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(1) | For additional information on our long-term debt, see Note 6 - Long-Term Debt to our consolidated financial statements in Item 8 of Part II of this report. For information on our total obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital resources - Future Contractual Obligations" in Item 7 of Part II of this report. |
We estimate that during 2019,2022, approximately 20%17% of our consolidated revenue was derived from providing telecommunications, colocation and hosting services outside the United States.
Operations
Organizational Structure
Since the November 1, 2017 closing of CenturyLink's acquisition of us, our operations have been integrated intoProducts and reported as part of the segments of CenturyLink. CenturyLink's chief operating decision maker ("CODM") has become 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 SEC. Otherwise, we do not provide our discrete financial information to the CODM on a regular basis.
P
roducts and Services
Global enterprises, governmental entities and regional organizations depend on our wide variety of technologies and services engineered to work in conjunction with them. These range from specific offerings such as networks or cloud-based application hosting to complex multi-layered engagements where we develop custom solutions involving numerous technologies and professional consulting services. In many cases, enterprises engage with us to outsource many of their IT functions so they can focus on their core business.
While most of our customized customer interactions with customers involve multiple integrated technologies and services, we organize our products and services according to the core technologies that drive them. We reportreflect product life cycles and our related revenue under the following categories:go to market approach. At December 31, 2022, we categorized our services as follows: Compute and Application Services, IP and Data Services, Fiber Infrastructure Services, Voice and Other, and Affiliate revenue.
Compute and Application Services
•Edge Cloud Services. We provide both public and private cloud solutions that allow our customers to optimize cost and performance by offloading workloads. Lumen’s cloud products are designed to leverage our network edge to provide low-latency secure services for our customers.Additionally, we provide cloud orchestration tools that allow customers to shift work between cloud environments dynamically;
•IT Solutions. We craft technology solutions for our customers and often manage these solutions on an ongoing basis. These services frequently enhance equipment or networks owned, acquired, or controlled by the customer and often include our consulting or software development services;
•Unified Communications and Collaboration ("UC&C"). We provide access to various unified communications platforms. This offering includes both individual, license-based service models and more robust options that transform a customer’s inbound and outbound calling platform;
•Colocation and Data Center Services. We provide different options for organizations’ data center needs. Our data center services transportrange from dedicated hosting and infrastructurecloud services voiceto more complex managed solutions, including disaster recovery, business continuity, applications management support and collaborationsecurity services other revenueto manage mission critical applications;
•Content Delivery. Our content delivery services provide our customers with the ability to meet their streaming video and affiliate revenue, which are described in further detail below.far-reaching digital content distribution needs through our Content Delivery Network ("CDN") services and our Vyvx Broadcast Solutions; and
•Managed Security Services. We provide enterprise security solutions that help our customers secure networks, mitigate malicious attacks and identify potential security threats. These services include DDoS mitigation, remote and premise-based firewalls, professional consulting and management services, and threat intelligence services.
IP and Data Services
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• | VPN Data Network. Built on our extensive optical transport network, we create private networks tailored to our customers’ needs. These technologies enable service providers, enterprises and government entities to streamline multiple networks into a single, cost-effective solution that simplifies the transmission of voice, video, and data over a single secure network;
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• | Ethernet. We deliver a robust array of networking services built on Ethernet technology. Ethernet services include point-to-point and multi-point equipment configurations that facilitate data transmissions across metropolitan areas and larger enterprise-class wide area networks. Our Ethernet technology is also used by wireless service providers for data transmission via our fiber-optic cables connected to their towers; and
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• | Internet Protocol ("IP"). Our Internet Services provide global internet access over a high performance, diverse network with connectivity in more than 60 countries with approximately 129 Tbps of global throughput.
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• | Content Delivery Network ("CDN"). Our CDN is supported by a global Point of Presence ("PoP") footprint across approximately 93 markets in six continents and directly connected to our IP backbone. CDN service supports in-network acquisition of broadcast channels for Over the Top-Video and Internet TV platforms, and a multi-regional Origin Storage Platform delivers high performance egress and rapid time to first byte. Our CDN is directly connected to major cloud storage platforms. Our Digital Download service provides software download, system update, gaming patch, antivirus files or other digital asset delivery with storage, security, scale, and global reach.
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Transport•Ethernet. We deliver a robust array of networking services built on ethernet technology. Ethernet services include point-to-point and multi-point equipment configurations that facilitate data transmissions across metropolitan areas and larger enterprise-class wide area networks. Our ethernet technology is also used by wireless service providers for data transmission via our fiber-optic cables connected to their towers;
•Internet Protocol ("IP"). Our IP services provide global internet access over a high performance, diverse network with connectivity in more than 60 countries;
•VPN Data Networks. Built on our extensive fiber-optic network, we create private networks tailored to our customers’ needs. These technologies enable service providers, enterprises and government entities to streamline multiple networks into a single, cost-effective solution that simplifies the transmission of voice, video, and data over a single secure network; and
•Voice Over Internet Protocol ("VoIP"). We deliver a broad range of local and enterprise voice and data services built on VoIP technology, including VoIP enhanced local service, national and multinational session initiation protocol ("SIP") trunking, hosted VoIP service, Primary Rate Interface ("PRI") service support, long distance service and toll-free service.
Fiber Infrastructure Services
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• | Wavelength. We deliver high bandwidth optical networks to firms requiring an end-to-end transport solution with Ethernet technology by contracting for a scalable amount of bandwidth connecting sites or providing high-speed access to cloud computing resources;
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• | Colocation and Data Center Services. We provide different options for organizations’ data center needs. Our data center services range from dedicated hosting and cloud services to more complex managed solutions, including disaster recovery, business continuity, applications management support and security services to manage mission critical applications;
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• | Dark Fiber. We possess an extensive array of unlit optical fiber, known as “dark fiber.” Many large enterprises are interested in building their networks with this high-bandwidth, highly secure optical technology and the dark fiber option gives them exclusive access to the technology. We provide professional services to engineer these networks and manage them for many customers;
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• | Private Line. We deliver a private line (including business data services), a direct circuit or channel specifically dedicated for connecting two or more organizational sites. Private line service offers a high-speed, secure solution for frequent transmission of large amounts of data between sites, including wireless backhaul transmissions;
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•Optical Services. We deliver high bandwidth optical wavelength networks to customers requiring an end-to-end solution with ethernet technology for a scalable amount of bandwidth connecting sites or providing high-speed access to cloud computing resources.
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• | Professional Services. Our experts deliver a robust array of consulting services to organizations either as part of a larger engagement or as stand-alone services. This category includes network management, installation and maintenance of data equipment and the building of proprietary fiber-optic networks for government and business customers.
