What changed in this filing

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Item 1. Business

2022-02-24 compared with 2021-03-03 · 59 added, 95 removed, 129 unchanged (54% of the section changed)

Changes From Prior Periodic Reports

In this report we have complied with the disclosure required by the Securities and Exchange Commission ("SEC") release No.

33-10825 "Modernization of Regulation S-K Items 101, 103, and 105" and we have early adopted the changes in disclosure standards included in SEC release No.

33-10890 "Management's Discussion and Analysis, Selected Financial Data, Supplementary Financial Information."

Modernization of Regulation S-K Items 101, 103 and 105

Effective as of November 9, 2020, the SEC issued Release No.

33-10825, “Modernization of Regulation S-K Items 101, 103, and 105”.

This release was adopted to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K.

Specifically, this release requires registrants to provide disclosure relating to their human capital resources and to restructure their risk factor disclosures.

Additionally, the release increases the threshold for disclosure of environmental proceedings to which the government is a party.

This report reflects these changes.

These changes are required for any annual period subsequent to the effective date of November 9, 2020.

As such we have adopted these changes in this report.

Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information

In November 2020, the SEC issued Release No.

33-10890, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information” which will become fully effective on August 9,

2021, with voluntary compliance permitted on or after February 10, 2021.

This release was adopted to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K.

Specifically, the SEC eliminated the requirement for selected financial data, only requiring quarterly disclosure when there are retrospective changes affecting comprehensive income, and amending the matters required to be presented under Management’s Discussion and Analysis (“MD&A”) to, among other things, eliminate the requirement of the contractual obligations table.

With our early adoption of this release we have eliminated from this report the items discussed above that are no longer required.

Information on our material contractual obligations is still disclosed in the narrative within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report.

Business Overview and Purpose

We are an integrated communications company engaged primarily in providing our customers with an array of communications services and solutions.

We are an integrated facilities-based communications company engaged primarily in providing our customers with an array of communications products and services.

Our specific products and services are detailed below under the heading "Operations - Products and Services."

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Substantially all of our long-lived assets are located in the United States and substantially all of our total consolidated operating revenue is from customers located in the United States.

For the reasons noted in Note 14—Products and Services Revenue to our consolidated financial statements in Item 8 of Part II of this report, we believe we have one reportable segment.

For the reasons noted in Note 1—Background and Summary of Significant Accounting Policies to our consolidated financial statements in Item 8 of Part II of this report, we believe we have one reportable segment.

Products and Services

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At December 31, 2021, we reported our related revenue under the following categories:

IP and Data Services, Transport and Infrastructure Services, Voice and Collaboration Services, IT and Managed Services, Regulatory Revenue and Affiliate Services, each of which is described in further detail below.

IP and Data Services

We deliver a robust array of networking services built on Ethernet technology.

Ethernet services include point-to-point and multi-point equipment configurations that facilitate data transmissions across metropolitan areas and larger enterprise-class wide area networks.

Our Ethernet technology is also used by wireless service providers for data transmission via our fiber-optic cables connected to their towers;

• Retail Video.

Our retail video services span a range of technologies aimed at consumers and business customers.

We also offer various broadcast services to deliver audio and video feeds over fiber or satellite for broadcast and production firms

Transport and Infrastructure

Our broadband services deliver a cost-effective Internet connection through existing telephone lines or fiber-optic cables while customers enjoy high speed data transfer.

A substantial portion of our broadband subscribers are located within the local service area of our wireline telephone operations;

Voice and Other, Fiber Infrastructure, IP and Data Services and Affiliate Services, each of which is described in further detail below.

Voice and Other

• Voice Services.

We offer our customers a complete portfolio of traditional Time Division Multiplexing ("TDM") voice services including Primary Rate Interface ("PRI") service, local inbound service, switched one-plus, toll free, long distance and international services;

• Private Line.

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Private line service offers a high-speed, secure solution for frequent transmission of large amounts of data between sites, including wireless backhaul transmissions;

• Unbundled Network Elements and Other .

We provide select technology elements to other network carriers on a regional basis who include those technologies in their offerings;

• Wavelength.

