LUMEN TECHNOLOGIES, INC.
All references to "Notes" in this Item 7 of Part II refer to the Notes to
Consolidated Financial Statements included in Item 8 of Part II of this report.
Certain statements in this report constitute forward-looking statements. See
"Special Note Regarding Forward-Looking Statements" immediately prior to Item 1
of Part I of this report for factors relating to these statements and "Risk
Factors" in Item 1A of Part I of this report for a discussion of certain risk
factors applicable to our business, financial condition, results of operations,
liquidity or prospects.
34
--------------------------------------------------------------------------------Overview
We are an international facilities-based technology and communications company focused on providing our business and residential customers with a broad array of integrated services and solutions necessary to fully participate in our rapidly evolving digital world. We believe we are the world's most inter-connected network and our platform empowers our customers to rapidly adjust digital programs to meet immediate demands, create efficiencies, accelerate market access, and reduce costs - allowing customers to rapidly evolve their IT programs to address dynamic changes without distraction from their core competencies. With approximately 450,000 route miles of fiber optic cable globally, we are among the largest providers of communications services to domestic and global enterprise customers. Our terrestrial and subsea fiber optic long-haul network throughoutNorth America ,Europe ,Latin America andAsia Pacific connects to metropolitan fiber networks that we operate. We provide services in over 60 countries, with most of our revenue being derived in theU.S. Impact of COVID-19 Pandemic In response to the safety and economic challenges arising out of the COVID-19 pandemic and in an 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. These steps have included: •taking theFCC 's "Keep Americans Connected Pledge," under which we waived certain late fees and suspended the application of data caps and service terminations for non-payment by certain consumer and small business customers through the end of the second quarter of 2020;
•establishing new protocols for the safety of our on-site technicians and customers, including our "Safe Connections" program;
•adopting a rigorous employee work-from-home policy and substantially restricting non-essential business travel, each of which remains in place;
•continuously monitoring our network to enhance its ability to respond to changes in usage patterns;
•donating products or services in several of our communities to enhance their abilities to provide necessary support services; and
•taking steps to maintain our internal controls and the security of our systems and data in a remote work environment.
As the pandemic continues and vaccination rates increase, we expect to revise our responses or take additional steps to adjust to changed circumstances.
Social distancing, business and school closures, travel restrictions, and other actions taken in response to the pandemic have impacted us, our customers and our business sinceMarch 2020 . In particular, during the second half of 2020, we rationalized our lease footprint and ceased using 16 leased property locations that were underutilized due to the COVID-19 pandemic. The Company determined that they no longer needed the leased space and, due to the limited remaining term on the contracts, concluded that the Company had neither the intent nor ability to sublease the properties. As a result, we incurred accelerated lease costs of approximately$41 million . In conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and incur additional costs in 2021. Additionally, as discussed further elsewhere herein, we are tracking pandemic impacts such as: (i) increases in certain revenue streams and decreases in others (including late fee revenue), (ii) increases in allowances for credit losses each quarter since the start of the pandemic, (iii) increase in overtime expenses and (iv) delays in our cost transformation initiatives. Thus far, these changes have not materially impacted our financial performance or financial position. This could change, however, if the pandemic intensifies or economic conditions deteriorate. The impact of the pandemic during 2021 will materially depend on additional steps that we may take in response to the pandemic and various events outside of our control, including the pace of vaccinations worldwide, the length and severity of the health crisis and economic slowdown, actions taken by governmental agencies or legislative bodies, and the impact of those events on our employees, suppliers and customers. For additional information, see the risk factor disclosures set forth or referenced in Item 1A of Part II of this report. 35 -------------------------------------------------------------------------------- For additional information on the impacts of the pandemic, see the remainder of this item, including "-Liquidity and Capital Resources - Overview of Sources and Uses of Cash," and "- Pension and Post-retirement Benefit Obligations."
Reporting Segments
Our reporting segments are organized by customer demographics. At
•International and Global Accounts Management ("IGAM") Segment. Under our IGAM
segment, we provided our products and services to approximately 200 global
enterprise customers and three operating regions: Europe Middle East and Africa ,
Latin America and Asia Pacific ;
•Enterprise Segment. Under our enterprise segment, we provided our products and
services to large and regional domestic and global enterprises, as well as the
public sector, which includes the U.S. Federal Government, state and local
governments and research and education institutions;
•Small and Medium Business ("SMB") Segment. Under our SMB segment, we provided
our products and services to small and medium businesses directly and indirectly
through our channel partners;
•Wholesale Segment. Under our wholesale segment, we provided our products and
services to a wide range of other communication providers across the wireline,
wireless, cable, voice and data center sectors. Our wholesale customers range
from large global telecom providers to small regional providers; and
•Consumer Segment. Under our consumer segment, we provided our products and
services to residential customers. Additionally, certain state support payments,
Connect America Fund ("CAF") federal support revenue, and other revenue from
leasing and subleasing, including 2018 rental income associated with the 2017
failed-sale-leaseback are reported in our consumer segment as regulatory
revenue. At December 31, 2020 , we served 4.5 million consumer broadband
subscribers. Our methodology for counting consumer broadband subscribers may not
be comparable to those of other companies.
See Note 16-Segment Information for additional information.
At
•IP and Data Services, which include primarily VPN data networks, Ethernet, IP, content delivery and other ancillary services;
•Transport and Infrastructure, which includes wavelengths, dark fiber, private line, colocation and data center services, including cloud, hosting and application management solutions, professional services and other ancillary services;
•Voice and Collaboration, which includes primarily local and long-distance voice, including wholesale voice, and other ancillary services, as well as VoIP services; and •IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services.
At
•Broadband, which includes high speed, fiber-based and lower speed DSL broadband services;
•Voice, which include local and long-distance services;
36
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•Regulatory Revenue, which consist of (i) CAF and other support payments
designed to reimburse us for various costs related to certain telecommunications
services and (ii) other operating revenue from the leasing and subleasing of
space; and
•Other, which include retail video services (including our linear TV services), professional services and other ancillary services.
Additionally, beginning in the first quarter of 2021, we plan on making changes to the product category reporting to better reflect product life cycles and the company's marketing approach. These changes will include both the creation of new product categories and the realignment of products and services within previously reported product categories. For Business segment revenue, we will report the following product categories: Compute & Application Services, IP & Data Services, Fiber Infrastructure Services and Voice & Other, by customer-facing sales channel. For Mass Markets segment revenue, we will report the following product categories: Consumer Broadband,Small Business Group ("SBG") Broadband, Voice & Other and CAF Phase II.
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 require robust, scalable network services. We are continuing to enhance our product capabilities and simplify our product portfolio based on demand and profitability to enable customers to have access to greater bandwidth.
