Lumen Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Lumen provides communications and technology services to business and residential customers, reporting through Business and Mass Markets segments. Results include the Latin American business through its August 1 sale and the ILEC business through its October 3 sale; neither was classified as discontinued operations.
Key financial results
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Operating revenue | $4.390B | $4.887B | $13.678B | $14.840B |
| Operating income | $1.384B | $1.131B | $3.379B | $3.124B |
| Net income | $578M | $544M | $1.521B | $1.525B |
| Diluted EPS | $0.57 | $0.51 | $1.50 | $1.41 |
| Operating cash flow | Not separately stated | Not separately stated | $3.894B | $4.894B |
| Capital expenditures | Not separately stated | Not separately stated | $2.183B | $2.052B |
Q3 operating margin was approximately 31.5% versus 23.1%; the comparison includes a $593M Latin American sale gain in 2022. Nine-month operating margin was approximately 24.7% versus 21.1%, also including that gain. Net margin was approximately 13.2% versus 11.1% for Q3 and 11.1% versus 10.3% for the nine-month periods. Operating cash flow less capital expenditures was $1.711B for the first nine months of 2022, down from $2.842B.
- Revenue and segments: Revenue declined 10% in Q3 and 8% year to date. Business revenue fell 8% and 6%, respectively; Mass Markets revenue fell 15% and 14%. Fiber Broadband revenue grew 19% in Q3 and 18% year to date, while copper-based broadband, legacy voice and other revenues declined.
- Profit and costs: Q3 net income increased despite lower revenue; nine-month net income was essentially flat. Lower service costs and depreciation helped operating income, while SG&A increased. Q3 other expense included investment losses, including $83M on equity securities and $43M on a limited partnership.
- Adjusted EBITDA: Reported adjusted EBITDA was $2.215B in Q3 versus $2.109B, and $5.893B for nine months versus $6.355B. The 2022 figures include the $593M sale gain. Segment adjusted EBITDA margins were 67% for Business in Q3 and 83% for Mass Markets, compared with 67% and 88%, respectively, a year earlier.
- Debt and liquidity: At September 30, total long-term debt was $25.238B, including $3.474B current maturities, versus $28.982B at December 31, 2021. Cash and cash equivalents were $252M; available revolver capacity was $1.9B. Lumen reported $11.7B of secured and $13.4B of unsecured debt, excluding specified held-for-sale debt and other exclusions. The company said it was in material compliance with debt covenants.
- Cash uses: Nine-month debt payments were $3.899B and dividends paid were $780M. Lumen contributed $319M to fund the pension plan associated with the ILEC sale.
Material changes and transactions
- On August 1, Lumen sold its Latin American business for approximately $2.7B in pre-tax cash proceeds and recorded a $593M pre-tax gain. It recorded an $86M fair-value liability for certain sale indemnifications.
- On October 3, Lumen completed the ILEC business sale for $7.5B of consideration, subject to approximately $0.4B of closing adjustments and including assumption of about $1.5B of debt; reported pre-tax cash proceeds were approximately $5.6B. Lumen expected to record a gain in Q4 2022.
- After quarter-end, Lumen repaid $3.224B of debt and said it would redeem another $112M. These repayments were reflected as current maturities at September 30.
- On November 2, the Board ended the quarterly dividend program and authorized a two-year share repurchase plan of up to $1.5B. No shares had been repurchased under the new plan as of November 3.
- Also on November 2, Lumen entered an exclusive arrangement to sell its EMEA operations for $1.8B in cash, subject to adjustments and approvals. Closing was expected as early as late 2023; the arrangement remained subject to required processes and approvals.
Outlook, commentary and risks
- Lumen projected 2022 capital expenditures of approximately $3.0B–$3.2B. The filing provides no clear numerical full-year revenue or earnings guidance.
- Management cited persistent declines in traditional voice and other mature services, competitive and pricing pressure, and lower government support following the end of CAF II. Quantum Fiber expansion and investment in network capabilities are intended to support growth.
- The company expected the divestitures to reduce recurring cash generation and to use a substantial portion of its net operating losses against taxable divestiture gains, increasing cash taxes substantially beginning in 2023. It estimated 2022 cash income taxes of approximately $100M.
- At September 30, Lumen had approximately $9.1B of floating-rate debt; a 100-basis-point LIBOR increase was estimated to reduce annual pre-tax earnings by approximately $91M. Credit-rating changes could increase borrowing costs.
- Litigation and non-income-tax contingency accruals totaled approximately $78M. Matters include tax, shareholder, billing-practices, outage, AT&T and patent disputes; outcomes may differ materially from estimates.
- Other risks include revenue erosion, execution of divestitures and cost-saving plans, customer and technology changes, cyber incidents and outages, pension and benefit obligations, and supply-chain or macroeconomic disruption. Management said pandemic-related impacts had not materially affected financial performance or position to date.
Important facts for investors to verify
- How much of reported operating income and EBITDA reflects the Latin American sale gain, and how underlying recurring profitability is trending.
- Post-sale cash proceeds, closing adjustments, indemnities, debt repayments and the effect of the ILEC and potential EMEA disposals on recurring cash flow and leverage.
- Revenue, customer and margin trends in Business and Mass Markets, particularly copper broadband and legacy services versus fiber growth.
- Cash generation after capital expenditures, pension funding and higher expected cash taxes as NOLs are used.
- The status and terms of the terminated dividend, the $1.5B repurchase authorization, debt maturities and floating-rate exposure.
- Developments in material litigation, regulatory matters, and the approvals and closing conditions for the proposed EMEA sale.