UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
| | | | |
ý
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20182021
or
|
| | | | |
o
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file numberFile No. 001-35134
LEVEL 3 PARENT, LLC
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| | |
Delaware | | 47-0210602 |
Delaware | | 47-0210602 |
(State or other jurisdiction ofincorporation or organization)
Incorporation) | | (I.R.S. Employer
Identification No.)
|
| | |
| 1025 Eldorado Blvd., | | |
| Broomfield, CO | | 80021-8869 |
| (Address of principal executive offices) | | (Zip Code) |
(720) 888-1000
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF LUMEN TECHNOLOGIES, INC. (FORMERLY NAMED CENTURYLINK, INC.), MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE PURSUANT TO GENERAL INSTRUCTION I(2).
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso☐Noý☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso☐Noý☒
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. Yesý☒ Noo☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý☒ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý☐
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 | ☐ |
| | |
Large accelerated filer o
| | Accelerated filer o
|
| | |
Non-accelerated filer ý
| | Smaller reporting company o
|
(Do not check if a smaller reporting company) | | |
| | Emerging growth companyo |
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. o
☐ |
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 ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso☐Noý☒
All of the limited liability company interest in the registrant is held by an affiliate of the registrant. None of the interest is publicly traded.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Auditor Name: KPMG LLP Auditor Location: Denver, Colorado Auditor Firm ID: 185
TABLE OF CONTENTS
Effective November 1, 2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc.’s name changed to Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the "Company" and "our" refer to Level 3 Parent, LLC and its predecessor Level 3 Communications, Inc., and their respective consolidated subsidiaries. References to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc. and its consolidated subsidiaries.
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 andor 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, buildout plans, and other initiatives, including synergies or costs associated with these initiatives;
statements concerning the anticipated impact of the Tax Cuts and Jobs Act enacted in late 2017;
•statements about our liquidity, profitability, profit margins, tax position, tax assets, tax rates, asset values, contingent liabilities, growth opportunities, and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, distribution and securities repurchase plans, leverage, capital allocation plans, financing alternatives and sources, and pricing plans;
•statements regarding how the health and economic challenges raised by the COVID-19 pandemic may impact our business, financial position, operating results or prospects; and
•other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts, many of which are highlighted by words such as “may,” “will,” “would,” “could,” “should,” “plan,“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 our discussion of factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-looking statements. Factors that could affect actual resultsThese factors include but are not limited to:
CenturyLink’s ability to timely realize the anticipated benefit of its November 1, 2017 business combination with us;
•the effects of competition from a wide variety of competitive providers, including decreased demand for our more mature service offerings and increased pricing pressures;
•the effects of new, emerging or competing technologies, including those that could make our products and services 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, and strengthening our relationships with customers and attaining projected cost savings;
•our ability to safeguard our network, and to avoid the adverse impact on our business fromof possible cyber-attacks, security breaches, service outages, system failures, equipment breakage, 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, interconnection obligations, special access, universal service, broadband deployment, data protection, privacy and net neutrality;
our ability to avoid unanticipated integration disruptions;
•our ability to effectively adjust to changes in the communications industry,retain and changes in the composition of our markets and product mix;hire key personnel;
•possible changes in thecustomer demand for our products and services, including our ability to effectively respond to increased demand for high-speed data transmission services;
•our ability to successfully maintain the quality and profitability of our existing product and service offerings and to introduce profitable new offerings on a timely and cost-effective basis;
•our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt paymentsrepayments and distributions;
•our ability to successfully and timely implement our corporate strategies, including our deleveraging strategy;
•our ability to successfully and timely consummate the pending divestiture of our Latin American business on the terms proposed, to realize the anticipated benefits therefrom and to operate our retained business successfully thereafter;
•changes in our operating plans, corporate strategies orand capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;
•the impact of any future material acquisitions or divestitures that we may transact;
•the negative impact of increases in the costs of Lumen’s pension, healthcare and post-employment benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations;
•the potential negative impact of customer complaints, government investigations, security breaches or service outages impacting us or our ability to effectively retain and hire key personnel and maintain satisfactory relations with our workforce;industry;
•adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt 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 lenders;financial institutions;
•Lumen's ability to meet evolving environmental, social and governance ("ESG") expectations and benchmarks, and effectively communicate its ESG strategies;
•our ability to collect our receivables from, financially troubledor continue to do business with, financially-troubled customers;
•Lumen's ability to use its net operating loss carryforwards in the amounts projected;
•our ability to continue to use or renew intellectual property used to conduct our operations;
•any adverse developments in legal or regulatory proceedings involving us or our affiliates, including CenturyLink;Lumen Technologies;
•changes in tax, communications,pension, healthcare or other laws or regulations;regulations, or in general government funding levels, including those arising from recently-enacted federal legislation promoting increased broadband spending;
•the effects of changes in accounting policies, practices or assumptions, including changes that could potentially require additional future impairment charges;
•continuing uncertainties regarding the impact that COVID-19 disruptions and vaccination policies could have on our business, operations, cash flows and corporate initiatives;
•the effects of adverse weather, terrorism, epidemics, pandemics, rioting, societal unrest, or other natural or man-made disasters;disasters or disturbances;
•the potential adverse effects if our internal controls over financial reporting have weaknesses or deficiencies, or otherwise fail to operate as intended;
•the effects of more general factors such as changes in interest rates, in inflation, in exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geo-political conditions; and
•other risks referenced in the "Risk Factors" in Item 1Asection or elsewhere inother portions of this report or other of our filings with the SEC.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 distribution or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
ITEM 1. BUSINESS
Overview
We are an international facilities-based technology and communications company engaged primarily infocused on providing an integratedour customers with a broad array of integrated services and solutions necessary to fully participate in our customers.rapidly evolving digital world, which we believe is undergoing the “Fourth Industrial Revolution” or simply the “4IR”. As a part of Lumen Technologies, 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 information, communications and technology programs to address dynamic changes. Our specific products and services are detailed below under the heading "Operations - Products and Services."
Our terrestrial and subsea fiber optic long-haul network throughout North America, Europe, Latin America 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.States ("U.S."). We believe our and Lumen's secure global platform plays a central role in facilitating communications worldwide.
We were incorporated under the laws of the State of Delaware in 1941. Our principal executive offices are located at 1025 Eldorado Boulevard, Broomfield, CO 80021 and our telephone number is (720) 888-1000.
On July 25, 2021 we entered into a definitive agreement to divest our Latin American business in exchange for $2.7 billion cash, subject to certain working capital, other purchase price adjustments and related transaction expenses. We anticipate closing the transaction mid-year 2022, upon receipt of all requisite regulatory approvals in the U.S. and certain countries where the Latin American business operates, as well as the satisfaction of other customary conditions. See Note 2—Planned Divestiture of the Latin American Business to our consolidated financial statements in Item 8 of Part II of this report for additional information on this transaction.
For a discussion of certain risks applicable to our business, see "Risk Factors" in Item 1A of Part I of this report. The summary financial information in this Item 1 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.
Acquisition of Level 3 by CenturyLinkFinancial Highlights
On November 1, 2017, CenturyLink acquired us through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as CenturyLink's indirect wholly-owned subsidiary underThe following table summarizes the name of Level 3 Parent, LLC. Our results of operations have been included in theour consolidated resultsoperations:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 (1) |
| (Dollars in millions) |
| Operating revenue | $ | 7,952 | | | 7,933 | | | 7,773 | |
| Operating expenses | 6,920 | | | 6,769 | | | 10,300 | |
| Operating income (loss) | $ | 1,032 | | | 1,164 | | | (2,527) | |
| Net income (loss) | $ | 586 | | | 651 | | | (3,201) | |
(1)During 2019, we recorded a non-cash, non-tax-deductible goodwill impairment charge of operations of CenturyLink since November 1, 2017.
$3.7 billion. For additional information, about CenturyLink's acquisition of Level 3, see (i) Note 2—CenturyLink Merger3—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 8 of Part II of this report, (ii) the current report on Form 8-K/A filed by CenturyLink with the Securities and Exchange Commission (the "SEC") on January 16, 2018, (iii) our current report on Form 8-K filed by us with the SEC on November 1, 2017 and (iv) the definitive joint proxy statement/prospectus filed by CenturyLink with the SEC on February 13, 2017.report.
Financial Highlights
The analysis below is presented on a combined basis for the successor and predecessor periods in 2017. We believe that the discussion on a combined basis is more meaningful as it allows our 2018 results of operations to be more readily compared to our aggregate 2017 results of operations. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of Part II of this report.
The following table summarizes our results of our consolidated operations: |
| | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Combined | | Predecessor |
| | Year Ended December 31, 2018(1)(2) | | Period Ended December 31, 2017(1)(2) | | | Period Ended October 31, 2017(2) | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| Operating revenue | $ | 8,220 |
| | 1,407 |
| | | 6,870 |
| | 8,277 |
| | 8,173 |
|
| Operating expenses | 7,252 |
| | 1,249 |
| | | 5,719 |
| | 6,968 |
| | 6,728 |
|
| Operating income | 968 |
| | 158 |
| | | 1,151 |
| | 1,309 |
| | 1,445 |
|
| Net income (loss) | 341 |
| | (141 | ) | | | 425 |
| | 284 |
| | 677 |
|
|
| |
(1) | The enactment of the Tax Cuts and Jobs Act in December 2017 resulted in a re-measurement of our deferred tax assets and liabilities at the new federal corporate tax rate of 21%. The re-measurement resulted in a tax expense of approximately $92 million and $195 million for 2018 and 2017, respectively. |
(2) | During the successor year ended December 31, 2018 and period ended December 31, 2017 and the predecessor period ended October 31, 2017 and year ended December 31, 2016, we incurred CenturyLink acquisition-related expenses of $121 million, $28 million, $85 million and $15 million, respectively. For additional information, see "Acquisition of Level 3 by CenturyLink" above and Note 2 - CenturyLink Merger to our consolidated financial statements in Item 8 of Part II of this report. |
The following table summarizes certain selected financial information from our consolidated balance sheets: | | | | As of December 31, | | As of December 31, |
| | 2018 | | 2017 | | 2021 | | 2020 |
| | (Dollars in millions) | | (Dollars in millions) |
| Total assets | $ | 32,291 |
| | 33,135 |
| Total assets | $ | 28,095 | | | 28,576 | |
Total long-term debt(1) | 10,844 |
| | 10,890 |
| Total long-term debt (1) | 10,422 | | | 10,387 | |
| Total member's equity | 17,877 |
| | 19,272 |
| Total member's equity | 13,009 | | | 12,905 | |
(1)For additional information on our long-term debt, see Note 7—Long-Term Debt 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. |
| |
(1) | For additional information on our long-term debt, see Note 5 - Long-Term Debt 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. |
We estimate that during 2018,2021, approximately 20% of our consolidated revenue was derived from providing telecommunications, colocation and hosting services outside the United States.
Operations
Organizational Structure
Since the November 1, 2017 closing of CenturyLink's acquisition of us, our operations are integrated into and are reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has become our CODM, but reviews our The summary financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC. Otherwise, we do not provide our discrete financial information to the CODM on a regular basis.
Products and Services
Global enterprises, governmental entities and regional organizations depend on our wide variety of technologies and the services engineered to workappearing above should be read in conjunction with, them. These range from specific offerings such as networks or cloud-based application hostingand is qualified by reference to, complex multi-layered engagements where we develop custom solutions involving numerous technologiesour consolidated financial statements and professional consulting services. In many cases, enterprises engage with us to outsource manynotes thereto in Item 8 of their IT functions so they can focus on their core business.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.
Operations
Products and Services
While most of our customized customer interactions with customers involve multiple integrated technologies and services, we organize our products and services according to the core technologies that drive them. We reportreflect product life cycles and our related revenue under the following categories:go to market approach. At December 31, 2021, we categorized our services as follows: Compute and Application Services, IP and Data Services, Fiber Infrastructure Services, Voice and Other, and Affiliate revenue.
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 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;
•Unified Communications and Collaboration ("UC&C"). We provide access to various unified communications platforms. This offering includes both individual, license-based UC&C 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 transportrange from dedicated hosting and infrastructurecloud services voiceto more complex managed solutions, including disaster recovery, business continuity, applications management support and collaborationsecurity services other revenueto manage mission critical applications;
•Content Delivery. Our content delivery services provide our customers with the ability to meet their streaming video and affiliate revenue, which are described in further detail below.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.
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;
•VPN Data Network. Networks. Built on our extensive optical transportfiber-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 ("IP"VoIP"). Our Internet Services provide global internet access over a high performance, diverse network with connectivity in more than 60 countries with over 72 Tbps of global throughput.
Ethernet.We deliver a robust arraybroad range of networkinglocal and enterprise voice and data services built on Ethernet technology. Ethernet services include point-to-pointVoIP technology, including VoIP enhanced local service, national and multi-point equipment configurations that facilitate data transmissions across metropolitan areasmultinational session initiation protocol ("SIP") trunking, hosted VoIP service, Primary Rate Interface ("PRI") service support, long distance service 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; andtoll-free service.
Content Delivery Network (CDN). Our CDN is supported by a global Point of Presence (PoP) footprint across 104 markets in six continents and directly connected to our IP backbone. CDN service supports in-network acquisition of broadcast channels for Over the Top-Video and Internet TV platforms, and a multi-regional Origin Storage Platform delivers high performance egress and rapid time to first byte. Our CDN is directly connected to major cloud storage platforms. Our Digital Download service provides software download, system update, gaming patch, antivirus files or other digital asset delivery with storage, security, scale, and global reach.
Transport andFiber Infrastructure Services
•Dark Fiber. We possess 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. Many large enterprises are interested in building their networks with this high-bandwidth, highly secure optical technology. We provide professional services to engineer these networks, and in some cases, manage them for customers; and
Wavelength.
•Optical Services. We deliver high bandwidth optical wavelength networks to firmscustomers requiring an end-to-end transport solution with Ethernetethernet technology by contracting for a scalable amount of bandwidth connecting sites or providing high-speed access to cloud computing resources;
resources.
ColocationVoice and Data Center Services. Other
•Voice Services. We provide different options for organizations’ data center needs. Our data centeroffer our customers a complete portfolio of traditional Time Division Multiplexing ("TDM") voice services range from dedicated hostingincluding PRI service, local inbound service, switched one-plus, toll free, long distance and cloud services to more complex managed solutions, including disaster recovery, business continuity, applications management support and security services to manage mission critical applications;
international services;
Dark Fiber. We possess an extensive array of unlit optical fiber, known as “dark fiber.” Many large enterprises are interested in building their networks with this high-bandwidth, highly secure optical technology and the dark fiber option gives them exclusive access to the technology. We provide professional services to engineer these networks and manage them for many customers;
•Private Line. We deliver a private line (including business data services),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
Professional Services. Our experts deliver a robust array of consulting•Other Legacy Services. We continue to provide certain services based on older platforms to organizations eithersupport our customers as part of a larger engagement or as stand-alone services. This category includes network management, installation and maintenance of data equipment, the building of proprietary fiber-optic networks for government and business customers.
Voice and Collaboration Services
Voice. We offer a complete portfolio of traditional Time Division Multiplexing (TDM) voice servicesthey transition to businesses and enterprises including Primary Rate Interface (“PRI”) service, local inbound service, switched one-plus, toll free, long distance and international services;
Voice Over IP (VoIP). We deliver a broad range of local and enterprise voice and data services built on VoIP (Voice over Internet Protocol)newer technology. Our local and enterprise voiceThese services include VoIP enhanced local service, nationalSynchronous Optical Network ("SONET") based ethernet, legacy data hosting services, and multinational SIP Trunking, Hosted VoIP, support of Primary Rate Interface (“PRI”) service, long distance service, and toll-free service; and
conferencing services.
Collaboration. We deliver collaboration capabilities partnered with leading technology providers including Cisco, Microsoft, and Amazon. Collaboration elements (audio, video, web) are seamlessly integrated providing a simple solution that is easy to manage as businesses grow and change. Our expertise and ongoing partnership with technology leaders like Cisco, Microsoft and AWS provides enterprises with the flexibility to select and adopt the right solution and latest innovation. Audio, web and video conferencing services are also available
Affiliate revenue
•Affiliate Services. We provide our affiliates with telecommunicationcertain communication services that we also provide to external customers. Please see our products and services listed above for further description of these services.
From time to time, we may change the categorization of our products and services.
Additional Information
For further information on regulatory, technological and competitive factors that could impact our revenue, see "Regulation" and "Competition" under this Item 1 below and "Risk Factors" under Item 1A below. 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.
Our Network
MostOur and Lumen's network, through which we provide most of our products and services, are provided usingprimarily consists of fiber-optic cables and other supporting equipment. We operate part of our telecommunications network. Anetwork with leased assets, and a substantial portion of our equipment operates with licensed software.
We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.
We and Lumen view our network as one of our most critical assets. We and Lumen have devoted, and plan to continue to enhancedevote, substantial resources to (i) simplify and modernize our network and legacy systems and (ii) expand our network by deploying various technologies to provide additional capacity to our customers. Rapid and significant changes in technology are expected to continue in the telecommunications industry. Our future success will depend, in part, on our ability to anticipate and adapt to changes in technology and customer demands, including demandsaddress demand for enhanced digitization, automation and customer self-service capabilities.or new products.
Although we or Lumen 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.
Like other large communications companies, we are a constant target of cyber-attacks of varyingvarious degrees, which has caused us to spend increasingly more time and money to deal with increasingly sophisticated attacks. Some of the attacks result in security breaches, and we periodically notify our customers, our employees or the public of these breaches when necessary or appropriate. None of these resulting security breaches to date have materially adversely affected our business, results of operations or financial condition.
Similarly, like other large communication companies operating complex networks, from time to time in the ordinary course of our business we experience disruptionsdisruption in our service. Although noneservices. We develop and maintain systems and programs designed to protect against cyber-attacks and network outages. The development, maintenance and operation of these outages have thus far materially adversely affected us, certain of these outages have resulted in regulatory fines, negative publicity, service creditssystems and other adverse consequences.programs is costly and requires ongoing monitoring and updating as technologies change and efforts to bypass security measures become more sophisticated and evolve rapidly.
We rely on several other communications companies to provide our offerings. We lease a portion of our core fiber network from our competitors and other third parties. Many of these leases will lapse in future years. A portion of our services are provided by other carriers under agency agreements or through reselling arrangements with other carriers. Our future ability to provide services on the terms of our current offerings will depend in part upon our ability to renew or replace these leases, agreements and arrangements on terms substantially similar to those currently in effect.
For additional information regarding our systems, network assets, network risks, capital expenditure requirements and reliance upon third parties, see "Risk Factors," generally,Factors" in Item 1A of Part I of this report,report.
Sales and in particular, "Risk Factors—Risks Affecting Marketing
Our Business"enterprise sales and "Risk Factors—Risks Affecting Our Liquiditymarketing approach revolves around solving complex customer problems with advanced technology and Capital Resources." For more informationnetwork solutions - striving to make core networks services compatible with digital tools. We also rely on our properties, seecall 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 sales and marketing approach to our business customers includes a commitment to provide comprehensive communications and IT solutions for business, wholesale and government customers of all sizes, ranging from small business offices to the world’s largest global enterprises 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. Either we or Lumen 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.
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.
Competition
We compete in a dynamic and highly competitive market in which demand for high-speed, secure data service 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 additional sources, including systems integrators, cloud service providers, software networking companies, infrastructure companies, cable companies, 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 requested services, competition can be intense, especially if one or more competitors in the market have network assets better suited to the customer’s needs, are offering 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 intercity and metro routes, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service.
Additional information about competitive pressures is located under the heading “Risk Factors—Business Risks” in Item 21A of Part I of this report.
Patents, Trade Names, Trademarks and Copyrights
Research, Development & Intellectual Property
Through acquisitions or our own research and development, as
As of December 31, 2018,2021, we had approximately 1,8001,500 patents and patent applications in the United StatesU.S. and other countries. Our patents cover a wide range of technologies, including those relating to data and voice services, content distribution and transmission and networking equipment.
We have also received licenses to use patents held by others, including through certain extensive cross-license arrangements. Patents give us the right to prevent others, particularly competitors, from using our proprietary technologies.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.
We periodically receive offers from third partiesIn addition to purchase or obtain licenses for patentsour patent rights, we have rights in various trade names, trademarks, copyrights and other intellectual property rights in exchange for royalties or other payments.that we use to conduct our business. Our services often use the intellectual property of others, including licensed software. We also periodically receive notices, or are named in lawsuits, alleging thatoccasionally license our products or services infringeintellectual property to others as we deem appropriate.
For information on patents or othervarious litigation risks associated with owning and using intellectual property rights, of third parties. In certain instances, these matters can potentially adversely impact our operations, operating results or financial position. For additional information, see “Risk Factors—Risks Affecting Our Business”Business Risks” in Item 1A of Part I of this report, and Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.
Sales and Marketing
We maintain local offices in most major and secondary markets within the U.S. and in most of the larger population centers within our local service area and in many of the primary markets of the more than 60 countries in which we provide services. These offices provide sales and customer support services. We also rely on our channel partners to promote sales of services that meet the needs of our customers. Our sales and marketing strategy is to enhance our sales by offering solutions tailored to the needs of our various customers and promoting our brands. 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 sales and marketing approach to our business customers includes a commitment to provide comprehensive communications and IT solutions for business, wholesale and government customers of all sizes, ranging from small business offices to the world's largest global enterprise customers. We strive to offer our business customers stable, reliable, secure and trusted solutions. 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, website promotions and public relations.
Regulation of Our Business
Overview
Our domestic operations are regulated by the Federal Communications Commission (the “FCC”), by various state utilityregulatory commissions and occasionally by local agencies. Our non-domestic operations are regulated by supranational groups (such as the European Union)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.
The following description discusses some of For information on the major industryrisks associated with the regulations that affect our operations, but numerous other regulations not discussed below, also have a substantial impact on us. For additional information, see "Risk Factors"“Risk Factors—Legal and Regulatory Risks” in Item 1A of Part I of this report.
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 1 of this report.
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 international communications services.intercarrier compensation. Additionally, the FCC regulates a number ofseveral 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, and(ii) our provision of emergency 911 services. Level 3 provides competitive services that are generally notand (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 regulation tojudicial review and additional rulemakings, thus increasing the same degree as incumbent local exchange carriers (“ILECs”).
In April 2017,difficulty of determining the FCC revised the regulation of the provision of data services by ILECs to businesses providing greater freedom to respond to competition for these business data services. Level 3 purchases a significant amountultimate impact of these services from ILECs. Several parties appealed the FCC's decision and the resulting remand proceedings remain pending. The ultimate impactchanges on us of the FCC's recent actions is currently unknown.and our competitors.
Intercarrier Compensation
Level 3 maintains approximately 300 interconnection agreements with other telecommunications carriers. These agreements set out the terms and conditions under which the parties will exchange traffic. The largest agreements are with AT&T and Verizon. Most of Level 3’s agreements with AT&T and Verizon have expired terms but remain effective in evergreen status. As these and other interconnection agreements expire, we will evaluate simply allowing them to continue in evergreen status (so long as the counterparty allows it) or negotiating new agreements. Any renegotiation would involve uncertainty as to the final terms and conditions, including compensation rates for various types of traffic. In addition, changes in law, including FCC orders, may allow or compel us to renegotiate current and successor interconnection agreements over the next year.
Broadband Regulation
In February 2015, the FCC adopted an order classifying Broadband Internet Access Servicesbroadband 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 most of those regulations and the classification of BIAS as a Title II service and to precludepreempt states from imposing substantial regulations of their own on broadband. Opponents of this change have appealed this action in federal court and have advocated in favor of re-instituting regulation of Internet services under Title II of the Communications Act.court. Several states have also opposed the change and have initiated state executiveproposed, implemented or enacted laws or orders or introduced legislation 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 resultultimate impact of these appeals is pending judicial matters and calls for additional regulation are currently unknown to us, although the potentialimposition 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 to Level 3 is currently unknown.our current operations.
State Regulation of Domestic Operations
State regulatory agencies have jurisdiction when our facilities and services are used to provide intrastate telecommunications services. Level 3 provides competitive services that are generally not subject to state regulation to the same degree as ILECs.incumbent local exchange carriers ("ILECs").
Data Privacy Regulations
International Regulations
Our subsidiaries operating outside of the United States are subject to various regulations in the markets where service is provided. The scope of regulation varies from country to country. The telecommunications 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. We cannot accurately predict whether and how these issues will be resolved, or their effect on our operations. Further, some of the legal requirements governing our foreign operations are more restrictive than or conflict with those governing our domestic operations, which raises our compliance costs and regulatory risks.
In June 2016, following a national referendum, the United Kingdom (the “UK”) elected to terminate its membership in the EU (“Brexit”). The UK will remain a member of the EU until at least March 29, 2019. Several factors which are currently unknown will influence Brexit’s impact on our business, including the form Brexit will take. We operate a staging facility in the UK, where certain core network elements and customer premises equipment is configured before being shipped to both UK and EU locations. The UK is currently also the central location of our stores of spare replenishment in our European operations. In respect to our UK workforce, we do not anticipate any adverse impact from Brexit as only a small percentage of the workforce are EU nationals. The same is true of UK nationals working in our EU located workforce. We are currently monitoring Brexit developments, reviewing our supply chain alternatives, and assessing the short- and long-term implications of Brexit on our operations. Nonetheless, based on current information, we do not anticipate Brexit will have a substantial impact on our business.
Other Regulations
Our networks are subject to numerous local regulations, including 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 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.
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 global company, 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. VariousThese regulations require careful handling of personal and customer data and could have a significant impact on our business. We have adopted data handling policies and practices to comply with global data privacy requirements, including GDPR and similar regulations.
Anti-Bribery and Corruption Regulations
As a global company 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 to prevent non-compliance with such anti-corruption regulations in the U.S. and other jurisdictions.
International Regulations
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.
The United Kingdom ("UK") recently 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. Several factors which are currently unknown will influence Brexit’s ultimate impact on our business. We operate a staging facility in the UK, where certain core network elements and customer premises equipment are 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. However, we have also established a third party sparing facility in Amsterdam which we believe will help mitigate potential disruptions resulting from any impediments to the free movement of goods between the EU and the UK. Given the small percentage of our global personnel that are UK or EU nationals, we do not anticipate any adverse impact from Brexit on our workforce. We are currently monitoring Brexit developments, reviewing our supply chain alternatives, and assessing the short and long-term implications of Brexit on our operations. Nonetheless, based on current information, we do not anticipate Brexit will have a substantial impact on our business.
Our overseas operations are subject to various U.S. export and sanctions laws and regulations. Our deconsolidated Venezuelan affiliate conducts operations in Venezuela, which is currently subject to certain U.S. sanctions.
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 16—Commitments, Contingencies And Other Items. Certain federal and state legislativeagencies, 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 regulatory bodies have recently adopted increasingly restrictive lawsthat require us to obtain permits, licenses or franchises to operate. Such regulations governing the protectionare enacted by municipalities, counties, state, federal or retention of data, and others are contemplating similar actions. In particular, regulatory bodies in Europe have aggressively enforced the stringent terms of the EU’s General Data Protection Regulation.
For additional information about these matters, see “Risk Factors-Risks Affecting Our Business” and “Risk Factors-Risks Relating to Legal and Regulatory Matters” in item 1A of Part I of this report.
Competition
We compete in a rapidly evolving and highly competitive market, and we expect intense competition from a wide variety of sources under evolving market conditions to continue. In addition to competition from larger telecommunication service providers, we are facing increasing competition from several other sources, including cable and satellite companies, wireless providers, technology companies, cloud companies, broadband providers, device providers, resellers, sales agents facilities-based providers, and smaller more narrowly focused niche providers either using their own networks leasing parts of our network, or providing services such as VoIP, SD-WAN and security independent of network assets. The ability to provide such services independently of the network challenges more traditional solution selling. Further technological advances and regulatory and legislative changes have increased opportunities for a wide range of alternative communications service providers, which in turn have increased competitive pressures on our business. These alternate providers often face fewer regulations and have lower cost structures than we do. In addition, the communications industry has, in recent years, experienced substantial consolidation, and some of our competitors in one or more lines of our business are generally larger, have stronger brand names, have more financial and business resources and have broader service offerings than we currently do. In certain overseas markets, we compete against national incumbent telecommunications providers and other regional or international companies thatgovernmental bodies, and can vary widely from jurisdiction to jurisdiction as a result. Such regulations may have a longer history of providing service in the market.also require us to pay substantial fees.
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 intercity and metro routes, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service. Depending on the applicable market and requested services, competition can be intense, especially if one or more competitors in the market have network assets better suited to the customer’s needs or are offering faster transmission speeds or lower prices.
Similar to us, many technology or other communications companies that previously offered a limited range of services are now offering diversified bundles of services, either through their own networks, reselling arrangements or joint ventures. As such, a growing number of companies are competing to serve the communications needs of the same customer base. Such activities will continue to place downward pressure on the demand for and pricing of our services.
As customers increasingly demand high-speed connections for communications and productivity, we expect the demands on our network will continue to increase over the next several years. To succeed, we must continue to invest in our networks to ensure that they can deliver competitive services that meet these increasing bandwidth and speed requirements. In addition, network reliability and security are increasingly important competitive factors in our business.
Additional information about competitive pressures is located (i) under the heading "Risk Factors-Risks Affecting Our Business" in Item 1A of Part I of this report.
Environmental Compliance
From time to time we may incur environmental compliance and remediation expenses, mainly resulting from owning or operating prior industrial sites or operating vehicle fleets or power supplies for our communications equipment. Although we cannot assess with certainty the impact of any future compliance and remediation obligations or provide you with any assurances regarding the ultimate impact thereof, we do not currently believe that future environmental compliance and remediation expenditures will have a material adverse effect on our financial condition or results of operations. For additional information, see "Risk Factors—Risks Relating to Legal and Regulatory Matters—Risks posed by other regulation" in Item 1A of Part I of this report and Note 16—Commitments, Contingencies and Other Items included in Item 8 of Part II of this report.
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.
Employees
AtAs of December 31, 2018,2021, we had approximately 11,50012,000 employees.
Additional Information
For further information on regulatory, technological and competitive factors that could impact our revenue, see "Regulations" under Item 1, above, and "Competition" under this Item 1, above, and "Risk Factors" under Item 1A below. 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. For additional information about us and our ultimate parent, Lumen Technologies, please refer to the periodic reports filed by Lumen Technologies with the SEC, which can be accessed by visiting the websites listed below under “Website Access and Important Investor Information.”
Website Access and Important Investor Information
OurLumen's and our website is www.centurylink.comwww.lumen.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.comir.lumen.com. The information contained on, or that may be accessed through, our website is not part of this report.report or any other periodic reports that we file with the SEC. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.comir.lumen.com) under the heading "FINANCIALS" and subheading "SEC Filings." These reports are also available on our website and 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.
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.
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.
LendersYou 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. Accordingly, lendersyou 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 industryindustries are based on estimates made by us using data from industry sources and on assumptions made by us based on our management’s knowledge and experience in the markets in which we operate and the communicationsour industry generally. 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.
ITEM 1A. RISK FACTORS
The following discussion identifies the most significant risks or uncertaintiesmaterial factors that could (i) materially and adversely affect our business, financial condition, results of operations liquidity 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” preceding Item 1,, “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 that 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, such as general economic conditions.us. In addition, certain of the risks described below apply only to a part or segment of our business.
Risks Affecting Our Business
Business Risks
Our failure to simplify our service support systems could adversely impact our competitive position.
For many of our services, we can effectively compete only if we can quickly and efficiently (i) quote and accept customer orders, (ii) provision and initiate ordered services, (iii) provide customers with adequate means to manage their services and (iv) accurately bill for our services. To attain these goals, we believe we must digitally transform our service support processes to permit greater automation and customer self-service options. This digital transformation is complex and will require a substantial amount of resources, especially in light of the multiplicity of our systems. Development of systems designed to support this transformation will continuously require our personnel and third-party vendors to, among other things, (i) adjust to changes in our offerings and customers’ preferences, (ii) simplify our processes, (iii) improve our data management capabilities, (iv) eliminate inconsistencies between our legacy and acquired operations, (v) eliminate older support systems that are costly or obsolete, (vi) develop uniform practices and procedures, and (vii) automate them as much as possible. We cannot assure you that these undertakings will be successful. Our competitive position could be adversely impacted if we fail to continuously develop viable service support systems that are satisfactory to our current and potential customers.
We may not be able to compete successfully against currentcreate 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, (ii) customer self-service options and (iii) digital access to our products, services and customer support. To do so, we must 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 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, upgrade and evolve 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, 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 value to our customers at required speed and scale.
We operate in an intensely competitive industry and existing and future competitors.competitive pressures could harm our performance.
Each of our business offerings to our customers facefaces increasingly intense competition, with increased pressure to be digitally integrated and quick to market, from a wide varietyrange of sources under evolving market conditions. In particular aggressive competition from a wide rangeconditions that have increased the number and variety of communications and technology companies has limited the prospects for several of our offerings to our customers. We expect these trends to continue. For more detailed information, see “Business-Competition” in Item 1 of this report.
In addition to competition from a wide range of technology companies and communications providers (including those described above), we are facing increasing competition from several other sources, including cloud companies, broadband providers, software developers, device providers, resellers, sales agents and facilities-based providers using their own networks as well as those leasing parts of our network. Further competition could arise through industry consolidation, technological innovation, or changes in regulation, including changes allowing foreign carriers to more extensivelythat compete in the U.S. market.
with us. Some of our current and potential competitorscompetitors: (i) offer products or services that are substitutes for our traditional network services, including wireless broadband, wireless voice and non-voice communication services, (ii) offer a more comprehensive range of communications products and services, (ii) offer products or services with features that we cannot readily match in some or all of our markets, (iii) install their services more quickly than we do, (iv) have greater marketing, engineering, research, development, technical, provisioning, customer relations, financial or other resources, (v) have larger or more diverse networks with greater transmission capacity, (vi)(iv) conduct operations or raise capital at a lower cost than us, (vii)we do, (v) are subject to less regulation whichthan we believe enables such competitors to operate more flexibly than us with respect to certain offerings, (viii) offer services nationally or internationally to a larger geographic area or larger base of customers, (ix)are, (vi) have substantially stronger brand names, which may provide them(vii) have deeper or more long-standing relationships with greater pricing power than ours,key customers, (viii) might be perceived as having an ESG profile more attractive to customers or (x)employees, or (ix) have larger operations than ours, any of which may enable them to compete more successfully in recruiting top talent, entering into operational orfor customers, strategic partnerships or acquiring companies. Consequently, these competitors may be better equipped to provide more attractive offerings, to charge lowerpartners and acquisitions. Competitive pressures have lowered market prices for theirmany of our products and services in recent years and continued competitive pressures will likely place further downward pressure on market pricing.
Our ability to successfully compete could be hampered if we fail to timely develop and expand their communications and network infrastructure more quickly, to adapt more swiftly to changes in technologies ormarket innovative technology solutions that address changing customer requirements, to devote greater resources to the marketing and sale of their products and services, to provide more comprehensive customer service, to provide greater resources to research and development initiatives and to take advantage of business or other opportunities more readily.demands.
Competition could adversely impact us in several ways, including (i) the loss of customers, market share, or traffic on our networks, (ii) our need to expend substantial time or money on new capital improvement projects, (iii) our need to lower prices or increase marketing expenses to remain competitive and (iv) our inability to diversify by successfully offering new products or services.
We are continually taking steps to respond to these competitive pressures, but these efforts may not be successful. Our operating results and financial condition would be adversely affected if these initiatives are unsuccessful or insufficient.
Rapid technological changes could significantly impact our competitive and financial position.
The technology and communications industry has been and continues to be impacted by significant technological changes, which in general are enabling a broader arrayan 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 (ii) displacing or (iv) reducing profit margins. For example, as service providers continue to invest in 5G networks and services, their 5G services could reduce demand for our services, or (iii) enabling the development ofnetwork services. Increasingly, customers are demanding more technologically advanced products that suit their evolving needs. To remain competitive, products or services. Continuous improvements in wireless data technologies have enabled wireless carriers to offer competing products, and we expect this trend to continue as technological advances enable these carriers to carry greater amounts of data faster and with less latency.
We may not be ablewill need to accurately predict orand respond to changes in technology, or industry standards, or to the introduction of newly-offered services. Any of these developmentscontinue developing products and services attractive to our customers, 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 make some or allbe restricted by various factors, including limitations of our offerings less desirableexisting network, technology, capital or even obsolete, which would place downward pressurepersonnel. 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 market shareplans for transformation, innovation and revenue. These developments could also require usstrategic growth. We operate in a highly competitive and expanding industry. We operate with a limited pool of employees and there is competition for highly qualified personnel in certain growth markets. Our competitors periodically target our employees with highly sought-after skills and will likely continue to (i) expend capital or other resourcesdo so in excessthe future. Further, the increased availability of currently contemplated levels, (ii) foregoremote working arrangements, largely driven by the development or provisionCOVID-19 pandemic, has expanded the pool of products or servicescompanies that others can provide more efficiently, or (iii) make other changes tocompete for our operating plans, corporate strategies or capital allocation plans, any of which could be contrary to the expectationsemployees and employee candidates. We believe some of our security holders or could adversely impact our business operating results.
Even if we succeed in adapting to changes in technology or industry standards by developing new products or services, there is no assurance that the new products or services wouldcompetitors with greater resources and fewer cost constraints than us have a positive impact on our profit margins or financial performance.
In addition to introducing new technologies and offerings, we may need, from time to time been able to phase out outdatedoffer compensation, benefits or accommodations in excess of what we are able to offer. As a result, we may be unable to cost-effectively hire and unprofitable technologiesretain employees with market-leading skills. There is no assurance our efforts to recruit and services.retain qualified personnel will be successful. If we are unable to do so, on a cost-effective basis, wesuch failure could experience reduced profits. Similarly, if new market entrants are not burdened by an installed base of outdated equipment or obsolete technology, they may have a competitive advantage over us.material adverse effect on our operations and financial condition.
For additional information on the risks of increased expenditures, see “Risk Factors-Risks Affecting our Liquidity and Capital Resources-Our business requiresThe COVID-19 pandemic caused us to incur substantial capital and operating expenses, which reducesmodify our available free cash flow.”
Our failure to meetworkforce practices, including having the evolving needsvast majority of our customers could adversely impactemployees work from home. We intend to reopen our competitive position.
In orderoffices in 2022 under a “hybrid” working environment, meaning that some of our employees will have the flexibility to compete effectively and respond to changing market conditions, we must continuously offer products and services on terms and conditions that allow us to retain and attract customers and to meet their evolving needs. To do so, we must continuously (i) invest inwork remotely at least some of the time, for the foreseeable future. The hybrid working environment may impair our network, (ii) develop, test and introduce new products and services and (iii) rationalize and simplify our offerings by eliminating older or overlapping products or services. Our ability to maintain attractive productsour collaborative and servicesinnovative 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 successfully introduce new product or service offerings onsafely reopen our offices and operate under a timely and cost-effective basis could be constrained by a range of factors, including network limitations, support system limitations, limited capital, an inability to attract key personnel with the necessary skills, intellectual property constraints, inadequate digitization or automation testing delays, technological limits or an inability to act as quickly or efficiently as other competitors. In addition, new product or service offerings mayhybrid working environment are not be widely accepted bysuccessful, our customers. Our business could be materially adversely affected ifimpacted.Additionally, any state or federal vaccine mandate that is upheld by the courts could make it more difficult to retain or attract employees who oppose vaccination mandates and are ineligible for an exemption.
The pandemic 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 are unablecan provide no assurances to maintain competitive products and services and to timely and successfully develop and introduce new products or services.this effect.
We could be harmed if our reputation is damaged.
We believe the Lumen and Level 3 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 difficulties in consolidating, integrating, updating and simplifyingreputational damage if customers, vendors, employees, advocacy groups, regulators, investors, the media, social media influencers or others criticize our technical infrastructure.services, operations or public positions.
Our abilitybrand and reputation could be impacted by our public commitments to consolidate, integrate, updatevarious corporate environmental, social and simplifygovernance (ESG) initiatives, including our systemspolitical contributions, our advocacy positions, and information technology infrastructure in response to our growthgoals for sustainability, inclusion and changing business needs is important todiversity. Positions we take or do not take on ESG issues could negatively impact our ability to developattract or retain customers and maintain attractive productemployees. Similarly, any failure to achieve our ESG commitments could harm our reputation and service offerings and to interface effectively withadversely affect us. See further ESG considerations described within Lumen's Form 10-K filing for the year ended December 31, 2021.
There is a risk that negative or inaccurate information about us, even if based on rumor or misunderstanding, could adversely affect our customers. In addition, there may be issues relatedbusiness. Damage to our expanded or updated infrastructure that are not identified byreputation could be difficult, expensive and time-consuming to repair. Damage to our testing processes,reputation could also reduce the value and which may only become evident after we have started to fully utilize the redesigned systems. Our failure to modernize, consolidate and upgrade our technology infrastructure could have adverse consequences, including the delayed implementation of new service offerings, decreased competitiveness of existing service offerings, network instabilities, increased operating or acquisition integration costs, service or billing interruptions or delays, service offering inconsistencies, customer dissatisfaction, and the diversion of development resources. Any or alleffectiveness of the foregoing developmentsLumen brand name and could havereduce investor confidence in us, having a negativematerial adverse impact on the value of our business, results of operations, financial condition and cash flows.securities.
We could be harmed by security breaches or other significant disruptions or failurescyber-attacks.
