From time to time, we may change the categorization of our products and services.
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.
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.
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 subject to the right to terminate held by each party. As these and other interconnection agreements expire, we will evaluate 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 in the future.
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 preempt states from imposing substantial regulations of their own on broadband. Opponents of this change appealed this action in federal court and 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 state 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 court also requested the FCC to make further findings relating to its classification decision. Numerous parties have sought further appellate review of this decision. 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
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. These 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 United StatesU.S. are subject to various regulations in the markets where service is provided. The scope of regulation varies from country to country. The telecommunicationscommunications 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.
The United Kingdom (the "UK"("UK") recently terminated its membership in the EU (“Brexit”), subject to an 11-month transition period during which and has entered into related separation agreements with the UK will continue to be subject to all EU rules, but will no longer have any voting rights. The British government is currently negotiating the terms of Brexit.regarding data sharing, financial services and other matters. Several factors which are currently unknown will influence Brexit’s ultimate impact on our business, including the form Brexit will take.business. We operate a staging facility in the UK, where certain core network elements and customer premises equipment isare 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 recently established a third party sparing facility in Amsterdam which we believe will help mitigate potential disruptions resulting from any restriction onimpediments to the free movement of goods between the EU and the UK after the end of the transition period.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 agencies, including attorneys general, monitor and exercise oversight related to consumer protection issues. We are also subject to codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate. Such regulations are enacted by municipalities, counties, state, federal or other regional governmental bodies, and can vary widely from jurisdiction to jurisdiction as a result. Such regulations may also require us to pay substantial fees.
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. The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction. Various foreign, federal and state legislative or regulatory bodies have recently adopted increasingly restrictive laws or regulations governing the protection 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 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. 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 that may 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. 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 entertainment, 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.
Our voice and collaboration services continue to face competition from a variety of other sources, including providers of wireless voice, electronic mail, text messaging, social networking and similar digital non-voice communications services.
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 Matters
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 (i) "Risk Factors—Risks Relating to Legal and Regulatory Matters—Risks posed by other regulation" and “Risk Factors-Other Risks-We face risks from natural disasters and extreme weather, which can disrupt our operations and cause us to incur additional capital and operating costs” in Item 1A of Part I of this report and (ii) Note 17—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, 2019,2021, we had approximately 11,30012,000 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 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. As a large complex organization, we are from time to time subject to litigation, disputes, governmental or internal investigations, service outages, security breaches or other adverse events, or are engaged in discussions regarding a wide range of business or strategic initiatives. We typically publicly disclose these events only when we determine these disclosures to be material to investors or otherwise required by applicable law, or, with respect to pending negotiations, when we have entered into a preliminary or definitive agreement.
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
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 objectives, we believe we must digitally transform our global 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. These undertakings will be challenging and time-consuming, and we cannot assure you that they 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 with greater pricing power than ours, (x)(vii) have deeper or more long-standing relationships with key customers, (viii) might be perceived as having an ESG profile more attractive to customers or (xi)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 much 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 of competitive products ornetwork services. Continuous improvements in wireless data technologies have enabled wireless carriers to offer competing data transmissionIncreasingly, customers are demanding more technologically advanced products that are highly convenient to use, andsuit their evolving needs. To remain competitive, 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, technological limits or an inability to act as quickly or efficiently as other competitors. Network service enhancements and product launches could take longer or cost more money than expected due to a range of factors, including software issues, supplier delays, testing delays, permitting delays, or network incompatibility issues. 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 very 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. In addition, our dedication of significant resources to these projects could divert attention from ongoing operations and other strategic initiatives. 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 of our business customers, could lead to material interruptions or curtailments of service. Moreover, in connection with processing and storing 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.
To safeguard our systems and data stored thereon, we strive to maintain effective security measures, disaster recovery plans, business contingency plans(iii) our processing and employee training programs, and to continuously upgrade these safeguards. Nonetheless, we cannot assure you that our security efforts and measures will prevent unauthorized access tostorage of sensitive customer data.
Cyber-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 such other systemsthem to deliver services tooperate our customers.business. Various other factors could intensify these risks, including, (i) our maintenance of information in digital form stored on servers connected to the Internet, (ii) our use of open and software-defined networks, (iii) the complexity of our multi-continent network composed of legacy and acquired properties, (iv) growth in the size and sophistication of our customers and their service requirements, and (v) increased use of our network due to greater demand for data services.services and (vi) our increased incidence of employees working from remote locations.
Similar toLike other largeprominent 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 and the wider accessibility of cyber-attack tools. Known and newly discovered software and hardware vulnerabilities are constantly evolving, which increases the difficulty of detecting and successfully defending against them. You should be further aware that defenses against cyber-attacks currently available to U.S. companies are unlikely to prevent intrusions by a highly-determined, highly-sophisticated hacker. Consequently, you should assume 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.
We believe our industry is by its nature more prone to reputational risks than many other industries. Our ability to attract and retain customers depends substantially 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, voice 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. Other more general factors have further increased the challenges of attracting and retaining talented individuals, including disruptions caused by our workforce reduction and restructuring initiatives over the past couple of years, and the challenges of employing represented and non-represented personnel under different compensation structures. In addition, subject to limited exceptions, our executives and domestic employees do not 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 customers will likely use much more bandwidth than in the past. If this occurs, we could be required to make significant budgeted or unbudgeted 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. These steps, however, may not fully protect us. Others may independently develop technologies that are substantially equivalent, superior to, or otherwise competitive to the technologies we employ in our services; or may intentionally or unintentionally infringe on our intellectual property. Moreover, we may be unable 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 unable or unwilling to continue to engage with us for any reason, including financial distress, bankruptcy, strikes, regulatory impediments, legal disputes or commercial differences.
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 a limited number of software and service vendors content suppliers or other parties to assist us with operating, maintaining and administering our business.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 andor services 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 may be adversely affected if third parties assert patent infringement claims against our suppliers or us. Similarly, inother factors have led to a shortage of semiconductors and certain instancesother supplies that we have access to only a limited number of alternative suppliers or vendors. In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, utilities or programming on economically attractive terms, on a timely basis, or at all, which could increase costs or cause disruptionsuse 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 utility providerskey licensors. We rely on key technologies licensed from third parties to deliver certain of our products and landlords.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 Our energy costs can fluctuate significantly or increase for. We have several complex high-value national and global customer contracts. These contracts are frequently impacted by a variety of reasons, including changes in legislation and regulation. Several pending proposals designedfactors that could reduce or eliminate the profitability of these contracts. Moreover, we would be adversely impacted if we fail to reduce greenhouse emissions could substantially increase our energy costs, which we may not be able to pass on to our customers. We lease many of our office facilities, which subjects us to risk of higher future rent payments or non-renewals when our current lease expires.renew major contracts upon their expiration.
Reliance on governmental paymentslandowners.. 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 being suspended or disbarred from future governmental programs or contracts for a significant period of time. 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, our results of operations and financial condition could be 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 Federal Communications Commission (the “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 a portion of our cable, conduit and other network equipment over, on or under their respective properties. A significant number of these authorizations are scheduled to lapse over the next five to ten years, unless we are able to extend or renew them. Further, some of our operations are subject to licensing and franchising requirements imposed by municipalities or other governmental authorities. Our operations could be adversely affected if any of these authorizations are cancelled, or otherwise terminate or lapse, or if the landowner requests price increases. Moreover, our abilityWe cannot assure you we will be able to expandsuccessfully extend these arrangements when their terms expire, or to enter into new arrangements that may be necessary to implement our network expansion opportunities.
Climate change could 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 attachingdisrupt 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 major contracts subject us to various risks.
We furnish to and receive from our business customers indemnities relating to damages caused or sustained by us in connection with certain of our operations. Our customers’ changing views on risk allocation couldoperations, cause us to accept greater risk to win new businessincur substantial additional capital and operating costs 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, and seek to insure against it, our insurance premiums could rise.
We have several complex high-value national and global customer contracts. The revenue and profitability of these contracts are frequently impacted by a variety of factors, including variations in cost, attaining milestones, meeting service level commitments, service outages, achieving cost savings anticipated in our contract pricing, changes in our customers’ needs, and our suppliers’ performance. Any of these factors 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.
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 adverselynegatively 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 behaviorbusiness.
A substantial number of our employees or agents, failuredomestic facilities are located in coastal areas, which subjects them to complythe risks associated with certain formal documentation or technical requirements, or otherwise. Violations of these lawssevere tropical storms, hurricanes and regulations could result in finestornadoes, and penalties, criminal sanctions against us or our personnel, or prohibitions on the conductmany other 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 servicesfacilities are more restrictive than U.S. laws and regulations, particularly those relating to privacy rights and data retention. Moreover, national regulatory frameworks that are consistent with the policies and requirements of global organizations and standards 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”), the U.K. Bribery Act of 2010, the Brazilian Anti-corruption Law and other applicable anti-corruption laws (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 United Kingdom exited the European Union on January 31, 2020 ("Brexit"), subject to the 11-month transition period further described elsewhere herein, and the British government is currently negotiating the terms of Brexit. Brexit could potentially impact our supply chains, logistics, and human resources, and subject us to additional regulatory complexities. 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 unableearthquakes, 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 control the scope or qualitysubstantial deductibles, coverage limits and exclusions, and limited availability, we have typically recovered only a portion of our overseas serviceslosses through insurance.
Climate change may increase the frequency or products, or being held liable under any 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, resultsseverity of operations, reputation or prospects.
We conduct significant operations in regions that have historically experienced high levels of political, economicnatural disasters and social instability, including the Latin American region. Variousother extreme weather 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, togetherwhich 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 and operations. In addition, any failure to achieve our goals or regulatory mandates with abrupt shifts in governmental administrations,respect to reducing our impact on the environment could impede our ability to develop or implement effective business plansresult 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 activityadverse impacts noted above.
Future acquisitions or strategic investments 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 convert those currencies into U.S. dollars and to expatriate those funds.
Assetasset 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 other unidentified issues not discovered in due diligence.
In addition, in the past, Lumen Technologies or we have disposed of assets or asset groups for a variety of reasons, and we may consider disposingdispose 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, ifIf 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. 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 make it harderits 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 to fund allin 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 cash requirements.
Unfavorable generalemployees 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 pandemic intensifies or economic conditions deteriorate, the pandemic’s adverse impact on us could negativelybecome pronounced in the future and could have a material adverse impact on our operating results and financial condition.
Unfavorable general economic conditions, including unstable economicMoreover, to the extent any of these risks and credit markets or depressed economic activity caused by trade wars, epidemics, pandemics oruncertainties adversely impact us, they may also have the effect of heightening many of the other factors,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 negatively affecthave a material adverse impact on us.
The precautionary measures described in this annual report we have taken to safeguard our business. Whileemployees and customers could make it ismore difficult to predict the ultimate impact of these general economic conditions, they could adversely affect demand for some of our(i) timely and efficiently furnish 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(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 may not be able to obtain adequate access to credit, whichcybersecurity related risks, (vi) maintain a consistent culture and (vii) otherwise operate and administer our affairs. As such, these measures ultimately could negativelyhave a material adverse 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 affecton our operating results and financial condition, and liquidity.condition.
For additional information about our business and operations, see "Business" in Item 1 of this report.
Our consolidated revenue is concentrated in a couple top customers.
Approximately 3% of our consolidated revenue is attributable to our top customer, and approximately 5%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 itstheir respective 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.
Although we believe our business has been successfully integrated into CenturyLink’s business, additional challenges may remain.
In late 2017, this transaction combined two companies which previously operated as independent public companies. Although, we believe the integration of the two companies has been successfully completed, additional challenges could arise, including those relating to the following:
the complexities of combining two companies with different histories, cultures, regulatory restrictions, operating structures, lending arrangements and markets;
the complexities associated with managing the combined businesses out of several different locations and integrating personnel from the two companies, while at the same time attempting to provide consistent, high-quality products and services under a unified culture; and
impediments to fully and timely integrating systems, technologies, procedures, policies, standards and controls.
Our failure to adequately address these and related challenges could adversely affect our business and financial results.
For additional information about our business and operations, see "Business" in Item 1 of this report.
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 domestic operations are also subject to potential investigation and legal action by the Federal Trade Commission ("FTC") and other federal and state regulatory authorities over issues such as consumer marketing, competitive practices, and privacy protections. 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. A substantial portion of our local voice services revenue remains subject to FCC and state utility commission pricing regulation, which periodically exposes us to pricing or earnings disputes and could expose us to unanticipated price declines. 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, which makes 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 investigations and fines. Various governmental agencies have routinely in the past investigated our or our affiliates’ business practices either in response to complaints or on their own initiative, and are expected to continue to do the same in the future. These 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 typically publicly disclose the existence or outcome of these investigations, or our own internal investigations, only when we determine these disclosures to be material to investors or otherwise required by applicable law.
Risks of higher costs. Regulations continue to create significant operating and capital costs for us. Regulatory challenges to our business practices 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 our 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 and data privacy could substantially impact us.
Since the creation of the Internet, there has been extensive debate about whether and how to regulate Internet service providers. A significant number of U.S. 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. The FCC voted to repeal most of those regulations in December 2017 and preempted states from substantial regulations of their own. Opponents of the rescission judicially challenged this action and continue to advocate in favor of re-instituting extensive federal regulation. In addition, California and other states have adopted, or are considering adopting, legislation or regulations that govern the terms of internet services. In October 2019, a federal court upheld the FCC’s classification decision but vacated a part of its preemption ruling. The court also remanded to the FCC for further findings related to the classification decision. Numerous parties have sought further appellate review of this decision. The results of these further appeals are pending. Depending on the scope of such current and future federal or state regulation and judicial proceedings regarding these matters, 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 operating, maintaining and upgrading our network, and otherwise negatively impact our current operations. As the significance of the Internet continues to expand, foreign governments similarly may adopt new laws or regulations governing the Internet. We cannot predict the outcome of any such changes.
A growing number of non-U.S. jurisdictions have adopted rigorous data privacy laws. For example, all current member states of the European Union have adopted new European data protection laws that have exposed our European operations to an increased risk of litigation and substantial regulatory fines. In the U.S., California and other states have adopted, or are considering adopting, comparable data privacy laws. These laws are complex and not consistent across jurisdictions. Although we cannot predict the ultimate outcomes of this growing trend toward additional regulation, we expect it will increase our operating costs and heighten our regulatory risk.
We may be liable for the material that content providers or distributors distribute over our network.