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Voice and CollaborationOther
•Voice Services. We offer our customers a complete portfolio of traditional Time Division Multiplexing ("TDM") voice services including PRI service, local inbound service, switched one-plus, toll free, long distance and international services;
•Private Line. We deliver private line services, a direct circuit or channel specifically dedicated for connecting two or more organizational sites. Private line service offers a high-speed, secure solution for frequent transmission of large amounts of data between sites, including wireless backhaul transmissions; and
•Other Legacy Services. We continue to provide certain services based on older platforms to support our customers as they transition to newer technology. These services include Synchronous Optical Network ("SONET") based ethernet, legacy data hosting services, and conferencing services.
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• | Voice. We offer a complete portfolio of traditional Time Division Multiplexing (TDM) voice services to businesses and enterprises including Primary Rate Interface (“PRI”) service, local inbound service, switched one-plus, toll free, long distance and international services;
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• | Voice Over IP (VoIP). We deliver a broad range of local and enterprise voice and data services built on VoIP (Voice over Internet Protocol) technology. Our local and enterprise voice services include VoIP enhanced local service, national and multinational SIP Trunking, Hosted VoIP, support of Primary Rate Interface (“PRI”) service, long distance service, and toll-free service; and
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• | Collaboration. We deliver collaboration capabilities partnered with leading technology providers including Cisco, Microsoft, and Amazon. Collaboration elements (audio, video, web) are seamlessly integrated providing a simple solution that is easy to manage as businesses grow and change. Our expertise and ongoing partnership with technology leaders like Cisco, Microsoft and AWS provides enterprises with the flexibility to select and adopt the right solution and latest innovation. Audio, web and video conferencing services are also available.
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Other revenue
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• | Other. Other revenue includes sublease rental income and information technology services and managed services, which may be purchased in conjunction with our other network services.
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Affiliate revenue
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• | •Affiliate Services. We provide our affiliates certain communication services that we also provide to external customers. Please see our products and services listed above for further description of these services.
We provide our affiliates with telecommunication services that we also provide to external customers. Please see our products and services listed above for further description of these services.
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From time to time, we may change the categorization of our products and services.
Additional Information
For further information on regulatory, technological and competitive factors that could impact our revenue, see "Regulation" and "Competition" under this Item 1 below and "Risk Factors" under Item 1A below. For more information on the financial contributions of our various services, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report. For additional information about us and our ultimate parent, CenturyLink, Inc., please refer to the periodic reports filed by CenturyLink, Inc. with the SEC, which can be accessed by visiting the websites listed below under “Website Access and Important Investor Information.”
Our Network
MostOur and Lumen's network, through which we provide most of our products and services, are provided using our telecommunications network.primarily consists of fiber-optic cables and other supporting equipment. We operate part of our network with leased assets, and a substantial portion of our equipment with licensed software.
We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.
We and Lumen view our network as one of our most critical assets. We and Lumen have devoted, and plan to continue to enhancedevote, substantial resources to (i) simplify and modernize our network and legacy systems and (ii) expand our network by deploying various technologies to provide additional capacity to our customers. Rapid and significant changes in technology are expected to continue in the telecommunications industry. Our future success will depend, in part, on our ability to anticipate and adapt to changes in technology and customer demands, including demandsaddress demand for enhanced digitization, automation and customer self-service capabilities.or new products.
Although we or Lumen own most of our network, we lease a substantial portion of our core fiber network from several other communication companies under arrangements that will periodically need to be renewed or replaced to support our current network operations.
Like other large communications companies, we are a constant target of cyber-attacks of varyingvarious degrees, which has caused us to spend increasingly more time and money to deal with increasingly sophisticated attacks. Some of the attacks result in security breaches, and we periodically notify our customers, our employees or the public of these breaches when necessary or appropriate. None of these resulting security breaches to date have materially adversely affected our business, results of operations or financial condition.
Similarly, like other large communication companies operating complex networks, from time to time in the ordinary course of our business we experience disruptionsdisruption in our service. Although noneservices. We develop and maintain systems and programs designed to protect against cyber-attacks and network outages. The development, maintenance and operation of these outages have thus far materially adversely affected us, certain of these outages have resulted in regulatory fines, negative publicity, service creditssystems and other adverse consequences.programs is costly and requires ongoing monitoring and updating as technologies change and efforts to bypass security measures become more sophisticated and evolve rapidly.
We rely on several other communications companies to provide our offerings. We lease a portion of our core fiber network from our competitors and other third parties. Many of these leases will lapse in future years. A portion of our services are provided by other carriers under agency agreements or through reselling arrangements with other carriers. Our future ability to provide services on the terms of our current offerings will depend in part upon our ability to renew or replace these leases, agreements and arrangements on terms substantially similar to those currently in effect.
For additional information regarding our systems, network assets, network risks, capital expenditure requirements and reliance upon third parties, see "Risk Factors," generally,Factors" in Item 1A of Part I of this report,report.
Sales and in particular, "Risk Factors—Risks Affecting Marketing
Our Business"enterprise sales and "Risk Factors—Risks Affecting Our Liquiditymarketing approach revolves around solving complex customer problems with advanced technology and Capital Resources." For more informationnetwork solutions - striving to make core networks services compatible with digital tools. We also rely on our properties, seecall center personnel and a variety of channel partners to promote sales of services that meet the needs of our customers. To meet the needs of different customers, our offerings include both stand-alone services and bundled services designed to provide a complete offering of integrated services.
Our business customers range from small business offices to the world’s largest global enterprises customers. Our marketing plans include marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including telecommunications agents, system integrators, value-added resellers and other telecommunications firms. We support our distribution through digital advertising, events, television advertising, website promotions and public relations. Either we or Lumen maintain local offices in most major and secondary markets within the U.S. and many of the primary markets of the more than 60 countries in which we provide services.
We generally market our business services to members of in-house IT departments or other highly-sophisticated customers with deep technological experience. These individuals typically satisfy their IT requirements by contracting with us or a rapidly evolving group of competitors, or by deploying in-house solutions.
Competition
We compete in a dynamic and highly competitive market in which demand for high-speed, secure data service continues to grow. We expect continued intense competition from a wide variety of sources under these evolving market conditions. In addition to competition from large international communications providers, we are facing competition from additional sources, including systems integrators, cloud service providers, software networking companies, infrastructure companies, cable companies, device providers, resellers and smaller niche providers.
Our ability to compete hinges upon effectively enhancing and better integrating our existing products, introducing new products on a timely and cost-effective basis, meeting changing customer needs, providing high-quality information security to build customer confidence and combat cyber-attacks, extending our core technology into new applications and anticipating emerging standards, business models, software delivery methods and other technological changes. Depending on the applicable market and requested services, competition can be intense, especially if one or more competitors in the market have network assets better suited to the customer’s needs, are offering faster transmission speeds or lower prices, or in certain overseas markets, are national or regional incumbent communications providers that have a longer history of providing service in the market.
We compete to provide services to business customers based on a variety of factors, including the comprehensiveness and reliability of our network, our data transmission speeds, price, the latency of our available intercity and metro routes, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service. Competition from large communications providers, systems integrators, hyperscalers and
others have increased pricing pressures with respect to several key products and services that we offer to our
enterprise and wholesale business customers. In particular, several hyperscalers have recently built their own data
transmission facilities, which has reduced demand for our network services.