Our vulnerability to cyber-attacks is heightened by several features of networks, information technology infrastructure or related systems owned or operated by us.
We are materially reliant uponour operations, including (i) our material reliance on our networks information technology infrastructure and related technology systems (including our billing and provisioning systems) to provide products and services to our customers and to manageconduct our operations, and affairs. We face the risk, as does any company,(ii) our transmission of a security breach or significant disruption of our information technology infrastructure and related systems. As a communications company that transmits large amounts of informationdata over communications networks, we face an added risk that a security breach or other significant disruption of our network, infrastructure or systems or those that we operate or maintain for certain ofand (iii) our business customers, could lead to material interruptions or curtailments of service. Moreover, in connection with processing and storingstorage of sensitive and confidential customer data, we face a heightened risk that a security breach or disruption could result in unauthorized access to our customers’ proprietary information.data.
We strive to maintain the security and integrity of information and systems under our control, and maintain contingency plans in the event of security breaches or other system disruptions. Nonetheless, we cannot assure you that our security efforts and measures will prevent unauthorized access toCyber-attacks on our systems loss or destructionmay stem from a variety of data (including confidential customer information), account takeovers, unavailability of service, computer viruses, malware, ransomware, distributed denial-of-service attacks, or other forms of cyber-attacks or similar events. These threats may derive from human error, hardware or software vulnerabilities, aging equipment or accidental technological failure. These threats may also stem fromsources, including fraud, malice or sabotage on the part of employees,foreign nations, third parties, vendors, or foreign nations, includingemployees and attempts by outside parties to fraudulently induce our employees or customers to disclose or grantgain 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 our customers’ data, potentially includingprotected health information, subject tothereby implicating stringent domestic and foreign data protection laws governing personally identifiable information, protected health information or other similar types of sensitive data.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 suchthem to operate our business. Various other systems to deliver services to our customers. Each offactors could intensify these risks, could further intensify to the extent we maintainincluding, (i) our maintenance of information in digital form stored on servers connected to the Internet.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.
Similar toLike other large telecommunicationsprominent technology and communications companies, we and our customers are a constant targettargets of cyber-attacks of varying degrees. Althoughcyber-attacks. Despite our efforts to prevent these events, some of these attacks have resulted in security breaches, although thus far none of these breaches havehas 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 our greater useand the wider accessibility of opencyber-attack tools. Known and software-defined networks, our increased operationnewly discovered software and hardware vulnerabilities are constantly evolving, which increases the difficulty of offshore systems,detecting and our increased profile due to the growth of our organization and our customer base.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 that we will be unable to implement security barriers or other preventative measures that repel all future cyber-attacks. Any such future security breaches or disruptions could materially adversely affect our business, results of operations or financial condition, especially in light of the growing frequency, scope and well-documented sophistication of cyber-attacks and intrusions.
Although CenturyLinkLumen Technologies maintains cyber liability 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.
Additional risksCyber-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) require us to provide credits for future service to our customers or to offer expensive incentives to retain customers; (v) subject us to claims by our customers or regulators for damages, fines, penalties, license or permit revocations or other remedies, (vi) damage our reputation or result in a loss of business, (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.
We could be harmed by outages in our network infrastructureor various platforms, or other failures of our services.
We are also vulnerable to outages in our network, hosting, cloud or IT platforms, as well as failures of our products or services to perform in the manner anticipated. These outages or other failures could result in several of the same adverse effects listed above for cyber-attacks, including the loss of customers, the issuance of credits or refunds, and related systems include, among others:
capacity or system configuration limitations,regulatory fines. This vulnerability may be increased by several factors, including those resulting fromaging network elements, human error, changes in our customer's usage patterns,network, the introduction of new technologies or products or incompatibilities between our newer and older systems;
theft or failure of our equipment;
software or hardware obsolescence, defects or malfunctions;
power losses or power surges;
physical damage, whether caused by fire, flood, adverse weather conditions, terrorism, sabotage, vandalism or otherwise;
deficienciestechnologies, vulnerabilities in our processesvendors or controls;
our inability to hiresupply chain, aberrant employees and retain personnel with the requisite skills to adequately maintainhardware and software limitations. The process for remediating any interruptions, outages, delays or improve our systems;
programming, processingcessations of service could be more expensive, time-consuming, disruptive and other human error; and
inadequate building maintenance by third-party landlords or other service failures of our third-party vendors.
Due to these factors, fromresource intensive than planned. From time to time in the ordinary course of our business we experience disruptions in our service. We could experience more significant disruptions in the future, especially if network traffic continues to increase and we continue to assume greater responsibility for managing our customers’ critical systems and networks.
Disruptions, security breaches and other significant failures of the above-described networks and systems could:
disrupt the proper functioning of these networks and systems, which could in turn disrupt (i) our operational, billingfuture. Delayed sales, lower margins, fines or other administrative functions or (ii) the operations of certain of ourlost customers who rely upon us to provide services critical to their operations;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive, classified or otherwise valuable information of ours, our customers or our customers’ end users, including trade secrets, which others could use for competitive, disruptive, destructive or otherwise harmful purposes and outcomes;
require us to notify customers, regulatory agencies or the public of data breaches;
require us to provide credits for future service under certain service level commitments we have provided contractually to our customers or to offer expensive incentives to retain customers;
subject us to claims for damages, fines, penalties, termination or other remedies under our customer contracts or service standards set by regulators, which in certain cases could exceed our insurance coverage;
result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional regulatory scrutiny or expose us to prolonged litigation; or
require significant management attention or financial resources to remedy the resulting damages or to change our systems, including expenses to repair systems, add new personnel or develop additional protective systems.
Any or all of the foregoing developmentsfrom such disruptions could have a negative impact on our business, reputation, results of operations, financial condition, and cash flows.
Negative publicity may adversely impact us.
Our ability to attract and retain customers depends in part upon external perceptions of our products, services management integrity and financial performance. Customer complaints, governmental investigations, outages, or other service failures of networks operated by us could cause substantial adverse publicity affecting us. Similar events impacting other operators could indirectly harm us by causing substantial adverse publicity affecting our industry in general. In either case, press coverage, social media messaging or other public statements that insinuate improper actions by us or other operators, regardless of their factual accuracy or truthfulness, may result in negative publicity, litigation, governmental investigations or additional regulations. Addressing negative publicity and any resulting litigation or investigations may distract management, increase costs and divert resources. Negative publicity may have an adverse impact on our reputation and the morale of our employees. We could suffer similar adverse effects if shareholders, financial analysts or other financial professionals issue public statements that cast us or our industry in a negative light. Any of these developments could adversely affect our business, results of operations, financial condition, cash flows, prospects and the value of our securities.
Market prices for many of our services have decreased in the past, and any similar price decreases in the future will adversely affect our revenue and margins.
Over the past several years, a range of competitive and technological factors, including robust network construction and intense competition, have lowered market prices for many of our products and services. If these market conditions persist, we may need to continue to reduce prices to retain customers and revenue. If future price reductions are necessary, our operating results will suffer unless we are able to offset these reductions by reducing our operating expenses or increasing our sales volumes.
Our future growth potential will depend in part on the continued development and expansion of the Internet.
Our future growth potential will depend in part upon the continued development and expansion of the Internet as a communication medium and marketplace for the distribution of data, video and other products by businesses, consumers, and governments. The use of the Internet for these purposes may not grow and expand at the rate anticipated by us or others, or may be restricted by factors outside of our control, including (i) actions by other carriers or governmental authorities that restrict us from delivering traffic over other parties' networks, (ii) changes in regulations, (iii) technological stagnation, (iv) increased concerns regarding cyber threats or (v) changes in consumers' preferences or data usage.
Our failure to hire and retain qualified personnel could harm our business.
Our future success depends on our ability to identify, hire, train and retain executives, managers and employees with technological, engineering, software, product development, operational, provisioning, marketing, sales, customer service, administrative, managerial and other key skills. There is a shortage of qualified personnel in several of these fields, particularly in certain growth markets, such as the areas adjoining our Denver and Seattle offices. We compete with several other companies for this limited pool of potential employees. As our industry increasingly becomes more competitive, it could become especially difficult to attract and retain top personnel with skills in high demand. Our workforce reduction and integration initiatives over the past couple of years have further increased the challenges of attracting and retaining talented individuals. In addition, subject to limited exceptions, none of our executives or domestic employees have long-term employment agreements. For all these reasons, there is no assurance that our efforts to recruit and retain qualified personnel will be successful.
Increases in broadband usage may cause network capacity limitations, resulting in service disruptions, reduced capacity or slower transmission speeds for our customers.
Video streaming services, gaming and peer-to-peer file sharing applications use significantly more bandwidth than other Internet activity such as web browsing and email. As use of these services continues to grow, our broadband customers will likely use much more bandwidth than in the past. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions, service degradation or slower transmission speeds for our customers. Alternatively, we could choose to implement network management practices to reduce the network capacity available to bandwidth-intensive activities during certain times in market areas experiencing congestion, which could negatively affect our ability to retain and attract customers in affected markets. Competitive or regulatory constraints may preclude us from recovering the costs of network investments designed to address these issues, which could adversely impact our operating margins, results of operations, financial condition and cash flows.
We have been accused of infringing the intellectual property rights of others and will likely face similar accusations in the future, which could subject us to costly and time-consuming litigation or require us to seek third-party licenses.
Like other communications companies, we have increasingly in recent years received a number of notices from third parties or have been named in lawsuits filed by third parties claiming we have infringed or are infringing upon their intellectual property rights. We are currently responding to several of these notices and claims and expect this industry-wide trend will continue. Responding to these claims may require us to expend significant time and money defending our use of the applicable technology, and divert management’s time and resources away from other business. In certain instances, we may be required to enter into licensing agreements requiring royalty payments. In the case of litigation, we could be required to pay significant monetary damages or cease using the applicable technology. If we are required to take one or more of these actions, our profit margins may decline or our operations could be materially impaired. In addition, in responding to these claims, we may be required to stop selling or redesign one or more of our products or services, which could significantly and adversely affect our business, results of operations, financial condition and cash flows.
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 license or otherwise 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.
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. The steps we have taken, however, may not prevent unauthorized use or the reverse engineering of our technology. Others may independently develop technologies that are substantially equivalent, superior to, or otherwise competitive to the technologies we employ in our services or that infringe on our intellectual property. We may be unable to prevent competitors from acquiring proprietary rights that are similar to or infringe upon our proprietary rights, or to prevent our current or former employees from using or disclosing to others our proprietary information. Enforcement of our intellectual property rights may depend on initiating legal actions against parties who infringe or misappropriate our proprietary information, but these actions may not be successful, even when our rights have been infringed. 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.
Our operations, financial performance and liquidity are materially reliant on variouskey 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 exposes us to multiple risks. Typically these arrangements limitlimits our control over the delivery and quality of our services and expose us to the risk that our ability to market our services could be adversely impacted by changes in the plans or properties of the carriers upon which we are reliant.services. In addition, we are exposed to the risk that the other carriers may be unwilling or unable to continue or renew these arrangements in the future on terms favorable to us, or at all. This risk isfuture. Those risks are heightened when the other carrier is a competitor who may benefit from terminating the agreement or imposing price increases, or a carrier who suffers financial distress or bankruptcy. If we lose these arrangements and cannot timely replace them, our ability to provide services to our customers and conduct our business could be materially adversely affected. Moreover, many of our arrangements with other carriers are regulated by domestic or foreign agencies, which subject us to the additional risk that changes in regulation could increase our costs or otherwise adversely affect our ability to provide services. Finally, even when another carrier agrees or is obligated to provide services to us to permit us to obtain new customers, it is frequently expensive, difficult and time-consuming to switch the new customers to our network, especially if the other carrier fails to provide timely and efficient cooperation.increases.
Conversely,Additionally, certain of our operations carry a significant amount of voice or data traffic for other communications providers. Their reliance on our services exposes us to the risk that they may transfer all or a portion of this traffic from our network to existing or newly-builtalternative networks owned or leased by them, thereby reducing our revenue.
Our operations and financial performance could be adversely affected if our relationships with any of these other communications companies are disrupted or terminated for any other reason, including if such other companies:
become bankrupt or experience substantial financial difficulties;
suffer work stoppages or other labor strife;
challenge our right to receive payments or services under applicable regulations or the terms of our existing contractual arrangements; or
are otherwise unable or unwilling to make payments or provide services to us.
Reliance on other key suppliers and vendors. We depend on a limited number of suppliers and vendors forto 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 suppliersvendors experience business interruptions, security breaches, litigation or other problems deliveringissues that interfere with their ability to deliver their products or servicing these network componentsservices on a timely basis, our operations could suffer significantly. To the extent that proprietary technology of a supplier is an integral component of our network, we may have limited flexibility to purchase key network components from alternative supplierssuppliers.
The COVID-19 pandemic and other factors have led to a shortage of semiconductors and certain other supplies that we use in our business. Thus far, the negative impact of these shortages on our financial results has not been significant. If these shortages intensify, however, it could materially impact our financial results in a variety of ways, including by increasing our expenses, delaying our network expansion plans or interfering with our ability to deliver products and services.
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 third parties assert patent infringement claims againstany of these authorizations are cancelled, or otherwise terminate or lapse, or if the landowner requests price increases. 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 suppliersnetwork expansion opportunities.
Climate change could disrupt our operations, cause us to incur substantial additional capital and operating costs or us. We also rely on a limitednegatively affect our business.
A substantial number of (i) software vendorsour domestic facilities are located in coastal areas, which subjects them to supportthe 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. These 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. Also, concern over climate change may result in new or increased legal and regulatory requirements to reduce or mitigate the effects of climate change, which could result in significant increased costs and require additional investments in facilities and equipment, thereby negatively affecting our business management systems, (ii) content suppliersand operations. In addition, any failure to provide programmingachieve our goals or regulatory mandates with respect to reducing our videoimpact on the environment could result in the adverse impacts noted above.
Future acquisitions or strategic investments and asset dispositions could have a detrimental impact on us or the holders of our securities.
In an effort to implement our and Lumen’s business strategies, Lumen from time to time in the future may attempt to pursue other acquisition or expansion opportunities, including strategic investments. 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 and our affiliates’ 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 and our affiliates’ operations, and (iii) contractors to assist usother unidentified issues not discovered in connection with our network construction and maintenance activities. due diligence.
In addition, in the event it becomes necessary to seek alternative suppliers and vendors,past, Lumen Technologies or we may be unable to obtain satisfactory replacement supplies, services, utilitieshave disposed of assets or programming on economically attractive terms, on a timely basis, or at all, which could increase costs or cause disruptions in our services.
Reliance on utility providers and landlords. Our energy costs can fluctuate significantly or increaseasset groups for a variety of reasons, including changes in legislation and regulation. Several pending proposals designed to reduce greenhouse emissions could substantially increase our energy costs, which we may not be abledispose of other assets or asset groups from time to pass ontime in the future. If we agree to proceed with any such divestitures of assets, we may experience operational difficulties segregating them from our retained assets and operations, which could result in disruptions to our customers.operations or claims for damages, among other things. Moreover, such dispositions could reduce our cash flows available to support our payment of distributions, capital expenditures, debt maturities or other commitments.
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 detrimental impact on the worldwide economy, could have a material adverse impact on our operating results and financial condition. Variants of the COVID-19 virus 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 for an indefinite period of time. Future events regarding the pandemic, which are unpredictable and beyond our control, will likely continue impacting our operations and results by its effects on demand for our products and services and network usage, on our customers’ ability to continue to pay us in a timely manner, on other third parties we rely on, on our workforce, on our performance under our contracts, and on our supply chains or distribution channels for our products and services. In addition, many of our office facilities. Althoughemployees continue to face challenges due to pandemic-related financial, family and health burdens that may negatively impact their ability or willingness to remain employed or fully engaged. If the majority of these leases providepandemic intensifies or economic conditions deteriorate, the pandemic’s adverse impact on us withcould become pronounced in the opportunity to renew the lease, many of these renewal options provide that rent for the renewal period will be equal to the fair market rental rate at the time of renewal. Any resulting increases in our rent costsfuture and could have a negativematerial adverse impact on our operating results and financial results.condition.
RelianceMoreover, 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.”
We have taken certain precautions due to the uncertain and evolving situation relating to the spread of COVID-19 that could have a material adverse impact on us.
The precautionary measures described in this annual report we have taken to safeguard our employees and customers could make it more difficult to (i) timely and efficiently furnish products and services to our customers, (ii) devote sufficient resources to our ongoing network and product simplification projects, (iii) efficiently monitor and maintain our network, (iv) maintain effective internal controls, (v) mitigate information technology or cybersecurity related risks, (vi) maintain a consistent culture and (vii) otherwise operate and administer our affairs. As such, these measures ultimately could have a material adverse impact on our operating results and financial condition.
Our consolidated revenue is concentrated in a couple top customers.
Approximately 3% of our consolidated revenue is attributable to our top customer, and approximately 6% of our consolidated revenue is attributable to our top two customers. If we lost either or both of these customers, or either of them materially decreased their respective orders for our services, our business would be adversely affected.
Adverse developments impacting our non-consolidated affiliates could indirectly impact us.
Our consolidated operations constitute only a portion of the consolidated operations of our corporate parent, Lumen. We engage in various intercompany transactions with affiliates of Lumen that are not members of our consolidated group of companies. Events or developments that adversely impact these non-consolidated affiliates will not directly impact our consolidated financial position or performance as reported under GAAP, but could nonetheless indirectly adversely impact us to the extent such developments interfere with the ability of such non-consolidated affiliates to provide services or pay amounts to which we or our subsidiaries are entitled. For these reasons, you are urged to review the risk factor disclosures contained in Item 1A of Lumen’s Annual Report on Form 10-K for the year ended December 31, 2021.
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 data storage, communication and transfer laws may increase our costs, limit our operational flexibility or result in third-party claims.
While Level 3 provides competitive services that are generally not subject to state regulation to the same degree as ILECs, 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.
Various governmental payments. 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. 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.
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 disbarreddebarred from future governmental programs or contracts for a significant period of time.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 could becondition.
Adapting and responding to changing regulatory requirements has historically materially adversely affected.
Violating our government contracts could have other serious consequences.
We provide services to various governmental agencies with responsibility for national security or law enforcement. These governmental contracts impose significant requirements on us relating to network security, information storage and other matters, and in certain instances impose on us additional heightened responsibilities, including requirements related to the composition of CenturyLink's Board of Directors. While we expect to continue to comply fully with all of our obligations under these contracts, we cannot assure you of this. The consequences of violating these contracts could be severe, potentially including the revocation of our FCC licenses in the U.S. (in addition to being suspended or debarred from government contracting, as noted above.)
Portions of our property, plant and equipment are located on property owned by third parties.
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 our cable, conduit and other network equipment 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. Our operations could be adversely affected if any of these authorizations terminate or lapse, or if the landowner requests price increases. Moreover, our ability to expand our network could depend in part on obtaining additional authorizations, the receipt of which is not assured.
Over the past few years, certain utilities, cooperatives and municipalities in certain of the states in which we operate have requested significant rate increases for attaching our plant to their facilities. To the extent that these entities are successful in increasing the amount we pay for these attachments, our future operating costs will increase.
Our subsidiaries currently are, and in the past have been, subject to lawsuits challenging the subsidiaries’ use of rights-of-way. Similar suits are possible in the future. Plaintiffs in these suits typically seek to have them certified as class action suits. These suits are typically complex, lengthy and costly to defend, and expose us to each of the other general litigation risks described elsewhere herein.
Our business customers may seek to shift risk to us.
We furnish to and receive from our business customers indemnities relating to damages caused or sustained by us in connection with certain ofimpacted our operations. Our customers’ changing views on risk allocation could cause us to accept greater risk to win new business or could result in us losing business if we are not prepared to take such risks. To the extent that we accept such additional risk,We believe evolving regulatory developments and seek to insure against it, our insurance premiums could rise.
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, tax laws, immigration laws, privacy laws and accounting requirements. Many of these laws are complex and change frequently. Regulations that require the awarding of contracts to local contractors or the employment of local citizens may adversely affect our flexibility or competitiveness in these jurisdictions. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions. There is a risk that these laws or regulations may materially restrict our ability to deliver services in various international jurisdictions or could be breached through inadvertence or mistake, fraudulent or negligent behavior of our employees or agents, failure to comply with certain formal documentation or technical requirements, or otherwise. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us or our personnel, or prohibitions on the conduct of our business or our ability to operate in one or more countries, any of which could have a material adverse effect on our business, reputation, results of operations, financial condition or prospects.
Many non-U.S. laws and regulations relating to communications services are more restrictive than U.S. laws and regulations, particularly those relating to privacy rights and data retention. For example, all 28 current member states of the European Union have adopted new European data protection laws that we believe could impact our operations in Europe and could potentially expose us to an increased risk of litigation or significant regulatory fines. Moreover, national regulatory frameworks that are consistent with the policies and requirements of the World Trade Organization have only recently been, or are still being, enacted in many countries. Accordingly, many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market. As a result, in these markets we may encounter more protracted and difficult procedures to obtain licenses necessary to provide the full set of products and services we seek to offer.
In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include:
tax, licensing, political or other business restrictions or requirements, which may render it more difficult to obtain licenses or interconnection agreements on acceptable terms, if at all;
uncertainty concerning import and export restrictions, including the risk of fines or penalties assessed for violations;
longer payment cycles and problems collecting accounts receivable;
U.S. and non-U.S. regulation of overseas operations, including regulation under the U.S. Foreign Corrupt Practices Act "the "FCPA") and other applicable anti-corruption laws, including the U.K. Bribery Act of 2010 and the Brazilian Anti-corruption Law, (collectively with the FCPA, the “Anti-Corruption Laws”);
economic, social and political instability, with the attendant risks of terrorism, kidnapping, extortion, civic unrest and potential seizure or nationalization of assets;
currency and exchange controls, repatriation restrictions and fluctuations in currency exchange rates;
challenges in securing and maintaining the necessary physical and telecommunications infrastructure;
the inability in certain jurisdictions to enforce contract rights either due to underdeveloped legal systems or government actions that result in a deprivation of contract rights;
increased risk of cyber-attacks or similar events to our network as we expand our network or interconnect our network with other networks internationally;
the inability in certain jurisdictions to adequately protect intellectual property rights;
laws, policies or practices that restrict with whom we can contract or otherwise limit the scope of operations that can legally or practicably be conducted within any particular country;
potential submission of disputes to the jurisdiction of a non-U.S. court or arbitration panel;
reliance on third parties, including those with which we have limited experience;
limitations in the availability, amount or terms of insurance coverage;
the imposition of unanticipated or increased taxes, increased communications or privacy regulations or other forms of public or governmental regulation that increase our operating expenses; and
challenges in staffing and managing overseas operations.
Changes in multilateral conventions, treaties, tariffs or other arrangements between or among sovereign nations could impact us. Specifically, the British government is currently negotiating the terms of the United Kingdom’s exit from the European Union ("Brexit"). Brexit could potentially impact our supply chains, logistics, and human resources. Additionally, Brexit and other changes in multilateral arrangements may more broadly adversely affect our operations and financial results
Many of these risks are beyond our control, and we cannot predict the nature or the likelihood of the occurrence or corresponding effect of any such events, each of which could have an adverse effect on our financial condition and results of operations.
Certain of our international operations are conducted in countries or regions experiencing corruption or instability, which subjects us to heightened legal and economic risks.
We do business and may in the future do additional business in certain countries or regions in which corruption is a serious problem. Moreover, in order to effectively compete in certain non-U.S. jurisdictions, it is frequently necessary or required to establish joint ventures, strategic alliances or marketing arrangements with local operators, partners or agents. In certain instances, these local operators, partners or agents may have interests that are not always aligned with ours. Reliance on local operators, partners or agents could expose us to the risk of being unable to control the scope or quality of our overseas services or products, or being held liable under Anti-Corruption Laws for actions taken by our strategic or local partners or agents. Any determination that we have violated any Anti-Corruption Laws could have a material adverse effect on our business, results of operations, reputation or prospects.
We conduct significant operations in regions that have historically experienced high levels of political, economic and social instability, including the Latin American region. Various events in recent years have placed pressures on the stability of the currencies of several Latin American countries in which we operate, including Argentina, Brazil and Colombia. Pressures or volatility in local or regional currencies may adversely affect our customers in this region, which could diminish their ability or willingness to order products or services from us. Several Latin American countries have historically experienced high rates of inflation. Governmental actions taken to curb inflation, coupled with speculation about possible future actions, have in the past contributed to periodic economic uncertainty in many Latin American countries. Similar actions in the future, together with abrupt shifts in governmental administrations, could impede our ability to develop or implement effective business plans in the region. In addition, if high rates of inflation persist, we may not be able to adjust the price of our services sufficiently to offset our higher costs. A high inflation environment would also have negative effects on the level of economic activity and employment and adversely affect our business.
We are exposed to currency exchange rate risks and currency transfer restrictions and our results may suffer due to currency translations and re-measurements.
Declines in the value of non-U.S. currencies relative to the U.S. dollar could adversely affect us in several respects, including hampering our ability to market our services to customers whose revenue is denominated in depreciated currencies. In addition, where we issue invoices for our services in currencies other than U.S. dollars, our results of operations may suffer due to currency translations if such currencies depreciate relative to the U.S. dollar and we cannot or do not elect to enter into currency hedging arrangements regarding those payment obligations. Similarly, the strengthening of the U.S. dollar and exchange control regulations could negatively impact the ability of overseas customers to pay for our services in U.S. dollars.
Certain Latin American economies have experienced shortages in non-U.S. currency reserves and have adopted restrictions on the use of certain mechanisms to expatriate local earnings and convert local currencies into U.S. dollars. Any of these shortages or restrictions may limit or impede our ability to transfer or to convert those currencies into U.S. dollars and to expatriate those funds.
We may not be able to dispose of assets or asset groups on terms that are attractive to us, or at all.
In the past, we have disposed of assets or asset groups for a variety of reasons, and we may consider disposing of other assets or asset groups from time to time in the future. We may not be able to divest any such assets on terms that are attractive to us, or at all. In addition, if we agree to proceed with any such divestitures of assets, we may experience operational difficulties segregating them from our retained assets and operations, which could impact the execution or timing for such dispositions and could result in disruptions to our operations or claims for damages, among other things.
Unfavorable general economic conditions could negatively impact our operating results and financial condition.
Unfavorable general economic conditions, including unstable economic and credit markets, could negatively affect our business. While it is difficult to predict the ultimate impact of these general economic 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. These conditions impact, in particular, our ability to sell discretionary products or services to business customers that are under pressure to reduce costs or to governmental customers operating under budgetary constraints. Any one or more of these circumstances could continue to depress our revenue. Also, our customers may encounter financial hardships or may not be able to obtain adequate access to credit, which could negatively impact their ability to make timely payments to us. In addition, as discussed further below, unstable economic and credit markets may preclude us from refinancing maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us, or at all. For these reasons, among others, weak economic conditions could adversely affect our operating results, financial condition, and liquidity.
Our consolidated revenue is concentrated in a relatively small number of customers.
A relatively small number of customers account for a significant percentage of our revenue. Our top ten customers accounted for approximately 20 percent of our revenue for the year ended December 31, 2018. If we lost any or all of these customers, or any such customer materially decreased its orders for our services, our business would be adversely affected.
For additional information about our business and operations, see "Business" in Item 1 of this report.
Risks Relating to Our November 2017 Combination with CenturyLink
We cannot assure you that our ultimate parent company, CenturyLink, will timely realize the anticipated benefits of the business combination with us.
Our ultimate parent company, CenturyLink, expects to attain substantial benefits from its November 1, 2017, business combination with us, including enhanced scale, cost savings and the receipt of our net operating loss carryforwards for tax purposes. We cannot assure you that CenturyLink will be able to attain these anticipated benefits.
The combination poses various risks to CenturyLink and us.
CenturyLink and we incurred substantial expenses in connection with completing the acquisition of Level 3 on November 1, 2017, and both they and we expect to continue to incur substantial expenses in connection with integrating its operations with our operations. For a variety of reasons, the integration process may not be successful. Moreover, in connection with the combination, CenturyLink incurred and assumed a substantial amount of indebtedness. Under the agreements that govern such indebtedness, CenturyLink is bound by various covenants and other provisions that impose restrictions on its ability to operate, and Level 3 Parent's immediate parent has guaranteed CenturyLink's debt and has secured such guaranty with a first priority interest in substantially all of its assets.
CenturyLink's combination with us raises other risks.
CenturyLink's combination with us raises additional risks not described above. For additional information, see CenturyLink's (i) Definitive joint proxy statement/prospectus filed with the SEC on February 13, 2017 and (ii) CenturyLink's most recently filed annual report on Form 10-K, as updated by its subsequent Exchange Act reports.
Risks Relating to Legal and Regulatory Matters
We operate in a highly regulated industry and are therefore exposed to restrictions on our operations and a variety of risks relating to such regulation.
General. Our domestic operations are regulated by the FCC, various state utility commissions and occasionally by local agencies. Our non-domestic operations are regulated by supranational groups (such as the European Union), national agencies and, frequently state, provincial or local bodies.
Generally, we must obtain and maintain operating licenses from these bodies in most territories where we offer regulated services. We cannot assure you that we will be successful in obtaining or retaining all licenses necessary to carry out our business plan. Even if we are, the prescribed service standards and conditions imposed on us under these licenses may increase our costs and limit our operational flexibility. We also operate in some areas of the world without licenses, as permitted through relationships with locally-licensed partners.
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. The regulation of telecommunications networks and services around the world varies widely. In some countries, the range of services we are legally permitted to provide may be limited or may change. As noted above, in other countries existing telecommunications legislation is in development, is subject to currently ongoing proceedings, is unclear or inconsistent, or is applied in an unequal or unpredictable fashion, often in the absence of adjudicative forums that are adequate to address disputes. Accordingly, we cannot ensure that we will always be considered to be in compliance with all these requirements at any single point in time (as discussed further elsewhere herein). Our inability or failure to comply with the telecommunications and other laws of one or more countries in which we operate could prevent us from commencing or continuing to provide service therein.
The agencies responsible for the enforcement of these laws, rules and regulations may initiate inquiries or actions based on customer complaints or on their own initiative. Even if we are ultimately found to have complied with applicable regulations, such actions or inquiries could create adverse publicity that negatively impacts our business.
Domestic regulation of the telecommunications industry continues to change, and the regulatory environment varies substantially from jurisdiction to jurisdiction. In addition, from time to time carriers or other third parties refuse to pay for certain of our services or challenge our rights to receive certain service payments. Our future revenue, costs, and capital investment could be adversely affected by material changes to or decisions regarding the applicability of government requirements, and we cannot assure you that future regulatory, judicial or legislative activities will not have a material adverse effect on our operations.
Changes in the composition and leadership of the FCC, state 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, and make future planning more difficult.
Risks associated with changes in regulation. Changes in regulation can have a material impact on our business, revenue or financial performance. Changes over the past couple of decades in federal regulations have substantially impacted our operations, including recent orders or laws overhauling intercarrier compensation, revamping universal service funding and increasing our responsibilities to assist various governmental agencies and safeguard customer data. These changes have significantly impacted various aspects of our operations, financial results and capital expenditures, including the amount of revenue we collect from our wholesale customers. We expect these impacts will continue in the future. For more information, see "Business-Regulation" in Item 1 of this report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report.
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.
Risks of higher costs. Regulations continue to create significant operating and capital costs for us. Regulatory challenges tobusiness. In particular, our business practicescould be materially impacted if the U.S. Congress amends or delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and, if successful, such challenges could adversely affect our operations.
Our business also may be impacted by legislation and regulation imposing new or greater obligations related to regulations or laws related to regulating broadband services, storing records, fighting crime, bolstering homeland security or cyber security, increasing disaster recovery requirements, minimizing environmental impacts, enhancing privacy, restricting data collection, protecting intellectual property rights of third parties, or addressing other issues that impact our business. We expect our compliance costs to increase if future laws or regulations continue to increase our obligations.
Risks posed by other regulations. All of our operations are also subject to a variety of environmental, safety, health and other governmental regulations. In connection with oureliminates current operations, we use, handle and dispose of various hazardous and non-hazardous substances and wastes. In prior decades, certain of our current or former subsidiaries owned or operated, or are alleged to have owned or operated, former manufacturing businesses for which we have been notified of certain potential environmental liabilities. We monitor our compliance with applicable regulations or commitments governing these current and past activities. Although we believe that we are in compliance with these regulations in all material respects, our use, handling and disposal of environmentally sensitive materials, or the prior operations of our predecessors, could expose us to claims or actions that could potentially have a material adverse effect on our business, financial condition and operating results.
For a discussion of regulatory risks associated with our international operations, see “Risk Factors-Risks Affecting Our Business-Our international operations expose us to various regulatory, currency, tax, legal and other risks."
Regulation of the Internet could limit our ability to operate our broadband business profitably and to manage our broadband facilities efficiently.
Since the creation of the Internet, there has been extensive debate about whether and how to regulate Internet service providers. A significant number of congressional leaders, state elected officials and various consumer interest groups have long advocated in favor of extensive regulation. In 2015, the FCC adopted new regulations that regulated broadband services as a public utility under Title II of the Communications Act of 1934. Although the FCC voted to repeal most of those regulations in December 2017, opponents of the rescission have judicially challenged this action and continue to advocate in favor of re-instituting extensive regulation. Dependingfederal law limitations on the scope of any such future federal or state regulations, the imposition of heightened regulation of our Internet operations could 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 network extensions and upgrades, and otherwise negatively impact our current operations. As the significance of the Internet expands, state, local or foreign governments may adopt new laws or regulations, or apply existing laws and regulations to the Internet. We cannot predict the outcome of any such changes.
We may be liable for the material that content providers or distributors distribute over our network.
The liability of private network operators for informationproviders, such as us, against claims related to third party content stored or transmitted on theirprivate networks, is impacted bothas currently proposed by changing technologycertain governmental officials, legislative leaders and evolving legal principles that remain unsettledconsumer 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. 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 many jurisdictions. liability or otherwise damage our reputation.
While we disclaim any 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 partythird-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. If we decideSuch third-party content could also result in adverse publicity and damage our reputation. Moreover, as noted above, pending proposals to implement additional measures to reducechange the law could materially heighten our exposure to these risks, or if we are required to defend ourselves against these kinds of claims, our operations and financial results could be negatively affected.legal exposure.
Pending legal proceedings could have a material adverse impact on our financial condition and operating results and our ability to access the capital markets.us.
There are several material proceedings pending against CenturyLink and its affiliates, and certainpotentially material proceedings pending against us as described in Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements included in Item 8 of this report.affiliates. Results of these legal proceedings cannot be predicted with certainty. 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 beenin excess of our accrued or as to which the accrued liability is inadequate.liability. For each of these reasons, any of the proceedings described in Note 16,16—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 debt 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 are subject to franchising requirements that could impedemay not be successful in protecting and enforcing our expansion opportunities or result in potential fines or penalties.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 obtain from municipal authorities operating franchises to installstop selling or expand certain facilities related to our fiber transport operations and certainredesign one or more of our other services. Some of these franchises may require us to pay franchise fees, and may require us to pay finesproducts or penalties if we violate or terminate our related contractual commitments. In some cases, certain franchise requirements could delay us in expanding our operations or increase the costs of providing these services.
We are exposed to risks arising out of recent legislation affecting U.S. public companies.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, and related regulations implemented thereunder, have increased our legal and financial compliance costs and made some activities more time consuming. Any failure to successfully or timely complete annual assessments of our internal controls required by Section 404 of the Sarbanes-Oxley Act could subject us to sanctions or investigation by regulatory authorities. Any such action could adversely affect our financial results or our reputation with investors, lenders or others.
Changes in any of the above-described laws or regulations may limit our ability to plan, and could subject us to further costs or constraints.
From time to time, the laws or regulations governing us or our customers, or the government’s policy of enforcing those laws or regulations, have changed frequently and materially. The variability of these laws could hamper the ability of us and our customers to plan for the future or establish long-term strategies. Moreover, future changes in these laws or regulations could further increase our operating or compliance costs, or further restrict our operational flexibility, any ofservices, which could have a material adverse effectimpact on our resultsbusiness. 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.
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 operations, competitive position, financial conditionthese laws are complex and change frequently. There is a risk that these laws or prospects.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.
ForMany non-U.S. laws and regulations relating to communications services are more restrictive than U.S. laws and regulations. We are subject to the European Union’s General Data Protection Regulation (“GDPR”), the United Kingdom’s GDPR, as well as various other laws governing privacy rights, data protection and cybersecurity laws in other regions. These laws and 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 thorough discussiondifficult for us to obtain licenses and conduct our operations.
In addition to these international regulatory risks, some of the regulatory issues that may affect ourother risks inherent in conducting business see "Business-Regulation"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 Item 1currency exchange rates including, without limitation, the matters outlined in Note 1—Background and Summary of this report.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.
Risks Affecting Our Liquidity and Capital Resources
Our highoperations 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.
We continue to carry significant debt. As of December 31, 2018, the aggregate principal amount2021, we had approximately $4.6 billion of ouroutstanding consolidated long-term debt was $10.5secured indebtedness and $5.5 billion excluding unamortized premiums, net, and capital leaseof outstanding consolidated unsecured indebtedness (excluding finance leases and other obligations. As of such date, $640 million aggregate principal amount of this long-termobligations, unamortized discounts or premiums and unamortized debt was scheduled to mature prior to December 31, 2021. While we currently believe we will have the financial resources to meet or refinance our obligations when they come due, we cannot fully anticipate our future performance or financial condition, the future condition of the credit markets or the economy generally.issuance costs.)
Our significant levels of debt canand related debt service obligations could adversely affect us in several other respects, including:
limiting our ability to obtain additional financing for working capital, capital expenditures, acquisitions, refinancings or other general corporate purposes, particularly if, as discussed further in the risk factor disclosure below, (i) the ratings assigned to our debt securities by nationally recognized credit rating organizations are revised downward or (ii) we seek capital during periods of turbulent or unsettled market conditions;
•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, strategic initiatives distributions, marketing and other potential growth initiatives;dividends;
•hindering our ability to capitalize on business opportunities and to plan for or react to changing market, industry, competitive or economic conditions;
increasing our future borrowing costs;
limiting or precluding us from entering into commercial, hedging or other financial arrangements with vendors, customers or other business partners;
•making us more vulnerable to economic or industry downturns, including interest rate increases;increases (especially with respect to our variable rate debt);
•placing us at a competitive disadvantage compared to less leveraged competitors;companies;
increasing•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 we will needthis could force us to sell securities or assets possibly on unfavorable terms, or take other unfavorableless desirable actions to meet payment obligations; orraise 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.
A substantial portionborrowings or experience any downgrade in our credit ratings or those of our indebtedness bears interest at variable rates. If market interest rates increase, our variable-rate debt will have higher debt service requirements, which could adversely impact our cash flows and financial condition.
Any failure to make required debt payments could, among other things, adversely affect our ability to conduct operations or raise capital.
Subject to certain limitations, our current debt agreements and the debt agreements of our subsidiaries allow us to incur additional debt, which could exacerbate the other risks described in this report.
affiliates. Subject to certain limitations and restrictions, the current terms of our debt instruments and theour subsidiaries’ debt instruments of our subsidiaries permit us or them to incur additional indebtedness. Incremental borrowings that impose additional financial risks could exacerbate the other risks described in this report.
We expect to periodically require financing, and we cannot assure you that we will be able to obtain such financing on terms that are acceptable to us, or at all.
We have a significant amount of indebtedness that we intendexpect to periodically require financing in the future to refinance over the next several years, principally through the issuance of debt by Level 3 Financing, Inc. We may also need to obtain additional financing under a variety ofexisting indebtedness and potentially for other circumstances, including if:
we engage in additional acquisitions or undertake substantial capital projects or other initiatives that increase our cash requirements;
we become subject to significant judgments or settlements, including in connection with one or more of the matters discussed elsewhere herein; or
we otherwise require cash to fund our cash requirements described elsewhere herein.
purposes. Our ability to arrange additional financing will depend on, among other factors, our financial position, performance, and credit ratings, as well as prevailing market conditions and other factors beyond our control. Global financial markets continue to be unpredictable and volatile. 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. VolatilityInstability in the domestic or global financial markets could limit our accesshas from time to the credit markets, leading to higher borrowing costs or,time resulted in some cases, the inability to obtain financing on terms that are acceptable to us, or at all.
In addition, our ability to borrow fundsperiodic volatility and disruptions in the future will depend in part on the satisfaction of the covenants in our credit facilitiescapital markets. For these and other debt instruments, which are discussed further below.
For all the reasons, mentioned above, we can give no assurance that additional financing for any of these purposes will be available on terms that are 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, reducing or terminating distributions, 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 docomplete some of these thingsactions on favorable terms, or at all. For these and other reasons, we cannot assure you that we could implement these steps in a sufficient or timely manner, or at all. Moreover, any steps taken to strengthen our liquidity, such as cutting costs, could adversely impact our business or operations.
We haveare part of a highly complex debt structure, which could impact the rights of our investors.
Nearly half of the debt of our subsidiary 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 by certain of its affiliates, including us. 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. Almost 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. Substantial amounts of debt are also owed by two direct or indirect subsidiaries of Qwest Communications International Inc. and by Embarq Corporation and one of its subsidiaries. Most of the nearly 400 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.
CenturyLink, Inc.Under our and various of its subsidiaries (including Embarq Corporation, Qwest Corporation, Qwest Capital Funding, Inc., Level 3 Financing, Inc. and Level 3 Parent, LLC) have borrowed substantial amounts of money from financial institutions or investors. Under the associatedour affiliates' consolidated debt and financing arrangements, we arethe issuer of the debt is subject to various covenants and restrictions, the most restrictive of which pertain to the debt of CenturyLink,Lumen Technologies, Inc. and the Level 3 entities.Financing, Inc.