•Businesses continue to adopt distributed, global operating models. We are expanding and enhancing our fiber network, connecting more buildings to our network to generate revenue opportunities and reducing our reliance upon other carriers. •Industry consolidation, coupled with changes in regulation, technology and customer preferences, are significantly reducing demand for our traditional voice services and are pressuring some other revenue streams through volume or rate reductions, while other advances, such as the need for lower latency provided by Edge computing or the implementation of 5G networks, are expected to create opportunities. •The operating margins of several of our newer, more technologically advanced services, some of which may connect to customers through other carriers, are lower than the operating margins on our traditional, on-net wireline services.
•Declines in our traditional wireline services have necessitated right-sizing our cost structures to remain competitive.
Results of Operations
In this section, we discuss our overall results of operations and highlight
special items that are not included in our segment results. In "Segment Results
of Operations" we review the performance of our five reporting segments in more
detail.
37
--------------------------------------------------------------------------------Consolidated Revenue
The following table summarizes our consolidated operating revenue recorded under each of our eight above described revenue categories:
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
IP and Data Services $ 6,372 6,621 (4) % 6,621 6,614 - %
Transport and Infrastructure 4,989 5,019 (1) % 5,019 5,256 (5) %
Voice and Collaboration 3,621 3,766 (4) % 3,766 4,091 (8) %
IT and Managed Services 479 535 (10) % 535 625 (14) %
Broadband 2,909 2,876 1 % 2,876 2,824 2 %
Voice 1,622 1,837 (12) % 1,837 2,127 (14) %
Regulatory 615 632 (3) % 632 727 (13) %
Other 105 172 (39) % 172 316 (46) %
Total operating revenue $ 20,712 21,458 (3) % 21,458 22,580 (5) %
Our consolidated revenue decreased by $746 million for the year ended December
31, 2020 as compared to the year ended December 31, 2019 largely due to revenue
declines in most of our revenue categories. See our segment results below for
additional information.
Our consolidated revenue decreased by $1.1 billion for the year ended December
31, 2019 compared to the year ended December 31, 2018 largely due to revenue
declines in most of our revenue categories. See our segment results below for
additional information.
Operating Expenses
The following tables summarize our operating expenses:
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
Cost of services and products
(exclusive of depreciation and
amortization) $ 8,934 9,134 (2) % 9,134 9,999 (9) %
Selling, general and administrative 3,464 3,715 (7) % 3,715 4,165 (11) %
Depreciation and amortization 4,710 4,829 (2) % 4,829 5,120 (6) %
Goodwill impairment 2,642 6,506 (59) % 6,506 2,726 139 %
Total operating expenses $ 19,750 24,184 (18) % 24,184 22,010 10 %
Cost of Services and Products (exclusive of depreciation and amortization)
Cost of services and products (exclusive of depreciation and amortization) decreased by$200 million for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease in costs of services and products (exclusive of depreciation and amortization) was primarily due to reductions in (i) salaries and wages and employee-related expense from lower headcount directly related to operating and maintaining our network and from lower medical costs from the COVID-19 pandemic, (ii) professional fees from contractors and consultants, (iii) facility costs from lower space and power expenses, and (iv) lower commissions due to increased commission deferrals. These reductions were partially offset by increases in severance expense, higher network expense as a result of project impairments and higher voice usage from conferencing sales. 38 -------------------------------------------------------------------------------- Cost of services and products (exclusive of depreciation and amortization) decreased by$865 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The decrease in costs of services and products (exclusive of depreciation and amortization) was primarily due to reductions in (i) salaries and wages and employee-related expenses from lower headcount directly related to operating and maintaining our network, (ii) network expenses and voice usage costs, (iii) customer premises equipment costs from lower sales, (iv) content costs from Prism TV, and (v) lower space and power expenses. These reductions were partially offset by increases in direct taxes and fees, professional services, customer installation costs and right of way and dark fiber expenses.
Selling, General and Administrative
Selling, general and administrative expenses decreased by$251 million for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease in selling, general and administrative expenses was primarily due to reductions in salaries and wages and employee-related expenses from lower headcount and lower medical costs from the COVID-19 pandemic, lower workers compensation expenses and lower professional fees. These reductions were partially offset by increases in the allowance for credit losses related to the impact of the COVID-19 pandemic and property and other taxes. Selling, general and administrative expenses decreased by$450 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The decrease in selling, general and administrative expenses was primarily due to reductions in salaries and wages and employee-related expenses from lower headcount, contract labor costs, lower rent expense in 2019 and from higher exited lease obligations in 2018, hardware and software maintenance costs, marketing and advertising expenses, bad debt expense, property and other taxes and an increase in the amount of labor capitalized or deferred and gains on the sale of assets. These reductions were slightly offset by higher professional fees, network infrastructure maintenance expenses and commissions.
Depreciation and Amortization
The following tables provide detail of our depreciation and amortization
expense:
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
Depreciation 2,963 3,089 (4) % 3,089 3,339 (7) %
Amortization 1,747 1,740 - % 1,740 1,781 (2) %
Total depreciation and
amortization $ 4,710 4,829 (2) % 4,829 5,120 (6) %
Depreciation expense decreased by $126 million for the year ended December 31,
2020 as compared to the year ended December 31, 2019 primarily due to a $239
million reduction attributable to the impact of annual rate depreciable life
changes, partially offset by $156 million of higher depreciation expense
associated with net growth in depreciable assets.
Depreciation expense decreased by $250 million for the year ended December 31,
2019 as compared to the year ended December 31, 2018 , primarily due to the
impact of the full depreciation in 2018 of plant, property, and equipment
assigned a one year life at the time we acquired Level 3 of $200 million , the
impact of annual rate depreciable life changes of $108 million , and the
discontinuation of depreciation on failed-sale-leaseback assets on $69 million .
These decreases were partially offset by higher depreciation expense of $93
million associated with net growth in depreciable assets and increases
associated with changes in our estimates of the remaining economic life of
certain network assets of $34 million .
Amortization expense increased by $7 million for the year ended December 31,
2020 as compared to the year ended December 31, 2019 primarily due to increases
associated with the net growth in amortizable assets of $54 million and the
accelerated amortization for a decommissioned applications of $31 million . These
increases were partially offset by a decrease of $70 million from the use of
accelerated amortization methods for a portion of the customer intangibles.
39
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Amortization expense decreased by $41 million for the year ended December 31,
2019 as compared to the year ended December 31, 2018 . The decrease in
amortization expense was primarily due to a $71 million decrease associated with
the use of accelerated amortization methods for a portion of the customer
intangibles and a $25 million decrease associated with annual rate amortizable
life changes of software for the period. These decreases were partially offset
by an increase in amortization of $55 million associated with net growth in
amortizable assets for the period.