Additional information about competitive pressures is located under the heading “Risk Factors—Business Risks” in Item 21A of Part I of this report.
Patents, Trade Names, Trademarks and Copyrights
Through acquisitions or our own research and development, as
As of December 31, 2019,2022, we had approximately 1,2801,600 patents and patent applications in the United StatesU.S. and other countries. Our patents cover a wide range of technologies, including those relating to data and voice services, content distribution and transmission and networking equipment.
We have also received licenses to use patents held by others, including through certain extensive cross-license arrangements. Patents give us the right to prevent others, particularly competitors, from using our proprietary technologies.others. Patent licenses give us the freedom to operate our business without the risk of interruption from the holder of the patented technology. We plan to continue to file new patent applications as we enhance and develop products and services, and we plan to continue to seek opportunities to expand our patent portfolio through strategic acquisitions and licensing.
We periodically receive offers from third partiesIn addition to purchase or obtain licenses for patentsour patent rights, we have rights in various trade names, trademarks, copyrights and other intellectual property rights in exchange for royalties or other payments.that we use to conduct our business. Our services often use the intellectual property of others, including licensed software. We also periodically receive notices, or are named in lawsuits, alleging thatoccasionally license our products or services infringeintellectual property to others as we deem appropriate.
For information on patents or othervarious litigation risks associated with owning and using intellectual property rights, of third parties, or receive requests to indemnify customers who allege that their use of our products or services caused them to be named in an infringement proceeding. In certain instances, these matters can potentially adversely impact our operations, operating results or financial position. For additional information, see “Risk Factors—Risks Affecting Our Business”Business Risks” in Item 1A of Part I of this report, and Note 17—16—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.
Sales and Marketing
Either CenturyLink or us maintain local offices in (i) most major and secondary markets within the U.S., (ii) most of the larger population centers within our service areas and (iii) many of the primary markets of the more than 60 countries in which we provide services. These offices provide sales and customer support services. We also rely on our channel partners to promote sales of services that meet the needs of our customers. Our sales and marketing strategy is to enhance our sales by offering solutions tailored to the needs of our various customers and promoting our brands. To meet the needs of different customers, our offerings include both stand-alone services and bundled services designed to provide a complete offering of integrated services.
Our sales and marketing approach to our business customers includes a commitment to provide comprehensive communications and IT solutions for business, wholesale and government customers of all sizes, ranging from small business offices to the world's largest global enterprise customers. We strive to offer our business customers stable, reliable, secure and trusted solutions. Our marketing plans include marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including telecommunications agents, system integrators, value-added resellers and other telecommunications firms. We support our distribution through digital advertising, events, website promotions and public relations.
Regulation of Our Business
Overview
Our domestic operations are regulated by the Federal Communications Commission (the “FCC”), by various state utilityregulatory commissions and occasionally by local agencies. Our non-domestic operations are regulated by supranational groups (such as the European Union)Union, or EU), national agencies and, frequently, state, provincial or local bodies. Generally, we must obtain and maintain operating licenses from these bodies in most areas where we offer regulated services.
Changes in the composition and leadership of the FCC, state regulatory commissions and other agencies that regulate our business could have significant impacts on our revenue, expenses, competitive position and prospects. Changes in the composition and leadership of these agencies are often difficult to predict, which makes future planning more difficult.
The following description discusses some of the major industry regulations that affectaffecting our operations, but numerous other regulations not discussed below alsoothers could have a substantial impact on us.us as well. For additional information, see "Risk Factors"“Risk Factors” in Item 1A of Part I1 of this report.
Federal Regulation of Domestic Operations
General
The FCC regulates the interstate services we provide, including the business data service charges we bill for wholesale network transmission and international communications services.intercarrier compensation. Additionally, the FCC regulates a number ofseveral aspects of our business related to international communications services, privacy, public safety and network infrastructure, including (i) our access to and use of local telephone numbers, and(ii) our provision of emergency 911 services. Level 3 provides competitive services that are generally notand (iii) our use or removal (potentially on a reimbursable basis) of equipment produced by certain vendors deemed to cause potential national security risks. We could incur substantial penalties if we fail to comply with the FCC's applicable regulations.
Many of the FCC’s regulations adopted in recent years remain subject to regulation tojudicial review and additional rulemakings, thus increasing the same degree as incumbent local exchange carriers (“ILECs”).difficulty of determining the ultimate impact of these changes on us and our competitors.
Intercarrier Compensation
Level 3 maintains approximately 300 interconnection agreements with other telecommunications carriers. These agreements set out the terms and conditions under which the parties will exchange traffic. The largest agreements are with AT&T and Verizon. Most of Level 3’s agreements with AT&T and Verizon have expired terms but remain effective in evergreen status 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.broadband services. 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").
InternationalData Privacy Regulations
Our subsidiaries operating outside of the United States are subject to various regulations in the markets where service is provided. The scope of regulation varies from country to country. The telecommunications regulatory regimes in certain of our non-domestic markets are in the process of development. Many issues, including the pricing of services, have not been addressed fully, or even at all. We cannot accurately predict whether and how these issues will be resolved, or their effect on our operations. Further, some of the legal requirements governing our foreign operations are more restrictive than or conflict with those governing our domestic operations, which raises our compliance costs and regulatory risks.
On January 31, 2020, the United Kingdom (the "UK") terminated its membership in the EU (“Brexit”), subject to an 11-month transition period during which 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. Several factors which are currently unknown will influence Brexit’s impact on our business, including the form Brexit will take. We operate a staging facility in the UK, where certain core network elements and customer premises equipment is configured before being shipped to both UK and EU locations. The UK is currently also 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 will help mitigate potential disruptions resulting from any restriction on the free movement of goods between the EU and the UK after the end of the transition period. 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.
Other Regulations
Our networks are subject to numerous local regulations, including codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate. Such regulations are enacted by municipalities, counties or other regional governmental bodies, and can vary widely from jurisdiction to jurisdiction as a result. Such regulations may also require us to pay substantial fees.
Various foreign, federal and state laws govern our storage, maintenance and use of customer data, including a wide range of consumer protection, data protection, privacy, intellectual property and similar laws. Data privacy regulations are complex and vary across jurisdictions. As a company with global operations, we must comply with various jurisdictional data privacy regulations, including the General Data Protection Regulation (“GDPR”) in the EU and similar laws adopted by various other jurisdictions in certain of our domestic and overseas markets. The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction. VariousThese regulations require careful handling of personal and customer data and could have a significant impact on our business, especially if we violate any of those regulations.
Anti-Bribery and Corruption Regulations
As a company with global operations, we must comply with complex foreign federal and state legislativeU.S. laws and regulations governing business ethics and practices, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to governmental officials, and anti-competition regulations. We have compliance policies, programs and training designed to prevent non-compliance with such anti-corruption regulations in the U.S. and other jurisdictions.