We deliver high bandwidth optical networks to firms requiring an end-to-end transport solution with Ethernet technology by contracting for a scalable amount of bandwidth connecting sites or providing high-speed access to cloud computing resources.

Voice and Collaboration

We offer our customers a complete portfolio of traditional Time Division Multiplexing voice services including Primary Rate Interface service, local inbound service, switched one-plus, toll free, long distance and international services.

IT and Managed Services

• Information Technology ("IT") Services.

Our IT-based services deliver strategic consulting and solutions to C-suite executives in mid to large enterprises.

These services involve architecting technologies to address business needs.

Solutions range from System Integration Services to Big Data Analytics, building and managing strategic application suites such as SAP and deploying security technologies.

In many cases, we operate and manage these solutions on behalf of customers once they are deployed.

Regulatory Revenue

• Universal Service Fund ("USF") Support Payments.

We receive federal and state USF support payment subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from operations;

• Connect America Fund ("CAF").

We receive federal support payments from CAF II of the CAF program.

The funding from the CAF II support program has substantially replaced the funding from the interstate USF program that we previously utilized to support voice services in high-cost rural markets in 33 states.

Affiliate Revenue

Between 2015 and December 31, 2021, we received federal support payments from CAF II of the FCC's CAF program;

We continue to provide certain services based on older platforms to support our customers as they transition to newer technology, such as conferencing services.

Fiber Infrastructure Services

• Fiber-based and DSL-based Broadband Services.

Our broadband services deliver a cost-effective Internet connection through existing telephone lines or fiber-optic cables while customers enjoy high speed data transfer.

A substantial portion of our broadband subscribers are located within the local service area of our wireline telephone operations;

• Optical Services.

We deliver high bandwidth optical wavelength networks to customers requiring an end-to-end solution with ethernet technology for a scalable amount of bandwidth connecting sites or providing high-speed access to cloud computing resources.

IP and Data Services

We deliver a robust array of networking services built on ethernet technology.

Ethernet services include point-to-point and multi-point equipment configurations that facilitate data transmissions across metropolitan areas and larger enterprise-class wide area networks.

Our ethernet technology is also used by wireless service providers for data transmission via our fiber-optic cables connected to their towers.

Affiliate Services

• Affiliate Services.

We provide our affiliates certain telecommunication services that we also provide to external customers.

Please see our products and services listed above for further description of these services.

In addition, we provide our affiliates computer system development and support services, network support and technical services.

In addition, we provide our affiliates application development and support services, network support and technical services.

From time to time, we may change the categorization of our products and services.

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Like other large communications companies, we are a constant target of cyber-attacks of various degrees, and from time to time in the ordinary course of our business we experience disruption in our services.

We develop and maintain systems and programs designed to protect against cyber-attacks and network outages.

The development, maintenance and operation of these systems and programs is costly and requires ongoing monitoring and updating as technologies change and efforts to bypass security measures become more sophisticated and evolve rapidly.

For additional information regarding our systems, network assets, network risks, capital expenditure requirements and reliance upon third parties, see "Risk Factors," in Item 1A of Part I of this report.

Competition and Market Overview

Organizations across the globe are competing to capitalize on opportunities created by emerging technologies.

The need for data-intensive and latency-sensitive emerging technologies continues to grow.

Helping businesses address these needs requires a platform that integrates essential technology services.

We compete in a dynamic and highly competitive market, and we expect continued intense competition from a wide variety of sources under these evolving market conditions.

In addition to competition from large communications providers, we are increasingly facing competition from systems integrators, cloud service providers, software companies, infrastructure companies, cable companies, device providers, resellers, and smaller niche providers, among others.

We compete in a dynamic and highly competitive market in which demand for high-speed, secure data services continues to grow.

We expect continued intense competition from a wide variety of sources under these evolving market conditions.

In addition to competition from large communications providers, we are facing competition from a growing number of sources, including, systems integrators, cloud service providers, software networking companies, infrastructure companies, cable companies, device providers, resellers, and smaller niche providers, among others.

