Lumen Technologies, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context requires otherwise, (i) references in this report to "Lumen Technologies" or "Lumen," "we," "us" and "our" refer to Lumen Technologies, Inc. and its consolidated subsidiaries and (ii) references in this report to "Level 3" refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc., which we acquired on November 1, 2017. All references to "Notes" in this Item 2 of Part I refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report. Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report for factors relating to these statements and "Risk Factors" referenced in Item 1A of Part II of this report or other of our filings with the SEC for a discussion of certain risk factors applicable to our business, financial condition, results of operations, liquidity or prospects. Overview Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2023 and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations and cash flows for the first three months of the year are not necessarily indicative of the results of operations and cash flows that might be expected for the entire year. We are a facilities-based technology and communications company that provides a broad array of integrated products and services to our domestic and global business customers and our domestic mass markets customers. We operate one of the world's most interconnected networks. Our platform empowers our customers to swiftly adjust digital programs to meet immediate demands, create efficiencies, accelerate market access, and reduce costs, which allows our customers to rapidly evolve their IT programs to address dynamic changes. We are among the largest providers of communications services to domestic and global enterprise customers. Our long-haul network throughout North America and Asia Pacific connects to metropolitan fiber networks that we operate. As of March 31, 2024, we had approximately 27,000 employees. Changes in the Macroeconomic, Industry and Work Environments Over the past few years, societal, governmental and macroeconomic changes have impacted us, our customers and our business in several ways. On a regular basis, we review and rationalize our lease footprint and may incur accelerated lease costs when we determine to cease using underutilized leased property locations. We did not incur material accelerated lease costs during the three months ended March 31, 2024. Additionally, as discussed further elsewhere herein, macroeconomic changes over the past few years have resulted in (i) increases in certain revenue streams and decreases in others, (ii) operational challenges resulting from inflation and, to a lesser extent, shortages of certain components and other supplies that we use in our business, (iii) delays in our cost transformation initiatives and (iv) delayed decision-making by certain of our customers. None of these effects, individually or in the aggregate, have to date materially impacted our financial performance or financial position. Industry developments over the past couple years have increased fiber construction demand. The resulting increase in construction labor rates increased the cost of enabling units to be capable of receiving our fiber broadband services. In recent years, we believe these factors contributed to a delay in attaining our Quantum Fiber buildout targets. Continued inflationary pressures, supply constraints or business uncertainty could materially impact our financial results in a variety of ways, including by increasing our expenses, decreasing our revenues, further delaying our network expansion plans or otherwise interfering with our ability to deliver products and services. 44 Table of Contents These above-mentioned macroeconomic factors, coupled with dis-synergies resulting from our 2022 and 2023 divestitures, changes in customer preferences and negotiations with our creditors through the end of the first quarter of 2024, placed additional pressures on our financial performance and our market capitalization. These developments contributed to us recognizing a total of nearly $14.0 billion in goodwill impairment charges in 2022 and 2023. Some, but not all, of these pressures continue to impact us. To the extent these pressures continue, we could experience additional deterioration in our projected cash flows or market capitalization, or make significant changes to the assumed discount rates or market multiples that we use to determine the fair value of our reporting units. Any of these could result in additional impairments on our approximately $2.0 billion of remaining goodwill in the future periods. Reporting Segments Our reporting segments are currently organized by customer focus, as follows: • Business Segment: Under our Business segment, we provide our products and services under four sales channels: ◦ Large Enterprise: Under our large enterprise sales channel, we provide our products and services to large enterprise customers and carriers in North America. ◦ Mid-Market Enterprise: Under our mid-market enterprise sales channel, we provide our products and services to medium-sized enterprises in North America directly and through our indirect channel partners. ◦ Public Sector: Under our public sector sales channel, we provide our products and services to the public sector, including the U.S. Federal government, state and local governments and research and education institutions. ◦ Wholesale: Under our wholesale sales channel, we provide our products and services to a wide range of other communication companies providing wireline, wireless, cable, voice and data center services. ◦ International and Other: Under our international and other sales channel, we provide products and services (i) to multinational and global enterprise customers and carriers and (ii) under those content