CenturyLink, Inc. (now Lumen Technologies) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing was submitted under the name CenturyLink, Inc. (NYSE: CTL). Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $5,192 | $5,375 | $10,420 | $10,802 |
| Operating income (loss) | $903 | $976 | $1,883 | $(4,523) |
| Net income (loss) | $377 | $371 | $691 | $(5,794) |
| Diluted EPS | $0.35 | $0.35 | $0.64 | $(5.41) |
| Adjusted EBITDA | $2,085 | $2,215 | $4,294 | $4,443 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3,048 | $2,883 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $1,983 | $1,731 |
Q2 operating margin was approximately 17.4% versus 18.2% a year earlier; adjusted EBITDA margin was approximately 40.2% versus 41.2%. First-half operating cash flow less capital expenditures was approximately $1,065, compared with $1,152 in the prior-year period. These are calculated amounts, not separately reported non-GAAP measures.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $1,763; current assets were $4,858 and current liabilities were $7,472.
- Total debt carrying value was $34,299, including $2,885 of current maturities; long-term debt excluding current maturities was $31,414. Cash less total debt implies net debt of approximately $32,536.
- The company reported $1.1 billion of available revolving-credit capacity. Cash included amounts set aside for scheduled debt redemptions.
- First-half financing included $2,425 of long-term debt issuance proceeds, $3,696 of debt payments, $825 of net revolving-credit borrowings, and $562 of dividends paid.
Material changes and operating trends
- Q2 revenue declined 3% year over year; first-half revenue declined 4%. Broadband revenue grew 1% in both comparisons, while traditional consumer voice fell 12% and consumer “Other” revenue fell 43% in Q2.
- Q2 Enterprise revenue grew 2%, but SMB, Wholesale, Consumer, and International and Global Accounts revenue declined. Management cited legacy voice and private-line attrition, pricing pressure, customer churn, and lower live-event traffic; pandemic-related call volumes supported some voice and collaboration revenue.
- Q2 interest expense fell 20% to $414, reflecting lower average debt and interest rates. First-half interest expense declined 17% to $863.
- First-half 2019 results included a $6.506 billion non-cash goodwill impairment; no impairment was recorded in first-half 2020. Management said its June assessment did not indicate that an impairment was more likely than not, but warned future conditions could trigger one.
- The company retrospectively changed presentation of certain transaction-based regulatory taxes to net presentation, reducing revenue and service costs in both comparison periods ($204 million and $203 million for Q2 2020 and 2019; $419 million and $423 million for the first half). The change did not affect operating or net income.
Outlook, risks and unusual items
- Management said COVID-19 had not materially affected financial performance or position through Q2, but effects could worsen with a longer pandemic or weaker economy. Impacts included reduced late-fee revenue, mixed demand across services, and increased expected credit losses.
- No numerical earnings or revenue guidance was provided. The company planned to continue its $0.25 quarterly dividend, subject to board discretion, and said it would monitor capital spending and capital allocation as conditions evolve.
- Management projected approximately $1.2 billion of debt maturities over the 12 months through June 2021 after specified redemptions, and said it did not anticipate difficulty meeting near-term obligations. It estimated 2020 cash income taxes of approximately $100 million, assuming use of tax attributes.
- Subsequent to quarter-end, $1.2 billion of Level 3 notes were redeemed on July 15, 2020; the company also anticipated redeeming $300 million of Qwest notes on August 7. First-half debt transactions included approximately $2.6 billion of repurchases and an $86 million loss on debt modification or extinguishment.
- COVID-19, competition, declining legacy services, refinancing access and borrowing costs, variable-rate debt, credit losses, pension obligations, regulatory support and litigation were identified as risks. A 100-basis-point LIBOR increase on $6.7 billion of unhedged floating-rate debt was estimated to reduce annual pretax earnings by approximately $67 million.
- Litigation and non-income-tax contingency accruals totaled approximately $135 million. Certain Brazilian tax claims could exceed established accruals by $37 million to $52 million; the ultimate outcomes of significant proceedings were uncertain.
Most important facts for investors to verify
- Whether revenue declines and pressure on adjusted EBITDA persist, particularly in SMB, Wholesale, and legacy consumer voice and video.
- Cash generation relative to capital spending, debt service, and dividends, alongside the company’s refinancing needs and credit ratings.
- Actual COVID-19 effects on customer collections, credit-loss provisions, network investment, and demand by service category.
- Progress on debt maturities and the company’s ability to use federal net operating loss carryforwards as projected.
- Any impairment indicators, material litigation developments, and the status of CAF buildout requirements and potential RDOF participation.