LUMEN TECHNOLOGIES, INC.

(LUMN)
  Report
Delayed Nyse  -  04:00 2022-07-01 pm EDT
11.14 USD   +2.11%
06/30LUMEN TECHNOLOGIES, INC. : Other Events (form 8-K)
AQ
06/30Apollo's Brightspeed Secures All Required State Approvals for Network Expansion
MT
06/30Brightspeed Achieves Major Regulatory Milestone in Its Operational Readiness Preparations
PR
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector news

LUMEN TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/04/2022 | 05:12pm EDT
Unless the context requires otherwise, (i) references in this report to "Lumen
Technologies" or "Lumen," "we," "us" and "our" refer to Lumen Technologies, Inc.
and its consolidated subsidiaries and (ii) references in this report to "Level
3" refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications,
Inc., which we acquired on November 1, 2017.

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 the SEC 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, 2021 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 three 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 products and services necessary to fully participate in our
rapidly evolving digital world. We operate one of the world's most
interconnected networks. Our platform empowers our customers to rapidly adjust
digital programs to meet immediate demands, create efficiencies, accelerate
market access, and reduce costs - allowing customers to rapidly evolve their IT
programs to address dynamic changes. 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 March 31, 2022, we had
approximately 35,000 employees.

Planned Divestiture of the Latin American and ILEC Businesses


On July 25, 2021, affiliates of Level 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). On August 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 any of our other assumptions prove to be incorrect. 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 referred to in Item 1A of Part II of this
report.

                                       38
--------------------------------------------------------------------------------

  Table of Contents
Impact of COVID-19 Pandemic

As previously described in greater detail in Item 7 of Part II of our Annual
Report on Form 10-K for the year ended December 31, 2021, 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.

Social distancing, business and school closures, travel restrictions, and other
actions taken in response to the pandemic have impacted us, our customers and
our business since March 2020. During the second half of 2020 and continuing
through 2021, we rationalized our leased footprint and ceased using 39 leased
property locations that were underutilized due to the COVID-19 pandemic. We
determined that we no longer needed the leased space and, due to the limited
remaining term on the contracts, concluded that we had neither the intent nor
ability to sublease the properties. In conjunction with our plans to continue to
reduce costs, we expect to continue our real estate rationalization efforts and
incur additional costs during 2022. Additionally, as discussed further elsewhere
herein, the pandemic resulted in (i) increases in certain revenue streams and
decreases in others, (ii) increases in overtime expenses, (iii) operational
challenges resulting from component shortages and certain other supplies that we
use in our business, and (iv) delays in our cost transformation initiatives. We
also experienced delayed decision-making by certain of our customers during
2021. Thus far, these changes have not materially impacted our financial
performance or financial position. However, we continue to monitor global
disruptions and work with our vendors to mitigate supply chain risks.

We reopened our offices in April 2022 under a "hybrid" working environment, which will permit some of our employees the flexibility to work remotely at least some of the time for the foreseeable future.

Reporting Segments

Our reporting segments are currently organized as follows, by customer focus:

•Business Segment: Under our Business segment, we provide our products and services under four sales channels:


•International and Global Accounts ("IGAM"): Our IGAM sales channel includes
multinational and enterprise customers. We provide our products and services to
approximately 350 of our highest potential enterprise customers and to
enterprise customers 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 residential and small business customers. At March 31, 2022, we served 4.5 million broadband subscribers under our Mass Markets segment.

See Note 12-Segment Information to our consolidated financial statements in Item 1 of Part I of this report for additional information.

                                       39
--------------------------------------------------------------------------------

Table of Contents We categorize our Business segment revenue among the following products and services categories:

•Compute and Application Services, which include our Edge Cloud services, IT solutions, Unified Communications and Collaboration ("UC&C"), data center, content delivery network ("CDN") and Managed Security services;

•IP and Data Services, which include Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;

•Fiber Infrastructure Services, which include dark fiber, optical services and equipment; and

•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services.

Beginning in the first quarter of 2022, we have categorized our products and services revenue among the following categories for the Mass Markets segment:

•Fiber Broadband, which includes high speed fiber-based services to residential and small business customers;

•Other Broadband, which primarily includes lower speed copper-based broadband services to residential and small businesses; and

•Voice and Other, which includes revenues from (i) providing local and long-distance services, professional services, and other ancillary services, and (ii) federal broadband and state support payments.

Trends Impacting Our Operations

In addition to the above-described impact of the pandemic, 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 and other more mature offerings have necessitated right-sizing our cost structures to remain competitive.

                                       40
--------------------------------------------------------------------------------

  Table of Contents
The amount of support payments we receive from governmental agencies has
decreased substantially since December 31, 2021. This and other developments and
trends impacting our operations are discussed elsewhere in this Item 2.

Results of Operations

In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In "Segment Results" we review the performance of our two reporting segments in more detail.