The liability of private network operators for information stored or transmitted on their networks is impacted both by changing technology and evolving legal principles that remain unsettled in many jurisdictions. While we disclaim any liability for third-party content in our service contracts, as a private network provider we potentially could be exposed to legal claims relating to third party content stored or transmitted on our networks. Such claims could involve, among others, allegations of defamation, invasion of privacy, copyright infringement, or aiding and abetting restricted activities such as online gambling or pornography. Although we believe our liability for these types of claims is limited, suits against other carriers have been successful and we cannot assure you that our defenses will prevail. If we decide to implement additional measures to reduce 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.
Our pending legal proceedings could have a material adverse impact on our financial condition and operating results, the trading price of our securities and our ability to access the capital markets.
There are several material proceedings pending against us, as described in Note 17—Commitments, Contingencies and Other Items to our consolidated financial statements included in Item 8 of this report. 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 been accrued or as to which the accrued liability is inadequate. For each of these reasons, any of the proceedings described in Note 17, as well as current litigation not described therein or future litigation, could have a material adverse effect on our business, reputation, financial position, operating results, the trading price of our securities and our ability to access the capital markets. We can give you no assurances as to the ultimate impact of these matters on us.
We are subject to franchising requirements that could impede our expansion opportunities or result in potential fines or penalties.
We may be required to obtain from municipal authorities operating franchises to install or expand certain facilities related to our fiber transport operations and certain of our other services. Some of these franchises may require us to pay franchise fees, and may require us to pay fines 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 comply with these laws and regulations, including any failure to timely complete annual assessments of our internal controls; 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 of which could have a material adverse effect on our results of operations, competitive position, financial condition or prospects.
For a more thorough discussion of the regulatory issues that may affect our business, see "Business-Regulation" in Item 1 of this report.
Risks Affecting Our Liquidity and Capital Resources
Our high debt levels expose us to a broad range of risks.
We continue to carry significant debt. As of December 31, 2019, the aggregate principal amount of our consolidated long-term debt was $10.1 billion, excluding unamortized premiums, net, unamortized debt issuance costs and finance leases. As of such date, $840 million aggregate principal amount of this long-term debt was scheduled to mature prior to December 31, 2022. 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.
Our significant levels of debt can adversely affect us in several 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, stock repurchases, marketing and other potential growth initiatives;
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;
placing us at a competitive disadvantage compared to less leveraged competitors;
increasing the risk that we will need to sell securities or assets, possibly on unfavorable terms, or take other unfavorable actions to meet payment obligations; or
increasing the risk that we may not meet the 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 portion 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. If such rate increases are significant and sustained, these impacts could be material.
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 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.
Subject to certain limitations and restrictions, the current terms of our debt instruments and the debt instruments of our subsidiaries permit us or them to incur additional indebtedness, including additional borrowings under CenturyLink's revolving credit facility. 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 intend to refinance over the next several years, principally through the issuance of debt securities or term loans by CenturyLink or one or more of our principal subsidiaries. We may also need to obtain additional financing under a variety of 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 additional cash to fund our cash requirements described elsewhere herein.
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. 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, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad and (ii) specific conditions in the communications industry. Instability in the domestic or global financial markets has from time to time resulted in periodic volatility and disruptions in the capital markets. Uncertainty regarding worldwide trade, the strength of various global and supranatural governing bodies and other geopolitical events could significantly affect global financial markets in 2020. Volatility in the global markets could limit our access to the credit markets, leading to higher borrowing costs or, in some cases, the inability to obtain financing on terms that are as favorable as those from which we previously benefited, on terms that are acceptable to us, or at all.
In addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities and other debt instruments, which are discussed further below.
Our access to funds under CenturyLink's revolving credit facility is further dependent upon the ability of the facility’s lenders to meet their funding commitments. Stricter capital-related and other regulations, particularly in the United States and Europe, could hamper the ability of these lenders to continue to fund their commitments. If one or more of the lenders fails to fund, the remaining lenders will not be legally obligated to rectify the funding shortfall.
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 our 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 complete some of these actions 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 have a highly complex debt structure, which could impact the rights of our investors.
CenturyLink, Inc. and various of its subsidiaries owe substantial sums pursuant to various debt and financing arrangements, certain of which are guaranteed by other principal subsidiaries. Over half of the debt of CenturyLink, Inc. is guaranteed by nine of its principal domestic subsidiaries, six 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 CenturyLink, Inc. is neither secured by collateral nor guaranteed by any of its subsidiaries. Nearly half of the debt of our affiliate 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 its parent. 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 approximately 400 subsidiaries of CenturyLink, Inc. have neither borrowed money nor guaranteed any of the debt of CenturyLink, 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 our non-guarantor subsidiaries to the extent of the value of those subsidiaries that are obligors.
Our various debt agreements include restrictions and covenants that could (i) limit our ability to conduct operations or borrow additional funds, (ii) restrict our ability to engage in inter-company transactions and (iii) lead to the acceleration of our repayment obligations in certain instances.
Under our and our affiliates' debt and financing arrangements, the issuer of the debt is subject to various covenants and restrictions, the most restrictive of which pertain to the debt of CenturyLink, Inc. and Level 3 Financing, Inc.
CenturyLink's debt arrangements contain several significant limitations restricting its ability to, among other things:
borrow additional money or issue guarantees;
pay dividends or other distributions to shareholders;
make loans, advances or other investments;
create liens on assets;
sell assets;
enter into sale-leaseback transactions;
enter into transactions with affiliates; and
engage in mergers or consolidations.
These above-listed restrictive covenants could materially adversely affect our ability to operate or expand our business, to pursue strategic transactions, or to otherwise pursue our plans and strategies.
The debt and financing arrangements of Level 3 Financing, Inc. contain substantially similar limitations that restrict our operations on a standalone basis as a separate restricted group. Consequently, certain of these covenants may significantly restrict our ability to distribute cash from Level 3 to other of our affiliated entities, or to enter into other transactions among our affiliated entities.
CenturyLink, Inc.’s senior secured credit facilities also 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.
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 us or our 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 respective 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 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 6—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 the long-term debt of Level 3 Financing, Inc. Some 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 or all of our outstanding debt or equity securities;
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.
Under our debt agreements, a change of control of us or certain of our affiliates could have certain adverse ramifications.
If the credit ratings relating to certain currently outstanding long-term debt of Level 3 Financing, Inc. are downgraded in the manner specified thereunder in connection with a “change of control” of Level 3 Financing or us, then Level 3 Financing could be required to offer to repurchase such debt securities. If, due to lack of cash, legal or contractual impediments, or otherwise, Level 3 Financing fails to offer to repurchase such debt, such failure could constitute an event of default under such debt . Any default under this debt could in turn constitute a default under other of our agreements relating to our indebtedness outstanding at that time. Moreover, the existence of these default or repurchase provisions may in certain circumstances render it more difficult or discourage certain sales transitions involving Level 3 Financing or us.
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 cash to maintain, upgrade and expand our network infrastructure as a result of several factors, including:
changes in customers' service requirements, including increased demands by customers to transmit larger amounts of data at faster speeds;
our above-described need to (i) consolidate and simplify our various legacy systems, (ii) strengthen and transform our customer support systems and (iii) support our development and launch of new products and services; and
technological advances of our competitors.
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 (i) replace some of our aging equipment that supports many of our traditional services that are experiencing revenue declines or (ii) 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 and maintain our operations. If we are unable to attain our objectives for managing or reducing these costs, our operating margins will be adversely impacted.
As a holding company, we rely on payments from our operating companies to meet our obligations.
As a holding company, substantially all of our income and operating cash flow is dependent upon the earnings of our subsidiaries and their distribution of those earnings to us in the form of dividends, loans or other payments. As a result, we rely upon our subsidiaries to generate cash flows in amounts sufficient to fund our obligations, including the payment of our long-term debt. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts owed by us, except to the extent they have guaranteed such payments. Similarly, subject to limited exceptions for tax-sharing or cash management purposes, our subsidiaries have no obligation to make any funds available to us to repay our obligations, whether by dividends, loans or other payments. Moreover, our rights to receive assets of any subsidiary upon its 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 tax laws or orders imposed by state regulators (either in connection with obtaining necessary approvals for our acquisitions or in connection with our regulated operations). For all these reasons, you should not assume that our subsidiaries will be able in the future to generate and distribute to us cash in amounts sufficient to fund our cash requirements. See “Management’s Discussion and Analysis 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 practices could limit our ability to deploy cash for other beneficial purposes.
The current practice of our Board of Directors to pay distributions to our member reflects a current intention to distribute to our member a substantial portion of our cash flow. As a result, 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 payments 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 use our net operating loss carryforwards, or when they will be depleted.
As of December 31, 2019, we had approximately $8.6 billion of federal net operating loss carryforwards, (“NOLs”), which for U.S. federal income tax purposes can be used to offset future taxable income. The majority of 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 these limitations could restrict our ability to use these NOLs in the amounts we project or could limit our flexibility to pursue otherwise favorable transactions.
At December 31, 2019, we had state NOL carryforwards of approximately $9.2 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, 2019, these state NOL carryforwards, net of federal benefit, had a net tax benefit (after giving effect to our valuation allowance) of $249 million.
Additionally, we have foreign NOL carryforwards of $6.0 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, 2019, we have determined that these foreign NOL carryforwards had net benefit of $235 million.
European Union regulation and reform of “benchmarks,” including LIBOR, is ongoing and could have a material adverse effect on the value and return on our variable rate indebtedness.
LIBOR and other interest rate and other types of indices which are deemed to be “benchmarks” are the subject of ongoing international regulatory reform in the European Union. Regulatory changes and the uncertainty as to the nature of such potential changes, alternative reference rates or other reforms could cause market volatility or disruptions for variable-rate debt instruments. Any changes announced by regulators or any other governance or oversight body, or future changes adopted thereby, in the method of determining LIBOR rates may impact reported LIBOR rates, and thereby affect our interest costs. In addition, in mid-2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. Although we believe that our variable rate indebtedness provides for alternative methods of calculating the interest rate payable on such indebtedness if LIBOR is not reported, uncertainty as to the extent and manner of future changes may adversely affect the value of our variable rate indebtedness.
Other Risks
We have lent money to CenturyLink, which exposes us to certain risks.
As of December 31, 2019, CenturyLink owed us $1.590 billion of the $1.825 billion we lent in late 2017. Developments that adversely impact CenturyLink could adversely impact our ability to collect this debt.
We face risks from natural disasters and extreme weather, 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 coastal areas, which subjects them to the risks associated with severe tropical storms, hurricanes and tornadoes, and many of our other facilities are subject to the risk of earthquakes, floods or other similar casualty events. These events could cause substantial damage, including flooded facilities, power outages, fuel shortages, damaged or destroyed property and equipment, and work interruptions. Although we maintain property and casualty insurance on our property (excluding our above ground outside plant) and may, under certain circumstances, 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 losses or, if obtainable and carried, whether this insurance will be adequate to cover such 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. Moreover, many climate experts have predicted an increase in extreme weather events in the future, which would increase our exposure to casualty risks. For all these reasons, any future hazard-related costs and work interruptions could adversely affect our operations and our financial condition.
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 ("GAAP") 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" in Item 1 of this report.
Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect our operations, profitability or reputation.
We maintain (i) disclosure controls and procedures designed to provide reasonable assurances regarding the accuracy and completeness of our SEC reports and (ii) internal control over financial reporting designed to provide reasonable assurance regarding the reliability and compliance with GAAP of our financial statements. We cannot assure you that these measures will be effective. As of December 31, 2018, we concluded that we had two material weaknesses relating to our accounting for the Level 3 combination and for revenue transactions. These material weaknesses caused us to file our annual report on Form 10‑K for the year ended December 31, 2018 after its original due date. Although we successfully remediated these material weaknesses during 2019, we cannot assure you that our remedial measures will avoid other control deficiencies in the future.
There can be no assurance that our disclosure controls and procedures or internal control over financial reporting will be effective in the future. As a result, it is possible that our current or future financial statements or SEC reports may not comply with generally accepted accounting principles or other applicable requirements, will contain a material misstatement or omission, or will not be available on a timely basis, any of which could cause investors to lose confidence in us and lead to, among other things, unanticipated legal, accounting and other expenses, delays in filing required financial disclosures or reports, enforcement actions by regulatory authorities, fines, penalties, the delisting of our securities, liabilities arising from shareholder litigation, restricted access to the capital markets and lower valuations of our securities.
If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings and reduce our member's equity.
As of December 31, 2019, approximately 51% of our total consolidated assets reflected on the consolidated balance sheet included in this report consisted of goodwill, customer relationships and other intangible assets. Under U.S. generally accepted accounting principles, most of these intangible assets must be tested for impairment on an annual basis or more frequently whenever events or circumstances indicate that their carrying value may not be recoverable. From time to time, including in the first quarter of 2019, CenturyLink and we recorded large non-cash charges to earnings in connection with required reductions of the value of its 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, financial condition or ability to comply with financial covenants in our debt instruments.
The Tax Cuts and Jobs Act will continue to have a substantial impact on us.
The Tax Cuts and Jobs Act (the "Act") enacted in December 2017 significantly changed U.S. tax law by reducing 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, further change as additional regulatory guidance is received from the Internal Revenue Service.
Additional changes in tax laws or tax audits could adversely affect us.
Like all large multinational businesses, we are subject to multiple sets of complex and varying tax laws and rules. Legislators and regulators at all levels of government may from time to time change existing tax laws or regulations or enact new laws or regulations. In many cases, the application of existing, newly enacted or amended tax laws (such as the U.S. Tax Cuts 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.
We believe that we have adequately provided for tax contingencies. However, our tax audits and examinations may 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.
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, CenturyLink.Lumen. We engage in various intercompany transactions with affiliates of CenturyLinkLumen 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 CenturyLink’sLumen’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 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 debarred from future governmental programs or contracts for a significant period of time and in certain instances could lead to the revocation of our FCC licenses. Moreover, certain governmental agencies frequently reserve the right to terminate their contracts for convenience or if funding is unavailable. If our governmental contracts are terminated for any reason, or if we are suspended or debarred from governmental programs or contracts, it could have a material adverse impact on our results of operations and financial condition.
Adapting and responding to changing regulatory requirements has historically materially impacted our operations. We believe evolving regulatory developments and regulatory uncertainty could continue to have a material impact on our business. In particular, our business could be materially impacted if the U.S. Congress amends or eliminates current federal law limitations on the liability of private network providers, such as us, against claims related to third party content stored or transmitted on private networks, as currently proposed by certain governmental officials, legislative leaders and consumer interest groups. We could also be materially affected if currently pending proposals to increase the regulation of internet service providers or to further strengthen data privacy laws are implemented. The variability of these laws could also hamper the ability of us and our customers to plan for the future or establish long-term strategies.