Goodwill Impairments
We are required to perform impairment tests related to our goodwill annually,
which we perform as of
When we performed our annual impairment test in the fourth quarter of 2020 we concluded that the estimated fair value of our consumer, wholesale, small and medium business and EMEA reporting units were less than our carrying value of equity for such reporting units and we recorded a non-cash non-tax-deductible goodwill impairment charge of approximately$2.6 billion in the fourth quarter of 2020. When we performed our impairment tests during the first quarter of 2019, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of the date of each of our impairment tests during the first quarter of 2019. As a result, we recorded non-cash, non-tax-deductible goodwill impairment charges aggregating to$6.5 billion in the quarter endedMarch 31, 2019 . Additionally, when we performed our annual impairment test in the fourth quarter of 2018 we concluded that the estimated fair value of our consumer reporting unit was less than our carrying value of equity for such reporting unit and we recorded a non-cash non-tax-deductible goodwill impairment charge of approximately$2.7 billion in the fourth quarter of 2018.
See Note 2-
Other Consolidated Results
The following tables summarize our total other expense, net and income tax
expense:
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
Interest expense $ (1,668) (2,021) (17) % (2,021) (2,177) (7) %
Other (expense) income, net (76) (19) nm (19) 44 nm
Total other expense, net$ (1,744) (2,040) (15) % (2,040) (2,133) (4) % Income tax expense$ 450 503 (11) % 503 170 196 %
_______________________________________________________________________________
nm Percentages greater than 200% and comparison between positive and negatives
values or to/from zero values are considered not meaningful.
Interest Expense
Interest expense decreased by$353 million for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease in interest expense was primarily due to a decrease in average long-term debt from$35.4 billion to$33.3 billion and a decrease in the average interest rate of 5.75% to 5.23%. Interest expense decreased by$156 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The decrease in interest expense was primarily due to a decrease in long-term debt from an average of$36.9 billion in 2018 to$35.4 billion in 2019. 40 --------------------------------------------------------------------------------
Other (Expense) Income, Net
Other (expense) income, net reflects certain items not directly related to our
core operations, including losses and gains on extinguishments of debt, our
share of income from partnerships we do not control, interest income, gains and
losses from non-operating asset dispositions, foreign currency gains and losses
and components of net periodic pension and postretirement benefit costs.
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
(Loss) gain on extinguishment
of debt $ (105) 72 nm 72 (7) nm
Pension and postretirement net periodic expense (31) (165) (81) % (165) (15) nm Foreign currency gain 30 8 nm 8 10 (20) % Other 30 66 (55) % 66 56 18 % Total other (expense) income, net$ (76) (19) nm (19) 44 nm
_______________________________________________________________________________
nm Percentages greater than 200% and comparison between positive and negatives
values or to/from zero values are considered not meaningful.
The significant decline in pension and post retirement net periodic expense for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 is driven by a decline in interest cost due to lower discount rates. The increase of$150 million in this expense for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 reflects a corresponding increase in interest costs due to higher discount rates in that period, as discussed further in Note 10-Employee Benefits.
Income Tax Expense
For the years endedDecember 31, 2020 , 2019 and 2018, our effective income tax rate was (57.5)%, (10.6)%, and (10.9)%, respectively. The effective tax rate for the years endedDecember 31, 2020 ,December 31, 2019 andDecember 31, 2018 include a$555 million ,$1.4 billion and a$572 million unfavorable impact of non-deductible goodwill impairments, respectively. Additionally, the effective tax rate for the year endedDecember 31, 2018 reflects the impact of purchase price accounting adjustments resulting from the Level 3 acquisition and from the tax reform impact of those adjustments of$92 million . The 2018 unfavorable impacts were partially offset by the tax benefit of a 2017 tax loss carryback to 2016 of$142 million . See Note 15-Income Taxes and "Critical Accounting Policies and Estimates-Income Taxes" below for additional information. 41 --------------------------------------------------------------------------------
Segment Results
General
Reconciliation of segment revenue to total operating revenue is below:
Years Ended December 31,
2020 2019 2018
(Dollars in millions)
Operating revenue
International and Global Accounts $ 3,405 3,476 3,543
Enterprise 5,722 5,696 5,765
Small and Medium Business 2,557 2,727 2,918
Wholesale 3,777 4,042 4,360
Consumer 5,251 5,517 5,994
Total operating revenue $ 20,712 21,458 22,580
Reconciliation of segment EBITDA to total adjusted EBITDA is below:
Years Ended December 31,
2020 2019 2018
(Dollars in millions)
Adjusted EBITDA
International and Global Accounts $ 2,228 2,295 2,354
Enterprise 3,334 3,383 3,354
Small and Medium Business 1,769 1,869 2,012
Wholesale 3,221 3,449 3,731
Consumer 4,612 4,799 5,021
Total segment EBITDA 15,164 15,795 16,472
Operations and Other EBITDA (6,675) (7,024) (7,870)
Total adjusted EBITDA $ 8,489 8,771 8,602
For additional information on our reportable segments and product and services categories, see Note 16-Segment Information.
International and Global Accounts Management Segment
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
Revenue:
IP and Data Services $ 1,556 1,627 (4) % 1,627 1,682 (3) %
Transport and Infrastructure 1,265 1,268 - % 1,268 1,230 3 %
Voice and Collaboration 368 354 4 % 354 365 (3) %
IT and Managed Services 216 227 (5) % 227 266 (15) %
Total revenue 3,405 3,476 (2) % 3,476 3,543 (2) %
Total expense 1,177 1,181 - % 1,181 1,189 (1) %
Total adjusted EBITDA $ 2,228 2,295 (3) % 2,295 2,354 (3) %
42--------------------------------------------------------------------------------
Year Ended
Segment revenue decreased$71 million for the year endedDecember 31, 2020 compared toDecember 31, 2019 and decreased$67 million for the year endedDecember 31, 2019 compared toDecember 31, 2018 . Excluding the impact of foreign currency fluctuations, segment revenue decreased$23 million , or 1%, for the year endedDecember 31, 2020 compared toDecember 31, 2019 . These changes are primarily due to the following factors:
•IT and managed services revenue declined due to lower volumes of legacy managed hosting services;
•IP and data services revenue declined mostly due to reduced rates and lower traffic;
•Voice and collaboration revenue increased due to higher usage and call volumes; and, for the period ended 2019 compared to 2018, the decrease was driven by stronger non-recurring revenue in 2018 that did not reoccur in 2019;
•Transport and infrastructure revenue increased for the period ended 2019 compared to 2018 due to expanded services for large customers and higher rates.