The following table summarizes the results of our consolidated operations for the three months ended March 31, 2022 and March 31, 2021:


                                                                          Three Months Ended
                                                                               March 31,
                                                                                    2022                   2021
                                                                              (Dollars in millions, except per share
                                                                                             amounts)
Operating revenue                                                             $        4,676                 5,029
Operating expenses                                                                     3,593                 4,042
Operating income                                                                       1,083                   987
Total other expense, net                                                                (282)                 (355)
Income before income taxes                                                               801                   632
Income tax expense                                                                       202                   157
Net income                                                                    $          599                   475
Basic earnings per common share                                               $         0.59                  0.44
Diluted earnings per common share                                             $         0.59                  0.44



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 and a reduction in government support payments, in particular the
cessation of the CAF II program. 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.

                                       41
--------------------------------------------------------------------------------

Table of Contents

Revenue


The following table summarizes our consolidated operating revenue recorded under
each of our two segments and in our four above-described revenue sales channels
within the Business segment:

                                              Three Months Ended March 31,
                                                    2022                   2021       % Change
                                                 (Dollars in millions)
Business Segment:
International & Global Accounts        $                        999       1,020            (2) %
Large Enterprise                                                877         953            (8) %
Mid-Market Enterprise                                           636         693            (8) %
Wholesale                                                       889         929            (4) %
Business Segment Revenue                                      3,401       3,595            (5) %
Mass Markets Segment Revenue                                  1,275       1,434           (11) %
Total consolidated operating revenue   $                      4,676       5,029            (7) %



Our consolidated operating revenue decreased by $353 million for the three
months ended March 31, 2022 as compared to the three months ended March 31,
2021, due to revenue declines in all of our above-listed revenue categories with
the exception of fiber broadband. See our segment results below for additional
information.

Operating Expenses

The following table summarizes our operating expenses for the three months ended
March 31, 2022 and 2021:

                                                                Three Months Ended March 31,
                                                                 2022                  2021                 % Change
                                                                   (Dollars

in millions) Cost of services and products (exclusive of depreciation and amortization)

                                          $       1,985                 2,136                       (7) %
Selling, general and administrative                                  800                   756                        6  %
Depreciation and amortization                                        808                 1,150                      (30) %

Total operating expenses                                   $       3,593                 4,042                      (11) %


Cost of Services and Products (exclusive of depreciation and amortization)


Cost of services and products (exclusive of depreciation and amortization)
decreased by $151 million for the three months ended March 31, 2022 as compared
to the three months ended March 31, 2021. This decrease was primarily due to
reductions in salaries and wages and other employee-related expense from lower
headcount and lower facility and real estate costs.

Selling, General and Administrative


Selling, general and administrative expenses increased by $44 million for the
three months ended March 31, 2022 as compared to the three months ended March
31, 2021. The increase was primarily due to a gain on sale of assets in the
three months ended March 31, 2021 and higher professional fees related to the
pending sale of our Latin American and ILEC businesses. The increases were
partially offset by lower property and other taxes.

                                       42
--------------------------------------------------------------------------------

  Table of Contents
Depreciation and Amortization

The following table provides detail of our depreciation and amortization
expense:

                                              Three Months Ended March 31,
                                                    2022                    2021       % Change
                                                  (Dollars in millions)
Depreciation                           $                         534         725          (26) %
Amortization                                                     274         425          (36) %
Total depreciation and amortization    $                         808       

1,150 (30) %




Depreciation expense decreased by $191 million for the three months ended March
31, 2022, as compared to the three months ended March 31, 2021 primarily due to
discontinuing the depreciation of the tangible assets reclassified as held for
sale of our Latin American and ILEC businesses upon entering into our
divestiture agreements. We estimate we would have recorded an additional $153
million of depreciation expense during the three months ended March 31, 2022 if
we had not agreed to sell these businesses. In addition, depreciation expense
decreased $48 million due to the early retirement of certain copper-based
infrastructure during the fourth quarter of 2021 and decreased $9 million due to
the impact of annual rate depreciable life changes. These decreases were
partially offset by higher depreciation expense of $25 million associated with
net growth in depreciable assets.

Amortization expense decreased by $151 million for the three months ended March
31, 2022, as compared to the three months ended March 31, 2021. The decrease was
primarily due to a decrease of $118 million as a result of certain customer
relationship intangible assets becoming fully amortized at the end of the first
quarter 2021, a decrease of $15 million due to discontinuing the amortization of
the intangible assets reclassified as held for sale of our Latin American and
ILEC businesses upon entering into our divestiture agreements, and a decrease of
$11 million associated with net reductions in amortizable assets.

Further analysis of our segment operating expenses by segment is provided below in "Segment Results."