CenturyLink, Inc.’s revolvingLumen’s senior secured credit facilities and term loan debt arrangementsnotes contain several significant limitations restricting ourLumen’s ability to, among other things:
things, borrow additional money or issue guarantees;
pay dividends or other distributions to our member;
shareholders; make loans, advances or other investments;
loans; create liens on assets;
sell assets;
enter into sale-leaseback transactions;
enter into transactions transact with affiliates;its affiliates and
engage in mergers or consolidations. These restrictive covenants could have a material adverse impact on our and our affiliates' ability to operate or reconfigure our business, to pursue acquisitions, divestitures or strategic transactions, or to otherwise pursue our plans and strategies.
The debt and financing arrangements of Level 3 Parent, LLC and its subsidiary Level 3 Financing, Inc. contain substantially similar limitations that restrict our operations on a standalone basis as a separate restricted group. Consequently, certain of these covenants may significantly restrict our ability to distribute cash to other of our affiliated entities or to enter into other transactions among our affiliatedwholly-owned entities.
CenturyLink, Inc.’s above-referenced debt arrangements also
Lumen’s senior secured credit facilities contain financial covenants that require it to maintain certain financial ratios, and the term loan debt of Qwest Corporation includes a similar financial covenant. The ability of CenturyLink, Inc. and Qwest Corporation to comply with these provisions may be affected by events beyond their control.maintenance covenants.
Increasingly in recent years, certain debt investors have sought to financially benefit themselves by identifying and seeking to enforce defaults under borrowers’ debt agreements. This development could increase the risk of claims made under our debt agreements.
The failure of CenturyLink, Inc.us or any of its subsidiariesour affiliates 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 their respectiveour 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. As noted elsewhere herein, we cannot assure you that we could
Our cash flows may not adequately address any such defaults, cross-defaults or acceleration of our debt payment obligations in a sufficient or timely manner, or at all. We expect to periodically require financing, and we cannot assure you that we will be able to obtain such financing on terms that are acceptable to us, or at all. For additional information, see “Risks Affecting Our Liquidity and Capital Resources” and Note 5—Long-Term Debt.
Any downgrade in the credit ratings of us or our affiliates could limit our ability to obtain future financing, increase our borrowing costs and adversely affect the market price of our existing debt securities or otherwise impair our business, financial condition and results of operations.
Nationally recognized credit rating organizations have issued credit ratings relating to our long-term debt and the long-term debt of Level 3 Financing, Inc. Most of these ratings are below “investment grade”, which results in higher borrowing costs than "investment grade" debt as well as reduced marketability of our debt securities. There can be no assurance that any rating assigned to any of these debt securities will remain in effect for any given period of time or that any such ratings will not be lowered, suspended or withdrawn entirely by a rating agency if, in that rating agency’s judgment, circumstances so warrant.
A downgrade of any of these credit ratings could:
adversely affect the market price of some orfund all of our outstanding debt or equity securities;cash requirements.
limit our access to the capital markets or otherwise adversely affect the availability of other new financing on favorable terms, if at all;
trigger the application of restrictive covenants or adverse conditions in our current or future debt agreements;
increase our cost of borrowing; and
impair our business, financial condition and results of operations.
For more information on the credit ratings of our secured and unsecured debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt and Other Financing Arrangements” in Item 7 of this report.
Our business requires us to incur substantial capital and operating expenses, which reduces our available free cash flow.
Our business is capital intensive. We expect to continue to require significant cashcapital to maintain, upgrade and expand our network infrastructure, as a result ofbased on several factors, including:
including (i) changes in customers'customers’ service requirements, including increased demands by customersrequirements; (ii) our continuing need to transmit largerexpand and improve our network to remain competitive and meet customer demand; and (iii) our regulatory commitments. We will also continue to need substantial amounts of data at faster speeds;
cash to meet our above-described needfixed 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. We cannot assure you our future cash flows from operating activities will be sufficient to (i) consolidate and simplify our various legacy systems, (ii) strengthen our customer support systems and (iii) support our development and launch of new products and services; and
technological advancesfund all of our competitors;cash requirements in the manner currently contemplated.
We may be unable to expand or adapt our network infrastructure to respond to these developments in a timely manner, at a commercially reasonable cost or on terms producing satisfactory returns on our investment.
In addition to investing in expanded networks, new products or new technologies, we must from time to time invest capital to convert older systems to simplify and modernize our network. While we believe that our currently planned level of capital expenditures will meet both our maintenance and core growth requirements, this may not be the case if demands on our network continue to accelerate or other circumstances underlying our expectations change. Increased spending could, among other things, adversely affect our operating margins, cash flows, results of operations and financial position.
Similarly, we continue to anticipate incurring substantial operating expenses to support our growth initiatives. We may be unable to sufficiently manage or reduce these costs, even if revenue in some of our lines of business are decreasing. If so, our operating margins will be adversely impacted.
As a holding company, we rely on payments from our operating companies to meet our obligations.
As aBecause both we and Level 3 Financing, Inc. are holding company,companies, substantially all of our income and operating cash flow is dependent upon the earnings of our respective 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 the cash flows in amounts sufficient to fund our obligations, including the payment of our long-term debt. Our respective 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 affiliatesnon-guarantor 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 certain of our subsidiaries limit the amount of funds that 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 subsidiaryour respective non-guarantor subsidiaries upon itstheir liquidation or reorganization will 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 that 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 orders imposed by state regulators (either in connection with obtaining necessary approvals for our acquisitions or in connection with our regulated operations).regulations. For all these reasons, you should not assume that our respective subsidiaries will be able in the future to generate and distribute to us cash in amounts sufficient to fund our respective cash requirements. See “Management’s Discussion and Analysis
We periodically transfer our cash to our controlling equity owner, which exposes us to certain risks.
We are controlled by Lumen Technologies, our ultimate parent company.
As of Financial Condition and Results of Operations-Liquidity and Capital Resources” included elsewhere in this report for further discussion of these matters.
Our current distribution practicesDecember 31, 2021, Lumen Technologies owed us approximately $1.5 billion on the affiliate note receivable. Developments that adversely impact Lumen Technologies could limitadversely impact our ability to deploy cash for other beneficial purposes.collect this debt.
The current practiceThere are no limitations on the ability of our Board of DirectorsLevel 3 Financing, Inc. to pay distributionstransfer assets to our member reflects a current intentionus, and we intend to continue to distribute to our memberdirect equity holder a substantial portion of our consolidated cash flow. As a result, weflow, thereby reducing our capital resources for debt repayments or other purposes. These and other risks of investing in our debt securities are more fully described in the disclosure documents distributed at the time of issuance.
We may not retain a sufficient amount of cash to apply to other transactions that could be beneficial to our member or debtholders, including debt prepayments or capital expenditures that strengthen our business. In addition, our ability to pursue any material expansion of our business through acquisitions or increased capital spending may depend more than it otherwise would on our ability to obtain third party financing.
We cannot assure you whether, when or in what amounts we will be able to usefully utilize our net operating loss carryforwards, or when they will be depleted.NOLs.
As of December 31, 2018,2021, we had approximately $9.5$8.1 billion of federal net operating loss carryforwards (“NOLs”("NOLs"), which for U.S. federal income tax purposes can be used to offset future taxable income. These NOLs are subject to limitations under Section 382 of the Internal Revenue Code (“Code”) and related Treasury regulations. It should be noted that issuances or sales of CenturyLink stock (including certain transactions outside of our control) could result in an ownership change of CenturyLink under Section 382, which may further limit our use of the NOLs. For these and other reasons, you should be aware that theseThese limitations could restrict our ability to use these NOLs in the amounts we project or could limitproject. In an effort to safeguard our flexibility to pursue otherwise favorable transactions.NOLs, Lumen Technologies has maintained an NOL rights agreement since February 2019.
At December 31, 2018, we had state NOL carryforwards of approximately $10 billion. A significant portion of the state NOL carryforwards are generated in states where separate company income tax returns are filed and our subsidiaries that generated the losses may not have the ability to generate income in sufficient amounts to realize these losses. In addition, certain of these state NOL carryforwards will be limited by state laws related to ownership changes. As a result, we expect to utilize only a small portion of the state NOL carryforwards, and consequently have determined that as of December 31, 2018, these state NOL carryforwards, net of federal benefit, had a net tax benefit (after giving effect to our valuation allowance) of $283 million.
Additionally, we have foreign NOL carryforwards of $6 billion. A significant portion of the foreign NOL carryforwards are generated in subsidiaries that do not have a history of earnings and may not have the ability to generate income in sufficient amounts to realize the losses. As of December 31, 2018,2021, we have determined that thesealso had substantial state NOLs and foreign NOL carryforwards had net benefit of $296 million.
Other Risks
We have lent moneyNOLs which we believe are subject to CenturyLink, which exposes us to certain risks.
We have lent $1.8 billion to CenturyLink. Developments that adversely impact CenturyLink could adversely impactlegal and practical limitations on our ability to collect this debt.
realize their full benefit. We face risks from natural disasters, which can disrupt our operations and cause us to incur substantial additional capital and operating costs.
A substantial number of our facilities are located in Florida, Alabama, Louisiana, Texas, North Carolina, South Carolina and other coastal states, which subjects them to the risks associated with severe tropical storms, hurricanes and tornadoes, including downed telephone lines, flooded facilities, power outages, fuel shortages, damaged or destroyed property and equipment, and work interruptions. Althoughcannot assure you we maintain property and casualty insurance on our property (excluding our above ground outside plant) and may, under certain circumstances,will be able to seek recovery of some additional costs through increased rates, only a portion of our additional costs directly related to such natural disasters have historically been recoverable. We cannot predict whether we will continue to be able to obtain insurance for catastrophic hazard-related damagesutilize these NOLs as projected or if obtainable and carried, whether this insurance will be adequate to cover our losses. In addition, we expect any insurance of this nature to be subject to substantial deductibles, retentions and coverage exclusions, and the premiums to be based on our loss experience. For all these reasons, any future hazard-related costs and work interruptions could adversely affect our operations and our financial condition.at all.
Terrorist attacks and other acts of violence or war may adversely affect the financial markets and our business.
Future terrorist attacks or armed conflicts may directly affect our physical facilities or those of our customers. These events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and world financial markets and economy. Any of these occurrences could materially adversely affect our business.
If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies or forward-looking statements, our consolidated financial statements and related disclosures could be materially affected.
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes, including the judgments, assumptions and estimates applied pursuant to our critical accounting policies, which are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in Item 7 of this report. If future events or assumptions differ significantly from the judgments, assumptions and estimates applied in connection with preparing our historical financial statements, our future financial statements could be materially impacted.
While frequently presented with numeric specificity, the guidance and other forward-looking statements that we disseminate from time to time is based on numerous variables and assumptions (including, but not limited to, those related to industry performance and competition and general business, economic, market and financial conditions and additional matters specific to our business, as applicable) that are inherently subjective and speculative and are largely beyond our control. As a result, actual results may differ materially from our guidance or other forward-looking statements. Similarly, for a variety of reasons, we may change our intentions, strategies or plans at any time, which could materially alter our actual results from those previously anticipated. For additional information, see "Special Note Regarding Forward-Looking Statements" preceding Item 1 of this report.
We identified material weaknesses in our internal control over financial reporting as of December 31, 2018, and the occurrence of this or any other future material weakness or significant deficiencies could have a material adverse effect on us.
Our management recently concluded that, as described under the heading Item 9A. Controls and Procedures, we had material weaknesses as of December 31, 2018 and therefore as of that date did not maintain effective internal control over financial reporting, which is a requirement of the Securities Exchange Act of 1934. As a result of that evaluation, management concluded that two material weaknesses existed as described below.
Ineffective design and operation of process level internal controls over the fair value measurement of certain assets acquired and liabilities assumed in CenturyLink's acquisition of us.
These deficiencies arose because (i) CenturyLink did not conduct an effective risk assessment to identify and assess changes needed to make to our financial reporting and process level controls, related to fair value measurement of assets acquired and liabilities assumed in the transaction with CenturyLink, (ii) CenturyLink did not clearly assign responsibility for the design, implementation, and operation of controls over the fair value measurements and (iii) CenturyLink did not maintain effective information and communication processes to ensure the right information was available to personnel on a timely basis so they could fulfill their control responsibilities related to the fair value measurements.
Ineffective design and operation of certain process level internal controls over the existence and accuracy of revenue transactions.
These deficiencies arose because we did not conduct an effective risk assessment to identify risks of material misstatement related to the existence and accuracy of revenue transactions.
We plan to execute our plans to remediate the material weaknesses identified above as soon as feasible. However, the remedial measures we take may not be adequate to avoid other control deficiencies in the future. There can be no assurance that any system of internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. As a result, it is possible that CenturyLink’s or our current or future financial statements may not comply with generally accepted accounting principles, will contain a material misstatement or will not be available on a timely basis, any of which could cause investors to lose confidence in CenturyLink or us and lead to, among other things, unanticipated legal, accounting and other expenses, delays in filing required financial disclosures, enforcement actions by regulatory authorities, fines, penalties, the delisting of CenturyLink’s or our securities and liabilities arising from litigation.
Lapses in our disclosure controls and procedures or internal control over financial reporting could materially and adversely affect our operations, profitability or reputation.us.
There can be no assurance that ourWe maintain (i) disclosure controls and procedures will be effective indesigned to provide reasonable assurances regarding the future or that we will not experience a material weakness or significant deficiency inaccuracy and completeness of our SEC reports and (ii) internal control over financial reporting. Any such lapses or deficiencies may materiallyreporting designed to provide reasonable assurance regarding the reliability and adversely affectcompliance with U.S. generally accepted accounting principles (“GAAP”) of our business, operating results or financial condition, restrictstatements. We cannot assure you these measures will be effective. Our and Lumen's management previously identified a material weakness related to our abilityaccounting for revenue transactions. Although we successfully remediated this material weakness during 2019, the deficiency was costly to access the capital markets, requireremediate and caused us to expend significant resourcesrequest an extension in order to correcttimely file our annual report on Form 10-K for the lapses or deficiencies, expose us to regulatory or legal proceedings, including litigation brought by private individuals, subject us to fines, penalties or judgments, harm our reputation, or otherwise cause a decline in investor confidence and our stock price.year ended December 31, 2018.
If our goodwill or otherwe are required to record additional intangible assets become impaired,asset impairments, we maywill be required to record a significant charge to earnings and reduce our member'smembers' equity.
As of December 31, 2018,2021, approximately 59%47% 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. Under U.S. generally accepted accounting principles, most of theseassets (including goodwill and other intangible assets must be testedreclassified as assets held for impairment on an annual basis or more frequently whenever events or circumstances indicate that their carrying value may not be recoverable.sale). From time to time, including most recently in the fourthfirst quarter of 2018, CenturyLink has2019, we have recorded large non-cash charges to earnings in connection with required reductions of the value of itsour 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 conditioncondition.
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, our affiliates or our industry could adversely impact the liquidity or market prices of our outstanding debt securities;
•a change of control of us or certain of our affiliates will accelerate a substantial portion of our outstanding indebtedness in an amount that we might not be able to repay, or could adversely impact our ability to comply with financial covenants incontinue periodic dividends on our debt instruments.capital stock at current rates, or at all; and
•current inflation could negatively impact (i) our margins if the higher cost of our labor and supplies cannot be offset by us raising our prices or reducing our other expenses or (ii) our revenues if an inflationary environment causes our customers to defer or decrease their expenditures on our products or services.
Pending Divestiture Risks
The Tax Cutscompletion of our pending divestitures are subject to several conditions.
As described further in Note 2—Planned Divestiture of the Latin American Business, we have agreed to divest our Latin American business. The completion of the divestiture of our Latin American business is subject to the receipt of all requisite regulatory approvals in the U.S. and Jobs Actcertain countries where the Latin American business operates, as well as the satisfaction of various other closing conditions. We cannot assure you that this divestiture will have a substantial impact on us.be completed in the timeframe anticipated by us or at all.
The Tax Cuts and Jobs Act (the "Act") enacted in December 2017 significantly changed U.S. tax law by reducingpendency of the U.S. corporate income tax rate and making certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items. The net impact of this Act, as applied to date, has been unfavorable to us. However, the Act is quite complex and the impacts could potentially change as additional regulatory guidance is received from the Internal Revenue Service. As a result, our views on the Act’s ultimate impact on us could change.
Additional changes in tax laws or tax auditsdivestiture could adversely affect our business.
The pendency of our 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 segregate the divested business from our retained business and realize the anticipated benefits of the divestiture.
Under the pending 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 purchaser, and (iii) receive certain post-closing services from the purchaser designed to ensure the continuity of services to our retained customers.
We anticipate that it will be challenging and time-consuming to segregate the business and provide transition services to the purchaser. Even if we successfully complete the divestiture, we may incur or experience (i) greater tax or other costs or realize fewer benefits than anticipated under the purchase agreement and our post-closing commercial agreement with the purchaser, (ii) operational or commercial difficulties segregating the divested assets from our retained assets, (iii) disputes with the purchaser regarding the nature and sufficiency of the transition services we provide or the terms and conditions of our commercial agreements with the purchaser, (iv) potential disputes with creditors concerning the pending transaction 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 business distracts or diverts personnel from operating 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 attracting personnel or (x) the loss of vendors or customers due to our inability to assign contracts with their consent.
The divestiture will reduce our future cash flows. If our remaining business fails to perform as expected, the divestiture 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
Unfavorable general economic, societal or environmental conditions could negatively impact us.
Like all large multinational businesses,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 or may not be able to obtain adequate access to credit, which could negatively impact their ability to make timely payments to us.
Shareholder or debtholder activism efforts could cause a material disruption to our business.
While we are subjectalways welcome constructive input from our shareholders and regularly engage in dialogue with our shareholders to multiple sets of complex and varying tax laws and rules. Legislators and regulatorsthat end, activist shareholders at all levels of governmentthe Lumen level may from time to time change existing tax lawsengage in proxy solicitations, advance shareholder proposals or regulationsotherwise attempt to effect changes or enact new lawsacquire control over Lumen and its affiliates, including us. Responding to these actions can be costly and time-consuming and may disrupt Lumen’s and 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, Lumen’s board or regulations. In many cases,management. The recent increase in the applicationactivism of existing, newly enacted or amended tax laws (such asdebtholders could increase the U.S. Tax Cutsrisk of claims being made under Lumen’s and Jobs Act of 2017) may be uncertain and subject to differing interpretations that could negatively impact our operating results or financial condition. We are also subject to frequent and regular audits by a broad range of foreign, federal, state and local tax authorities. These audits could subject us to tax liabilities if adverse positions are taken by these tax authorities.debt agreements.
We believeface other general risks.
As a large multinational business with complex operations, we face various other general risks, including among others, the risk that we have adequately provided for tax contingencies. However,one or more of our ongoing tax audits andor examinations maycould result in tax liabilities that differ materially from those that we have recognized in our consolidated financial statements. Because the ultimate outcomes of all of these matters are uncertain, we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our financial results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our property, plant and equipment consists principally of land, fiber, conduit and other outside plant, central office and other network electronics and support assets. Our gross values of property, plant and equipment consisted of the following components:
| | | | Successor | | As of December 31, |
| | December 31, 2018 | | December 31, 2017 | | 2021(5) | | 2020 |
| Land | 4 | % | | 4 | % | Land | 3 | % | | 3 | % |
Fiber, conduit and other outside plant (1) | 50 | % | | 50 | % | Fiber, conduit and other outside plant (1) | 45 | % | | 46 | % |
Central office and other network electronics (2) | 19 | % | | 22 | % | Central office and other network electronics (2) | 27 | % | | 25 | % |
Support assets (3) | 22 | % | | 21 | % | Support assets (3) | 20 | % | | 21 | % |
Construction in progress (4) | 5 | % | | 3 | % | Construction in progress (4) | 5 | % | | 5 | % |
| Gross property, plant and equipment | 100 | % | | 100 | % | 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. |
| |
(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. |
(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 reclassified as held for sale related to the pending divestiture of our Latin American business.
We own or lease numerous cable landing stations and telehouses throughout the world related to undersea and terrestrial cable systems. Furthermore, we own or lease properties to house and operate our fiber optic backbone and distribution network facilities, our point-to-point distribution capacity, as well as our switching equipment and connecting lines between other carriers’ equipment and facilities and the equipment and facilities of our customers. Our Gateway facilities are designed to house local sales staff, operational staff, our transmission and IP routing/switching facilities and technical space to accommodate colocation of equipment by high-volume Level 3 customers. We operate approximately 12.48 million square feet of space for our Gateway and technical or transmission facilities.
We have entered into various agreements regarding our unused office and technical space to reduce our ongoing operating expenses regarding such space.
ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings in which we are involved, see Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements included in Item 8 of Part II of this Form 10-K.report.
ITEM 4. MINING SAFETY DISCLOSURES
Not applicable.
Part II
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.
Unless context requires otherwise, references to the "predecessor" periods, or the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and to "2017 successor" period, or the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Not Applicable.
ITEM 6. SELECTED FINANCIAL DATA[Reserved]
Omitted pursuant to General Instruction I(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries. References to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc. and its consolidated subsidiaries.
Unless context requires otherwise, references to the period ended October 31, 2017 covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.
All references to "Notes" in this Item 7 of Part II refer to the Notes to Consolidated Financial Statements included in Item 8 of this annual report.
Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" preceding Item 1appearing at the beginning of this report for factors relating to these statements and see "Risk Factors" set forth or referenced in Item 1A of Part I of this report or other of our filings with the SEC for a discussion of certain risk factors applicablethat could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, and results of operations.operations, liquidity or prospects.
Overview
We are an international facilities-based technology and communications company engaged in providing a broad array of integrated communication services to our business customers. We created
On July 25, 2021, affiliates of ours entered into a definitive agreement to divest our communicationsLatin American business to an affiliate of a fund advised by Stonepeak Partners LP in exchange for $2.7 billion cash, subject to certain working capital and other purchase price adjustments and related transaction expenses (estimated to be approximately $50 million). For more information, see (i) Note 2—Planned Divestiture of the Latin American 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.
Impact of COVID-19 Pandemic
In response to the safety and economic challenges arising out of the COVID-19 pandemic and in a continued attempt to mitigate the negative impact on our stakeholders, we have taken a variety of steps to ensure the availability of our network by constructinginfrastructure, to promote the safety of our own assetsemployees and throughcustomers, to enable us to continue to adapt and provide our products and services worldwide to our customers, and to strengthen our communities. As vaccination rates increase, we expect to continue revising our responses to the pandemic or take additional steps necessary to adjust to changed circumstances. To date, these steps have included:
•establishing new protocols for the safety of our on-site technicians and customers, including our "Safe Connections" program;
•adopting a combinationrigorous employee work-from-home policy and substantially restricting non-essential business travel, each of purchasing other companies and purchasing or leasing facilities from others. We designedwhich remains in place;
•continuously monitoring our network to enhance its ability to respond to changes in usage patterns;
•donating products or services in several of our communities to enhance their abilities to provide communications services that employnecessary support services; and take advantage
•taking steps to maintain our internal controls and the security of rapidly improving underlying optical, Internet Protocol, computingour systems and storage technologies.data in a remote work environment.
As the pandemic continues and vaccination rates increase, we expect to revise our responses or take additional steps to adjust to changed circumstances.
Social distancing, business and school closures, travel restrictions, and other actions taken in response to the pandemic have impacted us, our customers and our business since March 2020. In particular, beginning in the second half of 2020 and continuing into early 2022, we have rationalized our leased footprint and ceased using 13 leased property locations that were underutilized due to the COVID-19 pandemic. 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. As a result, we incurred accelerated lease costs of approximately $15 million for the year ended December 31, 2021. In conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and incur additional costs during 2022. Additionally, as discussed further elsewhere herein, the pandemic resulted in Note 2—CenturyLink Merger,(i) increases in certain revenue streams and decreases in others, (ii) increases in allowances for credit losses through the end of 2020, (iii) increases in overtime expenses, (iv) operational challenges resulting from shortages of semiconductors and certain other supplies that we use in our business, and (v) delays in our cost transformation initiatives. We have also experienced delayed decision-making by certain of our customers. Thus far, these changes have not materially impacted our financial performance or financial position. However, we continue to monitor global disruptions and work with our vendors to mitigate supply chain risks.
We intend to reopen our offices in 2022 under a "hybrid" working environment, which permits some of our employees the flexibility to work remotely at least some of the time, for the foreseeable future.
For additional information on November 1, 2017,the impacts of the pandemic, see Item 1A of this report.
Trends Impacting Our Operations
Our consolidated operations have been, and are expected to continue to be, impacted by the following company-wide trends:
•Customers' demand for products and services and competitive pressures will require that we became a wholly-owned subsidiarycontinue to invest in new technologies and automated processes to improve our customer experience and reduce our operating expenses.
•The increasingly digital environment and the growth in online video requires robust, scalable network services. We are continuing to enhance our product capabilities and simplify our product portfolio based on demand and profitability to enable our customers to have access to greater bandwidth.
•Businesses continue to adopt distributed, global operating models. We are expanding and densifying our fiber network, connecting more buildings to our network to generate revenue opportunities and reduce our costs associated with leasing networks from other carriers.
•Industry consolidation, coupled with changes in regulation, technology and customer preferences, are significantly reducing demand for some of CenturyLink.our products and services or creating price compression, while other advances, such as the need for lower latency provided by Edge computing or the implementation of 5G networks, are expected to create opportunities.
•The operating margins of several of our newer, more technologically advanced services are lower than the operating margins on our traditional, on-net wireline services.
Results of Operations
Our analysis presented below is organized to provide the information we believe will be useful for understanding the relevant trends affecting our business. The discussion in MD&A is presented on a combined basis for the successor and predecessor periods in 2017. We believe that the discussion on a combined basis is more meaningful as it allows our 2018 results of operations to be more readily compared to our aggregate 2017 results of operations. This discussion should be read in conjunction with our consolidated financial statements and the notes thereto in Item 8 of this report.
The following table summarizes ourthe results of our consolidated operations for the years ended December 31, 20182021 and 2017:2020:
| | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| (Dollars in millions) |
| Operating revenue | $ | 7,952 | | | 7,933 | |
| Operating expenses | 6,920 | | | 6,769 | |
| Operating income | 1,032 | | | 1,164 | |
| Other expense, net | (249) | | | (292) | |
| Income before income taxes | 783 | | | 872 | |
| Income tax expense | 197 | | | 221 | |
| Net income | $ | 586 | | | 651 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Combined | | Increase / (Decrease) | | % Change |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2017 | | 2018 v Combined 2017 | | 2018 v Combined 2017 |
| | (Dollars in millions) | | |
| Operating revenue | $ | 8,220 |
| | 1,407 |
| | | 6,870 |
| | 8,277 |
| | (57 | ) | | (1 | )% |
| Operating expenses | 7,252 |
| | 1,249 |
| | | 5,719 |
| | 6,968 |
| | 284 |
| | 4 | % |
| Operating income | 968 |
| | 158 |
| | | 1,151 |
| | 1,309 |
| | (341 | ) | | (26 | )% |
| Other expense | (431 | ) | | (65 | ) | | | (458 | ) | | (523 | ) | | 92 |
| | (18 | )% |
| Income tax expense | (196 | ) | | (234 | ) | | | (268 | ) | | (502 | ) | | 306 |
| | (61 | )% |
| Net income (loss) | $ | 341 |
| | (141 | ) | | | 425 |
| | 284 |
| | 57 |
| | 20 | % |
Operating Revenue
We categorizeSince the first quarter of 2021, we have categorized our products and services and related revenue among the following five 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 primarilyEthernet, IP, and VPN data networks, Ethernet, IP, video (including our facilities-based videoincluding software-defined wide area networks ("SD WAN") based services, CDNDynamic Connections and Hyper WAN;
•Fiber Infrastructure Services,which include dark fiber, optical services and Vyvx broadcast services)equipment;
•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other ancillary services;
Transport and Infrastructure, which includes private line (including business data services), wavelength, colocation and data center facilities and services, including cloud, hosting and application management solutions professional services, dark fiber services and other ancillary services;
Voice and Collaboration, which includes primarily TDM voice services, VoIP and other ancillary services;
Other, which includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other networklegacy services; and
•Affiliate Services, we providewhich include communications services provided to our affiliates telecommunication services that we also provide to our external customers.
From time to time, we may change the categorization of our products and services.
For more information, see "Products and Services" in Item I of Part I of this report.
The following tables summarizetable summarizes our consolidated operating revenue recorded under our fiveabove-described revenue categoriescategories:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2021 | | 2020 | |
| | (Dollars in millions) | |
| Compute and Application Services | $ | 1,141 | | | 1,098 | | | 4 | % |
| IP and Data Services | 3,555 | | | 3,522 | | | 1 | % |
| Fiber Infrastructure Services | 1,612 | | | 1,507 | | | 7 | % |
| Voice and Other | 1,421 | | | 1,598 | | | (11) | % |
| Affiliate Services | 223 | | | 208 | | | 7 | % |
| Total operating revenue | $ | 7,952 | | | 7,933 | | | — | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Combined | | Increase / (Decrease) | | % Change |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2017 | | 2018 v Combined 2017 | | 2018 v Combined 2017 |
| | (Dollars in millions) | | |
| IP and Data Services | $ | 3,945 |
| | 668 |
| | | 3,284 |
| | 3,952 |
| | (7 | ) | | — | % |
| Transport and Infrastructure | 2,699 |
| | 464 |
| | | 2,272 |
| | 2,736 |
| | (37 | ) | | (1 | )% |
| Voice and Collaboration | 1,464 |
| | 258 |
| | | 1,308 |
| | 1,566 |
| | (102 | ) | | (7 | )% |
| Other Revenue | 5 |
| | 1 |
| | | 6 |
| | 7 |
| | (2 | ) | | (29 | )% |
| Affiliate Revenue | 107 |
| | 16 |
| | | — |
| | 16 |
| | 91 |
| | nm |
|
| Total Revenue | $ | 8,220 |
| | 1,407 |
| | | 6,870 |
| | 8,277 |
| | (57 | ) | | (1 | )% |
|
| |
nm | Percentages greater than 200% and comparison between positive and negatives values or to/from zero values are considered not meaningful. |
Our total operating revenue decreasedincreased by $57$19 million or 1%, for the successor year ended December 31, 20182021 as compared to the combined year ended December 31, 2017. The decrease2020 primarily due to increases in our total operating revenue was primarily due tomanaged security, IP, wavelength, dark fiber, and collaboration services, which were partially offset by decreases in voice and collaboration services of $102 millionother, VPN data networks and transport and infrastructure services of $37 million, partially offset by an increase in affiliate revenue.Ethernet services.
Our operating revenue for our products and services consisted of the following categories:
IP and data services revenue decreased by $7 million, or less than 1%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in IP and data services revenue was primarily due to a decrease in Ethernet and Vyvx, partially offset by an increase in CDN.
Transport and infrastructure services revenue decreased by $37 million, or 1%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in transport and infrastructure revenue was primarily due to a decrease in private line, partially offset by an increase in dark fiber, professional services, managed security and wavelength.
Voice and collaboration services revenue decreased by $102 million, or 7%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in voice and collaboration revenue was primarily due to a decline in voice services, partially offset by an increase in VoIP.
Other revenue remained essentially flat for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017.
Affiliate revenue increased by $91 million for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The increase in affiliate revenue was due to our acquisition by CenturyLink on November 1, 2017. Since CenturyLink's acquisition of us, we have recorded revenue from telecommunications and data services we bill to CenturyLink and certain of its subsidiaries as affiliate revenue. In the predecessor periods, since they were not affiliates, revenue associated with CenturyLink and its subsidiaries was recorded in the other operating revenue categories.
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 includeincludes third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses; costs incurred for universal service funds (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); certain legal expenses associated with our operations; 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; legal 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.
As discussed in Note 1—Background and Summary of Significant Accounting Policies in Item 8 of this report, in conjunction with the acquisition we now classify certain expenses as cost of services and products and selling, general and administrative and, as a result, we reclassified previously reported amounts to conform to the current period presentation.
The following table summarizes our consolidated operating expenses: |
| | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Combined | | Increase / (Decrease) | | % Change |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2017 | | 2018 v Combined 2017 | | 2018 v Combined 2017 |
| | (Dollars in millions) | | |
| Cost of services and products (exclusive of depreciation and amortization | $ | 3,937 |
| | 690 |
| | | 3,493 |
| | 4,183 |
| | (246 | ) | | (6 | )% |
| Selling, general and administrative | 1,354 |
| | 253 |
| | | 1,208 |
| | 1,461 |
| | (107 | ) | | (7 | )% |
| Operating expenses - affiliates | 257 |
| | 24 |
| | | — |
| | 24 |
| | 233 |
| | nm |
|
| Depreciation and amortization | 1,704 |
| | 282 |
| | | 1,018 |
| | 1,300 |
| | 404 |
| | 31 | % |
| Total operating expenses | $ | 7,252 |
| | 1,249 |
| | | 5,719 |
| | 6,968 |
| | 284 |
| | 4 | % |
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2021 | | 2020 | |
| | (Dollars in millions) | |
| Cost of services and products (exclusive of depreciation and amortization) | $ | 3,525 | | | 3,486 | | | 1 | % |
| Selling, general and administrative | 1,181 | | | 1,226 | | | (4) | % |
| Operating expenses - affiliates | 497 | | | 368 | | | 35 | % |
| Depreciation and amortization | 1,717 | | | 1,689 | | | 2 | % |
| Total operating expenses | $ | 6,920 | | | 6,769 | | | 2 | % |
|
| |
nm | Percentages greater than 200% and comparison between positive and negatives 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) decreasedincreased by $246$39 million or 6%, for the successor year ended December 31, 20182021 as compared to the combined year ended December 31, 2017. The decrease in our cost of services and products for the successor period was2020 primarily due to higher customer premise equipment costs from higher sales, higher network expenses, and accelerated lease costs as part of our acquisitionreal estate rationalization efforts. These increases were partially offset by CenturyLink on November 1, 2017. In the predecessor period, since they were not affiliates, the expense associated with CenturyLinklower employee-related expenses resulting from lower headcount and its subsidiaries was recorded as cost of services and products in the amount of $116 million for the period ended October 31, 2017. The remaining decrease is primarilylower facility costs due to declines inlower voice and collaboration revenue and network optimization.usage.
Selling, General and Administrative
Selling, general and administrative decreased by $107$45 million or 7%, for the successor year ended December 31, 20182021 as compared to the combined year ended December 31, 2017. The decrease was2020 primarily due to a decreasereduction in salaries and wages and employee-related benefits, lower bad debt expense primarily due toand lower retention bonuses and headcount and a decrease in stock-based compensation expense as a result of accelerated vesting for certain restricted stock awards associated with the CenturyLink acquisition in 2017,insurance costs. These reductions were partially offset by an increaselower gain on sale of assets in facilities-based expenses primarily resulting from impaired leases.2021 compared to 2020.
Operating Expenses - Affiliates
Operating expenses - affiliates increased by $233$129 million for the successor year ended December 31, 20182021 as compared to the combined year ended December 31, 2017.2020 primarily due to higher affiliate lease expense for circuits and colocation facilities. The increase was also partially due to transferring certain employees to other affiliates, which results in ourexpenses being allocated back to us through operating expenses - affiliates was due to our acquisition by CenturyLink on November 1, 2017. In the predecessor period, since they were not affiliates, the expense associated with CenturyLink and its subsidiaries was recorded as cost of services and products andrather than included in selling, general and administrative expenses.
Depreciation and Amortization
The following table providestables provide detail regarding depreciation and amortization expense: | | | | Successor | | | Predecessor | | Combined | | Increase / (Decrease) | | % Change | | Years Ended December 31, | | % Change |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2017 | | 2018 v Combined 2017 | | 2018 v Combined 2017 | | 2021 | | 2020 | |
| | | | (Dollars in millions) | | (Dollars in millions) | |
| Depreciation | $ | 906 |
| | 143 |
| | | 850 |
| | 993 |
| | (87 | ) | | (9 | )% | Depreciation | $ | 874 | | | 851 | | | 3 | % |
| Amortization | 798 |
| | 139 |
| | | 168 |
| | 307 |
| | 491 |
| | 160 | % | Amortization | 843 | | | 838 | | | 1 | % |
| Total depreciation and amortization | $ | 1,704 |
| | 282 |
| | | 1,018 |
| | 1,300 |
| | 404 |
| | 31 | % | Total depreciation and amortization | $ | 1,717 | | | 1,689 | | | 2 | % |
Depreciation expense decreasedincreased by $87$23 million or 9%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. As of November 1, 2017, our property, plant and equipment were recorded at fair value and as a result net property, plant and equipment decreased $1 billion due to CenturyLink's acquisition of us. This decrease in asset value resulted in lower depreciation expense for the year ended December 31, 2018 than would have been recorded had2021 as compared to the acquisition not occurred.year ended December 31, 2020 primarily due to higher depreciation expense of $57 million associated with net growth in depreciable assets and an increase of $8 million due to foreign currency exchange rate impacts. These increases were partially offset by a decrease of $47 million due to discontinuing the depreciation of the tangible assets reclassified as held for sale of our Latin American business upon entering into our divestiture agreement.
Amortization expense increased by $491$5 million or 160%, for the successor year ended December 31, 20182021 as compared to the combined year ended December 31, 2017. The accounting for CenturyLink's acquisition2020 due to an increase of us resulted in an additional $8.4 billion$6 million associated with the net growth in amortizable assets and an increase of $9 million due to the accelerated amortization of decommissioned applications. These increases were partially offset by a decrease of $13 million due to discontinuing the amortization of intangible customer relationship assets which resulted in additional amortization expensereclassified as held for the successor year ended December 31, 2018. In addition, trade names and developed technology were recorded at a fair valuesale of $378 million, which resulted in additional amortization expense for the successor year ended December 31, 2018.our Latin American business upon entering into our divestiture agreement.
Other Consolidated Results
The following table summarizes other (expense) incomeexpense, net and income tax expense: |
| | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Combined | | Increase / (Decrease) | | % Change |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2017 | | 2018 v Combined 2017 | | 2018 v Combined 2017 |
| | (Dollars in millions) | | |
| Interest income | $ | — |
| | 1 |
| | | 13 |
| | 14 |
| | (14 | ) | | (100 | )% |
| Interest income - affiliate | 67 |
| | 11 |
| | | — |
| | 11 |
| | 56 |
| | nm |
|
| Interest expense | (509 | ) | | (80 | ) | | | (441 | ) | | (521 | ) | | 12 |
| | (2 | )% |
| Loss on modification and extinguishment of debt | — |
| | — |
| | | (44 | ) | | (44 | ) | | 44 |
| | (100 | )% |
| Other income (expense), net | 11 |
| | 3 |
| | | 14 |
| | 17 |
| | (6 | ) | | (35 | )% |
| Total other expense, net | $ | (431 | ) | | (65 | ) | | | (458 | ) | | (523 | ) | | 92 |
| | (18 | )% |
| Income tax expense | $ | (196 | ) | | (234 | ) | | | (268 | ) | | (502 | ) | | 306 |
| | (61 | )% |
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2021 | | 2020 | |
| | (Dollars in millions) | |
| Interest income - affiliate | $ | 65 | | | 51 | | | 27 | % |
| Interest expense | (361) | | | (393) | | | (8) | % |
| Other income, net | 47 | | | 50 | | | (6) | % |
| Total other expense, net | $ | (249) | | | (292) | | | (15) | % |
| Income tax expense | $ | 197 | | | 221 | | | (11) | % |
|
| |
nm | Percentages greater than 200% and comparison between positive and negatives values or to/from zero values are considered not meaningful. |
Interest Income
Interest income decreased by $14 million, or 100%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease in interest income was primarily due to the decrease in our cash and cash equivalents balance.
Interest Income - Affiliate
Interest income - affiliate increased by $56$14 million for the successor year ended December 31, 20182021 as compared to the combined year ended December 31, 2017. The2020 primarily due to an increase in the average interest income - affiliate was due to a full year of the interestrate associated with our $1.8 billion loan made to CenturyLink in connection with the closing of the Merger Agreement in 2018.note receivable - affiliate balance.
Interest Expense
Interest expense decreased by $12$32 million or 2%, for the successor year ended December 31, 20182021 as compared to the combined year ended December 31, 2017. The2020 primarily due to a decrease in the average interest expense was duerate from 4.08% to lower interest expense associated with the repayment of our $300 million Floating rate Notes due in 2018, partially offset by a higher LIBOR on the $4.6 billion Tranche B 2024 Term Loan.3.61%.
Loss on Modification and Extinguishment of Debt
Loss on modification and extinguishment of debt decreased by $44 million, or 100%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. During the predecessor period ended October 31, 2017, we refinanced all of our then outstanding $4.6 billion senior secured term loans.