Our ability to compete hinges upon effectively enhancing and better integrating our existing products, introducing new products on a timely and cost-effective basis, meeting changing customer needs, providing high-quality information security to build customer confidence and combat cyber-attacks, extending our core technology into new applications and anticipating emerging standards, business models, software delivery methods and other technological changes.

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We anticipate that all these trends will continue to place downward pressures on the use of our network.

Additionally, the Telecommunications Act of 1996 obligates the incumbent local telephone companies ("ILECs"), to permit competitors to interconnect their facilities to the ILEC’s network and to take various other steps that are designed to promote competition, including obligations to (i) negotiate interconnection agreements in good faith, (ii) provide nondiscriminatory “unbundled” access to specific portions of the ILEC’s network and (iii) permit competitors to physically or virtually colocate their plant on the ILEC’s property.

As a result of these regulatory, consumer and technological developments, we also face competition from competitive local exchange carriers, or CLECs, particularly in densely populated areas.

Additionally, the Telecommunications Act of 1996 obligates incumbent local telephone carriers ("ILECs"), to permit competitors to interconnect their facilities to the ILEC’s network and to take various other steps that are designed to promote competition, including obligations to (i) negotiate interconnection agreements in good faith, (ii) provide nondiscriminatory “unbundled” access to specific portions of the ILEC’s network and (iii) permit competitors to physically or virtually collocate their plant on the ILEC’s property.

As a result of the above-described regulatory and technological developments, we also face competition from competitive local exchange carriers, or CLECs, particularly in densely populated areas.

CLECs provide competing services through (i) reselling an ILEC's local services, (ii) using an ILEC's unbundled network elements (iii) operating their own facilities or (iv) a combination thereof.

Competition for higher margin, legacy services remains high.

However, our and Lumen’s platform expansion and innovation strategy is focused largely on addressing these competitive pressures.

Competition to provide broadband and other data services remains high.

Market demand for our broadband services could be adversely affected by advanced wireless data transmission technologies and other systems delivering generally faster average broadband transmission speeds than our legacy copper-based infrastructure.

Our network expansion and innovation strategy is focused largely on addressing these competitive pressures.

As both residential and business customers increasingly demand high-speed connections for entertainment, communications and productivity, we expect the demands on our network will continue to increase over the next several years.

To remain competitive and successful, we are continuing to invest in network security, reliability and flexibility and design innovations to deliver competitive services to meet increasing customer bandwidth and speed requirements.

To meet these demands and remain competitive, we are continuing to invest in network capacity, security, reliability, flexibility and design innovations to deliver competitive high-speed services.

Additional information about competitive pressures is located under the heading "Risk Factors—Business Risks" in Item 1A of Part I of this report.

Market Overview

Understanding and anticipating market trends drives our investment in developing the products and services we believe will be well received by our customers.

As use cases continue to emerge, we expect secure network services will increase in importance as consumers require holistic solutions with the flexibility necessary to help accelerate the convergence of computing and communications capabilities with digital content.

We believe we and Lumen have a world-class set of global fiber assets that positions us to deliver a highly-competitive suite of services.

We generally market our business services to members of in-house IT departments or other highly-sophisticated customers with deep technological experience.

These individuals typically satisfy their IT requirements by contracting with us or a rapidly evolving group of competitors, or by deploying in-house solutions.

We expect our market competition to continue to increase as technology evolves and enables our customers to seek solutions from multiple sources.

We compete to provide services to business customers based on a variety of factors, including the comprehensiveness and reliability of our network, our data transmission speeds, price, the latency of our available intercity and metro routes, the scope of our integrated offerings, the reach and peering capacity of our IP network, and customer service.

As noted above, technological and competitive factors have led to new products and services that have reduced the demand for certain of our traditional network services, especially our traditional ILEC services.

Also, market demand for our broadband services could be adversely affected by advanced wireless data transmission technologies and other systems delivering generally faster average broadband transmission speeds than ours.

Sales and Marketing

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Our approach includes marketing our products and services primarily through direct sales representatives, inbound call centers, telemarketing and third parties, including retailers, satellite television providers, door to door sales agents and digital marketing firms.

We generally market our business services to members of in-house IT departments or other highly-sophisticated customers with deep technological experience.