Other Consolidated Results

The following table summarizes our total other expense, net and income tax
expense:

                                  Three Months Ended March 31,
                                        2022                   2021       % Change
                                     (Dollars in millions)
Interest expense           $                        (352)      (389)         (10) %
Other income, net                                     70         34          106  %
Total other expense, net   $                        (282)      (355)         (21) %
Income tax expense         $                         202        157           29  %



Interest Expense

Interest expense decreased by $37 million for the three months ended March 31,
2022 as compared to the three months ended March 31, 2021. The decrease was
primarily due to the decrease in average outstanding long-term debt from
$31.6 billion to $28.8 billion and the decrease in the average interest rate of
4.88% to 4.58% for the three months ended March 31, 2021 compared to the three
months ended March 31, 2022.

                                       43
--------------------------------------------------------------------------------

  Table of Contents
Other Income, Net

Other income, net reflects certain items not directly related to our core
operations, including (i) gains and losses on extinguishments of debt, (ii)
components of net periodic pension and post-retirement benefit costs, (iii)
foreign currency gains and losses, (iv) our share of income from partnerships we
do not control, (v) interest income, (vi) gains and losses from non-operating
asset dispositions and (vii) other non-core items.

                                                                     Three Months Ended March 31,
                                                                       2022                  2021                % Change
                                                                        (Dollars in millions)
Gain on extinguishment of debt                                  $             -                   8                        nm
Pension and post-retirement net periodic (expense) income                    (3)                 24                        nm
Foreign currency loss                                                       (13)                (16)                   (19) %
Gain on investment in limited partnership                                    66                   -                        nm
Other                                                                        20                  18                     11  %
Total other income, net                                         $            70                  34                    106  %

_______________________________________________________________________________

nm Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.



The change in pension and post-retirement net periodic (expense) income for the
three months ended March 31, 2022 as compared to the three months ended March
31, 2021 is primarily driven by lower expected returns on plan assets. Other
income, net for the three months ended March 31, 2022 also included a gain on
investment in a limited partnership as a result of the commencement of active
trading in late 2021 of the underlying investments held by the limited
partnership, which resulted in an increase to the net asset value of our
investment. See Note 10-Fair Value of Financial Instruments for more information
regarding the gain recognized on the investment in a limited partnership.

Income Tax Expense

For the three months ended March 31, 2022 and 2021, our effective income tax rate was 25.2% and 24.8%, respectively.

Segment Results

General

Reconciliation of segment revenue to total operating revenue is below:

                                 Three Months Ended March 31,
                                       2022                   2021
                                    (Dollars in millions)
Operating revenue
Business                  $                      3,401       3,595
Mass Markets                                     1,275       1,434
Total operating revenue   $                      4,676       5,029


                                       44
--------------------------------------------------------------------------------

Table of Contents

Reconciliation of segment EBITDA to total adjusted EBITDA is below:

                                     Three Months Ended March 31,
                                           2022                   2021
                                         (Dollars in millions)
Adjusted EBITDA
Business                      $                      2,288        2,407
Mass Markets                                         1,109        1,257
Total segment EBITDA                                 3,397        3,664
Operations and Other EBITDA                         (1,483)      (1,507)
Total adjusted EBITDA         $                      1,914        2,157



For additional information on our reportable segments and product and services
categories, see Note 4-Revenue Recognition and Note 12-Segment Information to
our consolidated financial statements in Item 1 of Part I of this report.

Business Segment

                                              Three Months Ended March 31,
                                                    2022                   2021       % Change
                                                 (Dollars in millions)
Business Segment Product Categories:
Compute and Application Services       $                        427         431            (1) %
IP and Data Services                                          1,522       1,578            (4) %
Fiber Infrastructure Services                                   535         557            (4) %
Voice and Other                                                 917       1,029           (11) %
Total Business Segment Revenue                                3,401       3,595            (5) %
Expenses:
Total expense                                                 1,113       1,188            (6) %
Total adjusted EBITDA                  $                      2,288       2,407            (5) %


Three months ended March 31, 2022 compared to the same period ended March 31, 2021


Business segment revenue decreased $194 million for the three months ended March
31, 2022 as compared to March 31, 2021. The revenue decrease was primarily due
to the following factors:

•Compute and Application Services declined primarily due an ongoing large customer disconnect for IT Solutions and lower demand in the Large Enterprise and IGAM sales channels, partially offset by growth in Managed Security and Cloud services;


•IP and Data Services decreased primarily due to declines in traditional VPN
networks and continued declines in Ethernet sales across all our sales channels,
partially offset by an increase in IP services across our IGAM and Enterprise
sales channels;

•Fiber Infrastructure Services declined primarily due to lower equipment sales, specifically within our Large Enterprise and Mid Markets sales channels and lower dark fiber sales within our Large Enterprise sales channel;

•Voice and Other decreased due to continued decline of legacy voice, private line and other services to customers across all sales channels.

                                       45
--------------------------------------------------------------------------------

Table of Contents


The decrease in Business segment revenue for the three months ended March 31,
2022 includes $8 million of unfavorable foreign currency adjustments as compared
to the three months ended March 31, 2021.

