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, 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 six 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 , and Asia Pacific connects and, prior to the recent closing of our
divestiture of the Latin American business, our Latin American network
connected, 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 June 30, 2022 , we had approximately 35,000 employees.
Recently Completed Divestiture of the Latin American Business and Planned Divestiture of the ILEC Business
OnAugust 1, 2022 , affiliates ofLevel 3 Parent, LLC , an indirect wholly-owned subsidiary of Lumen, sold Lumen's Latin American business in exchange for cash proceeds of approximately$2.7 billion , subject to certain post-closing adjustments. See Note 17-Subsequent Events for additional details. 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 ILEC transaction or any of our other assumptions prove to be incorrect. For more information, see (i) Note 2-Recently Completed Divestiture of the Latin American Business and Planned Divestiture of ILEC Business 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. 41 -------------------------------------------------------------------------------- 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 endedDecember 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. 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 sinceMarch 2020 . Beginning the second half of 2020 and continuing into 2021, we rationalized our leased footprint and ceased using 39 leased property locations that were underutilized. In conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and incur additional costs during the remainder of 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 shortages of certain components and 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
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
global enterprise customers and carriers.
•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
See Note 12-Segment Information to our consolidated financial statements in Item 1 of Part I of this report for additional information.
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--------------------------------------------------------------------------------Table of Contents We categorize our Business segment revenue among the following products and services categories:
•Compute and Application Services, which include our
•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.
Since 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.
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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 and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
(Dollars in millions, except per share amounts)
Operating revenue $ 4,612 4,924 9,288 9,953
Operating expenses 3,700 3,918 7,293 7,960
Operating income 912 1,006 1,995 1,993
Total other expense, net (459) (332) (741) (687)
Income before income taxes 453 674 1,254 1,306
Income tax expense 109 168 311 325
Net income $ 344 506 943 981
Basic earnings per common share $ 0.34 0.47 0.93 0.90
Diluted earnings per common share $ 0.34 0.46 0.93 0.90
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 FCC 's Connect America Fund II ("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.
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Revenue
The following tables summarize our consolidated operating revenue recorded under each of our two segments and in our four revenue sales channels within the Business segment described above:
Three Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Business Segment:
International & Global Accounts $ 996 1,011 (1) %
Large Enterprise 884 945 (6) %
Mid-Market Enterprise 626 661 (5) %
Wholesale 910 905 1 %
Business Segment Revenue 3,416 3,522 (3) %
Mass Markets Segment Revenue 1,196 1,402 (15) %
Total consolidated operating revenue $ 4,612 4,924 (6) %
Six Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Business Segment:
International & Global Accounts $ 1,995 2,031 (2) %
Large Enterprise 1,761 1,898 (7) %
Mid-Market Enterprise 1,262 1,354 (7) %
Wholesale 1,799 1,834 (2) %
Business Segment Revenue 6,817 7,117 (4) %
Mass Markets Segment Revenue 2,471 2,836 (13) %
Total consolidated operating revenue $ 9,288 9,953 (7) %
Our consolidated operating revenue decreased by $312 million and $665 million ,
respectively, for the three and six months ended June 30, 2022 as compared to
the three and six months ended June 30, 2021 , due to revenue declines in
substantially all of our revenue categories listed above. See our segment
results below for additional information.
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Operating Expenses
The following tables summarize our operating expenses for the three and six
months ended
Three Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Cost of services and products (exclusive of
depreciation and amortization) $ 2,058 2,115 (3) %
Selling, general and administrative 815 762 7 %
Depreciation and amortization 827 1,041 (21) %
Total operating expenses $ 3,700 3,918 (6) %
Six Months Ended June 30,
2022 2021 % Change
(Dollarsin millions) Cost of services and products (exclusive of depreciation and amortization)
$ 4,043 4,251 (5) % Selling, general and administrative 1,615 1,518 6 % Depreciation and amortization 1,635 2,191 (25) % Total operating expenses$ 7,293 7,960 (8) %
Cost of Services and Products (exclusive of depreciation and amortization)
Cost of services and products (exclusive of depreciation and amortization) decreased by$57 million and$208 million , respectively, for the three and six months endedJune 30, 2022 as compared to the three and six months endedJune 30, 2021 . This decrease was primarily due to reductions in employee-related expense from lower headcount and lower facility costs and network expenses.