These individuals typically satisfy their IT requirements by contracting with us or a rapidly evolving group of competitors, or by deploying in-house solutions.

Research, Development & Intellectual Property

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For information on various litigation risks associated with owning and using intellectual property rights, see “Risk Factors—Business Risks” in Item 1A of Part I of this report, and Note 14—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of this report.

Our domestic operations are regulated by the Federal Communications Commission (the “FCC”), by various state utility commissions and occasionally by local agencies.

Regulation of Our Business

Our domestic operations are regulated by the Federal Communications Commission (the “FCC”), by various state regulatory commissions and occasionally by local agencies.

Generally, we must obtain and maintain operating licenses from these bodies in most areas where we offer regulated services.

For information on the risks associated with the regulations discussed below, see “Risk Factors—Legal and Regulatory Risks” in Item 1A of Part I of this report.

Changes in the composition and leadership of the FCC, state commissions and other agencies that regulate our business could have significant impacts on our revenue, expenses, competitive position and prospects.

Changes in the composition and leadership of the FCC, state regulatory commissions and other agencies that regulate our business could have significant impacts on our revenue, expenses, competitive position and prospects.

Changes in the composition and leadership of these agencies are often difficult to predict, which makes future planning more difficult.

The following description discusses some of the major regulations that affect our operations, but various others could have a substantial impact on us.

For additional information, see "Risk Factors" in item 1A of Part I of this report.

Federal Regulation

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Additionally, the FCC regulates several aspects of our business related to international communications services, privacy, public safety and network infrastructure, including our access to and use of local telephone numbers and our provision of emergency 911 services.

We could incur substantial penalties if we fail to comply with the FCC's applicable regulations.

Many of the FCC’s regulations adopted in recent years remain subject to judicial review and additional rulemakings, thus increasing the difficulty of determining the ultimate impact of these changes on us and our competitors.

The following description discusses some of the major regulations affecting our operations, but others could have a substantial impact on us as well.

For additional information, see “Risk Factors” in Item 1A of Part I of this report.

Universal Service

In 2015, Lumen Technologies accepted Connect America Fund or "CAF" funding from the FCC of approximately $500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses in 33 of the 37 states in which we or Lumen are an ILEC under the CAF Phase II high-cost support program.

As a result of accepting CAF Phase II support payments for 33 states, we are obligated to make substantial capital expenditures to build infrastructure by certain specified milestone deadlines.

In accordance with the FCC's January 2020 order, Lumen Technologies elected to receive an additional year of CAF Phase II funding in 2021.

As a result of accepting CAF Phase II support payments for 33 states, we were obligated to make substantial capital expenditures to build infrastructure by certain specified milestone deadlines.

In accordance with the FCC's January 2020 order, Lumen Technologies elected to receive an additional year of CAF Phase II funding through 2021.

In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”) which is a new federal support program designed to replace the CAF Phase II program.

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Lumen Technologies won bids for RDOF Phase I support payments of $26 million annually.

These RDOF Phase I support payments are expected to begin January 1, 2022.

Lumen Technologies expects support payments under the RDOF Phase I program will begin soon after its anticipated receipt of the FCC's approval of its pending application.

Assuming Lumen Technologies timely completes their pending divestiture of the ILEC business assets on the terms described in Note 2—Planned Divestiture of the Latin American and ILEC Businesses in Item 8 of Part II of Lumen's Annual Report on Form 10-K for the period ended December 31, 2021, a portion of these payments would accrue to the purchaser.

For additional information about the potential financial impact of the CAF Phase II program, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of this report.

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In February 2015, the FCC adopted an order classifying broadband internet access services ("BIAS") under Title II of the Communications Act of 1934 and applying new regulations.

In December 2017, the FCC voted to repeal most of those regulations and the classification of BIAS as a Title II service and to preempt states from imposing substantial regulations on broadband.

In December 2017, the FCC voted to repeal the classification of BIAS as a Title II service and to preempt states from imposing substantial regulations on broadband.

Opponents of this change appealed this action in federal court.

Several states have also opposed the change and have initiated state executive orders or introduced legislation focused on state-specific Internet service regulation.