Segment expenses decreased by$4 million for the year endedDecember 31, 2020 compared toDecember 31, 2019 primarily due to lower headcount related costs, partially offset by higher cost of sales. Segment expenses decreased by$8 million for the year endedDecember 31, 2019 compared toDecember 31, 2018 , primarily due to lower cost of sales in line with lower revenue. Segment adjusted EBITDA as a percentage of revenue was 65% for the year endedDecember 31, 2020 and 66% for both the years endedDecember 31, 2019 and 2018, respectively. Enterprise Segment Years Ended December 31, Years Ended December 31, 2020 2019 % Change 2019 2018 % Change (Dollars in millions) (Dollars in millions) Revenue: IP and Data Services$ 2,474 2,538 (3) % 2,538 2,485 2 % Transport and Infrastructure 1,608 1,479 9 % 1,479 1,484 - % Voice and Collaboration 1,424 1,423 - % 1,423 1,495 (5) % IT and Managed Services 216 256 (16) % 256 301 (15) % Total revenue 5,722 5,696 - % 5,696 5,765 (1) % Total expense 2,388 2,313 3 % 2,313 2,411 (4) % Total adjusted EBITDA$ 3,334 3,383 (1) % 3,383 3,354 1 %
Year Ended
Segment revenue increased by
•For the year ended 2020 compared to 2019, IP and data services revenue decreased, primarily driven by customers migrating from traditional wireline services to more technologically advanced lower rate services, and, for the period ended 2019 compared to 2018, revenue increased due to rate increases.
•for both periods, IT and managed services revenue declined mainly due to churn in legacy managed services;
43
--------------------------------------------------------------------------------•for the year ended 2019 compared to 2018, the decline in voice and collaboration revenue was due to a combination of customers discontinuing traditional voice TDM products and lower rates on customers transitioning to VoIP; and
•for the year ended 2020 compared to 2019, transport and infrastructure revenue increased due to strength in our Federal business, mainly in professional services, equipment and managed security services, and for the year ended 2019 compared to 2018, the decline was due to lower professional services and data center and colocation services, partially offset by increased managed security revenue.
Segment expenses increased by
•For the year ended 2020 compared to 2019, segment expenses increased due to higher cost of sales in line with revenue increases, partially offset by lower headcount related costs;
•for the year ended 2019 compared to 2018, segment expenses decreased due to lower headcount related costs and external commissions.
Segment adjusted EBITDA as a percentage of revenue was 58%, 59% and 58% for the
year ended
Small and Medium Business Segment
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
Revenue:
IP and Data Services $ 1,062 1,091 (3) % 1,091 1,078 1 %
Transport and Infrastructure 352 365 (4) % 365 424 (14) %
Voice and Collaboration 1,098 1,226 (10) % 1,226 1,366 (10) %
IT and Managed Services 45 45 - % 45 50 (10) %
Total revenue 2,557 2,727 (6) % 2,727 2,918 (7) %
Total expense 788 858 (8) % 858 906 (5) %
Total adjusted EBITDA $ 1,769 1,869 (5) % 1,869 2,012 (7) %
Year Ended
Segment revenue decreased
•For both periods, voice and collaboration revenue decreased due to continued declines in demand for traditional voice TDM services;
•for the year ended 2020 compared to 2019, transport and infrastructure revenue
decreased primarily due to continued reductions in demand for our low-speed
broadband, and for the year ended 2019 compared to 2018, transport and
infrastructure declined primarily due to lower equipment sales and lower demand
for broadband services; and
•for the year ended 2020 compared to 2019, IP and data services decreased due to
lower VPN revenue and customers transitioning from Ethernet solutions to
lower-rate IP services, and for the year ended 2019 compared to 2018, IP and
data services increased due to strength in VPN revenue.
44
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Segment expenses decreased by
•For the year ended 2020 compared to 2019 due to lower cost of sales in line with lower revenue and lower headcount related costs; and
•for the year ended 2019 compared to 2018 due to lower network costs driven by declines in customer demand, and network expense synergies.
Segment adjusted EBITDA as a percentage of revenue was 69% for the years ended
Wholesale Segment
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
Revenue:
IP and Data Services $ 1,280 1,365 (6) % 1,365 1,369 - %
Transport and Infrastructure 1,764 1,907 (7) % 1,907 2,118 (10) %
Voice and Collaboration 731 763 (4) % 763 865 (12) %
IT and Managed Services 2 7 (71) % 7 8 (13) %
Total revenue 3,777 4,042 (7) % 4,042 4,360 (7) %
Total expense 556 593 (6) % 593 629 (6) %
Total adjusted EBITDA $ 3,221 3,449 (7) % 3,449 3,731 (8) %
Year Ended
Segment revenue decreased
•For both periods, transport and infrastructure revenue decreased due to continued declines in traditional private line services and customer network consolidation and grooming efforts;
•for both periods, voice and collaboration revenue decreased due to market rate compression and lower customer volumes; and
•for the year ended 2020 compared to 2019, IP and data services decreased due to customer churn.
Segment expenses decreased by$37 million for the year endedDecember 31, 2020 compared toDecember 31, 2019 , primarily due to lower cost of sales and continued network grooming efforts, partially offset by higher employee related costs, and decreased by$36 million for the year endedDecember 31, 2019 compared toDecember 31, 2018 , due to lower cost of sales and network grooming and operating synergies.
Segment adjusted EBITDA as a percentage of revenue was 85%, 85% and 86% for the
year ended
45
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Consumer Segment
Years Ended December 31, Years Ended December 31,
2020 2019 % Change 2019 2018 % Change
(Dollars in millions) (Dollars in millions)
Revenue:
Broadband $ 2,909 2,876 1 % 2,876 2,824 2 %
Voice 1,622 1,837 (12) % 1,837 2,127 (14) %
Regulatory 615 632 (3) % 632 727 (13) %
Other 105 172 (39) % 172 316 (46) %
Total revenue 5,251 5,517 (5) % 5,517 5,994 (8) %
Total expense 639 718 (11) % 718 973 (26) %
Total adjusted EBITDA $ 4,612 4,799 (4) % 4,799 5,021 (4) %
Year Ended
Segment revenue decreased by$266 million for the year endedDecember 31, 2020 compared toDecember 31, 2019 and decreased by$477 million for the year endedDecember 31, 2019 compared toDecember 31, 2018 , primarily due to the following factors:
•For both periods, decreases in our voice and other revenue were driven by continued legacy voice customer losses and our de-emphasis of Prism video product;
•for the year endedDecember 31, 2019 , regulatory revenue declined due to the derecognition of the failed-sales-leaseback described in our prior reports. For the year endedDecember 31, 2020 , regulatory revenue declined due to lower state support revenue;
•for both periods, an increase in Broadband revenue driven by increased demand for higher-speed services and higher rates;
Segment expenses decreased by$79 million for the year endedDecember 31, 2020 compared toDecember 31, 2019 and decreased by$255 million for the year endedDecember 31, 2019 compared toDecember 31, 2018 . Expenses decreased for both periods due to lower Prism content costs, headcount related costs and marketing expenses.