Business segment expense decreased by $75 million for the three months ended
March 31, 2022 compared to March 31, 2021 primarily due to lower cost of sales
due to the decline in revenue and lower employee headcount.

Business segment adjusted EBITDA as a percentage of revenue was 67% for both the three months ended March 31, 2022 and March 31, 2021.

Mass Markets Segment

                                            Three Months Ended March 31,
                                                  2022                   2021       % Change
                                                 (Dollars in millions)
Mass Markets Product Categories:
Fiber Broadband                      $                        145         122            19  %
Other Broadband                                               610         648            (6) %
Voice and Other                                               520         664           (22) %
Total Mass Markets Segment Revenue                          1,275       1,434           (11) %
Expenses:
Total expense                                                 166         177            (6) %
Total adjusted EBITDA                $                      1,109       1,257           (12) %


Three months ended March 31, 2022 compared to the same period ended March 31, 2021

Segment revenue decreased $159 million for the three months ended March 31, 2022 as compared to the March 31, 2021 primarily due to the following factors:


•Fiber Broadband revenue increased driven by continued growth in fiber customers
associated with our continued increase in enabled locations from our Quantum
Fiber buildout;

•Other Broadband revenue decreased during the period driven by continued pressure on our lower speed copper-based broadband services due to customer losses;


•Voice and Other declined primarily due to (i) a $64 million net reduction in
CAF II revenue during the three months ended March 31, 2022 compared to the same
period in 2021, resulting from a decrease of $123 million due to the conclusion
of the CAF II program on December 31, 2021, partially offset by our recognition
of $59 million of non-cash revenue release related to CAF II support payments
received through the end of 2021 based on our final buildout and filing
submissions, (ii) the continued loss of legacy voice customers and (iii) the
exit of our Prism video product.

Mass Markets segment expense decreased $11 million for the three months ended
March 31, 2022 as compared to the March 31, 2021 primarily due to lower cost of
sales due to the decline in revenue and lower employee headcount.

Segment adjusted EBITDA as a percentage of revenue was 87% for the three months ended March 31, 2022 and 88% for the three months ended March 31, 2021.

                                       46
--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources

Overview of Sources and Uses of Cash


We are a holding company that is dependent on the capital resources of our
subsidiaries to satisfy our parent company liquidity requirements. Several of
our significant operating subsidiaries have borrowed funds either on a
standalone basis or as part of a separate restricted group with certain of its
subsidiaries or affiliates. The terms of the instruments governing the
indebtedness of these borrowers or borrowing groups may restrict our ability to
access their accumulated cash. In addition, our ability to access the liquidity
of these and other subsidiaries may be limited by tax, legal and other
considerations.

At March 31, 2022, we held cash and cash equivalents of $425 million, which
includes cash and cash equivalents classified as held for sale, and we also had
$1.0 billion of borrowing capacity available under our revolving credit
facility. We typically use our revolving credit facility as a source of
liquidity for operating activities and our other cash requirements. We had
approximately $148 million of cash and cash equivalents outside the United
States at March 31, 2022. We currently believe that there are no material
restrictions on our ability to repatriate cash and cash equivalents into the
United States, and that we may do so without paying or accruing U.S. taxes.
Other than transactions related to the pending sale of our Latin American
business, we do not currently intend to repatriate to the United States any of
our foreign cash and cash equivalents from operating entities.

Our executive officers and our Board of Directors review our sources and potential uses of cash in connection with our annual budgeting process. Generally speaking, our principal funding source is cash from operating activities, and our principal cash requirements include operating expenses, capital expenditures, income taxes, debt repayments, dividends, periodic securities repurchases, periodic pension contributions and other benefits payments. The impact of the pending sale of our Latin American and ILEC businesses is further described below.


Based on our current capital allocation objectives, for the full year 2022 we
project expending approximately $3.2 billion to $3.4 billion of capital
expenditures and $1.00 per share for cash dividends on our common stock (based
on the assumptions described below under "Dividends").

For the 12 month period ending March 31, 2023, we project that our fixed
commitments will include (i) $125 million of scheduled term loan amortization
payments and (ii) $33 million of finance lease and other fixed payments (which
includes $2 million of current finance lease obligations that have been
reclassified as held for sale).

We will continue to monitor our future sources and uses of cash, and anticipate
that we will make adjustments to our capital allocation strategies when, as and
if determined by our Board of Directors. We may also draw on our revolving
credit facility as a source of liquidity for operating activities and to give us
additional flexibility to finance our capital investments, repayments of debt,
pension contributions and other cash requirements.

For additional information, see "Risk Factors-Financial Risks" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021.