delivery network ("CDN") contracts that we did not sell in late 2023. • Mass Markets Segment: Under our Mass Markets segment, we provide products and services to domestic residential and small business customers. At March 31, 2024, we served 2.7 million broadband subscribers under our Mass Markets segment. See Note 10—Segment Information to our consolidated financial statements in Item 1 of Part I of this report for additional information. We categorize our Business segment revenue among the following products and services categories: • Grow , which includes products and services that we anticipate will grow, including our dark fiber, Edge Cloud services, IP, managed security, software-defined wide area networks ("SD WAN"), Unified Communications and Collaboration ("UC&C") and wavelengths services; • Nurture , which includes our more mature offerings, including ethernet and VPN data networks services; • Harvest , which includes our legacy services managed for cash flow, including Time Division Multiplexing ("TDM") voice, private line and other legacy services; and • Other , which includes equipment sales, managed and professional service solutions and other services. 45 Table of Contents We categorize our Mass Markets products and services revenue among the following categories: • Fiber Broadband , under which we provide high speed broadband services to residential and small business customers utilizing our fiber-based network infrastructure; • Other Broadband , under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure; and • Voice and Other, under which we derive revenues from (i) providing local and long-distance voice services, professional services, and other ancillary services, and (ii) federal broadband and state support programs. Trends Impacting Our Operations In addition to the above-described impact of macroeconomic pressures, our consolidated operations have been, and will 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 increased use of digital applications, online video, gaming and artificial intelligence has substantially increased demand for 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. • Changes in customer preferences and in the regulatory, technological and competitive environment are (i) significantly reducing demand for our more mature service offerings, commoditizing certain of our other offerings, or resulting in volume or rate reductions for other of our offerings and (ii) also creating certain opportunities for us arising out of increased demand for lower latency provided by Edge computing and for faster and more secure data transmissions. • 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. • Uncertainties regarding our financial performance, leverage and debt covenant compliance have caused, and may continue to cause, certain of our customers and other third parties to reduce or cease transacting business with us. • Our expenses will be impacted by higher vendor costs, reduced economies of scale and other dis-synergies due to our completed 2022 and 2023 divestitures and any future divestitures. • Declines in our traditional wireline services and other more mature offerings have necessitated right-sizing our cost structures to remain competitive. • We have historically generated revenue by entering into transactions that utilize excess conduit, fiber or other assets, on our network to create custom networks for our customers. We expect the demand for and size of these transactions to grow. We routinely assess revenue-generating opportunities with respect to these assets through right-of-use agreements, leases or other agreements. We may or may not consummate such transactions from time to time, and the revenue from and obligations associated with any such opportunities may be significant, either individually or in the aggregate. The completion of any future transactions may be subject to customary conditions, and may not be executed in a timely manner, or at all. 46 Table of Contents Inflation has placed downward pressure on our margins and macroeconomic uncertainties have likely contributed to delayed decision-making by certain of our customers, which are trends that will likely continue to impact us as long as elevated inflation and macroeconomic uncertainties persist. These and other developments and trends impacting our operations are discussed elsewhere in this Item 2. Results of Operations In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In "Segment Results" we review the performance of our two reporting segments in more detail. Results in this section include the results of our EMEA business prior to its sale on November 1, 2023. The following table summarizes the results of our consolidated operations for the three months ended March 31, 2024 and March 31, 2023: Three Months Ended March 31, 2024 2023 (Dollars in millions, except per share amounts) Operating revenue $ 3,290 3,738 Operating expenses 3,245 3,348 Operating income 45 390 Total other income (expense), net 57 290 Income before income taxes 102 680 Income tax expense 45 169 Net income $ 57 511 Basic earnings per common share $ 0.06 0.52 Diluted earnings per common share $ 0.06 0.52 We have experienced revenue declines, excluding the impact of acquisitions, primarily due to declines in voice and private line customers, switched access rates and minutes of use. More recently, we have experienced declines in revenue derived from the sale of certain of our other products and services. To partially mitigate these revenue declines, we remain focused on efforts to, among other things: • promote long-term relationships with our customers through bundling of integrated services; • increase the size, capacity, speed and usage of our networks; • allocate capital to our most promising products and services; • increase revenue from providing our Grow products and services to Business customers and our Quantum Fiber services to Mass Markets customers; • pursue acquisitions of additional assets or divestitures of non-strategic assets, in each case if available at attractive prices; • increase prices on our products and services and rationalize products across our portfolio if and when practicable; and • market our products and services to new customers, and transition existing customers from our legacy products to our newer offerings. 