LUMEN TECHNOLOGIES, INC. Unless the context requires otherwise, (i) references in this report to "Lumen Technologies" or "Lumen," "we," "us" and "our" refer toLumen Technologies, Inc. and its consolidated subsidiaries and (ii) references in this report to "Level 3" refer toLevel 3 Parent, LLC and its predecessor, Level 3Communications, Inc. , which we acquired onNovember 1, 2017 .
All references to "Notes" in this Item 2 of Part I refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report.
Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report and "Risk Factors" referenced in Item 1A of Part II of this report or other of our filings with theSEC for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects.
Overview
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included herein should be read in conjunction with MD&A and
the other information included in our Annual Report on Form 10-K for the year
ended December 31, 2020 and with the consolidated financial statements and
related notes in Item 1 of Part I of this report. The results of operations and
cash flows for the first nine months of the year are not necessarily indicative
of the results of operations and cash flows that might be expected for the
entire year.
We are an international facilities-based technology and communications company
focused on providing our business and mass markets customers with a broad array
of integrated services and solutions necessary to fully participate in our
rapidly evolving digital world. We believe we are the world's most
inter-connected network and our platform empowers our customers to rapidly
adjust digital programs to meet immediate demands, create efficiencies,
accelerate market access, and reduce costs - allowing customers to rapidly
evolve their IT programs to address dynamic changes without distraction from
their core competencies. With approximately 450,000 route miles of fiber optic
cable globally, we are among the largest providers of communications services to
domestic and global enterprise customers. Our terrestrial and subsea fiber optic
long-haul network throughout North America , Europe , Latin America and Asia
Pacific connects to metropolitan fiber networks that we operate. We provide
services in over 60 countries, with most of our revenue being derived in the
United States . As of September 30, 2021 , we had approximately 37,000 employees.
Planned Divestiture of the Latin American and ILEC Businesses
OnJuly 25, 2021 , affiliates ofLevel 3 Parent, LLC , an indirect wholly-owned subsidiary of Lumen, agreed to divest their Latin American business in exchange for$2.7 billion cash, subject to certain working capital, other purchase price adjustments and related transaction expenses (estimated to be approximately$50 million ). OnAugust 3, 2021 , Lumen and certain of its subsidiaries agreed to divest a substantial portion of their incumbent local exchange business in exchange for$7.5 billion , subject to offsets for (i) assumed indebtedness (expected to be approximately$1.4 billion ) and (ii) our transaction expenses, certain of purchaser's transaction expenses, income taxes and certain working capital and other customary purchase price adjustments (currently estimated to aggregate to approximately$1.7 billion ). The actual amount of our net after-tax proceeds from these divestitures could vary substantially from the amounts we currently estimate, particularly if we experience delays in completing the transactions or if there are changes in other assumptions that impact our estimates. For more information, see (i) Note 2-Planned Divestiture of the Latin American and ILEC Businesses to our consolidated financial statements in Item 1 of Part I of this report and (ii) the risk factors included in Item 1A of Part II of this report. 43 --------------------------------------------------------------------------------
Impact of COVID-19 Pandemic
As previously outlined in Item 7 of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , in response to the safety and economic challenges arising out of the COVID-19 pandemic and in a continued attempt to mitigate the negative impact on our stakeholders, we have taken a variety of steps to ensure the availability of our network infrastructure, to promote the safety of our employees and customers, to enable us to continue to adapt and provide our products and services worldwide to our customers, and to strengthen our communities. As vaccination rates increase, we expect to continue revising our responses to the pandemic or take additional steps necessary to adjust to changed circumstances. As discussed in further detail in our prior reports, the pandemic resulted in (i) increases in certain revenue streams and decreases in others, (ii) increases in allowances for credit losses through the end of 2020, (iii) increases in overtime expenses, (iv) delays in our cost transformation initiatives and (v) an acceleration of our real estate rationalization efforts and the incurrence of related costs. We believe we are also experiencing delayed decision-making by certain of our customers in the current environment. These changes did not materially impact our financial performance or financial position during 2020, and, barring any substantial deterioration in prevailing health or economic conditions, are not expected to materially impact us in the near term. EffectiveDecember 8, 2021 , we plan to comply withPresident Biden's September 2021 Executive Order requiring covered employees of federal contractors to be vaccinated against COVID-19. For additional information, see "Risk Factors" in Item 1A of Part II of this report.