Selling, General and Administrative
Selling, general and administrative expenses increased by$53 million and$97 million , respectively, for the three and six months endedJune 30, 2022 as compared to the three and six months endedJune 30, 2021 . The increase was primarily due to a gain on sale of assets in the three and six months endedJune 30, 2021 and higher professional fees related to the completed divestiture of our Latin American business and pending divestiture of a portion of our ILEC business during the three and six months endedJune 30, 2022 . These increases were partially offset by lower property and other taxes. 46 -------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization The following tables provide detail of our depreciation and amortization expense: Three Months Ended June 30, 2022 2021 % Change (Dollars in millions) Depreciation $ 550 723 (24) % Amortization 277 318 (13) % Total depreciation and amortization $ 827 1,041 (21) % Six Months Ended June 30, 2022 2021 % Change (Dollars in millions) Depreciation $ 1,084 1,448 (25) % Amortization 551 743 (26) % Total depreciation and amortization $ 1,635
2,191 (25) %
Depreciation expense decreased by$173 million and$364 million , respectively, for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 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$145 million and$298 million of depreciation expense during the three and six months endedJune 30, 2022 if we had not agreed to sell these businesses. In addition, for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 , depreciation expense decreased$48 million and$96 million , respectively, due to the early retirement of certain copper-based infrastructure during the fourth quarter of 2021 and decreased$10 million and$19 million , respectively due to the impact of annual rate depreciable life changes. These decreases were partially offset by higher depreciation expense of$33 million and$58 million , respectively, associated with net growth in depreciable assets. Amortization expense decreased by$41 million and$192 million , respectively, for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 . The decrease was primarily due to a decrease of$118 million for the six months endedJune 30, 2022 as compared toJune 30, 2021 resulting from certain customer relationship intangible assets becoming fully amortized at the end of the first quarter 2021, a decrease of$14 million and$29 million , respectively, 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, a decrease of$16 million and$27 million , respectively, associated with net reductions in amortizable assets and a decrease of$7 million and$10 million , respectively, related to decommissioned applications for the three and six months endedJune 30, 2022 , as compared to the three and six months endedJune 30, 2021 .
Further analysis of our segment operating expenses by segment is provided below in "Segment Results."
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Other Consolidated Results
The following tables summarize our total other expense, net and income tax
expense:
Three Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Interest expense $ (337) (384) (12) %
Other (expense) income, net (122) 52 nm
Total other expense, net $ (459) (332) 38 %
Income tax expense $ 109 168 (35) %
Six Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Interest expense $ (689) (773) (11) %
Other (expense) income, net (52) 86 nm
Total other expense, net $ (741) (687) 8 %
Income tax expense $ 311 325 (4) %
Interest Expense
Interest expense decreased by $47 million and $84 million , respectively, for the
three and six months ended June 30, 2022 as compared to the three and six months
ended June 30, 2021 . The decrease was primarily due to the decrease in average
outstanding long-term debt (inclusive of debt classified as held for sale) from
$31.3 billion to $29.7 billion and from $31.5 billion to $29.9 billion ,
respectively, and the decrease in the average interest rate of 4.83% to 4.65%
and 4.86% to 4.80%, respectively, for the three and six months ended June 30,
2021 compared to the three and six months ended June 30, 2022 .
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Other (Expense) Income, Net
Other (expense) 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 including income from
transition and separation services provided by us to the purchasers of our
divested businesses.
Three Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Pension and post-retirement net periodic income $ 7 27 (74) %
Foreign currency (loss) gain (16) 8 nm
Loss on investment in limited partnership (137) - nm
Other 24 17 41 %
Total other (expense) income, net $ (122) 52 nm
Six Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Gain on extinguishment of debt $ - 8 nm
Pension and post-retirement net periodic income 4 51 (92) %
Foreign currency loss (29) (8) nm
Loss on investment in limited partnership (71) - nm
Other 44 35 26 %
Total other (expense) income, net $ (52) 86 nm
_______________________________________________________________________________nm Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
The decrease in pension and post-retirement net periodic income for the three and six months endedJune 30, 2022 as compared to the three and six months endedJune 30, 2021 was primarily driven by lower expected returns on plan assets. Other (expense) income, net for the three and six months endedJune 30, 2022 also included a loss on investment in a limited partnership as a result of changes in the value of underlying investments held by the limited partnership, which commenced active trading in late 2021, resulting in an decrease to the net asset value of our investment atJune 30, 2022 . See Note 10-Fair Value of Financial Instruments for more information regarding the loss recognized on the investment in a limited partnership.