Segment adjusted EBITDA as a percentage of revenue was 88%, 87% and 84% for the
year ended
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles that are generally accepted inthe United States . The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenue and expenses. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations related to (i) goodwill, customer relationships and other intangible assets; (ii) pension and post-retirement benefits; (iii) loss contingencies and litigation reserves and (iv) income taxes. These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions or estimates. We believe that the estimates, judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were made. However, actual results may differ from those estimates, and these differences may be material. 46 --------------------------------------------------------------------------------
We have a significant amount of goodwill and indefinite-lived intangible assets that are assessed at least annually for impairment. AtDecember 31, 2020 , goodwill and intangible assets totaled$27.1 billion , or 46%, of our total assets. The impairment analyses of these assets are considered critical because of their significance to us and our segments. We have assigned our goodwill balance to our segments atDecember 31, 2020 as follows: International and Small and Medium Global Accounts Enterprise Business Wholesale Consumer Total (Dollars in millions)
As of December 31, 2020 $ 2,555 4,738 2,808 3,114 5,655 18,870 Intangible assets arising from business combinations, such as goodwill, customer relationships, capitalized software, trademarks and tradenames, are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of 7 to 15 years, using either the sum-of-years-digits or the straight-line methods, depending on the customer. We amortize capitalized software using the straight-line method primarily over estimated lives ranging up to 7 years. We amortize our other intangible assets using the sum-of-years-digits or straight-line method over an estimated life of 4 to 20 years. Other intangible assets not arising from business combinations are initially recorded at cost. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of an intangible asset, we classify the intangible asset as indefinite-lived and such intangible assets are not amortized. Our long-lived intangible assets, other than goodwill, with indefinite lives are assessed for impairment annually, or, under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be an impairment. These assets are carried at the estimated fair value at the time of acquisition and assets not acquired in acquisitions are recorded at historical cost. However, if their estimated fair value is less than the carrying amount, we recognize an impairment charge for the amount by which the carrying amount of these assets exceeds their estimated fair value.
Our goodwill was derived from numerous acquisitions where the purchase price exceeded the fair value of the net assets acquired.
We are required to reassign goodwill to reporting units whenever reorganizations of our internal reporting structure changes the composition of our reporting units.Goodwill is reassigned to the reporting units using a relative fair value approach. When the fair value of a reporting unit is available, we allocate goodwill based on the relative fair value of the reporting units. When fair value is not available, we utilize an alternative allocation methodology that represents a reasonable proxy for the fair value of the operations being reorganized. For additional information on our segments, see Note 16-Segment Information. We are required to assess goodwill at least annually, or more frequently, if an event occurs or circumstances change that indicates it is more likely than not the fair values of our reporting units were less than their carrying values. In assessing goodwill for impairment, we may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carry value. Our annual impairment assessment date for goodwill isOctober 31 , at which date we assess our reporting units. AtOctober 31, 2020 , our international and global accounts segment was comprised of ourNorth America global accounts ("NA GAM"),Europe ,Middle East andAfrica region ("EMEA"),Latin America region ("LATAM") andAsia Pacific region ("APAC") reporting units. AtOctober 31, 2020 , our reporting units were consumer, small and medium business, enterprise, wholesale, NA GAM, EMEA, LATAM, and APAC. 47 -------------------------------------------------------------------------------- Our reporting units are not discrete legal entities with discrete full financial statements. Our assets and liabilities are employed in and relate to the operations of multiple reporting units and are allocated to individual reporting units based on their relative revenue or earnings before interest, taxes depreciation and amortization ("EBITDA"). For each reporting unit, we compare its estimated fair value of equity to its carrying value of equity that we assign to the reporting unit. If the estimated fair value of the reporting unit is equal or greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, we record an impairment equal to the difference. Depending on the facts and circumstances, we typically estimate the fair value of our reporting units by considering either or both of (i) a discounted cash flow method, which is based on the present value of projected cash flows over a discrete projection period and a terminal value, which represents the expected normalized cash flows of the reporting units beyond the cash flows from the discrete projection period, and (ii) a market approach, which includes the use of multiples of publicly-traded companies whose services are comparable to ours. With respect to our analysis used in the discounted cash flow method, the timing and amount of projected cash flows under these forecasts require estimates developed from our long-range plan, which is informed by wireline industry trends, the competitive landscape, product lifecycles, operational initiatives, capital allocation priorities and other company-specific and external factors that influence our business. These cash flows consider recent historical results and are consistent with the Company's short-term financial forecasts and long-term business strategies. The development of these cash flows, and the discount rate applied to the cash flows, is subject to inherent uncertainties, and actual results could vary significantly from such estimates. Our determination of the discount rate is based on a weighted average cost of capital approach, which uses a market participant's cost of equity and after-tax cost of debt and reflects certain risks inherent in the future cash flows. With respect to a market approach, the fair value of a reporting unit is estimated based upon a market multiple applied to the reporting unit's revenue and EBITDA, adjusted for an appropriate control premium based on recent market transactions. The fair value of reporting units estimated using revenue and EBITDA market multiples are equally weighted to determine the estimated fair value under the market approach. We also reconcile the estimated fair values of the reporting units to our market capitalization to conclude whether the indicated implied control premium is reasonable in comparison to recent transactions in the marketplace. A decline in our stock price could potentially cause an impairment of goodwill. Changes in the underlying assumptions that we use in allocating the assets and liabilities to reporting units under either the discounted cash flow or market approach method can result in materially different determinations of fair value. We believe the estimates, judgments, assumptions and allocation methods used by us are reasonable, but changes in any of them can significantly affect whether we must incur impairment charges, as well as the size of such charges. AtOctober 31, 2020 , we estimated the fair value of our eight above-mentioned reporting units by considering both a market approach and a discounted cash flow method. We reconciled the estimated fair values of the reporting units to our market capitalization as ofOctober 31, 2020 and concluded that the indicated control premium of approximately 33.0% was reasonable based on recent market transactions. Due to the decline in our stock price atOctober 31, 2020 and our assessment performed with respect to the reporting units described above, we concluded that our consumer, wholesale, small and medium business and EMEA reporting units were impaired resulting in a non-cash, non-tax-deductible goodwill impairment charge of$2.6 billion . As ofOctober 31, 2020 , the estimated fair value of equity exceeded the carrying value of equity for our enterprise, NA GAM, LATAM, and APAC reporting units by 2%, 46%, 74% and 23%, respectively. Based on our assessments performed, we concluded that the goodwill for our enterprise, NA GAM, LATAM, and APAC reporting units was not impaired as ofOctober 31, 2020 . AtOctober 31, 2019 , we estimated the fair value of our eight above-mentioned reporting units by considering both a market approach and a discounted cash flow method. We reconciled the estimated fair values of the reporting units to our market capitalization as ofOctober 31, 2019 and concluded that the indicated control premium of approximately 44.7% was reasonable based on recent market transactions. As ofOctober 31, 2019 , based on our assessment performed with respect to our eight reporting units, the estimated fair value of our equity exceeded the carrying value of equity for our consumer, small and medium business, enterprise, wholesale, NA