Third-party content stored or transmitted on our networks could result in liability or otherwise damage our reputation.
While we disclaim liability for third-party content in most of our service contracts, as a private network provider we potentially could be exposed to legal claims relating to third-party content stored or transmitted on our networks. Such claims could involve, among others, allegations of defamation, invasion of privacy, copyright infringement, or aiding and abetting restricted activities such as online gambling or pornography. Although we believe our liability for these types of claims is limited under current law, suits against other carriers have been successful and we cannot assure you that our defenses will prevail. Such third-party content could also result in adverse publicity and damage our reputation. Moreover, as noted above, pending proposals to change the law could materially heighten our legal exposure.
Pending legal proceedings could have a material adverse impact on us.
There are several potentially material proceedings pending against us and our affiliates. Results of these legal proceedings cannot be predicted with certainty. As of any given date we could have exposure to losses under proceedings in excess of our accrued liability. For each of these reasons, any of the proceedings described in Note 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 may not be successful in protecting and enforcing our intellectual property rights.
We rely on various patents, copyrights, trade names, trademarks, service marks, trade secrets and other similar intellectual property rights, as well as confidentiality agreements and procedures, to establish and protect our proprietary rights. For a variety of reasons, however, these steps may not fully protect us, including due to inherent limitations on the ability to enforce these rights. If we are unsuccessful in protecting or enforcing our intellectual property rights, our business, competitive position, results of operations and financial condition could be adversely affected.
We have been accused of infringing the intellectual property rights of others and will likely face similar accusations in the future.
We routinely receive notices from third parties or are named in lawsuits filed by third parties claiming we have infringed or are infringing their intellectual property rights. We are currently responding to several of these notices and claims and expect this industry-wide trend will continue. If these claims succeed, we could be required to pay significant monetary damages, to cease using the applicable technology or to make royalty payments to continue using the applicable technology. If we are required to take one or more of these actions, our revenues or profit margins may decline, our operations could be materially impaired or we may be required to stop selling or redesign one or more of our products or services, which could have a material adverse impact on our business. Similarly, from time to time, we may need to obtain the right to use certain patents or other intellectual property from third parties to be able to offer new products and services. If we cannot obtain rights to use any required technology from a third party on reasonable terms, our ability to offer new products and services may be prohibited, restricted, made more costly or delayed.
Our international operations expose us to various regulatory, currency, tax, legal and other risks.
Our international operations are subject to U.S. and non-U.S. laws and regulations regarding operations in international jurisdictions in which we provide services. These numerous and sometimes conflicting laws and regulations include anti-corruption laws, anti-competition laws, trade restrictions, economic sanctions, tax laws, immigration laws, environmental laws, privacy laws and accounting requirements. Many of these laws are complex and change frequently. There is a risk that these laws or regulations may materially restrict our ability to deliver services in various international jurisdictions or expose us to the risk of fines, penalties or license revocations if we are determined to have violated applicable laws or regulations. Additionally, these laws or regulations may potentially impact our customers and result in foregone business or penalties to us if we fail to comply with any applicable sanctions or restrictions on our activities.
Many non-U.S. laws and regulations relating to communications services are more restrictive than U.S. laws and regulations. We are subject to the 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 difficult for us to obtain licenses and conduct our operations.
In addition to these international regulatory risks, some of the other risks inherent in conducting business internationally include: economic, social and political instability, with the attendant risks of terrorism, kidnapping, extortion, civic unrest, potential seizure or nationalization of assets; currency and exchange controls, repatriation restrictions and fluctuations in currency exchange rates including, without limitation, the matters outlined in Note 1—Background and Summary of Significant Accounting Policies—Foreign Currency; problems collecting accounts receivable; the difficulty or inability in certain jurisdictions to enforce contract or intellectual property rights; reliance on certain third parties with whom we lack extensive experience; supply chain challenges; and challenges in securing and maintaining the necessary physical and telecommunications infrastructure.
Our operations and financial results could be impacted by changes in multilateral conventions, treaties, tariffs or other arrangements between or among sovereign nations , including most recently Brexit.
Financial Risks
Our significant debt levels expose us to a broad range of risks.
As of December 31, 2021, we had approximately $4.6 billion of outstanding consolidated secured indebtedness and $5.5 billion of outstanding consolidated unsecured indebtedness (excluding finance leases and other obligations, unamortized discounts or premiums and unamortized debt issuance costs.)
Our significant levels of debt and related debt service obligations could adversely affect us in several respects, including:
•requiring us to dedicate a substantial portion of our cash flow from operations to the payment of interest and principal on our debt, thereby reducing the funds available to us for other purposes, including acquisitions, capital expenditures, strategic initiatives and dividends;
•hindering our ability to capitalize on business opportunities and to plan for or react to changing market, industry, competitive or economic conditions;
•making us more vulnerable to economic or industry downturns, including interest rate increases (especially with respect to our variable rate debt);
•placing us at a competitive disadvantage compared to less leveraged companies;
•adversely impacting other parties’ perception of Lumen, including but not limited to existing or potential customers, vendors, employees or creditors;
•making it more difficult or expensive for us to obtain any necessary future financing or refinancing, including the risk that this could force us to sell assets or take other less desirable actions to raise capital; and
•increasing the risk that we may not meet the financial or non-financial covenants contained in our debt agreements or timely make all required debt payments, either of which could result in the acceleration of some or all of our outstanding indebtedness.
The effects of each of these factors could be intensified if we increase our borrowings or experience any downgrade in our credit ratings or those of our affiliates. Subject to certain limitations and restrictions, the current terms of our debt instruments and our subsidiaries’ debt instruments permit us or them to incur additional indebtedness.
We expect to periodically require financing, and we cannot assure you we will be able to obtain such financing on terms that are acceptable to us, or at all.
We expect to periodically require financing in the future to refinance existing indebtedness and potentially for other purposes. Our ability to arrange additional financing will depend on, among other factors, our financial position, performance, and credit ratings, as well as prevailing market conditions and other factors beyond our control. Prevailing market conditions could be adversely affected by (i) general market conditions, such as disruptions in domestic or overseas sovereign or corporate debt markets, geo-political instabilities, trade restrictions, pandemics, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad, and (ii) specific conditions in the communications industry. Instability in the domestic or global financial markets has from time to time resulted in periodic volatility and disruptions in capital markets. For these and other reasons, we can give no assurance additional financing for any of these purposes will be available on terms acceptable to us, or at all.
If we are unable to make required debt payments or refinance our debt, we would likely have to consider other options, such as selling assets, cutting or delaying costs or otherwise reducing our cash requirements, or negotiating with our lenders to restructure our applicable debt. Our current and future debt instruments may restrict, or market or business conditions may limit, our ability to complete some of these actions on favorable terms, or at all. For these and other reasons, we cannot assure you we could implement these steps in a sufficient or timely manner, or at all.
We are 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.
Under our and our affiliates' consolidated debt and financing arrangements, the issuer of the debt is subject to various covenants and restrictions, the most restrictive of which pertain to the debt of Lumen Technologies, Inc. and Level 3 Financing, Inc.
Lumen’s senior secured credit facilities and notes contain several significant limitations restricting Lumen’s ability to, among other things, borrow additional money or issue guarantees; pay dividends or other distributions to shareholders; make loans; create liens on assets; sell assets; transact with its affiliates and engage in mergers 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 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 wholly-owned entities.
Lumen’s senior secured credit facilities contain financial maintenance covenants.
The failure of us or our 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 our debt repayment obligations. Certain of our debt instruments have cross-default or cross-acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument.
Our cash flows may not adequately fund all of our cash requirements.
Our business is capital intensive. We expect to continue to require significant capital to maintain, upgrade and expand our network infrastructure, based on several factors, including (i) changes in customers’ service requirements; (ii) our continuing need to expand and improve our network to remain competitive and meet customer demand; and (iii) our regulatory commitments. We will also continue to need substantial amounts of cash to meet our fixed commitments and other business objectives, including without limitation funding our operating costs, maintenance expenses, debt repayments, tax obligations, periodic pension contributions and other benefits payments. We cannot assure you our future cash flows from operating activities will be sufficient to fund all of our cash requirements in the manner currently contemplated.
We rely on payments from our operating companies to meet our obligations.
Because both we and Level 3 Financing, Inc. are holding 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 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, our non-guarantor subsidiaries have no obligation to make any funds available to us to repay our obligations, whether by dividends, loans or other payments. Moreover, our rights to receive assets of our respective non-guarantor subsidiaries upon their 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 they may pay. The ability of our subsidiaries to transfer funds could be further restricted under applicable state or federal tax laws, regulatory orders or regulations. For all these reasons, you should not assume our respective subsidiaries will be able in the future to generate and distribute to us cash in amounts sufficient to fund our respective cash requirements.
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 December 31, 2021, Lumen Technologies owed us approximately $1.5 billion on the affiliate note receivable. Developments that adversely impact Lumen Technologies could adversely impact our ability to collect this debt.
There are no limitations on the ability of Level 3 Financing, Inc. to transfer assets to us, and we intend to continue to distribute to our direct equity holder a substantial portion of our consolidated cash flow, 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 be able to fully utilize our NOLs.
As of December 31, 2021, we had approximately $8.1 billion of federal net operating loss carryforwards ("NOLs"), which are subject to limitations under Section 382 of the Internal Revenue Code and related regulations. These limitations could restrict our ability to use these NOLs in the amounts we project. In an effort to safeguard our NOLs, Lumen Technologies has maintained an NOL rights agreement since February 2019.
As of December 31, 2021, we also had substantial state NOLs and foreign NOLs which we believe are subject to legal and practical limitations on our ability to realize their full benefit. We cannot assure you we will be able to utilize these NOLs as projected or at all.
Lapses in our disclosure controls and procedures or internal control over financial reporting could materially and adversely affect us.
We maintain (i) disclosure controls and procedures designed to provide reasonable assurances regarding the accuracy and completeness of our SEC reports and (ii) internal control over financial reporting designed to provide reasonable assurance regarding the reliability and compliance with U.S. generally accepted accounting principles (“GAAP”) of our financial statements. We cannot assure you these measures will be effective. Our and Lumen's management previously identified a material weakness related to our accounting for revenue transactions. Although we successfully remediated this material weakness during 2019, the deficiency was costly to remediate and caused us to request an extension in order to timely file our annual report on Form 10-K for the year ended December 31, 2018.
If we are required to record additional intangible asset impairments, we will be required to record a significant charge to earnings and reduce our members' equity.
As of December 31, 2021, approximately 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 (including goodwill and other intangible assets reclassified as assets held for sale). From time to time, including most recently in the first quarter of 2019, we have recorded large non-cash charges to earnings in connection with required reductions of the value of our intangible assets. If our intangible assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Any such charges could, in turn, have a material adverse effect on our results of operation or financial condition.
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 continue periodic dividends on our 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 completion 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 certain 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 be completed in the timeframe anticipated by us or at all.
The pendency of the divestiture 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.
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 always welcome constructive input from our shareholders and regularly engage in dialogue with our shareholders to that end, activist shareholders at the Lumen level may from time to time engage in proxy solicitations, advance shareholder proposals or otherwise attempt to effect changes or acquire 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 management. The recent increase in the activism of debtholders could increase the risk of claims being made under Lumen’s and our debt agreements.
We face other general risks.
As a large multinational business with complex operations, we face various other general risks, including among others, the risk that one or more of our ongoing tax audits or examinations could result in tax liabilities that differ materially from those we have recognized in our consolidated financial statements.
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:
| | | | | | | | | | | |
| As of December 31, |
| 2021(5) | | 2020 |
| Land | 3 | % | | 3 | % |
Fiber, conduit and other outside plant (1) | 45 | % | | 46 | % |
Central office and other network electronics (2) | 27 | % | | 25 | % |
Support assets (3) | 20 | % | | 21 | % |
Construction in progress (4) | 5 | % | | 5 | % |
| Gross property, plant and equipment | 100 | % | | 100 | % |
|
| | | | | |
| | Successor |
| | December 31, 2019 | | December 31, 2018 |
| Land | 3 | % | | 4 | % |
Fiber, conduit and other outside plant (1) | 44 | % | | 50 | % |
Central office and other network electronics (2) | 23 | % | | 19 | % |
Support assets (3) | 21 | % | | 22 | % |
Construction in progress (4) | 9 | % | | 5 | % |
| 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.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 128 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
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, results of operations, liquidity andor 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, we became a wholly-owned subsidiarythe impacts of CenturyLink.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 automated products and services and competitive pressures will require that we continue to invest in new technologies and automated processes to improve theour customer experience and reduce our operating expenses.
•The increasingly digital environment and the growth in online video requirerequires 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 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 some of which may connect to customers through other carriers, 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. 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, 20192021 and 2018:2020:
| | | | | | | | | | | |
| 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 | |
|
| | | | | | |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| | (Dollars in millions) |
| Operating revenue | $ | 8,185 |
| | 8,220 |
|
| Operating expenses | 10,712 |
| | 7,252 |
|
| Operating (loss) income | (2,527 | ) | | 968 |
|
| Other expense | (419 | ) | | (431 | ) |
| Income tax expense | (255 | ) | | (196 | ) |
| Net (loss) income | $ | (3,201 | ) | | 341 |
|
Operating Revenue
We categorizeSince the first quarter of 2021, we have categorized our products and services and related 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 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 network services; and
|
| |
• | Affiliate Services, which includestelecommunication•Affiliate Services, which include communications services provided to our affiliates 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 table summarizes our consolidated operating revenue recorded under each of our five above describedabove-described revenue categories:
| | | | | | | | | | | | | | | | | |
| | 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 | | | — | % |
|
| | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2019 | | 2018 | |
| | (Dollars in millions) | |
| IP and Data Services | $ | 3,888 |
| | 3,945 |
| | (1 | )% |
| Transport and Infrastructure | 2,662 |
| | 2,701 |
| | (1 | )% |
| Voice and Collaboration | 1,443 |
| | 1,464 |
| | (1 | )% |
| Other revenue | 12 |
| | 3 |
| | nm |
|
| Affiliate revenue | 180 |
| | 107 |
| | 68 | % |
| Total operating revenue | $ | 8,185 |
| | 8,220 |
| | — | % |
_______________________________________________________________________________
|
| |
nm | Percentages greater than 200% and comparison between positive and negative values or to/from zero values are considered not meaningful. |
Our total operating revenue decreasedincreased by $35$19 million for the year ended December 31, 20192021 as compared to the year ended December 31, 2018. The decrease in our total operating revenue was2020 primarily due to declinesincreases in our managed security, IP, and data, transport and infrastructure and voicewavelength, dark fiber, and collaboration services, which were partially offset by an increasedecreases in the level of services we provide to our affiliates.voice and other, VPN data networks and Ethernet services.
