Pending Divestiture of the EMEA Business

9 Months Ended

Sep. 30, 2023

Discontinued Operations and Disposal Groups [Abstract]

Pending Divestiture of the EMEA Business

Planned Divestiture of the EMEA Business

On November 2, 2022, affiliates of Level 3 Parent, LLC, an indirect wholly-owned subsidiary of Lumen Technologies, Inc., granted an option to Colt Technology Services Group Limited, a portfolio company of Fidelity Investments, to purchase certain of their operations in Europe, the Middle East and Africa (the "EMEA business"), in exchange for $1.8 billion in cash, subject to certain working capital and other purchase price adjustments. Following the completion of a French consultative process, Colt exercised its option and on February 8, 2023, the parties entered into a definitive purchase agreement, which contains various customary covenants for transactions of this type, including various indemnities. Subject to satisfaction of customary closing conditions, Level 3 Parent, LLC expects to close the transaction November 1, 2023, although it can provide no assurance to this effect.

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

We do not believe this divestiture represents a strategic shift for us. Therefore, the planned divestiture of the EMEA business does not meet the criteria to be classified as discontinued operations. As a result, we will continue to report our operating results for the EMEA business (the "disposal group") in our consolidated operating results until the transaction is closed.

The pre-tax net income of the disposal group is estimated to be and reported as follows in the table below:

	Three Months Ended September 30,			Nine Months Ended September 30,
	2023		2022	2023	2022
	(Dollars in millions)
EMEA business pre-tax net income (loss)	$	32	(21)	131	(55)

As of September 30, 2023 in the accompanying consolidated balance sheet, the assets and liabilities of our EMEA business are classified as held for sale and measured at the lower of (i) the carrying value when we classified the disposal group as held for sale and (ii) the fair value of the disposal group as of such date, less costs to sell. Effective with the designation of the disposal group as held for sale on November 2, 2022, 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 $90 million and $232 million of depreciation, intangible amortization, and amortization of right-of-use assets for the three and nine months ended September 30, 2023, respectively, if the EMEA business did not meet the held for sale criteria.

The classification of the EMEA business as held for sale was considered an event or change in circumstance which requires an assessment of the goodwill of the disposal group for impairment each reporting period until disposal. We performed a pre-classification and post-classification goodwill impairment test of the disposal group as described further in Note 3—Goodwill, Customer Relationships and Other Intangible Assets, in our Annual Report on Form 10-K for the year ended December 31, 2022. As a result of our impairment tests, we determined the EMEA business disposal group was impaired, resulting in a non-cash, non-tax-deductible goodwill impairment charge of $224 million in the fourth quarter of 2022. We evaluated 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, and recorded an estimated loss on disposal of $616 million during the year ended December 31, 2022 in the consolidated statement of operations and a valuation allowance included in assets held for sale on the consolidated balance sheet. As a result of our evaluation of the recoverability of the carrying value of the EMEA assets and liabilities held for sale relative to the agreed upon sales price, adjusted for costs to sell, as of September 30, 2023, we recorded a $28 million and $113 million estimated loss on disposal during the three and nine months ended September 30, 2023, respectively, and adjusted the valuation allowance by the same amounts. For each reporting period through the closing date, we will conduct similar evaluations and adjust the valuation allowance for the EMEA assets held for sale as necessary.

The principal components of the held for sale assets and liabilities of the EMEA business as of the dates below are as follows:

	September 30, 2023		December 31, 2022
	(Dollars in millions)
Assets held for sale
Cash and cash equivalents	$	27	43
Accounts receivable, less allowance of $4 and $5	70		76
Other current assets	54		56
Property, plant and equipment, net accumulated depreciation of $1,013 and $998	1,954		1,864
Customer relationships and other intangibles, net	103		100
Operating lease assets	215		156
Valuation allowance on assets held for sale (1)	(729)		(616)
Deferred tax assets	145		131
Other non-current assets	34		32
Total assets held for sale	$	1,873	1,842
Liabilities held for sale
Accounts payable	$	56	78
Salaries and benefits	20		23
Current portion of deferred revenue	28		28
Current operating lease liabilities	41		33
Other current liabilities	33		28
Deferred income taxes	60		38
Asset retirement obligations	31		30
Deferred revenue, non-current	99		85
Operating lease liabilities, non-current	106		103
Total liabilities held for sale	$	474	446

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(1)    Includes the impact of $341 million and $353 million as of September 30, 2023 and December 31, 2022, respectively, primarily related to loss on foreign currency translation, expected to be reclassified out of accumulated other comprehensive loss upon close of the sale.