Planned Divestiture of the Latin American and ILEC Businesses

3 Months Ended

Mar. 31, 2022

Discontinued Operations and Disposal Groups [Abstract]

Planned Divestiture of the Latin American and ILEC Businesses

On July 25, 2021, affiliates of Level 3 Parent, LLC, an indirect wholly-owned subsidiary of Lumen Technologies, Inc., entered into a definitive agreement to divest Lumen’s Latin American business to an affiliate of a fund advised by Stonepeak Partners LP in exchange for $2.7 billion cash, subject to certain working capital, other purchase price adjustments and related transaction expenses (estimated to be approximately $50 million). Level 3 Parent, LLC anticipates closing the transaction during the second half of 2022, upon receipt of all requisite regulatory approvals in the U.S. and certain countries where the Latin American business operates, as well as the satisfaction of other customary conditions.

On August 3, 2021, we and certain of our affiliates entered into a definitive agreement to divest our incumbent local exchange ("ILEC") business conducted within 20 Midwestern and Southern states to an affiliate of funds advised by Apollo Global Management, Inc. In exchange, we would receive $7.5 billion, subject to offsets for (i) assumed indebtedness (expected to be approximately $1.4 billion) and (ii) certain purchaser’s transaction expenses along with working capital, tax, other customary purchase price adjustments and related transaction expenses (estimated to be approximately $1.7 billion). We anticipate closing the transaction during the second half of 2022 upon receipt of all regulatory approvals and the satisfaction of other customary closing conditions.

The actual amount of our net after-tax proceeds from these divestitures could vary substantially from the amounts we currently estimate, particularly if we experience delays in completing the transactions or if any of our other assumptions prove to be incorrect.

We do not believe these divestiture transactions represent a strategic shift for Lumen. Therefore, neither divested business meets the criteria to be classified as a discontinued operation. As a result, we will continue to report our operating results for the Latin American and ILEC businesses (the "disposal groups") in our consolidated operating results until the transactions are closed. The pre-tax net income of the disposal groups is estimated to be as follows in the table below:


	Three Months Ended March 31,
	2022		2021
	(Dollars in millions)
Latin American business pre-tax net income	$	83	28
ILEC business pre-tax net income	255		149
Total disposal groups pre-tax net income	$	338	177

As of March 31, 2022 in the accompanying consolidated balance sheet, the assets and liabilities of our Latin American and ILEC businesses are classified as held for sale and are measured at the lower of (i) the carrying value of the disposal groups and (ii) the fair value of the disposal groups, less costs to sell. Effective with the designation of both disposal groups as held for sale on July 25, 2021 and August 3, 2021, respectively, we suspended recording depreciation of property, plant and equipment and amortization of finite-lived intangible assets and right-of-use assets while these assets are classified as held for sale. We estimate that we would have recorded an additional $170 million of depreciation, intangible amortization, and amortization of right-of-use assets for the three months ended March 31, 2022 if the Latin American and ILEC businesses did not meet the held for sale criteria, of which $49 million and $121 million relates to the Latin American business and ILEC business, respectively.

As a result of our evaluation of the recoverability of the carrying value of the assets and liabilities held for sale relative to the agreed upon sales price, adjusted for costs to sell, we did not record any estimated loss on disposal during the three months ended March 31, 2022. The recoverability of each disposal group will be re-evaluated each reporting period until the closing of each transaction.

The principal components of the held for sale assets and liabilities are as follows:


	March 31, 2022				December 31, 2021
	Latin American Business		ILEC Business	Total	Latin American Business	ILEC Business	Total
	(Dollars in millions)
Assets held for sale
Cash and cash equivalents	$	58	1	59	39	1	40
Accounts receivable, less allowance of $3, $18, $21, $3, $21 and $24	93		191	284	83	227	310
Other current assets	83		40	123	81	45	126
Property, plant and equipment, net accumulated depreciation of $456, $8,379, $8,835, $434, $8,303 and $8,737	1,704		3,565	5,269	1,591	3,491	5,082
Goodwill(1)	259		2,615	2,874	239	2,615	2,854
Other intangible assets, net	138		158	296	126	158	284
Other non-current assets	83		37	120	75	38	113
Total assets held for sale	$	2,418	6,607	9,025	2,234	6,575	8,809

Liabilities held for sale
Accounts payable	$	90	50	140	101	64	165
Salaries and benefits	25		25	50	23	25	48
Income and other taxes	34		30	64	27	24	51
Interest	—		38	38	—	10	10
Current portion of deferred revenue	26		82	108	26	90	116
Other current liabilities	7		23	30	7	35	42
Long-term debt, net of discounts(2)	—		1,387	1,387	—	1,377	1,377
Deferred income taxes, net	148		—	148	129	—	129
Pension and other post-retirement benefits(3)	2		56	58	2	56	58
Other non-current liabilities	132		95	227	120	141	261
Total liabilities held for sale	$	464	1,786	2,250	435	1,822	2,257

______________________________________________________________________

(1)The assignment of goodwill was based on the relative fair values of the applicable reporting units prior to being reclassified as held for sale.

(2)Long-term debt, net of discounts, as of March 31, 2022 and December 31, 2021 includes (i) $1.4 billion for both periods of 7.995% Embarq senior notes maturing in 2036, (ii) $116 million and $117 million of related unamortized discounts, respectively, and (iii) $66 million and $57 million of long-term finance lease obligations, respectively.

(3)Excludes pension obligation of approximately $2.5 billion for the ILEC business as of March 31, 2022 and December 31, 2021, which will be transferred to the purchaser of the ILEC business upon closing. As of January 1, 2022, a new pension plan (the "Lumen Pension Plan") was spun off in anticipation of this transfer. Along with the transfer of the $2.5 billion pension benefit obligation, $2.2 billion of assets were allocated to the new plan. The remaining portion of the obligation is expected to be separately funded with cash paid by Lumen at the time of closing. See Note 8—Employee Benefits for additional information.