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 includes third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses; and other expenses directly related to our operations; and
•Selling, general and administrative expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; property and other operating taxes and fees; external commissions; legal expenses associated with general matters; bad debt expense; and other selling, general and administrative expenses.
are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which include third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses; 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); 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:
| | | | | | | | | | | | | | | | | |
| | 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 | % |
|
| | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2019 | | 2018 | |
| | (Dollars in millions) | |
| Cost of services and products (exclusive of depreciation and amortization) | $ | 3,799 |
| | 3,937 |
| | (4 | )% |
| Selling, general and administrative | 1,258 |
| | 1,354 |
| | (7 | )% |
| Operating expenses - affiliates | 334 |
| | 257 |
| | 30 | % |
| Depreciation and amortization | 1,613 |
| | 1,704 |
| | (5 | )% |
| Goodwill impairment | 3,708 |
| | — |
| | nm |
|
| Total operating expenses | $ | 10,712 |
| | 7,252 |
| | 48 | % |
|
| |
nm | Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. |
Cost of Services and Products (Exclusive of depreciation and amortization)
Cost of services and products (exclusive of depreciation and amortization) decreasedincreased by $138$39 million or 4%, for the year ended December 31, 2019,2021 as compared to the year ended December 31, 2018. The decrease in our cost of services and products was2020 primarily due to reductions in salarieshigher customer premise equipment costs from higher sales, higher network expenses, and wages from lower headcount directly related to operating and maintainingaccelerated lease costs as part of our network, network expense and voice usage costs, professional services and right-of-way costs. real estate rationalization efforts. These reductionsincreases were partially offset by increases in direct taxeslower employee-related expenses resulting from lower headcount and fees, USF rates, customer installationlower facility costs and right of way and dark fiber expenses.due to lower voice usage.
Selling, General and Administrative
Selling, general and administrative decreased by $96$45 million or 7%, for the year ended December 31, 20192021 as compared to the year ended December 31, 2018. The decrease was2020 primarily due to reductionsa reduction in salaries and wages fromand employee-related benefits, lower headcount, hardwarebad debt expense and software expenses, marketing and advertising expenses, lower rent expense in 2019 and from higher exited lease obligations in 2018, lower building maintenance expenses, an increase in the amount of labor capitalized or deferred and gain on the sale of assets.insurance costs. These reductions were partially offset by higher network infrastructure maintenance expenses, property and other taxes, commissions and bad debt expense.lower gain on sale of assets in 2021 compared to 2020.
Operating Expenses - Affiliates
Operating expenses - affiliates increased by $77$129 million or 30%, for the year ended December 31, 20192021 as compared to the year ended December 31, 2018.2020 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 the increaserather than included in the level of services provided to us by our affiliates.selling, general and administrative expenses.
Depreciation and Amortization
The following tables provide detail regarding depreciation and amortization expense:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2021 | | 2020 | |
| (Dollars in millions) | |
| Depreciation | $ | 874 | | | 851 | | | 3 | % |
| Amortization | 843 | | | 838 | | | 1 | % |
| Total depreciation and amortization | $ | 1,717 | | | 1,689 | | | 2 | % |
|
| | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2019 | | 2018 | |
| | (Dollars in millions) | |
| Depreciation | 804 |
| | 906 |
| | (11 | )% |
| Amortization | 809 |
| | 798 |
| | 1 | % |
| Total depreciation and amortization | $ | 1,613 |
| | 1,704 |
| | (5 | )% |
Depreciation expense decreasedincreased by $102$23 million or 11%, for the year ended December 31, 20192021 as compared to the year ended December 31, 20182020 primarily due to the impacthigher depreciation expense of the full depreciation of plant, property and equipment assigned a one year life at the time CenturyLink acquired us, of approximately $200$57 million partially offset byassociated with net growth in depreciable assets and an increase of $56$8 million anddue to foreign currency exchange rate impacts. These increases associated with changes in our estimateswere partially offset by a decrease of $47 million due to discontinuing the depreciation of the remaining economic lifetangible assets reclassified as held for sale of certain network assets of $43 million.our Latin American business upon entering into our divestiture agreement.
Amortization expense increased by $11$5 million or 1%, for the year ended December 31, 20192021 as compared to the year ended December 31, 2018 primarily2020 due to an increase in net amortizable assets.
Goodwill Impairment
Our goodwill was derived from CenturyLink's acquisition of us where the purchase price exceeded the fair value of$6 million associated with the net growth in amortizable assets acquired.
We are requiredand an increase of $9 million due to perform an impairment test relatedthe accelerated amortization of decommissioned applications. These increases were partially offset by a decrease of $13 million due to our goodwill annually, which we performdiscontinuing the amortization of intangible assets reclassified as of October 31, or sooner if an indicator of impairment occurs. Since the decline in CenturyLink's stock price was a triggerheld for impairment testing in the first quarter of 2019, we evaluated our goodwill as of March 31, 2019.
When we performed our annual impairment test in the fourth quarter of 2019 the results indicated we did not have any impairment charges. When we performed our impairment test during the first quarter of 2019, we concluded that the estimated fair valuesale of our Latin American business was less thanupon entering into 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.divestiture agreement.
See Note 3—Goodwill, Customer Relationships and Other Intangible Assets for more information.
Other Consolidated Results
The following table summarizes other (expense) incomeexpense, net and income tax expense:
| | | | | | | | | | | | | | | | | |
| | 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) | % |
|
| | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2019 | | 2018 | |
| | (Dollars in millions) | |
| Interest income | $ | 9 |
| | 4 |
| | 125 | % |
| Interest income - affiliate | 61 |
| | 63 |
| | (3 | )% |
| Interest expense | (502 | ) | | (509 | ) | | (1 | )% |
| Gain on modification and extinguishment of debt | 5 |
| | — |
| | nm |
|
| Other income, net | 8 |
| | 11 |
| | (27 | )% |
| Total other expense, net | $ | (419 | ) | | (431 | ) | | (3 | )% |
| Income tax expense | $ | (255 | ) | | (196 | ) | | 30 | % |
|
| |
nm | Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. |
Interest Income - Affiliate
Interest income - affiliate increased by $5$14 million or 125%, for the year ended December 31, 20192021 as compared to the year ended December 31, 2018. The2020 primarily due to an increase in the average interest income was due primarily to higher average daily cash balances of approximately $425 million during 2019 compared to approximately $340 million in 2018.rate associated with our note receivable - affiliate balance.
Interest Income - AffiliateExpense
Interest income - affiliateexpense decreased by $2$32 million or 3%, for the year ended December 31, 20192021 as compared to the year ended December 31, 2018. The2020 primarily due to a decrease in the average interest rate from 4.08% to 3.61%.
Other Income, Net
The following table summarizes our total other income, - affiliate was due to the decrease in note receivable - affiliate balance 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 an average of $1.8 billion in 2018 to $1.7 billion in 2019.zero values are considered not meaningful.
InterestIncome Tax Expense
Interest expense decreased by $7 million, or 1%, forFor the year ended December 31, 2019 as compared to the year ended December 31, 2018. The decrease in interest expense was due to the decrease in long-term debt from an average balance of $10.9 billion in 2018 to $10.6 billion in 2019.
Gain on Modification2021 and Extinguishment of Debt
In the second half of 2019, we redeemed certain of our outstanding debt securities, which resulted in a gain of $5 million.
Other Income (Net)
Other income - net decreased by $3 million, or 27%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The decrease in other income was due to an increase in foreign currency loss in theyear ended December 31, 2019 as compared to the year ended December 31, 2018.
Income Tax Expense
For the years ended December 31, 2019 and December 31, 2018,2020, our effective income tax rate was (8.6)%25.2% and 36.5%25.3%, respectively. The effective tax rate for the year ended December 31, 2019 includes a $779 million unfavorable impact of non-deductible goodwill impairments. The effective tax rate for the year ended
December 31, 2018 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. 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; (ii) goodwill, customer relationships and other intangible assets; (iii)(ii) loss contingencies and litigation reserves; (iv)(iii) affiliate transactions; and (v)(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.
Business Combinations
We have accounted for CenturyLink's acquisition of us on November 1, 2017, 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 of the purchase price in excess of the estimated fair value of the net tangible and separately identifiable intangible assets acquired represents goodwill. The allocation of the purchase price related to CenturyLink's acquisition of us involves estimates and judgments by CenturyLink's management. The fair values recorded are made based on management's best estimates and assumptions. In arriving at the fair values of assets acquired and liabilities assumed, CenturyLink considered the following generally accepted valuation approaches: the cost approach, income approach and market approach. CenturyLink's estimates also include assumptions about projected growth rates, cost of capital, effective tax rates, tax amortization periods, technology life cycles, the regulatory and legal environment, and industry and economic trends.
Since November 1, 2017, our results of operations 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 the assignment of the purchase price to the assets acquired 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 and 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.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and tradenames, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 7 to 14 years, using the straight-line method. 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.
Our goodwill was derived from CenturyLink'sLumen's acquisition of us where 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 circumstances indicate there may be impairment. We are required to write-downwrite down the value of goodwill in periods in whichonly when our assessment determines the carrying amountvalue of theequity of our reporting unit equity exceeds the estimatedits fair value of the equity of the reporting unit, limited to the goodwill balance. The impairment assessment is performed at the reporting unit level. We have determined that our operations consist of one reporting unit, consistent with our determination that our business consists of one operating segment.value. Our annual impairment assessment date for goodwill is October 31.31, 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, 2019,2021 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, 2019,2021 and 2020, based on our assessmentassessments performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 26%.14% and 17%, respectively. We concluded that the goodwill was not impaired as of October 31, 2019.2021 and 2020.
Our 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 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 our 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 CenturyLink'sLumen's low stock price indicated the carrying value of our reporting unit was a trigger for impairment testing,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 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.
At October 31, 2018, we estimated theOur fair value estimates for evaluating goodwill incorporated significant judgements and assumptions including forecast revenues and expenses, cost of equity by considering both acapital, and control premiums. In developing market approach and a discounted cash flow method. As of October 31, 2018, based on our assessment performed, the estimated fair valuemultiples, we also considered observed trends of our equity exceeded our carrying valueindustry participants and other qualitative factors that required significant judgement. Alternative estimates, judgements, and interpretations of equity by approximately 16%. We concluded thatthese factors could have resulted in different conclusions regarding the goodwill was not impaired as of October 31, 2018.
need 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 size of such charges.
See Note 3-Goodwill,3—Goodwill, Customer Relationships and Other Intangible Assets to our consolidated financial statements in Item 8 of Part II of this report for additional information.
Loss Contingencies and Litigation Reserves
We are involved in several potentially material legal proceedings, as described in more detail in Note 17—16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.Items. On a quarterly basis, we assess potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the differences are material, our consolidated financial statements could be materially impacted.
For matters related to income taxes, if we determine in our judgment that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize in our financial statements a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if we determine in our judgment that the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. 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 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 (ii) differences between the financial statement carrying value of assets and liabilities and the tax basis 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. AtAs of December 31, 2019,2021, we established a valuation allowance of $892 million$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 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 closing on November 1, 2017,As of 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. During 2019, CenturyLink repaid $235 million of the amount owedsubject to us under notes receivable - affiliate.
other limitations. A significant component of our liquidity is dependent upon CenturyLink'sLumen's ability to repay its obligation to us.
AtAs of December 31, 2019,2021, we held cash and cash equivalents, including cash and cash equivalents classified as held for sale, of $316$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 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 December 31, 2019, ourOur long-term debt (including current maturities and finance leases) outstanding totaled $10.4 billion compared to $10.8 billion outstanding as of December 31, 2018.2021 and 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 Financing, Inc. were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Borrower | | Moody's Investors Service, Inc. | | Standard & Poor's | | Fitch Ratings |
| 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, 2019. this report.
See Note 6—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.
Letters of Credit
Future Contractual Obligations
The following table summarizes our estimated future contractual obligations as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and thereafter | | Total |
| | (Dollars in millions) |
Long-term debt (1)(2) | $ | 11 |
| | 8 |
| | 850 |
| | 1,210 |
| | 911 |
| | 7,307 |
| | 10,297 |
|
Interest on long-term debt and finance leases (2) | 453 |
| | 462 |
| | 449 |
| | 379 |
| | 326 |
| | 707 |
| | 2,776 |
|
Purchase commitments (3) | 119 |
| | 87 |
| | 44 |
| | 24 |
| | 18 |
| | 41 |
| | 333 |
|
| Operating leases | 276 |
| | 231 |
| | 199 |
| | 166 |
| | 113 |
| | 437 |
| | 1,422 |
|
| Right-of-way agreements | 83 |
| | 58 |
| | 55 |
| | 53 |
| | 44 |
| | 276 |
| | 569 |
|
| Asset retirement obligations | 16 |
| | 16 |
| | 12 |
| | 8 |
| | 11 |
| | 51 |
| | 114 |
|
Total future contractual obligations (4) | $ | 958 |
| | 862 |
| | 1,609 |
| | 1,840 |
| | 1,423 |
| | 8,819 |
| | 15,511 |
|
|
| |
(1) | Includes current maturities and finance 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, 2019. 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, | | Increase / (Decrease) | | Years Ended December 31, | | Change |
| | 2019 | | 2018 | | | 2021 | | 2020 | |
| | (Dollars in millions) | | (Dollars in millions) |
| Net cash provided by operating activities | $ | 2,683 |
| | 2,397 |
| | 286 |
| Net cash provided by operating activities | $ | 1,570 | | | 2,284 | | | (714) | |
| Net cash used in investing activities | (1,078 | ) | | (904 | ) | | 174 |
| Net cash used in investing activities | (1,166) | | | (1,173) | | | (7) | |
| Net cash used in financing activities | (1,539 | ) | | (1,552 | ) | | (13 | ) | Net cash used in financing activities | (418) | | | (1,244) | | | (826) | |
Operating Activities
Net cash provided by operating activities increaseddecreased by $286$714 million for the year ended December 31, 20192021 compared to the year ended December 31, 2018,2020, primarily due to a positive variancedecrease in net (loss) income after adjusting for non-cash items for goodwill impairment, depreciation and amortization and deferred income taxes, and from positive variances in the accounts payable - affiliates balance due to repayments to our parent company, which was partially offset by changes in other currentnon-current assets and liabilities, net and other noncurrent assets and liabilities, net, which were partially offset by a negative variance in the change in accounts payable and current and non-current deferred revenue.liabilities. Cash provided by operating activities is subject to variability period over period as a result of the timing, ofincluding the collection of receivables and payments related toof interest, expense, accounts payable, payroll and bonuses.