Impact of the Planned Divestiture of the Latin American and ILEC Businesses


As discussed in 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, we entered into definitive agreements to divest our Latin American and
ILEC businesses on July 25, 2021 and August 3, 2021, respectively. As further
described elsewhere herein, these transactions are expected to provide us with a
substantial amount of cash proceeds upon closing, but ultimately will reduce our
base of income-generating assets that generate our recurring cash from operating
activities.
                                       47
--------------------------------------------------------------------------------

Table of Contents

Capital Expenditures


We incur capital expenditures on an ongoing basis to expand and improve our
service offerings, enhance and modernize our networks and compete effectively in
our markets. We evaluate capital expenditure projects based on a variety of
factors, including expected strategic impacts (such as forecasted impact on
revenue growth, productivity, expenses, service levels and customer retention)
and our expected return on investment. The amount of capital investment is
influenced by, among other things, current and projected demand for our services
and products, cash flow generated by operating activities, cash required for
other purposes and regulatory considerations (such as governmentally-mandated
infrastructure buildout requirements).

Our capital expenditures continue to be focused on enhancing network operating
efficiencies, supporting new service developments, and expanding our fiber
network, including our Quantum Fiber buildout plan. For more information on our
capital spending, see (i) "-Overview of Sources and Uses of Cash " above, (ii)
"Cash Flow Activities-Investing Activities" below and (iii) Item 1 of Part I of
our Annual Report on Form 10-K for the year ended December 31, 2021.

Debt and Other Financing Arrangements


Subject to market conditions, we expect to continue to issue debt securities
from time to time in the future to refinance a substantial portion of our
maturing debt, including issuing debt securities of certain of our subsidiaries
to refinance their maturing debt to the extent feasible and consistent with our
capital allocation strategies. The availability, interest rate and other terms
of any new borrowings will depend on the ratings assigned by credit rating
agencies, among other factors.

As of the date of this report, the credit ratings for the senior secured and
unsecured debt of Lumen Technologies, Inc., Level 3 Financing, Inc. and Qwest
Corporation were as follows:

                                                               Moody's Investors
                       Borrower                                  Service, Inc.            Standard & Poor's             Fitch Ratings
Lumen Technologies, Inc.:
Unsecured                                                             B2                         BB-                          BB
Secured                                                               Ba3                        BBB-                        BB+

Level 3 Financing, Inc.
Unsecured                                                             Ba3                         BB                          BB
Secured                                                               Ba1                        BBB-                        BBB-

Qwest Corporation:
Unsecured                                                             Ba2                        BBB-                         BB



Our credit ratings are reviewed and adjusted from time to time by the rating
agencies. Any future changes in the senior unsecured or secured debt ratings of
us or our subsidiaries could impact our access to capital or borrowing costs.
See "Risk Factors-Financial Risks" in Item 1A of Part I of our Annual Report on
Form 10-K for the year ended December 31, 2021.
                                       48
--------------------------------------------------------------------------------

Table of Contents

Net Operating Loss Carryforwards


As of December 31, 2021, Lumen Technologies had approximately $2.9 billion of
federal net operating loss carryforwards ("NOLs"), which for U.S. federal income
tax purposes can be used to offset future taxable income. These NOLs are
primarily related to federal NOLs we acquired through the Level 3 acquisition on
November 1, 2017 and are subject to limitations under Section 382 of the
Internal Revenue Code and related U.S. Treasury Department regulations. We
maintain a Section 382 rights agreement designed to safeguard through late 2023
our ability to use those NOLs. Assuming we can continue using these NOLs in the
amounts projected, we expect to utilize a substantial portion of our NOLs to
offset taxable gains generated by the completion of our pending divestitures.
The amounts of our near-term future tax payments will depend upon many factors,
including our future earnings and tax circumstances and the impact of any
corporate tax reform or taxable transactions. Based on current laws and our
current assumptions and projections, we estimate our cash income tax liability
related to 2022 will be approximately $100 million. If, as expected, we use a
substantial portion of our NOLs in 2022 to offset divestiture-related gains, we
anticipate that our cash income tax liabilities will increase substantially in
future periods.

We cannot assure you we will be able to use our NOL carryforwards fully. See
"Risk Factors-Financial Risks-We may not be able to fully utilize our NOLs" in
Item 1A of Part I of our Annual Report on Form 10-K for the year ended December
31, 2021.

Dividends

We currently expect to continue our current practice of paying quarterly cash
dividends in respect of our common stock subject to our Board of Directors'
discretion to modify or terminate this practice at any time and for any reason
without prior notice. Our current quarterly common stock dividend rate is $0.25
per share, as approved by our Board of Directors, which we believe is a payout
rate which enables us to balance our multiple objectives of managing and
investing in our business, deleveraging our balance sheet over time and
returning a substantial portion of our cash to our shareholders. Assuming
continued authorization by our Board during 2022 at this rate of $0.25 per
share, our average total dividend paid each quarter would be approximately $253
million based on the number of our currently outstanding shares (which figure
(i) assumes no increases or decreases in the number of shares and (ii) includes
dividend payments in connection with the anticipated vesting of currently
outstanding equity awards). Dividend payments upon the vesting of equity
incentive awards was $19 million during three months ended March 31, 2022. See
Risk Factors-"Business Risks" in Item 1A of Part I of our Annual Report on Form
10-K for the year ended December 31, 2021.