47 Table of Contents Revenue The following table summarizes our consolidated operating revenue recorded under each of our two segments and in our five above-described revenue sales channels within the Business segment: Three Months Ended March 31, % Change 2024 2023 (Dollars in millions) Business Segment: Large Enterprise $ 858 911 (6) % Mid-Market Enterprise 486 523 (7) % Public Sector 420 432 (3) % Wholesale 730 823 (11) % International and Other 97 279 (65) % Business Segment Revenue 2,591 2,968 (13) % Mass Markets Segment Revenue 699 770 (9) % Total consolidated operating revenue $ 3,290 3,738 (12) % Our consolidated operating revenue decreased by $448 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, $168 million of which was due to the sale of the EMEA business and select CDN contracts in the fourth quarter of 2023. See our segment results below for additional information on the drivers of the decrease in revenue. Operating Expenses The following table summarizes our operating expenses for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, % Change 2024 2023 (Dollars in millions) Cost of services and products (exclusive of depreciation and amortization) $ 1,652 1,817 (9) % Selling, general and administrative 823 721 14 % Loss on sale of business 22 77 (71) % Depreciation and amortization 748 733 2 % Total operating expenses $ 3,245 3,348 (3) % Cost of Services and Products (exclusive of depreciation and amortization) Cost of services and products (exclusive of depreciation and amortization) decreased by $165 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. This decrease was primarily due to a decrease of approximately $126 million due to the sale of the EMEA business in the fourth quarter of 2023, as well as reductions of approximately $16 million in facilities costs and $14 million in employee-related expense from lower headcount in our retained business. 48 Table of Contents Selling, General and Administrative Selling, general and administrative expenses increased by $102 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. The increase was primarily due to an increase of $143 million in legal and other professional fees, mainly driven by our debt transaction, offset by a decrease of approximately $25 million due to the sale of our EMEA business in the fourth quarter of 2023, as well as recognition of a deferred gain of $22 million on the sale of select CDN contracts in the fourth quarter of 2023. Loss on Sale of Business For a discussion of the loss on sale of business that we recognized for the three months ended March 31, 2023, see Note 2—Divestitures of the Latin American, ILEC and EMEA Businesses to our consolidated financial statements in Item 8 of Part II of our Annual Report Form 10-K for the year ended December 31, 2023. Depreciation and Amortization The following table provides detail of our depreciation and amortization expense: Three Months Ended March 31, % Change 2024 2023 (Dollars in millions) Depreciation $ 476 473 1 % Amortization 272 260 5 % Total depreciation and amortization $ 748 733 2 % Depreciation expense increased by $3 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023 primarily due a $12 million increase from accelerated depreciation of CDN assets and an $8 million increase due to decommissioned assets, which were partially offset by a decrease of $16 million due to changes in the depreciation lives of fiber network assets. Amortization expense increased by $12 million for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The increase was primarily due to an increase of $13 million associated with net increases in amortizable assets as well as $10 million associated with the accelerated amortization of CDN software assets. These increases were partially offset by (i) a $4 million decrease due to a changed method of amortization as discussed in Note 1— Background "— Change in Accounting Estimates", (ii) a $7 million decrease from certain customer relationship intangible assets becoming fully amortized in the second quarter of 2023 and (iii) a $4 million decrease related to CDN customer relationships. Further analysis of our segment operating expenses by segment is provided below in "Segment Results." Other Consolidated Results The following table summarizes our total other income (expense), net and income tax expense: Three Months Ended March 31, % Change 2024 2023 (Dollars in millions) Interest expense $ (291) (279) 4 % Net gain on early retirement of debt 275 609 (55) % Other income (expense), net 73 (40) nm Total other income, net $ 57 290 (80) % Income tax expense $ 45 169 (73) % _______________________________________________________________________________ nm Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful. 49 Table of Contents Interest Expense Interest expense increased by $12 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. The increase was due to the increase in the average interest rate from 5.73% for the three months ended March 31, 2023 to 6.59% for the three months ended March 31, 2024, which was partially offset by a decrease in average outstanding long-term debt of approximately $900 million. Net Gain on Early Retirement of Debt For a discussion of the TSA Transactions that resulted in the net gain on debt we recognized for the three months ended March 31, 2024, see Note 5—Long-Term Debt and Credit Facilities. See