Investing Activities
Net cash used in investing activities increaseddecreased by $174$7 million for the year ended December 31, 20192021 compared to the year ended December 31, 20182020 primarily due to an increasea 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 proceeds from property, plant and equipment, partially offset by $235 million repayment of affiliate loans.collections on notes receivable - affiliates.
Financing Activities
Net cash used in financing activities decreased by $826 million for the year ended December 31, 20192021 compared to the year ended December 31, 2018 decreased by $13 million2020 primarily due to a decrease in payments of long-term debt and a decrease in distributions, which was partially offset by redemptionsa decrease in net proceeds from issuance of long-term debt. For additional information regarding our financing activities, see Note 6—Long-Term Debt to our consolidated financial statements in Item 8 of this report.
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 17—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 result2021:
| | | | | | | | | | | | | | | | | |
| 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 following tables present summarized financial information reflected in our consolidated balance sheet as 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.December 31, 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 | |
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 December 31, 2019,2021, we had approximately $10.126$10.1 billion (excluding unamortized premiums, net, unamortized debt issuance costs and finance leases) of long-term debt outstanding, 69% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held approximately $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 approximately $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. 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 December 31, 2019.2021.
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, 20192021 and 2018,2020, the related consolidated statements of operations, comprehensive income (loss) income,, cash flows, and member’s/stockholders’member’s equity for each of the years in the three-year period ended December 31, 2019 and 2018, and for the periods November 1, 2017 to December 31, 2017 (Successor period) and January 1, 2017 to October 31, 2017 (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, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 and 2018, and for the periods from November 1, 2017 to December 31 2017 (Successor period) and January 1, 2017 to October 31, 2017 (Predecessor period),2021, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
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
February 24, 2022
March 5, 2020
LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| OPERATING REVENUE | | | | | | | | |
| Operating revenue | $ | 8,005 |
| | 8,113 |
| | 1,391 |
| | | 6,870 |
|
| Operating revenue - affiliates | 180 |
| | 107 |
| | 16 |
| | | — |
|
| Total operating revenue | 8,185 |
| | 8,220 |
| | 1,407 |
|
|
| 6,870 |
|
| OPERATING EXPENSES | | | | | | | | |
| Cost of services and products (exclusive of depreciation and amortization) | 3,799 |
| | 3,937 |
| | 690 |
| | | 3,493 |
|
| Selling, general and administrative | 1,258 |
| | 1,354 |
| | 253 |
| | | 1,208 |
|
| Operating expenses - affiliates | 334 |
| | 257 |
| | 24 |
| | | — |
|
| Depreciation and amortization | 1,613 |
| | 1,704 |
| | 282 |
| | | 1,018 |
|
| Goodwill impairment | 3,708 |
| | — |
| | — |
| | | — |
|
| Total operating expenses | 10,712 |
| | 7,252 |
| | 1,249 |
| | | 5,719 |
|
| OPERATING (LOSS) INCOME | (2,527 | ) | | 968 |
| | 158 |
| | | 1,151 |
|
| OTHER (EXPENSE) INCOME | | | | | | | | |
| Interest income | 9 |
| | 4 |
| | 1 |
| | | 13 |
|
| Interest income - affiliate | 61 |
| | 63 |
| | 11 |
| | | — |
|
| Interest expense | (502 | ) | | (509 | ) | | (80 | ) | | | (441 | ) |
| Gain (loss) on modification and extinguishment of debt | 5 |
| | — |
| | — |
| | | (44 | ) |
| Other income, net | 8 |
| | 11 |
| | 3 |
| | | 14 |
|
| Total other expense, net | (419 | ) | | (431 | ) | | (65 | ) | | | (458 | ) |
| (LOSS) INCOME BEFORE INCOME TAXES | (2,946 | ) | | 537 |
| | 93 |
| | | 693 |
|
| Income tax expense | (255 | ) | | (196 | ) | | (234 | ) | | | (268 | ) |
| NET (LOSS) INCOME | $ | (3,201 | ) | | 341 |
| | (141 | ) | | | 425 |
|
| | | | | | | | | | | | | | | | | |
| 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 STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME
|
| | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| NET (LOSS) INCOME | $ | (3,201 | ) | | 341 |
| | (141 | ) | | | 425 |
|
| OTHER COMPREHENSIVE (LOSS) INCOME: | | | | | | | | |
| Defined benefit pension plan adjustment, net of $1, ($1), $— and ($3) tax | (3 | ) | | 5 |
| | — |
| | | (1 | ) |
| Foreign currency translation adjustment, net of ($6), $50, ($17) and ($46) tax | (5 | ) | | (200 | ) | | 18 |
| | | 81 |
|
| Other comprehensive (loss) income | (8 | ) | | (195 | ) | | 18 |
| | | 80 |
|
| COMPREHENSIVE (LOSS) INCOME | $ | (3,209 | ) | | 146 |
| | (123 | ) | | | 505 |
|
| | | | | | | | | | | | | | | | | |
| 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 BALANCE SHEETS
|
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
| | (Dollars in millions) |
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 316 |
| | 243 |
|
| Restricted cash - current | 3 |
| | 4 |
|
| Accounts receivable, less allowance of $13 and $11 | 667 |
| | 712 |
|
| Note receivable - affiliate | 1,590 |
| | 1,825 |
|
| Other | 266 |
| | 234 |
|
| Total current assets | 2,842 |
| | 3,018 |
|
| Property, plant and equipment, net of accumulated depreciation of $1,825 and $1,021 | 9,936 |
| | 9,453 |
|
| GOODWILL AND OTHER ASSETS | | | |
| Goodwill | 7,415 |
| | 11,119 |
|
| Operating lease assets | 1,060 |
| | — |
|
| Restricted cash | 19 |
| | 25 |
|
| Customer relationships, net | 6,865 |
| | 7,567 |
|
| Other intangible assets, net | 469 |
| | 410 |
|
| Other, net | 492 |
| | 699 |
|
| Total goodwill and other assets | 16,320 |
| | 19,820 |
|
| TOTAL ASSETS | $ | 29,098 |
| | 32,291 |
|
| LIABILITIES AND MEMBER'S EQUITY | | | |
| CURRENT LIABILITIES | | | |
| Current maturities of long-term debt | $ | 11 |
| | 6 |
|
| Accounts payable | 654 |
| | 726 |
|
| Accounts payable - affiliates | 669 |
| | 246 |
|
| Accrued expenses and other liabilities | | | |
| Salaries and benefits | 240 |
| | 233 |
|
| Income and other taxes | 152 |
| | 130 |
|
| Current operating lease liabilities | 249 |
| | — |
|
| Interest | 85 |
| | 95 |
|
| Other | 77 |
| | 78 |
|
| Current portion of deferred revenue | 309 |
| | 310 |
|
| Total current liabilities | 2,446 |
| | 1,824 |
|
| LONG-TERM DEBT | 10,356 |
| | 10,838 |
|
| DEFERRED REVENUE AND OTHER LIABILITIES | | | |
| Deferred revenue | 1,343 |
| | 1,181 |
|
| Deferred income taxes, net | 241 |
| | 202 |
|
| Noncurrent operating lease liabilities | 854 |
| | — |
|
| Other | 313 |
| | 369 |
|
| Total deferred revenue and other liabilities | 2,751 |
| | 1,752 |
|
| COMMITMENTS AND CONTINGENCIES (Note 17) |
|
| |
|
|
| MEMBER'S EQUITY | | | |
| Member's equity | 13,724 |
| | 18,048 |
|
| Accumulated other comprehensive loss | (179 | ) | | (171 | ) |
| Total member's equity | 13,545 |
| | 17,877 |
|
| TOTAL LIABILITIES AND MEMBER'S EQUITY | $ | 29,098 |
| | 32,291 |
|
| | | | | | | | | | | |
| 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 CASH FLOWS
|
| | | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| OPERATING ACTIVITIES | | | | | | | | |
| Net (loss) income | $ | (3,201 | ) | | 341 |
| | (141 | ) | | | 425 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | 1,613 |
| | 1,704 |
| | 282 |
| | | 1,018 |
|
| Goodwill impairment | 3,708 |
| | — |
| | — |
| | | — |
|
| Deferred income taxes | 219 |
| | 175 |
| | 270 |
| | | 217 |
|
| Changes in current assets and liabilities: | | | | | | | | |
| Accounts receivable | 21 |
| | 46 |
| | (1 | ) | | | (16 | ) |
| Accounts payable | (134 | ) | | (37 | ) | | 35 |
| | | (102 | ) |
| Other current assets and liabilities | (6 | ) | | 4 |
| | (100 | ) | | | 70 |
|
| Other current assets and liabilities, affiliates | 423 |
| | 216 |
| | (17 | ) | | | — |
|
| Changes in other noncurrent assets and liabilities, net | 120 |
| | (22 | ) | | (53 | ) | | | 154 |
|
| Other, net | (80 | ) | | (30 | ) | | 33 |
| | | 148 |
|
| Net cash provided by operating activities | 2,683 |
| | 2,397 |
| | 308 |
| | | 1,914 |
|
| INVESTING ACTIVITIES | | | | | | | | |
| Capital expenditures | (1,341 | ) | | (1,038 | ) | | (207 | ) | | | (1,119 | ) |
| Purchase of marketable securities | — |
| | — |
| | — |
| | | (1,127 | ) |
| Maturity of marketable securities | — |
| | — |
| | — |
| | | 1,127 |
|
| Proceeds from sale of property, plant and equipment and other assets | 28 |
| | 134 |
| | — |
| | | 1 |
|
| Note receivable - affiliate | 235 |
| | — |
| | (1,825 | ) | | | — |
|
| Net cash used in investing activities | (1,078 | ) | | (904 | ) | | (2,032 | ) | | | (1,118 | ) |
| FINANCING ACTIVITIES | | | | | | | | |
| Net proceeds from issuance of long-term debt | 2,479 |
| | — |
| | — |
| | | 4,569 |
|
| Payments of long-term debt | (2,906 | ) | | (7 | ) | | (1 | ) | | | (4,917 | ) |
| Distributions | (1,084 | ) | | (1,545 | ) | | (250 | ) | | | — |
|
| Other | (28 | ) | | — |
| | (2 | ) | | | 3 |
|
| Net cash used in financing activities | (1,539 | ) | | (1,552 | ) | | (253 | ) | | | (345 | ) |
| Net increase (decrease) in cash, cash equivalents, restricted cash and securities | 66 |
| | (59 | ) | | (1,977 | ) | | | 451 |
|
| Cash, cash equivalents, restricted cash and securities at beginning of period | 272 |
| | 331 |
| | 2,308 |
| | | 1,857 |
|
| Cash, cash equivalents, restricted cash and securities at end of period | $ | 338 |
| | $ | 272 |
| | 331 |
| | | 2,308 |
|
|
| | | | | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| Income taxes paid, net | $ | (23 | ) | | (33 | ) | | (10 | ) | | | (49 | ) |
| Interest paid (net of capitalized interest of $15, $1, — and —) | $ | 531 |
| | 542 |
| | 56 |
| | | 468 |
|
|
| | | | | | | | | | | | | |
| Cash, cash equivalents, restricted cash and securities: | | | | | | | | |
| Cash and cash equivalents | $ | 316 |
| | 243 |
| | 297 |
| | | 2,274 |
|
| Restricted cash and securities - current | 3 |
| | 4 |
| | 5 |
| | | 5 |
|
| Restricted cash and securities - noncurrent | 19 |
| | 25 |
| | 29 |
| | | 29 |
|
| Total | $ | 338 |
| | 272 |
| | 331 |
| | | 2,308 |
|
| | | | | | | | | | | | | | | | | |
| 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/STOCKHOLDERS'MEMBER'S EQUITY
|
| | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| MEMBER'S EQUITY | | | | | | | | |
| Balance at beginning of period | $ | 18,048 |
| | 19,254 |
| | 19,617 |
| | | — |
|
| Net (loss) income | (3,201 | ) | | 341 |
| | (141 | ) | | | — |
|
| Cumulative effect of adoption of ASU 2016-02, Leases | (39 | ) | | — |
| | — |
| | | — |
|
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 | (1,084 | ) | | (1,545 | ) | | (250 | ) | | | — |
|
| Balance at end of period | 13,724 |
| | 18,048 |
| | 19,254 |
| | | — |
|
| COMMON STOCK | | | | | | | | |
| Balance at beginning of period | — |
| | — |
| | — |
| | | 4 |
|
| Balance at end of period | — |
| | — |
| | — |
| | | 4 |
|
| ADDITIONAL PAID-IN CAPITAL | | | | | | | | |
| Balance at beginning of period | — |
| | — |
| | — |
| | | 19,800 |
|
| Common stock issued under employee stock benefit plans and other | — |
| | — |
| | — |
| | | 30 |
|
| Share-based compensation | — |
| | — |
| | — |
| | | 102 |
|
| Balance at end of period | — |
| | — |
| | — |
| | | 19,932 |
|
| ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME | | | | | | | | |
| Balance at beginning of period | (171 | ) | | 18 |
| | — |
| | | (387 | ) |
| Other comprehensive (loss) income | (8 | ) | | (195 | ) | | 18 |
| | | 80 |
|
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 | (179 | ) | | (171 | ) | | 18 |
| | | (307 | ) |
| | | | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | | |
| ACCUMULATED DEFICIT | | | | | | | | |
| Balance at beginning of period | — |
| | — |
| | — |
| | | (8,500 | ) |
| Net income | — |
| | — |
| | — |
| | | 425 |
|
| Balance at end of period | — |
| | — |
| | — |
| | | (8,075 | ) |
| TOTAL MEMBER'S/STOCKHOLDERS' EQUITY | $ | 13,545 |
| | 17,877 |
| | 19,272 |
| | | 11,554 |
|
| | | | | | | | | | | | | | | | | |
| 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 2019.2021.
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 2019, 2018additional information. These changes had no impact on total operating revenue, total operating expenses or net income (loss) for any period.
Segments
Our operations are integrated into and 2017. Althoughreported 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 annual reports that we continued as a surviving corporation and legal entity afterfile with the acquisition of us by CenturyLink, the accompanying consolidated statements of operations, comprehensive (loss) income, cash flows and member's/stockholders' equity (deficit) are presented for two periods: predecessor and successor, which relatesSEC. 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 13—Income Taxes and Note 17—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.