Other Income, (Expense)Net
Other income decreased by $6 million, or 35%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. The decrease infollowing table summarizes our total other income, was due to an increase in foreign currency loss in thesuccessor year ended December 31, 2018 as compared to the combined year ended December 31, 2017.net:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2021 | | 2020 | |
| (Dollars in millions) | |
| Gain on extinguishment of debt | $ | 16 | | | 27 | | | (41) | % |
| Foreign currency (loss) gain | (18) | | | 29 | | | nm |
| Interest income | — | | | 1 | | | nm |
| Other | 49 | | | (7) | | | nm |
| Total other income, net | $ | 47 | | | 50 | | | (6) | % |
nm Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
Income Tax Expense
Income tax expense decreased by $306 million, or 61%, for the successor year ended December 31, 2018 as compared to the combined year ended December 31, 2017. For the year ended December 31, 20182021 and the combined year ended December 31, 2017,2020, our effective income tax rate was 36.5%25.2% and 63.7%25.3%, respectively. The effective tax rate for the combined year ended December 31, 2017 was significantly impacted by purchase price adjustments as a result of the CenturyLink merger and the enactment of the Tax Cuts and Jobs Act legislation in December 2017 which resulted in a remeasurement of our deferred tax assets and liabilities at the new federal corporate tax rate. For the year ended December 31, 2018, the impact from purchase accounting adjustments resulted in a 17.2% increase in the effective rate. See Note 1—Background13—Income Taxes and Summary of Significant"Critical Accounting Policies.Policies and Estimates—Income Taxes" below for additional information.
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) business combinations;goodwill, customer relationships and other intangible assets; (ii) loss contingencies and litigation reserves; (iii) affiliate transactions; 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 the 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, there can be no assurance that actual results will not differ from those estimates.
Goodwill, Customer Relationships and Other Intangible Assets
Business CombinationsIntangible 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. We amortize capitalized software using the straight-line method primarily over estimated lives ranging up to 7 years. We amortize our other intangible assets over an estimated life of 5 years. We annually review the estimated lives and methods used to amortize our other intangible assets. The amount of future amortization expense may differ materially from current amounts, depending on the results of our annual reviews.
We have accounted for CenturyLink'sOur goodwill was derived from Lumen's acquisition of us under the acquisition method of accounting, whereby the tangible and separately identifiable intangible assets acquired and liabilities assumed are recognized at their estimated fair values at the acquisition date. The portion ofwhere the purchase price exceeded the fair value of the net assets acquired.
We assess our goodwill for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in excesscircumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of our reporting unit exceeds its fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assess goodwill at our reporting unit. In reviewing the criteria for reporting units, we have determined that we are one reporting unit.
At October 31, 2021 and 2020, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value equal to the present value of all normalized cash flows after the projection period. As of October 31, 2021 and 2020, based on our assessments performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 14% and 17%, respectively. We concluded that the net tangiblegoodwill was not impaired as of October 31, 2021 and separately identifiable intangible2020.
Our reclassification of held for sale assets, acquired represents goodwill. The allocationas described in Note 2—Planned Divestiture of the purchase price relatedLatin American 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-reclassification goodwill impairment test to CenturyLink's acquisition of us involves estimatesdetermine whether there was an impairment prior to the reclassification and judgments by CenturyLink's management. Theto determine the July 31, 2021 fair values recorded are made basedto be utilized for goodwill allocation to the Latin American business to be reclassified as assets held for sale. We also performed a post-reclassification goodwill impairment test using our estimated post-divestiture cash flows and carrying value of equity to evaluate whether the fair value of our reporting unit that will remain following the divestiture exceeds the carrying value of the equity of the reporting unit after reclassification of assets held for sale. Based on management's best estimatesour assessments performed, we concluded it was more likely than not that the fair value of our reporting unit exceeded the carrying value of equity of our reporting unit at July 31, 2021. Therefore, we concluded no impairment existed as of our assessment date.
Lumen's stock price declined significantly in the first quarter of 2019 causing us to evaluate our goodwill for impairment as of March 31, 2019. Because Lumen's low stock price indicated the carrying value of our reporting unit was more likely than not in excess of its fair value, we estimated the fair value of our operations using only the market approach in the quarter ended March 31, 2019. Applying this approach, we utilized company comparisons and assumptions. In arriving atanalyst reports within the telecommunications industry, which have historically supported a range of fair values of assets acquiredannualized revenue and liabilities assumed, CenturyLink consideredEBITDA multiples between 2.1x and 4.9x and 4.9x and 9.8x, respectively. We selected a revenue and EBITDA multiple within this range. As of March 31, 2019, based on our assessments performed as described above, we concluded that the following generally accepted valuation approaches:estimated fair value of equity was less than our carrying value of equity as of the cost approach, income approachdate of our triggering event during the first quarter. As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $3.7 billion in the quarter ended March 31, 2019.
Our fair value estimates for evaluating goodwill incorporated significant judgements and market approach. CenturyLink's estimates also include assumptions about projected growth rates,including forecast revenues and expenses, cost of capital, effective tax rates, tax amortization periods, technology life cycles, the regulatory and legal environment,control premiums. In developing market multiples, we also considered observed trends of our industry participants and industryother qualitative factors that required significant judgement. Alternative estimates, judgements, and economic trends.
Since November 1, 2017, our resultsinterpretations of operationsthese factors could have been included in the consolidated results of operations of CenturyLink. CenturyLink has accounted for its acquisition of us under the acquisition method of accounting, which resulted in different conclusions regarding the assignmentneed for an impairment charge. 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 purchase price to the assets acquiredsize of such charges.
See Note 3—Goodwill, Customer Relationships and liabilities assumed based on estimates of their acquisition date fair values. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) required significant judgment. CenturyLink completed its final fair value determinations during the fourth quarter of 2018. CenturyLink's final fair value determinations were different than those preliminary values reflected in our consolidated financial statements as of andOther Intangible Assets for the successor period ended December 31, 2017. The recognition of assets and liabilities at fair value is reflected in our financial statements and therefore has resulted in a new basis of accounting for the "successor period" beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.additional information.
Loss Contingencies and Litigation Reserves
We are involved in several potentially material legal proceedings, as described in more detail in Note 16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report. We periodicallyItems. On a quarterly basis, we assess potential losses forin 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. Because of this, whether a tax position will ultimately be sustained may be uncertain.
Affiliate Transactions
We provide to and receive from CenturyLinkLumen Technologies and its subsidiaries ("our affiliates") various communications and other services. We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates.
Because of the significance of the services we provide to our affiliates and our other affiliate transactions, and the services our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented. See Note 14—15—Affiliate Transactions to our consolidated financial statements in Item 8 of Part II of this annual report for additional information.
Income Taxes
Until November 1, 2017, we filed a consolidated federal income tax return of Level 3 Communications, Inc. Since CenturyLink's acquisition of us on November 1, 2017, we have beenWe are included in the consolidated federal income tax return of CenturyLink.Lumen Technologies. Under CenturyLink'sLumen's tax allocation policy, CenturyLinkLumen Technologies treats our consolidated results as if we were a separate taxpayer. The policy requires us to pay our tax liabilities to CenturyLinkLumen Technologies in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by CenturyLinkLumen Technologies and the same payment and allocation policy applies.
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 and(ii) differences between the financial statement carrying value of assets and liabilities and the tax basesbasis of those assets and liabilities, and (iii) tax net operating loss carryforwards, or 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 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.
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 allowance 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. As of the successor date of December 31, 2018,2021, we have recordedestablished a valuation allowance of $0.9$1.1 billion primarily related to state and foreign NOLs, as it is more likely than not that these NOLs will 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 a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations. See Note 12—13—Income Taxes for additional information.
Liquidity and Capital Resources
Overview
As of November 1, 2017, we becameWe are a wholly ownedwholly-owned subsidiary of CenturyLink.Lumen Technologies, Inc. As such, factors relating to, or affecting, CenturyLink'sLumen's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.
In connection with the closingAs of the Merger Agreement,December 31, 2021, we loaned $1.8have $1.5 billion of outstanding notes receivable-affiliate under a revolving credit facility that we extended to CenturyLink in exchange for an unsecured demand note thatLumen Technologies. The principal amount outstanding under such facility currently bears interest at 3.5%4.250% per annum. Theannum, subject to certain adjustments as set forth in the facility. This principal amount of such note is payable upon demand by Level 3 Parentus and prepayable by Lumen Technologies at any time, but no later than November 1, 2020October 15, 2025, which maturity date may be extended for two additional one-year periods. The facility has covenants, including a maximum total leverage ratio, and is prepayable by CenturyLink at any time.
subject to other limitations. A significant component of our liquidity is dependent upon CenturyLink'sLumen's ability to repay its obligation to us.
As of December 31, 2021, we held cash and cash equivalents, including cash and cash equivalents classified as held for sale, of $185 million, of which $64 million were held in foreign bank accounts for funding our foreign operations. Due to various factors, our access to foreign cash is generally more restricted than our access to domestic cash.
We anticipate that any future liquidity needs will be met through (i) our cash provided by operating activities, (ii) amounts due to us from CenturyLinkLumen Technologies, (iii) proceeds from the pending divestiture of our Latin American business, (iv) our ability to refinance our debt obligations at maturity and (iv)(v) capital contributions, advances or loans from CenturyLinkLumen Technologies or its affiliates if and to the extent they have available funds or access to funds that they are willing and able to contribute, advance or loan.
For additional information, see "Risk Factors—Financial Risks" in Item 1A of Part I of this report.
Impact of Planned Divestiture of our Latin American Business
As discussed inNote 2—Planned Divestiture of the Latin American Business to our consolidated financial statements in Item 1 of Part 1 of this report, we executed a definitive agreement to divest our Latin American business on July 25, 2021. As further described elsewhere herein, this transaction is expected to provide us with a substantial amount of cash proceeds upon closing, but would thereafter reduce our recurring cash from operating activities that we plan to use to fund our future cash requirements.
Debt and Other Financing Arrangements
As of the successor date of December 31, 2018, ourOur long-term debt (including current maturities and capitalfinance leases) outstanding totaled $10.8$10.4 billion compared to $10.9 billion outstanding as of the predecessor date of December 31, 2017. On September 29, 2017, the $300 million aggregate principal amount plus accrued2021 and unpaid interest due under the Floating Rate Senior Notes due 2018 was paid.2020.
Subject to market conditions, from time to time we expect to continue to issue term debt or senior notes to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will be impacted by the ratings assigned us by the three major credit rating agencies, among other factors. As of the date of this report, the credit ratings for the senior secured and unsecured debt of Level 3 Parent, LLC and Level 3 Financing, Inc. were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Borrower | | Moody's Investors Service, Inc. | | Standard & Poor's | | Fitch Ratings |
Level 3 Parent, LLC: | | | | | | |
Unsecured | | B1 | | B+ | | BB- |
| | | | | | |
| Level 3 Financing, Inc. | | | | | | |
| Unsecured | | Ba3 | | BB | | BB |
| Secured | | Ba1 | | BBB- | | BBB- |
We believe we wereOur credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future changes in compliancethe senior unsecured or secured debt ratings of Level 3 Financing, Inc. could impact our access to debt capital or adjust our borrowing costs. See "Risk Factors—Financial Risks" in all material respects with all provisions and financial covenantsItem 1A of our debt agreements asPart I of December 31, 2018. this report.
See Note 5—7—Long-Term Debt to our consolidated financial statements in Item 8 of this report for additional information about our long-term debt.debt and letters of credit.
Future Contractual ObligationsLetters of Credit
The following table summarizes our estimated future contractual obligations as of December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and thereafter | | Total |
| | (Dollars in millions) |
Long-term debt (1)(2) | $ | 6 |
| | 6 |
| | 648 |
| | 1,609 |
| | 1,209 |
| | 7,211 |
| | 10,689 |
|
Interest on long-term debt and capital leases (2) | 552 |
| | 551 |
| | 522 |
| | 480 |
| | 386 |
| | 141 |
| | 2,632 |
|
Purchase commitments (3) | 132 |
| | 74 |
| | 56 |
| | 27 |
| | 14 |
| | 36 |
| | 339 |
|
| Operating leases | 396 |
| | 259 |
| | 219 |
| | 164 |
| | 137 |
| | 613 |
| | 1,788 |
|
| Right-of-way agreements | 77 |
| | 51 |
| | 38 |
| | 37 |
| | 37 |
| | 225 |
| | 465 |
|
| Asset retirement obligations | 16 |
| | 18 |
| | 9 |
| | 5 |
| | 4 |
| | 54 |
| | 106 |
|
Total future contractual obligations (4) | $ | 1,179 |
| | 959 |
| | 1,492 |
| | 2,322 |
| | 1,787 |
| | 8,280 |
| | 16,019 |
|
|
| |
(1) | Includes current maturities and capital lease obligations, but excludes unamortized premium, net, unamortized debt issuance costs and intercompany debt. |
(2) | Actual principal and interest paid in all years may differ due to future refinancing of outstanding debt or issuance of new debt. |
(3) | Represent purchase commitments with third-party vendors for operating, installation and maintenance services for facilities. In addition, we have service-related commitments with various vendors for data processing, technical and software support services. Future payments under certain service contracts will vary depending on our actual usage. In the table above, we estimated payments for these service contracts based on estimates of the level of services we expect to receive. |
(4) | The table is limited solely to contractual payment obligations and does not include: |
contingent liabilities;
our open purchase orders as of December 31, 2018. These purchase orders are generally issued at fair value, and are generally cancelable without penalty;
other long-term liabilities, such as accrualsIt is customary for legal matters and other taxes that are not contractual obligations by nature. We cannot determine with any degree of reliability the years in which these liabilities might ultimately settle;
contract termination fees. These fees are non-recurring payments, the timing and payment of which, if any, is uncertain. In the ordinary course of business andus to optimize our cost structure, we enter into contracts with terms greater than one year to purchase other goods and services;
service level commitments to our customers, the violation of which typically results in service credits rather than cash payments; and
potential indemnification obligations to counterparties in certain agreements entered intouse various financial instruments in the normal course of business. The natureThese instruments include letters of credit. Letters of credit are conditional commitments issued on our behalf in accordance with specified terms and termsconditions. As of these arrangements vary.December 31, 2021, we had outstanding letters of credit or other similar obligations of approximately $9 million, of which $5 million was collateralized by restricted cash.
Future Contractual Obligations
Our estimated future obligations as of December 31, 2021 include both current and long term obligations. For our long-term debt as noted in Note 7—Long-Term Debt, we have a current obligation of $26 million and a long-term obligation of $10.4 billion. Under our operating leases as noted in Note 5—Leases, we have a current obligation of $350 million and a long-term obligation of $1.2 billion. As noted in Note 16—Commitments, Contingencies and Other Items, we have a current obligation related to right-of-way agreements and purchase commitments of $289 million and a long-term obligation of $1.1 billion. Additionally, we have a current obligation for asset retirement obligation of $15 million and a long-term obligation of $109 million.
Capital Expenditures
We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand our service offerings. CenturyLinkThese amounts include liabilities that have been reclassified as liabilities held for sale on our consolidated balance sheet. Lumen Technologies and 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 the expected return on investment. The amount of CenturyLink'sLumen's consolidated capital investment is influenced by, among other things, demand for CenturyLink'sLumen's services and products, cash flow generated by operating activities and cash required for other purposes. For more information on our capital spending, see "Business" and "Risk Factors" in Items 1 and 1A, respectively, of Part I of this report.
Distributions
From time to time we make distributions to our controlling parent company, which reduce our capital resources for debt repayments and other purposes. For additional information, see our consolidated statements of member’s equity and consolidated statements of cash flows.
Historical Information
The following table summarizes our consolidated cash flow activities:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | Change |
| 2021 | | 2020 | |
| (Dollars in millions) |
| Net cash provided by operating activities | $ | 1,570 | | | 2,284 | | | (714) | |
| Net cash used in investing activities | (1,166) | | | (1,173) | | | (7) | |
| Net cash used in financing activities | (418) | | | (1,244) | | | (826) | |
Operating Activities
Net cash provided by operating activities decreased by $714 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to a decrease in the accounts payable - affiliates balance due to repayments to our parent company, which was partially offset by changes in other non-current assets and liabilities. Cash provided by operating activities is subject to variability period over period as a result of timing, including the collection of receivables and payments of interest, accounts payable, and bonuses.
Investing Activities
Net cash used in investing activities decreased by $7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a decrease in capital expenditures, which was partially offset by an decrease in proceeds from the sale of property, plant and equipment and a decrease in collections on notes receivable - affiliates.
Financing Activities
Net cash used in financing activities decreased by $826 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a decrease in payments of long-term debt and a decrease in distributions, which was partially offset by a decrease in net proceeds from issuance of long-term debt.
Other Matters
We are subject to various legal proceedings and other contingent liabilities that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. See Note 16—Commitments, Contingencies and Other Items for additional information.
CenturyLinkLumen Technologies is involved in several legal proceedings to which we are not a party that, if resolved against it, could have a material adverse effect on its business and financial condition. As a wholly owned subsidiary of CenturyLink,Lumen Technologies, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink'sLumen's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for these matters.
On December 22, 2017,The Biden Administration has proposed several 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 Tax Act was signed into law. The Tax Act reducedObama Administration. In November 2021, the U.S. corporate income tax rate from a maximum of 35%Congress enacted legislation that appropriated $65 billion to 21% for all corporations, effective January 1, 2018,improve broadband affordability and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.
access, primarily through federally-funded state grants. As a result of the reduction indate of this report, the U.S. corporate income tax rateDepartment of Commerce is still developing guidance regarding these grants, so it is premature to speculate on the potential impact of this legislation on us.
Summarized Financial Information
Level 3 Financing, Inc., our wholly owned subsidiary, has registered two series of currently outstanding Senior Notes that are fully and unconditionally and jointly and severally guaranteed on an unsubordinated unsecured basis by Level 3 Parent, LLC and Level 3 Communications, LLC. Level 3 Financing, Inc., Level 3 Parent, LLC and Level 3 Communications, LLC are collectively referred to as the “Obligor Group.”
In conjunction with the registration of those Level 3 Financing, Inc. Senior Notes under the Securities Act of 1933, we have presented below the accompanying summarized financial information pursuant to SEC Regulation S-X Rule 13-01 "Guarantors and issuers of guaranteed securities registered or being registered."
The summarized financial information set forth below excludes subsidiaries that are not within the Obligor Group and presents transactions between the Obligor Group and the subsidiaries that do not guarantee the Senior Notes (the “Non-Guarantor Subsidiaries”). Investment in, and equity in earnings of subsidiaries have been excluded from 35% to 21%, we provisionally revalued our net deferred tax assets at December 31, 2017 and recognized a $195 million tax expensethe summarized financial information.
The following table presents summarized financial information specified in our consolidated statementRule 1-02(bb)(1) of operationsRegulation S-X for the year ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded an additional expense of $92 million in 2018. Based on current circumstances, we do not expect to experience a material near term reduction in the amount of cash income taxes paid by us from the Act due to utilization of net operating loss carryforwards. However, we anticipate that the provisions of the Act may reduce our cash income taxes in future years.2021:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC |
| (Dollars in millions) |
| Operating revenue | $ | — | | | — | | | 4,151 | |
| Operating revenue-affiliates | — | | | — | | | 229 | |
| Operating expenses | (50) | | | 2 | | | 3,975 | |
| Operating expenses-affiliates | — | | | — | | | 400 | |
| Operating income (loss) | 50 | | | (2) | | | 5 | |
| Net income (loss) | 4,535 | | | 498 | | | (5,172) | |
The Act imposed a one-time repatriation tax on certain earnings of foreign subsidiaries. We have completed our analysis of the impact of the one-time repatriation tax and concluded that we do not have a tax liability under this provision. We have also completed our analysis of the impact of the global intangible low-taxed and base erosion provisions and have recorded a tax expense of $10 million related to the global intangible low-taxed income provisions. We do not have liability related to the base erosion and anti-abuse tax provisions of the Act.
For a more detailed description of the Tax Act and its impact on us, please see Note 12—Income Taxes to the accompanying consolidatedfollowing tables present summarized financial statements includedinformation reflected in Item 8.
Historical Information
The following table summarizes cash flow activities: |
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | Combined | | Increase / (Decrease) |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2017 | | 2018 v Combined 2017 |
| | (Dollars in millions) |
| Net cash provided by operating activities | $ | 2,397 |
| | 308 |
| | | 1,914 |
| | 2,222 |
| | 175 |
|
| Net cash used in investing activities | (904 | ) | | (2,032 | ) | | | (1,118 | ) | | (3,150 | ) | | 2,246 |
|
| Net cash used in financing activities | (1,552 | ) | | (253 | ) | | | (345 | ) | | (598 | ) | | (954 | ) |
| Net (decrease) increase in cash, cash equivalents, restricted cash and securities | $ | (59 | ) | | $ | (1,977 | ) | | | 451 |
| | (1,526 | ) | | 1,467 |
|
Net cash provided by operating activities in the successor year ended December 31, 2018 compared to the combined year ended December 31, 2017 increased $175 million primarily due to the increase in accounts payable, affiliates. Cash provided by operating activities is subject to variability period over period as a result of the timing of the collection of receivables and payments related to interest expense, accounts payable, and bonuses.
Net cash used in investing activities decreased $2.2 billion in the successor year ended December 31, 2018 compared to the combined year ended December 31, 2017 primarily due to the $1.8 billion we loaned to CenturyLink in exchange for an unsecured demand note in connection with the closing of the Merger Agreement and a decrease in capital expenditures of $288 million.
Net cash used in financing activities in the successor year ended December 31, 2018 compared to the combined year ended December 31, 2017 increased $954 million primarily due to $1.5 billion of distributions to our member in 2018, partially offset by a $300 million debt repayment in 2017 compared to 2018. For additional information regarding our financing activities, see Note 5—Long-Term Debt to our consolidated financial statements in Item 8 of this report.
On February 22, 2017, we completed the refinancing of all of our then outstanding $4.6 billion senior secured term loans through the issuance of a new Tranche B 2024 Term Loan in the principal amount of $4.6 billion. The term loans refinanced were our Tranche B-III 2019 Term Loan, Tranche B 2020 Term Loan, and the Tranche B-II 2022 Term Loan. The new Tranche B 2024 Term Loan bears interest at LIBOR plus 2.25 percent, with a zero percent minimum LIBOR, and will mature on February 22, 2024. The Tranche B 2024 Term Loan was priced to lenders at par, with the payment to the lenders at closing of an upfront 25 basis point fee. We recognized a charge of approximately $44 million for modification and extinguishment in the first quarter of 2017 related to this refinancing.
Certain Matters Related to CenturyLink's Acquisition of Level 3
Until November 1, 2017, we filed a consolidated federal income tax return of Level 3 Communications, Inc. Since CenturyLink's acquisition of us on November 1, 2017, we have been included in the consolidated federal income tax return of CenturyLink. Under CenturyLink's tax allocation policy, CenturyLink treats our consolidated resultsbalance sheet as if we were a separate taxpayer. The policy requires us to pay our tax liabilities to CenturyLink in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by CenturyLink and the same payment and allocation policy applies.
As of the successor date of December 31, 2018, we had paid certain costs that were associated with the CenturyLink acquisition. These costs include compensation costs comprised of retention bonuses and severance. The final amounts and timing of the compensation costs to be paid are partially dependent upon personnel decisions that continue to be made as part of the continuing integration. These amounts may be material.2021:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC |
| (Dollars in millions) |
| Advances to affiliates | $ | 24,161 | | | 30,473 | | | 174 | |
| Note receivable-affiliate | 1,468 | | | — | | | — | |
| Other current assets | 4 | | | — | | | 509 | |
| Operating lease assets - affiliates | — | | | — | | | 737 | |
| Other noncurrent assets | 271 | | | 1,687 | | | 8,701 | |
| Accounts payable-affiliates | 73 | | | 64 | | | 174 | |
| Current operating lease liabilities-affiliates | — | | | — | | | 189 | |
| Due to affiliates | — | | | — | | | 61,657 | |
| Other current liabilities | 1 | | | 89 | | | 747 | |
| Non-current operating lease liabilities-affiliates | — | | | — | | | 560 | |
| Other noncurrent liabilities | 88 | | | 10,106 | | | 2,872 | |
In accounting for the CenturyLink's acquisition of us, we recorded our debt securities at their estimated fair values, which totaled $10.7 billion as of November 1, 2017. Our acquisition date fair value estimates were based primarily on inputs other than quoted market prices in active markets that are either directly or indirectly observable. The fair value of our debt securities exceeded their stated principal balances on the acquisition date by $190 million, which is being recognized as a reduction to interest expense over the remaining terms of the debt.
Market Risk
We areAs of December 31, 2021, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.
As of the successor date of December 31, 2018,2021, we havehad approximately $10.526$10.1 billion (excluding unamortized premiums, net, unamortized debt issuance costs and capital lease and other obligations)finance leases) of long-term debt outstanding, 56%69% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held $4.6approximately $3.1 billion of floating rate debt exposed to changes in the London InterBank Offered Rate (LIBOR). A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $46approximately $31 million.
By operating internationally, we are exposed to the risk of fluctuations in the foreign currencies used by our international subsidiaries, including the British Pound, the Euro, the Brazilian Real and the Argentinian Peso, in each case as of December 31, 2017.Peso. Although the percentages of our consolidated revenue and costs that are denominated in these currencies are immaterial, our consolidated results of operations could be adversely impacted by volatility in exchange rates or an increase in the number of foreign currency transactions.
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 presented above if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed as of the successor date of December 31, 2018.2021.
Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements or in the Future Contractual Obligations table above or (ii) discussed under the heading "Market Risk" above.
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 this report is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.
Unless context requires otherwise, references to the "predecessor" periods, or the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and to "successor" periods, or the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Member
Level 3 Parent, LLC:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Level 3 Parent, LLC and subsidiaries (the Company) as of December 31, 20182021 and 2017,2020, the related consolidated statements of operations, comprehensive income (loss), cash flows, and changes in member’s/stockholders’member’s equity for each of the yearyears in the three-year period ended December 31, 2018, for the periods November 1, 2017 to December 31, 2017 (Successor period) and January 1, 2017 to October 31, 2017 (Predecessor period) and for the year ended December 31, 2016 (Predecessor period),2021, 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, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the yearyears in the three-year period ended December 31, 2018, for the periods November 1, 2017 to December 31, 2017 (Successor period) and January 1, 2017 to October 31, 2017 (Predecessor period) and for the year ended December 31, 2016 (Predecessor period),2021, in conformity with U.S. generally accepted accounting principles.
Change in Basis of Presentation
As discussed in Note 1 to the consolidated financial statements, effective November 1, 2017, CenturyLink, Inc. acquired all of the outstanding stock of Level 3 Communications, Inc. (now known as Level 3 Parent, LLC) in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.
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 Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to those charged with governance and that: (1) relates 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 a critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Testing of revenue
As discussed in Note 4 to the consolidated financial statements, the Company recorded $8.0 billion of operating revenues for the year ended December 31, 2021. 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.
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.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Shreveport, LouisianaDenver, Colorado
March 18, 2019February 24, 2022
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| OPERATING REVENUE | | | | | | | | |
| Operating revenue | $ | 8,113 |
| | 1,391 |
| | | 6,870 |
| | 8,173 |
|
| Operating revenue - affiliates | 107 |
| | 16 |
| | | — |
| | — |
|
| Total operating revenue | 8,220 |
| | 1,407 |
|
|
| 6,870 |
| | 8,173 |
|
| OPERATING EXPENSES | | | | | | | | |
| Cost of services and products (exclusive of depreciation and amortization) | 3,937 |
| | 690 |
| | | 3,493 |
| | 4,162 |
|
| Selling, general and administrative | 1,354 |
| | 253 |
| | | 1,208 |
| | 1,407 |
|
| Operating expenses - affiliates | 257 |
| | 24 |
| | | — |
| | — |
|
| Depreciation and amortization | 1,704 |
| | 282 |
| | | 1,018 |
| | 1,159 |
|
| Total operating expenses | 7,252 |
| | 1,249 |
| | | 5,719 |
| | 6,728 |
|
| OPERATING INCOME | 968 |
| | 158 |
| | | 1,151 |
| | 1,445 |
|
| OTHER (EXPENSE) INCOME | | | | | | | | |
| Interest income | — |
| | 1 |
| | | 13 |
| | 4 |
|
| Interest income - affiliate | 67 |
| | 11 |
| | | — |
| | — |
|
| Interest expense | (509 | ) | | (80 | ) | | | (441 | ) | | (544 | ) |
| Loss on modification and extinguishment of debt | — |
| | — |
| | | (44 | ) | | (40 | ) |
| Other income (expense), net | 11 |
| | 3 |
| | | 14 |
| | (23 | ) |
| Total other expense, net | (431 | ) | | (65 | ) | | | (458 | ) | | (603 | ) |
| INCOME BEFORE INCOME TAX EXPENSE | 537 |
| | 93 |
| | | 693 |
| | 842 |
|
| Income tax expense | (196 | ) | | (234 | ) | | | (268 | ) | | (165 | ) |
| NET INCOME (LOSS) | $ | 341 |
| | (141 | ) | | | 425 |
| | 677 |
|
See accompanying notes to consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| NET INCOME (LOSS) | $ | 341 |
| | (141 | ) | | | 425 |
| | 677 |
|
| OTHER COMPREHENSIVE (LOSS) INCOME: | | | | | | | | |
| Defined benefit pension plan adjustment, net of ($1), $—, ($3), and $4 tax | 5 |
| | — |
| | | (1 | ) | | (6 | ) |
| Foreign currency translation adjustment, net of $50, ($17), ($46), and $39 tax | (200 | ) | | 18 |
| | | 81 |
| | (80 | ) |
| Other comprehensive (loss) income | (195 | ) | | 18 |
| | | 80 |
| | (86 | ) |
| COMPREHENSIVE INCOME (LOSS) | $ | 146 |
| | (123 | ) | | | 505 |
| | 591 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (Dollars in millions) |
| OPERATING REVENUE | | | | | |
| Operating revenue | $ | 7,729 | | | 7,725 | | | 7,593 | |
| Operating revenue - affiliates | 223 | | | 208 | | | 180 | |
| Total operating revenue | 7,952 | | | 7,933 | | | 7,773 | |
| OPERATING EXPENSES | | | | | |
| Cost of services and products (exclusive of depreciation and amortization) | 3,525 | | | 3,486 | | | 3,387 | |
| Selling, general and administrative | 1,181 | | | 1,226 | | | 1,258 | |
| Operating expenses - affiliates | 497 | | | 368 | | | 334 | |
| Depreciation and amortization | 1,717 | | | 1,689 | | | 1,613 | |
| Goodwill impairment | — | | | — | | | 3,708 | |
| Total operating expenses | 6,920 | | | 6,769 | | | 10,300 | |
| OPERATING INCOME (LOSS) | 1,032 | | | 1,164 | | | (2,527) | |
| OTHER (EXPENSE) INCOME | | | | | |
| Interest income - affiliate | 65 | | | 51 | | | 61 | |
| Interest expense | (361) | | | (393) | | | (502) | |
| Other income, net | 47 | | | 50 | | | 22 | |
| Total other expense, net | (249) | | | (292) | | | (419) | |
| INCOME (LOSS) BEFORE INCOME TAXES | 783 | | | 872 | | | (2,946) | |
| Income tax expense | 197 | | | 221 | | | 255 | |
| NET INCOME (LOSS) | $ | 586 | | | 651 | | | (3,201) | |
See accompanying notes to consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | |
| | Successor |
| | December 31,
2018 | | December 31,
2017 |
| | (Dollars in millions) |
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 243 |
| | 297 |
|
| Restricted cash and securities - current | 4 |
| | 5 |
|
| Accounts receivable, less allowance of $11 and $3 | 712 |
| | 748 |
|
| Accounts receivable - affiliates | — |
| | 13 |
|
| Assets held for sale | — |
| | 140 |
|
| Note receivable - affiliate | 1,825 |
| | 1,825 |
|
| Other | 234 |
| | 117 |
|
| Total current assets | 3,018 |
| | 3,145 |
|
| NET PROPERTY, PLANT AND EQUIPMENT | | | |
| Property, plant and equipment | 10,474 |
| | 9,555 |
|
| Accumulated depreciation | (1,021 | ) | | (143 | ) |
| Net property, plant and equipment | 9,453 |
| | 9,412 |
|
| GOODWILL AND OTHER ASSETS | | | |
| Goodwill | 11,119 |
| | 10,837 |
|
| Restricted cash and securities | 25 |
| | 29 |
|
| Customer relationships, net | 7,567 |
| | 8,845 |
|
| Other intangible assets, net | 410 |
| | 378 |
|
| Other, net | 699 |
| | 489 |
|
| Total goodwill and other assets | 19,820 |
| | 20,578 |
|
| TOTAL ASSETS | $ | 32,291 |
| | 33,135 |
|
| LIABILITIES AND MEMBER'S EQUITY | | | |
| CURRENT LIABILITIES | | | |
| Current maturities of long-term debt | $ | 6 |
| | 8 |
|
| Accounts payable | 726 |
| | 695 |
|
| Accounts payable - affiliates | 246 |
| | 41 |
|
| Accrued expenses and other liabilities | | | |
| Salaries and benefits | 233 |
| | 136 |
|
| Income and other taxes | 130 |
| | 100 |
|
| Interest | 95 |
| | 109 |
|
| Other | 78 |
| | 59 |
|
| Advance billings and customer deposits | 310 |
| | 258 |
|
| Total current liabilities | 1,824 |
| | 1,406 |
|
| LONG-TERM DEBT | 10,838 |
| | 10,882 |
|
| DEFERRED REVENUE AND OTHER LIABILITIES | | | |
| Deferred revenue | 1,181 |
| | 1,093 |
|
| Deferred tax liability | 202 |
| | 212 |
|
| Other | 369 |
| | 270 |
|
| Total deferred revenue and other liabilities | 1,752 |
| | 1,575 |
|
| COMMITMENTS AND CONTINGENCIES (Note 16) |
|
| |
|
|
| MEMBER'S EQUITY | | | |
| Member's equity | 18,048 |
| | 19,254 |
|
| Accumulated other comprehensive (loss) gain | (171 | ) | | 18 |
|
| Total member's equity | 17,877 |
| | 19,272 |
|
| TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 32,291 |
| | 33,135 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in millions) |
| NET INCOME (LOSS) | $ | 586 | | | 651 | | | (3,201) | |
| OTHER COMPREHENSIVE LOSS | | | | | |
| Defined benefit pension plan adjustment, net of $—, $— and $1 tax | 16 | | | (15) | | | (3) | |
| Foreign currency translation adjustment, net of $30, $(43) and $(6) tax | (133) | | | (40) | | | (5) | |
| Other comprehensive loss, net of tax | (117) | | | (55) | | | (8) | |
| COMPREHENSIVE INCOME (LOSS) | $ | 469 | | | 596 | | | (3,209) | |
See accompanying notes to consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| OPERATING ACTIVITIES | | | | | | | | |
| Net income (loss) | $ | 341 |
| | (141 | ) | | | 425 |
| | 677 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | 1,704 |
| | 282 |
| | | 1,018 |
| | 1,159 |
|
| Deferred income taxes | 175 |
| | 270 |
| | | 217 |
| | 123 |
|
| Net long-term debt issuance costs and premium amortization | (30 | ) | | (5 | ) | | | 14 |
| | 21 |
|
| Loss on modification and extinguishment of debt | — |
| | — |
| | | 44 |
| | 40 |
|
| Share-based compensation | — |
| | 26 |
| | | 132 |
| | 156 |
|
| Accrued interest on long-term debt, net | (14 | ) | | 27 |
| | | (47 | ) | | 21 |
|
| Changes in current assets and liabilities: | | | | | | | | |
| Accounts receivable | 46 |
| | (1 | ) | | | (16 | ) | | 31 |
|
| Accounts payable | (37 | ) | | 35 |
| | | (102 | ) | | 83 |
|
| Deferred revenue | 71 |
| | (15 | ) | | | 146 |
| | 18 |
|
| Other current assets and liabilities | 4 |
| | (100 | ) | | | 70 |
| | 26 |
|
| Other current assets and liabilities, affiliates | 216 |
| | (17 | ) | | | — |
| | — |
|
| Changes in other noncurrent assets and liabilities, net | (93 | ) | | (38 | ) | | | 8 |
| | (9 | ) |
| Other, net | 14 |
| | (15 | ) | | | 5 |
| | (3 | ) |
| Net cash provided by operating activities | 2,397 |
| | 308 |
| | | 1,914 |
| | 2,343 |
|
| INVESTING ACTIVITIES | | | | | | | | |
| Capital expenditures | (1,038 | ) | | (207 | ) | | | (1,119 | ) | | (1,334 | ) |
| Purchase of marketable securities | — |
| | — |
| | | (1,127 | ) | | — |
|
| Maturity of marketable securities | — |
| | — |
| | | 1,127 |
| | — |
|
| Proceeds from sale of property, plant and equipment and other assets | 134 |
| | — |
| | | 1 |
| | 3 |
|
| Note receivable - affiliate | — |
| | (1,825 | ) | | | — |
| | — |
|
| Net cash used in investing activities | (904 | ) | | (2,032 | ) | | | (1,118 | ) | | (1,331 | ) |
| FINANCING ACTIVITIES | | | | | | | | |
| Net proceeds from issuance of long-term debt | — |
| | — |
| | | 4,569 |
| | 764 |
|
| Payments of long-term debt | (7 | ) | | (1 | ) | | | (4,917 | ) | | (820 | ) |
| Distributions | (1,545 | ) | | (250 | ) | | | — |
| | — |
|
| Other | — |
| | (2 | ) | | | 3 |
| | (3 | ) |
| Net cash used in financing activities | (1,552 | ) | | (253 | ) | | | (345 | ) | | (59 | ) |
| Net (decrease) increase in cash, cash equivalents, restricted cash and securities | (59 | ) | | (1,977 | ) | | | 451 |
| | 953 |
|
| Cash, cash equivalents, restricted cash and securities at beginning of period | 331 |
| | 2,308 |
| | | 1,857 |
| | 904 |
|
| Cash, cash equivalents, restricted cash and securities at end of period | $ | 272 |
| | 331 |
| | | 2,308 |
| | 1,857 |
|
|
| | | | | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| Income taxes paid, net | $ | 33 |
| | 10 |
| | | 49 |
| | 35 |
|
| Interest paid | 542 |
| | 56 |
| | | 468 |
| | 508 |
|
|
| | | | | | | | | | | | | |
| Cash, cash equivalents, restricted cash and securities: | | | | | | | | |
| Cash and cash equivalents | $ | 243 |
| | 297 |
| | | 2,274 |
| | 1,819 |
|
| Restricted cash and securities - current | 4 |
| | 5 |
| | | 5 |
| | 7 |
|
| Restricted cash and securities - noncurrent | 25 |
| | 29 |
| | | 29 |
| | 31 |
|
| Total | $ | 272 |
| | 331 |
| | | 2,308 |
| | 1,857 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 146 | | | 190 | |
| Accounts receivable, less allowance of $39 and $45 | 642 | | | 683 | |
| Note receivable - affiliate | 1,468 | | | 1,468 | |
| Assets held for sale | 2,708 | | | — | |
| Other | 239 | | | 297 | |
| Total current assets | 5,203 | | | 2,638 | |
| Property, plant and equipment, net of accumulated depreciation $3,202 and $2,818 | 9,042 | | | 10,518 | |
| GOODWILL AND OTHER ASSETS | | | |
| Goodwill | 6,666 | | | 7,405 | |
| Other intangible assets, net | 5,725 | | | 6,605 | |
| Other, net | 1,459 | | | 1,410 | |
| Total goodwill and other assets | 13,850 | | | 15,420 | |
| TOTAL ASSETS | $ | 28,095 | | | 28,576 | |
| LIABILITIES AND MEMBER'S EQUITY | | | |
| CURRENT LIABILITIES | | | |
| Current maturities of long-term debt | $ | 26 | | | 14 | |
| Accounts payable | 381 | | | 495 | |
| Accounts payable - affiliates | 18 | | | 869 | |
| Accrued expenses and other liabilities | | | |
| Salaries and benefits | 176 | | | 220 | |
| Income and other taxes | 83 | | | 111 | |
| Current operating lease liabilities | 299 | | | 241 | |
| Other | 150 | | | 159 | |
| Liabilities held for sale | 435 | | | — | |
| Current portion of deferred revenue | 291 | | | 315 | |
| Total current liabilities | 1,859 | | | 2,424 | |
| LONG-TERM DEBT | 10,396 | | | 10,373 | |
| DEFERRED REVENUE AND OTHER LIABILITIES | | | |
| Deferred revenue | 1,404 | | | 1,396 | |
| Operating lease liabilities | 953 | | | 903 | |
| Other | 474 | | | 575 | |
| Total deferred revenue and other liabilities | 2,831 | | | 2,874 | |
| COMMITMENTS AND CONTINGENCIES (Note 16) | 0 | | 0 |
| MEMBER'S EQUITY | | | |
| Member's equity | 13,360 | | | 13,139 | |
| Accumulated other comprehensive loss | (351) | | | (234) | |
| Total member's equity | 13,009 | | | 12,905 | |
| TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 28,095 | | | 28,576 | |
See accompanying notes to consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF MEMBER'S/STOCKHOLDERS' EQUITYCASH FLOWS
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| MEMBER'S EQUITY | | | | | | | | |
| Balance at beginning of period | $ | 19,254 |
| | 19,617 |
| | | — |
| | — |
|
| Net income (loss) | 341 |
| | (141 | ) | | | — |
| | — |
|
Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $3, $-, $-, $- tax | 9 |
| | — |
| | | — |
| | — |
|
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | (6 | ) | | — |
| | | — |
| | — |
|
| Contributions | — |
| | 28 |
| | | — |
| | — |
|
| Purchase price accounting adjustments | (5 | ) | | — |
| | | — |
| | — |
|
| Distributions | (1,545 | ) | | (250 | ) | | | — |
| | — |
|
| Balance at end of period | 18,048 |
| | 19,254 |
| | | — |
| | — |
|
| COMMON STOCK | | | | | | | | |
| Balance at beginning of period | — |
| | — |
| | | 4 |
| | 4 |
|
| Balance at end of period | — |
| | — |
| | | 4 |
| | 4 |
|
| ADDITIONAL PAID-IN CAPITAL | | | | | | | | |
| Balance at beginning of period | — |
| | — |
| | | 19,800 |
| | 19,642 |
|
| Common stock issued under employee stock benefit plans and other | — |
| | — |
| | | 30 |
| | 37 |
|
| Share-based compensation | — |
| | — |
| | | 102 |
| | 121 |
|
| Balance at end of period | — |
| | — |
| | | 19,932 |
| | 19,800 |
|
| ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME | | | | | | | | |
| Balance at beginning of period | 18 |
| | — |
| | | (387 | ) | | (301 | ) |
| Other comprehensive (loss) income | (195 | ) | | 18 |
| | | 80 |
| | (86 | ) |
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | 6 |
| | — |
| | | — |
| | — |
|
| Balance at end of period | (171 | ) | | 18 |
| | | (307 | ) | | (387 | ) |
| | | | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | | |
| ACCUMULATED DEFICIT | | | | | | | | |
| Balance at beginning of period | — |
| | — |
| | | (8,500 | ) | | (9,219 | ) |
| Net income | — |
| | — |
| | | 425 |
| | 677 |
|
Cumulative effect of adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting | — |
| | — |
| | | — |
| | 42 |
|
| Balance at end of period | — |
| | — |
| | | (8,075 | ) | | (8,500 | ) |
| TOTAL MEMBER'S/STOCKHOLDERS' EQUITY | $ | 17,877 |
| | 19,272 |
| | | 11,554 |
| | 10,917 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in millions) |
| OPERATING ACTIVITIES | | | | | |
| Net income (loss) | $ | 586 | | | 651 | | | (3,201) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 1,717 | | | 1,689 | | | 1,613 | |
| Goodwill impairment | — | | | — | | | 3,708 | |
| Deferred income taxes | 166 | | | 175 | | | 219 | |
| Changes in current assets and liabilities: | | | | | |
| Accounts receivable | (72) | | | (63) | | | 21 | |
| Accounts payable | (37) | | | (218) | | | (134) | |
| Other assets and liabilities, net | (97) | | | (159) | | | (6) | |
| Other assets and liabilities, affiliate | (846) | | | 108 | | | 423 | |
| Changes in other noncurrent assets and liabilities, net | 150 | | | 71 | | | 120 | |
| Other, net | 3 | | | 30 | | | (80) | |
| Net cash provided by operating activities | 1,570 | | | 2,284 | | | 2,683 | |
| INVESTING ACTIVITIES | | | | | |
| Capital expenditures | (1,218) | | | (1,432) | | | (1,341) | |
| Collections on notes receivable - affiliates | — | | | 122 | | | 235 | |
| Proceeds from sale of property, plant and equipment and other assets | 52 | | | 137 | | | 28 | |
| Net cash used in investing activities | (1,166) | | | (1,173) | | | (1,078) | |
| FINANCING ACTIVITIES | | | | | |
| Net proceeds from issuance of long-term debt | 891 | | | 2,020 | | | 2,479 | |
| Distributions | (365) | | | (1,200) | | | (1,084) | |
| Payments of long-term debt | (943) | | | (2,060) | | | (2,906) | |
| Other | (1) | | | (4) | | | (28) | |
| Net cash used in financing activities | (418) | | | (1,244) | | | (1,539) | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (14) | | | (133) | | | 66 | |
| Cash, cash equivalents and restricted cash at beginning of period | 205 | | | 338 | | | 272 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 191 | | | 205 | | | 338 | |
| Supplemental cash flow information: | | | | | |
| Income taxes paid, net | $ | (27) | | | (24) | | | (23) | |
| Interest paid (net of capitalized interest of $15, $23 and $15) | (368) | | | (382) | | | (531) | |
| | | | | |
| Cash, cash equivalents and restricted cash: | | | | | |
| Cash and cash equivalents | $ | 146 | | | 190 | | | 316 | |
| Cash and cash equivalents included in assets held for sale | 39 | | | — | | | — | |
| Restricted cash included in Other current assets | 2 | | | 3 | | | 3 | |
| Restricted cash included in Other, net noncurrent assets | 4 | | | 12 | | | 19 | |
| Total | $ | 191 | | | 205 | | | 338 | |
See accompanying notes to consolidated financial statements.