Income Tax Expense
For the three and six months endedJune 30, 2022 , our effective income tax rate was 24.1% and 24.8%, respectively, and for both the three and six months endedJune 30, 2021 , our effective income tax rate was 24.9%. 49 --------------------------------------------------------------------------------
Table of Contents Segment Results General
Reconciliation of segment revenue to total operating revenue is below:
Three Months Ended June 30,
2022 2021
(Dollars in millions)
Operating revenue
Business $ 3,416 3,522
Mass Markets 1,196 1,402
Total operating revenue $ 4,612 4,924
Six Months Ended June 30,
2022 2021
(Dollars in millions)
Operating revenue
Business $ 6,817 7,117
Mass Markets 2,471 2,836
Total operating revenue $ 9,288 9,953
Reconciliation of segment EBITDA to total adjusted EBITDA is below:
Three Months Ended June 30,
2022 2021
(Dollars in millions)
Adjusted EBITDA
Business $ 2,287 2,364
Mass Markets 1,026 1,209
Total segment EBITDA 3,313 3,573
Operations and Other EBITDA (1,549) (1,484)
Total adjusted EBITDA $ 1,764 2,089
Six Months Ended June 30,
2022 2021
(Dollars in millions)
Adjusted EBITDA
Business $ 4,575 4,771
Mass Markets 2,135 2,466
Total segment EBITDA 6,710 7,237
Operations and Other EBITDA (3,032) (2,991)
Total adjusted EBITDA $ 3,678 4,246
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.
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Business Segment
Three Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Business Segment Product Categories:
Compute and Application Services $ 453 435 4 %
IP and Data Services 1,495 1,549 (3) %
Fiber Infrastructure Services 564 552 2 %
Voice and Other 904 986 (8) %
Total Business Segment Revenue 3,416 3,522 (3) %
Expenses:
Total expense 1,129 1,158 (3) %
Total adjusted EBITDA $ 2,287 2,364 (3) %
Six Months Ended June 30,
2022 2021 % Change
(Dollars in millions)
Business Segment Product Categories:
Compute and Application Services $ 880 866 2 %
IP and Data Services 3,017 3,127 (4) %
Fiber Infrastructure Services 1,099 1,109 (1) %
Voice and Other 1,821 2,015 (10) %
Total Business Segment Revenue 6,817 7,117 (4) %
Expenses:
Total expense 2,242 2,346 (4) %
Total adjusted EBITDA $ 4,575 4,771 (4) %
Three and six months ended
Business segment revenue decreased$106 million for the three months endedJune 30, 2022 as compared toJune 30, 2021 and decreased$300 million for the six months endedJune 30, 2022 as compared toJune 30, 2021 . The revenue decrease was primarily due to the following factors: •Compute and Application Services increased in both the three months and six months endedJune 30, 2022 , with higher revenue in IT solutions in the Wholesale sales channel, cloud services in the IGAM sales channel and managed security in the Large Enterprise sales channel, partially offset due to lower IT solutions revenue within both the Large Enterprise and IGAM sales channels; •IP and Data Services decreased in both the three months and six months endedJune 30, 2022 primarily due to declines in traditional VPN networks and continued declines in Ethernet services across all our sales channels, partially offset by continued strength in IP services across our IGAM, Large and Mid-Market Enterprise sales channels; 51 -------------------------------------------------------------------------------- Table of Contents •Fiber Infrastructure Services increased during the three months endedJune 30, 2022 primarily due to equipment sales in our IGAM and Large Enterprise sales channels and wavelengths services in our Wholesale sales channel. During the six months endedJune 30, 2022 , these product revenues declined primarily due to lower equipment sales in our Mid-Market sales channel and lower dark fiber services within our Large Enterprise sales channel, partially offset by higher wavelengths services in our Wholesale sales channel and equipment and dark fiber growth due to demand in our IGAM sales channel;
•Voice and Other decreased due to continued decline of legacy voice, private line and other services to customers across all sales channels.