Revenue Recognition
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 five years depending on the service. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.
For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis.
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 is adjusted for the time value of money and is recognized ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our 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 (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life. Our deferred contract costs for our customers have average amortization periods of approximately 3033 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.
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
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 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 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, 20192021 and 2018.2020.
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 changes 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 8— 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.
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 7 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.
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 carrying amount of the reporting unit equity exceeds the estimated fair value of the equity of the reporting unit, limited to the goodwill balance. The impairment assessment is performed at the reporting unit level. We have determined that our operations consist of 1 reporting unit, consistent with our determination that our business consists of 1 operating segment.
For more information, see Note 3—Goodwill, Customer Relationships and Other Intangible 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 years ended December 31, 20192021, December 31, 2020 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017. 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
Leases
WeDuring 2021, we adopted Accounting Standards Update ("ASU") 2016-02,2020-09, " "LeasesDebt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762" ("ASU 2020-09"), ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)" ("ASU 2020-01"), and ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)" ("ASU 2019-12"). During 2020, we adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments” ("ASU 2016-13"). During 2019, we adopted ASU 2016-02, "Leases (ASC 842)"," ("ASU 2016-02").
Each of these is described further below.
Debt
On January 1, 2021, we adopted ASU 2020-09. This ASU amends and supersedes various SEC guidance to reflect SEC Release No. 33-10762, which includes amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The adoption of ASU 2020-09 did not have a material impact to our consolidated financial statements.
Investments
On January 1, 2021, we adopted ASU 2020-01. This ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments - Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. As of December 31, 2021, we determined there was no application or discontinuation of the equity method during the reporting periods covered in this report. The adoption of ASU 2020-01 did not 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 ASU 2019-12 did not have a material impact to our consolidated financial statements.
Measurement of Credit Losses on Financial Instruments
We adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13") on January 1, 2020, and recognized a cumulative adjustment to our accumulated deficit as of the date of adoption of $3 million, net of tax effect of $2 million. Please refer to Note 6—Credit Losses on Financial Instruments for more information.
Leases
We adopted ASU 2016-02 on January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11. Therefore, we have not restated comparative period financial information for the effects of ASC 842,2018-11 and we will not make the new required lease disclosures for comparative periods beginning before January 1, 2019. Instead, we have recognized ASC 842's cumulative effect transition adjustment (discussed below) as of January 1, 2019. In addition, we elected to apply the package of practical expedients permitted under the transition guidance within the new standard, which among other things (i) allowed us to carry forward the historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases under the new definition of a 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 land 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"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 commences, the definition of fair value (in ASC 820, "Fair"Fair ValueMeasurement") should be applied. More importantly, the ASU also exempts both lessees and lessors from having
We recorded a $39 million cumulative adjustment to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. Early adoption permits public companies to adopt concurrent with the transition to ASC 842 on leases. We adopted ASU 2019-01accumulated deficit as of January 1, 2019.
Adoption2019, for the impact of the new standards resulted in the recording of operating lease assets and operating lease liabilities of approximately $1.3 billion and $1.4 billion, respectively, as of January 1, 2019. The standards did not materially impact our consolidated net earnings and had no impact on cash flows.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 continue to be reported in accordance with previous guidance.
Revenue RecognitionRecently Issued Accounting Pronouncements
In May 2014,November 2021, the FASB issued ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition with a principles-based approach2021-10, “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 become effective 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 related 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 adjustment that increased our member's equity 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 2018-02us in the first quarter of 2018. Thefiscal 2022 and early adoption is permitted. As of December 31, 2021, we do not expect the cumulative effect of initially applying ASU 2018-02 resulted2021-10 in the first quarter of fiscal 2022 will have a $6 million decreasematerial impact to member's equity and increase to accumulated other comprehensive income. See Note 18—Accumulated Other Comprehensive Income (Loss) for additional information.
Income Taxes
In October 2016,2021, the FASB issued ASU 2016-16, “Intra-Entity Transfers of2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets Other Than Inventory” ("and Contract Liabilities from Contracts with Customers” (“ASU 2016-16"2021-08”)., which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. 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, except2021-08 will become effective for the transfer of inventory, will be recognizedus in the periodfirst quarter of fiscal 2023 and early adoption is permitted. As of December 31, 2021, we do not expect the asset is transferred versus the current deferral and recognition upon either the salecumulative effect of the asset to a third party or over the remaining useful life of the asset. We adoptedinitially applying ASU 2016-162021-08 on January 1, 2018. The2023 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 classification requirements for lessors 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 lease 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 2016-16 did2021-05 on January 1, 2022 will have a material impact to our consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU 2021-01 provides option guidance for a limited time to ease the potential burden in accounting for reference rate reform. Based on our review of our key material contracts through December 31, 2021, we do not expect ASU 2021-01 will have a material impact to our consolidated financial statements.
Goodwill Impairment
In January 2017,August 2020, the FASB issued ASU 2017-04, “Simplifying2020-06, “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 Testcurrent 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 Goodwill Impairment” (“embedded conversion features. ASU 2017-04”). ASU 2017-04 simplifies the impairment testing2020-06 will become effective for goodwill by changing the measurement for goodwill impairment. Under prior rules, we were 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 equals the excess of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned to the reporting unit.
We elected to early adopt the provisions of ASU 2017-04 as of October 1, 2018. We applied ASU 2017-04 to determine the impairment of $3.7 billion recorded duringus in the first quarter of 2019. See Note 3 - Goodwill, Customer Relationshipsfiscal 2022 and Other Intangible Assets for additional information.
Recently Issued Accounting Pronouncements
Financial Instruments
In June 2016,early adoption is permitted. As of December 31, 2021, we do not expect the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments". 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 in the process of implementing the model for the recognition of credit losses related to our financial instruments, new processes and internal controls to assist us in the application of the new standard. The cumulative effect of initially applying the new standardASU 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 review of our key material contracts through December 31, 2021, we do not expect ASU 2020-04 will not be material.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 granteddisposal group as held for sale 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 1 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,July 25, 2021, 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 certain Level 3 network assets. 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 salesuspended 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.
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 recognized2021 are 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 | |
______________________________________________________________________(1)The assignment of goodwill was based on the relative fair value of the disposal group and the portion of the remaining reporting unit.
Acquisition-Related Expenses
We have incurred acquisition-related expenses related to our activities surrounding the CenturyLink Merger. The table below summarizes our acquisition-related expenses, which consist of integration and transformation-related expenses, including severance and retention compensation expenses, and transaction-related expenses: |
| | | | | | | | | | | | | |
| | | | Successor | | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | | | (Dollars in millions) |
| Transaction-related expenses | — |
| | 1 |
| | — |
| | | 18 |
|
| Integration and transformation-related expenses | 82 |
| | 120 |
| | 28 |
| | | 67 |
|
| Total acquisition-related expenses | $ | 82 |
| | 121 |
| | 28 |
| | | 85 |
|
As part of the acquisition accounting on November 1, 2017, we also included in our goodwill approximately $1 million for certain restricted stock awards and $47 million related to transaction costs, all of which were contingent on the completion of the acquisition and had no benefit to CenturyLink after the acquisition.
(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 | |
|
| | | | | |
| | December 31, |
| | 2019 | | 2018 |
| | (Dollars in millions) |
| Goodwill | 7,415 |
| | 11,119 |
|
| Customer relationships, less accumulated amortization of $1,538 and $833 | 6,865 |
| | 7,567 |
|
| Other intangible assets subject to amortization: | | | |
| Trade names, less accumulated amortization of $57 and $30 | 74 |
| | 100 |
|
| Capitalized software, less accumulated amortization of $146 and $67 | 395 |
| | 310 |
|
| Total other intangible assets, net | 469 |
| | 410 |
|
Our goodwill was derived from CenturyLink'sLumen's acquisition of us where 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 circumstances indicate there may be impairment. We are required to write-downwrite down the value of goodwill in periods in whichonly when our assessment determines the carrying value of equity of our reporting unit exceeds the estimatedits fair value of equity, limited to the amount of goodwill.value. Our annual impairment assessment date for goodwill is October 31, at which date we assessedassess goodwill at our reporting unit. In reviewing the criteria for reporting units, we have determined that we are 1 reporting unit.
At October 31, 2019,2021, 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 CenturyLink'sLumen'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.
At October 31, 2018, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. As of October 31, 2018, based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 16%. We concluded that the goodwill was not impaired as of October 31, 2018.
The following table shows the rollforward of goodwill from December 31, 20172019 through December 31, 2019:2021:
| | | | | |
| (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) |
| | | |
| | (Dollars in millions) |
| 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 |
|
| Impairment | (3,708 | ) |
| Effect of foreign currency rate change and other | 4 |
|
| As of December 31, 2019 | $ | 7,415 |
|
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 years ended December 31, 2021, 2020 and 2019 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017 was $809$843 million, $798 million, $139$838 million and $168$809 million, respectively. As of December 31, 2019,2021, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $16$15.6 billion. As of December 31, 2019,2021, the weighted average remaining useful lives of our finite-lived intangible assets was approximately 98 years in total; 109 years for customer relationships, 3 years1 year for trade names, and 4 years for developed technology.
We estimate that total amortization expense for intangible assets for the successor years ending 20202022 through 20242026 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) |
| | (Dollars in millions) | |
| 2020 | $ | 833 |
| |
| 2021 | 833 |
| |
| 2022 | 773 |
| 2022 | $ | 738 | |
| 2023 | 744 |
| 2023 | 710 | |
| 2024 | 732 |
| 2024 | 706 | |
| 2025 | | 2025 | 682 | |
| 2026 | | 2026 | 638 | |
(4) Revenue Recognition
The following tables present our reported results under ASC 606 and a reconciliation to 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) |
| 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 |
|
•Compute and Application Services, which include our Edge Cloud services, IT solutions, Unified Communications and Collaboration ("UC&C"), data center, content delivery network ("CDN") and Managed Security services;
•IP and Data Services, which include Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;
•Fiber Infrastructure Services,which include dark fiber, optical services and equipment;
•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 affiliates that we also provide to our external customers.
From time to time, we may change the categorization of our products and services.
Disaggregated Revenue by Service Offering
The following tabledtables provide disaggregation of revenue from contracts with customers based on service offering for the years ended December 31, 20192021, 2020 and 2018.2019. 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 | |
|
| | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Total Revenue | | Adjustments for Non-ASC 606 Revenue(6) | | Total Revenue from Contracts with Customers |
| | (Dollars in millions) |
IP and Data Services (1) | $ | 3,888 |
| | — |
| | 3,888 |
|
Transport and Infrastructure (2) | 2,662 |
| | (704 | ) | | 1,958 |
|
Voice and Collaboration (3) | 1,443 |
| | — |
| | 1,443 |
|
Other Revenue (4) | 12 |
| | (9 | ) | | 3 |
|
Affiliate Revenue (5) | 180 |
| | (180 | ) | | — |
|
| Total Revenue | $ | 8,185 |
| | (893 | ) | | 7,292 |
|
| | | | | | |
| Timing of revenue | | | | | |
| Goods transferred at a point in time | | | | | $ | — |
|
| Services performed over time | | | | | 7,292 |
|
| Total revenue from contracts with customers | | | | | $ | 7,292 |
|
|
| | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | (Dollars in millions) |
| | Total Revenue | | Adjustments for Non-ASC 606 Revenue(6) | | Total Revenue from Contracts with Customers |
IP and Data Services (1) | $ | 3,945 |
| | — |
| | 3,945 |
|
Transport and Infrastructure (2) | 2,701 |
| | (189 | ) | | 2,512 |
|
Voice and Collaboration (3) | 1,464 |
| | — |
| | 1,464 |
|
Other Revenue (4) | 3 |
| | (3 | ) | | — |
|
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 |
|
|
| |
(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. |
| | | | | | | | | | | | | | | | | |
| 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.
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, 20192021 and 2020:
| | | | | | | | | | | |
| 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, 2018: |
| | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | (Dollars in millions) |
Customer receivables (1) | $ | 678 |
| | 712 |
|
| Contract assets | 32 |
| | 19 |
|
| Contract liabilities | 423 |
| | 393 |
|
_______________________________________________________________________________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 $691 million and $723 million, net of allowance for doubtful accounts of $13 million and $11 million, at December 31, 2019 and December 31, 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 five years depending on the service. Contract liabilities are included within deferred revenue and liabilities held for sale in our consolidated balance sheets. During the years ended December 31, 20192021 and December 31, 2018,2020, we recognized $175$182 million and $158$188 million, respectively, of revenue that was included in contract liabilities of $385 million and $423 million as of January 1, 20192021 and January 1, 2018,2020, respectively.
Performance Obligations
As of December 31, 2019,2021, 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 $3.9$3.5 billion. We expect to recognize approximately 91%93% of this revenue through 2022,2024, with the balance recognized thereafter.
We do not discloseThese amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), 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 tables provide changes in our contract acquisition costs and fulfillment costs for the 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 | |
| | | | Year Ended December 31, 2019 | | Year Ended December 31, 2020 |
| | Acquisition Costs | | Fulfillment Costs | | Acquisition Costs | | Fulfillment Costs |
| | (Dollars in millions) | | (Dollars in millions) |
| Beginning of period balance | $ | 64 |
| | 84 |
| Beginning of period balance | $ | 79 | | | 121 | |
| Costs incurred | 60 |
| | 103 |
| Costs incurred | 61 | | | 88 | |
| Amortization | (45 | ) | | (66 | ) | Amortization | (62) | | | (87) | |
| End of period balance | $ | 79 |
| | 121 |
| End of period balance | $ | 78 | | | 122 | |
|
| | | | | | |
| | Year Ended December 31, 2018 |
| | Acquisition Costs | | Fulfillment Costs |
| | (Dollars in millions) |
| Beginning of period balance | $ | 13 |
| | 14 |
|
| Costs incurred | 68 |
| | 99 |
|
| Amortization | (17 | ) | | (29 | ) |
| End of period balance | $ | 64 |
| | 84 |
|
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 statements 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
Financial position for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance, as discussed in Note 1—Background and Summary of Significant Accounting Policies.
