Lumen Technologies, Inc. (then legally CenturyLink, Inc.) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; compared with the corresponding 2019 periods. The company launched the Lumen brand in September and began trading as LUMN on September 18, 2020. It said the legal name change was still subject to applicable requirements.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $5.167 billion | $5.350 billion | $15.587 billion | $16.152 billion |
| Operating income (loss) | $888 million | $950 million | $2.771 billion | $(3.573) billion |
| Net income (loss) | $366 million | $302 million | $1.057 billion | $(5.492) billion |
| Diluted EPS | $0.34 | $0.28 | $0.98 | $(5.13) |
| Adjusted EBITDA | $2.112 billion | $2.223 billion | $6.406 billion | $6.666 billion |
- Q3 operating margin was approximately 17.2% versus 17.8%; net margin was approximately 7.1% versus 5.6%. Adjusted EBITDA margin was approximately 40.9% versus 41.6%. These percentages are calculated from reported figures.
- Nine-month operating cash flow was $4.842 billion, compared with $4.771 billion. Capital expenditures were $2.971 billion versus $2.688 billion, leaving operating cash flow less capex of approximately $1.871 billion versus $2.083 billion.
- Cash and cash equivalents were $526 million at September 30, down from $1.690 billion at year-end 2019. Total debt was $32.592 billion, including $1.487 billion of current maturities, versus $34.694 billion at year-end. The company reported $1.1 billion of available revolving-credit capacity.
- Quarterly dividend was $0.25 per share; $837 million in dividends was paid during the first nine months.
Changes and operating trends
- Revenue declined 3% in both the quarter and first nine months. Q3 weakness included IP and data services (down 5%), voice and collaboration (down 5%), and consumer voice (down 11%); broadband revenue grew 2%.
- Enterprise revenue grew 1% in Q3, but SMB and wholesale revenue declined 6% and 7%, respectively; consumer revenue declined 4%. Segment adjusted EBITDA fell 5% year over year in Q3 overall.
- Q3 interest expense declined 18% to $409 million, principally reflecting lower average debt and interest rates. The company reported $82 million of debt modification and extinguishment losses for the first nine months, including a $67 million charge associated with the January credit-agreement changes.
- Net income improved against the prior-year nine-month loss, but comparison is heavily affected by the $6.506 billion noncash goodwill impairment recorded in 2019. There was no goodwill impairment in the 2020 periods presented.
- A change to net presentation of certain transaction-based taxes reduced both revenue and cost of services by $253 million (Q3 2020) and $256 million (Q3 2019), and by $672 million and $679 million, respectively, for the nine-month periods. The company said this had no effect on operating income, net income, or EPS.
Outlook, risks and unusual items
- Management said COVID-19 had not materially affected financial performance or financial position through Q3, while warning that prolonged disruption or worsening conditions could affect demand, collections, credit losses, costs, capital plans, and cash flows. The company had increased its allowance for credit losses, which it attributed predominantly to the pandemic-related slowdown.
- No consolidated revenue or earnings guidance is provided in the supplied filing text. Management said it planned to maintain its current dividend policy, subject to Board discretion, and would continue monitoring capital spending and capital allocation.
- For the 12 months ending September 30, 2021, projected fixed commitments included $1.3 billion of debt maturities, $125 million of scheduled term-loan amortization, and $34 million of finance lease and other fixed payments. Management said it did not anticipate COVID-19 preventing payment of these obligations.
- The company repurchased approximately $5.2 billion of debt during the first nine months and issued debt primarily to refinance obligations. It reported $32.927 billion of principal debt, with $2.423 billion scheduled to mature in 2021; most principal maturities fall in 2025 and thereafter.
- Risks include continued legacy voice and other service declines, pricing and competitive pressure, customer churn, refinancing and interest-rate exposure, and potential future goodwill impairment. A 100-basis-point LIBOR increase on $6.7 billion of unhedged floating-rate debt was estimated to reduce annual pretax earnings by about $67 million.
- Legal and tax contingencies included approximately $129 million of accrued litigation and non-income-tax contingencies. The company described unresolved state tax, billing-practices, shareholder, and other proceedings; Brazilian tax assessments could produce losses $16 million to $44 million above established accruals. Outcomes remain uncertain.
- Other notable items: the company estimated $6.2 billion of federal NOL carryforwards at year-end 2019, subject to limitations; expected approximately $100 million of 2020 cash income taxes; and estimated $135 million of payroll tax deferrals for 2020 under the CARES Act. It estimated a possible additional 2020 pension expense of about $110 million if settlement thresholds were reached.
Most important facts for investors to verify
- Whether revenue declines stabilize, particularly in wholesale, SMB, legacy voice, and other mature services, and whether broadband growth persists.
- Cash generation after capital expenditures, debt maturities and refinancing access, and the sustainability of the $0.25 quarterly dividend.
- COVID-19 effects on customer collections, credit-loss allowances, operating costs, and capital investment.
- Potential pension expense, tax exposures, litigation outcomes, and any future goodwill impairment.
- Whether the stated available revolver capacity, debt covenant compliance, and expected use of NOL carryforwards remain valid as conditions change.