Lumen Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Lumen provides communications and technology services to business, wholesale, residential and small-business customers. It reports Business and Mass Markets segments. The results include the EMEA business, classified as held for sale, and reflect the 2022 sales of its Latin American and part of its ILEC businesses in prior-year comparisons.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3,641 | $4,390 | $11,040 | $13,678 |
| Operating income (loss) | $223 | $1,384 | $(7,808) | $3,379 |
| Net income (loss) | $(78) | $578 | $(8,303) | $1,521 |
| Diluted earnings (loss) per share | $(0.08) | $0.57 | $(8.45) | $1.50 |
| Adjusted EBITDA | $994 | $2,215 | $3,258 | $5,893 |
| Operating cash flow | Not separately provided here | $1,376 | $3,894 | |
| Capital expenditures | Not separately provided here | $2,279 | $2,183 |
Q3 operating margin was approximately 6.1% and net margin approximately negative 2.1%, versus approximately 31.5% and 13.2%, respectively, in Q3 2022. Q3 adjusted EBITDA was down about 55% year over year. Nine-month operating and net losses include an $8.8 billion non-cash, non-tax-deductible goodwill impairment recorded in Q2 2023. Nine-month operating cash flow less capital expenditures was negative $903 million, compared with positive $1,711 million in the prior-year period.
Revenue and material changes
- Q3 revenue declined 17%; nine-month revenue declined 19%. Management attributed $571 million of the Q3 decline and $2.0 billion of the nine-month decline to the 2022 Latin American and ILEC divestitures. Continuing declines in legacy and other offerings also weighed on results.
- Q3 Business revenue fell 10% to $2,894 million; segment adjusted EBITDA fell 17% to $1,774 million. Grow-category revenue rose 1%, while Nurture and Harvest declined 14% and 23%. Management cited growth in IP, dark fiber, wavelengths and colocation, offset by declines in traditional VPN, Ethernet and legacy voice.
- Q3 Mass Markets revenue fell 36% to $747 million and adjusted EBITDA fell 45% to $369 million. Fiber Broadband revenue increased 1%; Other Broadband fell 41% and Voice and Other fell 43%. Divestiture effects accounted for a substantial portion of the segment’s year-over-year revenue reduction; copper broadband and legacy voice also declined.
- The Q3 consolidated revenue comparison also reflects the absence of $593 million of prior-year gain on sale of business in operating expenses. Q3 included a $22 million estimated loss on disposal of the EMEA business; the nine-month loss was $112 million.
Financial position, cash flow and debt
- At September 30, 2023, cash and cash equivalents were $311 million on the balance sheet. Management cited $338 million including $27 million classified as held for sale; cash, cash equivalents and restricted cash totaled $350 million in the cash flow statement.
- Total debt was $19,895 million, including current maturities of $155 million; long-term debt excluding current maturities was $19,740 million. Debt principal maturities include $1,739 million in 2025 and $9,386 million in 2027. The company reported approximately $2.0 billion of available revolving-credit borrowing capacity.
- During the first nine months, debt exchange offers and repurchases reduced consolidated principal by approximately $630 million and generated a $618 million accounting gain. The exchanged notes included newly issued 10.5% secured notes due 2030. Average borrowing costs rose: management reported a 6.17% average interest rate for Q3 2023 versus 5.14% a year earlier.
- Operating cash flow was down $2.5 billion year over year, principally reflecting lower cash generation and approximately $1.3 billion of estimated federal and state taxes paid, mostly related to 2022 divestitures. Investing cash flow included no comparable prior-year $2.7 billion Latin American sale proceeds. Financing cash use was $101 million, versus $4.6 billion in the prior-year period.
- Approximately $7.8 billion of floating-rate debt was unhedged; management estimated a 100-basis-point SOFR increase would reduce annual pretax earnings by about $78 million. The company said it was in material compliance with its debt covenants at September 30.
Outlook, management commentary and risks
- Management projected 2023 capital expenditures of approximately $2.9–$3.1 billion. It expected 2023 federal income tax liability of $300–$400 million, excluding the effect of 2022 divestitures, and said it expected an approximately $900 million federal tax refund, with about $700 million in cash expected in Q1 2024.
- The planned EMEA sale to Colt was for $1.8 billion, subject to adjustments and customary closing conditions; management expected closing November 1, 2023, but gave no assurance. The filing recorded the business as held for sale, not discontinued operations.
- On October 31, 2023, Lumen announced a planned global workforce reduction of approximately 4%, expected to be substantially completed by year-end, with estimated severance and related costs of $55–$65 million. No related accrual was recorded at September 30. Also on October 31, the company announced a transaction support agreement with creditors representing over $7 billion of debt, including commitments for $1.2 billion of new long-term financing; completion is conditional.
- Lumen cited intense competition, declining demand for mature services, inflation and vendor costs, customer decision delays, fiber construction costs and execution risks for its Quantum Fiber buildout and cost initiatives. It also highlighted refinancing and credit-rating risks; its disclosed ratings included Caa3/CCC-/CCC+ for parent unsecured debt.
- Contingencies include shareholder and other litigation, Missouri tax disputes, patent matters, and potential environmental and lead-sheathed cable-related costs. The company had accrued $85 million in aggregate for litigation and non-income tax contingencies, but could not estimate reasonably possible losses above that amount. It had not accrued potential lead-cable costs as of September 30.
- Other subsequent events included the October 10 sale of substantially all CDN service contracts, with transition services for 90 days and a planned wind-down of remaining contracts in 2024. Management stated disclosure controls were effective as of September 30.
Most important facts for investors to verify
- Whether the EMEA sale closed on the expected date, and the final net proceeds, taxes and any further disposal valuation adjustments.
- Whether the October 31 creditor agreement and proposed $1.2 billion financing satisfy closing conditions, extend maturities as planned, and what the final financing costs and terms are.
- Underlying revenue and cash-flow trends excluding divestitures, particularly Business Grow products, legacy-service declines, Mass Markets fiber growth and copper customer losses.
- Liquidity and refinancing capacity relative to debt maturities, high floating-rate exposure, and continued access to revolving credit and capital markets.
- Actual 2023 capital spending, tax payments and refund timing, and the costs and expected savings from workforce and other cost-reduction actions.
- Potential changes to goodwill valuations, litigation and environmental exposures, including lead-cable-related costs not accrued in this filing.