Reporting Segments
As previously announced, we completed an internal reorganization of our
reporting segments in
•Business Segment: Under our Business segment, we provide our products and services under four sales channels:
•International and Global Accounts ("IGAM"): Our IGAM sales channel includes
multinational and enterprise customers. We provide our products and services to
approximately 350 of our highest potential enterprise customers and to
enterprises and carriers in three operating regions: Europe Middle East and
Africa , Latin America and Asia Pacific .
•Large Enterprise: Under our large enterprise sales channel, we provide our
products and services to large enterprises and the public sector, including the
U.S. Federal government, state and local governments and research and education
institutions.
•Mid-Market Enterprise: Under our mid-market enterprise sales channel, we provide our products and services to medium-sized enterprises directly and through our indirect channel partners.
•Wholesale: Under our wholesale sales channel, we provide our products and services to a wide range of other communication providers across the wireline, wireless, cable, voice and data center sectors. •Mass Markets Segment: Under our Mass Markets segment, we provide products and services to consumer and small business customers. AtSeptember 30, 2021 , we served 4.6 million broadband subscribers under our Mass Markets segment.
See Note 14-Segment Information to our consolidated financial statements in Item 1 of Part I of this report for additional information.
We categorize our Business segment revenue among the following products and services categories:
•Compute and Application Services, which include our
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--------------------------------------------------------------------------------•IP and Data Services, which include Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;
•Fiber Infrastructure Services, which include dark fiber, optical services and equipment; and
•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services.
Under our Mass Markets segment, we provide the following products and services:
•Consumer Broadband, which includes high speed fiber-based and lower speed DSL-based broadband services to residential customers;
•SBG Broadband, which includes high speed fiber-based and lower speed DSL-based broadband services to small businesses;
•Voice and Other, which include local and long-distance services, retail video services (including our linear TV services), state support and other ancillary services; and
•CAF II, which consists of Connect America Fund Phase II payments through the
end of 2021 to support voice and broadband in
Trends Impacting Our Operations
In addition to the above-described impact of the pandemic, our consolidated operations have been, and are expected to continue to be, impacted by the following company-wide trends:
•Customers' demand for automated products and services and competitive pressures will require that we continue to invest in new technologies and automated processes to improve the customer experience and reduce our operating expenses.
•The increasingly digital environment and the growth in online video and gaming require robust, scalable network services. We are continuing to enhance our product capabilities and simplify our product portfolio based on demand and profitability to enable customers to have access to greater bandwidth.
•Businesses continue to adopt distributed, global operating models. We are expanding and enhancing our fiber network, connecting more buildings to our network to generate revenue opportunities and reducing our reliance upon other carriers. •Industry consolidation, coupled with changes in regulation, technology and customer preferences, are significantly reducing demand for our traditional voice services and are pressuring some other revenue streams through volume or rate reductions, while other advances, such as the need for lower latency provided by Edge computing or the implementation of 5G networks, are expected to create opportunities. •The operating margins of several of our newer, more technologically advanced services, some of which may connect to customers through other carriers, are lower than the operating margins on our traditional, on-net wireline services.
•Declines in our traditional wireline services have necessitated right-sizing our cost structures to remain competitive.
The amount of support payments we receive from governmental agencies will
decrease substantially after
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--------------------------------------------------------------------------------Results of Operations
In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In "Segment Results of Operations" we review the performance of our two reporting segments in more detail.
The following table summarizes the results of our consolidated operations for
the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(Dollars in millions, except per share amounts)
Operating revenue $ 4,887 5,167 14,840 15,587
Operating expenses 3,756 4,279 11,716 12,816
Operating income 1,131 888 3,124 2,771
Total other expense, net (415) (408) (1,102) (1,345)
Income before income taxes 716 480 2,022 1,426
Income tax expense 172 114 497 369
Net income $ 544 366 1,525 1,057
Basic earnings per common share $ 0.51 0.34 1.42 0.98
Diluted earnings per common share $ 0.51 0.34 1.41 0.98
For years, we have experienced revenue declines, excluding the impact of
acquisitions, primarily due to declines in voice and private line customers,
switched access rates and minutes of use. More recently, we have experienced
declines in revenue derived from the sale of certain of our other products and
services. To partially mitigate these revenue declines, we remain focused on
efforts to, among other things:
•promote long-term relationships with our customers through bundling of integrated services;
•increase the size, capacity, speed and usage of our networks;
•provide a wide array of diverse services, including enhanced or additional services that may become available in the future due to, among other things, advances in technology or improvements in our infrastructure;
•provide our premium services to a higher percentage of our customers;
•pursue acquisitions of additional assets or divestitures of non-strategic assets, in each case if available at attractive prices;
•increase prices on our products and services if and when practicable; and
•market our products and services to new customers.
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