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF MEMBER'S EQUITY
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in millions) |
| MEMBER'S EQUITY | | | | | |
| Balance at beginning of period | $ | 13,139 | | | 13,724 | | | 18,048 | |
| Net income (loss) | 586 | | | 651 | | | (3,201) | |
Cumulative effect of adoption of ASU 2016-13, Credit losses, net of $2 tax | — | | | (3) | | | — | |
| Cumulative effect of adoption of ASU 2016-02, Leases | — | | | — | | | (39) | |
| Distributions | (365) | | | (1,243) | | | (1,084) | |
| Other | — | | | 10 | | | — | |
| Balance at end of period | 13,360 | | | 13,139 | | | 13,724 | |
| ACCUMULATED OTHER COMPREHENSIVE LOSS | | | | | |
| Balance at beginning of period | (234) | | | (179) | | | (171) | |
| Other comprehensive loss | (117) | | | (55) | | | (8) | |
| Balance at end of period | (351) | | | (234) | | | (179) | |
| TOTAL MEMBER'S EQUITY | $ | 13,009 | | | 12,905 | | | 13,545 | |
See accompanying notes to consolidated financial statements.
LEVEL 3 PARENT, LLC
Notes to Consolidated Financial Statements
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the “Company” and “our”, refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc. and their respective subsidiaries. References to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc. and its consolidated subsidiaries.
Unless context requires otherwise, references to the period ended October 31, 2017 covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017 covers the successor period from November 1, 2017 through December 31, 2017.
(1) Background and Summary of Significant Accounting Policies
General
We are an international facilities-based technology communications provider (that is, a provider that owns or leases a substantial portion of the property, plant and equipment necessary to provide our services) of a broad range of integrated communications services. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.
Effective November 1, 2017, we were acquired by CenturyLink in a cash and stock transaction, including the assumption of our debt (the "CenturyLink Merger"). See Note 2—CenturyLink Merger.
Basis of Presentation
On November 1, 2017, we became a wholly owned subsidiary of CenturyLink. On the date of the acquisition, our assets and liabilities were recognized at fair value. This revaluation has been reflected in our financial statements and, therefore, has resulted in a new basis of accounting for the successor period beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods will not be comparable to our previously reported financial statements, including the predecessor period financial statements in this report.
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. Transactions with our non-consolidated affiliates (CenturyLink(Lumen Technologies and its other subsidiaries, referred to herein as affiliates) have not been eliminated. Due to exchange restrictions and other conditions, effective at the end of the third quarter of 2015 we deconsolidated our Venezuelan subsidiary and began accounting for our investment in our Venezuelan subsidiary using the cost method of accounting. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the end of 2018.2021.
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenue by product and service categories. See Note 4—Revenue Recognition for 2018, 2017 and 2016. Although we continued as a surviving corporation and legal entity after the acquisition of us by CenturyLink, the accompanying consolidated statements of operations, comprehensiveadditional information. These changes had no impact on total operating revenue, total operating expenses or net income (loss), cash flows for any period.
Segments
Our operations are integrated into and member's/stockholder's equity (deficit) are presented for two periods: predecessorreported as part of Lumen Technologies. Lumen's chief operating decision maker ("CODM") is our CODM but reviews our financial information on an aggregate basis only in connection with our quarterly and successor, which relatesannual reports that we file with the SEC. Consequently, we do not provide our discrete financial information to the period preceding the acquisition and the period succeeding the acquisition.CODM on a regular basis. As such, we have 1 reportable segment.
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 including, but not limited to, revenue recognition, revenue reserves, network access costs, network access cost dispute reserves, investments, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, taxes, certain liabilities and other provisions and contingencies, 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 member's 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 12—13—Income Taxes and Note 16—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.
RevenueRecognition
We earn most of our consolidated revenue from contracts with customers, primarily through the provision of telecommunications 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) 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;
•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, including local voice, VPN, Ethernet, data, private line (including special access), network access, transport, voice, information technology ("IT"), video and other ancillary services. We provide these services to a wide range of businesses, including global/international,global, enterprise, wholesale, government, 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 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 ranges from one year to sevenfive 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.
Promotional or performance based incentive payments are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. 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 optical 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 10 -to 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue, which we recognizeis 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 adjusted for the time value of money and 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 optical capacity assets for other non-owned optical 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 such service levels arewere not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions,may not have been achieved, we will 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.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.
We defer (i.e.(or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average customercontract life. Third party installations over $50 thousand are amortized over contract term; internalOur deferred contract costs are amortized over 30for our customers have average amortization periods of approximately 33 months. These deferred costs are periodically monitored every period to reflect any significant change in assumptions.
See Note 4—Revenue Recognition for additional information.
Affiliate Transactions
We provide services to our affiliates telecommunications services that we also provide to external customers. Services provided by us to our affiliatesThese services are recognized as operating revenue-affiliates in our consolidated statements of operations. Services provided to us from our affiliates are recognized as operating expenses-affiliates on our consolidated statements of operations. Because of the significance of the services we provide to our affiliates and our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.
We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates. The resulting net balance for transactions between us and our affiliates at the end of each period is reported as accounts receivables - affiliates or accounts payable - affiliates on the accompanying consolidated balance sheets.
From time to time we make distributions to our parent.parent, which reduce our capital resources for debt repayments or other purposes. Distributions are reflected on our consolidated statements of member's/stockholders'member's equity and theour consolidated statements of cash flows reflects distributions made as financing activities.
USF Surcharges, Gross Receipts Taxes and Other SurchargesOur ultimate parent company, Lumen Technologies, is currently indebted to us under a revolving credit facility.
In determining whether to include in our revenue and expenses the taxes and surcharges collected from customers and remitted to government authorities, including USF surcharges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we are the principal taxpayer, we record the surcharges on a gross basis and include them in our revenue and costs of services and products. In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenue and costs of services and products. Total revenue and cost of services and products on the consolidated statements of operations include USF contributions of $415 million and $71 million for the successor year ended December 31, 2018 and successor period ended December 31, 2017, and $331 million and $414 million for the predecessor period ended October 31, 2017 and the predecessor year ended December 31, 2016, 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. WeSubject to certain exceptions, we expense these costs as the related services are received.
Income Taxes
Until November 1, 2017, we filed a consolidated federal income tax return with our eligible subsidiaries. Since CenturyLink's acquisition of us on November 1, 2017, we have been included in the consolidated federal income tax return of CenturyLink. Under CenturyLink'sLumen's tax allocation policy, CenturyLinkLumen Technologies treats our consolidated results as if we were a separate taxpayer. Our reported deferred tax assets and liabilities, as discussed below and in Note 12—13—Income Taxes, are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, CenturyLink,Lumen Technologies, rather than tax authorities. The policy requires us to pay our tax liabilities in cash based upon our separate return taxable income. We are also included in the combined state tax returns filed by CenturyLinkLumen Technologies and the same payment and allocation policy applies. The provision for income taxes consists of an amount for taxes currently payable, an amount for 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"),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 all or a portion of the valuation allowance on our deferred tax assets. See Note 12—13—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 have been issued 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 sheet. 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, 2021 or 2020.
Restricted Cash and Securities
Restricted cash and securities consist primarily of cash and investments that serve to 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 approximates fair value as of December 31, 20182021 and 2017.2020.
Accounts Receivable and Allowance for Doubtful AccountsCredit Losses
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for other receivables, less an allowance for doubtful accounts. Thecredit losses. We use a loss rate method to estimate our allowance for doubtful accounts receivable reflectscredit losses. For more information on our best estimate of probablemethodology for estimating our allowance for credit losses, inherent in our receivable portfolio determinedsee Note 6—Credit Losses on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. 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 doubtful accountscredit 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 doubtful accountscredit losses approximates fair value.
Concentration of Credit Risk
We provide communications services to a wide range of wholesale and enterprise customers, ranging from well capitalized national carriersglobal enterprises to small early stage companies primarily in the United States, Europe and Latin America. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographical regions. We perform ongoing credit evaluations of our customers' financial condition and generally require no collateral from our customers, although letters of credit and deposits are required in certain limited circumstances. We have, from time to time, entered into agreements with value added resellers and other channel partners to reach consumer and enterprise markets for voice services. We have policies and procedures in place to evaluate the financial condition of these resellers prior to initiating service to the final customer. We are not able to predict changes in the financial stability of our customers. Any material changechanges in the financial status of any one or a particular group of customers may cause us to adjust our estimate of the recoverability of receivables and could have a material effect on our results of operation.
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 in the notes presented do not include assets and liabilities that have been reclassified as held for sale as of December 31, 2021. See Note 2—Planned Divestiture of the Latin American Business for additional information.
Property, Plant and Equipment
As a result of CenturyLink's acquisition of us, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition plus the estimated value of any associated legally or contractually required retirement obligations. Therefore, the allocated fair values of the assets represent their new basis of accounting in our consolidated financial statements. This resulted in adjustments to our property, plant and equipment accounts, including accumulated depreciation at the acquisition date. The adjustments related to CenturyLink's acquisition of us are described in Note 2—CenturyLink Merger and Note 7— Property, Plant and Equipment.
We record purchased and constructed property, plant and equipment at cost, plus the estimated value of any associated legally or contractually required retirement obligations. Property,We depreciate our property, plant and equipment is depreciated using the straight-line method. 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. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.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 take into account actual usage, the physical condition of our property, plant, and equipment, industry data, and other relevant factors. Our remaining useful life assessments assessevaluate 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 not 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.
Capitalized labor associated with employees and contract labor working on capital projects were approximately $95 million and $32 million for the successor year ended December 31, 2018 and successor period ended December 31, 2017 and $178 million and $210 million for the predecessor period ended October 31, 2017 and year ended December 31, 2016.
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 level for which identifiable cash flows are largely independent of the cash flows of other 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 seven7 to 14 years, using the straight-line methods,method, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives ranging up to seven7 years. We amortize our other intangible assets over an estimated life of five5 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 devoting timedevoted to the projectssoftware 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 goodwill for impairment at least annually, or more frequently, if an event occurs or circumstances change that would indicate an impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded carrying valueamount of the reporting unit equity exceeds the estimated fair value of equity. Therefore, the equity carrying value and future cash flows is assessed each time aof the reporting unit, limited to the goodwill balance. The impairment assessment is performed on aat the reporting unit. To do so, we assign our assets, liabilities and cash flows to reporting units using reasonable and consistent allocation methodologies, which entail various estimates, judgments and assumptions.unit level. We believe these estimates, judgments and assumptions to be reasonable, but changes in any of these can significantly affect each reporting unit's equity carrying value and future cash flows utilized for our goodwill impairment assessment.
As a result of the merger, the impairment testing date was changed to October 31 for successor periods beginning in 2018. We conducted our annual goodwill impairment analysis as of October 31, 2018 and concludedhave determined that our goodwill was not impaired in 2018. We conducted our annual goodwill impairment analysis asoperations consist of October 1 2017 and concluded that our goodwill was not impaired in 2017.
We are required to reassign goodwill to reporting units each time we reorganize our internal reporting structure which causes a change in the composition of our reporting units. As a result of CenturyLink's acquisition of us, we are now comprised of one reporting unit, consistent with our determination that our business consists of one1 operating segment.
SeeFor more information, see Note 3—Goodwill, Customer Relationships and Other Intangible Assets for additional information.Assets.
Foreign Currency
Local currencies of foreign subsidiaries are the functional currencies for financial reporting purposes except for certain foreign subsidiaries, primarily in Latin America. 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 Statesnon-U.S. subsidiaries have either the British pound, the euro or the Brazilian real as the functional currency, each of which experienced significant fluctuations against the U.S. dollar during the successor yearyears ended December 31, 2018 and period ended2021, December 31, 20172020 and the predecessor period ended October 31, 2017 and year ended December 31, 2016. Foreign2019. We recognize foreign currency translation gains and losses are recognized as a component of accumulated other comprehensive income (loss) in member's/stockholders' equity and in theour consolidated statements of comprehensive income (loss) in accordance with accounting guidance for foreign currency translation. We consider 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) in "Other, net" on theour consolidated statements of operations.
Recently Adopted Accounting Pronouncements
During 2018,2021, we adopted Accounting Standards Update (“ASU”("ASU") 2014-09, “Revenue from Contracts with Customers”2020-09, "Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762" ("ASU 2020-09"), ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” 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 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”2020-01"), and ASU 2017-04, 2019-12, "Simplifying the TestAccounting for Goodwill ImpairmentIncome Taxes (Topic 740)" ("ASU 2019-12"). During 2020, we adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments” ("ASU 2016-13"). During 2019, we adopted ASU 2016-02, "Leases (ASC 842)" ("ASU 2016-02").
Each of these is described further below.
Revenue RecognitionDebt
In May 2014, the FASB issuedOn January 1, 2021, we adopted ASU 2014-092020-09. This ASU amends and supersedes various SEC guidance to reflect SEC Release No. 33-10762, which replaces virtually all existing generally accepted accounting principles on revenue recognition with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles relatedamendments to the deferral and amortization of contract acquisition and fulfillment costs.
We adopted the new revenue recognition standard under the modified retrospective transition method. During the year ended December 31, 2018, we recorded a cumulative catch-up adjustmentfinancial disclosure requirements applicable to registered debt offerings that increased our retained earnings by $9 million, net of $3 million of income taxes.
See Note 4—Revenue Recognition for additional information.
Comprehensive Income (Loss)
In February 2018, the FASB issued ASU 2018-02 provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (the "Act") (or portion thereof) is recorded. If an entity elects to reclassify the income tax effects of the Act, the amount of that reclassification shall include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Act related to items remaining in accumulated other comprehensive income. The effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included. ASU 2018-02 is effective January 1, 2019, but early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. We early adopted and applied ASU 2018-02 in the first quarter of 2018.credit enhancements, such as subsidiary guarantees. The adoption of ASU 2018-02 resulted in a $6 million decrease to member's equity and increase to accumulated other comprehensive income. See Note 17—Accumulated Other Comprehensive Income (Loss) for additional information.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-16"). ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries. After adoption of ASU 2016-16, the income tax effects associated with these asset transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or over the remaining useful life of the asset. We adopted ASU 2016-16 on January 1, 2018. The adoption of ASU 2016-162020-09 did not have a material impact to our consolidated financial statements.
Goodwill ImpairmentInvestments
InOn January 2017,1, 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 FASB issued ASU 2017-04, “Simplifyingequity method of accounting under Topic 323, Investments - Equity Method and Joint Ventures, for the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the impairment testing for goodwill by changingpurposes of applying the measurement for goodwill impairment. Under current rules,alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. As of December 31, 2021, we are required to compute the fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value. Under ASU 2017-04, the goodwill impairment charge will equal the excessdetermined there was no application or discontinuation of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned toequity method during the reporting unit.
We elected to early adopt the provisionsperiods covered in this report. The adoption of ASU 2017-04 as2020-01 did not impact 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 October 1, 2018.ASU 2019-12 did not have a material impact to our consolidated financial statements.
Recently Issued Accounting Pronouncements
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments"
We adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.
We expect to adopt the provisions of ASU 2016-13 effective January 1, 2020, and expect to recognize the impacts throughrecognized a cumulative adjustment to retained earningsour accumulated deficit as of the date of adoption.adoption of $3 million, net of tax effect of $2 million. Please refer to Note 6—Credit Losses on Financial Instruments for more information.
Leases
In February 2016, the FASB issuedWe adopted ASU 2016-02 “Leases” (“ASU 2016-02”), and associated ASUs related to ASU 842, Leases, which require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and
uncertainty of cash flows arising from leases. For leases where we are a lessee, the presentation and measurement of the assets and liabilities will depend on each lease’s classification as either a finance or operating lease. For leases where we are a lessor, the accounting remains largely unchanged from current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (ASC 606). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
We have a cross-functional team in place to evaluate and implement the new guidance and we have substantially completed the implementation of third-party software solutions to facilitate compliance with accounting and reporting requirements. The team continues to review existing lease arrangements and has collected and loaded a significant portion of our lease portfolio into the software. We continue to enhance accounting systems and update business processes and controls related to the new guidance for leases. Collectively, these activities are expected to facilitate our ability to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.
ASU 2016-02 requires a modified retrospective transition approach, applying the new standard to all leases existing at the date of initial adoption. An entity may choose to use either (1) the effective date or (2) the beginning of the earliest comparative period presented in the financial statements at the date of initial application. We will apply the transition requirements at the January 1, 2019, effective date by showing ausing the non-comparative transition option pursuant to ASU 2018-11 and recognized ASC 842's cumulative effect transition adjustment in the first quarter(discussed below) as of 2019, rather than restating any prior periods.January 1, 2019. In addition, we will electelected to apply the package of practical expedients permitted under the transition guidance within the new standard, which doesamong other things (i) allowed us to carry forward the historical lease classification; (ii) did not require reassessmentus to reassess whether any expired or existing contracts are or contain leases under the new definition of prior conclusionsa lease; and (iii) did not require us to reassess whether previously capitalized initial direct costs for any existing leases would qualify for capitalization under ASC 842. We also elected to apply the practical expedient related to contracts containingland easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect to apply the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment of right-of-use assets for existing leases.
On March 5, 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-01, "Leases (ASC 842): Codification Improvements" ("ASU 2019-01"), effective for public companies for fiscal years beginning after December 15, 2019. The new ASU aligns the guidance in ASC 842 for determining fair value of the underlying asset by lessors that are not manufacturers or dealers, with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease classificationcommences, the definition of fair value (in ASC 820, "Fair Value Measurement") should be applied.
We recorded a $39 million cumulative adjustment to accumulated deficit as of January 1, 2019, for the impact of the new accounting standards. Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts are not adjusted and initial direct lease costs. As an accounting policy election, wecontinue to be reported in accordance with previous guidance.
Recently Issued Accounting Pronouncements
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”). These amendments are expected to increase transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance they receive. ASU 2021-10 will exclude short-term leases (term of 12 months or less) from the balance sheet presentation and will accountbecome effective for non-lease and lease components in a contract as a single lease component for most asset classes.
We areus in the processfirst quarter of completing ourfiscal 2022 and early adoption is permitted. As of ASU 2016-02, including reviewing our lease portfolio, completing the implementation and testing of the third-party software solution and exercising internal controls over adoption and implementation of ASU 2016-02. Therefore, the estimated impact on our consolidated balance sheet cannot currently be determined. However,December 31, 2021, we do not expect the adoptioncumulative effect of initially applying ASU 2016-022021-10 in the first quarter of fiscal 2022 will have a material impact onto our consolidated balance sheet throughfinancial statements.
In October 2021, the recognition of right of useFASB 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, 2021, we do not expect the cumulative effect of initially applying ASU 2021-08 on January 1, 2023 will have a material impact our consolidated financial statements.
In July 2021, the FASB issued ASU 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments” (“ASU 2021-05”), which amends the lease liabilitiesclassification requirements for ourlessors to align them with practice under ASC Topic 840. Under this ASU, lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating leases. Thelease if certain criteria are met; and when a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. ASU 2021-05 will become effective for us in the first quarter of fiscal 2022 and early adoption is permitted. As of December 31, 2021, we do not expect the cumulative effect of initially applying ASU 2021-05 on January 1, 2022 will have a material impact to our consolidated statementsfinancial 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 operationsthe scope clarification and consolidated statementsto tailor the existing guidance to derivative instruments affected by the discounting transition. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU 2021-01 provides option guidance for a limited time to ease the potential burden in accounting for reference rate reform. Based on our review of cash flows isour key material contracts through December 31, 2021, we do not expected to be material. We believe the new standardexpect ASU 2021-01 will have a material impact to our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under the current ASC. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 will become effective for us in the first quarter of fiscal 2022 and early adoption is permitted. As of December 31, 2021, we do not expect the cumulative effect of initially applying ASU 2020-06 on January 1, 2022 will 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 debt covenant compliance underreview of our current agreements.key material contracts through December 31, 2021, we do not expect ASU 2020-04 will have a material impact to our consolidated financial statements.
(2) CenturyLink MergerPlanned Divestiture of the Latin American Business
On November 1, 2017, CenturyLink acquired Level 3 through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as CenturyLink's indirect wholly-owned subsidiary under the nameJuly 25, 2021, affiliates of Level 3 Parent, LLC. CenturyLink entered intoLLC executed a definitive agreement to divest our Latin American business to an affiliate of a fund advised by Stonepeak Partners LP in exchange for $2.7 billion cash, subject to certain working capital and other purchase price adjustments and related transaction expenses (estimated to be approximately $50 million). We anticipate closing the transaction mid-year 2022, upon receipt of all requisite regulatory approvals in the U.S. and certain countries where the Latin American business operates, as well as the satisfaction of other customary conditions.
The actual amount of our net after-tax proceeds from this acquisitiondivestiture 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 among other things, realize certainbe incorrect.
We do not believe this divestiture transaction represents a strategic benefits, including enhanced financial and operational scale, market diversification and an enhanced combined network.shift for Level 3. Therefore, the Latin American business does not meet the criteria to be classified as a discontinued operation. As a result, we will continue to report our operating results for the Latin American business in our consolidated operating results until the transaction is closed. The pre-tax net income of the acquisition, Level 3 shareholders received $26.50 per shareLatin American business is estimated to be as follows in cashthe table below:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | 2020 | 2019 |
| (Dollars in millions) |
| Pre-tax net income | $ | 214 | | 160 | | 30 | |
As of December 31, 2021 in the accompanying consolidated balance sheets, the assets and 1.4286 sharesliabilities of CenturyLink common stock, with cash paid in lieuour Latin American business (the "disposal group") are classified as held for sale and are measured at the lower of fractional shares,(i) the carrying value when we classified the disposal group as held for each outstanding share of Level 3 common stock they owned at closing, subject to certain limited exceptions. CenturyLink issued this consideration with respect to allsale and (ii) the fair value of the outstanding common stock of Level 3,disposal group less costs to sell. Effective with the exception of shares held by the dissenting common shareholders. CenturyLink shareholders owned approximately 51% and former Level 3 shareholders owned approximately 49%designation of the combined company.
In addition, each outstanding Level 3 restricted stock unit award granted prior to April 1, 2014 or granted to an outside director of Level 3 was converted into $26.50 in cash and 1.4286 shares of CenturyLink common stock (and cash in lieu of fractional shares) with respect to each Level 3 share covered by such award (the "Converted RSU Awards"). Each outstanding Level 3 restricted stock unit award granted on or after April 1, 2014 (other than those granted to outside directors of Level 3) was converted into a CenturyLink restricted stock unit award using a conversion ratio of 2.8386 to 1disposal group as determined in accordance with a formula set forth in the merger agreement (“the Continuing RSU Awards”).
In connection with the closing of the Merger Agreement, we loaned $1.825 billion to CenturyLink in exchange for an unsecured demand note that bears interest at 3.5% per annum. The principal amount of such note is payable upon demand by Level 3 Parent but no later than November 1, 2020 and may be prepaid by CenturyLink at any time.
In connection with receiving approval from the U.S. Department of Justice to complete the Level 3 acquisition CenturyLink agreed to divest (i) certain Level 3 network assets in three metropolitan areas and (ii) 24 strands of dark fiber connecting 30 specified city-pairs across the United States. All of the metro network assets were classified as assets held for sale on our consolidated balance sheet as of December 31, 2017.
All of those assets were sold by December 31, 2018. The proceeds from the sale of the metro network assets were included in the proceeds from saleJuly 25, 2021, we suspended recording depreciation of property, plant and equipment inand 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 $62 million of depreciation, intangible amortization, and amortization of right-of use assets for the year ended December 31, 2021 if the Latin American business did not meet the held for sale criteria.
As a result of our consolidated statementsevaluation of cash flows. No gain or loss was recognized with these transactions.
CenturyLink recognizedthe recoverability of the carrying value of the assets and liabilities of Level 3 basedheld for sale relative to the agreed upon sales price, adjusted for costs to sell, we did not record any estimated loss on disposal for the fair valueyear ended December 31, 2021. The recoverability of the acquired tangible and intangibledisposal group will be evaluated each reporting period until the closing of the transaction.
The principal components of the held for sale assets and assumed liabilities of Level 3 as of November 1, 2017, the consummation date of the acquisition, with the excess aggregate consideration recorded as goodwill. The estimation of such fair values and the estimation of lives of depreciable tangible assets and amortizable intangible assets required significant judgment. CenturyLink completed their final fair value determination during the fourth quarter of 2018. The final fair value determinations were different than those reflected in our consolidated financial statements at December 31, 2017.2021 are as follows:
As of October 31, 2018, the aggregate consideration exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities by $11.2 billion, which we have recognized as goodwill. The goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.
The following is our assignment of the aggregate consideration: |
| | | | | | | | | |
| | Adjusted November 1, 2017 Balance as of December 31, 2017 | | Purchase Price Adjustments | | Adjusted November 1, 2017 Balance as of October 31, 2018 |
| | (Dollars in millions) |
Cash, accounts receivable and other current assets (1) | $ | 3,317 |
| | (26 | ) | | 3,291 |
|
| Property, plant and equipment | 9,311 |
| | 157 |
| | 9,468 |
|
Identifiable intangible assets (2) | | | | | |
| Customer relationships | 8,964 |
| | (533 | ) | | 8,431 |
|
| Other | 391 |
| | (13 | ) | | 378 |
|
| Other noncurrent assets | 782 |
| | 216 |
| | 998 |
|
| Current liabilities, excluding current maturities of long-term debt | (1,461 | ) | | (32 | ) | | (1,493 | ) |
| Current maturities of long-term debt | (7 | ) | | — |
| | (7 | ) |
| Long-term debt | (10,888 | ) | | — |
| | (10,888 | ) |
| Deferred revenue and other liabilities | (1,613 | ) | | (114 | ) | | (1,727 | ) |
| Goodwill | 10,837 |
| | 340 |
| | 11,177 |
|
| Total estimated aggregate consideration | $ | 19,633 |
| | (5 | ) | | 19,628 |
|
| | | | | |
| December 31, 2021 |
| (Dollars in millions) |
| Assets held for sale | |
| Cash and cash equivalents | $ | 39 | |
| Accounts receivable, less allowance of $3 | 83 | |
| Other current assets | 81 | |
| Property, plant and equipment, net accumulated depreciation of $434 | 1,591 | |
| Goodwill | 713 | |
| Customer relationships and other intangibles, net | 126 | |
| Other non-current assets | 75 | |
| Total assets held for sale | $ | 2,708 | |
| |
(1)Liabilities held for sale | Includes accounts receivable, which had a gross contractual value of $884 million on November 1, 2017. |
(2)Accounts payable | The weighted-average amortization period$ | 101 | |
| Salaries and benefits | 23 | |
| Income and other taxes | 27 | |
| Current portion of deferred revenue | 26 | |
| Other current liabilities | 7 | |
| Deferred income taxes, net | 129 | |
| Other non-current liabilities | 122 | |
Total liabilities held for the acquired intangible assets is approximately 12.0 years.sale | $ | 435 | |
______________________________________________________________________
Acquisition-Related Expenses
We have incurred acquisition-related expenses related to our activities surrounding(1)The assignment of goodwill was based on the CenturyLink Merger. The table below summarizes our acquisition-related expenses, which consist of integration-related expenses, including severance and retention compensation expenses, and transaction-related expenses: |
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| Transaction-related expenses | $ | 1 |
| | — |
| | | 18 |
| | — |
|
| Integration-related expenses | 120 |
| | 28 |
| | | 67 |
| | 15 |
|
| Total acquisition-related expenses | $ | 121 |
| | 28 |
| | | 85 |
| | 15 |
|
As partrelative fair value of the acquisition accounting on November 1, 2017, we also included in our goodwill approximately $1 million for certain restricted stock awardsdisposal group and $47 million related to transaction costs, all of which were contingent on the completionportion of the acquisition and had no benefit to CenturyLink after the acquisition.remaining reporting unit.
(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
| Goodwill | $ | 6,666 | | | 7,405 | |
| Customer relationships, less accumulated amortization of $2,779 and $2,246 | $ | 5,325 | | | 6,156 | |
| Capitalized software, less accumulated amortization of $349 and $256 | 378 | | | 401 | |
| Trade names, less accumulated amortization of $109 and $83 | 22 | | | 48 | |
| Total other intangible assets, net | $ | 5,725 | | | 6,605 | |
Our goodwill was derived from Lumen's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.
|
| | | | | | |
| | Successor |
| | December 31,
2018 | | December 31,
2017 |
| | (Dollars in millions) |
| Goodwill | $ | 11,119 |
| | 10,837 |
|
| Customer relationships, less accumulated amortization of $833 and $126 | $ | 7,567 |
| | 8,845 |
|
| Other intangible assets subject to amortization: | | | |
| Trade names, less accumulated amortization of $30 and $4 | $ | 100 |
| | 126 |
|
| Developed technology, less accumulated amortization of $67 and $9 | 310 |
| | 252 |
|
| Total other intangible assets, net | $ | 410 |
| | 378 |
|
At October 31, 2021, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value equal to the present value of all normalized cash flows after the projection period. As of October 31, 2021, based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 14%. We concluded that the goodwill was not impaired as of October 31, 2021.
The reclassification of held for sale assets, as described in Note 2—Planned Divestiture of the Latin American 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-reclassification goodwill impairment test to determine whether there was an impairment prior to the reclassification and to determine the July 31, 2021 fair values to be utilized for goodwill allocation to the Latin American business to be reclassified as assets held for sale. We concluded it is more likely than not that the fair value of our reporting unit exceeded the carrying value of equity of our reporting unit at July 31, 2021. We also performed a post-reclassification goodwill impairment test using our estimated post-divestiture cash flows and carrying value of equity to evaluate whether the fair value of our reporting unit that will remain following the divestiture exceeds the carrying value of the equity of the reporting unit after reclassification of assets held for sale.
At July 31, 2021, we estimated the fair value of equity by considering both a market approach and a discounted cash flow methodology. The market approach includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow methodology is based on the present value of projected cash flows and a terminal value equal to the present value of all normalized cash flows after the projection period. As of July 31, 2021, based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 17%. We concluded that we did not have any impairment as of July 31, 2021.
At October 31, 2020, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. As of October 31, 2020, based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 17%. We concluded that the goodwill was not impaired as of October 31, 2020.
At October 31, 2019, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. As of October 31, 2019, based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 26%. We concluded that the goodwill was not impaired as of October 31, 2019.
Because Lumen's low stock price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach in the quarter ended March 31, 2019. Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry, which have historically supported a range of fair values of annualized revenue and EBITDA multiples between 2.1x and 4.9x and 4.9x and 9.8x, respectively. We selected a revenue and EBITDA multiple within this range. As of March 31, 2019, based on our assessments performed as described above, we concluded that the estimated fair value of equity was less than our carrying value of equity as of the date of our triggering event during the first quarter. As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $3.7 billion in the quarter ended March 31, 2019.
The market multiples approach that we used in the quarter ended March 31, 2019 incorporated significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain cost synergies. In developing the market multiple, we also considered observed trends of our industry participants. Our assessment included many qualitative factors that required significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the size of our impairments.
The following table shows the rollforward of goodwill from
November 1, 2017December 31, 2019 through December 31,
2018:2021: |
| | | |
| | (Dollars in millions) |
| As of November 1, 2017 | $ | 10,821 |
|
| Purchase accounting and other adjustments | 16 |
|
| As of December 31, 2017 | 10,837 |
|
| Purchase accounting and other adjustments | 340 |
|
| Effect of foreign currency rate change | (58 | ) |
| As of December 31, 2018 | $ | 11,119 |
|
| | | | | |
| (Dollars in millions) |
As of December 31, 2019 (1) | $ | 7,415 | |
| Effect of foreign currency exchange rate changes and other | (10) | |
As of December 31, 2020 (1) | 7,405 | |
Reclassified as held for sale (2) | (713) | |
| Effect of foreign currency exchange rate changes and other | (26) | |
As of December 31, 2021 (1) | $ | 6,666 | |
(1)Goodwill at December 31, 2021, December 31, 2020, December 31, 2019 is net of accumulated impairment loss of $3.6 billion, $3.7 billion and $3.7 billion, respectively. The change in accumulated impairment losses at December 31, 2021 is a result of amounts reclassified to held for sale related to our planned divestiture.
Our goodwill balance includes $16 million,(2)Represents the amount of goodwill, that was allocatednet of accumulated impairment loss reclassified as held for sale related to us from CenturyLink associated with differences inour planned divestiture. See Note 2—Planned Divestiture of the deferred state income taxes that CenturyLink expects to realize due to its consolidation of our results of operations into its state tax returns.Latin American Business.
Total amortization expense for intangible assets for the successor periodyears ended December 31, 2018, the successor period ended December 31, 2017, the predecessor period ended October 31, 20172021, 2020 and the predecessor year ended December 31, 20162019 was $798$843 million, $139 million, $168$838 million and $211$809 million, respectively. As of December 31, 2018,2021, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $20$15.6 billion. As of the successor date of December 31, 2018,2021, the weighted average remaining
useful lives of our finite-lived intangible assets was 11approximately 8 years in total; 119 years for customer relationships, 4 years1 year for trade names, and 34 years for developed technology.
We estimate that total amortization expense for intangible assets for the successor years ending 20192022 through 20232026 will be as follows:provided in the table below. As a result of reclassifying our Latin American business as being held for sale on our December 31, 2021 consolidated balance sheet, the amounts presented below do not include the future amortization of the intangible assets for the business to be divested. See Note 2—Planned Divestiture of the Latin American Business for more information. |
| | | |
| | (Dollars in millions) |
| 2019 | $ | 800 |
|
| 2020 | 800 |
|
| 2021 | 800 |
|
| 2022 | 796 |
|
| 2023 | 766 |
|
| | | | | |
| (Dollars in millions) |
| 2022 | $ | 738 | |
| 2023 | 710 | |
| 2024 | 706 | |
| 2025 | 682 | |
| 2026 | 638 | |
(4) Revenue Recognition
Comparative ResultsSince the first quarter of 2021, we have categorized our products and services and related revenue among the following 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;
The following tables present•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;
•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services; and
•Affiliate Services, which include communications services provided to our reported results under ASC 606 and a reconciliationaffiliates that we also provide to results using the historical accounting method:our external customers.
|
| | | | | | | | | |
| | Successor |
| | Reported Balances as of December 31, 2018 | | Impact of ASC 606 | | ASC 605 Historical Adjusted Balances |
| | (Dollars in millions) |
| Operating revenue | $ | 8,220 |
| | (5 | ) | | 8,215 |
|
| Cost of services and products (exclusive of depreciation and amortization) | 3,937 |
| | — |
| | 3,937 |
|
| Selling, general and administrative | 1,354 |
| | 52 |
| | 1,406 |
|
| Interest expense | 509 |
| | (9 | ) | | 500 |
|
| Income tax expense | 196 |
| | (12 | ) | | 184 |
|
| Net income | 341 |
| | (36 | ) | | 305 |
|
The following table presents a reconciliation of certain consolidated balance sheet captions under ASC 606 to the balance sheet results using the historical accounting method: |
| | | | | | | | | |
| | Successor |
| | Reported Balances as of December 31, 2018 | | Impact of ASC 606 | | ASC 605 Historical Adjusted Balances |
| | (Dollars in millions) |
| Other current assets | $ | 234 |
| | (33 | ) | | 201 |
|
| Other long-term assets, net | 191 |
| | (31 | ) | | 160 |
|
| Deferred revenue | 1,491 |
| | (4 | ) | | 1,487 |
|
| Deferred income tax assets, net | 306 |
| | 15 |
| | 321 |
|
| Member's equity | 17,877 |
| | (45 | ) | | 17,832 |
|
Disaggregated Revenue by Service Offering
The following table providestables provide disaggregation of revenue from contracts with customers based on service offering for the yearyears ended December 31, 2018.2021, 2020 and 2019. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Total Revenue | | Adjustments for Non-ASC 606 Revenue (1) | | Total Revenue from Contracts with Customers |
| (Dollars in millions) |
| Compute and Application Services | $ | 1,141 | | | (504) | | | 637 | |
| IP and Data Services | 3,555 | | | — | | | 3,555 | |
| Fiber Infrastructure Services | 1,612 | | | (220) | | | 1,392 | |
| Voice and Other | 1,421 | | | (12) | | | 1,409 | |
| Affiliate Services | 223 | | | (223) | | | — | |
| Total Revenue | $ | 7,952 | | | (959) | | | 6,993 | |
| | | | | |
| Timing of revenue: | | | | | |
| Goods transferred at a point in time | | | | | $ | 13 | |
| Services performed over time | | | | | 6,980 | |
| Total revenue from contracts with customers | | | | | $ | 6,993 | |
|
| | | | | | | | | | |
| | Successor |
| | Year Ended December 31, 2018 |
| | (Dollars in millions) |
| | Total Revenue | | Adjustments(6) | | Total Revenue from Contracts with Customers |
IP and Data Services (1) | $ | 3,945 |
| | — |
| | 3,945 |
|
Transport and Infrastructure (2) | 2,699 |
| | (189 | ) | | 2,510 |
|
Voice and Collaboration (3) | 1,464 |
| | — |
| | 1,464 |
|
Other Revenue (4) | 5 |
| | (3 | ) | | 2 |
|
Affiliate Revenue (5) | 107 |
| | (107 | ) | | — |
|
| Total Revenue | $ | 8,220 |
| | (299 | ) | | 7,921 |
|
| | | | | | |
| Timing of revenue | | | | | |
| Goods transferred at a point in time | | | | | $ | — |
|
| Services performed over time | | | | | 7,921 |
|
| Total revenue from contracts with customers | | | | | $ | 7,921 |
|
60
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Total Revenue | | Adjustments for Non-ASC 606 Revenue (1) | | Total Revenue from Contracts with Customers |
| (Dollars in millions) |
| Compute and Application Services | $ | 1,098 | | | (494) | | | 604 | |
| IP and Data Services | 3,522 | | | — | | | 3,522 | |
| Fiber Infrastructure Services | 1,507 | | | (209) | | | 1,298 | |
| Voice and Other | 1,598 | | | (8) | | | 1,590 | |
| Affiliate Services | 208 | | | (208) | | | — | |
| Total Revenue | $ | 7,933 | | | (919) | | | 7,014 | |
| | | | | |
| Timing of revenue: | | | | | |
| Goods transferred at a point in time | | | | | $ | 15 | |
| Services performed over time | | | | | 6,999 | |
| Total revenue from contracts with customers | | | | | $ | 7,014 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Total Revenue | | Adjustments for Non-ASC 606 Revenue (1) | | Total Revenue from Contracts with Customers |
| (Dollars in millions) |
| Compute and Application Services | $ | 1,063 | | | (506) | | | 557 | |
| IP and Data Services | 3,528 | | | — | | | 3,528 | |
| Fiber Infrastructure Services | 1,392 | | | (198) | | | 1,194 | |
| Voice and Other | 1,610 | | | (9) | | | 1,601 | |
| Affiliate Services | 180 | | | (180) | | | — | |
| Total Revenue | $ | 7,773 | | | (893) | | | 6,880 | |
| | | | | |
| Timing of revenue: | | | | | |
| Goods transferred at a point in time | | | | | $ | — | |
| Services performed over time | | | | | 6,880 | |
| Total revenue from contracts with customers | | | | | $ | 6,880 | |
(1) Includes lease revenue which is not within the scope of ASC 606.
|
| |
(1) | Includes primarily VPN data network, IP, Ethernet, video and ancillary revenue. |
(2) | Includes primarily wavelength, colocation and data center services, dark fiber, private line and professional services revenue. |
(3) | Includes voice, Voice Over IP ("VoIP"), Collaboration. |
(4) | Includes sublease rental income and IT services and managed services revenue. |
(5) | Includes telecommunications and data services we bill to our affiliates. |
(6) | Includes sublease rental income and revenue from fiber capacity lease arrangements which are 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 reclassified as held for sale as of December 31, 20182021 and January 1, 2018:2020:
|
| | | | | | |
| | Successor |
| | December 31, 2018 | | January 1, 2018 |
| | (Dollars in millions) |
Customer receivables (1) | $ | 712 |
| | 748 |
|
| Contract assets | 19 |
| | 22 |
|
| Contract liabilities | 393 |
| | 353 |
|
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| (Dollars in millions) |
Customer receivables (1) (2) | $ | 640 | | | 683 | |
Contract assets (3) | 35 | | | 38 | |
Contract liabilities (4) | 247 | | | 385 | |
(1)Reflects gross customer receivables of $679 million and $728 million, net of allowance for credit losses of $39 million and $45 million, as of December 31, 2021 and 2020, respectively.