We primarily lease to or from third parties various office facilities switching 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 fixed payments, such as rent,common-area maintenance costs) and executory costs (including real estate taxes and insurance costs) and non-lease components (including common-area maintenance 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 | |
|
| | |
| Year Ended December 31, 2019 |
| (Dollars in millions) |
Operating and short-term lease cost | 388 |
|
Finance lease cost: | |
Amortization of right-of-use assets | 14 |
|
Interest on lease liability | 10 |
|
Total finance lease cost | 24 |
|
Total lease cost | 412 |
|
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, 20192021, 2020 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017,2019, our gross rental expense, including the accelerated lease costs discussed above, was $412$404 million, $524 million, $95$470 million and $447$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 December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017 of $9 million, $9 million, $2 million and $7 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 | % |
_______________________________________________________________________________ |
| | | | |
| | | December 31 |
| Leases (millions) | Classification on the Balance Sheet | 2019 |
| Assets | | |
| Operating lease assets | Operating lease assets | $ | 1,060 |
|
| Finance lease assets | Property, plant and equipment, net of accumulated depreciation | 154 |
|
| Total leased assets | | $ | 1,214 |
|
| | | |
| Liabilities | | |
| Current | | |
| Operating | Current operating lease liabilities | $ | 249 |
|
| Finance | Current portion of long-term debt | 11 |
|
| Noncurrent | | |
| Operating | Noncurrent operating lease liabilities | 854 |
|
| Finance | Long-term debt | 160 |
|
| Total lease liabilities | | $ | 1,274 |
|
| | | |
| Weighted-average remaining lease term (years) | |
| Operating leases | | 7.5 |
|
| Finance leases | | 13.1 |
|
| Weighted-average discount rate | | |
| Operating leases | | 6.19 | % |
| Finance leases | | 5.60 | % |
(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:
|
| | |
| Year Ended December 31, 2019 |
| (Dollars in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | 387 |
|
Operating cash flows from finance leases | 11 |
|
Financing cash flows from finance leases | 5 |
|
Supplemental lease cash flow disclosures | |
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | 206 |
|
Right-of-use assets obtained in exchange for new finance lease liabilities | 12 |
|
| | | | | | | | | | | |
| 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, 2019,2021, 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 | |
|
| | | | | | | |
| | Operating Leases | | Finance Leases |
| | (Dollars in millions) |
| 2020 | $ | 276 |
| | 21 |
|
| 2021 | 231 |
| | 17 |
|
| 2022 | 199 |
| | 18 |
|
| 2023 | 166 |
| | 18 |
|
| 2024 | 113 |
| | 18 |
|
| Thereafter | 437 |
| | 154 |
|
| Total lease payments | 1,422 |
| | 246 |
|
| Less: interest | (319 | ) | | (75 | ) |
| Total | 1,103 |
|
| $ | 171 |
|
| Less: current portion | (249 | ) | | (11 | ) |
| Long-term portion | $ | 854 |
| | $ | 160 |
|
As of December 31, 2019,2021, we had no material operating orentered into a $15 million finance leases that had not yet commenced.lease with a deferred commencement date.
Operating Lease Income
We lease various IRUs, office facilities, switchingcolocation facilities and other network sitesdark 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, 20192021, 2020 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017,2019 our gross rental income was $802 million or 10%, $760 million or 10%, and $798 million or 10%, $192 million or 2%, $28 million or 2%, and $138 million or 2% respectively, of our operating revenue.
Disclosures under ASC 840
We adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption.
The future annual minimum payments under capital lease agreements as 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 |
|
At
(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, 2018,2020 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 future rental commitmentsplanned divestiture. See Note 2—Planned Divestiture of the Latin American Business.
For the year ended December 31, 2021, we decreased our allowance for operating leasescredit 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 as follows:
|
| | | |
| | Operating Leases |
| | (Dollars in millions) |
| 2019 | $ | 396 |
|
| 2020 | 259 |
|
| 2021 | 219 |
|
| 2022 | 164 |
|
| 2023 | 137 |
|
| 2024 and thereafter | 613 |
|
Total future minimum payments (1) | $ | 1,788 |
|
| |
(1) | Minimum payments have not been reduced by minimum sublease rentals of $29 million due in the future under non-cancelable subleases. |
(6)(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:
|
| | | | | | | | | | |
| | Interest Rates | | Maturities | | December 31,
2019 | | December 31,
2018 |
| | | | | | (Dollars in millions) |
| Level 3 Parent, LLC | | | | | | | |
| Senior Notes | 5.750% | | 2022 | | $ | — |
| | 600 |
|
| Subsidiaries | | | | | | | |
| Level 3 Financing, Inc. | | | | | | | |
Senior Secured Debt:(1) | | | | | | | |
Senior Notes (2) | 3.400% - 3.875% | | 2027 - 2029 | | 1,500 |
| | — |
|
Tranche B 2024 Term Loan (3) | LIBOR + 2.25% | | 2024 | | — |
| | 4,611 |
|
Tranche B 2027 Term Loan (4) | LIBOR + 1.75% | | 2027 | | 3,111 |
| | — |
|
| Senior Notes and other debt: | | | | | | | |
Senior Notes (2) | 4.625% - 6.125% | | 2021 - 2027 | | 5,515 |
| | 5,315 |
|
| Finance Leases | Various | | Various | | 171 |
| | 163 |
|
| Unamortized premiums, net | | | | | 104 |
| | 155 |
|
| Unamortized debt issuance costs | | | | | (34 | ) | | — |
|
| Total long-term debt | | | | | 10,367 |
| | 10,844 |
|
| Less current maturities | | | | | (11 | ) | | (6 | ) |
| Long-term debt, excluding current maturities | | | | | $ | 10,356 |
| | 10,838 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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.
|
| |
(1) | See the remainder of this Note for a description of certain parent and subsidiary guarantees and liens securing this debt. |
(2) | As described further below, the notes are fully and unconditionally guaranteed by certain affiliates of Level 3 Financing, Inc., including Level 3 Parent, LLC and Level 3 Communications, LLC. (subject in certain cases to pending regulatory approvals). |
(3) | The Tranche B 2024 Term Loan had an interest rate of 4.754% as of December 31, 2018. |
(4) | The Tranche B 2027 Term Loan had an interest rate of 3.549% as of December 31, 2019. |
(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 and Repayments
On November 29, 2019,January 13, 2021, Level 3 Financing, Inc. issued $750$900 million aggregate principal amount of 3.4%its 3.750% Sustainability-Linked Senior Secured Notes due 2027 and $750 million of 3.875% Senior Secured Notes due 2029.2029 (the "Sustainability-Linked Notes"). The net proceeds from the offeringwere used, together with cash on hand, were used to redeem $1.5 billioncertain of the $4.611 billion Tranche B 2024 Term Loan that was repaid on November 29, 2019. On November 29, 2019its outstanding senior note indebtedness. See "—Redemption of Senior Notes" below. The Sustainability-Linked Notes are guaranteed by Level 3 Financing, Inc. entered into an amendment to its credit agreement to incur $3.111 billion in aggregate borrowing under the agreement through a new Tranche B 2027 Term Loan. The net proceeds of the Tranche B 2027 Term Loan, together with the proceeds of the Senior Secured NotesParent, LLC and cash on hand, were used to pre-pay in full the Tranche B 2024 Term Loan.Level 3 Communications, LLC.
On September 25, 2019,August 12, 2020, Level 3 Financing, Inc. issued $1.0 billion$840 million aggregate principal amount of 4.625%its 3.625% Senior Notes due 2027.2029 (the "2029 Notes"). The net proceeds from the offering together with cash on hand were used to redeem during the fourth quartercertain of 2019, allits 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.'s $240 million outstanding issued $1.2 billion aggregate principal amount of 6.125%its 4.250% Senior Notes due 2021, all2028 (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's $600LLC and Level 3 Communications, LLC.
Redemption of Senior Notes
On February 12, 2021, Level 3 Financing, Inc. redeemed all $900 million outstandingaggregate principal amount of 5.75%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 $160$360 million of Level 3 Financing, Inc.'s $1 billion in outstandingaggregate principal amount of 5.375%its outstanding 5.625% Senior Notes due 2022.2023.
On August 25,For the years ended December 31, 2021, 2020 and 2019, Level 3 Financing, Inc. redeemed $400redemptions 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 its 6.125% Senior Notes due 2021.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
AtAs of December 31, 2019,2021, Level 3 Financing, Inc. owed $3.111$3.1 billion under thea senior secured Tranche B 2027 Term Loan, which matures on March 1, 2027. The Tranche B 2027 Term Loan carries an interest rate, in the case of base rate borrowings, equal to (i) the greater of the Prime Rate, the Federal Funds Effective Rate plus 50 basis points, or LIBOR plus 100 basis points (with all such terms and calculations as defined or further specified in the credit agreement) plus (ii) 0.75% per annum. Any Eurodollar borrowings under the Tranche B 2027 Term Loan bear interest at LIBOR plus 1.75% per annum.
The Tranche B 2027 Term Loan requires certain specified mandatory prepayments in connection with certain asset sales and other transactions, subject to certain significant exceptions. The obligations of Level 3 Financing, Inc. under the Tranche B 2027 Term Loan 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 and certain of its subsidiaries have guaranteed the obligations of Level 3 Financing, Inc. under the Tranche B 2027 Term Loan. Additional secured term loans or revolving credit may in the future be extended to Level 3 Financing, Inc. under 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’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 prior 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
In connection with debt issuances, we deferred costs of $34 million for the year ended December 31, 2019. For the year ended December 31, 2018 we deferred 0 costs in connection with debt issuances.
Aggregate Maturities of Long-Term Debt
Set forth below is the aggregate principal amount of our long-term debt
and finance leasesas of December 31, 2021 (excluding unamortized premiums, net,
and unamortized debt issuance
costs)costs and intercompany debt) maturing during the following years:
|
| | | |
| | (Dollars in millions)(1) |
| 2020 | $ | 11 |
|
| 2021 | 8 |
|
| 2022 | 850 |
|
| 2023 | 1,210 |
|
| 2024 | 911 |
|
| 2024 and thereafter | 7,307 |
|
| Total long-term debt | $ | 10,297 |
|
| | | | | |
| (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, 20192021 and 2018,2020, we had outstanding letters of credit or other similar obligations of approximately $23$9 million and $30$18 million, respectively, of which $18$5 million and $24$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 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, in connection with a "change of control" of Level 3 Parent, 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 materially adversely affecthave 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
AtAs of December 31, 20192021 and December 31, 2018,2020, we believe we were in compliance with the provisions and financial covenants contained in our debt agreements in all material respects.
(7)(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 | |
|
| | | | | |
| | December 31, |
| | 2019 | | 2018 |
| | (Dollars in millions) |
| Trade receivables | 529 |
| | 533 |
|
| Earned and unbilled receivables | 151 |
| | 177 |
|
| Other | — |
| | 13 |
|
| Total accounts receivable | 680 |
| | 723 |
|
Less: allowance for doubtful accounts (1) | (13 | ) | | (11 | ) |
| Accounts receivable, less allowance | 667 |
| | 712 |
|
|
| |
(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 | |
|
| | | | | | | | |
| | Beginning Balance | Additions | Deductions | Ending Balance |
| | (Dollars in millions) |
| 2019 | 11 |
| 24 |
| (22 | ) | 13 |
|
| 2018 | 3 |
| 18 |
| (10 | ) | 11 |
|
| December 31, 2017 (Successor) | — |
| 3 |
| — |
| 3 |
|
| October 31, 2017 (Predecessor) | 29 |
| 16 |
| (12 | ) | 33 |
|
(8)(9) Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
|
| | | | | | | |
| | Depreciable Lives | | As of December 31, |
| | | 2019 | | 2018 |
| | | | (Dollars in millions) |
| Land | N/A | | 336 |
| | 339 |
|
Fiber conduit and other outside plant(1) | 15-45 years | | 5,226 |
| | 5,262 |
|
Central office and other network electronics(2) | 7-10 years | | 2,687 |
| | 1,986 |
|
Support assets(3) | 3-30 years | | 2,419 |
| | 2,327 |
|
Construction-in-progress(4) | N/A | | 1,093 |
| | 560 |
|
| Gross property, plant and equipment | | | 11,761 |
| | 10,474 |
|
Accumulated depreciation(5) | | | (1,825 | ) | | (1,021 | ) |
| Net property, plant and equipment | | | 9,936 |
| | 9,453 |
|
| | | | | | | | | | | | | | | | | |
| 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.
Depreciation expense was $804$874 million, $851 million and $906$804 million for the years ended December 31, 2021, 2020 and 2019, and December 31, 2018, respectively, $143 million for the successor period ended December 31, 2017and$850 million for the predecessor period ended October 31, 2017.respectively.
Asset Retirement Obligations
AtAs of December 31, 20192021 and 2018,2020, our asset retirement obligations consisted primarily of restoration requirements for leased facilities. 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 | | Predecessor | | Years Ended December 31, |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | 2021 | | 2020 | | 2019 |
| | (Dollars in millions) | | (Dollars in millions) |
| Balance at beginning of period | $ | 105 |
| | 45 |
| | 45 |
| | | 89 |
| Balance at beginning of period | $ | 122 | | | 113 | | | 105 | |
| Accretion expense | 5 |
| | 5 |
| | 1 |
| | | 12 |
| Accretion expense | 5 | | | 6 | | | 5 | |
Purchase price adjustments (1) | — |
| | 58 |
| | — |
| | | — |
| |
| Liabilities settled | (12 | ) | | (13 | ) | | (1 | ) | | | (7 | ) | Liabilities settled | (10) | | | (7) | | | (12) | |
| Revision in estimated cash flows | 15 |
| | 10 |
| | — |
| | | — |
| Revision in estimated cash flows | 7 | | | 10 | | | 15 | |
Reclassified as held for sale (1) | | Reclassified as held for sale (1) | (3) | | | — | | | — | |
| Balance at end of period | $ | 113 |
| | 105 |
| | 45 |
| | | 94 |
| Balance at end of period | $ | 121 | | | 122 | | | 113 | |
(1)Represents the amounts reclassified as held for sale related to our planned divestiture. See Note 2—Planned Divestiture of the Latin American Business.
|
| |
(1) | These liabilities relate to purchase price adjustments that occurred during 2018 from CenturyLink's acquisition of us. |
(9) 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.
Changes in our accrued liabilities for severance expenses were as follows:
|
| | | |
| | Severance |
| | (Dollars in millions) |
| Balance at December 31, 2017 (Successor) | $ | 5 |
|
| Accrued to expense | 33 |
|
| Payments, net | (19 | ) |
| Balance at December 31, 2018 | $ | 19 |
|
| Accrued to expense | 6 |
|
| Payments, net | (16 | ) |
| Balance at December 31, 2019 | $ | 9 |
|
We recognized liabilities to reflect our estimates of the fair values of the existing lease obligations for real estate which we have ceased using, net of estimated sublease rentals. In accordance with transitional guidance under the new lease standard (ASC 842), the existing lease obligation of $47 million as of January 1, 2019 has been netted against the operating lease right of use assets at adoption. For additional information, see Note 5—Leases to our consolidated financial statements in Item 8 of Part II of this report.