GAM, EMEA, LATAM, and APAC reporting units by 44%, 41%, 53%, 46%, 55%, 5%, 63% and 38%, respectively. Based on our assessments performed, we concluded that the goodwill for our eight reporting units was not impaired as ofOctober 31, 2019 . Both ourJanuary 2019 internal reorganization and the decline in our stock price indicated the carrying values of our reporting units were more likely than not in excess of their fair values, requiring an impairment test in the first quarter of 2019. Consequently, we evaluated our goodwill inJanuary 2019 and again as ofMarch 31, 2019 . Because our low stock price was a key trigger for impairment testing in early 2019, we estimated the fair value of our operations using only the market approach. Applying this approach, we utilized company comparisons and 48 -------------------------------------------------------------------------------- analyst reports within the telecommunications industry which have historically supported a range of fair values derived from annualized revenue and EBITDA multiples between 2.1x and 4.9x and 4.9x and 9.8x, respectively. We selected a revenue and EBITDA multiple for each of our reporting units within this range. We reconciled the estimated fair values of the reporting units to our market capitalization as of the date of each of our impairment tests during the first quarter and concluded that the indicated control premiums of approximately 4.5% and 4.1% were reasonable based on recent market transactions. In the quarter endedMarch 31, 2019 , based on our assessments performed with respect to the reporting units as described above, we concluded that the estimated fair value of certain of our reporting units was less than our carrying value of equity as of the date of each of our impairment tests during the first quarter. As a result, we recorded non-cash, non-tax-deductible goodwill impairment charges aggregating to$6.5 billion in the quarter endedMarch 31, 2019 . AtOctober 31, 2018 , we estimated the fair value of our then five reporting units, which we determined to be consumer, medium and small business, enterprise, international and global accounts and wholesale and indirect, by considering both a market approach and a discounted cash flow method. We reconciled the estimated fair values of the reporting units to our market capitalization as ofOctober 31, 2018 and concluded that the indicated control premium of approximately 0.1% was reasonable based on recent transactions in the marketplace. As ofOctober 31, 2018 , based on our assessment we concluded that the estimated fair value of our consumer reporting unit was less than our carrying value of equity for such unit by approximately$2.7 billion . As a result, we recorded a non-cash, non-tax deductible goodwill impairment charge of$2.7 billion for goodwill assigned to our consumer segment during the fourth quarter of 2018. We plan to make changes to our segment and customer-facing sales channel reporting categories in 2021 to align with operational changes designed to better support our customers. Beginning in the first quarter of 2021, the company plans to report two segments: Business and Mass Markets. The Business segment will include four sales channels: International & Global Accounts, Large Enterprise, Mid-Market Enterprise and Wholesale. The Mass Markets segment will include both ourConsumer and Small Business Group sales channels. As a result of the organization changes noted above, we will perform a goodwill impairment analysis during the first quarter of 2021.
For additional information on our goodwill balances by segment, see Note
2-
Pension and Post-retirement Benefits
We sponsor a noncontributory qualified defined benefit pension plan (referred to as our qualified pension plan) for a substantial portion of our current and former employees inthe United States . In addition to this tax-qualified pension plan, we also maintain several non-qualified pension plans for certain eligible highly compensated employees. We also maintain post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. Due to the insignificant impact of these non-qualified plans on our consolidated financial statements, we have excluded them from the following pension and post-retirement benefits disclosures for 2020, 2019 and 2018. In 2020, approximately 59% of the qualified pension plan'sJanuary 1, 2020 net actuarial loss balance of$3.0 billion was subject to amortization as a component of net periodic expense over the average remaining service period of 9 years for participating employees expected to receive benefits for the plan. The other 41% of the qualified pension plan's beginning net actuarial loss balance was treated as indefinitely deferred during 2020. The entire beginning net actuarial loss of$175 million for the post-retirement benefit plans was treated as indefinitely deferred during 2020. In 2019, approximately 60% of the qualified pension plan'sJanuary 1, 2019 net actuarial loss balance of$3.0 billion was subject to amortization as a component of net periodic expense over the average remaining service period of 9 years for participating employees expected to receive benefits for the plan. The other 40% of the qualified pension plan's beginning net actuarial loss balance was treated as indefinitely deferred during 2020. The entire beginning net actuarial gain of$7 million for the post-retirement benefit plans was treated as indefinitely deferred during 2019. 49 -------------------------------------------------------------------------------- In 2018, approximately 55% of the qualified pension plan'sJanuary 1, 2018 net actuarial loss balance of$2.9 billion was subject to amortization as a component of net periodic expense over the average remaining service period of participating employees expected to receive benefits, which ranges from 8 to 9 years for the plan. The other 45% of the qualified pension plan's beginning net actuarial loss balance was treated as indefinitely deferred during 2018. The entire beginning net actuarial loss of$248 million for the post-retirement benefit plans was treated as indefinitely deferred during 2018. In computing our pension and post-retirement health care and life insurance benefit obligations, our most significant assumptions are the discount rate and mortality rates. In computing our periodic pension and post-retirement benefit expense, our most significant assumptions are the discount rate and the expected rate of return on plan assets. The discount rate for each plan is the rate at which we believe we could effectively settle the plan's benefit obligations as of the end of the year. We selected each plan's discount rate based on a cash flow matching analysis using hypothetical yield curves fromU.S. corporate bonds rated high quality and projections of the future benefit payments that constitute the projected benefit obligation for the plans. This process establishes the uniform discount rate that produces the same present value of the estimated future benefit payments as is generated by discounting each year's benefit payments by a spot rate applicable to that year. The spot rates used in this process are derived from a yield curve created from yields on the 60th to 90th percentile ofU.S. high quality bonds. Mortality rates help predict the expected life of plan participants and are based on historical demographic studies by theSociety of Actuaries ("SOA"). The SOA publishes new mortality rates (mortality tables and projection scales) on a regular basis which reflect updates to projected life expectancies inNorth America . Historically, we have adopted the new projection tables immediately after publication. In 2020, we adopted the revised mortality tables and projection scale released by the SOA, which decreased the projected benefit obligation of our benefit plans by approximately$3 million . The change in the projected benefit obligation of our benefit plans was recognized as part of the net actuarial loss and is included in accumulated other comprehensive loss, a portion of which is subject to amortization over the remaining estimated life of plan participants, which was approximately 9 years as ofDecember 31, 2020 . The expected rate of return on plan assets is the long-term rate of return we expect to earn on the plans' assets in the future, net of administrative expenses paid from plan assets. The rate of return is determined by the strategic allocation of plan assets and the long-term risk and return forecast for each asset class. The forecasts for each asset class are generated primarily from an analysis of the long-term expectations of various third-party investment management organizations, to which we then add a factor of 50 basis points to reflect the benefit we expect to result from our active management of the assets. The expected rate of return on plan assets is reviewed annually and revised, as necessary, to reflect changes in the financial markets and our investment strategy. To compute the expected return on pension and post-retirement benefit plan assets, we apply an expected rate of return to the fair value of the applicable plan assets adjusted for contribution timing and for projected benefit payments to be made from the plan assets. Annual market volatility for these assets (higher or lower than expected return) is reflected in the net actuarial losses. Changes in any of the above factors could significantly impact operating expenses in the consolidated statements of operations and other comprehensive loss in the consolidated statements of comprehensive income as well as the value of the liability and accumulated other comprehensive loss of stockholders' equity on our consolidated balance sheets.
