Lumen Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unless otherwise noted, financial figures are in millions of dollars. Lumen provides communications and technology services to business and residential customers through its Business and Mass Markets segments. Comparisons are affected by the 2022 sales of the Latin American and ILEC businesses.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenue | $3,738 | $4,676 |
| Operating income | $390 | $1,083 |
| Net income | $511 | $599 |
| Diluted earnings per share | $0.52 | $0.59 |
| Net cash from operating activities | $595 | $1,375 |
| Capital expenditures | $640 | $577 |
| Adjusted EBITDA | $1,137 | $1,914 |
- Revenue fell 20%; operating income fell 64%. Operating margin was approximately 10.4%, compared with 23.2% a year earlier.
- Adjusted EBITDA margin was approximately 30.4%, compared with 40.9%. This non-GAAP measure excludes, among other items, depreciation and amortization, interest, taxes, and other income and expense.
- Operating cash flow less capital expenditures was negative $45 million, versus positive $798 million in Q1 2022. This simple calculation is not a company-reported free-cash-flow measure.
- Cash and cash equivalents were $1,148 at March 31. Total debt carrying value was $19,896, including $153 current maturities; principal debt maturities were reported at $20,061. The company had $2.2 billion of unused revolving-credit capacity and no revolver borrowings.
- Current assets were $5,405 and current liabilities $4,848. The company reported $11.3 billion of consolidated secured debt and $8.5 billion of unsecured debt, excluding specified lease and accounting items.
Material changes versus prior year
- Revenue declined $938 million. Management attributed $716 million to the 2022 Latin American and ILEC divestitures and the Q1 2022 recognition of $59 million of expired CAF II deferred revenue; ongoing declines also affected continuing operations.
- Business segment revenue decreased 13% to $2,956 and adjusted EBITDA decreased 18% to $1,865. Grow revenue declined 5%, Nurture 17%, and Harvest 22%; management cited continued weakness in legacy and traditional network services, partly offset by growth in selected IP, dark fiber, wavelength, and colocation products.
- Mass Markets revenue decreased 39% to $782 and adjusted EBITDA decreased 49% to $432. The comparison includes the ILEC sale; copper broadband customer losses and legacy voice declines also weighed on results. Fiber Broadband revenue rose 5% to $152.
- Q1 net income included a $609 million gain on early retirement of debt. The company exchanged $1.535 billion of unsecured notes for $915 million of new 10.5% secured notes, reducing consolidated principal debt by approximately $620 million. The gain makes reported net income less representative of underlying operating trends.
- Interest expense fell to $279 from $352, despite higher average borrowing rates, as average debt declined. Other expense included $61 million of limited-partnership investment losses and $19 million of equity-security losses.
Outlook, risks and unusual items
- Management projected 2023 capital expenditures of approximately $2.9–$3.1 billion. It estimated 2023 federal cash income taxes of $300–$400 million, excluding the approximately $1.0 billion estimated federal and state tax payment made in April, mostly related to 2022 divestitures.
- The planned sale of the EMEA business to Colt is for $1.8 billion in cash, subject to adjustments and approvals; closing was expected as early as late 2023. The business remained in continuing operations. Lumen recorded an additional $77 million estimated disposal loss in Q1; cumulative valuation allowance on held-for-sale assets was $737 million.
- Management cited competition, declining legacy services, inflation and facility costs, divestiture-related dis-synergies, customer decision delays, supply constraints, and execution of cost, network, and Quantum Fiber buildout plans as operating pressures. It warned that further deterioration in cash flows or valuation assumptions could lead to future goodwill impairment.
- Approximately $7.8 billion of existing-contract performance obligations remained unsatisfied at quarter-end; the company expects $2.4 billion to be recognized in the remainder of 2023, $1.9 billion in 2024, and $3.5 billion thereafter.
- Approximately $7.8 billion of floating-rate debt was unhedged. A 100-basis-point rate increase was estimated to reduce annual pre-tax earnings by about $78 million. The filing also disclosed recent downgrades to credit ratings and said lower ratings could constrain borrowing access or increase costs.
- Lumen disclosed two cybersecurity incidents announced March 27, including access by a sophisticated intruder to internal IT systems. The company characterized the activity as surveillance and said its investigation indicated no likely material adverse impact, while cautioning that future cybersecurity events could be material.
- Litigation and non-income tax contingency accruals totaled $86 million; Lumen said it could not estimate reasonably possible losses beyond that accrual. The filing discusses shareholder, tax, billing-practices, outage, AT&T, and patent-related proceedings.
- The company declared no common-stock dividend in Q1 and made no share repurchases. It said it did not plan near-term repurchases.
Important facts for investors to verify
- How much of ongoing revenue and EBITDA decline reflects continuing operations rather than prior divestitures, and whether fiber and Business Grow offerings can offset legacy-service losses.
- Whether operating cash generation can support the planned capital expenditure program, debt service, post-retirement benefit payments, and substantial tax payments.
- Completion timing and net proceeds of the EMEA sale, including purchase-price adjustments, tax effects, and any further disposal valuation changes.
- Debt refinancing capacity, covenant compliance, exposure to variable rates, and the cost and terms of future financing.
- Developments in the cybersecurity investigations and material legal proceedings, as well as the potential for goodwill impairment or other non-cash charges.