Revolving Facilities and Other Debt Instruments


At March 31, 2022, we had $13.4 billion of outstanding consolidated secured
indebtedness, $16.4 billion of outstanding consolidated unsecured indebtedness
(including long-term debt reclassified as liabilities held for sale, but
excluding finance lease obligations, unamortized premiums, net and unamortized
debt issuance costs) and $1.0 billion of unused borrowing capacity under our
revolving credit facility, as discussed further below.

Under our amended and restated credit agreement dated as of January 31, 2020
(the "Amended Credit Agreement"), we maintained at March 31, 2022 (i) a $2.2
billion senior secured revolving credit facility, under which we owed $1.2
billion as of such date, and (ii) $6.2 billion of senior secured term loan
facilities. For additional information, see (i) "-Overview of Sources and Uses
of Cash," (ii) Note 6-Long-Term Debt and Credit Facilities to our consolidated
financial statements in Item 1 of Part I of this report and (iii) Note
7-Long-Term Debt and Credit Facilities in Item 8 of Part II of our Annual Report
on Form 10-K for the year ended December 31, 2021.

At March 31, 2022, we had $47 million of letters of credit outstanding under our
$225 million uncommitted letter of credit facility. Additionally, under separate
facilities maintained by one of our affiliates, we had outstanding letters of
credit, or other similar obligations, of approximately $67 million as of March
31, 2022, of which $4 million was collateralized by cash that is reflected on
our consolidated balance sheets as restricted cash.

                                       49
--------------------------------------------------------------------------------

  Table of Contents
In addition to its indebtedness under our Amended Credit Agreement, Lumen
Technologies is indebted under its outstanding senior notes, and several of its
subsidiaries are indebted under separate credit facilities or senior notes. For
information on the terms and conditions of other debt instruments of ours and
our subsidiaries, including financial and operating covenants, see (i) Note
6-Long-Term Debt and Credit Facilities to our consolidated financial statements
in Item 1 of Part I of this report and (ii) "-Other Matters" below.

Pension and Post-retirement Benefit Obligations


We are subject to material obligations under our existing defined benefit
pension plans and post-retirement benefit plans. At December 31, 2021, the
accounting unfunded status of our qualified and non-qualified defined benefit
pension plans and our qualified post-retirement benefit plans was $1.2 billion
and $2.8 billion, respectively. For additional information about our pension and
post-retirement benefit arrangements, see "Critical Accounting Policies and
Estimates-Pensions and Post-Retirement Benefits" in Item 7 of our Annual Report
on Form 10-K for the year ended December 31, 2021 and see Note 11-Employee
Benefits to our consolidated financial statements in Item 8 of Part II of the
same report.

As of January 1, 2022, we spun off a new pension plan (the "Lumen Pension Plan")
from the Lumen Combined Pension Plan ("Combined Pension Plan") in anticipation
of the pending sale of the ILEC business, as described further in 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. As a result, at the
time of the spin-off $2.5 billion of pension benefit obligation and $2.2 billion
of plan assets were transferred to the Lumen Pension Plan.

Benefits paid by our Combined Pension Plan and the Lumen Pension Plan are paid
through the trust that holds the Combined Pension Plan's assets. The pension
obligation and pension assets for the Lumen Pension Plan will be revalued in
conjunction with the closing of the sale of the ILEC business, and we will make
the necessary contributions, if any, to fully fund the Lumen Pension Plan
obligation at, or prior to, the time of closing as required under the purchase
agreement. Based on current laws and circumstances, we do not expect any
contributions to be required for our Combined Pension Plan during 2022. The
amount of required contributions to our Combined Pension Plan in 2023 and beyond
will depend on a variety of factors, most of which are beyond our control,
including earnings on plan investments, prevailing interest rates, demographic
experience, changes in plan benefits and changes in funding laws and
regulations. We occasionally make voluntary contributions to our plans in
addition to required contributions and reserve the right to do so in the future.
We last made a voluntary contribution to the trust for our Combined Pension Plan
during 2018, and we currently do not expect to make a voluntary contribution in
2022.

Substantially all of our post-retirement health care and life insurance benefits
plans are unfunded and are paid by us with available cash. Based on our most
recent estimates, we expect to pay $217 million of post-retirement benefits, net
of participant contributions and direct subsidies for the full year 2022. For
additional information on our expected future benefits payments for our
post-retirement benefit plans, please see Note 11-Employee Benefits to our
consolidated financial statements in Item 8 of Part II of our Annual Report Form
10-K for the year ended December 31, 2021.