Note 7—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 8 of Part II of our Annual Report Form 10-K for the year ended December 31, 2023 for discussion of the 2023 exchange offers that resulted in the net gain on debt recognized for the three months ended March 31, 2023. Other Income (Expense), Net Other income (expense), net reflects certain items not directly related to our core operations, including (i) components of net periodic pension and post-retirement benefit costs, (ii) foreign currency gains and losses, (iii) our share of income from partnerships we do not control, (iv) interest income, (v) gains and losses from non-operating asset dispositions, (vi) income from transition and separation services provided by us to the purchasers of our divested businesses and (vii) other non-core items. Three Months Ended March 31, 2024 2023 (Dollars in millions) Pension and post-retirement net periodic expense $ (39) (39) Foreign currency (loss) gain (12) 2 Gain (loss) on investment in limited partnership 20 (61) Loss on investment in equity securities — (19) Transition and separation services 35 49 Interest income 58 13 Other 11 15 Total other income (expense), net $ 73 (40) See Note 9—Fair Value of Financial Instruments for more information regarding the losses recognized on our investments in equity securities and a limited partnership. Income Tax Expense For the three months ended March 31, 2024, our effective income tax rate was 44.1%, including an unfavorable impact of interest on our uncertain tax position reserves, and for the three months ended March 31, 2023, our effective income tax rate was 24.9%. 50 Table of Contents Segment Results General Reconciliation of segment revenue to total operating revenue is below. The results presented in this section include results of our EMEA business prior to its sale on November 1, 2023: Three Months Ended March 31, 2024 2023 (Dollars in millions) Operating revenue Business $ 2,591 2,968 Mass Markets 699 770 Total operating revenue $ 3,290 3,738 Reconciliation of segment EBITDA to total adjusted EBITDA is below: Three Months Ended March 31, 2024 2023 (Dollars in millions) Net income $ 57 511 Income tax expense 45 169 Total other income, net (57) (290) Depreciation and amortization expense 748 733 Stock-based compensation expense 14 14 Total adjusted EBITDA $ 807 1,137 Business segment adjusted EBITDA $ 1,355 1,595 Mass Markets segment adjusted EBITDA 376 414 Other unallocated amounts (924) (872) For additional information on our reportable segments and product and services categories, see Note 3—Revenue Recognition and Note 10—Segment Information to our consolidated financial statements in Item 1 of Part I of this report. 51 Table of Contents Business Segment Three Months Ended March 31, % Change 2024 2023 (Dollars in millions) Business Segment Product Categories: Grow $ 1,059 1,134 (7) % Nurture 777 913 (15) % Harvest 582 706 (18) % Other 173 215 (20) % Total segment revenue 2,591 2,968 (13) % Expenses: Total segment expense 1,236 1,373 (10) % Total segment adjusted EBITDA $ 1,355 1,595 (15) % Three months ended March 31, 2024 compared to the same period ended March 31, 2023 Business segment revenue decreased $377 million for the three months ended March 31, 2024 as compared to March 31, 2023. Approximately $168 million of this decrease was due to the sale of the EMEA business and select CDN contracts in the fourth quarter of 2023. More specifically, within each product category: • Grow decreased by $75 million for the three months ended March 31, 2024 compared to March 31, 2023 due to a decrease of approximately $81 million associated with the sale of the EMEA business. This decline was partially offset by growth in IP services of $35 million; • Nurture decreased by $136 million for the three months ended March 31, 2024 compared to March 31, 2023, approximately $27 million of which was attributable to the sale of the EMEA business. The remainder of the decline is principally attributable to declines in traditional VPN services of $78 million and declines in Ethernet services of $35 million; • Harvest decreased by$124 million for the three months ended March 31, 2024 compared to March 31, 2023, approximately $24 million of which was attributable to the sale of the EMEA business. The remainder of the decline is principally attributable to an $80 million decline in legacy voice and private line services; and • Other decreased by $42 million for the three months ended March 31, 2024 compared to March 31, 2023 approximately $29 million of which was attributable to the sale of select CDN contracts and $14 million of which is due to lower equipment revenue, which was partially offset by a $12 million increase in managed and professional services. Business segment expense decreased by $137 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 primarily driven by a decrease of $53 million due to the sale of the EMEA business and select CDN contracts and an $86 million reduction in overall network expense. Business segment adjusted EBITDA as a percentage of segment revenue was 52% for the three months ended March 31, 2024 and 54% for the three months ended March 31, 2023. 