The decrease in Business segment revenue for the three months endedJune 30, 2022 includes$15 million of unfavorable foreign currency adjustments as compared toJune 30, 2021 and the six months endedJune 30, 2022 includes$23 million of unfavorable foreign currency adjustments as compared toJune 30, 2021 . Business segment expense decreased by$29 million for the three months endedJune 30, 2022 as compared toJune 30, 2021 and decreased by$104 million for the six months endedJune 30, 2022 as compared toJune 30, 2021 , primarily driven by lower cost of sales due to the decline in revenue and lower external commissions, professional fees and vendor services. Business segment adjusted EBITDA as a percentage of segment revenue was 67% for both the three and six months endedJune 30, 2022 and 67% for both the three and six months endedJune 30, 2021 . Mass Markets Segment Three Months Ended June 30, 2022 2021 % Change (Dollars in millions) Mass Markets Product Categories: Fiber Broadband $ 151 130 16 % Other Broadband 596 632 (6) % Voice and Other 449 640 (30) % Total Mass Markets Segment Revenue 1,196 1,402 (15) % Expenses: Total expense 170 193 (12) % Total adjusted EBITDA $ 1,026 1,209 (15) % Six Months Ended June 30, 2022 2021 % Change (Dollars in millions) Mass Markets Product Categories: Fiber Broadband $ 296 252 17 % Other Broadband 1,206 1,280 (6) % Voice and Other 969 1,304 (26) % Total Mass Markets Segment Revenue 2,471 2,836 (13) % Expenses: Total expense 336 370 (9) % Total adjusted EBITDA $ 2,135 2,466 (13) % 52
-------------------------------------------------------------------------------- Table of Contents Three and six months endedJune 30, 2022 compared to the same periods endedJune 30, 2021 Mass Markets segment revenue decreased$206 million for the three months endedJune 30, 2022 as compared toJune 30, 2021 and decreased$365 million for the six months endedJune 30, 2022 as compared toJune 30, 2021 primarily due to the following factors:
•Fiber Broadband revenue increased, driven by 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 customer losses in our lower speed copper-based broadband services;
•Voice and Other declined primarily due to (i) a$122 million reduction inCAF II revenue during the three months endedJune 30, 2022 compared to the same period in 2021 due to the conclusion of the CAF II program onDecember 31, 2021 , (ii) a$186 million net reduction inCAF II revenue during the six months endedJune 30, 2022 compared to the same period in 2021 (amount consists of a gross decrease of$245 million ofCAF II revenues, net of our first quarter 2022 recognition of$59 million of non-cash revenue release related toCAF II support payments received through the end of 2021 based on our final buildout and filing submissions), and (iii) the continued loss of legacy voice customers. Mass Markets segment expense decreased$23 million for the three months endedJune 30, 2022 as compared toJune 30, 2021 and decreased$34 million for the six months endedJune 30, 2022 as compared toJune 30, 2021 , in each case primarily due to lower cost of sales due to the decline in revenue, lower employee headcount and lower network expenses.
Mass Markets segment adjusted EBITDA as a percentage of segment revenue was 86%
for both the three and six months ended
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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. AtJune 30, 2022 , we held cash and cash equivalents of$408 million , which includes cash and cash equivalents classified as held for sale, and we also had$1.4 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$141 million of cash and cash equivalents outsidethe United States atJune 30, 2022 . We currently believe that there are no material restrictions on our ability to repatriate cash and cash equivalents intothe United States , and that we may do so without paying or accruingU.S. taxes. Other than transactions related to theAugust 1, 2022 sale of our Latin American business, we do not currently intend to repatriate tothe United States any of our foreign cash and cash equivalents from operating entities (see Note 17-Subsequent Events for additional information related to the closing of the sale of our Latin American business). Our executive officers and our Board of Directors review our sources and potential uses of cash in connection with our annual budgeting process and whenever circumstances warrant. 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 recent sale of our Latin American and pending sale of our 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 endingJune 30, 2023 , we project that our fixed commitments will include (i)$125 million of scheduled term loan amortization payments and (ii)$34 million of finance lease and other fixed payments (which includes$3 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
Impact of the Recently Completed Divestiture of the Latin American Business and Planned Divestiture of the ILEC Business
As discussed in Note 2-Recently Completed Divestiture of the Latin American Business and Planned Divestiture of ILEC Business to our consolidated financial statements in Item 1 of Part I of this report, we sold our Latin American business onAugust 1, 2022 and expect to sell a portion of our ILEC business during the remainder of 2022. As further described elsewhere herein, these transactions in the aggregate are expected to provide us with a substantial amount of cash proceeds, but ultimately will reduce our base of income-generating assets that generate our recurring cash from operating activities. 54 --------------------------------------------------------------------------------
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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 endedDecember 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 ofLumen Technologies, Inc. ,Level 3 Financing, Inc. andQwest Corporation were as follows:Moody's Investors Borrower Service, Inc. Standard & Poor's Fitch RatingsLumen 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 endedDecember 31, 2021 . 55 --------------------------------------------------------------------------------
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Net Operating Loss Carryforwards
