Lumen Technologies, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 23, 2023. This is an annual filing, not a standalone fourth-quarter report. Lumen provides communications, network and technology services through its Business and Mass Markets segments.
Financial results and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Operating revenue | $17.478 billion | $19.687 billion |
| Operating income | $95 million | $4.285 billion |
| Net income (loss) | $(1.548) billion | $2.033 billion |
| Diluted earnings (loss) per share | $(1.54) | $1.91 |
| Adjusted EBITDA | $6.703 billion | $8.424 billion |
| Cash from operating activities | $4.735 billion | $6.501 billion |
| Capital expenditures | $3.016 billion | $2.900 billion |
| Long-term debt | $20.572 billion | $28.982 billion |
| Cash and cash equivalents | $1.251 billion | $354 million |
- Revenue fell 11%; adjusted EBITDA declined about 20%, and operating cash flow fell $1.766 billion. Revenue declined across all reported channels and was also reduced by the Latin American and ILEC business sales during 2022.
- Operating expenses rose 13% to $17.383 billion, despite lower service costs and depreciation, primarily reflecting a $3.271 billion goodwill impairment. The company also recorded a $700 million loss on disposal groups held for sale and $773 million of gains on business sales.
- The goodwill charge was non-cash and non-tax-deductible, largely associated with the North America Business reporting unit. The resulting tax expense was $557 million despite a pre-tax loss; the effective tax rate was negative 56.2%.
- Year-end liquidity included $1.251 billion of cash and $2.2 billion of unused revolving-credit capacity. The filing reports $10.4 billion of secured and $10.1 billion of unsecured debt, using stated exclusions; debt maturities include $9.387 billion in 2027.
- Interest expense was $1.332 billion. Lumen had $7.8 billion of unhedged floating-rate debt; a 100-basis-point rate increase would reduce annual pre-tax earnings by approximately $78 million.
Material changes and transactions
- Lumen sold its Latin American business on August 1, 2022, for approximately $2.7 billion in pre-tax cash proceeds, and sold part of its ILEC business on October 3, 2022. The ILEC transaction generated approximately $5.6 billion in pre-tax cash proceeds, subject to adjustments and indemnities, and included the buyer’s assumption of about $1.5 billion of debt.
- Lumen agreed to sell certain EMEA operations for $1.8 billion in cash, subject to adjustments and regulatory approvals. Closing was expected as early as late 2023; proceeds and timing were uncertain. The company recorded a $660 million estimated disposal loss for the EMEA group in 2022.
- Mass Markets revenue declined 20%, while fiber broadband revenue grew 15% to $604 million; copper-based broadband and voice revenue decreased. Business segment revenue fell 8%.
- The board ended the quarterly common-stock dividend program in November 2022. A new two-year repurchase authorization permits up to $1.5 billion; $200 million was repurchased in 2022.
- Total segment adjusted EBITDA was $12.432 billion, before $5.729 billion of centrally managed “Operations and Other” costs and other items. Business and Mass Markets adjusted EBITDA margins were 67% and 85%, respectively.
Outlook, commentary and key risks
- Management projected 2023 capital expenditures of approximately $2.9 billion to $3.1 billion and federal cash income taxes of $200 million to $300 million. It estimated 2022 cash taxes related to divestitures at $900 million to $1 billion.
- Strategy emphasizes Quantum Fiber expansion, network modernization, digital self-service, cost reduction, asset monetization and debt reduction. Management said higher fiber-construction costs and labor rates had delayed some Quantum Fiber projects.
- Management expects divestitures to reduce recurring cash flows and notes potential dis-synergies, stranded costs and transition-service obligations. The EMEA transaction remains conditional.
- Principal risks include continued revenue declines and pricing pressure, competition from cable and wireless providers and hyperscalers, execution of transformation and fiber plans, cyberattacks and outages, inflation, and the ability to generate sufficient cash to fund debt service and investment.
- Debt covenants restrict certain borrowing, distributions, asset sales and intercompany transfers. Lumen reported compliance with material debt covenants at year-end. Its ratings had recently been downgraded, and it cautioned that financing costs or access could worsen.
- Federal NOLs were approximately $1.0 billion and subject to Section 382 limitations; a rights agreement intended to protect them was scheduled to lapse in late 2023. Pension and post-retirement plans were underfunded by approximately $615 million and $2.0 billion, respectively.
- KPMG issued unqualified opinions on the financial statements and internal controls. The filing identifies revenue testing and North America Business goodwill impairment as critical audit matters.
Important facts for investors to verify
- Whether revenue and cash-flow trends stabilize after accounting for the businesses sold, and how much recurring cash flow remains in the retained business.
- Progress, timing, approvals and net proceeds from the EMEA sale, including the effect of transition services, indemnities and stranded costs.
- Debt maturities, refinancing terms, covenant headroom, ratings and the effect of unhedged floating-rate debt.
- Whether Quantum Fiber buildout targets and 2023 capital-spending plans are achieved at acceptable returns.
- Actual cash taxes after divestitures and the availability of remaining NOLs, as well as any material CAF II audit outcomes or litigation developments.