52 Table of Contents Mass Markets Segment Three Months Ended March 31, % Change 2024 2023 (Dollars in millions) Mass Markets Product Categories: Fiber Broadband $ 170 152 12 % Other Broadband 315 369 (15) % Voice and Other 214 249 (14) % Total segment revenue 699 770 (9) % Expenses: Total segment expense 323 356 (9) % Total segment adjusted EBITDA $ 376 414 (9) % Three months ended March 31, 2024 compared to the same period ended March 31, 2023 Mass Markets segment revenue decreased $71 million for the three months ended March 31, 2024 as compared to March 31, 2023. More specifically, within each product category: • Fiber Broadband revenue increased $18 million, primarily driven by growth in the number of fiber customers associated with our continued increase in enabled locations from our Quantum Fiber buildout; • Other Broadband revenue decreased $54 million, primarily due to fewer customers for our lower speed copper-based broadband services; • Voice and Other declined $35 million, principally due to the continued loss of copper-based voice customers. Mass Markets segment expense decreased $33 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 primarily driven by a $14 million increase in capitalized expenses related to our Quantum Fiber buildout, a decrease of $13 million in professional fees and $7 million in employee costs, partially offset by an $11 million increase in marketing and advertising expense. Mass Markets segment adjusted EBITDA as a percentage of segment revenue was 54% for both the three months ended March 31, 2024 and the three months ended March 31, 2023. 53 Table of Contents 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 constrained by tax, legal and other limitations. At March 31, 2024, we held cash and cash equivalents of $1.6 billion. As of March 31, 2024 we had $715 million of borrowing capacity available under our approximately $1.0 billion revolving credit facilities, net of undrawn letters of credit issued to us thereunder. We typically use our revolving credit facilities as a source of liquidity for operating activities and our other cash requirements. We had approximately $60 million of cash and cash equivalents outside the United States at March 31, 2024. We currently believe that there are no material restrictions on our ability to repatriate cash and cash equivalents into the United States, and that we may do so without paying or accruing U.S. taxes. We do not currently intend to repatriate to the United States any of our foreign cash and cash equivalents from operating entities. Our executive officers and our Board of Directors review our sources and potential uses of cash in connection with our annual budgeting process and throughout the year as circumstances warrant. Generally speaking, our principal funding source is cash from operating activities, and our principal cash requirements include operating expenses, capital expenditures, income taxes, debt payments, periodic securities repurchases, periodic pension contributions and other benefits payments. The impact of the divestitures of our Latin American, ILEC and EMEA businesses is further described below. Based on our current capital allocation objectives, for the full year 2024 we project approximately $2.7 billion to $2.9 billion of capital expenditures. For the 12 month period ending March 31, 2025, we project that our fixed commitments will include (i) $52 million of scheduled term loan amortization payments and (ii) $34 million of finance lease and other fixed payments. We will continue to monitor our future sources and uses of cash, and anticipate that we will make adjustments to our capital allocation strategies when, as and if determined by our Board of Directors. We may also draw on our revolving credit facilities as a source of liquidity for operating activities and to give us additional flexibility to finance our capital investments, payments of debt, pension contributions and other cash requirements. For additional information, see "Risk Factors—Financial Risks" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023. Impact of the Divestitures of the Latin American, ILEC and EMEA Business As discussed in Note 2—Divestitures of the Latin American, ILEC and EMEA Businesses in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023, we sold our Latin American, ILEC and EMEA Businesses on August 1, 2022, October 3, 2022 and November 1, 2023, respectively. As further described elsewhere herein, these transactions have provided us with a substantial amount of cash proceeds but have also reduced our base of income-generating assets that generate our recurring cash from operating activities. For a discussion of the impact of our divestitures upon our federal income taxes, see "Liquidity and Capital Resources–Federal Income Tax Obligations.” 54 Table of Contents 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, our network requirements, cash flow generated by operating activities, cash required for debt service and other purposes, regulatory considerations (such as governmentally-mandated infrastructure buildout requirements) and the availability of requisite supplies, labor and permits. Our capital expenditures continue to be focused on enhancing network operating efficiencies, developing new services, and expanding our fiber network, including our Quantum Fiber buildout plan. A portion of our 2024 capital expenditures will also be focused on replacing aged network assets. For more information on our capital spending, see (i) "—Overview of Sources and Uses of Cash " above, (ii) "Cash Flow Activities—Investing Activities" below and (iii) Item 1 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023. Debt Instruments and Financing Arrangements Debt Instruments On March 22, 2024, Lumen completed the TSA Transactions with a group of Consenting Debtholders representing over $15 billion of Lumen's outstanding consolidated long-term debt to, among other things, extend maturities of the debt instruments of the Company and Level 3 Financing, Inc. and provide access to approximately $1.0 billion of new Lumen revolving credit facilities maturing in 2028 to replace Lumen's former $2.2 billion revolving credit facility. In addition, Level 3 Financing, Inc. privately placed $1.575 billion aggregate principal amount of newly-issued first lien notes. For more information, see Note 5 to the financial statements included in Item 1 Part I of this report. At March 31, 2024, we had: • $13.0 billion of outstanding consolidated secured