Lumen Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. Lumen changed its legal name from CenturyLink, Inc. in January 2021. The company provides communications and technology services to business and mass-market customers and reported under newly reorganized Business and Mass Markets segments.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $5.029 billion | $5.228 billion | Down 4% |
| Operating income | $987 million | $980 million | Up $7 million |
| Net income | $475 million | $314 million | Up $161 million |
| Diluted earnings per share | $0.44 | $0.29 | Up $0.15 |
| Operating cash flow | $1.525 billion | $1.299 billion | Up $226 million |
| Capital expenditures | $716 million | $974 million | Down $258 million |
| Operating cash flow less capital expenditures | $809 million | $325 million | Up $484 million |
Operating margin was approximately 19.6%, versus 18.7%; net margin was approximately 9.4%, versus 6.0%. Adjusted EBITDA was $2.157 billion, down 2% from $2.209 billion. Segment adjusted EBITDA margins were 67% for Business and 88% for Mass Markets (67% and 87% in Q1 2020, respectively). These EBITDA figures are company-reported non-GAAP segment measures.
Interest expense fell 13% to $389 million, reflecting lower average debt and a lower average interest rate. The effective tax rate was 24.8%, compared with 27.5%. Other income, net, was $34 million, versus a $98 million expense, including an $8 million debt-extinguishment gain compared with a $79 million loss in Q1 2020.
Revenue and operating changes
- Business revenue declined 4% to $3.595 billion; Mass Markets revenue declined 4% to $1.434 billion. Revenue fell across all Business sales channels.
- Business product revenue included $1.580 billion of IP and Data Services (down 3%), $1.033 billion of Voice and Other (down 9%), $554 million of Fiber Infrastructure Services (up 1%), and $428 million of Compute and Application Services (down 2%).
- Mass Markets Consumer Broadband revenue rose 1% to $731 million, supported by demand for higher-speed services and higher rates. Voice and Other declined 11% to $541 million, reflecting legacy voice losses and reduced emphasis on Prism video.
- Operating expenses fell 5% to $4.042 billion. Lower headcount and employee-related costs, lower bad-debt expense and lower facility and marketing costs contributed; higher network expenses partly offset cost-of-service savings.
Financial position, debt and liquidity
- At March 31, cash and cash equivalents were $486 million. Total debt, including current maturities, was $31.440 billion, down from $31.837 billion at year-end 2020; long-term debt excluding current maturities was $27.599 billion.
- Current maturities of long-term debt were $3.841 billion, compared with $2.427 billion at December 31, 2020. The company reported $2.2 billion of available borrowing capacity under its revolving credit facility.
- Debt principal maturities were $2.410 billion for the remaining nine months of 2021 and $1.541 billion in 2022. Management projected $3.7 billion of debt maturities for the 12 months ending March 31, 2022.
- Q1 financing included issuance of $900 million of 3.750% sustainability-linked notes due 2029, with proceeds and cash used to redeem debt. The company repaid or redeemed approximately $1.3 billion of debt during the quarter.
- Cash dividends paid were $294 million; dividends declared were $0.25 per common share. Stockholders’ equity was $11.303 billion at quarter-end.
Outlook, risks and unusual items
- Management projected 2021 capital expenditures of $3.5–$3.8 billion and approximately $1.1 billion of cash dividends, assuming the quarterly dividend remains $0.25 per share. The board may change or discontinue the dividend. The filing provides no specific revenue or earnings guidance.
- Management said pandemic-related changes had not materially affected financial performance or position to date and, barring unforeseen developments, were not expected to do so materially in 2021. Impacts remain dependent on the course of the pandemic and broader economic conditions.
- Legacy voice and other traditional services face continuing customer, volume and rate declines; competition and technology shifts create pricing and obsolescence risks. Management cited opportunities in broadband, fiber, Edge computing and 5G-related demand, while noting some newer services may carry lower margins.
- The company expects $3.5–$3.8 billion of 2021 capital spending, including investment to meet broadband buildout requirements. CAF Phase II support is scheduled to end in 2021; management said it was on track to meet requirements but could not assure timely completion. RDOF support payments of $26 million annually are expected to begin in 2022.
- A 100-basis-point increase in LIBOR on $5.7 billion of unhedged floating-rate debt was estimated to reduce annual pretax earnings by approximately $57 million. Lumen also identified refinancing access, leverage, pension obligations, foreign currency exposure and its ability to generate cash for debt service and dividends as risks.
- Litigation and non-income-tax contingency accruals totaled approximately $119 million. Potential exposures include Brazilian tax assessments of $12–$49 million above established accruals, Missouri tax litigation that could exceed accrued amounts, and a stayed government-contract qui tam case alleging approximately $50 million in damages before possible trebling. Outcomes are uncertain.
- The company reclassified a $268 million right-of-way intangible asset from indefinite-lived to a nine-year remaining life. The change added approximately $7 million of Q1 amortization and is expected to add about $30 million for 2021.
- Management’s January 2021 qualitative goodwill impairment assessment found no impairment. Q1 2021 results also benefited from a change in other income/expense, notably the debt-extinguishment gain and improved pension-related results.
Most important facts for investors to verify
- Whether broadband and fiber growth can offset continued declines in legacy voice and other revenues, and whether reported segment margins remain sustainable.
- Debt refinancing and repayment needs, especially the approximately $3.7 billion of maturities projected over the 12 months ending March 31, 2022, alongside capital spending and dividend commitments.
- Execution and returns on planned 2021 capital expenditures, including CAF Phase II buildout obligations and the transition to RDOF support.
- Whether cash generation can support investment, debt reduction and the current dividend as operating revenue declines.
- Developments in material legal and tax contingencies, floating-rate exposure and the company’s ability to use its approximately $5.1 billion of federal net operating loss carryforwards.