CenturyLink, Inc. (now Lumen Technologies, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing was made under CenturyLink, Inc.; the company’s name and ticker at the time were CenturyLink and CTL.
Business context
CenturyLink provided communications, network, broadband and related services to business and residential customers in more than 60 countries, with most revenue from the United States. It reported five segments: International and Global Accounts, Enterprise, Small and Medium Business, Wholesale, and Consumer.
Financial highlights
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $5.228 billion | $5.427 billion |
| Operating income (loss) | $980 million | $(5.499) billion |
| Net income (loss) | $314 million | $(6.165) billion |
| Diluted EPS | $0.29 | $(5.77) |
| Adjusted EBITDA | $2.209 billion | $2.228 billion |
| Cash from operations | $1.299 billion | $1.182 billion |
| Capital expenditures | $974 million | $931 million |
Revenue declined 4% year over year. Operating margin was approximately 18.7%; adjusted EBITDA margin was approximately 42.3%. Operating cash flow less capital expenditures was approximately $325 million, versus $251 million a year earlier. The prior-year loss included a $6.506 billion non-cash goodwill impairment, so the sharp change in reported earnings is not a like-for-like operating improvement.
At March 31, cash and cash equivalents were $1.564 billion. Long-term debt was $34.610 billion, including $1.129 billion of current maturities; stockholders’ equity was $13.291 billion. Cash plus reported available revolving-credit capacity was approximately $2.389 billion, although the cash balance included funds used to pay $973 million of notes at maturity on April 1, 2020. The company reported $825 million of revolver borrowing capacity at quarter-end.
Changes versus prior comparable period
- Revenue fell $199 million. Consumer revenue declined 6%, Wholesale 7%, and SMB 6%; Enterprise and International and Global Accounts were approximately flat. Consumer broadband revenue was flat, while legacy voice and other revenue declined.
- Adjusted EBITDA fell $19 million. Lower EBITDA in Enterprise, SMB, Wholesale and Consumer was partly offset by International and Global Accounts.
- Interest expense decreased 14% to $449 million, primarily reflecting lower average debt and prior refinancing. Other loss increased to $98 million, including a $79 million debt modification and extinguishment loss.
- Operating cash flow increased $117 million; capital spending rose $43 million. Financing cash use increased, chiefly because of higher debt repayments.
- Debt declined from $34.694 billion at year-end 2019 to $34.610 billion at March 31, despite debt issuance and revolving-credit borrowings. The company repurchased approximately $2.4 billion of debt during the quarter.
The company retrospectively changed its presentation of certain transaction-based taxes to net presentation, reducing reported revenue and cost of services by $215 million in Q1 2020 and $220 million in Q1 2019. The change did not affect operating income, net income or EPS. The comparative figures also reflect certain segment reporting reclassifications.
Outlook, management commentary and risks
- COVID-19: The company said pandemic effects had begun to reduce late-fee and Vyvx revenue late in Q1, and expected a more pronounced impact in Q2. Effects on customer demand and payment, operations, suppliers, capital markets and cash flows remained uncertain. The company had adopted remote-work and technician-safety measures and the FCC’s Keep Americans Connected Pledge.
- Spending and dividends: The pre-pandemic 2020 capital-spending budget was $3.6–$3.9 billion, excluding integration and transformation capital. Management said it planned to continue the $0.25 quarterly dividend, subject to board discretion, while monitoring liquidity and capital spending. No full-year earnings or revenue guidance was provided in the supplied filing text.
- Debt and liquidity: A January credit-agreement amendment extended certain maturities to 2025 and 2027 and lowered applicable rates. The company said it was in material compliance with debt covenants. It expected no scheduled debt maturities over the 12 months after March 31, following the April 1 note repayment, but remained reliant on capital markets to refinance debt.
- Other cash and operating considerations: The company estimated 2020 cash income taxes of approximately $100 million, assuming use of tax attributes, and said the CARES Act improved liquidity by $41 million and allowed deferral of an estimated $135 million of 2020 payroll taxes. Management did not expect required qualified-pension contributions in 2020.
- Business risks: Long-term declines in traditional voice and other legacy services, pricing pressure, competition, customer churn, and the need to invest in fiber and network capabilities continued. Pandemic-related constraints could also affect CAF broadband buildout deadlines. A further goodwill impairment remained possible if economic or market conditions worsened.
- Contingencies: Accrued litigation and non-income-tax contingencies totaled approximately $143 million. Brazilian tax assessments could produce an additional $37–$42 million loss beyond accruals if upheld. Other material proceedings included sales-practices litigation, switched-access disputes, state tax cases and a stayed qui tam action; outcomes were uncertain.
Important facts for investors to verify
- How COVID-19 affected Q2 and later revenue, customer collections, late fees, Vyvx activity, and operating and capital spending.
- Available revolver capacity and cash after the April 1, 2020 payment of $973 million of maturing notes, including subsequent borrowing and repayment activity.
- Progress against the $3.6–$3.9 billion capital-spending budget, the stated dividend policy, and debt-reduction objectives.
- Whether legacy-service declines, segment trends and customer churn changed, and whether management revised its goodwill impairment assessment.
- Developments in significant legal and tax contingencies, CAF buildout obligations, and the company’s ability to use its net operating loss carryforwards.