Loss Contingencies and Litigation Reserves
We are involved in several potentially material legal proceedings, as described
in more detail in Note 17-Commitments, Contingencies and Other Items. On a
quarterly basis, we assess potential losses in relation to these and other
pending or threatened tax and legal matters. For matters not related to income
taxes, if a loss is considered probable and the amount can be reasonably
estimated, we recognize an expense for the estimated loss. To the extent these
estimates are more or less than the actual liability resulting from the
resolution of these matters, our earnings will be increased or decreased
accordingly. If the differences are material, our consolidated financial
statements could be materially impacted.
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For matters related to income taxes, if we determine in our judgment that the
impact of an uncertain tax position is more likely than not to be sustained upon
audit by the relevant taxing authority, then we recognize in our financial
statements a benefit for the largest amount that is more likely than not to be
sustained. No portion of an uncertain tax position will be recognized if we
determine in our judgment that the position has less than a 50% likelihood of
being sustained. Though the validity of any tax position is a matter of tax law,
the body of statutory, regulatory and interpretive guidance on the application
of the law is complex and often ambiguous, particularly in certain of the
non-U.S. jurisdictions in which we operate. Because of this, whether a tax
position will ultimately be sustained may be uncertain.
Income Taxes
Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to (i) tax credit carryforwards, (ii) differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities and (iii) tax net operating loss carryforwards, or NOLs. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. The measurement of deferred taxes often involves the exercise of considerable judgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the states in which we operate. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations. In connection with recording deferred income tax assets and liabilities, we establish valuation allowances when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be realized. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings. We also rely on our forecasts of future earnings and the nature and timing of future deductions and benefits represented by the deferred tax assets, all of which involve the exercise of significant judgment. AtDecember 31, 2020 , we established a valuation allowance of$1.5 billion primarily related to foreign and state NOLs, based on our determination that it was more likely than not that this amount of these NOLs would expire unused. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that existing valuation allowances must be revised or eliminated or new valuation allowances created, any of which could materially impact our financial condition or results of operations. See Note 15-Income Taxes.
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. AtDecember 31, 2020 , we held cash and cash equivalents of$406 million , and we also had approximately$2.0 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$98 million of cash and cash equivalents outsidethe United States atDecember 31, 2020 . 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. We do not currently intend to repatriate tothe United States any of our foreign cash and cash equivalents from operating entities outside ofLatin America . 51 -------------------------------------------------------------------------------- In response to COVID-19, theU.S. Congress passed the CARES Act onMarch 27, 2020 . The CARES Act favorably increased our liquidity in 2020 by$41 million as a result of allowing us to receive a full refund of the alternative minimum tax credit carryforward in 2020, as compared to receiving the refund in phases over the next few years in accordance with the Tax Cuts and Jobs Act. Under the CARES Act, we also deferred$134 million of our 2020 payroll taxes, which under current law will be required to be repaid in installments over 2021 and 2022.
Our executive officers and our Board of Directors periodically 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.
Based on our current capital allocation objectives, during 2021 we project expending approximately$3.5 billion to$3.8 billion of cash for capital investment in property, plant and equipment and approximately$1.1 billion of cash for dividends on our common stock (based on the assumptions described below under "Dividends"). For the 12 month period endingDecember 31, 2021 , we project that our fixed commitments will include (i)$125 million of scheduled term loan amortization payments, (ii)$24 million of finance lease and other fixed payments and (iii)$2.3 billion of debt maturities (excluding issuances made afterDecember 31, 2020 ). We do not anticipate that the COVID-19 pandemic will interfere with our ability to discharge these obligations over the next year.
For additional information, see "Risk Factors-Financial Risks" in Item 1A of Part I of this report.
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 our CAF Phase II or RDOF infrastructure buildout requirements). Our capital expenditures continue to be focused on enhancing network operating efficiencies and supporting new service developments. For more information on our capital spending, see (i) "-Overview of Sources and uses of Cash" above, (ii) "Historical Information-Investing Activities" below and (iii) Item 1 of Part 1 of this report.
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. The availability,
interest rate and other terms of any new borrowings will depend on the ratings
assigned by credit rating agencies, among other factors.
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As of the date of this report, the credit ratings for the senior secured and
unsecured debt of
Moody's Investors
Borrower Service, Inc. Standard & Poor's Fitch Ratings
Lumen Technologies :
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 downgrades of the senior unsecured or secured debt ratings
of us or our subsidiaries could impact our access to capital or further raise
our borrowing costs. See "Risk Factors-Financial Risks" in Item 1A of Part I of
this report.
Net Operating Loss Carryforwards
As ofDecember 31, 2020 ,Lumen Technologies had approximately$5.1 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 reduce our federal cash taxes for the next several years. The amounts of our near-term future tax payments will depend upon many factors, including our future earnings and tax circumstances and results of any corporate tax reform. Based on current laws and our current assumptions and projections, we estimate our cash income tax liability related to 2021 will be approximately$100 million . 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 this report.
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 dividend rate per share which enables us to balance our multiple objectives of managing our business, investing in the business, de-leveraging our balance sheet and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2021 at this rate of$0.25 per share, our average total dividend paid each quarter would be approximately$277 million based on the number of our current outstanding shares (which figure (i) assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards, and (ii) excludes dividend costs we periodically incur in connection with releasing dividend payments upon the vesting of equity incentive awards, which was$31 million during the year endedDecember 31, 2020 ). See Risk Factors-Business Risks" in Item 1A of Part I of this report. 53 --------------------------------------------------------------------------------
Revolving Facilities and Other Debt Instruments
AtDecember 31, 2020 , we had$12.5 billion of outstanding consolidated secured indebtedness,$19.3 billion of outstanding consolidated unsecured indebtedness and$2.0 billion of unused borrowing capacity under our revolving credit facility, as discussed further below. OnJanuary 31, 2020 , we amended and restated our credit agreement datedJune 19, 2017 (as so amended and restated, the "Amended Credit Agreement"). AtDecember 31, 2020 , we maintained senior secured credit facilities under the Amended Credit Agreement consisting of (i) a$2.2 billion revolving credit facility, under which we owed$150 million as ofDecember 31, 2020 , and (ii)$6.4 billion of term loan facilities.
At
Additionally, as ofDecember 31, 2020 , we had outstanding letters of credit, or other similar obligations, of approximately$18 million of which$11 million is collateralized by cash that is reflected on our consolidated balance sheets as restricted cash.
In addition to its indebtedness under the Amended Credit Agreement,
For additional information on the terms and conditions of our consolidated debt instruments, including financial and operating covenants, see Note 6-Long-Term Debt and Credit Facilities. For a discussion of certain intercompany obligations, see "-Other Matters."
