Lumen Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Dollar amounts are in millions unless stated otherwise.
Business context
Lumen is an international communications and technology company serving business and mass-market customers. Following an internal reorganization, it reports Business and Mass Markets segments. The filing describes a global fiber network of approximately 450,000 route miles and service in more than 60 countries; Mass Markets served 4.7 million broadband subscribers.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $4,924 | $5,192 | $9,953 | $10,420 |
| Operating income | $1,006 | $903 | $1,993 | $1,883 |
| Net income | $506 | $377 | $981 | $691 |
| Diluted EPS | $0.46 | $0.35 | $0.90 | $0.64 |
| Adjusted EBITDA (non-GAAP) | $2,089 | $2,085 | $4,246 | $4,294 |
- Revenue fell 5% year over year in Q2 and 4% for the first half. Operating income rose 11% and 6%, respectively; net income increased 34% and 42%.
- Calculated operating margin was 20.4% in Q2 versus 17.4%; net margin was 10.3% versus 7.3%. Adjusted EBITDA margin was 42.4% versus 40.2%. For the first half, those margins were 20.0% versus 18.1%, 9.9% versus 6.6%, and 42.7% versus 41.2%, respectively.
- First-half operating cash flow was $3,164, versus $3,048. Capital expenditures were $1,362, versus $1,983; operating cash flow less capital expenditures was $1,802, versus $1,065.
- At June 30, cash and equivalents were $935; total debt was $31,169, including $2,595 in current maturities. Long-term debt was $28,574. Available revolver capacity was $2.2 billion. Cash less total debt was approximately $30.2 billion.
- First-half dividends paid were $568; dividends declared were $0.50 per common share. The current quarterly rate was $0.25 per share.
Material changes and management commentary
- Revenue declined across both segments. Business revenue fell 5% in Q2 and the first half; Mass Markets revenue fell 5% and 4%, respectively. Legacy voice, private line, VPN and Ethernet declines were notable pressures. Broadband revenue was broadly steady; fiber infrastructure growth partly offset declines.
- Operating expenses fell 9% in Q2 and 7% in the first half, mainly from lower headcount and related costs, lower facilities and real-estate costs, and lower bad-debt expense. Lower amortization also reflected customer relationship assets becoming fully amortized.
- Interest expense declined year over year, reflecting lower average debt and interest rates. First-half other income included an $8 million gain on debt extinguishment; 2020 included an $86 million loss.
- Management cited continued investment in network capacity, automation and customer experience, alongside pressure from competition, declining traditional services and the need to right-size costs. It said COVID-19 impacts were not expected to be material in 2021 absent substantial deterioration in health or economic conditions.
Liquidity, outlook, risks and unusual items
- Management projected 2021 capital expenditures of approximately $3.2–$3.5 billion and cash dividends of approximately $1.1 billion, assuming the quarterly dividend remained $0.25 per share. It projected about $2.4 billion of debt maturities in the 12 months ending June 30, 2022. These are company estimates, not guarantees.
- During the first half, Lumen and affiliates repaid or redeemed approximately $2.6 billion of debt. New issuances included $1.0 billion of 5.375% senior notes due 2029 and $900 million of 3.750% sustainability-linked notes due 2029. The company reported compliance in all material respects with material debt covenants.
- Subsequent to quarter-end, Lumen agreed to sell its Latin American business for $2.735 billion cash, subject to adjustments, and a substantial portion of its incumbent local exchange business for $7.5 billion, subject to specified offsets and adjustments. Both transactions require regulatory approvals and were expected to close in 2022; final pre-tax gains or losses had not been determined. Management warned that divestitures could reduce future cash flows and carry execution, cost and operational-separation risks.
- In August 2021, the board authorized a 24-month share repurchase program of up to $1.0 billion; no shares had been repurchased under it as of August 4, 2021.
- Material litigation and tax exposures include a Missouri tax ruling of approximately $55 million plus interest, which Lumen appealed and said could exceed reserves if not overturned or modified, and Brazilian tax assessments with potential losses up to $53 million beyond reserves. Accrued litigation and non-income-tax contingencies totaled approximately $115 million. The filing says outcomes may differ materially from expectations.
- Approximately $5.1 billion of federal net operating loss carryforwards were reported as of December 31, 2020, subject to limitations. Management estimated 2021 cash income taxes of approximately $100 million and said utilization of the NOLs is not assured.
- Interest-rate exposure included approximately $5.6 billion of unhedged floating-rate debt; a hypothetical 100-basis-point LIBOR increase was estimated to reduce annual pre-tax earnings by approximately $56 million. CAF Phase II support was scheduled to end in 2021, and required buildout work remained subject to execution risk.
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management stated the 2021 first-half results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the announced divestitures receive approvals, close on expected terms and timing, and deliver the anticipated cash proceeds after adjustments, taxes and transaction costs.
- Whether cash generation can sustain planned capital spending, dividends, debt maturities and any share repurchases while reducing leverage.
- Whether revenue declines in legacy voice and other business lines continue, and whether broadband, fiber and newer services can offset them.
- The eventual outcomes and cash impact of the Missouri and Brazilian tax matters and other litigation, compared with recorded accruals.
- Progress on CAF II buildout requirements, the transition to replacement broadband support, and the effect of changing interest rates and NOL limitations.