Regulation of International Operations
Our subsidiaries operating outside of the U.S. are subject to various regulations in the markets where service is provided. The scope of regulation varies from country to country. The communications regulatory regimes in certain of our non-domestic markets are in the process of development. Many issues, including the pricing of services, have not been addressed fully, or regulatory bodies have recently adopted increasingly restrictiveeven at all.
Our overseas operations are also subject to various other domestic or non-domestic laws or regulations, including various laws or regulations governing the protectionexports and imports of various goods or retention of data,technologies 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.certain sanctioned business activities.
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
In 2020, the United Kingdom (“UK”) terminated its membership in the EU (“Brexit”) and has entered into related separation agreements with the EU regarding data sharing, financial services and other matters. We competecurrently operate a staging facility in the UK, where certain core network elements and customer premise equipment is configured before being shipped to both UK and EU locations. The UK is currently also a 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 somecentral repository of our competitorsspare parts for use in one or more linesour European operations. Nonetheless, only a relatively small portion of our business are generally larger,is conducted within the UK, and we have stronger brand names, have more financial and business resources and have broader service offerings thanentered into an arrangement to sell our EMEA operations. Consequently, Brexit has not had, nor do we currently do. In certain overseas markets, we compete against national incumbent telecommunications providers and other regional or international companiesanticipate 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 expendituresit will have, a material adverse effectsubstantial impact on our financial condition or resultsbusiness.
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 operations. For additional information, see (i) "Risk Factors—Risks Relating to Legalhazardous materials, the release of pollutants into the environment 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”the remediation of contamination. Our contingent liabilities under these laws are further described in Item 1A of Part I of this report and (ii) Note 17—16—Commitments, Contingencies and Other Items included in Item 8 of Part II of this report.Items. Certain federal and state agencies, including attorneys general, monitor and exercise oversight related to consumer protection issues. We are also subject to codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate. Such regulations are enacted by municipalities, counties, state, federal or other regional governmental bodies, and can vary widely from jurisdiction to jurisdiction as a result. Such regulations may also require us to pay substantial fees.
Seasonality
Overall, our business is not materially impacted by seasonality. Our network-related operating expenses are, however, generally higher in the second and third quarters of the year. From time to time, weather related problems have resulted in increased costs to repair our network and respond to service calls in some of our markets. The amount and timing of these costs are subject to the weather patterns of any given year, but have generally been highest during the third quarter and have been related to damage from severe storms, including hurricanes, tropical storms and tornadoes in our markets along the Atlantic and Gulf of Mexico coastlines.
Employees
AtAs of December 31, 2019,2022, we had approximately 11,30010,000 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. Any references to our website in this report or any other periodic reports that we file with the SEC are provided for convenience only, and are not intended to make any of our website information a part of this or such other reports. You may obtain free electronic copies of 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 competecreate the global digital experience expected by customers.
Our customers expect us to create and maintain a global digital experience, including (i) automation and simplification of our offerings and (ii) digital self-service access to our products, services and customer support. To do so, we must timely and successfully against currentcomplete the digital transformation of our operations that is currently underway. Effective digital transformation is a complex, dynamic process requiring efficient allocation and prioritization of resources, simplification of our product portfolio, faster product deployments, retirement of obsolete systems, migration of data and corresponding workforce and system development. We cannot assure you we will be able to timely effect the successful digital transformation necessary to develop or deliver a global digital experience expected by our customers. If we are unable to do so, we could lose existing customers or fail to attract new ones, either of which could prevent us from attaining our financial goals.
Challenges with integrating or modernizing our existing applications and systems could harm our performance.
To succeed, we need to integrate, update and upgrade our existing applications and systems, including many legacy systems from past acquisitions. We cannot assure you we will be able to integrate our legacy IT systems, modernize our infrastructure, timely retire aging systems or deploy a master data management platform. These modernization efforts will require efficient allocation of resources, development capacity, greater use of artificial intelligence and other emerging technologies, access to subject-matter experts, development of a sustainable operating model and successful collaboration between legal, privacy and security personnel. Any failure to timely accomplish these initiatives may negatively affect our (i) customer and employee experiences, (ii) ability to meet regulatory, legal or contractual obligations, (iii) network stability, (iv) ability to realize anticipated efficiencies, (v) ability to timely repair infrastructure and respond to service outages, or (vi) ability to deliver services to our customers at required speed and scale.
We operate in an intensely competitive industry and existing and future competitors.competitive pressures could harm our performance.
Each of our business offerings to our customers facefaces increasingly intense competition, with increased pressure to timely offer digitally integrated services, 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,financial, provisioning, technical, engineering, research, development, technical, provisioning,marketing, 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 lower pricespartners and acquisitions. In recent years, competitive pressures have commoditized pricing for theirsome of our products and services and lowered market prices for many of our other products and services. Continued competitive pressures will likely place further downward pressure on market pricing.
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 our profit margins. For example, as service providers continue to invest in 5G and low earth orbit satellite networks and services, their services could reduce demand for our 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 timely provision our products and services, to maintain and expand our network to enable it to support customer demands for greater transmission capacity and speeds, and to discontinue outdated products and services on a cost-effective basis. Our ability to do so could 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, where competition for highly-skilled employees has grown increasingly intense, and we have experienced, and may continue to (i) expend capital or other resourcesexperience, higher than anticipated levels of employee attrition. Our competitors periodically target our employees with highly sought-after skills and will likely continue to do so in excessthe future. Further, the increased availability of currently contemplated levels, (ii) forego
remote 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. These risks to attracting and unprofitable technologiesretaining the necessary talent may be exacerbated by inflationary pressures on employee wages and services.benefits. As a result, we may be unable to cost-effectively hire and retain employees with market-leading skills. There is no assurance our efforts to recruit and retain qualified personnel will be successful. If we are unable to do so, such failure could have a material adverse effect on our operations and financial condition.
The COVID-19 pandemic caused us to modify our workforce practices, including having the majority of our employees work from home on a cost-effective basis, we could experience reduced profits. Similarly, if new market entrants are not burdened by an installed base of outdated equipmentfully remote or obsolete technology, they may havehybrid basis. We reopened our offices in 2022 under a competitive advantage over us.
For additional information on the risks of increased expenditures, see “Risk Factors-Risks Affecting our Liquidity and Capital Resources-Our business requires us to incur substantial capital and operating expenses, which reduces our available free cash flow.”
Our failure to meet the evolving needs“hybrid” working environment, meaning that some of our customers could adversely impactemployees have the flexibility to work remotely at least some of the time, for the foreseeable future. The hybrid working environment may impair our competitive position.
In order 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 in 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 onoperate 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.