Future Contractual Obligations
Our estimated future obligations as ofDecember 31, 2020 include both current and long term obligations. For our long-term debt as noted in Note 6-Long-Term Debt and Credit Facilities, we have a current obligation of$2.4 billion and a long-term obligation of$29.7 billion . Under our operating leases as noted in Note 4-Leases, we have a current obligation of$469 million and a long-term obligation of$1.7 billion . As noted in Note 17-Commitments, Contingencies and Other Items, we have a current obligations related to right-of-way agreements and purchase commitments of$624 million and a long-term obligation of$1.6 billion . Additionally, we have a current obligation for asset retirement obligation of$28 million and a long-term obligation of$171 million . Finally, our pension and post-retirement benefit plans have a current obligation of$232 million and a long-term obligation of$4.5 billion .
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, 2020 , the accounting unfunded status of our qualified and non-qualified defined benefit pension plans and our qualified post-retirement benefit plans was$1.7 billion and$3.0 billion , respectively. For additional information about our pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates - Pensions and Post-Retirements Benefits" in Item 7 of Part II of this report and see Note 10-Employee Benefits. Benefits paid by our qualified pension plan are paid through a trust that holds all of the plan's assets. Based on current laws and circumstances, we do not expect any contributions to be required for our qualified pension plan during 2021. The amount of required contributions to our qualified pension plan in 2022 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 in addition to required contributions. We last made a voluntary contribution to the trust for our qualified pension plan during 2018. Based on current laws and circumstances, we do not anticipate making a voluntary contribution to the trust for our qualified pension plan in 2021. 54 -------------------------------------------------------------------------------- Substantially all of our post-retirement health care and life insurance benefits plans are unfunded and are paid by us with available cash. In the past, we maintained several trusts that helped cover some of those costs, but the trust funds are almost completely depleted and currently cover an immaterial amount of our annual plan costs. As described further in Note 10-Employee Benefits, aggregate benefits paid by us under these plans (net of participant contributions and direct subsidy receipts) were$211 million ,$241 million and$249 million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. For additional information on our expected future benefits payments for our post-retirement benefit plans, please see Note 10-Employee Benefits. The capital markets have been volatile during 2020, primarily as a result of uncertainties related to the COVID-19 outbreak.U.S. federal governmental actions to stimulate the economy have significantly impacted interest rates. These events could ultimately affect the funding levels of our pension plans and calculations of our liabilities under our pension and other post-employment benefit plans. For 2020, our expected annual long-term rates of return on the pension plan and post-retirements health care and life insurance benefit plan assets, net of administrative expenses, were 6.0% and 4.0%, respectively. For 2021, our expected annual long-term rates of return on these assets are 5.5% and 4.0%, respectively. However, actual returns could be substantially different. 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. As ofDecember 31, 2020 , the settlement threshold was not reached. In the event of workforce reductions in the future, the annual lump sum payments may trigger settlement accounting.
Since 2015, we have been receiving over$500 million annually through Phase II of the CAF, a program that will end this year. In connection with the CAF funding, we must meet certain specified infrastructure buildout requirements in 33 states which requires substantial capital expenditures. While we are on track to meet the requirements this year, we cannot provide any assurances that we will be able to timely meet our mandated buildout requirements. In accordance with theFCC 'sJanuary 2020 order, we elected to receive an additional year of CAF Phase II funding in 2021. In early 2020, theFCC created 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. These RDOF Phase I support payments are expected to beginJanuary 1, 2022 . For additional information on these programs, see "Business-Regulation" in Item 1 of Part I of this report and see "Risk Factors-Financial Risks" in Item 1A of Part I of this report. Historical Information
The following tables summarize our consolidated cash flow activities:
Years Ended December 31, Increase /
2020 2019 (Decrease)
(Dollars in millions)
Net cash provided by operating activities $ 6,524 6,680 (156)
Net cash used in investing activities (3,564) (3,570) (6)
Net cash used in financing activities (4,250) (1,911) 2,339
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Years Ended December 31, Increase /
2019 2018 (Decrease)
(Dollars in millions)
Net cash provided by operating activities $ 6,680 7,032 (352)
Net cash used in investing activities (3,570) (3,078) 492
Net cash used in financing activities (1,911) (4,023) (2,112)
Operating Activities
Net cash provided by operating activities decreased by $156 million for the year
ended December 31, 2020 as compared to the year ended December 31, 2019
primarily due to increased payments on accounts payable and other current
liabilities, increases in cash payments for retirement benefits and increases in
payments for prepaid assets, 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.
Net cash provided by operating activities decreased by $352 million for the year
ended December 31, 2019 as compared to the year ended December 31, 2018
primarily due to an increase in net loss after adjusting for non-cash items,
increases in payments on accounts payable and other noncurrent liabilities and
increases in payments for prepaid assets, primarily offset by a decrease in
retirement benefit contributions.
For additional information about our operating results, see "Results of Operations" above.
Investing Activities
Net cash used in investing activities decreased by$6 million for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 primarily due to an increase in proceeds from the sale of property, plant and equipment and other assets, partially offset by an increase in capital expenditures. Net cash used in investing activities increased by$492 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The change in investing activities is primarily due to increased capital expenditures on property, plant and equipment and decreased proceeds from the sale of property, plant and equipment and other assets.
Financing Activities
Net cash used in financing activities increased by$2.3 billion for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 primarily due to an increase in payments of long-term debt, partially offset by increases in net proceeds from issuance of long-term debt and net proceeds from our revolving line of credit. Net cash used in financing activities decreased by$2.1 billion for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 primarily due to net proceeds from the issuance of long-term debt and the decrease in dividends paid, partially offset by higher levels of payments on our long-term debt and revolving line of credit.
See Note 6-Long-Term Debt and Credit Facilities for additional information on our outstanding debt securities.
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--------------------------------------------------------------------------------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 also are involved in various legal proceedings that could substantially impact our financial position. See Note 17-Commitments, Contingencies and Other Items for additional information.
Market Risk
As ofDecember 31, 2020 , 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. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates. 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 changing 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 ofDecember 31, 2020 , we did not hold or issue derivative financial instruments for trading or speculative purposes. In 2019, we executed swap transactions that reduced our exposure to floating rates with respect to$4.0 billion principal amount of floating rate debt. See Note 14-Derivative Financial Instruments for additional disclosure regarding our hedging arrangements. As ofDecember 31, 2020 , we had approximately$9.9 billion floating rate debt potentially subject to LIBOR,$4.0 billion of which was subject to the above-described hedging arrangements. A hypothetical increase of 100 basis points in LIBOR relating to our$5.9 billion of unhedged floating rate debt would, among other things, decrease our annual pre-tax earnings by approximately$59 million . 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 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 theU.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 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 atDecember 31, 2020 .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information in "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Market Risk" in Item 7 of Part II of this report is
incorporated herein by reference.
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