(2)As of December 31, 2021, amount excludes customer receivables reclassified as held for sale of $83 million. |
| |
(1) | Gross customer receivables of $723 million and $751 million, net of allowance for doubtful accounts of $11 million and $3 million, at December 31, 2018 and January 1, 2018, respectively |
(3)As of December 31, 2021, no amounts have been reclassified as held for sale.
(4)As of December 31, 2021, amount excludes contract liabilities reclassified as held for sale of $58 million.
Contract liabilities are consideration we have received from our customers or billed in advance of providing the goods or services promised in the future. We defer recognizing this consideration until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which typically ranges from one to sevenfive years depending on the service. Contract liabilities are included within deferred revenue and liabilities held for sale in our consolidated balance sheets.
The following table provides information about revenue recognized for During the yearyears ended December 31, 2018:2021 and 2020, we recognized $182 million and $188 million, respectively, of revenue that was included in contract liabilities of $385 million and $423 million as of January 1, 2021 and 2020, respectively. |
| | | |
| | Successor |
| | (Dollars in millions) |
| Revenue recognized in the current period from: | |
| Amounts included in contract liability at the beginning of the period (January 1, 2018) | $ | 158 |
|
| Performance obligations satisfied in previous periods | — |
|
Performance Obligations
As of December 31, 2018,2021, our estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are unsatisfied (or partially satisfied)or wholly unsatisfied is approximately $5.2$3.5 billion. We expect to recognize approximately 77%93% of this revenue through 2021,2024, with the balance recognized thereafter.
We do not discloseThese amounts exclude (i) the amountvalue of unsatisfied performance obligations for contracts underfor which we are contractually entitledrecognize revenue at the amount to bill pre-determined amountswhich we have the right to invoice for future services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or(ii) contracts that are classified as leasing arrangements that are not subject to ASC 606.606 and (iii) the value of unsatisfied performance obligations for contracts which relate to our divestiture.
Contract Costs
The following table providestables provide changes in our contract acquisition costs and fulfillment costs for the year ended December 31, 2018:years ended:
| | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Acquisition Costs | | Fulfillment Costs |
| (Dollars in millions) |
| Beginning of period balance | $ | 78 | | | 122 | |
| Costs incurred | 58 | | | 90 | |
| Amortization | (60) | | | (86) | |
Reclassified as held for sale (1) | — | | | (27) | |
| End of period balance | $ | 76 | | | 99 | |
| | | | Successor | | | | | | | | | | |
| | December 31, 2018 | | Year Ended December 31, 2020 |
| | Acquisition Costs | | Fulfillment Costs | | Acquisition Costs | | Fulfillment Costs |
| | (Dollars in millions) | | (Dollars in millions) |
| Beginning of period balance | $ | 13 |
| | 14 |
| Beginning of period balance | $ | 79 | | | 121 | |
| Costs incurred | 68 |
| | 99 |
| Costs incurred | 61 | | | 88 | |
| Amortization | (17 | ) | | (29 | ) | Amortization | (62) | | | (87) | |
| End of period balance | $ | 64 |
| | 84 |
| End of period balance | $ | 78 | | | 122 | |
(1)Represents the amounts reclassified as held for sale related to our planned divestiture. See Note 2—Planned Divestiture of the Latin American 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 telecommunications services to customers, including labor and materials consumed for these activities.
Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average expected contract termlife of 12 to 60approximately 33 months for our business customers and amortizedcustomers. 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 statementstatements of operations. The amount of these deferred costs that are anticipated to be amortized in the next twelve12 months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond twelve12 months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.
(5) Leases
We primarily lease to or from third parties various office facilities and colocation facilities, equipment and dark fiber. Leases with an initial term of 12 months or less are not recorded on the balance sheet; 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.
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 it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. 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 contain any material residual value guarantees or material restrictive covenants.
Lease expense consisted of the following:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
| Operating and short-term lease cost | $ | 368 | | | 440 | |
| Finance lease cost: | | | |
| Amortization of right-of-use assets | 24 | | | 19 | |
| Interest on lease liability | 12 | | | 11 | |
| Total finance lease cost | 36 | | | 30 | |
| Total lease cost | $ | 404 | | | 470 | |
We lease various equipment, office facilities, retail outlets, switching facilities and other network sites. These leases, with few exceptions, provide for renewal options and 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 are reasonably assured.
During the year ended December 31, 2021, we rationalized our lease footprint and ceased using 13 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 year ended December 31, 2021, we incurred accelerated lease costs of approximately $15 million.
For the years ended December 31, 2021, 2020 and 2019, our gross rental expense, including the accelerated lease costs discussed above, was $404 million, $470 million and $412 million, respectively. We also received sublease rental income for the years ended December 31, 2021, 2020 and 2019 of $12 million, $8 million and $9 million, respectively.
Supplemental consolidated balance sheet information and other information related to leases:
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| Leases | Classification on the Balance Sheet | 2021 | | 2020 |
| | (Dollars in millions) |
| Assets | | | | |
| Operating lease assets | Other, net (1) | $ | 1,182 | | | 1,091 | |
| Finance lease assets | Property, plant and equipment, net of accumulated depreciation | 231 | | | 235 | |
| Total leased assets | | $ | 1,413 | | | 1,326 | |
| | | | |
| Liabilities | | | | |
| Current | | | | |
| Operating | Current operating lease liabilities (2) | $ | 299 | | | 241 | |
| Finance | Current maturities of long-term debt | 16 | | | 14 | |
| Noncurrent | | | | |
| Operating | Operating lease liabilities (3) | 953 | | | 903 | |
| Finance | Long-term debt | 226 | | | 241 | |
| Total lease liabilities | | $ | 1,494 | | | 1,399 | |
| | | | |
| Weighted-average remaining lease term (years) | | | |
| Operating leases | | 6.9 | | 7.2 |
| Finance leases | | 11.1 | | 12.5 |
| Weighted-average discount rate | | | | |
| Operating leases | | 4.79 | % | | 5.85 | % |
| Finance leases | | 4.81 | % | | 5.01 | % |
_______________________________________________________________________________(1)Includes affiliate operating lease assets of $294 million and $83 million as of December 31, 2021 and 2020, respectively.
(2) Includes current portion of affiliate operating lease liabilities of $82 million and $31 million as of December 31, 2021 and 2020, respectively.
(3) Includes noncurrent portion of affiliate operating lease liabilities of $224 million and $65 million as of December 31, 2021 and 2020, respectively.
At December 31, 2021, we classified certain operating lease assets and liabilities as held for sale and discontinued recording amortization on the related right-of-use assets of the Latin American business. See Note 2—Planned Divestiture of the Latin American Business for more information.
Supplemental unaudited consolidated cash flow statement information related to leases:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows for operating leases | $ | 360 | | | 350 | |
| Operating cash flows for finance leases | 12 | | | 13 | |
| Financing cash flows for finance leases | 38 | | | 18 | |
| Supplemental lease cash flow disclosures: | | | |
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | 380 | | | 151 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 28 | | | 100 | |
As of December 31, 2021, maturities of lease liabilities were as follows:
| | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
| | (Dollars in millions) |
| 2022 | $ | 347 | | | 28 | |
| 2023 | 284 | | | 25 | |
| 2024 | 223 | | | 26 | |
| 2025 | 175 | | | 26 | |
| 2026 | 115 | | | 26 | |
| Thereafter | 355 | | | 191 | |
| Total lease payments | 1,499 | | | 322 | |
| Less: interest | (247) | | | (80) | |
| Total | 1,252 | | | 242 | |
| Less: current portion | (299) | | | (16) | |
| Long-term portion | $ | 953 | | | 226 | |
As of December 31, 2021, we had entered into a $15 million finance lease with a deferred commencement date.
Operating Lease Income
We lease various office facilities, colocation facilities and dark fiber to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations.
For the years ended December 31, 2021, 2020 and 2019 our gross rental income was $802 million or 10%, $760 million or 10%, and $798 million or 10% respectively, of our operating revenue.
(6) Credit Losses on Financial Instruments
In accordance with ASC 326, "Financial Instruments - Credit Losses", we aggregate financial assets with similar risk characteristics to align our expected credit losses with the 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. Financial assets that do not share risk characteristics with other financial assets are evaluated separately. Our financial assets measured at amortized cost primarily consist of accounts receivable.
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 changes caused by COVID-19 or other 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 the 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 for our accounts receivable portfolio:
| | | | | | | | | | | | | | | |
| Years Ended December 31, | | | | |
| 2021 | | 2020 | | | | |
| (Dollars in millions) | | | | |
Balance at beginning of period (1) | $ | 45 | | | 18 | | | | | |
| Provision for expected losses | 19 | | | 41 | | | | | |
| Write-offs charged against the allowance | (27) | | | (23) | | | | | |
| Recoveries collected | 5 | | | 11 | | | | | |
Reclassified as held for sale (2) | (3) | | | — | | | | | |
| Foreign currency exchange rate changes adjustment | — | | | (2) | | | | | |
| Balance at end of period | $ | 39 | | | 45 | | | | | |
______________________________________________________________________
(1) The beginning balance for the year ended December 31, 2020 includes the cumulative effect of the adoption of the new credit loss standard.
(2) Represents the amounts reclassified as held for sale related to our planned divestiture. See Note 2—Planned Divestiture of the Latin American Business.
For the year ended December 31, 2021, we decreased our allowance for credit losses primarily due to higher write-off activity during 2021, along with lower receivable balances.
For the year ended December 31, 2020, we increased our allowance for credit losses for our accounts receivable portfolio due to an increase in historical and expected loss experience in certain classes of aged balances, which we believe were predominantly attributable to the current COVID-19 induced economic slowdown. The increases were partially offset by recoveries of amounts previously written off.
(7) Long-Term Debt
The following chart reflects our consolidated long-term debt, including finance leases and other obligations, unamortized discounts and premiums, net and unamortized debt issuance costs, but excluding intercompany debt:
|
| | | | | | | | | | |
| | | | | | Successor |
| | Interest Rates | | Maturities | | December 31,
2018 | | December 31,
2017 |
| | | | | | (Dollars in millions) |
| Level 3 Parent, LLC | | | | | | | |
5.750% Senior Notes due 2022 (1) | 5.750% | | 2022 | | $ | 600 |
| | 600 |
|
| Subsidiaries | | | | | | | |
| Level 3 Financing, Inc. | | | | | | | |
| Senior Notes: | | | | | | | |
6.125% Senior Notes due 2021 (2) | 6.125% | | 2021 | | 640 |
| | 640 |
|
5.375% Senior Notes due 2022 (2) | 5.375% | | 2022 | | 1,000 |
| | 1,000 |
|
5.625% Senior Notes due 2023 (2) | 5.625% | | 2023 | | 500 |
| | 500 |
|
5.125% Senior Notes due 2023 (2) | 5.125% | | 2023 | | 700 |
| | 700 |
|
5.375% Senior Notes due 2025 (2) | 5.375% | | 2025 | | 800 |
| | 800 |
|
5.375% Senior Notes due 2024 (2) | 5.375% | | 2024 | | 900 |
| | 900 |
|
5.25% Senior Notes due 2026 (2) | 5.250% | | 2026 | | 775 |
| | 775 |
|
| Term Loan: | | | | | | | |
Tranche B 2024 Term Loan (3)(4) | LIBOR + 2.25% | | 2024 | | 4,611 |
| | 4,611 |
|
| Capital leases and other debt | Various | | Various | | 163 |
| | 179 |
|
| Unamortized premiums, net | | | | | 155 |
| | 185 |
|
| Total long-term debt | | | | | 10,844 |
| | 10,890 |
|
| Less current maturities | | | | | (6 | ) | | (8 | ) |
| Long-term debt, excluding current maturities | | | | | $ | 10,838 |
| | 10,882 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rates (1) | | Maturities (1) | | December 31, 2021 | | December 31, 2020 |
| | | | | (Dollars in millions) |
| Level 3 Financing, Inc. | | | | | | | |
Senior Secured Debt: (2) | | | | | | | |
| Senior notes | 3.400% - 3.875% | | 2027 - 2029 | | $ | 1,500 | | | 1,500 | |
Tranche B 2027 Term Loan (3) | LIBOR + 1.75% | | 2027 | | 3,111 | | | 3,111 | |
| Senior Notes and Other Debt: | | | | | | | |
Senior notes (4) | 3.625% - 5.375% | | 2025 - 2029 | | 5,515 | | | 5,515 | |
| Finance leases and other obligations | Various | | Various | | 319 | | | 255 | |
| Unamortized premiums, net | | | | | 34 | | | 60 | |
| Unamortized debt issuance costs | | | | | (57) | | | (54) | |
| Total long-term debt | | | | | 10,422 | | | 10,387 | |
| Less current maturities | | | | | (26) | | | (14) | |
| Long-term debt, excluding current maturities | | | | | $ | 10,396 | | | 10,373 | |
(1)As of December 31, 2021.
(2)See the remainder of this Note for a description of certain parent and subsidiary guarantees and liens securing this debt.
(3)The Tranche B 2027 Term Loan had an interest rate of 1.854% and 1.897% as of December 31, 2021 and December 31, 2020, respectively.
(4)This debt is fully and unconditionally guaranteed by certain affiliates of Level 3 Financing, inc., including Level 3 Parent, LLC and Level 3 Communications, LLC.
New Issuances
On January 13, 2021, Level 3 Financing, Inc. issued $900 million aggregate principal amount of its 3.750% Sustainability-Linked Senior Notes due 2029 (the "Sustainability-Linked Notes"). The net proceeds were used, together with cash on hand, to redeem certain of its outstanding senior note indebtedness. See "—Redemption of Senior Notes" below. The Sustainability-Linked Notes are guaranteed by Level 3 Parent, LLC and Level 3 Communications, LLC.
On August 12, 2020, Level 3 Financing, Inc. issued $840 million aggregate principal amount of its 3.625% Senior Notes due 2029 (the "2029 Notes"). The net proceeds from the offering were used to redeem certain of its outstanding senior note indebtedness. See "—Redemption of Senior Notes" below. The 2029 Notes are guaranteed by Level 3 Parent, LLC and Level 3 Communications, LLC.
On June 15, 2020, Level 3 Financing, Inc. issued $1.2 billion aggregate principal amount of its 4.250% Senior Notes due 2028 (the "2028 Notes"). The net proceeds from the offering were used to redeem certain of its outstanding senior note indebtedness. See "—Redemption of Senior Notes" below. The 2028 Notes are guaranteed by Level 3 Parent, LLC and Level 3 Communications, LLC.
|
| |
(1) | The notes are not guaranteed by any of Level 3 Parent, LLC's subsidiaries. |
(2) | The notes are fully and unconditionally guaranteed on an unsubordinated unsecured basis by Level 3 Parent, LLC and Level 3 Communications, LLC. |
(3) | The Tranche B 2024 Term Loan had an interest rate of 4.754% and 3.557% as of December 31, 2018 and December 31, 2017, respectively. The interest rate on the Tranche B 2024 Term Loan is set with a minimum London Interbank Offered Rate ("LIBOR") of zero percent. The term loan was refinanced on February 22, 2017 as described below. |
(4) | The Tranche B 2024 Term Loan is a secured obligation and is guaranteed by Level 3 Parent, LLC and certain of its non-regulated subsidiaries. |
Redemption of Senior Notes
On February 12, 2021, Level 3 Financing, Inc. redeemed all $900 million aggregate principal amount of its outstanding 5.375% Senior Notes due 2024.
On September 11, 2020, Level 3 Financing, Inc. redeemed the remaining $140 million aggregate principal amount of its outstanding 5.625% Senior Notes due 2023 and all $700 million aggregate principal amount of its 5.125% Senior Notes due 2023.
On July 15, 2020, Level 3 Financing, Inc. redeemed the remaining $840 million aggregate principal amount of its outstanding 5.375% Senior Notes due 2022 and $360 million aggregate principal amount of its outstanding 5.625% Senior Notes due 2023.
For the years ended December 31, 2021, 2020 and 2019, redemptions of senior notes resulted in a gain of $16 million, $27 million and $5 million, respectively.
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, |
| | 2021 | | 2020 | | 2019 |
| | (Dollars in millions) |
| Interest expense: | | | | | |
| Gross interest expense | $ | 376 | | | 416 | | | 517 | |
| Capitalized interest | (15) | | | (23) | | | (15) | |
| Total interest expense | $ | 361 | | | 393 | | | 502 | |
Senior Secured Term Loan
As of the successor date of December 31, 2018,2021, Level 3 Financing, Inc., Level 3 Parent, LLC's direct wholly owned subsidiary ("Level 3 Financing") had owed $3.1 billion under a senior secured credit facility consisting of a $4.6 billion Tranche B 2027 Term Loan, due 2024.which matures on March 1, 2027. The Tranche B 20242027 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 applicable credit agreement) plus (ii) 1.25%0.75% per annum. Any Eurodollar borrowings under the Tranche B 20242027 Term Loan bear interest at LIBOR plus 2.25%1.75% per annum.
The Tranche B 20242027 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 20242027 Term Loan are,were, 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 has guaranteed and certain of its subsidiaries guaranteehave guaranteed the obligations of Level 3 Financing, Inc. under the Tranche B 20242027 Term Loan. Level 3 Communications, LLC and its material domestic subsidiaries guarantee and, subjectAdditional secured term loans or revolving credit may in the future be extended to certain exceptions, pledge certain of their assets to secure the obligations of Level 3 Financing, Inc. under the Tranche B 2024 Term Loan.its credit agreement dated as of March 13, 2007, as amended on November 29, 2019.
Senior Notes
All of the notes of Level 3 Financing, Inc. reflected in the table above pay interest semiannually and allow for the redemption of the notes at the option of the issuer, 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 circumstances in connection with certain sales of equity securities. For purposes of early redemption, all of the notes reflected in the table above, excluding the Senior Notes due 2025 and Senior Notes due 2026, allow for the redemption of the notes at the option of the issuer upon not less than 10 or more than 60 days prior notice. For purposes of early redemption, the Senior Notes due 2025 and Senior Notes due 2026, allow for the redemption of the notes at the option of the issuer upon not less than 30 or more than 60 days’days prior notice by paying the greater of 101% of the principal amount or a “make whole” amount, plus accrued interest. In addition, the notes also have a provision that allows for an additional right of optional redemption using cash proceeds received from the sale of equity securities.notice. For specific details of these features and requirements, including the applicable premiums and timing, refer to the indentures forsetting forth the specific terms of each respective series of the senior notes in connection with the original issuances.of Level 3 Financing, Inc.
Debt Issuance Costs
For the successor year ended December 31, 2018 and period ended December 31, 2017, we deferred no costs in connection with debt issuances. For the predecessor period ended October 31, 2017 and the predecessor year ended December 31, 2016, we deferred costs of $40 million and $11 million, respectively, in connection with debt issuances.
New Issuances
On the predecessor date of February 22, 2017, we completed the refinancing of all of our then outstanding $4.6 billion senior secured term loans through the issuance of a new Tranche B 2024 Term Loan in the principal amount of $4.6 billion. The new Tranche B 2024 Term Loan bears interest at LIBOR plus 2.25 percent, with a zero percent minimum LIBOR, and will mature on February 22, 2024. The Tranche B 2024 Term Loan was priced to lenders at par, with the payment to the lenders at closing of an upfront 25 basis point fee. We recognized a charge of approximately $44 million for modification and extinguishment in the first quarter of 2017 related to this refinancing.
Repayments
On the predecessor date of September 29, 2017, the $300 million aggregate principal amount plus accrued and unpaid interest due under the Floating Rate Senior Notes due 2018 was paid and we recognized a loss on extinguishment of less than $1 million.
Aggregate Maturities of Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt and capital leasesas of December 31, 2021 (excluding unamortized premiums)premiums, net, unamortized debt issuance costs and intercompany debt) maturing during the following years: |
| | | |
| | (Dollars in millions)(1) |
| 2019 | $ | 6 |
|
| 2020 | 6 |
|
| 2021 | 648 |
|
| 2022 | 1,609 |
|
| 2023 | 1,209 |
|
| 2024 and thereafter | 7,211 |
|
| Total long-term debt | $ | 10,689 |
|
| | | | | |
| (Dollars in millions) |
| 2022 | $ | 26 | |
| 2023 | 27 | |
| 2024 | 32 | |
| 2025 | 838 | |
| 2026 | 811 | |
| 2027 and thereafter | 8,711 | |
| Total long-term debt | $ | 10,445 | |
|
| |
(1) | Actual principal paid in any year may differ due to the possible future refinancing of outstanding debt or the issuance of new debt. |
Letters of Credit
It is customary for us to use various financial instruments in the normal course of business. These instruments include letters of credit. Letters of credit are conditional commitments issued on our behalf in accordance with specified terms and conditions. As of December 31, 20182021 and 2017,2020, we had outstanding letters of credit or other similar obligations of approximately $30$9 million and $36$18 million, respectively, of which $24$5 million and $30$11 million arewere collateralized by cash that is reflected on the consolidated balance sheets as restricted cash and securities. We do not believe exposure to loss related tocash. None of our conditional commitments under our outstanding letters of credit is material.are reflected as debt on our balance sheets.
Covenants
The term loan and senior notes of Level 3 Parent, LLC and Level 3 Financing, Inc. contain 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, engage in transactions with their affiliates including CenturyLinkLumen Technologies and its other subsidiaries, dispose of assets and merge or consolidate with any other person. Also, Level 3 Parent, LLC, as well as Level 3 Financing, Inc., will be required to offer to purchase certain of its long-term debt securities under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC.LLC, or Level 3 Financing, Inc., Level 3 Financing will be required to offer to repurchase or repay certain of its long-term debt at a price of 101% of the principal amount of debt repurchased or repaid, plus accrued and unpaid interest.
The debt covenants applicable to us and our subsidiaries could have a material adverse effect on their ability to operate or expand their respective businesses, to pursue strategic transactions, to transfer cash to or engage in transactions with their unconsolidated affiliates, or to otherwise pursue their plans and strategies.
Certain of CenturyLink'sLumen's and our debt instruments contain 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 ability to comply with the financial covenants in our debt instruments could be adversely impacted by a wide variety of events, including unforeseen contingencies, many of which are beyond our control.
Compliance
At the successor datesAs of December 31, 20182021 and December 31, 2017,2020, we believe we were in compliance with the provisions and financial covenants contained in our debt agreements in all material respects.
(6)(8) Accounts Receivable
The following table presents details of our accounts receivable balances:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
| Trade receivables | $ | 495 | | | 570 | |
| Earned and unbilled receivables | 184 | | | 158 | |
| Other | 2 | | | — | |
| Total accounts receivable | 681 | | | 728 | |
| Less: allowance for credit losses | (39) | | | (45) | |
| Accounts receivable, less allowance | $ | 642 | | | 683 | |
|
| | | | | | |
| | Successor |
| | December 31,
2018 | | December 31,
2017 |
| | (Dollars in millions) |
| Trade receivables | $ | 533 |
| | 562 |
|
| Earned and unbilled receivables | 177 |
| | 165 |
|
| Other | 13 |
| | 24 |
|
| Total accounts receivable | 723 |
| | 751 |
|
Less: allowance for doubtful accounts (1) | (11 | ) | | (3 | ) |
| Accounts receivable, less allowance | $ | 712 |
| | 748 |
|
|
| |
(1) | CenturyLink's acquisition of us caused our assets and liabilities to be recognized at fair value and resulted in the allowance for doubtful accounts being reset as of the date of acquisition. |
We are exposed to concentrations of credit risk from our customers and other telecommunications service providers. We generally do not require collateral to secure our receivable balances.
The following table presents details of our allowance for doubtful accounts:credit losses:
| | | | | | | | | | | | | | | | | | | | | | | |
| Beginning Balance | | Additions | | Deductions | | Ending Balance |
| (Dollars in millions) |
| 2021 | $ | 45 | | | 19 | | | (25) | | | 39 | |
2020(1) | 13 | | | 41 | | | (9) | | | 45 | |
| 2019 | 11 | | | 24 | | | (22) | | | 13 | |
(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 $3 million, net of $2 million tax effect. This adjustment is included within "Deductions". Please refer to Note 6—Credit Losses on Financial Instruments for more information.
|
| | | | | | | | | |
| | Beginning Balance | Additions | Deductions | Ending Balance |
| | (Dollars in millions) |
| 2018 (Successor) | $ | 3 |
| 18 |
| (10 | ) | 11 |
|
| December 31, 2017 (Successor) | — |
| 3 |
| — |
| 3 |
|
| October 31, 2017 (Predecessor) | 29 |
| 16 |
| (12 | ) | 33 |
|
| 2016 (Predecessor) | 32 |
| 18 |
| (21 | ) | 29 |
|
(7)(9) Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
|
| | | | | | | | |
| | | | Successor |
| | Depreciable Lives | | December 31,
2018 | | December 31,
2017 |
| | | | (Dollars in millions) |
| Land | N/A | | $ | 339 |
| | 348 |
|
Fiber conduit and other outside plant(1) | 15-45 years | | 5,262 |
| | 4,750 |
|
Central office and other network electronics(2) | 7-10 years | | 1,986 |
| | 2,134 |
|
Support assets(3) | 3-30 years | | 2,327 |
| | 2,019 |
|
Construction-in-progress(4) | N/A | | 560 |
| | 304 |
|
| Gross property, plant and equipment | | | 10,474 |
| | 9,555 |
|
Accumulated depreciation(5) | | | (1,021 | ) | | (143 | ) |
| Net property, plant and equipment | | | $ | 9,453 |
| | 9,412 |
|
| | | | | | | | | | | | | | | | | |
| Depreciable Lives | | As of December 31, |
| | 2021 | | 2020 |
| | | (Dollars in millions) |
| Land | N/A | | $ | 305 | | | 320 | |
Fiber conduit and other outside plant (1) | 15-45 years | | 5,531 | | | 6,186 | |
Central office and other network electronics (2) | 7-10 years | | 3,280 | | | 3,388 | |
Support assets (3) | 3-30 years | | 2,504 | | | 2,722 | |
Construction-in-progress (4) | N/A | | 624 | | | 720 | |
| Gross property, plant and equipment | | | 12,244 | | | 13,336 | |
| Accumulated depreciation | | | (3,202) | | | (2,818) | |
| Net property, plant and equipment | | | $ | 9,042 | | | 10,518 | |
(1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures. |
| |
(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, data centers, computers and other administrative and support equipment. |
(4) | Construction in progress includes construction and property of the aforementioned categories that has not been placed in service as it is still under construction. |
(5) | CenturyLink's acquisition of us caused our assets and liabilities to be recognized at fair value and resulted in accumulated depreciation being reset as of the date of acquisition. |
(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, data centers, computers and other administrative and support equipment.
(4)Construction in progress includes construction and property of the aforementioned categories that has not been placed in service as it is still under construction.
At December 31, 2021, we classified certain property, plant and equipment as held for sale and discontinued recording depreciation on the planned divestiture of our Latin American business. SeeNote 2—Planned Divestiture of the Latin American Business for more information.
Depreciation expense was $906$874 million, $851 million and $143$804 million for the successor yearyears ended December 31, 20182021, 2020 and period ended December 31, 2017, $850 million and $948 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016.2019, respectively.
Asset Retirement Obligations
At the successor datesAs of December 31, 20182021 and 2017,2020, our asset retirement obligations consisted primarily of restoration requirements for leased facilities. At the predecessor date of December 31, 2016, our asset retirement obligations balance was primarily related to estimated future costs to remove certain of our network infrastructure at the expiration of the underlying right-of-way ("ROW") term and restoration requirements for leased facilities and estimated future costs of properly disposing of asbestos and other hazardous materials upon remodeling or demolishing buildings. We recognize our estimate of the fair value of our asset retirement obligations in the period incurred in other long-term liabilities. The fair value of the asset retirement obligation is also capitalized as property, plant and equipment and then depreciated over the estimated remaining useful life of the associated asset.
The following table provides asset retirement obligation activity: | | | | Successor | | Successor | | | Predecessor | | Years Ended December 31, |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 | | 2021 | | 2020 | | 2019 |
| | (Dollars in millions) | | (Dollars in millions) |
| Balance at beginning of period | $ | 45 |
| | 45 |
| | | 89 |
| | 90 |
| Balance at beginning of period | $ | 122 | | | 113 | | | 105 | |
| Accretion expense | 5 |
| | 1 |
| | | 12 |
| | 10 |
| Accretion expense | 5 | | | 6 | | | 5 | |
Purchase price adjustments (1) | 58 |
| | — |
| | | — |
| | — |
| |
| Liabilities settled | (13 | ) | | (1 | ) | | | (7 | ) | | (9 | ) | Liabilities settled | (10) | | | (7) | | | (12) | |
| Revision in estimated cash flows | 10 |
| | — |
| | | — |
| | — |
| Revision in estimated cash flows | 7 | | | 10 | | | 15 | |
| Effect of foreign currency rate change | — |
| | — |
| | | — |
| | (2 | ) | |
Reclassified as held for sale (1) | | Reclassified as held for sale (1) | (3) | | | — | | | — | |
| Balance at end of period | $ | 105 |
| | 45 |
| | | 94 |
| | 89 |
| Balance at end of period | $ | 121 | | | 122 | | | 113 | |
|
| |
(1) | These liabilities relate(1)Represents the amounts reclassified as held for sale related to purchase price adjustments that occurred during 2018 from CenturyLink's acquisition of us. |
(8) Severance and Leased Real Estate
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 workload demands due to the loss of customers purchasing 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.
We have recognized liabilities to reflect our estimatesplanned divestiture. See Note 2—Planned Divestiture of the fair values of the existing lease obligations for real estate which we have ceased using, net of estimated sublease rentals. As of the acquisition date, we recorded liabilities to reflect the fair values of the existing lease obligations for real estate for which we had ceased using, net of estimated sublease rentals. Our fair value estimates were determined using discounted cash flow methods. We recognize expense to reflect accretion of the discounted liabilities and periodically we adjust the expense when our actual subleasing experience differs from our initial estimates. We report the current portion of liabilities for ceased-use real estate leases in accrued expenses and other liabilities-other and report the noncurrent portion in deferred credits and other liabilities-other in our consolidated balance sheets. We report the related expenses in selling, general and administrative expenses in our consolidated statements of operations. At December 31, 2018, the current and noncurrent portions of our leased real estate accrual were $8 million and $39 million, respectively. The remaining lease terms range from less than one year to 12.0 years, with a weighted average of 8.2 years.Latin American Business.
Changes in our accrued liabilities for severance expenses and leased real estate were as follows:
|
| | | | | | |
| | Severance | | Real Estate |
| | (Dollars in millions) |
| Balance at December 31, 2016 (Predecessor) | $ | 2 |
| | 5 |
|
| Accrued to expense | — |
| | 2 |
|
| Payments, net | (1 | ) | | (2 | ) |
| Balance at October 31, 2017 (Predecessor) | 1 |
| | 5 |
|
| Balance at November 1, 2017 (Successor) | 1 |
| | 5 |
|
| Accrued to expense | 6 |
| | — |
|
| Payment, net | (2 | ) | | (1 | ) |
| Balance at December 31, 2017 (Successor) | 5 |
| | 4 |
|
| Accrued to expense | 33 |
| | 51 |
|
| Payments, net | (19 | ) | | (8 | ) |
| Balance at December 31, 2018 (Successor) | $ | 19 |
| | 47 |
|
(9)(10) Employee Benefits
Defined Contribution Plans
Prior to the CenturyLink acquisition on November 1, 2017, we offered ourLumen Technologies sponsors a qualified employees the opportunity to participate in a defined contribution retirement plan qualifying undercovering substantially all of our employees. Under this plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the provisions of Section 401(k) ofplan and by the Internal Revenue CodeService ("401(k) Plan"IRS"). Each employee was eligible to contribute, onCurrently, we match a tax deferred basis, a portionpercentage of annual earnings generally not to exceed $18,500 in 2018, $18,000 in 2017 and $18,000 in 2016. We matched 100% of employeeour employee's contributions up to 4% of eligible earnings or applicable regulatory limits.
Effective December 31, 2017, the Level 3 Communications, Inc. 401(k) Profit Sharing Plan and Trust assets merged with the CenturyLink, Inc. Dollars & Sense 401(k) Plan. Those employees eligible to contribute to the Level 3 Plan at December 31, 2017 were automatically enrolled in the CenturyLink Plan at January 1, 2018. Provisions regarding eligibility, participant and employer contributions, vesting, and benefit payments within the Level 3 Plan document did not materially change and protected provisions applicable to Level 3 and its predecessor Plans remained grandfathered as required by law.
Prior to the CenturyLink acquisition on November 1, 2017, our matching contributions were made with Level 3 common stock based on the closing stock price on each pay date. After our acquisition, matching contributions were made in cash. We made 401(k) Plan matching contributions of $7recognized $31 million, $29 million and $29 million in expense related to this plan for the successor periodyears ended December 31, 2017,2021, 2020, and $30 million and $37 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016, respectively. Our matching contributions are recorded as compensation and included in cost of services of $1 million for the successor period ended December 31, 2017, and $4 million and $5 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016, respectively. Our matching contributions included in selling, general and administrative expenses totaled $5 million for the successor period ended December 31, 2017, and $26 million and $32 million for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016,2019, respectively.
Other defined contribution plans we sponsored are individually not significant. On an aggregate basis, the expense we recorded relating to these plans was approximately $5$8 million, and $1 million for the successor year ended December 31, 2018 and period ended December 31, 2017, and $5$8 million and $6 million for the predecessor period ended October 31, 2017 and for the predecessor yearyears ended December 31, 2016,2021, 2020, and 2019, respectively.
Defined Benefit Plans
We have certain contributory and non-contributory employee pension plans, which are not significant to our financial position or operating results. We recognize in our balance sheet the funded status of our defined benefit post-retirement plans, which is measured as the difference between the fair value of the plan assets and the plan benefit obligations. We are also required to recognize changes in the funded status within accumulated other comprehensive income, net of tax, to the extent such changes are not recognized in earnings as components of periodic net benefit cost. The fair value of the plan assets was $133$75 million and $147$128 million as of December 31, 20182021 and 2017,2020, respectively. The total plan benefit obligations were $144$92 million and $165$161 million as of December 31, 20182021 and 2017,2020, respectively. Therefore, the net unfunded status was $11$17 million and $18$33 million as of December 31, 20182021 and 2017,2020, respectively.
(10) Share-Based(11) Share-based Compensation
Prior to our acquisition by CenturyLink on November 1, 2017, we recorded share-based compensation expense for our performance restricted stock units, restricted stock units, 401(k) matching contributions and prior to October 1, 2016, outperform stock appreciation rights. Due to CenturyLink's acquisition of us, we now record share-based compensation expense that is allocated to us from CenturyLink. Based on many factors that affect the allocation, the amount of share-based compensation expense recorded at CenturyLink and ultimately allocated to us may fluctuate. We cash settle the share-based compensation expense allocated to us from CenturyLink.
Share-based compensation expenses wereare included in cost of services and products, and selling, general, and administrative expenses in our consolidated statements of operations. During our predecessor period
For the years ended December 31, 2021, 2020 and years,2019, we recognized compensation expense relating to awards granted to our employees under the Level 3 Communications, Inc. Stock Incentive Plan, as amended (the "Stock Plan"). The Stock Plan provided for accelerated vesting of stock awards upon retirement if an employee met certain age and years of service requirements and certain other requirements. Under the Stock Compensation guidance, if an employee meets the age and years of service requirements under the accelerated vesting provision, the award would be expensed at grant or expensed over the period from the grant date to the date the employee meets the requirements, even if the employee has not actually retired.
Our totalrecorded share-based compensation expense wasof approximately $105$47 million, $78 million and $26$85 million, for the successor year ended December 31, 2018 and period ended December 31, 2017, and $132 million and $156 million for the predecessor period ended October 31, 2017 and year ended December 31, 2016, respectively.
(11)(12) Fair Value Disclosureof Financial Instruments
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, note receivable-affiliate and long-term debt, excluding capital leasefinance leases and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, note receivable-affiliate 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 set forth by the FASB.
We determined the fair values of our long-term debt, including the current portion, based primarily 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 are generally as follows:
|
| | | | | | | |
| Input Level | | Description of Input |
| Level 1 | | Observable inputs such as quoted market prices in active markets. |
| Level 2 | | Inputs other than quoted prices in active markets that are either directly or indirectly observable. |
| Level 3 | | Unobservable inputs in which little or no market data exists. |
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital leasefinance leases and other obligations, as well as the input level used to determine the fair values indicated below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2021 | | 2020 |
| Input Level | | Carrying Amount | Fair Value | | Carrying Amount | Fair Value |
| | | (Dollars in million) |
| Liabilities-Long-term debt, excluding finance leases and other obligations | 2 | | $ | 10,103 | | 10,090 | | | 10,132 | | 10,340 | |
|
| | | | | | | | | | | | | |
| | | | Successor |
| | | | As of December 31, 2018 | | | As of December 31, 2017 |
| | Input Level | | Carrying Amount | Fair Value | | | Carrying Amount | Fair Value |
| | | | (Dollars in million) |
| Liabilities-Long-term debt, excluding capital lease and other obligations | 2 | | $ | 10,681 |
| 10,089 |
| | | 10,711 |
| 10,528 |
|
(12)(13) Income Taxes
On December 22, 2017,The components of the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act reduces the U.S. corporate income tax rate from a maximum of 35% to 21% for all corporations, effective January 1, 2018, and makes certain changes to U.S. taxation of income earned by foreign subsidiaries, capital expenditures, interest expense and various other items.are as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in millions) |
| Federal | | | | | |
| Current | $ | — | | | — | | | 12 | |
| Deferred | 125 | | | 162 | | | 186 | |
| State and local | | | | | |
| Current | 12 | | | 22 | | | 4 | |
| Deferred | 28 | | | 42 | | | 41 | |
| Foreign | | | | | |
| Current | 16 | | | 19 | | | 17 | |
| Deferred | 16 | | | (24) | | | (5) | |
| Total income tax expense | $ | 197 | | | 221 | | | 255 | |
As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we revalued our net deferred tax assets at December 31, 2017 and recognized a provisional $195 million tax expense in our consolidated statement of operations for the year ended December 31, 2017. As a result of finalizing our provisional amount recorded in 2017, we recorded an increase to this amount of $92 million in 2018.
