||
| 10.2+ | |||||||||||
| (i). | Form of Restricted Stock Agreement for annual equity grants to non-management directors beginning in 2018 (incorporated by reference to Exhibit 10.1A to CenturyLink, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 (File No. 001-07784) filed with the Securities and Exchange Commission on August 9, 2018). | ||||||||||
| (ii) | |||||||||||
| (iii) | |||||||||||
| (iv) | |||||||||||
| (v) | |||||||||||
| (vi)* | |||||||||||
| (vii)* | |||||||||||
| 10.3+ | |||||||||||
| 10.4+ | |||||||||||
149
150
* Exhibit filed herewith.
+ Indicates a management contract or compensatory plan or arrangement.
_______________________________________________________________________________
(1)Certain of the items in Sections 4.5, 4.6 and 4.7 (i) omit supplemental indentures or other instruments governing debt that has been retired, or (ii) refer to trustees who may have been replaced, acquired or affected by similar changes. In accordance with applicable rules of the SEC, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed herewith. Additional documentation regarding the credit agreement of Level 3 Parent, LLC and its affiliates is available in reports filed by Level 3 Parent, LLC with the Securities and Exchange Commission.
151
ITEM 16. SUMMARY OF BUSINESS AND FINANCIAL INFORMATION
Not applicable.
152
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized.
| Lumen Technologies, Inc. | ||||||||||||||
| Date: February 23, 2023 | By: | /s/ Andrea Genschaw | ||||||||||||
| Andrea Genschaw | ||||||||||||||
Senior Vice President, Controller (Principal Accounting Officer) | ||||||||||||||
___________________________________________________________________________________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Kate Johnson | President and Chief Executive Officer | February 23, 2023 | ||||||||||||
| Kate Johnson | ||||||||||||||
| /s/ T. Michael Glenn | Non-Executive Chairman of the Board | February 23, 2023 | ||||||||||||
| T. Michael Glenn | ||||||||||||||
| /s/ W. Bruce Hanks | Non-Executive Vice Chairman of the Board | February 23, 2023 | ||||||||||||
| W. Bruce Hanks | ||||||||||||||
| /s/ Chris Stansbury | Executive Vice President and Chief Financial Officer | February 23, 2023 | ||||||||||||
| Chris Stansbury | ||||||||||||||
| /s/ Andrea Genschaw | Senior Vice President, Controller (Principal Accounting Officer) | February 23, 2023 | ||||||||||||
| Andrea Genschaw | ||||||||||||||
| /s/ Quincy L. Allen | Director | February 23, 2023 | ||||||||||||
| Quincy L. Allen | ||||||||||||||
| /s/ Martha Helena Bejar | Director | February 23, 2023 | ||||||||||||
| Martha Helena Bejar | ||||||||||||||
| /s/ Peter C. Brown | Director | February 23, 2023 | ||||||||||||
| Peter C. Brown | ||||||||||||||
| /s/ Kevin P. Chilton | Director | February 23, 2023 | ||||||||||||
| Kevin P. Chilton | ||||||||||||||
| /s/ Steven T. "Terry" Clontz | Director | February 23, 2023 | ||||||||||||
| Steven T. "Terry" Clontz | ||||||||||||||
| /s/ Hal Stanley Jones | Director | February 23, 2023 | ||||||||||||
| Hal Stanley Jones | ||||||||||||||
| /s/ Michael Roberts | Director | February 23, 2023 | ||||||||||||
| Michael Roberts | ||||||||||||||
| /s/ Laurie Siegel | Director | February 23, 2023 | ||||||||||||
| Laurie Siegel | ||||||||||||||
153