Lumen Technologies, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Lumen provides communications and technology services through its Business and Mass Markets segments. It sold its EMEA operations in November 2023, following 2022 sales of its Latin American business and part of its U.S. ILEC business. Comparisons therefore reflect both divestitures and underlying business trends.
Financial results and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Operating revenue | $14.557 billion | $17.478 billion |
| Operating income (loss) | $(9.584) billion | $95 million |
| Net income (loss) | $(10.298) billion | $(1.548) billion |
| Adjusted EBITDA | $4.146 billion | $6.703 billion |
| Cash from operating activities | $2.160 billion | $4.735 billion |
| Capital expenditures | $3.100 billion | $3.016 billion |
| Long-term debt, including current maturities | $19.988 billion | $20.572 billion |
| Cash and cash equivalents at year-end | $2.234 billion | $1.251 billion |
- Revenue fell 17%; management attributed about $2.1 billion of the year-over-year decline to the 2022 and 2023 divestitures. Business segment revenue decreased 12%, and Mass Markets revenue decreased 32%.
- The net loss included $10.693 billion of non-cash, non-tax-deductible goodwill impairment charges. The impairment drove the decline in reported earnings and stockholders’ equity, which was $417 million at year-end versus $10.374 billion a year earlier.
- Adjusted EBITDA declined 38%. Business segment adjusted EBITDA was $7.165 billion, with a 62% margin versus 66%; Mass Markets adjusted EBITDA was $1.589 billion, with a 53% margin versus 61%.
- Operating cash flow decreased $2.575 billion, primarily reflecting lower earnings adjusted for non-cash items and the effects of divestitures. Capital expenditures exceeded operating cash flow by $940 million.
- At year-end, Lumen reported $11.4 billion of secured debt, $8.5 billion of unsecured debt (excluding specified lease and accounting items), and approximately $1.8 billion of available capacity under its $2.2 billion revolving facility. The company reported $7.9 billion of unhedged floating-rate debt; a 100-basis-point SOFR increase would reduce annual pretax earnings by an estimated $79 million.
- Interest expense was $1.158 billion, down from $1.332 billion, despite the average interest rate increasing from 5.14% to 5.9%. The 2023 results included a $618 million gain on early retirement of debt.
Material changes and outlook
- Fiber Broadband revenue in Mass Markets increased 5% to $636 million, while copper-based Other Broadband revenue declined 36% and Voice and Other declined 41%. The company served 2.8 million Mass Markets broadband subscribers at year-end.
- Business segment “Grow” category revenue declined 3%, while “Nurture” and “Harvest” revenue declined 15% and 22%, respectively. Management cited continued pressure on legacy services, competitive pricing, and customer shifts away from traditional network services.
- The EMEA sale generated $1.7 billion in pretax cash proceeds and a $102 million net loss on disposal in 2023. Earlier divestitures produced substantial cash proceeds but also reduced recurring revenue and cash generation.
- For 2024, management projected capital expenditures of approximately $2.7 billion to $2.9 billion and scheduled term-loan amortization of $125 million. Lumen received a $729 million federal tax refund, including interest, in January 2024.
- On January 22, 2024, Lumen entered an amended transaction support agreement with creditors holding more than $12.5 billion of debt. The proposed transactions include $1.325 billion of new long-term secured financing, an approximately $1 billion new revolving facility, and extensions and modifications of certain debt. Completion was subject to closing conditions; the filing does not establish that the transactions had closed.
- Lumen discontinued its common-stock dividend in 2022 and had no current plans to resume it. It made no common-stock repurchases in 2023 and said it did not plan near-term repurchases.
Risks, contingencies, and unusual items
- Debt and liquidity: Debt maturities include $1.864 billion in 2025 and $9.386 billion in 2027. Lumen disclosed creditor allegations concerning a potential Level 3 covenant default related to proceeds from the Latin American sale, and noted that creditor actions could lead to acceleration or foreclosure. It stated it believed it and its subsidiaries were in material compliance with debt covenants at December 31, 2023. The proposed creditor transactions were not assured.
- Operating pressures: Management cited persistent revenue declines, intense competition, pricing pressure, declining legacy services, dis-synergies from divestitures, inflation, and the execution risks of network modernization and Quantum Fiber expansion.
- Cybersecurity: The company disclosed two 2023 cybersecurity incidents, including unauthorized access to internal IT systems. Based on information then known, management did not believe the incidents had or were likely to have a material adverse impact, but acknowledged future incidents could be material.
- Legal and environmental matters: The Marshall Fire litigation includes claims against Qwest with preliminary damage estimates exceeding $2 billion; Lumen is defending the claims. Lumen also faces investigations concerning Huawei equipment and litigation and potential proceedings relating to lead-sheathed legacy cables. The company had not accrued for potential lead-cable costs because they were not considered probable and reasonably estimable at year-end. Aggregate litigation and non-income tax contingency accruals were $84 million; the company could not estimate reasonably possible losses above that amount.
- Other unusual items: Lumen recorded a $101 million loss from donating its Monroe, Louisiana campus and $53 million of severance and related costs from a fourth-quarter workforce reduction of approximately 4%. It also disclosed immaterial corrections to prior-period accounts receivable and accounts payable balances; the corrections did not affect previously issued income statements or cash flows.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The auditors identified revenue testing and goodwill impairment estimates as critical audit matters.
Important facts for investors to verify
- Whether and on what final terms the January 2024 creditor transaction support agreement closed, and how it changes maturities, interest costs, covenants, and available liquidity.
- Whether operating cash flow can support projected capital spending, debt service, pension and retiree obligations, and other commitments as revenue continues to decline.
- Quantum Fiber buildout progress, fiber subscriber growth, customer retention, and whether fiber growth can offset copper and legacy-service losses.
- Developments in creditor covenant claims, the Marshall Fire litigation, Huawei investigations, lead-cable matters, and other contingencies, including potential cash exposure beyond recorded accruals.
- Future impairment assumptions and results, given $1.964 billion of goodwill remained at year-end and management warned further deterioration could trigger additional impairment charges.