indebtedness; • $6.2 billion of outstanding consolidated unsecured indebtedness (excluding (i) finance lease obligations, (ii) unamortized premiums, net, and (iii) unamortized debt issuance costs); and • approximately $715 million of unused borrowing capacity under our revolving credit facilities, as discussed further below. Under its credit agreements dated March 22, 2024, Lumen maintained at March 31, 2024 (i) approximately $1.0 billion of superpriority revolving credit facilities, under which it owed none as of such date and had approximately $241 million of letters of credit issued and undrawn as of such date, and (ii) approximately $3.6 billion of drawn superpriority term loan facilities. Under its credit agreement dated March 22, 2024, Level 3 Financing, Inc. maintained at March 31, 2024, $2.4 billion of drawn secured term loan facilities. For additional information, see (i) "—Overview of Sources and Uses of Cash," (ii) Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report and (iii) Note 7—Long-Term Debt and Credit Facilities in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023. At March 31, 2024, we had $270 million undrawn letters of credit outstanding, $241 million of which were issued under our revolving credit facilities, $27 million of letters of credit outstanding under our $225 million uncommitted letter of credit facility and $2 million of which were issued under a separate facility maintained by one of our subsidiaries (the full amount of which is collateralized by cash that is reflected on our consolidated balance sheets as restricted cash within other assets). In addition to indebtedness under their March 22, 2024 credit agreements, Lumen and Level 3 Financing, Inc. are indebted under their respective outstanding senior notes, and several of Lumen's other subsidiaries are indebted under their respective outstanding senior notes. 55 Table of Contents For additional information on the terms and conditions of debt instruments of ours and our subsidiaries, including financial and operating covenants, see (i) Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report, (ii) "—Other Matters" below, and (iii) our Current Report on Form 8-K dated March 22, 2024. Future Financings and Debt Reduction Transactions Subject to market conditions, we plan 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 permitted under our debt covenants and consistent with our capital allocation strategies. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned by credit rating agencies, among other factors. As of the filing date of this report, the credit ratings for the senior secured and unsecured debt of Lumen Technologies, Inc., Level 3 Financing, Inc. and Qwest Corporation were as follows: Borrower Moody's Investors Service, Inc. Standard & Poor's Fitch Ratings Lumen Technologies, Inc.: Unsecured Ca CCC- CCC Secured Caa2/Caa3 B B+ Level 3 Financing, Inc. Unsecured Caa2 CCC- CCC- Secured B3/Caa2 B/B- B+/CCC Qwest Corporation: Unsecured Caa3 B- B+ Our credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future changes in the senior unsecured or secured debt ratings of us or our subsidiaries could impact our access to capital or borrowing costs. We cannot provide any assurances that we will be able to borrow additional funds on favorable terms, or at all. See "Risk Factors—Financial Risks" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023. From time to time over the past couple of years, we have engaged in various refinancings, redemptions, tender offers, exchange offers, open market purchases and other transactions designed to reduce our consolidated indebtedness, improve our financial flexibility or otherwise enhance our debt profile. Subject to market conditions, restrictions under our debt covenants, and other limitations, we expect to opportunistically pursue similar transactions in the future to the extent feasible. See Note 5—Long-Term Debt and Credit Facilities for additional information. Federal Income Tax Obligations As of December 31, 2023, Lumen Technologies had approximately $800 million of federal NOLs which, for U.S. federal income tax purposes, may be used to offset future taxable income. These NOLs are primarily related to federal NOLs we acquired through the Level 3 acquisition on November 1, 2017 and are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended ("Section 382"). We maintain a Section 382 rights agreement designed to safeguard through late 2026 our ability to use those NOLs. We utilized a substantial portion of our previously available NOLs to offset taxable gains generated by the completion of our 2022 divestitures. As a result, we anticipate that our cash income tax liability will increase in future periods. 56 Table of Contents In January 2024, we received a federal income tax cash refund of $729 million, including interest. The amounts of our near-term future tax payments will depend upon many factors, including our future earnings and tax circumstances and the impact of any corporate tax reform or taxable transactions. Although we expect to use substantially all of our remaining NOLs in future periods in accordance with Section 382's annual limitations, we cannot assure this. See "Risk Factors—Financial Risks—We may not be able to fully utilize our NOLs" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023. In August 2022, the Inflation Reduction Act was signed into law, which, among other things, implemented a corporate alternative minimum tax (“CAMT”) on adjusted financial statement income effective for tax periods occurring after December 31, 2022. The CAMT had no material impact on our financial results as of December 31, 2023. In addition, the Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15% intended to be effective on January 1, 2024. While the U.S. has not yet adopted the Pillar Two rules, various