(10) Employee Benefits
Defined Contribution Plans
We offer eligible employees the opportunity to participate inLumen Technologies sponsors a qualified defined contribution retirement plan subjectcovering 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 Code, as amendedService ("401(k) Plan"IRS"). Each employee is eligible to contribute, onCurrently, we match a tax deferred basis, a portionpercentage of annual earnings generally not to exceed $19,000 in 2019, $18,500 in 2018 and $18,000 in 2017. We match 100% of a participant’s pre-tax and/or Rothour employee's contributions of the first 1% of the participant’s eligible compensation plus 60% of the same contributions that exceed 1% up to a maximum of 6% of the participant’s eligible compensation.
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 of the Level 3 Plan document regarding eligibility, participant and employer contributions, vesting, and benefit payments 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, 20172021, 2020, and $30 million for the predecessor period ended October 31, 2017. Matching contributions recorded as compensation expense in cost of services totaled $1 million for the successor period ended December 31, 2017 and $4 million for the predecessor period ended October 31, 2017. Matching contributions included in selling, general and administrative expenses totaled $5 million for the successor period ended December 31, 2017and $26 million for the predecessor period ended October 31, 2017.2019, respectively.
Matching contributions for the year ended December 31, 2019 were $29 million, of which $11 million was recognized in cost of sales and $18 million in selling, general and administrative costs. Matching contributions for the year ended December 31, 2018 were $26 million, of which $10 million was recognized in cost of sales and $16 million in selling, general and administrative costs.
Other defined contribution plans we sponsored are individually not significant. On an aggregate basis, the expense we recorded relating to these plans was approximately $6$8 million, $8 million and $5$6 million for the years ended December 31, 2021, 2020, and 2019, and 2018, respectively, $1 million for the successor period ended December 31, 2017 and $5 million for the predecessor period ended October 31, 2017.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 $122$75 million and $133$128 million as of December 31, 20192021 and 2018,2020, respectively. The total plan benefit obligations were $140$92 million and $144$161 million as of December 31, 20192021 and 2018,2020, respectively. Therefore, the net unfunded status was $18$17 million and $11$33 million as of December 31, 20192021 and 2018,2020, respectively.
(11) Share-BasedShare-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. 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.
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 and years, 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 total share-based compensation expense was approximately $85 million and $105 million for
For the years ended December 31, 2021, 2020 and 2019, we recorded share-based compensation expense of approximately $47 million, $78 million and 2018, respectively, $26$85 million, for the successor period ended December 31, 2017respectively.
and $132 million for the predecessor period ended October 31, 2017.
(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 finance leaseleases 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 finance 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 | |
|
| | | | | | | | | | | |
| | | | As of December 31, |
| | | | 2019 | | 2018 |
| | Input Level | | Carrying Amount | Fair Value | | Carrying Amount | Fair Value |
| | | | (Dollars in million) |
| Liabilities-Long-term debt, excluding finance leases | 2 | | 10,196 |
| 10,244 |
| | 10,681 |
| 10,089 |
|
(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 successor period 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.
|
| | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| Income tax expense was as follows: | | | | | | | | |
| Federal | | | | | | | | |
| Current | $ | 12 |
| | — |
| | — |
| | | — |
|
| Deferred | 186 |
| | 199 |
| | 231 |
| | | 193 |
|
| State | | | | | | | | |
| Current | 4 |
| | (9 | ) | | 2 |
| | | 7 |
|
| Deferred | 41 |
| | 28 |
| | 6 |
| | | 16 |
|
| Foreign | | | | | | | | |
| Current | 17 |
| | 30 |
| | 4 |
| | | 39 |
|
| Deferred | (5 | ) | | (52 | ) | | (9 | ) | | | 13 |
|
| Total income tax expense | $ | 255 |
| | 196 |
| | 234 |
| | | 268 |
|
|
| | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| Income tax expense was allocated as follows: | | | | | | | | |
| Income tax expense in the consolidated statements of operations: | | | | | | | | |
| Attributable to income | 255 |
| | 196 |
| | 234 |
| | | 268 |
|
| Member's/Stockholders' equity: | | | | | | | | |
| Tax effect of the change in accumulated other comprehensive loss | 5 |
| | (49 | ) | | 17 |
| | | 49 |
|
| | | | | | | | | | | | | | | | | |
| 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 | |
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, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Percentage of pre-tax income) |
| Statutory federal income tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % | | | 35.0 | % |
| State income taxes, net of federal income tax benefit | (1.2 | )% | | 2.8 | % | | 3.6 | % | | | 2.9 | % |
| Goodwill impairment | (26.4 | )% | | — | % | | — | % | | | — | % |
| Tax Reform | (0.2 | )% | | 17.2 | % | | 210.6 | % | | | — | % |
| Global intangible low-taxed income | (0.4 | )% | | 1.8 | % | | — | % | | | — | % |
| CenturyLink acquisition transaction costs | — | % | | — | % | | 11.3 | % | | | — | % |
| Uncertain tax positions | — | % | | 0.5 | % | | 1.2 | % | | | 0.1 | % |
| Base erosion and anti-abuse tax | (0.4 | )% | | — | % | | — | % | | | — | % |
| Net foreign income tax | (0.8 | )% | | (4.8 | )% | | (19.3 | )% | | | 0.9 | % |
| Executive compensation limitation | (0.2 | )% | | 1.2 | % | | 5.4 | % | | | 0.9 | % |
| Research and development credits | 0.1 | % | | (1.3 | )% | | (0.9 | )% | | | (1.2 | )% |
| Other, net | (0.1 | )% | | (1.9 | )% | | 4.7 | % | | | 0.1 | % |
| Effective income tax rate | (8.6 | )% | | 36.5 | % | | 251.6 | % | | | 38.7 | % |
For the year ended December 31, 2021, the effective tax rate is 25.2% compared to 25.3% and (8.6)% for the years ended December 31, 20192020 and December 31, 2018, the effective tax rate is (8.6)% and 36.5% compared to 251.6% for the successor period ended December 31, 2017 and 38.7% for the predecessor period ended October 31, 2017,2019, respectively. The effective tax rate for the year ended December 31, 2019 includes areflects $779 million unfavorable impact of a non-deductible goodwill impairment. The effective tax rate for the year 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 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) | |
|
| | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| | (Dollars in millions) |
| Deferred tax assets | | | |
| Deferred revenue | $ | 306 |
| | 298 |
|
| Net operating loss carry forwards | 3,233 |
| | 3,494 |
|
| Property, plant and equipment | 58 |
| | 57 |
|
| Other | 326 |
| | 309 |
|
| Gross deferred tax assets | 3,923 |
| | 4,158 |
|
| Less valuation allowance | (892 | ) | | (931 | ) |
| Net deferred tax assets | 3,031 |
| | 3,227 |
|
| Deferred tax liabilities | | | |
| Deferred revenue | (41 | ) | | (45 | ) |
| Property, plant and equipment | (974 | ) | | (853 | ) |
| Intangible assets | (1,898 | ) | | (1,998 | ) |
| Other | (29 | ) | | (25 | ) |
| Gross deferred tax liabilities | (2,942 | ) | | (2,921 | ) |
| Net deferred tax assets | 89 |
| | 306 |
|
Of the $89$136 million and $306$86 million net deferred tax assets atliabilities as of December 31, 20192021 and 2018,2020, respectively, $241$212 million and $202$247 million is reflected as a long-term liability, in other on our consolidated balance sheets and $330$76 million and $508$161 million is reflected as a net noncurrent deferred tax asset, at December 31, 2019 and 2018, 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 December 31, 2019,2021, we had federal NOLs of $12.9$12 billion before uncertain tax positions of $4.3$4 billion, which will expire between 2025 and 2037 if unused, and state NOLs of $9.2 billion. If unused, the NOLs will expire between 2022 and 2037. At$8 billion before uncertain tax positions of $521 million. As of December 31, 2019,2021, 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, 2019,2021, a valuation allowance of $892 million$1.1 billion was recorded 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, 20192021 and 20182020 is primarily related to foreign and state NOL carryforwards.
A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 20192021 and 20182020 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 | |
|
| | | | | | |
| | 2019 | | 2018 |
| | (Dollars in millions) |
| Unrecognized tax benefits at beginning of period | $ | 970 |
| | 21 |
|
| Tax positions of prior periods netted against deferred tax assets | (24 | ) | | 950 |
|
| (Decrease) increase in tax positions taken in the prior period | 1 |
| | (1 | ) |
| Increase in tax positions taken in the current period | 5 |
| | 3 |
|
| Decrease due to settlement/payments | — |
| | (1 | ) |
| Decrease from the lapse of statute of limitations | — |
| | (2 | ) |
| Unrecognized tax benefits at end of period | 952 |
| | 970 |
|
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 $30$34 million and $23$33 million for the years ended December 31, 20192021 and December 31, 2018,2020, 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 $8$5 million and $6$9 million atas of December 31, 20192021 and 2018,2020, 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 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 $3$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.
(14) 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, which includes telecommunication services that we also provide to our 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, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
| IP and Data Services | $ | 3,888 |
| | 3,945 |
| | 668 |
| | | 3,284 |
|
| Transport and Infrastructure | 2,662 |
| | 2,701 |
| | 464 |
| | | 2,272 |
|
| Voice and Collaboration | 1,443 |
| | 1,464 |
| | 258 |
| | | 1,308 |
|
| Other revenue | 12 |
| | 3 |
| | 1 |
| | | 6 |
|
| Affiliate revenue | 180 |
| | 107 |
| | 16 |
| | | — |
|
| Total revenue | $ | 8,185 |
| | 8,220 |
| | 1,407 |
| | | 6,870 |
|
(14) Geographic and Customer Concentrations
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 USF surcharges 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.
|
| | | | | | | | | | | | | |
| | Successor | | Predecessor |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 |
| | (Dollars in millions) |
USF surcharges and transaction taxes
| $ | 428 |
| | 415 |
| | 71 |
| | | 331 |
|
The following tables present total assets as of the years ended December 31, 20192021 and December 31, 20182020 as well as operating revenue for the years ended December 31, 20192021, 2020 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 20172019 by geographic region:
| | | | Total Assets | | Total Assets |
| | December 31, | | As of December 31, |
| | 2019 | | 2018 | | 2021 | | 2020 |
| | (Dollars in millions) | | (Dollars in millions) |
| North America | $ | 24,144 |
| | 27,520 |
| North America | $ | 23,296 | | | 23,511 | |
| Europe, Middle East and Africa | 2,842 |
| | 2,765 |
| Europe, Middle East and Africa | 2,830 | | | 3,059 | |
| Latin America | 2,112 |
| | 2,006 |
| Latin America | 1,969 | | | 2,006 | |
| Total | $ | 29,098 |
| | 32,291 |
| Total | $ | 28,095 | | | 28,576 | |
| | | | Revenue | | Revenue |
| | Successor | | Predecessor | | Years Ended December 31, |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Period Ended December 31, 2017 | | | Period Ended October 31, 2017 | | 2021 | | 2020 | | 2019 |
| | (Dollars in millions) | | (Dollars in millions) |
| North America | $ | 6,719 |
| | 6,739 |
| | 1,155 |
| | | 5,651 |
| North America | $ | 6,365 | | | 6,411 | | | 6,307 | |
| Europe, Middle East and Africa | 719 |
| | 744 |
| | 128 |
| | | 607 |
| Europe, Middle East and Africa | 805 | | | 785 | | | 719 | |
| Latin America | 747 |
| | 737 |
| | 124 |
| | | 612 |
| Latin America | 782 | | | 737 | | | 747 | |
| Total | $ | 8,185 |
| | 8,220 |
| | 1,407 |
| | | 6,870 |
| 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 1 reportable segment.
A relatively small number of customers account for a significant percentage of our revenue. Our top ten customers accounted for approximately 17%, 16% and 20%16% of our revenue for the years ended December 31, 20192021, 2020 and December 31, 2018, respectively, 19% for the successor period ended December 31, 2017 and 18% for the predecessor period ended October 31, 2017,2019, respectively.
(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 2020.2022.
(16) Quarterly Financial Data (Unaudited)
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
| | (Dollars in millions) |
| 2019 | | | | | | | | | |
| Operating revenue | $ | 2,046 |
| | 2,014 |
| | 2,064 |
| | 2,061 |
| | 8,185 |
|
| Operating (loss) income | (3,393 | ) | | 272 |
| | 309 |
| | 285 |
| | (2,527 | ) |
| Net (loss) income | (3,585 | ) | | 110 |
| | 114 |
| | 160 |
| | (3,201 | ) |
|
| | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
| | (Dollars in millions) |
| 2018 | | | | | | | | | |
| Operating revenue | $ | 2,087 |
| | 2,052 |
| | 2,010 |
| | 2,071 |
| | 8,220 |
|
| Operating income | 261 |
| | 196 |
| | 227 |
| | 284 |
| | 968 |
|
| Net income | 62 |
| | 40 |
| | 88 |
| | 151 |
| | 341 |
|
During the first quarter of 2019, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $3.7 billion for goodwill. See Note 3—Goodwill, Customer Relationships and Other Intangible Assets for further details.
In the twelve months ended December 31, 2018, we recognized a $92 million income tax expense related to the Tax Act.
(17)(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, 20192021 aggregated to approximately $69$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 $7 million at December 31, 2019.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. Oral argument was held before the Supreme Court of Justice in June 2019. AIn May 2021, the Company was served with a favorable and final decision on this casefrom 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, 20192021, 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.
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 1 or more may go to trial during 20202022 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.
Right-of-Way
AtAs of December 31, 2019,2021, our future rental commitments for right-of-way agreements 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 |
| | | (Dollars in millions) |
| 2020 | | $ | 83 |
|
| 2021 | | 58 |
|
| 2022 | | 55 |
|
| 2023 | | 53 |
|
| 2024 | | 44 |
|
| 2025 and thereafter | | 276 |
|
Total future minimum payments(1) | | $ | 569 |
|
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 $333$472 million atas of December 31, 2019.2021. Of this amount, we expect to purchase $119$164 million in 2020, $131 million in 2021 through 2022, $42$168 million in 2023 through 2024, and $41$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, 2019.2021.