Our pension plan contains provisions that allow us, from time to time, to offer
lump sum payment options to certain former employees in settlement of their
future retirement benefits. We record an accounting settlement charge,
consisting of the recognition of certain deferred costs of the pension plan,
associated with these lump sum payments only if, in the aggregate, they exceed
the sum of the annual service and interest costs for the plan's net periodic
pension benefit cost, which represents the settlement accounting threshold.
During 2021, lump sum pension settlement payments exceeded the settlement
threshold. Please see Note 11-Employee Benefits to our consolidated financial
statements in Item 8 of Part II of our Annual Report Form 10-K for the year
ended December 31, 2021 for additional information. Although the settlement
threshold was not exceeded as of, March 31, 2022, it could be reached in
subsequent quarters this year.

For 2022, our expected annual long-term rate of return on the pension plan assets is 5.5%. However, actual returns could be substantially different.

See Note 8-Employee Benefits to our consolidated financial statements in Item 1 of Part I of this report for more information.

                                       50
--------------------------------------------------------------------------------

Table of Contents

Future Contractual Obligations


For information regarding our estimated future contractual obligations, see the
MD&A discussion included in Item 7 of Part II of our Annual Report on Form 10-K
for the year ended December 31, 2021.

Federal Broadband Support Programs


Between 2015 and 2021, we received approximately $500 million annually through
Phase II of the CAF, a program that ended on December 31, 2021. In connection
with the CAF funding, we were required to meet certain specified infrastructure
buildout requirements in 33 states by the end of 2021, which required
substantial capital expenditures. In the first quarter of 2022, we recognized
$59 million of previously deferred revenue related to the conclusion of the CAF
program based upon our final buildout and filing submissions. The government has
the right to audit our compliance with the CAF program and the ultimate outcome
of any remaining examinations is unknown, but could result in a liability to us
in excess of our reserve accruals established for these matters.

In early 2020, the FCC created the Rural Digital Opportunity Fund (the "RDOF"),
which is a new federal support program designed to replace the CAF Phase II
program. On December 7, 2020, the FCC allocated in its RDOF Phase I auction $9.2
billion in support payments over 10 years to deploy high speed broadband to over
5.2 million unserved locations. We won bids for RDOF Phase I support payments of
$26 million, annually. We expect our support payments under the RDOF Phase I
program will begin soon after our anticipated receipt of the FCC's approval of
our pending application. Assuming we timely complete our pending divestiture of
the ILEC business on the terms described herein, we expect a portion of these
payments will accrue to the purchaser of that business. See 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.

For additional information on these programs, see (i) "Business-Regulation of
Our Business" in Item 1 of Part I of our Annual Report on Form 10-K for the year
ended December 31, 2021 and (ii) "Risk Factors-Financial Risks" in Item 1A of
Part I of the same Annual Report.

Federal officials have proposed changes to current programs and laws that could
impact us, including proposals designed to increase broadband access, increase
competition among broadband providers, lower broadband costs and re-adopt "net
neutrality" rules similar to those adopted under the Obama Administration. In
November 2021, the U.S. Congress enacted legislation that appropriated $65
billion to improve broadband affordability and access, primarily through
federally funded state grants. As of the date of this report, the U.S.
Department of Commerce is still developing guidance regarding these grants, so
it is premature to speculate on the potential impact of this legislation on us.

                                       51
--------------------------------------------------------------------------------

  Table of Contents
Cash Flow Activities

The following table summarizes our consolidated cash flow activities for the three months ended March 31, 2022 and 2021.

                                                           Three Months Ended March 31,
                                                            2022                  2021                 $ Change
                                                                          (Dollars in millions)
Net cash provided by operating activities             $       1,375                 1,525                 (150)
Net cash used in investing activities                          (569)                 (675)                (106)
Net cash used in financing activities                          (776)                 (774)                   2



Operating Activities

Net cash provided by operating activities decreased by $150 million for the
three months ended March 31, 2022 as compared to the three months ended March
31, 2021 primarily due to lower net income adjusted for non-cash expenses and
gains, partially offset by increased collections on accounts receivable. Cash
provided by operating activities is subject to variability period over period as
a result of timing differences, including with respect to the collection of
receivables and payments of interest expense, accounts payable and bonuses.

For additional information about our operating results, see "Results of Operations" above.

Investing Activities


Net cash used in investing activities decreased by $106 million for the three
months ended March 31, 2022 as compared to the three months ended March 31, 2021
primarily due to a decrease in capital expenditures.

Financing Activities


Net cash used in financing activities increased by $2 million for the three
months ended March 31, 2022 as compared to the three months ended March 31, 2021
primarily due to higher payments of long-term debt, partially offset by higher
net borrowing on the Revolving Credit Facility.

See Note 6-Long-Term Debt and Credit Facilities to our consolidated financial
statements in Item 1 of Part I of this report for additional information on our
outstanding debt securities.