The pandemic, inflation and other events over the past couple years have increased employees’ expectations regarding compensation, workplace flexibility and work-home balance. These developments have intensified certain of our above-described challenges and made it relatively more difficult for us to attract and retain top talent. We do not expect these developments to have a material adverse impact on us, but we 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 ability to consolidate, integrate, update and simplifyThere is a risk that negative or inaccurate information about us, even if based on rumor or misunderstanding, could adversely affect our systems and information technology infrastructure in responsebusiness. Damage to our growthreputation could be difficult, expensive and changing business needs is very importanttime-consuming to repair. Damage to our ability to developreputation could also reduce the value and maintain attractive product and service offerings and to interface effectively with our customers. In addition, there may be issues related to our expanded or updated infrastructure that are not identified by our testing processes, 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-attackscyber-attacks. The number of varying degrees. Althoughthese attacks against us increased in 2022. Despite our efforts to prevent these events, some of these attacks have resulted in security breaches, although thus far none of these breaches have 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 risks to our network, infrastructure and related systems include, among others:
capacity or system configuration limitations, including those resulting from changes in our customer's usage patterns, 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;
deficiencies in our processes or controls;
our inability to hire and retain personnel with the requisite skills to adequately maintain or improve our systems;
programming, processing 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, from time to time in the ordinary course of our business we experience disruptions in our service. WeCyber-attacks 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:
(i) disrupt the proper functioning of theseour networks and systems, which could in turn disrupt (i) our operational, billing or other administrative functions or (ii) the operations of certain of our customers, who rely upon us to provide services critical to their operations;
(ii) 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 employees, our customers or our customers’ end users, including trade secrets, which others could use for competitive, disruptive, destructive or otherwise harmful purposes and outcomes;
(iii) require us to notify customers, regulatory agencies or the public of data breaches;
breaches, (iv) damage our reputation or result in a loss of business, (v) 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;
customers, (vi) subject us to claims by our customers or regulators for damages, fines, penalties, terminationlicense or permit revocations or other remedies, under our customer contracts or service standards set by regulators, which in certain cases could exceed our insurance coverage;
(vii) result in athe loss of business, damage our reputation among our customers and the public generally, subject us to additional regulatory scrutinyindustry certifications, or expose us to prolonged litigation; or
(viii) 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 developments could have a negativematerial adverse impact on us.
We could be harmed by outages in our network or various platforms, or other failures of our services.
From time to time in the ordinary course of our business, we experience outages in our network, hosting, cloud or IT platforms, or failures of our products or services to perform in the manner anticipated. These disruptions expose us to several of the same risks listed above for cyber-attacks, including the loss of customers, the issuance of credits or refunds, and regulatory fines. We remain vulnerable to future disruptions due to several factors, including aging network elements, human error, changes in our network, the introduction of new products or technologies, vulnerabilities in our vendors or supply chain, aberrant employees and hardware and software limitations. The process for remediating any interruptions, outages, delays or cessations of service could be more expensive, time-consuming, disruptive and resource intensive than planned. Delayed sales, lower margins, fines or lost customers resulting from future disruptions could have a material adverse impact on our business, reputation, results of operations, financial condition, 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 commoditized or lowered market prices for manyseveral 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 In addition, some of our control, including (i) actions by other carriersnew product offerings have reduced 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.displaced our sale of older product offerings.
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 toincreases. Additionally, several communications companies rely on our network especially if the other carrier fails to provide timely and efficient cooperation.
Conversely, certain of our operations carry a significant amount oftransmit their data or voice or data traffic for other communications providers.traffic. Their reliance on our servicesnetwork 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, constructed or leased by them, thereby reducing our revenue. Certain of our hyperscaler customers have built infrastructure that has reduced their reliance on us.
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
For a description of how the extent that proprietaryCOVID-19 pandemic and its aftermath have impacted our access to supplies and labor, please see Item 7 in Part II of this report.
Reliance on key licensors. We rely on key technologies licensed from third parties to deliver certain of our products and services. Our agreements with these licensors may expire or be terminated, and some of the licenses may not be available to us in the future on terms acceptable to us or at all. Moreover, if we incorporate licensed technology of a supplier is an integral component ofinto our network, we may have limited flexibility to purchase key network componentsdeploy different technologies from alternative suppliers and may be adversely affected if third parties assert patent infringement claims against our suppliers or us. Similarly, in certain instances 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 disruptions in our services.licensors.
Reliance on utility providerskey customer contracts. We have several complex high-value national and landlords. Our energy costs can fluctuate significantly or increase forglobal 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,Similarly, our ability to expand our network could depend in part on obtaining additional authorizations, the receipt of which is not assured.
Over the past few years, certain utilities, cooperatives and municipalities in certain of the states in which we operate have requested significant rate increases for attaching our plant to their facilities. To the extent that these entities are successful in increasing the amount we pay for these attachments, our future operating costs will increase.
Our subsidiaries currently are, and in the past have been, subject to lawsuits challenging the subsidiaries’ use of rights-of-way. Similar suits are possible in the future. Plaintiffs in these suits typically seek to have them certified as class action suits. These suits are typically complex, lengthy and costly to defend, and expose us to each of the other general litigation risks described elsewhere herein.
Our 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 could cause us to accept greater risk to win new business or could result in us losing businessbuildout plans can be delayed 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 adversely affect our flexibility or competitiveness in these jurisdictions. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions. There is a risk that these laws or regulations may materially restrict our ability to deliver services in various international jurisdictions or could be breached through inadvertence or mistake, fraudulent or negligent behavior of our employees or agents, failure to comply with certain formal documentation or technical requirements, or otherwise. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us or our personnel, or prohibitions on the conduct of our business or our ability to operate in one or more countries, any of which could have a material adverse effect on our business, reputation, results of operations, financial condition or prospects.
Many non-U.S. laws and regulations relating to communications services are more restrictive than U.S. laws and regulations, particularly those relating to privacy rights and data retention. 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 licensescannot receive 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 publiclandowner authorizations 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 unable to control the scope or quality of our overseas services 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, results of operations, reputation or prospects.
We conduct significant operations in regions that have historically experienced high levels of political, economic and social instability, including the Latin American region. Various events in recent years have placed pressures on the stability of the currencies of several Latin American countries in which we operate, including Argentina, Brazil and Colombia. Pressures or volatility in local or regional currencies may adversely affect our customers in this region, which could diminish their ability or willingness to order products or services from us. Several Latin American countries have historically experienced high rates of inflation. Governmental actions taken to curb inflation, coupled with speculation about possible future actions, have in the past contributed to periodic economic uncertainty in many Latin American countries. Similar actions in the future, together with abrupt shifts in governmental administrations, could impede our ability to develop or implement effective business plans in the region. In addition, if high rates of inflation persist, we may not be able to adjust the price of our services sufficiently to offset our higher costs. A high inflation environment would also have negative effects on the level of economic activity and employment and adversely affect our business.
We are exposed to currency exchange rate risks and currency transfer restrictions and our results may suffer due to currency translations and re-measurements.