other governments around the world are enacting legislation, some of which are effective for tax periods after December 31, 2023. While the global minimum tax will increase our administrative and compliance burdens, we expect that it will have an immaterial impact on our financial statements for tax period ending December 31, 2024. Stock Repurchases Effective November 2, 2022, our Board of Directors authorized a two-year program to repurchase up to an aggregate of $1.5 billion of our outstanding common stock (the "November 2022 stock repurchase program"). During the three months ended March 31, 2024, we did not repurchase any shares of our outstanding common stock under this program. As of March 31, 2024, we were authorized to purchase up to an aggregate of $1.3 billion of our outstanding common stock under this program. We currently do not plan to purchase any shares of our outstanding common stock under this program in the near term. Pension and Post-retirement Benefit Obligations We are subject to material obligations under our existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2023, the accounting unfunded status of our qualified and non-qualified defined benefit pension plans and our qualified post-retirement benefit plans was $769 million and $1.9 billion, respectively. For additional information about our pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates—Pension and Post-retirement Benefits" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 and see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of the same report. Benefits paid by our Combined Pension Plan are paid through the trust that holds the Combined Pension Plan's assets. Based on current laws and circumstances, we do not expect any contributions to be required for our Combined Pension Plan during 2024. The amount of required contributions to our Combined Pension Plan in 2025 and beyond will depend on a variety of factors, most of which are beyond our control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. We occasionally make voluntary contributions to our plans in addition to required contributions and reserve the right to do so in the future. We last made a voluntary contribution to the trust for our Combined Pension Plan during 2018. We currently do not expect to make a voluntary contribution in 2024. Substantially all of our post-retirement health care and life insurance benefits plans are unfunded and are paid by us with available cash. Based on our most recent estimates, we expect to pay $193 million of post-retirement benefits, net of participant contributions and direct subsidies, for the full year 2024. For additional information on our expected future benefits payments for our post-retirement benefit plans, please see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of our Annual Report Form 10-K for the year ended December 31, 2023. 57 Table of Contents 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. Please see Note 11—Employee Benefits to our consolidated financial statements in Item 8 of Part II of our Annual Report Form 10-K for the year ended December 31, 2023 for additional information. For 2024, our expected annual long-term rate of return on the pension plan assets is 6.5%. However, actual returns could be substantially different. See Note 7—Employee Benefits to our consolidated financial statements in Item 1 of Part I of this report for more information. Future Contractual Obligations For information regarding our estimated future contractual obligations, see the MD&A discussion included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023. Federal Broadband Support Programs In January 2020, the FCC created the Rural Digital Opportunity Fund (“RDOF”) program, a federal support program designed to fund broadband deployment in rural America. For the first phase of this program, RDOF Phase I, the FCC ultimately awarded $6.4 billion in support payments to be paid in equal monthly installments over 10 years. We were awarded RDOF funding in several of the states in which we operate and began receiving monthly support payments during the second quarter of 2022. We received approximately $17 million in annual RDOF Phase I support payments during 2023 and expect to receive this same amount each year thereafter during the program period. For additional information on these programs, see (i) Note 4—Revenue Recognition to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023 (ii) "Business—Regulation of Our Business" in Item 1 of Part I of the same Annual Report and (iii) "Risk Factors—Legal and Regulatory Risks" in Item 1A of Part I of the same Annual Report. Federal officials have proposed changes to current programs and laws that could impact us, including proposals designed to increase broadband access, increase competition among broadband providers, lower broadband costs and increase broadband regulation. In late 2021, the U.S. Congress enacted legislation that appropriated $65 billion to improve broadband affordability and access, primarily through federally funded state grants. As of the date of this report, various state and federal agencies are continuing to take steps to make this funding available to eligible applicants, including us. Although, it remains premature to speculate on the ultimate impact of this legislation on us, we anticipate that the release of this funding would increase competition for broadband customers in newly-served areas. On April 25, 2024, the FCC re-adopted net neutrality rules similar to those in effect between 2015 and 2018. These rules are expected to take effect mid-year, subject to the outcome of any legal challenges. 