Other Matters


We have cash management and loan arrangements with a majority of our
income-generating subsidiaries, in which a substantial portion of the aggregate
cash of those subsidiaries' is periodically advanced or loaned to us or our
service company affiliate. Although we periodically repay these advances to fund
the subsidiaries' cash requirements throughout the year, at any given point in
time we may owe a substantial sum to our subsidiaries under these arrangements.
In accordance with generally accepted accounting principles, these arrangements
are reflected in the balance sheets of our subsidiaries but are eliminated in
consolidation and therefore not recognized on our consolidated balance sheets.

We are also involved in various legal proceedings that could substantially impact our financial position. See Note 13-Commitments, Contingencies and Other Items to our consolidated financial statements in Item 1 of Part I of this report for additional information.

                                       52
--------------------------------------------------------------------------------

Table of Contents

Market Risk

As of March 31, 2022, we are exposed to market risk from changes in interest rates on our variable rate long-term debt obligations and fluctuations in certain foreign currencies.


Management periodically reviews our exposure to interest rate fluctuations and
periodically implements strategies to manage the exposure. From time to time, we
have used derivative instruments to (i) swap our exposure to variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. We have established policies and procedures
for risk assessment and the approval, reporting and monitoring of derivative
instrument activities. As of March 31, 2022, we did not hold or issue derivative
financial instruments for trading or speculative purposes.

In 2019, we executed swap agreements that reduced our exposure to floating rates
with respect to $4.0 billion principal amount of floating rate debt. Certain
agreements relating to $2.5 billion of such debt expired on March 31, 2022, with
the remainder expiring on June 30, 2022. See Note 11-Derivative Financial
Instruments to our consolidated financial statements in Item 1 of Part I of this
report for additional disclosure regarding our hedging arrangements.

As of March 31, 2022, we had approximately $10.7 billion of floating rate debt,
$1.5 billion of which was subject to the remaining hedging arrangements
described above. A hypothetical increase of 100 basis points in LIBOR relating
to our $9.2 billion of unhedged floating rate debt would, among other things,
decrease our annual pre-tax earnings by approximately $92 million. Additionally,
our credit agreements contain language about a possible change from LIBOR to an
alternative index.

We conduct a portion of our business in currencies other than the U.S. dollar,
the currency in which our consolidated financial statements are reported. Our
European subsidiaries and certain Latin American subsidiaries use the local
currency as their functional currency, as the majority of their revenue and
purchases are transacted in their local currencies. Certain Latin American
countries previously designated as highly inflationary economies use the U.S.
dollar as their functional currency. Although we continue to evaluate strategies
to mitigate risks related to the effect of fluctuations in currency exchange
rates, we will likely recognize gains or losses from international transactions.
Accordingly, changes in foreign currency rates relative to the U.S. dollar could
adversely impact our operating results.

Certain shortcomings are inherent in the method of analysis presented in the
computation of exposures to market risks. Actual values may differ materially
from those disclosed by us from time to time if market conditions vary from the
assumptions used in the analyses performed. These analyses only incorporate the
risk exposures that existed at March 31, 2022.

Other Information


Our website is www.lumen.com. We routinely post important investor information
in the "Investor Relations" section of our website at ir.lumen.com. The
information contained on, or that may be accessed through, our website is not
part of this quarterly report. You may obtain free electronic copies of annual
reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on
Form 8-K filed by us or our affiliates Level 3 Parent, LLC and Qwest
Corporation, and all amendments to those reports, in the "Investor Relations"
section of our website (ir.lumen.com) under the headings "FINANCIALS" and "SEC
Filings." These reports are available on our website as soon as reasonably
practicable after they are electronically filed with the SEC. 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.
                                       53
--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses

All news about LUMEN TECHNOLOGIES, INC.
06/30LUMEN TECHNOLOGIES, INC. : Other Events (form 8-K)
AQ
06/30Apollo's Brightspeed Secures All Required State Approvals for Network Expansion
MT
06/30Brightspeed Achieves Major Regulatory Milestone in Its Operational Readiness Preparatio..
PR
06/29Brightspeed Announces Initial Fiber Build Markets for Ohio
PR
06/28Lumen discovers new malware that targeted home-office routers for two years
PR
06/22Brightspeed Announces Initial Fiber Build Markets for Alabama
PR
06/15Brightspeed Announces Initial Fiber Build Markets for Texas
PR
06/13TRANSCRIPT : Lumen Technologies, Inc. Presents at Wells Fargo Streaming and Connectivity C..
CI
06/07Brightspeed Announces Initial Fiber Build Markets for North Carolina
PR
06/06Lumen Technologies to Present at the Wells Fargo Streaming & Connectivity Day
PR
More news
Analyst Recommendations on LUMEN TECHNOLOGIES, INC.
More recommendations