Declines in the value of non-U.S. currencies relative to the U.S. dollar could adversely affect us in several respects, including hampering our ability to market our services to customers whose revenue is denominated in depreciated currencies. In addition, where we issue invoices for our services in currencies other than U.S. dollars, our results of operations may suffer due to currency translations if such currencies depreciate relative to the U.S. dollar and we cannot or do not elect to enter into currency hedging arrangements regarding those payment obligations. Similarly, the strengthening of the U.S. dollar and exchange control regulations could negatively impact the ability of overseas customers to pay for our services in U.S. dollars.
Certain Latin American economies have experienced shortages in non-U.S. currency reserves and have adopted restrictions on the use of certain mechanisms to expatriate local earnings and convert local currencies into U.S. dollars. Any of these shortages or restrictions may limit or impede our ability to transfer or convert those currencies into U.S. dollars and to expatriate those funds.
Asset dispositions could have a detrimental impact on us or the holders of our securities.
In the past, we have disposed of assets or asset groups for a variety of reasons, and we may consider disposing of other assets or asset groups from time to time in the future. We may not be able to divest any such assets on terms that are attractive to us, or at all. In addition, if we agree to proceed with any such divestitures of assets, we may experience operational difficulties segregating them from our retained assets and operations, which could impact the execution or timing for such dispositions and could result in disruptions to our operations or claims for damages, among other things. Moreover, such dispositions could reduce our cash flows and make it harder for us to fund all of our cash requirements.
Unfavorable general economic conditions could negatively impact our operating results and financial condition.
Unfavorable general economic conditions, including unstable economic and credit markets or depressed economic activity caused by trade wars, epidemics, pandemics or other factors, could negatively affect our business. While it is difficult to predict the ultimate impact of these general economic conditions, they could adversely affect demand for some of our products and services and could cause customers to shift to lower priced products and services or to delay or forego purchases of our products and services. These conditions impact, in particular, our ability to sell discretionary products or services to business customers that are under pressure to reduce costs or to governmental customers operating under budgetary constraints. Any one or more of these circumstances could continue to depress our revenue. Also, our customers may encounter financial hardships or may not be able to obtain adequate access to credit, which could negatively impact their ability to make timely payments to us. In addition, as discussed further below, unstable economic and credit markets may preclude us from refinancing maturing debt at terms that are as favorable as those from which we previously benefited, at terms that are acceptable to us, or at all. For these reasons, among others, weak economic conditions could adversely affect our operating results, financial condition, and liquidity.
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% 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 its orders for our services, our business would be adversely affected.
For additional information about our business and operations, see "Business" in Item 1 of this report.
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.permits. 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 onsuccessfully extend these arrangements when their 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,expire, or to enter into other transactions among our affiliated entities.
CenturyLink, Inc.’s senior secured credit facilities also contain financial covenantsnew arrangements 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 soughtnecessary 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 expandimplement our network infrastructure as a result of several factors, including:expansion opportunities.
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 spendingClimate change 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.costs or negatively affect our business.
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 other of our other facilities are subject to the risk of earthquakes, floods, fires, tornadoes or other similar casualty events. TheseFrom time to time these events (including Hurricane Ian in 2022 in Florida) have disrupted our operations, and similar future events could cause substantial damage,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. AlthoughDue to substantial deductibles, coverage limits and exclusions, and limited availability, 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,have typically recovered only a portion of our additional costs directly related to suchlosses through insurance.
Climate change may increase the frequency or severity of 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 inother extreme weather events in the future, which would increase our exposure to casualtythe above-cited risks and could disrupt our supply chain from our key suppliers and vendors.
Our environmental, social and governance (ESG) commitments and disclosures may expose us to reputational and legal risks. For all these reasons, any future hazard-related costs
Our brand and work interruptionsreputation could adversely affectbe impacted by our operationspublic commitments to various corporate environmental, social and governance (ESG) initiatives, including our political contributions, our advocacy positions, and our financial condition.
Terrorist attacksgoals for sustainability, inclusion and other actsdiversity. Positions we take or do not take on ESG issues could negatively impact our ability to attract or retain customers and employees. In addition, we could be criticized for the timing, scope or nature of violencethese initiatives, goals, or war may adversely affectcommitments, or for any revisions to them. To the financial marketsextent that our required and voluntary disclosures about ESG matters increase, we could be criticized for the accuracy, adequacy, or completeness of such disclosures. Our actual or perceived failure to achieve our ESG-related initiatives, goals, commitments or mandates could negatively impact our reputation or otherwise materially harm our business.
Future terrorist attacks or armed conflicts may directly affect our physical facilities or those of our customers. These events could cause consumer confidenceIncreasing focus on ESG matters has resulted in, and spendingis expected to decrease orcontinue to result in, the adoption of legal and regulatory requirements designed to mitigate the effects of climate change on the environment, as well as legal and regulatory requirements requiring additional related disclosures. If new laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased volatility incompliance burdens and costs to meet such obligations. In addition, our selection of voluntary disclosure frameworks and standards, and the U.S.interpretation or application of those frameworks 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 disseminatestandards, may change from time to time or may not meet the expectations of investors or other stakeholders. Our ability to achieve our ESG commitments is based onsubject to numerous variablesrisks, many of which are outside of our control, including (i) evolving and assumptions (including, but not limitedpotentially inconsistent regulatory requirements affecting ESG standards, measurements, methodologies and disclosures, (ii) the availability of suppliers that can meet our sustainability, diversity and other standards, and (iii) our ability to those related to industry performancerecruit, develop, and competitionretain diverse talent. Our processes and general business, economic, marketcontrols for reporting ESG matters across our operations and financial conditionssupply chain are evolving along with multiple disparate standards for identifying, measuring, and additional matters specificreporting ESG metrics, including enhanced ESG-related disclosures that may be required by the SEC, and other regulators. Such standards may change over time, which could result in significant revisions to our current goals, reported progress in achieving such goals, or ability to achieve such goals in the future.
Future acquisitions or strategic investments and asset dispositions could have a detrimental impact on us or the holders of our securities.
In an effort to implement our and Lumen’s business as applicable) that are inherently subjectivestrategies, 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 speculativeuncertainties, including the difficulty of identifying appropriate companies to acquire or invest in on acceptable terms, potential violations of covenants in our and are largely beyond our control. As a result, actual results may differ materially fromaffiliates’ 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 guidanceand our affiliates’ operations, and other unidentified issues not discovered in due diligence.
In addition, in the past, Lumen Technologies or other forward-looking statements. Similarly,we have disposed of assets or asset groups for a variety of reasons, and we may change our intentions, strategiesdispose of other assets 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 mayasset groups from time to time change existing tax laws or regulations or enact new laws or regulations. In many cases,in the applicationfuture. If we agree to proceed with any such divestitures of existing, newly enacted or amended tax laws (such as the U.S. Tax Cutsassets, we may experience operational difficulties segregating them from our retained assets and Jobs Act of 2017) may be uncertain and subject to differing interpretations thatoperations, which 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 indisruptions to our consolidated financial statements. Because the ultimate outcomesoperations or claims for damages, among other things. Moreover, such dispositions could reduce our cash flows available to support our payment of all of these matters are uncertain, we can give no assurance as to whether an adverse result from onedistributions, capital expenditures, debt maturities or more of them will have a material effect on our financial results.other commitments.