58 Table of Contents Cash Flow Activities The following table summarizes our consolidated cash flow activities for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ Change 2024 2023 (Dollars in millions) Net cash provided by operating activities $ 1,102 595 507 Net cash used in investing activities (698) (616) 82 Net cash used in financing activities (1,060) (86) 974 Operating Activities Net cash provided by operating activities increased by $507 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 primarily due to our federal income tax cash refund of $729 million, including interest, received in first quarter of 2024. This increase was partially offset by a decrease in net income adjusted for non-cash expenses and gains, partly as a result of the sale of our EMEA business in late 2023. Cash provided by operating activities is subject to variability period over period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable and bonuses. For additional information about our operating results, see "Results of Operations" above. Investing Activities Net cash used in investing activities increased by $82 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 primarily due to an increase in capital expenditures. Financing Activities Net cash used in financing activities increased by $974 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 primarily due to the payments of long-term debt and associated fees, partially offset by proceeds from issuance of long-term debt. See Note 5—Long-Term Debt and Credit Facilities to our consolidated financial statements in Item 1 of Part I of this report for additional information on our outstanding debt securities. Other Matters We have cash management and loan arrangements with a majority of our income-generating subsidiaries, in which a substantial portion of the aggregate cash of those subsidiaries' is periodically advanced or loaned to us or our service company affiliate. Although we periodically repay these advances to fund the subsidiaries' cash requirements throughout the year, at any given point in time we may owe a substantial sum to our subsidiaries under these arrangements. In accordance with generally accepted accounting principles, these arrangements are reflected in the balance sheets of our subsidiaries but are eliminated in consolidation and therefore not recognized on our consolidated balance sheets. Our network includes some residual lead-sheathed copper cables installed years ago. These lead-sheathed cables constitute a small portion of our network. Due to media coverage over the past year of potential health and environmental risks associated with these cables, we anticipate incurring certain investigative costs. We also may incur other costs from related proceedings, including litigation, regulatory initiatives, and remediation. As March 31, 2024, we have not accrued for any such potential costs and will only accrue when such costs are probable and reasonably estimable. For additional information about related litigation and potential risks, see Note 11—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 1 of Part I of this 59 Table of Contents report, and the risk factor disclosures incorporated by reference herein under “Risk Factors” in Item 1A of Part II of this report. We are also involved in various legal proceedings that could substantially impact our financial position. See Note 11—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 1 of Part I of this report for additional information. 60 Table of Contents Market Risk As of March 31, 2024, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations and fluctuations in certain foreign currencies. 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 swap our exposure to variable interest rates for fixed interest rates. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. As of March 31, 2024, we did not hold or issue derivative financial instruments for trading or speculative purposes. As of March 31, 2024, we had approximately $6.1 billion of unhedged floating rate debt based on the secured overnight financing rate ("SOFR"). A hypothetical increase of 100 basis points in SOFR relating to our $6.1 billion of unhedged floating rate debt would, among other things, decrease our annual pre-tax earnings by approximately $61 million. We conduct a small portion of our business in currencies other than the U.S. dollar, the currency in which our consolidated financial statements are reported. Prior to the November 1, 2023 divestiture of our EMEA business, certain of our former European subsidiaries used the local currency as their functional currency, as the majority of their sales and purchases were transacted in their local currencies. Although we continue to evaluate strategies to mitigate risks related to the effect of fluctuations in currency exchange rates, we will likely recognize gains or losses from international transactions. Accordingly, changes in foreign currency rates relative to the U.S. dollar could positively or negatively 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 at March 31, 2024. Other Information Our website is www.lumen.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.lumen.com . The information contained on, or that may be accessed through, our website is not part of this quarterly report. You may obtain free electronic copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed by us or our affiliates Level 3 Parent, LLC and Qwest Corporation, and all amendments to those reports, in the "Investor Relations" section of our website ( ir.lumen.com ) under the headings "FINANCIALS" and "SEC Filings." These reports are available on our website as soon as reasonably practicable after they are electronically filed with the SEC. From time to time, we also use our website to webcast our earnings calls and certain of our meetings with investors or other members of the investment community. 61 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Liquidity and Capital Resources— Market Risk " in Item 2 of Part I above.