As ofDecember 31, 2021 ,Lumen Technologies had approximately$2.9 billion of federal net operating loss carryforwards ("NOLs"), which forU.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 onNovember 1, 2017 and are subject to limitations under Section 382 of the Internal Revenue Code and relatedU.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 the recent sale of our Latin American business and the pending sale of our ILEC business. 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 endedDecember 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$254 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 six months endedJune 30, 2022 . See Risk Factors-"Business Risks" in Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Revolving Facilities and Other Debt Instruments
AtJune 30, 2022 , we had$13.0 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$1.4 billion of unused borrowing capacity under our revolving credit facility, as discussed further below. Under our amended and restated credit agreement dated as ofJanuary 31, 2020 (the "Amended Credit Agreement"), we maintained atJune 30, 2022 (i) a$2.2 billion senior secured revolving credit facility, under which we owed$800 million 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 endedDecember 31, 2021 . AtJune 30, 2022 , we had$46 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$66 million as ofJune 30, 2022 , of which$3 million was collateralized by cash that is reflected on our consolidated balance sheets as restricted cash. 56 -------------------------------------------------------------------------------- Table of Contents In addition to its indebtedness under the 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. AtDecember 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 endedDecember 31, 2021 and see Note 11-Employee Benefits to our consolidated financial statements in Item 8 of Part II of the same report. As ofJanuary 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-Recently Completed Divestiture of the Latin American Business and Planned Divestiture of ILEC Business 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 endedDecember 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 endedDecember 31, 2021 for additional information. Although the settlement threshold was not exceeded as of,June 30, 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.
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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 endedDecember 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 onDecember 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, theFCC created theRural Digital Opportunity Fund (the "RDOF"), which is a new federal support program designed to replace the CAF Phase II program. OnDecember 7, 2020 , theFCC 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. Our support payments under the RDOF Phase I program commenced during the second quarter of 2022. 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-Recently Completed Divestiture of the Latin American Business and Planned Divestiture of ILEC Business 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 endedDecember 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 theObama Administration . InNovember 2021 , theU.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, various state and federal agencies are continuing to take steps in anticipation of making grants to eligible applicants, so it is premature to speculate on the potential impact of this legislation on us. 58 -------------------------------------------------------------------------------- Table of Contents Cash Flow Activities
The following table summarizes our consolidated cash flow activities for the six
months ended
Six Months Ended June 30,
2022 2021 $ Change
(Dollars in millions)
Net cash provided by operating activities $ 2,771 3,164 (393)
Net cash used in investing activities (1,270) (1,295) (25)
Net cash used in financing activities (1,489) (1,350) 139
Operating Activities
Net cash provided by operating activities decreased by $393 million for the six
months ended June 30, 2022 as compared to the six months ended June 30, 2021
primarily due to lower net income adjusted for non-cash expenses and gains,
partially offset by increased collections on accounts receivable and increased
accounts payable. 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
Financing Activities
Net cash used in financing activities increased by$139 million for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 primarily due to proceeds from issuance of long-term debt in the prior year, partially offset by lower payments of long-term debt and higher net borrowing on our 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.
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Market Risk
As of
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 ofJune 30, 2022 , we did not hold or issue derivative financial instruments for trading or speculative purposes. As ofJune 30, 2022 , we had approximately$10.3 billion of floating rate debt. A hypothetical increase of 100 basis points in LIBOR relating to our$10.3 billion of floating rate debt would, among other things, decrease our annual pre-tax earnings by approximately$103 million . Additionally, our credit agreements contain language about a possible change from LIBOR to an alternative index. 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. All of these swap agreements have expired as ofJune 30, 2022 and we are not currently hedged against any of our exposure to floating interest rates. 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. We conduct a portion of our business in currencies other than theU.S. dollar, the currency in which our consolidated financial statements are reported. Our European subsidiaries use, and, prior to the recent divestiture of our Latin American Business, certain of our Latin American subsidiaries used the local currency as their functional currency, as the majority of their revenue and purchases are or were transacted in their local currencies. 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 theU.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 atJune 30, 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 affiliatesLevel 3 Parent, LLC andQwest 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 theSEC . 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. 60 --------------------------------------------------------------------------------
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