The Tax Act imposed a one-time repatriation tax on certain earnings of foreign subsidiaries. The Tax Act also includes certain anti-abuse and base erosion provisions that may impact the amount of U.S. tax that we pay with respect to income earned by our foreign subsidiaries. We have completed our analysis of the impact of the one-time repatriation tax and concluded that we do not have a tax liability under this provision. We have also completed our analysis of the anti-abuse and base erosion provisions and have recorded a tax expense of $10 million related to the global intangible low-taxed income provisions and do not have liability related to the base erosion and anti-abuse tax provisions of the Act.
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| Income tax expense was as follows: | | | | | | | | |
| Federal | | | | | | | | |
| Current | $ | — |
| | — |
| | | — |
| | — |
|
| Deferred | 199 |
| | 231 |
| | | 193 |
| | 177 |
|
| State | | | | | | | | |
| Current | (9 | ) | | 2 |
| | | 7 |
| | 4 |
|
| Deferred | 28 |
| | 6 |
| | | 16 |
| | 27 |
|
| Foreign | | | | | | | | |
| Current | 30 |
| | 4 |
| | | 39 |
| | 41 |
|
| Deferred | (52 | ) | | (9 | ) | | | 13 |
| | (84 | ) |
| Total income tax expense | $ | 196 |
| | 234 |
| | | 268 |
| | 165 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in millions) |
| Income tax expense was allocated as follows: | | | | | |
| Income tax expense in the consolidated statements of operations: | | | | | |
| Attributable to income | $ | 197 | | | 221 | | | 255 | |
| Member's equity: | | | | | |
| Tax effect of the change in accumulated other comprehensive loss | $ | (30) | | | 43 | | | 5 | |
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| Income tax expense was allocated as follows: | | | | | | | | |
| Income tax expense in the consolidated statements of operations: | | | | | | | | |
| Attributable to income | $ | 196 |
| | 234 |
| | | 268 |
| | 165 |
|
| Member's/Stockholders' equity: | | | | | | | | |
| Tax effect of the change in accumulated other comprehensive loss | $ | (49 | ) | | 17 |
| | | 49 |
| | (43 | ) |
The following is a reconciliation from the statutory federal income tax rate to our effective income tax rate:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Percentage of pre-tax income) |
| Statutory federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal income tax benefit | 4.1 | % | | 5.8 | % | | (1.2) | % |
| Goodwill impairment | — | % | | — | % | | (26.4) | % |
| Tax law changes | — | % | | (1.5) | % | | (0.2) | % |
| Global intangible low-taxed income | — | % | | — | % | | (0.4) | % |
| Net foreign income tax | 1.6 | % | | 0.9 | % | | (0.8) | % |
| Executive compensation limitation | — | % | | — | % | | (0.2) | % |
| Research and development credits | (0.4) | % | | (0.6) | % | | 0.1 | % |
| Other, net | (1.1) | % | | (0.3) | % | | (0.5) | % |
| Effective income tax rate | 25.2 | % | | 25.3 | % | | (8.6) | % |
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Percentage of pre-tax income) |
| Statutory federal income tax rate | 21.0 | % | | 35.0 | % | | | 35.0 | % | | 35.0 | % |
| State income taxes, net of federal income tax benefit | 2.8 | % | | 3.6 | % | | | 2.9 | % | | 3.7 | % |
| Tax Reform | 17.2 | % | | 210.6 | % | | | — | % | | (13.2 | )% |
| Global intangible low-taxed income | 1.8 | % | | — | % | | | — | % | | — | % |
| CenturyLink acquisition transaction costs | — | % | | 11.3 | % | | | — | % | | — | % |
| Uncertain tax positions | 0.5 | % | | 1.2 | % | | | 0.1 | % | | 0.1 | % |
| Net foreign income tax | (4.8 | )% | | (19.3 | )% | | | 0.9 | % | | (6.7 | )% |
| Executive compensation limitation | 1.2 | % | | 5.4 | % | | | 0.9 | % | | 1.1 | % |
| Research and development credits | (1.3 | )% | | (0.9 | )% | | | (1.2 | )% | | — | % |
| Other, net | (1.9 | )% | | 4.7 | % | | | 0.1 | % | | (0.4 | )% |
| Effective income tax rate | 36.5 | % | | 251.6 | % | | | 38.7 | % | | 19.6 | % |
The successorFor the year ended December 31, 2018 and the period ended December 31, 2017,2021, the effective tax rate is 36.5% and 251.6%25.2% compared to 38.7%25.3% and (8.6)% for the predecessor period ended October 31, 2017 and 19.6% for the predecessor yearyears ended December 31, 2016,2020 and 2019, respectively. The effective tax rate for the successor period ended December 31, 2018 reflects $92 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017. The effective tax rate for the successor period ended December 31, 2017 reflects $195 million of an estimated one-time income tax expense related to income tax law changes under the Tax Act enacted in 2017. The predecessor year ended December 31, 20162019 reflects $779 million unfavorable impact of a $110 million estimated one-time income tax benefit related to newly issued regulations under Internal Revenue Code Section 987 addressing the taxation of foreign currency translations gains and losses arising from foreign branches, as well as $82 million of income tax benefit related to the release of foreign valuation allowances, primarily in Germany, Brazil and Mexico.non-deductible goodwill impairment.
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, |
| 2021 | | 2020 |
| (Dollars in millions) |
| Deferred tax assets | | | |
| Deferred revenue | $ | 306 | | | 277 | |
| Net operating loss carry forwards | 3,191 | | | 3,503 | |
| Property, plant and equipment | 71 | | | 65 | |
| Other | 267 | | | 343 | |
| Gross deferred tax assets | 3,835 | | | 4,188 | |
| Less valuation allowance | (1,103) | | | (1,170) | |
| Net deferred tax assets | 2,732 | | | 3,018 | |
| Deferred tax liabilities | | | |
| Deferred revenue | (14) | | | (34) | |
| Property, plant and equipment | (1,295) | | | (1,264) | |
| Intangible assets | (1,539) | | | (1,773) | |
| Other | (20) | | | (33) | |
| Gross deferred tax liabilities | (2,868) | | | (3,104) | |
| Net deferred tax liabilities | $ | (136) | | | (86) | |
|
| | | | | | |
| | Successor |
| | December 31,
2018 | | December 31,
2017 |
| | (Dollars in millions) |
| Deferred tax assets | | | |
| Deferred revenue | $ | 298 |
| | 256 |
|
| Net operating loss carry forwards | 3,494 |
| | 3,633 |
|
| Property, plant and equipment | 57 |
| | 63 |
|
| Other | 309 |
| | 282 |
|
| Gross deferred tax assets | 4,158 |
| | 4,234 |
|
| Less valuation allowance | (931 | ) | | (942 | ) |
| Net deferred tax assets | 3,227 |
| | 3,292 |
|
| Deferred tax liabilities | | | |
| Deferred revenue | (45 | ) | | (44 | ) |
| Property, plant and equipment | (853 | ) | | (689 | ) |
| Intangible assets | (1,998 | ) | | (2,329 | ) |
| Other | (25 | ) | | (16 | ) |
| Gross deferred tax liabilities | (2,921 | ) | | (3,078 | ) |
| Net deferred tax assets | $ | 306 |
| | 214 |
|
Of the $306$136 million and $214$86 million net deferred tax assets atliabilities as of December 31, 20182021 and 2017,2020, respectively, $202$212 million and $212$247 million is reflected as a long-term liability, in other on our consolidated balance sheets and $508$76 million and $426$161 million is reflected as a net noncurrent deferred tax asset, at December 31, 2018 and 2017, respectively.in other, net on our consolidated balance sheets.
During the twelve months ended December 31, 2017, we completed an extensive analysis of our Internal Revenue Code ("IRC") Section 382 limitation that resulted in an increase of the amount of net operating loss carry forwards asAs of December 31, 2017 by approximately $1.0 billion on a pre-tax basis that was recorded in purchase accounting. At the successor date of December 31, 2018,2021, we had federal NOLs of $13.8$12 billion before uncertain tax positions of $4.3$4 billion, which will expire between 2025 and 2037 if unused, and state NOLs of $10 billion. If unused, the NOLs will expire between 2022 and 2037. At the successor date$8 billion before uncertain tax positions of $521 million. As of December 31, 2018, we had $31 million of federal tax credits. At the successor date of December 31, 2018,2021, we had foreign NOLs of $6.0$6 billion.
We establish valuation allowances when necessary to reduce the deferred tax assets to amounts we expect to realize. As of December 31, 2018,2021, a valuation allowance of $0.9$1.1 billion was establishedrecorded as it is more likely than not that this amount of net operating loss and tax credit carryforwards will not be utilized prior to expiration. Our valuation allowance atas of December 31, 20182021 and 20172020 is primarily related to foreign and state NOL carryforwards. This valuation allowance decreased by $11 million during 2018 primarily due to the impact of foreign exchange rate adjustments and state law changes.
During 2016, we recognized a $22 million income tax benefit from the vesting of share-based compensation due to the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. We also recognized $82 million of income tax benefit related to the release of deferred tax asset valuation allowances primarily in Germany, Brazil, and Mexico. The determinations to release the foreign valuation allowances were driven by our projection of future profitability for each legal entity due to the recapitalization of our German subsidiary, the planned action to restructure our Brazilian business, and the merger of our Mexican subsidiaries.
With respect to our foreign corporate subsidiaries, we provide for U.S. income taxes on the undistributed earnings and the other outside basis temporary differences (differences between a parent's book and tax basis in a subsidiary, including currency translation adjustments) unless they are considered indefinitely reinvested outside the United States. The amount of temporary differences related to undistributed earnings and other outside basis temporary differences of investments in foreign subsidiaries upon which U.S. income taxes have not been provided was immaterial.
With respect to our foreign branches, we had historically established deferred tax liabilities for foreign branches with an overall cumulative translation gain, but had not established deferred tax assets for those with an overall translation loss as we had no plans to trigger realization of the losses in the foreseeable future. On December 7, 2016, the Internal Revenue Service issued regulations under Internal Revenue Code Section 987 addressing the taxation of foreign currency translations gains and losses arising from foreign branches. The new regulations require a “fresh start” recalculation of the unrealized gains and losses as of the adoption date. The regulations provide that the tax bases of specified assets, such as fixed assets, will be translated at historic foreign exchange rates. As a result, the deferred taxes related to such foreign currency translation are expected to reverse through the operations of the branch thereby allowing the recognition of deferred tax assets arising from translation losses as well. The issuance of the regulations resulted in us recognizing an estimated one-time tax benefit of $110 million during the fourth quarter 2016.
A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from the successor period NovemberJanuary 1 to December 31 2017, the predecessor period January 1 to October 31, 2017for 2021 and the predecessor year ended December 31, 20162020 is as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
| (Dollars in millions) |
| Unrecognized tax benefits at beginning of period | $ | 923 | | | 952 | |
| Tax positions of prior periods netted against deferred tax assets | (49) | | | (32) | |
| Increase in tax positions taken in the prior period | — | | | — | |
| Increase in tax positions taken in the current period | 4 | | | 4 | |
| Decrease due to settlement/payments | (2) | | | (1) | |
| Decrease from the lapse of statute of limitations | — | | | — | |
| Unrecognized tax benefits at end of period | $ | 876 | | | 923 | |
|
| | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| Unrecognized tax benefits at beginning of period | $ | 21 |
| | 20 |
|
| | 18 |
|
| Tax positions of prior periods netted against deferred tax assets | 950 |
| | — |
| | | — |
|
| (Decrease) increase in tax positions taken in the prior period | (1 | ) | | 1 |
| | | — |
|
| Increase in tax positions taken in the current period | 3 |
| | — |
| | | 2 |
|
| Decrease due to settlement/payments | (1 | ) | | — |
| | | — |
|
| Decrease from the lapse of statute of limitations | (2 | ) | | — |
| | | — |
|
| Unrecognized tax benefits at end of period | $ | 970 |
| | 21 |
|
| | 20 |
|
The total amount (including interest and any related federal benefit) of unrecognized tax benefits that, if recognized, would impact the effective income tax rate was $23 million, $28$34 million and $27$33 million for the successor yearyears ended December 31, 2018, period ended December 31, 20172021 and the predecessor period ended October 31, 2017,2020, 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 $6$5 million and $20$9 million atas of December 31, 20182021 and 2017,2020, respectively.
We, or at least one of our affiliates, 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 2003.2002. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carry forwards 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 decreaseincrease by up to $2 million within the next 12 months. The actual amount of such decrease,increase, if any, will depend on several future developments and events, many of which are outside our control.
We incur tax expense attributable to income in various subsidiaries that are required to file state or foreign income tax returns on a separate legal entity basis. We also recognize accrued interest
(14) Geographic and penalties in income tax expense related to uncertain tax benefits. Our tax rate is volatile and may move up or down with changes in, among other things, the amount and source of income or loss, our ability to utilize foreign tax credits, changes in tax laws, and the movement of liabilities established for uncertain tax positions as statutes of limitations expire or positions are otherwise effectively settled.Customer Concentrations
(13) Products and Services Revenue
We categorize our products, services and revenue among the following five categories:
IP and Data Services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;
Transport and Infrastructure,which includes private line (including business data services), wavelength, colocation and data center services, including cloud, hosting and application management solutions, professional services, network security services, dark fiber services and other ancillary services;
Voice and Collaboration, which includes primarily TDM voice services, VoIP and other ancillary services;
Other, which includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other network services; and
Affiliate services, we provide to our affiliates telecommunication services that we also provide to external customers.
From time to time, we may change the categorization of our products and services.
Our operating revenue for our products and services consisted of the following categories: |
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| IP and Data Services | $ | 3,945 |
| | 668 |
| | | 3,284 |
| | 3,862 |
|
| Transport and Infrastructure | 2,699 |
| | 464 |
| | | 2,272 |
| | 2,703 |
|
| Voice and Collaboration | 1,464 |
| | 258 |
| | | 1,308 |
| | 1,600 |
|
| Other revenue | 5 |
| | 1 |
| | | 6 |
| | 8 |
|
| Affiliate revenue | 107 |
| | 16 |
| | | — |
| | — |
|
| Total revenue | $ | 8,220 |
| | 1,407 |
| | | 6,870 |
| | 8,173 |
|
We recognize revenue in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenue aggregated $415 million, $71 million, $331 million and $414 million for the successor year ended December 31, 2018 and period ended December 31, 2017 and the predecessor period ended October 31, 2017 and year ended December 31, 2016, respectively. These USF surcharges, where we record revenue and transaction taxes, are assigned to the products and services categories based on the underlying revenue. We also act as a collection agent for certain other USF and transaction taxes that we are
required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.
The following table presentstables present total assets as of the successor date ofyears ended December 31, 20182021 and December 31, 20172020 as well as operating revenue for the predecessor period ended October 31, 2017 and the successor yearyears ended December 31, 20162021, 2020 and 2019 by geographic region:
| | | | Total Assets | | Total Assets |
| | Successor | | As of December 31, |
| | December 31, 2018 | | December 31, 2017 | | 2021 | | 2020 |
| | (Dollars in millions) | | (Dollars in millions) |
| North America | $ | 27,520 |
| | 27,776 |
| North America | $ | 23,296 | | | 23,511 | |
| EMEA | 2,765 |
| | 1,192 |
| |
| Europe, Middle East and Africa | | Europe, Middle East and Africa | 2,830 | | | 3,059 | |
| Latin America | 2,006 |
| | 4,167 |
| Latin America | 1,969 | | | 2,006 | |
| Total | $ | 32,291 |
| | 33,135 |
| Total | $ | 28,095 | | | 28,576 | |
| | | | Revenue | | Revenue |
| | Successor | | | Predecessor | | Years Ended December 31, |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 | | 2021 | | 2020 | | 2019 |
| | (Dollars in millions) | | (Dollars in millions) |
| North America | $ | 6,739 |
| | 1,155 |
| | | 5,651 |
| | 6,748 |
| North America | $ | 6,365 | | | 6,411 | | | 6,307 | |
| EMEA | 744 |
| | 128 |
| | | 607 |
| | 755 |
| |
| Europe, Middle East and Africa | | Europe, Middle East and Africa | 805 | | | 785 | | | 719 | |
| Latin America | 737 |
| | 124 |
| | | 612 |
| | 670 |
| Latin America | 782 | | | 737 | | | 747 | |
| Total | $ | 8,220 |
| | 1,407 |
| | | 6,870 |
| | 8,173 |
| Total | $ | 7,952 | | | 7,933 | | | 7,773 | |
Our operations are integrated into and reported as part of the consolidated segment data of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we believe we have one reportable segment.
A relatively small number of customers account for a significant percentage of our revenue. Our top ten customers accounted for approximately 20%17%, 16% and 19%16% of our revenue for the successor yearyears ended December 31, 20182021, 2020 and period ended December 31, 2017, and 18% and 16% for the predecessor period ended October 31, 2017 and for the predecessor year ended December 31, 2016,2019, respectively.
(14)(15) Affiliate Transactions
We provide telecommunications services to our affiliates telecommunications services that we also provide to external customers.
Whenever possible, costs are directly assigned to our affiliates for the services they use. If costs cannot be directly assigned, they are allocated among all affiliates based upon cost causative measures; or if no cost causative measure is available, these costs are allocated based on a general allocator. These cost allocation methodologies are reasonable. From time to time, we adjust the basis for allocating the costs of a shared service among affiliates. Such changes in allocation methodologies are generally billed prospectively.
We also purchase services from our affiliates including telecommunication services, insurance, flight services and other support services such as legal, regulatory, finance and accounting, tax, human resources and executive support.
On October 15, 2020, we agreed to refinance our notes receivable - affiliate due to mature on November 1, 2020 via a revolving credit facility that we extended to Lumen Technologies. We had $1.5 billion of outstanding notes receivable-affiliate under this facility as of December 31, 2021 and 2020. As of December 31, 2021, the interest rate for this facility was 4.250% per annum, and is subject to certain adjustments as set forth in the facility. The principal amount is payable upon demand by us and prepayable by Lumen Technologies at any time, but no later than October 15, 2025, which maturity date may be extended for 2 additional one-year periods. The facility has covenants, including a maximum total leverage ratio, and is subject to other limitations.
Subsequent Event
As of the date of this report, $225$85 million of distributions were made to our parent in the first quarter of 2019.2022.
(15) Quarterly Financial Data (Unaudited)
|
| | | | | | | | | |
| | Operating Revenue | | Operating Income | | Net Income (Loss) |
| | (Dollars in millions) |
| 2018 | | | | | |
| First quarter (successor) | $ | 2,087 |
| | 261 |
| | 62 |
|
| Second quarter (successor) | 2,052 |
| | 196 |
| | 40 |
|
| Third quarter (successor) | 2,010 |
| | 227 |
| | 88 |
|
| Fourth quarter (successor) | 2,071 |
| | 284 |
| | 151 |
|
| Total | $ | 8,220 |
| | 968 |
| | 341 |
|
| | | | | | |
| 2017 | | | | | |
| First quarter (predecessor) | $ | 2,048 |
| | 337 |
| | 95 |
|
| Second quarter (predecessor) | 2,062 |
| | 353 |
| | 154 |
|
| Third quarter (predecessor) | 2,059 |
| | 349 |
| | 157 |
|
| Fourth quarter (predecessor) | 701 |
| | 112 |
| | 19 |
|
| Two months ended December 31 (successor) | 1,407 |
| | 158 |
| | (141 | ) |
| Total | $ | 8,277 |
| | 1,309 |
| | 284 |
|
In the two months ended December 31, 2017, we recognized a $195 million income tax expense related to the Tax Act. In the twelve months ended December 31, 2018, we recognized a $92 million income tax expense related to the Tax Act.
(16) 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-establishedpreviously 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, 20182021 aggregated to approximately $70$40 million and are included in other current liabilities, and other liabilities, and liabilities held for sale in our consolidated balance sheet as of such date. 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.
Peruvian Tax Litigation
In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one1 of our Peruvian subsidiaries asserting $26 million of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After takingIn May 2021, the Company paid the remaining amount on the fractioning regimes entered into accountby the developments described below, as well asCompany to pay the accrued interest and foreign exchange effects, we believe the total amount of exposure is $11 million at December 31, 2018.assessed while it was appealed.
We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the "Tribunal")Tribunal) decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.
In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. That appealOral argument was held before the Supreme Court of Justice in June 2019. In May 2021, the Company was served with a favorable and final decision from the Supreme Court of Justice. The Company is pending.working with SUNAT to provide additional information before SUNAT submits its plan for complying with the Supreme Court of Justice's decision.
Brazilian Tax Claims
In December 2004, March 2009, April 2009 and July 2014, theThe São Paulo and Rio de Janeiro state tax authorities have issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”), mainly with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues.
We have filed objections to these assessments in both states, arguing, among other things that neither the lease of assets andnor the provision of Internet access are not communication servicesqualifies as “communication services” subject to ICMS. The objections
We have appealed to the September 2002, December 2004 and March 2009 assessments were rejectedrespective state judicial courts the decisions by the respective state administrative courts that rejected our objections to these assessments. In cases in which state lower courts ruled partially in our favor finding that the lease assets are not subject to ICMS, and we havein connection, the State appealed those decisions torulings. In other cases, the judicial courts. In October 2012 and June 2014, we received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014affirmed at the first administrative level and we appealed this decisionour appeal to the second administrative level.level is pending. Other assessments are still pending state judicial decisions.
We are vigorously contesting all such assessments in both states and in particular, view the assessment of ICMS on revenue from equipment leasing and Internet access to be without merit. These assessments, if upheld, could result in a loss of up to $37$46 million atas of December 31, 20182021, in excess of the reserved accruals established for these matters.
Qui Tam Action
We were notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc. and others in the United StatesU.S. District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint was filed under seal on November 26, 2013, and an amended complaint was filed under seal on June 16, 2014. The court unsealed the complaints on October 26, 2017.
The amended complaint allegesalleged that we,Level 3, principally through two2 former employees, submitted false claims and made false statements to the government in connection with two2 government contracts. The relator seekssought damages in this lawsuit of approximately $50 million, subject to trebling, plus statutory penalties, pre-and-post judgment interest, and attorney’s fees.million. The case is currently stayed.
We are evaluating our defenses to the claims. At this time, we do not believe it is probable we will incur a material loss. If, contrary to our expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operationswas settled in the period in which a liabilitysecond quarter of 2021 for an immaterial amount. This matter is recognized and on our cash flows for the period in which any damages are paid.now fully resolved.
Several people, including two former Level 3 employees, were indicted in the United States District Court for the Eastern District of Virginia on October 3, 2017, and charged with, among other things, accepting kickbacks from a subcontractor, who was also indicted, for work to be performed under a prime government contract. Of the two former employees, one entered into a plea agreement, and the other is deceased. We are fully cooperating in the government’s investigations in this matter.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrativeregulatory hearings of state public utility commissions 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.
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 one1 or more may go to trial in the coming 24 monthsduring 2022 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 individually is reasonably expected to exceed $100,000$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 above 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.
Environmental Contingencies
In connection with largely historical operations, we have responded to or been notified of potential environmental liability at approximately 175 properties. We are engaged in addressing or have litigated environmental liabilities at many of those properties. We could potentially be held liable, jointly, or severally, and without regard to fault, for the costs of investigation and remediation of these sites. The discovery of additional environmental liabilities or changes in existing environmental requirements could have a material adverse effect on our business.
Capital LeasesRight-of-Way
We lease facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense in our consolidated statements of operations. Payments on capital leases are included in repayments of long-term debt, including current maturities in our consolidated statements of cash flows.
The tables below summarize our capital lease activity |
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | Year Ended December 31, 2016 |
| | (Dollars in millions) |
| Assets acquired through capital leases | $ | 7 |
| | — |
| | | — |
| | 19 |
|
| Depreciation expense | 13 |
| | — |
| | | 2 |
| | 5 |
|
| Cash payments towards capital leases | 14 |
| | — |
| | | 1 |
| | 10 |
|
|
| | | | | |
| | Successor |
| | As of December 31, |
| | 2018 | | 2017 |
| | (Dollars in millions) |
| Assets included in property, plant and equipment | $ | 135 |
| | 128 |
| Accumulated depreciation | 15 |
| | 2 |
The future annual minimum payments under capital lease arrangements asAs of December 31, 2018 were as follows:
|
| | | |
| | Future Minimum Payments |
| | (Dollars in millions) |
| Capital lease obligations: | |
| 2019 | $ | 16 |
|
| 2020 | 15 |
|
| 2021 | 16 |
|
| 2022 | 16 |
|
| 2023 | 17 |
|
| 2024 and thereafter | 164 |
|
| Total minimum payments | 244 |
|
| Less: amount representing interest and executory costs | (81 | ) |
| Present value of minimum payments | 163 |
|
| Less: current portion | (6 | ) |
| Long-term portion | $ | 157 |
|
Operating Lease Income
We lease fiber capacity agreements, various office and switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations.
For the successor year ended December 31, 2018, the period ended December 31, 2017, the predecessor period ended October 31, 2017 and year ended December 31, 2016, our gross rental income was $192 million, $28 million, $138 million and $165 million, respectively.
At December 31, 2018, our future commitments for operating lease income were as follows:
|
| | | |
| | Future Minimum Receipts |
| | (Dollars in millions) |
| 2019 | $ | 135 |
|
| 2020 | 90 |
|
| 2021 | 78 |
|
| 2022 | 73 |
|
| 2023 | 69 |
|
Right-of-Way and Operating Lease Expense
We lease various equipment, office facilities, retail outlets, switching facilities and other network sites. These leases, with few exceptions, provide for renewal options and 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 are reasonably assured. For the successor year ended December 31, 2018, the period ended December 31, 2017, the predecessor period ended October 31, 2017 and year ended December 31, 2016, our gross rental expense was $524 million, $95 million, $447 million and $552 million, respectively. We also received sublease rental income for the successor year ended December 31, 2018, the period ended December 31, 2017, the predecessor period ended October 31, 2017 and year ended December 31, 2016 of $9 million, $2 million, $7 million and $8 million, respectively.
At December 31, 2018,2021, our future rental commitments for right-of-way agreements and operating leases were as follows:
| | | | | | | | |
| | Right-of-Way
Agreements |
| | (Dollars in millions) |
| 2022 | | $ | 125 | |
| 2023 | | 66 | |
| 2024 | | 53 | |
| 2025 | | 47 | |
| 2026 | | 47 | |
| 2027 and thereafter | | 551 | |
| Total future minimum payments | | $ | 889 | |
|
| | | | | | | | | | |
| | | Right-of-Way Agreements | | Operating Leases | | Total |
| | | (Dollars in millions) |
| 2019 | | $ | 77 |
| | 396 |
| | 473 |
|
| 2020 | | 51 |
| | 259 |
| | 310 |
|
| 2021 | | 38 |
| | 219 |
| | 257 |
|
| 2022 | | 37 |
| | 164 |
| | 201 |
|
| 2023 | | 37 |
| | 137 |
| | 174 |
|
| 2024 and thereafter | | 225 |
| | 613 |
| | 838 |
|
Total future minimum payments(1) | | $ | 465 |
| | 1,788 |
| | 2,253 |
|
(1)Minimum payments have not been reduced by minimum sublease rentals of $29 million due in the future under non-cancelable
subleases.
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 $339$472 million atas of December 31, 2018.2021. Of this amount, we expect to purchase $132 million in 2019, $130 million in 2020 through 2021, $41$164 million in 2022, through 2023 and $36$168 million in 2023 through 2024, $52 million in 2025 through 2026 and $88 million in 2027 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, 2018.2021.
Amounts included in the Right-of-Way table and in the purchase commitments disclosed above are inclusive of contractual obligations related to our Latin American business to be divested.
(17) Accumulated Other Comprehensive Income (Loss)Loss
The table below summarizes changes in accumulated other comprehensive income (loss) recorded on our consolidated balance sheet by component for the predecessor period ended October 31, 2017 and the successor periodyears ended December 31, 20172020 and December 31, 2018:2021:
| | | | | | | | | | | | | | | | | |
| Pension Plans | | Foreign Currency Translation Adjustments and Other | | Total |
| (Dollars in millions) |
| Balance at December 31, 2019 | $ | 2 | | | (181) | | | (179) | |
| Other comprehensive loss, net of tax | (15) | | | (40) | | | (55) | |
| Net other comprehensive loss | (15) | | | (40) | | | (55) | |
| Balance at December 31, 2020 | $ | (13) | | | (221) | | | (234) | |
| | | | | |
| Balance at December 31, 2020 | $ | (13) | | | (221) | | | (234) | |
| Other comprehensive income (loss), net of tax | 16 | | | (133) | | | (117) | |
| Net other comprehensive income (loss) | 16 | | | (133) | | | (117) | |
| Balance at December 31, 2021 | $ | 3 | | | (354) | | | (351) | |
|
| | | | | | | | | |
| | Pension Plans | | Foreign Currency Translation Adjustments and Other | | Total |
| | (Dollars in millions) |
| Balance at December 31, 2016 (predecessor) | $ | (34 | ) | | (353 | ) | | (387 | ) |
| Other comprehensive (loss) income before reclassifications | (3 | ) | | 81 |
| | 78 |
|
| Amounts reclassified from accumulated other comprehensive loss | 2 |
| | — |
| | 2 |
|
| Net other comprehensive (loss) income | (1 | ) | | 81 |
| | 80 |
|
| Balance at October 31, 2017 (predecessor) | $ | (35 | ) | | (272 | ) | | (307 | ) |
| | | | | | |
| Balance at November 1, 2017 (successor) | $ | — |
| | — |
| | — |
|
| Other comprehensive income before reclassifications | — |
| | 18 |
| | 18 |
|
| Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | — |
|
| Net other comprehensive income | — |
| | 18 |
| | 18 |
|
| Balance at December 31, 2017 (successor) | $ | — |
| | 18 |
| | 18 |
|
| | | | | | |
| Balance at December 31, 2017 (successor) | $ | — |
| | 18 |
| | 18 |
|
| Other comprehensive loss before reclassifications | — |
| | (200 | ) | | (200 | ) |
| Amounts reclassified from accumulated other comprehensive income | 5 |
| | — |
| | 5 |
|
| Net current-period other comprehensive income | 5 |
| | (200 | ) | | (195 | ) |
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated other Comprehensive Income | — |
| | 6 |
| | 6 |
|
| Balance at December 31, 2018 (successor) | $ | 5 |
| | (176 | ) | | (171 | ) |
(18) Condensed ConsolidatingOther Financial Information
Level 3 Financing, Inc., a wholly owned subsidiary, has issued Senior Notes that are unsecured obligations of Level 3 Financing, Inc.; however, they are also fully and unconditionally and jointly and severally guaranteed on an unsecured senior basis by Level 3 Parent, LLC and Level 3 Communications, LLC.Other Current Assets
In conjunction with the registration of the Level 3 Financing, Inc. Senior Notes, the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered."
The operating activitiesfollowing table presents details of the separate legal entities includedother current assets reflected in our consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the statementsbalance sheets:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (Dollars in millions) |
| Prepaid expenses | $ | 109 | | | 106 | |
| Contract fulfillment costs | 48 | | | 63 | |
| Contract acquisition costs | 45 | | | 47 | |
| Contract assets | 28 | | | 34 | |
| Other | 9 | | | 47 | |
Total other current assets (1) | $ | 239 | | | 297 | |
(1)As of comprehensive income (loss), balance sheets and statements of cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities, and is not intended to present the operating results of those legal entities on a stand-alone basis. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Parent, LLC. These transactions are eliminated in our consolidated results.
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the year ended December 31, 2018 (Successor)
2021, other current assets exclude $81 million that have been reclassified as held for sale.