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, 2019.2022.
We face other business risks.
We face other business risks, including among others:
•the difficulties of managing and administering an organization that offers a complex set of products to a diverse range of customers across several continents; and
•the adverse effects of terrorism, rioting, vandalism or social unrest.
Legal and Regulatory Risks
We are subject to an extensive, evolving regulatory framework that could create operational or compliance costs.
As explained in greater detail elsewhere in this annual report, (i) our domestic operations are regulated by the FCC and other federal, state and local agencies and (ii) our international operations are regulated by a wide range of various foreign and international bodies. We cannot assure you we will be successful in obtaining or retaining all regulatory licenses necessary to carry out our business in our various markets. Even if we are, the prescribed service standards and conditions imposed on us under these licenses and related laws may increase our costs, limit our operational flexibility or result in third-party claims.
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 our 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, there could be a material adverse impact on our results of operations and financial condition.
A variety of state, national, foreign and international laws and regulations apply to the collection, use, retention, protection, security, disclosure, transfer and other processing of personal and other data. The European Union and other international regulators, as well as some state governments, have recently enacted or enhanced data privacy regulations, and other governments are considering establishing similar or stronger protections. Many of these laws are complex and change frequently and often conflict with the laws in other jurisdictions. Some of our customers impose similar requirements on us that are equally or more demanding. Despite our best efforts to comply with these governmental or contractual requirements, any noncompliance could result in incurring potential substantial penalties and reputational damage.
Adapting and responding to changing regulatory requirements has historically materially impacted our operations. We believe evolving regulatory developments and regulatory uncertainty could continue to have a material impact on our business. In particular, our business could be materially impacted if the U.S. Congress amends or eliminates current federal law limitations on the liability of private network providers, such as us, against claims related to third party content stored or transmitted on private networks, as currently proposed by certain governmental officials, legislative leaders and consumer interest groups. We could also be materially affected if currently pending proposals to increase the regulation of internet service providers or to further strengthen data privacy laws are implemented. 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, any of which could have a material adverse impact on our business. Similarly, from time to time, we may need to obtain the right to use certain patents or other intellectual property from third parties to be able to offer new products and services. If we cannot obtain rights to use any required technology from a third party on reasonable terms, our ability to offer new products and services may be prohibited, restricted, made more costly or delayed.
Our international operations expose us to various regulatory, currency, tax, legal and other risks.
Our international operations are subject to U.S. and non-U.S. laws and regulations regarding operations in international jurisdictions in which we provide services. These numerous and sometimes conflicting laws and regulations include anti-corruption laws, anti-competition laws, trade restrictions, economic sanctions, tax laws, immigration laws, environmental laws, privacy laws and accounting requirements. Many of these laws are complex and change frequently. There is a risk that these laws or regulations may materially restrict our ability to deliver services in various international jurisdictions or expose us to the risk of fines, penalties or license revocations if we are determined to have violated applicable laws or regulations. Additionally, these laws or regulations may potentially impact our customers and result in foregone business or penalties to us if we fail to comply with any applicable sanctions or restrictions on our activities.
Many non-U.S. laws and regulations relating to communications services are more restrictive than U.S. laws and regulations. We are subject to the GDPR of the European Union and the United Kingdom’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, 2022, we had approximately $3.9 billion of outstanding consolidated secured indebtedness and $3.9 billion of outstanding consolidated unsecured indebtedness (excluding (i) finance leases and other obligations, (ii) unamortized premiums, net, (iii) unamortized debt issuance costs and (iv) intercompany debt.)
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 to our direct parent company;
•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, credit ratings, and debt covenants, as well as prevailing market conditions and other factors beyond our control. Prevailing market conditions could be adversely affected by (i) general market conditions, such as disruptions in domestic or overseas sovereign or corporate debt markets, geo-political instabilities, trade restrictions, pandemics, contractions or limited growth in the economy or other similar adverse economic developments in the U.S. or abroad, and (ii) specific conditions in the communications industry. Instability in the domestic or global financial markets has from time to time resulted in periodic volatility and disruptions in capital markets that have partially or severely limited the ability of leveraged companies like us to obtain debt financing. For these and other reasons, we can give no assurance additional financing for any of these purposes will be available on terms acceptable to us, or at all.
If we are unable to make required debt payments or refinance our debt, we would likely have to consider other options, such as selling assets, cutting or delaying costs or otherwise reducing our cash requirements, or negotiating with our lenders to restructure our applicable debt. The current and future debt instruments of us or our affiliates may restrict, or market or business conditions may limit, our ability to complete some of these actions on favorable terms, or at all. For these and other reasons, we cannot assure you we could implement these steps in a sufficient or timely manner, or at all. Nor can we assure you that these steps, even if successfully implemented, would not be detrimental to our operations, financial performance or future prospects.
We 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. Over half of the debt of Lumen Technologies, Inc. is guaranteed by certain of its principal domestic subsidiaries, some of which have pledged substantially all of their assets (including certain of their respective subsidiaries) to secure their guarantees. The remainder of the debt of Lumen Technologies, Inc. is neither guaranteed nor secured. Substantial amounts of debt are also owed by two direct or indirect subsidiaries of Qwest Communications International Inc. Most of the nearly 300 subsidiaries of Lumen Technologies, Inc. have neither borrowed money nor guaranteed any of the debt of Lumen Technologies, Inc. or its affiliates. As such, investors in our consolidated debt instruments should be aware that (i) determining the priority of their rights as creditors is a complex matter which is substantially dependent upon the assets and earning power of the entities that issued or guaranteed (if any) the applicable debt and (ii) a substantial portion of such debt is structurally subordinated to all liabilities of the non-guarantor subsidiaries of Lumen Technologies, Inc. to the extent of the value of those subsidiaries that are obligors.
Our and our affiliates' 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 the ability of it and its subsidiaries to, among other things, borrow additional money or issue guarantees; pay dividends or other distributions to shareholders; make loans; create liens on assets; sell assets; transact with its affiliates and engage in mergers, consolidations or other similar transactions. These restrictive covenants could have a material adverse impact on our and our affiliates' ability to operate or reconfigure our respective businesses, to issue additional priority debt, to pursue acquisitions, divestitures or strategic transactions, or to otherwise pursue our respective 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 very 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. Any failure to make appropriate capital expenditures could adversely impact our financial performance or prospects. We will also continue to need substantial amounts of cash to meet our fixed commitments and other business objectives, including without limitation funding our operating costs, maintenance expenses, debt repayments, tax obligations, periodic pension contributions and other benefits payments. As discussed elsewhere in this annual report, competitive pressures and divestitures, coupled with other factors, have reduced our cash flows. For all these reasons, we cannot assure you our future cash flows from operating activities will be sufficient to fund all of our cash requirements in the manner currently contemplated.
