Lumen Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data. Lumen provides communications and technology services to business and residential customers through its Business and Mass Markets segments.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $4,676 | $5,029 | Down 7% |
| Operating income | $1,083 | $987 | Up 10% |
| Net income | $599 | $475 | Up 26% |
| Diluted EPS | $0.59 | $0.44 | Up $0.15 |
| Adjusted EBITDA | $1,914 | $2,157 | Down 11% |
| Cash from operations | $1,375 | $1,525 | Down $150 |
| Capital expenditures | $577 | $716 | Down $139 |
Operating margin was approximately 23.2%, compared with 19.6% in the prior-year quarter; adjusted EBITDA margin was approximately 40.9%, compared with 42.9%. Operating cash flow less capital expenditures was approximately $798 million, versus $809 million. The filing does not present this difference as a defined free-cash-flow measure.
Revenue fell $353 million. Business segment revenue declined 5% to $3,401 million; Mass Markets revenue declined 11% to $1,275 million. Fiber Broadband revenue grew 19% to $145 million, while Other Broadband fell 6% and Mass Markets Voice and Other fell 22%. Business adjusted EBITDA was $2,288 million, down 5%; Mass Markets adjusted EBITDA was $1,109 million, down 12%.
Cash and cash equivalents were $366 million on the balance sheet, and cash classified as held for sale was $59 million. Management reported $425 million of cash and cash equivalents including held-for-sale cash, plus $1.0 billion available under the revolving credit facility. Long-term debt was $28,553 million, including current maturities; a further $1,387 million of debt was classified within liabilities held for sale. Total current liabilities were $5,655 million. The company paid $271 million in dividends during the quarter and declared $0.25 per common share.
Key changes and drivers
- Revenue declined across most categories, reflecting ongoing pressure in legacy voice and private-line services, lower business-service demand in some channels, copper broadband customer losses, and reduced government support payments. Fiber Broadband was the exception.
- Net income increased despite lower revenue, while adjusted EBITDA declined. Depreciation and amortization decreased $342 million year over year, primarily reflecting assets classified as held for sale and customer relationship intangibles that had become fully amortized. The company estimated it would have recorded an additional $170 million of depreciation and amortization in Q1 absent the held-for-sale classification.
- Other income included a $66 million gain on an investment in a limited partnership. Lower interest expense reflected reduced average debt and a lower average interest rate.
- Operating cash flow decreased $150 million, mainly due to lower net income adjusted for non-cash items and gains, partly offset by improved receivable collections. Investing cash use fell mainly because capital expenditures were lower.
Outlook, management commentary, and risks
- For 2022, Lumen projected capital expenditures of approximately $3.2 billion to $3.4 billion and expected $1.00 per share in cash dividends, assuming continued Board approval. The current quarterly dividend was $0.25 per share and remains subject to Board discretion.
- Lumen agreed to sell its Latin American business for $2.7 billion cash, subject to adjustments, and its ILEC business for $7.5 billion, subject to assumed debt and other offsets. Both transactions were expected to close in the second half of 2022, subject to regulatory approvals and customary conditions. Proceeds and timing are uncertain; the sales would also reduce recurring income-generating assets.
- Management estimated 2022 cash income tax liability of approximately $100 million, based on current assumptions, and expected to use a substantial portion of federal net operating loss carryforwards against taxable gains from the planned sales. Future cash taxes could rise if those carryforwards are used.
- The CAF II support program ended December 31, 2021. Q1 included a $59 million non-cash revenue release related to final buildout and filings; the filing also describes a $123 million reduction in CAF II revenue compared with the prior-year quarter. RDOF support payments of $26 million annually were subject to FCC approval.
- Interest-rate exposure is material: Lumen reported approximately $9.2 billion of unhedged floating-rate debt and estimated that a 100-basis-point LIBOR increase would reduce annual pretax earnings by approximately $92 million. Remaining interest-rate swaps were due to expire by June 30, 2022.
- Risks include competitive and technology-driven revenue pressure, network outages and cybersecurity events, execution of divestitures and fiber buildout plans, debt and liquidity needs, regulatory changes, and pension obligations. The filing reports $102 million of accrued litigation and non-income-tax contingencies. Certain Missouri tax proceedings and Brazilian tax assessments could result in liabilities above existing reserves; outcomes remain uncertain.
- Management stated that disclosure controls were effective as of March 31, 2022 and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Latin American and ILEC sales close on the expected timetable, and the ultimate net proceeds after debt, taxes, transaction expenses, and other adjustments.
- Whether reported earnings growth is sustainable given declining revenue and adjusted EBITDA, and the contribution of lower depreciation and amortization and the $66 million investment gain.
- Fiber Broadband customer, location-buildout, and revenue growth relative to continuing copper broadband and legacy-service declines.
- Debt reduction, refinancing needs, revolving-credit availability, and sensitivity to rising interest rates as hedges expire.
- Dividend and capital-expenditure plans, including whether cash generation supports them alongside debt service and pension requirements.
- Potential exposure from the identified tax, litigation, regulatory, and CAF compliance matters, which may differ materially from accrued amounts.