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING REVENUE | | | | | | | | | | |
|
|
| Operating revenue | $ | — |
| | — |
| | 3,884 |
| | 4,229 |
| | — |
| | 8,113 |
|
| Operating revenue - affiliates | — |
| | — |
| | 130 |
| | 285 |
| | (308 | ) | | 107 |
|
| Total operating revenue | — |
| | — |
| | 4,014 |
| | 4,514 |
| | (308 | ) | | 8,220 |
|
| OPERATING EXPENSES | | | | | | | | | | | |
| Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 2,209 |
| | 1,728 |
| | — |
| | 3,937 |
|
| Selling, general and administrative | 12 |
| | 3 |
| | 392 |
| | 1,255 |
| | (308 | ) | | 1,354 |
|
| Operating expenses - affiliates | — |
| | — |
| | 176 |
| | 81 |
| | — |
| | 257 |
|
| Depreciation and amortization | — |
| | — |
| | 688 |
| | 1,016 |
| | — |
| | 1,704 |
|
| Total operating expenses | 12 |
| | 3 |
| | 3,465 |
| | 4,080 |
| | (308 | ) | | 7,252 |
|
| OPERATING (LOSS) INCOME | (12 | ) | | (3 | ) | | 549 |
| | 434 |
| | — |
| | 968 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | | | |
| Interest income (expense) - affiliates, net | 2,430 |
| | 1,562 |
| | (3,800 | ) | | (125 | ) | | — |
| | 67 |
|
| Interest expense | (33 | ) | | (457 | ) | | (3 | ) | | (16 | ) | | — |
| | (509 | ) |
| Equity in net (losses) earnings of subsidiaries | (2,044 | ) | | (3,257 | ) | | 254 |
| | — |
| | 5,047 |
| | — |
|
| Other income, net | (9 | ) | | — |
| | 1 |
| | 19 |
| | — |
| | 11 |
|
| Total other income (expense), net | 344 |
| | (2,152 | ) | | (3,548 | ) | | (122 | ) | | 5,047 |
| | (431 | ) |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE) | 332 |
| | (2,155 | ) | | (2,999 | ) | | 312 |
| | 5,047 |
| | 537 |
|
| Income tax benefit (expense) | 10 |
| | 111 |
| | (232 | ) | | (85 | ) | | — |
| | (196 | ) |
| NET INCOME (LOSS) | 342 |
| | (2,044 | ) | | (3,231 | ) | | 227 |
| | 5,047 |
| | 341 |
|
| Other comprehensive loss, net of income taxes | (195 | ) | | — |
| | — |
| | (195 | ) | | 195 |
| | (195 | ) |
| COMPREHENSIVE INCOME (LOSS) | $ | 147 |
| | (2,044 | ) | | (3,231 | ) | | 32 |
| | 5,242 |
| | 146 |
|
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the period ended December 31, 2017 (Successor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING REVENUE | | | | | | | | | | | |
| Operating revenue | $ | — |
| | — |
| | 748 |
| | 671 |
| | (28 | ) | | 1,391 |
|
| Operating revenue - affiliates | — |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
| Total operating revenue | — |
| | — |
| | 764 |
| | 671 |
| | (28 | ) | | 1,407 |
|
| OPERATING EXPENSES | | | | | | | | | | | |
| Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 418 |
| | 300 |
| | (28 | ) | | 690 |
|
| Selling, general and administrative | 1 |
| | 3 |
| | 179 |
| | 70 |
| | — |
| | 253 |
|
| Operating expenses - affiliates | — |
| | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
| Depreciation and amortization | — |
| | — |
| | 117 |
| | 165 |
| | — |
| | 282 |
|
| Total operating expenses | 1 |
| | 3 |
| | 738 |
| | 535 |
| | (28 | ) | | 1,249 |
|
| OPERATING (LOSS) INCOME | (1 | ) | | (3 | ) | | 26 |
| | 136 |
| | — |
| | 158 |
|
| OTHER (EXPENSE) INCOME | | | | | | | | | | | |
| Interest income | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Interest income (expense) affiliates, net | 262 |
| | 368 |
| | (578 | ) | | (41 | ) | | — |
| | 11 |
|
| Interest expense | (5 | ) | | (72 | ) | | — |
| | (3 | ) | | — |
| | (80 | ) |
| Equity in net (losses) earnings of subsidiaries | (827 | ) | | (15 | ) | | 71 |
| | — |
| | 771 |
| | — |
|
| Other income (expense), net | 1 |
| | — |
| | 2 |
| | — |
| | — |
| | 3 |
|
| Total other (expense) income, net | (569 | ) | | 281 |
| | (504 | ) | | (44 | ) | | 771 |
| | (65 | ) |
| (LOSS) INCOME BEFORE INCOME TAX (EXPENSE) BENEFIT | (570 | ) | | 278 |
| | (478 | ) | | 92 |
| | 771 |
| | 93 |
|
| Income tax benefit (expense) | 429 |
| | (1,105 | ) | | 433 |
| | 9 |
| | — |
| | (234 | ) |
| NET (LOSS) INCOME | (141 | ) | | (827 | ) | | (45 | ) | | 101 |
| | 771 |
| | (141 | ) |
| Other comprehensive income, net of income taxes | 18 |
| | — |
| | — |
| | 18 |
| | (18 | ) | | 18 |
|
| COMPREHENSIVE (LOSS) INCOME | $ | (123 | ) | | (827 | ) | | (45 | ) | | 119 |
| | 753 |
| | (123 | ) |
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the period ended October 31, 2017 (Predecessor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING REVENUE | | | | | | | | | | | |
| Operating revenue | $ | — |
| | — |
| | 3,108 |
| | 3,891 |
| | (129 | ) | | 6,870 |
|
| Total operating revenue | — |
| | — |
| | 3,108 |
| | 3,891 |
| | (129 | ) | | 6,870 |
|
| OPERATING EXPENSES | | | | | | | | | | | |
| Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 1,942 |
| | 1,680 |
| | (129 | ) | | 3,493 |
|
| Selling, general and administrative | 4 |
| | 3 |
| | 942 |
| | 259 |
| | — |
| | 1,208 |
|
| Depreciation and amortization | — |
| | — |
| | 356 |
| | 662 |
| | — |
| | 1,018 |
|
| Total operating expenses | 4 |
| | 3 |
| | 3,240 |
| | 2,601 |
| | (129 | ) | | 5,719 |
|
| OPERATING (LOSS) INCOME | (4 | ) | | (3 | ) | | (132 | ) | | 1,290 |
| | — |
| | 1,151 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | | | |
| Interest income | — |
| | — |
| | 12 |
| | 1 |
| | — |
| | 13 |
|
| Interest income (expense) - affiliates, net | 1,260 |
| | 1,890 |
| | (2,896 | ) | | (254 | ) | | — |
| | — |
|
| Interest expense | (30 | ) | | (397 | ) | | (2 | ) | | (12 | ) | | — |
| | (441 | ) |
| Loss on modification and extinguishment of debt | — |
| | (44 | ) | | — |
| | — |
| | — |
| | (44 | ) |
| Equity in net (losses) earnings of subsidiaries | (815 | ) | | (2,138 | ) | | 692 |
| | — |
| | 2,261 |
| | — |
|
| Other (expense) income, net | 3 |
| | — |
| | 15 |
| | (4 | ) | | — |
| | 14 |
|
| Total other income (expense), net | 418 |
| | (689 | ) | | (2,179 | ) | | (269 | ) | | 2,261 |
| | (458 | ) |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE) | 414 |
| | (692 | ) | | (2,311 | ) | | 1,021 |
| | 2,261 |
| | 693 |
|
| Income tax benefit (expense) | 11 |
| | (123 | ) | | (2 | ) | | (154 | ) | | — |
| | (268 | ) |
| NET INCOME (LOSS) | 425 |
| | (815 | ) | | (2,313 | ) | | 867 |
| | 2,261 |
| | 425 |
|
| Other comprehensive income, net of income taxes | 80 |
| | — |
| | — |
| | — |
| | — |
| | 80 |
|
| COMPREHENSIVE INCOME (LOSS) | $ | 505 |
| | (815 | ) | | (2,313 | ) | | 867 |
| | 2,261 |
| | 505 |
|
Condensed Consolidating Statements of Comprehensive Income (Loss)
For the year ended December 31, 2016 (Predecessor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING REVENUE | | | | | | | | | | | |
| Operating revenue | $ | — |
| | — |
| | 3,558 |
| | 4,747 |
| | (132 | ) | | 8,173 |
|
| Total operating revenue | — |
| | — |
| | 3,558 |
| | 4,747 |
| | (132 | ) | | 8,173 |
|
| OPERATING EXPENSES | | | | | | | | | | | |
| Cost of services and products (exclusive of depreciation and amortization) | — |
| | — |
| | 2,249 |
| | 2,045 |
| | (132 | ) | | 4,162 |
|
| Selling, general and administrative | 16 |
| | 5 |
| | 1,025 |
| | 361 |
| | — |
| | 1,407 |
|
| Depreciation and amortization | — |
| | — |
| | 372 |
| | 787 |
| | — |
| | 1,159 |
|
| Total operating expenses | 16 |
| | 5 |
| | 3,646 |
| | 3,193 |
| | (132 | ) | | 6,728 |
|
| OPERATING (LOSS) INCOME | (16 | ) | | (5 | ) | | (88 | ) | | 1,554 |
| | — |
| | 1,445 |
|
| OTHER INCOME (EXPENSE) | | | | | | | | | | | |
| Interest income | — |
| | — |
| | 3 |
| | 1 |
| | — |
| | 4 |
|
| Interest income (expense) - affiliates, net | 1,385 |
| | 2,113 |
| | (3,215 | ) | | (283 | ) | | — |
| | — |
|
| Interest expense | (36 | ) | | (505 | ) | | (2 | ) | | (1 | ) | | — |
| | (544 | ) |
| Equity in net earnings (losses) of subsidiaries | (669 | ) | | (2,033 | ) | | 757 |
| | — |
| | 1,945 |
| | — |
|
| Other (expense) income, net | (1 | ) | | (39 | ) | | 2 |
| | (25 | ) | | — |
| | (63 | ) |
| Total other income (expense), net | 679 |
| | (464 | ) | | (2,455 | ) | | (308 | ) | | 1,945 |
| | (603 | ) |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE) | 663 |
| | (469 | ) | | (2,543 | ) | | 1,246 |
| | 1,945 |
| | 842 |
|
| Income tax benefit (expense) | 14 |
| | (200 | ) | | (2 | ) | | 23 |
| | — |
| | (165 | ) |
| NET INCOME (LOSS) | 677 |
| | (669 | ) | | (2,545 | ) | | 1,269 |
| | 1,945 |
| | 677 |
|
| Other comprehensive loss, net of income taxes | (86 | ) | | — |
| | — |
| | (86 | ) | | 86 |
| | (86 | ) |
| COMPREHENSIVE INCOME (LOSS) | $ | 591 |
| | (669 | ) | | (2,545 | ) | | 1,183 |
| | 2,031 |
| | 591 |
|
Condensed Consolidating Balance Sheets
December 31, 2018 (Successor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| ASSETS | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | |
| Cash and cash equivalents | $ | 2 |
| | — |
| | 164 |
| | 77 |
| | — |
| | 243 |
|
| Restricted cash and securities - current | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Accounts receivable | — |
| | — |
| | 70 |
| | 642 |
| | — |
| | 712 |
|
| Advances to affiliates | 16,852 |
| | 23,957 |
| | 7,744 |
| | 2,707 |
| | (51,260 | ) | | — |
|
| Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
| Other | 1 |
| | 3 |
| | 97 |
| | 133 |
| | — |
| | 234 |
|
| Total current assets | 18,680 |
| | 23,960 |
| | 8,075 |
| | 3,563 |
| | (51,260 | ) | | 3,018 |
|
| NET PROPERTY, PLANT AND EQUIPMENT | | | | | | | | | | |
|
|
| Property, plant and equipment | — |
| | — |
| | 3,456 |
| | 7,018 |
| | — |
| | 10,474 |
|
| Accumulated depreciation | — |
| | — |
| | (320 | ) | | (701 | ) | | — |
| | (1,021 | ) |
| Net property, plant and equipment | — |
| | — |
| | 3,136 |
| | 6,317 |
| | — |
| | 9,453 |
|
| GOODWILL AND OTHER ASSETS | | | | | | | | | | |
|
|
| Goodwill | — |
| | — |
| | 1,665 |
| | 9,454 |
| | — |
| | 11,119 |
|
| Restricted cash and securities | 15 |
| | — |
| | 9 |
| | 1 |
| | — |
| | 25 |
|
| Customer relationships, net | — |
| | — |
| | 3,823 |
| | 3,744 |
| | — |
| | 7,567 |
|
| Other intangible assets, net | — |
| | — |
| | 409 |
| | 1 |
| | — |
| | 410 |
|
| Investment in subsidiaries | 15,541 |
| | 17,915 |
| | 3,861 |
| | — |
| | (37,317 | ) | | — |
|
| Other, net | 275 |
| | 1,421 |
| | 110 |
| | 225 |
| | (1,332 | ) | | 699 |
|
| Total goodwill and other assets | 15,831 |
| | 19,336 |
| | 9,877 |
| | 13,425 |
| | (38,649 | ) | | 19,820 |
|
| TOTAL ASSETS | $ | 34,511 |
| | 43,296 |
| | 21,088 |
| | 23,305 |
| | (89,909 | ) | | 32,291 |
|
| | | | | | | | | | | |
|
|
| LIABILITIES AND MEMBER'S EQUITY (DEFICIT) | | | | | | | | | | |
|
|
| CURRENT LIABILITIES | | | | | | | | | | | |
| Current maturities of long-term debt | $ | — |
| | — |
| | 1 |
| | 5 |
| | — |
| | 6 |
|
| Accounts payable | — |
| | — |
| | 380 |
| | 346 |
| | — |
| | 726 |
|
| Accounts payable - affiliates | 62 |
| | 11 |
| | 162 |
| | 11 |
| | — |
| | 246 |
|
| Accrued expenses and other liabilities | | | | | | | | | | |
|
|
| Salaries and benefits | — |
| | — |
| | 189 |
| | 44 |
| | — |
| | 233 |
|
| Income and other taxes | — |
| | 4 |
| | 72 |
| | 54 |
| | — |
| | 130 |
|
| Interest | 11 |
| | 78 |
| | 1 |
| | 5 |
| | — |
| | 95 |
|
| Other | 3 |
| | 1 |
| | 8 |
| | 66 |
| | — |
| | 78 |
|
|
| | | | | | | | | | | | | | | | | | |
| Advance billings and customer deposits | — |
| | — |
| | 168 |
| | 142 |
| | — |
| | 310 |
|
| Due to affiliates | — |
| | — |
| | 45,347 |
| | 5,913 |
| | (51,260 | ) | | — |
|
| Total current liabilities | 76 |
| | 94 |
| | 46,328 |
| | 6,586 |
| | (51,260 | ) | | 1,824 |
|
| LONG-TERM DEBT | 613 |
| | 10,068 |
| | 7 |
| | 150 |
| | — |
| | 10,838 |
|
| DEFERRED REVENUE AND OTHER LIABILITES | | | | | | | | | | |
|
|
| Deferred revenue | — |
| | — |
| | 971 |
| | 210 |
| | — |
| | 1,181 |
|
| Deferred tax liability | 56 |
| | — |
| | 841 |
| | 637 |
| | (1,332 | ) | | 202 |
|
| Other | — |
| | — |
| | 197 |
| | 172 |
| | — |
| | 369 |
|
| Total deferred revenue and other liabilities | 56 |
| | — |
| | 2,009 |
| | 1,019 |
| | (1,332 | ) | | 1,752 |
|
| COMMITMENTS AND CONTINGENCIES |
| |
| |
| |
| |
| |
|
|
| MEMBER'S EQUITY (DEFICIT) | 33,766 |
| | 33,134 |
| | (27,256 | ) | | 15,550 |
| | (37,317 | ) | | 17,877 |
|
| TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT) | $ | 34,511 |
| | 43,296 |
| | 21,088 |
| | 23,305 |
| | (89,909 | ) | | 32,291 |
|
Condensed Consolidating Balance Sheets
December 31, 2017 (Successor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| ASSETS | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | |
| Cash and cash equivalents | $ | 13 |
| | — |
| | 175 |
| | 109 |
| | — |
| | 297 |
|
| Restricted cash and securities - current | — |
| | — |
| | 1 |
| | 4 |
| | — |
| | 5 |
|
| Accounts receivable | — |
| | — |
| | 26 |
| | 722 |
| | — |
| | 748 |
|
| Accounts receivable - affiliates | — |
| | — |
| | 60 |
| | 4 |
| | (51 | ) | | 13 |
|
| Assets held for sale | 68 |
| | — |
| | 5 |
| | 67 |
| | — |
| | 140 |
|
| Advances to affiliates | 16,251 |
| | 21,032 |
| | — |
| | 5,200 |
| | (42,483 | ) | | — |
|
| Note receivable - affiliate | 1,825 |
| | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
| Other | — |
| | — |
| | 54 |
| | 63 |
| | — |
| | 117 |
|
| Total current assets | 18,157 |
| | 21,032 |
| | 321 |
| | 6,169 |
| | (42,534 | ) | | 3,145 |
|
| NET PROPERTY, PLANT AND EQUIPMENT | | | | | | | | | | | |
| Property, plant and equipment | — |
| | — |
| | 3,285 |
| | 6,270 |
| | — |
| | 9,555 |
|
| Accumulated depreciation | — |
| | — |
| | (48 | ) | | (95 | ) | | — |
| | (143 | ) |
| Net property, plant and equipment | — |
| | — |
| | 3,237 |
| | 6,175 |
| | — |
| | 9,412 |
|
| GOODWILL AND OTHER ASSETS | | | | | | | | | | | |
| Goodwill | — |
| | — |
| | 1,200 |
| | 9,637 |
| | — |
| | 10,837 |
|
| Restricted cash and securities | 19 |
| | — |
| | 10 |
| | — |
| | — |
| | 29 |
|
| Customer relationships, net | — |
| | — |
| | 4,324 |
| | 4,521 |
| | — |
| | 8,845 |
|
| Other intangible assets, net | — |
| | — |
| | 378 |
| | — |
| | — |
| | 378 |
|
| Investment in subsidiaries | 16,954 |
| | 18,403 |
| | 3,616 |
| | — |
| | (38,973 | ) | | — |
|
| Other, net | 280 |
| | 1,795 |
| | 32 |
| | 153 |
| | (1,771 | ) | | 489 |
|
| Total goodwill and other assets | 17,253 |
| | 20,198 |
| | 9,560 |
| | 14,311 |
| | (40,744 | ) | | 20,578 |
|
| TOTAL ASSETS | $ | 35,410 |
| | 41,230 |
| | 13,118 |
| | 26,655 |
| | (83,278 | ) | | 33,135 |
|
| | | | | | | | | | | | |
| LIABILITIES AND MEMBER'S EQUITY (DEFICIT) | | | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | |
| Current maturities of long-term debt | $ | — |
| | — |
| | 2 |
| | 6 |
| | — |
| | 8 |
|
| Accounts payable | — |
| | 1 |
| | 323 |
| | 371 |
| | — |
| | 695 |
|
| Accounts payable - affiliates | 11 |
| | — |
| | — |
| | 81 |
| | (51 | ) | | 41 |
|
| Accrued expenses and other liabilities | | | | | | | | | | | |
| Salaries and benefits | — |
| | — |
| | 109 |
| | 27 |
| | — |
| | 136 |
|
| Income and other taxes | — |
| | — |
| | 55 |
| | 45 |
| | — |
| | 100 |
|
|
| | | | | | | | | | | | | | | | | | |
| Interest | 11 |
| | 91 |
| | — |
| | 7 |
| | — |
| | 109 |
|
| Other | 16 |
| | — |
| | 25 |
| | 18 |
| | — |
| | 59 |
|
| Advance billings and customer deposits | — |
| | — |
| | 127 |
| | 131 |
| | — |
| | 258 |
|
| Due to affiliates | — |
| | — |
| | 42,483 |
| | — |
| | (42,483 | ) | | — |
|
| Total current liabilities | 38 |
| | 92 |
| | 43,124 |
| | 686 |
| | (42,534 | ) | | 1,406 |
|
| LONG-TERM DEBT | 616 |
| | 10,096 |
| | 13 |
| | 157 |
| | — |
| | 10,882 |
|
| DEFERRED REVENUE AND OTHER LIABILITES | | | | | | | | | | | |
| Deferred revenue | — |
| | — |
| | 841 |
| | 252 |
| | — |
| | 1,093 |
|
| Deferred tax liability | 648 |
| | — |
| | 870 |
| | 465 |
| | (1,771 | ) | | 212 |
|
| Other | 1 |
| | 1 |
| | 103 |
| | 165 |
| | — |
| | 270 |
|
| Total deferred revenue and other liabilities | 649 |
| | 1 |
| | 1,814 |
| | 882 |
| | (1,771 | ) | | 1,575 |
|
| COMMITMENTS AND CONTINGENCIES |
| |
| |
| |
| |
| |
|
|
| MEMBER'S EQUITY (DEFICIT) | 34,107 |
| | 31,041 |
| | (31,833 | ) | | 24,930 |
| | (38,973 | ) | | 19,272 |
|
| TOTAL LIABILITIES AND MEMBER'S EQUITY (DEFICIT) | $ | 35,410 |
| | 41,230 |
| | 13,118 |
| | 26,655 |
| | (83,278 | ) | | 33,135 |
|
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2018 (Successor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING ACTIVITIES | | | | | | | | | | | |
| Net cash (used in) provided by operating activities | $ | (98 | ) | | — |
| | 2,059 |
| | 436 |
| | — |
| | 2,397 |
|
| INVESTING ACTIVITIES | | | | | | | | | | | |
| Capital expenditures | — |
| | — |
| | (527 | ) | | (511 | ) | | — |
| | (1,038 | ) |
| Proceeds from the sale of property, plant and equipment and other assets | 83 |
| | — |
| | — |
| | 51 |
| | — |
| | 134 |
|
| Net cash provided by (used in) investing activities | 83 |
| | — |
| | (527 | ) | | (460 | ) | | — |
| | (904 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | |
| Payments of long-term debt | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
| Distributions | (1,545 | ) | | — |
| | — |
| | — |
| | — |
| | (1,545 | ) |
| Increase (decrease) due to from affiliates, net | 1,545 |
| | — |
| | (1,545 | ) | | — |
| | — |
| | — |
|
| Net cash used in financing activities | — |
| | — |
| | (1,545 | ) | | (7 | ) | | — |
| | (1,552 | ) |
| Net decrease in cash, cash equivalents and restricted cash and securities | (15 | ) | | — |
| | (13 | ) | | (31 | ) | | — |
| | (59 | ) |
| Cash, cash equivalents and restricted cash and securities at beginning of period | 32 |
| | — |
| | 186 |
| | 113 |
| | — |
| | 331 |
|
| Cash, cash equivalents and restricted cash and securities at end of period | $ | 17 |
| | — |
| | 173 |
| | 82 |
| | — |
| | 272 |
|
Condensed Consolidating Statements of Cash Flows
For the period ended December 31, 2017 (Successor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING ACTIVITIES | | | | | | | | | | | |
| Net cash (used in) provided by operating activities | $ | (1 | ) | | — |
| | 172 |
| | 137 |
| | — |
| | 308 |
|
| INVESTING ACTIVITIES | | | | | | | | | | | |
| Capital expenditures | — |
| | — |
| | (110 | ) | | (97 | ) | | — |
| | (207 | ) |
| Note receivable - affiliate | — |
| | — |
| | (1,825 | ) | | — |
| | — |
| | (1,825 | ) |
| Net cash used in investing activities | — |
| | — |
| | (1,935 | ) | | (97 | ) | | — |
| | (2,032 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | |
| Payments of long-term debt | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Distributions | (250 | ) | | — |
| | — |
| | — |
| | — |
| | (250 | ) |
| Increase (decrease) due from/to affiliates, net | 250 |
| | — |
| | (250 | ) | | — |
| | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Net cash used in financing activities | — |
| | — |
| | (250 | ) | | (3 | ) | | — |
| | (253 | ) |
| Net increase (decrease) in cash, cash equivalents, and restricted cash and securities | (1 | ) | | — |
| | (2,013 | ) | | 37 |
| | — |
| | (1,977 | ) |
| Cash, cash equivalents and restricted cash and securities at beginning of period | 33 |
| | — |
| | 2,199 |
| | 76 |
| | — |
| | 2,308 |
|
| Cash, cash equivalents and restricted cash and securities at end of period | $ | 32 |
| | — |
| | 186 |
| | 113 |
| | — |
| | 331 |
|
Condensed Consolidating Statements of Cash Flows
For the period ended October 31, 2017 (Predecessor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING ACTIVITIES | | | | | | | | | | | |
| Net cash (used in) provided by operating activities | $ | (61 | ) | | (401 | ) | | 1,615 |
| | 761 |
| | — |
| | 1,914 |
|
| INVESTING ACTIVITIES | | | | | | | | | | | |
| Capital expenditures | — |
| | — |
| | (667 | ) | | (452 | ) | | — |
| | (1,119 | ) |
| Purchase of marketable securities | — |
| | — |
| | (1,127 | ) | | — |
| | — |
| | (1,127 | ) |
| Maturity of marketable securities | — |
| | — |
| | 1,127 |
| | — |
| | — |
| | 1,127 |
|
| Proceeds from sale of property, plant and equipment and other assets | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Net cash used in investing activities | — |
| | — |
| | (666 | ) | | (452 | ) | | — |
| | (1,118 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | |
| Net proceeds from issuance of long-term debt | — |
| | 4,569 |
| | — |
| | — |
| | — |
| | 4,569 |
|
| Payments of long-term debt | — |
| | (4,911 | ) | | 1 |
| | (7 | ) | | — |
| | (4,917 | ) |
| Increase (decrease) due from/to affiliates, net | 57 |
| | 743 |
| | (460 | ) | | (340 | ) | | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Net cash provided by (used in) financing activities | 57 |
| | 401 |
| | (459 | ) | | (344 | ) | | — |
| | (345 | ) |
| Net (decrease) increase in cash, cash equivalents, and restricted cash and securities | (4 | ) | | — |
| | 490 |
| | (35 | ) | | — |
| | 451 |
|
| Cash, cash equivalents and restricted cash and securities at beginning of period | 37 |
| | — |
| | 1,710 |
| | 110 |
| | — |
| | 1,857 |
|
| Cash, cash equivalents and restricted cash and securities at end of period | $ | 33 |
| | — |
| | 2,200 |
| | 75 |
| | — |
| | 2,308 |
|
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2016 (Predecessor)
|
| | | | | | | | | | | | | | | | | | |
| | Level 3 Parent, LLC | | Level 3 Financing, Inc. | | Level 3 Communications, LLC | | Other Non-Guarantor Subsidiaries | | Eliminations | | Total |
| | (Dollars in millions) |
| OPERATING ACTIVITIES | | | | | | | | | | | |
| Net cash (used in) provided by operating activities | $ | (49 | ) | | (468 | ) | | 565 |
| | 2,295 |
| | — |
| | 2,343 |
|
| INVESTING ACTIVITIES | | | | | | | | | | | |
| Capital expenditures | — |
| | — |
| | (704 | ) | | (630 | ) | | — |
| | (1,334 | ) |
| Proceeds from sale of property, plant and equipment and other assets | — |
| | — |
| | 1 |
| | 2 |
| | — |
| | 3 |
|
| Net cash used in investing activities | — |
| | — |
| | (703 | ) | | (628 | ) | | — |
| | (1,331 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | |
| Net proceeds from issuance of long-term debt | — |
| | 764 |
| | — |
| | — |
| | — |
| | 764 |
|
| Payments of long-term debt | — |
| | (806 | ) | | (1 | ) | | (13 | ) | | — |
| | (820 | ) |
| Increase (decrease) due from/to affiliates, net | 47 |
| | 504 |
| | 1,107 |
| | (1,658 | ) | | — |
| | — |
|
| Other | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Net cash provided by (used in) financing activities | 47 |
| | 462 |
| | 1,106 |
| | (1,674 | ) | | — |
| | (59 | ) |
| Net increase (decrease) in cash, cash equivalents, and restricted cash and securities | (2 | ) | | (6 | ) | | 968 |
| | (7 | ) | | — |
| | 953 |
|
| Cash, cash equivalents and restricted cash and securities at beginning of period | 39 |
| | 6 |
| | 742 |
| | 117 |
| | — |
| | 904 |
|
| Cash, cash equivalents and restricted cash and securities at end of period | $ | 37 |
| | — |
| | 1,710 |
| | 110 |
| | — |
| | 1,857 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
DisclosureWe maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to provide reasonable assurance that the information required to be (i)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 formsforms. These include controls and (ii)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, recognizes that anywith the participation of our Chief Executive Officer, Jeff K. Storey, and our Executive Vice President and Chief Financial Officer, Indraneel Dev, evaluated the effectiveness of our disclosure controls and procedures no matter how well designed and operated, can provide only reasonable assuranceas of achieving their objectives, and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
December 31, 2021. Based on their most recentthis evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, our Company’s disclosure controls and procedures were not effective, as a result of December 31, 2021, in providing reasonable assurance the material weaknesses in our internal control over financial reporting described below.
Notwithstanding the material weaknesses described below, our management, including our chief executive officer and chief financial officer, believes that the audited consolidated financial statements containedinformation required to be disclosed by us in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operationsreport was accumulated and cash flows for the fiscal years presented in conformity with U.S. generally accepted accounting principles. In addition, the material weaknesses described below did not resultcommunicated in the restatements of any of our audited or unaudited consolidated financial statements or disclosures for any previously reported periods.manner provided above.
Changes in Internal Control overOver Financial Reporting
DuringOther than the fourth quarter 2018, we identified a deficiency that existed earlier in the year in the designimplementation of process controls over manual journal entries. Specifically, we had not designed and implemented controls to ensure all manual journal entries were reviewed. Although this control deficiency did not result in a misstatement in our consolidated financial statements, it created a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis. Therefore we concluded the deficiency represented a material weakness in our internal control over financial reporting.
Upon identification of the deficiency, management designed and implemented a new journal entry module into our enterprise resource planning (ERP) system with certain configuration and automated workflow controls that we believe, together with newly-designed and implemented monitoring controls, sufficiently remediated the material weakness prior to December 31, 2018.
Exceptreporting for the remediation of the manual journal entry material weakness discussed above,assets and the two additional material weaknesses disclosed below,liabilities to be sold through our previously announced divestiture, there werehave been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) of the Exchange Act) that occurred during the fourth quarter ended December 31, 2018of 2021 that have materially affected, or that we believe 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.
Internal Control Over Financial Reporting
Management’s Report on Internal Control over Financial Reporting
Our managementManagement of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Our 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 in the United States. Our systemUnder the supervision and with the participation of internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of our management; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Our management, under the oversight ofincluding our principal executive officer and principal financial officer, and Audit Committee, assessedwe conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 usingbased on the criteria set forthframework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal control - An Integrated Framework (“2013 Framework”COSO”). In connection with this assessment, we identified material weaknesses in internal control over financial reporting asBased on our evaluation under the framework of December 31, 2018. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this assessment,COSO, management concluded that two material weaknesses existed as described below.
Ineffective design and operation of process level internal controls over the fair value measurement of certain assets acquired and liabilities assumed in CenturyLink's acquisition of us.
These deficiencies arose because (i) CenturyLink did not conduct an effective risk assessment to identify and assess changes needed to make to our financial reporting and process level controls, related to fair value measurement of assets acquired and liabilities assumed in the transaction with CenturyLink, (ii) CenturyLink did not clearly assign responsibility for the design, implementation, and operation of controls over the fair value measurements and (iii) CenturyLink did not maintain effective information and communication processes to ensure the right information was available to personnel on a timely basis so they could fulfill their control responsibilities related to the fair value measurements.
Ineffective design and operation of certain process level internal controls over the existence and accuracy of revenue transactions.
These deficiencies arose because we did not conduct an effective risk assessment to identify risks of material misstatement related to the existence and accuracy of revenue transactions.
The deficiencies led to material misstatements in the valuation of assets acquired and liabilities assumed in CenturyLink's acquisition of us that were corrected prior to the issuance of the consolidated financial statements as of and for the year ended December 31, 2018 set out in this annual report on Form 10-K. However, the misstatements did not result in the need to restate any of our audited or unaudited consolidated financial statements or disclosures filed for any previously reported period. The deficiencies also led to immaterial misstatements that were not corrected in the valuation of assets acquired and liabilities assumed in the acquisition and in revenue. These control deficiencies created a reasonable possibility that material misstatements to the consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded they represented material weaknesses and our internal control over financial reporting was not effective as of December 31, 2018.2021.
Pursuant to Regulation S-K 308(b), this AnnualManagement’s Report on Form 10-K does not include an attestation reportthe Consolidated Financial Statements
Management has prepared and is responsible for the integrity and objectivity of our company’sconsolidated financial statements for the year ended December 31, 2021. 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, regarding internal control overwho have expressed an unqualified opinion on the consolidated financial reporting.
Remediation Plans
We are taking several steps to remediate the material weaknesses identified above. These steps include the following:
We plan to implement continuous risk assessment processes that are designed to identify and assess changes that could significantly impact our internal control over financial reporting environment and risks of material misstatement related to the revenue recognition process.
We plan to ensure the effective design, implementation and operation of sufficient process level controls over the valuation of assets acquired and liabilities assumedstatements. Their audit was conducted in business combinations by developing written procedures and controls on accounting for business combinations. Additionally, we plan to assign responsibility for financial reporting and internal controls and will endeavor to ensure there are effective communication processes in place so individuals assignedaccordance with the overall responsibility to operate these process level controls understand their roles and expectations as it relates to designing, implementing and operating process level controls for future business combinations.
We plan to design and implement sufficient additional process level control activities over the existence and accuracy of revenue transactions.
We plan to execute our plans to remediate the material weaknesses identified above as soon as feasible. We will test the ongoing effectivenessstandards of the new controls and will consider the material weakness remediated after the new controls operate effectively for a sufficient period of time. There is no assurance, however, that these measures will remediate the material weakness or ensure that our internal controls over financial reporting will be effective in the future.Public Company Accounting Oversight Board (United States).
ITEM 9B. OTHER INFORMATION
None.The following disclosure is being made under Section 13(r) of the Exchange Act out of an abundance of caution:
We are required to engage on a regular basis with the Russian Federal Security Service (“FSB”) in the FSB’s official capacity of regulating our use of technology in Russia in connection with providing commercial services therein through our local subsidiary. On March 2, 2021, the U.S. Secretary of State designated the FSB as a party subject to the provisions of U.S. Executive Order No. 13382 issued in 2005. We do not derive any gross revenues or net profits directly associated with any such dealings by us with the FSB and all such dealings are explicitly authorized by General License 1B issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control. We currently plan to continue these activities as required to continue to provide commercial services in Russia.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
Part III
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.
Unless context requires otherwise, references to the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017, covers the successor period from November 1, 2017, through December 31, 2017.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have omitted this information pursuant to General Instruction I.
ITEM 11. EXECUTIVE COMPENSATION
We have omitted this information pursuant to General Instruction I.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We have omitted this information pursuant to General Instruction I.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We have omitted this information pursuant to General Instruction I.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Pre-Approval Policies and Procedures
The Audit Committee of CenturyLink'sLumen's Board of Directors is responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm. Under the Audit Committee's charter, the Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm. The approval may be given as part of the Audit Committee's approval of the scope of the engagement of our independent registered public accounting firm or on an individual basis. The pre-approval of non-audit services may be delegated to one or more of the Audit Committee's members, but the decision must be reported to the full Audit Committee. Our independent registered public accounting firm may not be retained to perform the non-audit services specified in Section 10A(g) of the Exchange Act.
Fees Paid to the Independent Registered Public Accounting Firm
Level 3 Parent, LLC first engaged KPMG LLP to be our independent registered public accounting firm in 2002. The aggregate fees billed or allocated to us were $2.4 million and $2.9 million for the successor years ended December 31, 20182021 and 20172020, respectively, for professional accounting services, including KPMG's audit of our annual consolidated financial statements, are set forth in the table below.statements.
|
| | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | (Dollars in thousands) |
| Audit fees | $ | 3,100 |
| | 4,303 |
|
| Audit-related fees | — |
| | 168 |
|
| Tax fees | — |
| | 7 |
|
| Total fees | $ | 3,100 |
| | 4,478 |
|
For purposes of the preceding table, the professionalAudit fees are classified as follows:
Audit fees— These fees consisted principally of feesbilled for the year shown for professional services performed for the audit of the consolidated financial statements including statutory auditsincluded in our Form 10-K filing for that year, the review of foreign subsidiaries, audit of internal control overcondensed consolidated financial reporting, and fees relating tostatements included in our Form 10-Q filings made during that year, comfort letters, consents and registration statements.
Audit-related fees—These fees consisted principallyassistance with and review of documents filed with the SEC. Audit fees for auditseach year shown include amounts that have been billed through the date of employee benefit plans, agreed-upon procedures reports, due diligence activities,this filing and other audits not required by statute or regulation.any additional amounts that are expected to be billed thereafter.
Tax fees - These fees consisted principally of fees for tax consultation and tax compliance activities.
The CenturyLink Audit Committee subsequent to November 1, 2017, and the Level 3 Audit Committee prior to that dateof Lumen Technologies, Inc. approved in advance all of the services performed by KPMG described above.
Part IV
Effective November 1,2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. As part of the completion of the acquisition, Level 3 Communications, Inc. was merged into an acquisition subsidiary, which survived the merger under the name Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries.
Unless context requires otherwise, references to the period ended October 31, 2017, covers the predecessor period from January 1, 2017 through October 31, 2017, and the period ended December 31, 2017, covers the successor period from November 1, 2017, through December 31, 2017.
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.
|
| | | | |
| 3.1 |
|
| 3.2 | |
| 4.1.1 | Indenture, dated as of November 14, 2013, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and the Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 6.125% Senior Notes due 2021 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 14, 2013). |
4.1.2 | Supplemental Indenture, dated as of March 14, 2014, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 6.125% Senior Notes due 2021 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated March 17, 2014). |
4.1.3 | Supplemental Indenture, dated as of March 14, 2014, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 6.125% Senior Notes due 2021 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated March 17, 2014). |
4.1.4 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of November 14, 2013, governing the 6.125% Senior Notes due 2021 (incorporated by reference to Exhibit 4.7 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
4.1.5 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of November 14, 2013, governing the 6.125% Senior Notes due 2021 (incorporated by referenced to Exhibit 4.7 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
|
| |
4.2.1 | Indenture, dated as of August 12, 2014, between Level 3 Escrow II, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.375% Senior Notes due 2022 of Level 3 Escrow II, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated August 12, 2014). |
4.2.2 | Securities Assumption Supplemental Indenture, dated as of October 31, 2014, by and among Level 3 Escrow II, Inc., Level 3 Financing, Inc., Level 3 Communications, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 5, 2014). |
4.2.3 | Supplemental Indenture, dated as of October 31, 2014, by and among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.375% Senior Notes due 2022 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 5, 2014). |
4.2.4 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of August 12, 2014, governing the 5.375% Senior Notes due 2022 (incorporated by reference to Exhibit 4.6 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
4.2.5 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of August 12, 2014, governing the 5.375% Senior Notes due 2022 (incorporated by referenced to Exhibit 4.6 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
4.3.1 | |
4.3.2 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, Inc., and The Bank of New York Mellon Trust Company, N.A, amending the Indenture, dated as of December 1, 2014 governing the 5.750% Senior Notes due 2022 (incorporated by reference to Exhibit 4.8 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
4.3.3 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc., Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., amending the Indenture, dated as of December 1, 2014 governing the 5.750% Senior Notes due 2022 (incorporated by reference to Exhibit 4.8 of the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
4.4.1 | Indenture, dated as of January 29, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.625% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated January 30, 2015). |
4.4.2 | Supplemental Indenture, dated as of June 3, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.625% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated June 4, 2015). |
4.4.3 | Supplemental Indenture, dated as of June 3, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.625% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated June 4, 2015). |
|
| |
4.4.4 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of January 29, 2015, governing the 5.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.5 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
4.4.5 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of January 29, 2015 governing the 5.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.5 of the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
4.5.1 | Indenture, dated as of April 28, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.375% Senior Notes due 2025 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated April 30, 2015). |
4.5.24.1.2 | Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’sLLC's unconditioned, unsecured guarantee of the 5.375% Senior Notes due 2025 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015). |
4.5.34.1.3 | Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.375% Senior Notes due 2025 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015). |
4.5.44.1.4 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015, governing the 5.375% Senior Notes due 2025 (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
4.5.54.1.5 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015, governing the 5.375% Senior Notes due 2025 (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
4.6.14.2.1 | Indenture, dated as of April 28, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.125% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated April 30, 2015). |
4.6.2 | Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.125% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015). |
4.6.3 | Supplemental Indenture, dated as of September 1, 2015, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.125% Senior Notes due 2023 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 2, 2015). |
|
| |
4.6.4 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015, governing the 5.125% Senior Notes due 2023 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
4.6.5 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of April 28, 2015 governing the 5.125% Senior Notes due 2023 (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
4.7.1 | Indenture, dated as of November 13, 2015, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.375% Senior Notes due 2024 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 13, 2015). |
4.7.2 | Supplemental Indenture, dated as of February 8, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.375% Senior Notes due 2024 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated February 8, 2016). |
4.7.3 | Supplemental Indenture, dated as of February 8, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.375% Senior Notes due 2024 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated February 8, 2016). |
4.7.4 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of November 13, 2015, governing the 5.375% Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
4.7.5 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of November 13, 2015 governing the 5.375% Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
4.8.1 | Indenture, dated as of March 22, 2016, among Level 3 Communications, Inc., as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 5.25% Senior Notes due 2026 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated March 22, 2016). |
4.8.24.2.2 | Supplemental Indenture, dated as of September 16, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unconditioned, unsecured guarantee of the 5.25% Senior Notes due 2026 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 16, 2016). |
4.8.34.2.3 | Supplemental Indenture, dated as of September 16, 2016, among Level 3 Communications, LLC, as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 5.25% Senior Notes due 2026 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 16, 2016). |
|
| |
4.8.44.2.4 | Supplemental Indenture, dated as of November 22, 2016, among Level 3 Communications, LLC as guarantor, Level 3 Communications, Inc., as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of March 22, 2016, governing the 5.25% Senior Notes due 2026 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 28, 2016). |
| | | | | |
4.8.54.2.5 | Supplemental Indenture, dated as of November 1, 2017, among Level 3 Communications, Inc. as guarantor, Level 3 Financing, Inc., as issuer, Level 3 Parent, LLC (f/k/a WWG Merger Sub LLC) and The Bank of New York Mellon Trust Company, N.A., as trustee, amending the Indenture dated as of March 22, 2016 governing the 5.25% Senior Notes due 2026 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
10.14.3.1 | Indenture, dated as of September 25, 2019, among Level 3 Parent, LLC, as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 4.625% Senior Notes due 2027 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated September 25, 2019). |
| 4.3.2 | First Supplemental Indenture, dated as of March 2, 2020, among Level 3 Parent, LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unsecured guarantee of the 4.625% Senior Notes due 2027 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(d)(i) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| 4.3.3 | Second Supplemental Indenture, dated as of March 2, 2020, among Level 3 Parent, LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 4.625% Senior Notes due 2027 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(d)(ii) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| 4.4.1 | Indenture, dated as of November 29, 2019, among Level 3 Parent, LLC and the other guarantors party thereto, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee and Notes Collateral Agent, relating to the 3.400% Senior Secured Notes due 2027 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 29, 2019). |
| 4.4.2 | Supplemental Indenture, dated as of April 15, 2020, among Level 3 Financing, Inc., as issuer, The Bank of New York Mellon Trust Company, N.A., as trustee, and Level 3 Parent, LLC and several of its subsidiaries, as guarantors, designating and outlining the terms and conditions of the secured guarantees of the 3.400% Senior Secured Notes due 2027 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(e)(i) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| 4.5.1 | Indenture, dated as of November 29, 2019, among Level 3 Parent, LLC and the other guarantors party thereto, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee and Notes Collateral Agent, relating to the 3.875% Senior Secured Notes due 2029 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 29, 2019). |
| 4.5.2 | Supplemental Indenture, dated as of April 15, 2020, among Level 3 Financing, Inc., as issuer, The Bank of New York Mellon Trust Company, N.A., as trustee, and Level 3 Parent, LLC and several of its subsidiaries, as guarantors, designating and outlining the terms and conditions of the secured guarantees of the 3.875% Senior Secured Notes due 2029 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(f)((i) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| 4.6.1 | Indenture, dated as of June 15, 2020, among Level 3 Parent, LLC, as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 4.250% Senior Notes due 2028 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated June 15, 2020). |
| 4.6.2 | First Supplemental Indenture, dated as of December 21, 2020, among Level 3 Parent LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unsecured guarantee of the 4.250% Senior Notes due 2028 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(g)(i) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| | | | | |
| 4.6.3 | Second Supplemental Indenture, dated as of December 21, 2020, among Level 3 Parent LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 4.250% Senior Notes due 2028 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(g)(ii) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| 4.7.1 | Indenture, dated as of August 12, 2020, among Level 3 Parent, LLC, as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 3.625% Senior Notes due 2029 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated August 12, 2020). |
| 4.7.2 | First Supplemental Indenture, dated as of December 21, 2020, among Level 3 Parent LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to Level 3 Communications, LLC’s unsecured guarantee of the 3.625% Senior Notes due 2029 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(h)(i) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| 4.7.3 | Second Supplemental Indenture, dated as of December 21, 2020, among Level 3 Parent LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 3.625% Senior Notes due 2029 of Level 3 Financing, Inc.(incorporated by reference to Exhibit 4.8(h)(ii) to Lumen Technologies, Inc.’s Annual Report on Form 10-K (File No. 001-07784) for the year ended December 31, 2020 filed with the Securities and Exchange Commission on February 25, 2021). |
| 4.8.1 | Indenture, dated as of January 13, 2021, among Level 3 Parent, LLC, as Guarantor, Level 3 Financing, Inc., as Issuer, and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to the 3.750% Sustainability-Linked Senior Notes due 2029 of Level 3 Financing, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated January 13, 2021). |
| 4.8.2* | First Supplemental Indenture, dated as of May 7, 2021, among Level 3 Parent, LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, designating and outlining the terms and conditions of Level 3 Communications, LLC’s unsecured guarantee of the 3.750% Sustainability-Linked Senior Notes due 2029 of Level 3 Financing, Inc. |
| 4.8.3* | Second Supplemental Indenture, dated as of May 7, 2021, among Level 3 Parent, LLC, as guarantor, Level 3 Communications, LLC, as guarantor, Level 3 Financing, Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to the subordination in any bankruptcy, liquidation or winding up proceeding of the guarantee by Level 3 Communications, LLC of the 3.750% Sustainability-Linked Senior Notes due 2029 of Level 3 Financing, Inc. |
| 10.1 | |
| 10.2 | |
| 10.3 | |
| 10.4 | Indemnity, Subrogation and Contribution Agreement, dated as of March 13, 2007, among Level 3 Communications, Inc., Level 3 Financing, Inc., the Subsidiaries of Level 3 Communications, Inc. and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated March 16, 2007). |
| 10.5 | |
| | | | | |
| 10.6 | |
| 10.7 | Amendment Agreement to the March 13, 2007 Credit Agreement, dated April 16, 2009, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Wachovia Bank, N.A., and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated April 17, 2009). |
| 10.8 | |
| 10.9 | First Amendment, dated as of May 15, 2009, to the Amended and Restated Credit Agreement dated as of April 16, 2009, among Level 3 Communications, Inc., Level 3 Financing, Inc. and Merrill Lynch Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Wachovia Bank, N.A., and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (file no. 000-15658) dated May 15, 2009). |
| 10.10 | |
| 10.11 | |
| 10.12 | |
|
| |
| 10.13 | |
| 10.14 | |
| 10.15 | |
| 10.16 | |
| 10.17 | |
| 10.18 | |
| 10.19 | |
| | | | | |
| 10.20 | Twelfth Amendment Agreement to the Amended and Restated Credit Agreement, dated as of February 22, 2017, by and between Level 3 Communications, Inc., Level 3 Financing, Inc., the Lenders party thereto and Merrill Lynch Capital Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (file No. 001-35134) dated February 22, 2017), including the Amended and Restated Loan Proceeds Notes issued on the same date by Level 3 Communications, LLC to Level 3 Financing, Inc. (incorporated by reference to Exhibit 10.2 and Exhibit 10.3 to the Registrant's Current Report on Form 8-K (file No. 001-35134) dated February 22, 2017). |
| 10.21 | |
| 10.22 | Assumption Agreement, dated as of November 1, 2017, between Level 3 Parents, LLC (f/k/a WWG Merger Sub LLC) and Merrill Lynch Capital Corporation, as administrative agent and collateral agent, with respect to the Amended and Restated Credit Agreement, amended as of February 22, 2017, among Level 3 Communications, Inc., Level 3 Financing, Inc., as borrower, the lenders party thereto and Merrill Lynch Capital Corporation, as administrative agent and collateral agent (incorporated by reference to Exhibit 4.9 to the Registrant’s Current Report on Form 8-K (file no. 001-35134) dated November 1, 2017). |
| 31.1* | |
31.2* | |
32* | |
| 31.2* | |
| 32.1* | |
| 32.2* |
|
| 101* | The following materials from the Annual Report on Form 10-K of Level 3 Parent, LLC for the year ended December 31, 2018,2021, formatted in XBRL (eXtensible Business Reporting Language);Inline XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Member's/Stockholders'Member's Equity and (vi) Notes to Consolidated Financial Statements. |
| 104* | Cover page formatted as Inline XBRL and contained in Exhibit 101. |
| |
* | * Exhibit filed herewith. |
ITEM 16. SUMMARY OF BUSINESS AND FINANCIAL INFORMATION
Not Applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this March 18, 2019
| | | | | | | | | | | | | | |
| | | | |
| | | | |
| | LEVEL 3 PARENT, LLC |
| Date: February 24, 2022 | | By: | | /s/ Eric J. MortensenAndrea Genschaw |
| | | Eric J. Mortensen | Andrea Genschaw |
| | | | Senior Vice President, - Controller (Principal Accounting Officer) and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| /s/ Jeff K. Storey | | Chief Executive Officer and President (Principal Executive Officer) | | February 24, 2022 |
| Jeff K. Storey | | | | |
| | | | |
Signature | | Title | | Date |
/s/ Jeff K. Storey | | Chief Executive Officer and President (Principal Executive Officer) | | March 18, 2019 |
Jeff K. Storey | | | |
| | | | |
| /s/ Indraneel Dev | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | March 18, 2019February 24, 2022 |
| Indraneel Dev | | | | |
| | | | |
| /s/ Stacey W. Goff | | Executive Vice President, General Counsel and Director | | March 18, 2019February 24, 2022 |
| Stacey W. Goff | | | | |
| | | | |
/s/ Eric J. MortensenAndrea Genschaw | | Senior Vice President, - Controller (Principal Accounting Officer) and Director | | March 18, 2019February 24, 2022 |
Eric J. MortensenAndrea Genschaw | | | | |