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, 2022, 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, 2022, we had approximately $6.4 billion of gross federal net operating loss carryforwards ("NOLs"), net of uncertain tax positions, which remain subject to limitations under Section 382 of the Internal Revenue Code and related regulations ("Section 382"). These limitations could restrict our ability to use these NOLs in the amounts we project. In an effort to safeguard our NOLs, Lumen Technologies has maintained an NOL rights agreement which is scheduled to lapse in late 2023.
As of December 31, 2022, we also had substantial state NOLs which we believe are subject to legal and practical limitations on our ability to realize their full benefit. We cannot assure you we will be able to utilize these NOLs as projected or at all.
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, 2022, approximately 36% of our total consolidated assets reflected on the consolidated balance sheet included in this annual report consisted of goodwill, customer relationships and other intangible assets (including goodwill and other intangible assets classified as assets held for sale). From time to time, including most recently in the fourth quarter of 2022, we have recorded large non-cash charges to earnings in connection with required reductions of the value of our intangible assets. If our intangible assets are determined to be impaired in the future, we may be required to record additional significant, non-cash charges to earnings during the period in which the impairment is determined to have occurred. Any such charges could, in turn, have a material adverse effect on our results of operation or financial condition.
High inflation could continue to adversely impact us.
Although inflation appears to be declining, during 2021 and 2022, our operations were impacted by the highest domestic inflation rates in decades. If inflation rates remain elevated, our operations will likely continue to be impacted. Potential impacts of high inflation include (i) lower revenue if inflationary pressures cause customers to defer, decrease or cancel their expenditures on our products and services, (ii) lower margins if we cannot offset the higher cost of our labor and supplies by raising our prices or reducing our other expenses, (iii) higher interest costs to the extent inflation places upwards pressure on prevailing interest rates and (iv) as noted above, potential difficulties retaining personnel if we do not match the salary increase expectations of our workforce.
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 could accelerate a substantial portion of our outstanding indebtedness in an amount that we might not be able to repay.
Divestiture Risks
The completion of our planned EMEA divestiture is subject to several conditions.
As described further in Note 2—Completed Divestiture of the Latin American Business and Planned Divestiture of European, Middle Eastern and African Business, we have agreed to divest our EMEA business. The completion of the divestiture is subject to receipt of all requisite regulatory approvals in the U.S. and certain countries where the EMEA business operates, as well as the satisfaction of other customary conditions. We cannot assure you that this divestiture will be completed in the timeframes anticipated by us or at all.
The pendency of the EMEA divestiture could adversely affect our business.
The pendency of our EMEA divestiture could impact us in several ways, including (i) impacting relationships with our customers and vendors, (ii) restricting our operations due to certain specified operating covenants in the purchase agreement, (iii) diverting management’s attention from operating our business in the ordinary course, and (iv) diminishing our ability to retain or attract employees due to concerns over future job security or responsibilities.
We may be unable to successfully separate our divested businesses from our retained business and realize the anticipated benefits of our recently-completed and planned divestitures.
In connection with our planned EMEA divestiture, we have agreed to (i) complete certain restructuring transactions to segregate the divested business from our retained business, (ii) provide certain post-closing transition and commercial services to the purchaser, and (iii) receive certain post-closing services from the purchaser designed to ensure the continuity of services to our retained customers. Similarly, in connection with the 2022 divestiture of our Latin American business, we completed internal restructurings and entered into multi-year agreements with the purchaser to provide certain transitional services and to provide or receive certain commercial services.
We anticipate that it will be challenging and time-consuming to segregate the business and provide transition services to the purchaser of our EMEA business, and to continue to support the Latin American business that we sold in 2022. Even if we successfully complete the EMEA divestiture and continue to successfully support the divested business, we may incur or experience (i) greater tax or other costs or realize fewer benefits than anticipated under our pre- and post-closing our post-closing 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 the operation, digitization, and transformation of our retained business, (vii) losses or increased inefficiencies from stranded or underutilized assets, (viii) the loss of any customers dissatisfied with our services post-closing, (ix) challenges in retaining and 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
An outbreak of disease or similar public health threat, such as the recent COVID-19 pandemic, could have a material adverse impact on us.
An outbreak of disease or similar public health threat, such as the recent COVID-19 pandemic and its attendant detrimental impact on the worldwide economy, could have a material adverse impact on our operating results and financial condition. Even as efforts to contain the COVID-19 pandemic, including vaccinations, have fostered progress and eased governmental restrictions, new variants of the virus have continued to cause outbreaks and uncertainties. Variants of the virus continue to pose the risk that we or our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities at expected levels through established processes. Future events regarding the pandemic, which are unpredictable and beyond our control, could continue impacting our operations. Accordingly, COVID-19, or any other future major public health crisis, may have negative impacts on our business in the future, and any future adverse impacts on our business may be worse than we anticipate.
Moreover, to the extent any of these risks and uncertainties adversely impact us, they may also have the effect of heightening many of the other risks described in this section “Item 1A. Risk Factors.”
Unfavorable general economic, societal or environmental conditions could negatively impact us.
Unfavorable general economic, societal or environmental conditions, including unstable economic and credit markets, or depressed economic activity caused by trade wars, epidemics, pandemics, wars, societal unrest, rioting, civic disturbances, natural disasters, terrorist attacks, environmental disasters, political instability or other factors, could negatively affect our business or operations. While it is difficult to predict the ultimate impact of these general economic, societal or environmental conditions, they could adversely affect demand for some of our products and services and could cause customers to shift to lower-priced products and services or to delay or forego purchases of our products and services for a variety of reasons. Any one or more of these circumstances could continue to depress our revenue. Also, our customers may encounter financial hardships which could negatively impact their ability to make timely payments to us or to continuing doing business with us.
Shareholder or debtholder activism efforts could cause a material disruption to our business.
While we always welcome constructive input from stakeholders, 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 the debt agreements of us or our affiliates.
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:
| | | | Successor | | As of December 31, |
| | December 31, 2019 | | December 31, 2018 | | 2022(5) | | 2021(5) |
| Land | 3 | % | | 4 | % | Land | 2 | % | | 3 | % |
Fiber, conduit and other outside plant (1) | 44 | % | | 50 | % | Fiber, conduit and other outside plant (1) | 41 | % | | 45 | % |
Central office and other network electronics (2) | 23 | % | | 19 | % | Central office and other network electronics (2) | 29 | % | | 27 | % |
Support assets (3) | 21 | % | | 22 | % | Support assets (3) | 21 | % | | 20 | % |
Construction in progress (4) | 9 | % | | 5 | % | Construction in progress (4) | 7 | % | | 5 | % |
| Gross property, plant and equipment | 100 | % | | 100 | % | Gross property, plant and equipment | 100 | % | | 100 | % |
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.