Lumen Technologies, Inc. quarterly report, Q3 FY2021

Lumen Technologies, Inc. — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. Lumen provides communications and technology services through its Business and Mass Markets segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Financial results

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Revenue	$4,887	$5,167	$14,840	$15,587
Operating income	$1,131	$888	$3,124	$2,771
Net income	$544	$366	$1,525	$1,057
Diluted EPS	$0.51	$0.34	$1.41	$0.98
Adjusted EBITDA	$2,109	$2,112	$6,355	$6,406

Revenue fell 5% year over year in both periods. Q3 operating margin rose to approximately 23.1% from 17.2%; net margin rose to 11.1% from 7.1%. These margins are calculated from reported figures.
Adjusted EBITDA margin was approximately 43.1% in Q3 versus 40.9% in Q3 2020; nine-month margin was approximately 42.8% versus 41.1%.
Operating cash flow for the first nine months was $4,894, compared with $4,842 a year earlier. Capital expenditures were $2,052, down from $2,971; operating cash flow less capex was approximately $2,842 versus $1,871.
Cash and cash equivalents were $635 at September 30; management reported $674 including cash classified as held for sale. Management also cited $2.2 billion of available revolving-credit borrowing capacity.
Reported debt was $29,761, including current maturities; a further $1,367 of debt was included in liabilities held for sale. Long-term debt excluding current maturities was $27,260. The filing reports $2.3 billion of debt maturities over the 12 months ending September 30, 2022.

Changes and operating trends

Q3 Business segment revenue decreased 5% to $3,508; Mass Markets revenue decreased 6% to $1,379. Nine-month revenue declined 5% in each segment.
Management attributed declines to legacy voice and private-line losses, pressure on traditional data and broadband services, customer disconnects, and lower rates in some offerings. Fiber-based broadband gains and growth in selected security, data-center and fiber-infrastructure services partly offset declines.
Expense reductions helped lift operating income despite lower revenue. SG&A declined partly due to lower staffing, bad-debt and marketing costs, and a $75 million gain on land sales. Depreciation and amortization also fell, in part because assets held for sale ceased being depreciated or amortized.
Cash dividends paid were $834 million in the first nine months. Lumen repurchased 73.8 million shares for $909 million through September 30; the company said its $1 billion repurchase program was completed on October 5, with total purchases of 80.9 million shares.

Transactions, outlook and risks

Lumen agreed to sell its Latin American business for $2.7 billion cash, subject to adjustments and estimated transaction expenses, with closing expected in the first half of 2022 subject to approvals. It also agreed to sell its ILEC business in 20 states for $7.5 billion, subject to assumed debt, expenses, taxes and other adjustments; closing was expected in the second half of 2022, subject to approvals. Net after-tax proceeds may differ materially from current estimates.
The disposal groups remained in reported operating results pending closing. At September 30, assets held for sale totaled $8.682 billion and liabilities held for sale totaled $2.291 billion. Lumen recorded no estimated disposal loss at that date.
For full-year 2021, management projected capital expenditures of $2.8–$3.0 billion and approximately $1.1 billion of common dividends, or $1.00 per share, assuming continued Board authorization. The quarterly dividend was $0.25 per share. No specific revenue or earnings guidance is provided in the filing excerpt.
CAF Phase II support, which had provided over $500 million annually, was scheduled to end after 2021; management noted that government support payments would decrease substantially after December 31, 2021. Lumen said it was on track to meet required buildout obligations but could not assure timely completion.
Management estimated an approximately $350 million noncash pension settlement charge for Q4 2021, dependent on completion of a planned annuity transaction and lump-sum payments. The annuity is intended to transfer about $1.4 billion of pension liabilities using existing plan assets.
Q3 included approximately $35 million of accelerated lease costs related to vacated properties. Risks include execution and approval of divestitures, continued competitive and legacy-service revenue pressure, debt refinancing and interest-rate exposure, regulatory changes, COVID-related uncertainty and litigation.
Accrued litigation and non-income-tax contingencies totaled approximately $104 million. A Missouri tax ruling awarded cities approximately $55 million plus interest; if not overturned or modified, the liability would exceed existing reserves. Brazilian tax assessments could result in losses up to $47 million beyond reserves.
The company reported compliance with material debt covenants and effective disclosure controls as of September 30, 2021. It warned that the federal-contractor vaccination requirement could create staffing or operational disruptions.

Key facts for investors to verify

Regulatory approvals, closing timelines, purchase-price adjustments, taxes and net proceeds for both divestitures, and the impact of the sales on retained-business cash flows and debt.
Whether revenue declines stabilize, particularly in legacy voice, Business services and broadband, and whether fiber and other growth offerings can offset them.
Cash generation after capital expenditures, debt maturities and dividends; liquidity availability and progress on deleveraging.
The expected decline in CAF support and completion of related broadband buildout obligations.
The final pension settlement charge and funding or transfer arrangements for pension obligations, including those associated with the ILEC sale.
Outcomes of the Missouri and Brazilian tax matters and other legal proceedings, as well as any material changes to reserves.