Several states have also opposed the change and have proposed, implemented or enacted laws or orders focused on state-specific Internet service regulation.

In October 2019, the federal court upheld the FCC’s classification decision but vacated a part of its preemption ruling.

The court also requested the FCC to make further findings relating to its classification decision.

Numerous parties have appealed this decision, which remain pending.

Various courts are considering or have ruled upon the issue of the enforceability of state broadband regulation, and additional litigation and appeals are expected with respect to this issue.

In addition, members of the Biden Administration and various consumer interest groups have advocated in favor of reclassifying BIAS under Title II.

The ultimate impact of these pending judicial appeals and calls for additional regulation are currently unknown to us, although the imposition of heightened regulation of our Internet operations could potentially hamper our ability to operate our data networks efficiently, restrict our ability to implement network management practices necessary to ensure quality service, increase the cost of operating, maintaining and upgrading our network, and otherwise negatively impact our current operations.

The ultimate impact of these pending judicial matters and calls for additional regulation are currently unknown to us, although the imposition of heightened regulation of our Internet operations could potentially hamper our ability to operate our data networks efficiently, restrict our ability to implement network management practices necessary to ensure quality service, increase the cost of operating, maintaining and upgrading our network and otherwise negatively impact our current operations.

State Regulation of Domestic Operations

In recent years, most states have reduced their regulation of ILECs, including ours.

Nonetheless, state regulatory commissions generally continue to (i) set the rates that telecommunication companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) limit ILECs' ability to borrow and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various other service standards.

Historically ILECs, including ours, have been regulated as “common carriers,” and state regulatory commissions have generally exercised jurisdiction over intrastate voice telecommunications services and their associated facilities.

In recent years, most states have reduced their regulation of ILECs.

State regulatory commissions generally continue to (i) set the rates that telecommunications companies charge each other for exchanging traffic, (ii) administer support programs designed to subsidize the provision of services to high-cost rural areas, (iii) regulate the purchase and sale of ILECs, (iv) require ILECs to provide service under publicly-filed tariffs setting forth the terms, conditions and prices of regulated services, (v) limit ILECs' ability to borrow and pledge their assets, (vi) regulate transactions between ILECs and their affiliates and (vii) impose various other service standards.

In most states, switched and business data services and interconnection services are subject to price regulation, although the extent of regulation varies by type of service and geographic region.

In addition, our Voice-Over-Internet Protocol services are regulated more lightly than legacy telephone services.

Data Privacy Regulations

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Data privacy regulations are complex and vary across jurisdictions.

We must comply with various jurisdictional data

privacy regulations, adopted by various jurisdictions in certain of our domestic markets.

We must comply with various jurisdictional data privacy regulations, adopted by various jurisdictions in certain of our domestic markets.

The application, interpretation and enforcement of these laws are often uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction.

These regulations require careful handling of personal and customer data.

We have data handling policies and practices to comply with data privacy requirements, and have resources dedicated to complying with changing data privacy regulations.

These regulations require careful handling of personal and customer data and could have a significant impact on our business.

We have adopted data handling policies and practices to comply with data privacy requirements, and have resources dedicated to complying with changing data privacy regulations.

Other Regulations

Our networks and properties are subject to numerous federal, state, and/or local regulations, including environmental compliance and remediation expenses.

Our networks and properties are subject to numerous federal, state, and local laws and regulations, including laws and regulations governing the use, storage and disposal of hazardous materials, the release of pollutants into the environment and the remediation of contamination.

Our contingent liabilities under these laws are further described in Note 14—Commitments, Contingencies and Other Items.

Certain federal and state agencies, including attorneys general, monitor and exercise oversight related to consumer protection issues.

We are also subject to codes that regulate our trenching and construction operations or that require us to obtain permits, licenses or franchises to operate.

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Nonetheless, from time to time we have used, and intend to continue to use, our website and social media accounts to augment our disclosures.

Lenders should also be aware that while we do, at various times, answer questions raised by securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information.

Accordingly, lenders should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance.

You should also be aware that while we do, at various times, answer questions raised by securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information.

Accordingly, you should not assume that we agree with any statement or report issued by an analyst with respect to our past or projected performance.

To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business