Lumen Technologies, Inc. quarterly report, Q1 FY2019

Business context and reporting period

This is CenturyLink, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019. The company, identified in the request as Lumen Technologies, reported five segments: International and Global Accounts, Enterprise, Small and Medium Business, Wholesale, and Consumer. It provided communications services in more than 60 countries, with most revenue generated in the United States.

Financial performance and liquidity

• Revenue declined 5%. Cost of services fell 10% to $2.520 billion, SG&A fell 16% to $932 million, and depreciation and amortization fell 7% to $1.188 billion.
• Q1 included a $6.506 billion non-cash, non-tax-deductible goodwill impairment. The company attributed the impairment testing to its January reorganization and a decline in its stock price. Without this charge, the reported operating loss and net loss would have been materially different; the filing does not provide a single adjusted net-income figure.
• Company-reported total segment adjusted EBITDA was $4.033 billion, down from $4.166 billion. After “Operations and Other,” the reconciliation reports $2.228 billion versus $2.074 billion. These are company-defined non-GAAP measures.
• At March 31, cash and cash equivalents were $441 million; total debt, including current maturities, was $35.490 billion. The company reported approximately $1.5 billion of available revolving-credit borrowing capacity and said it was in material compliance with debt covenants.
• Cash dividends paid were $285 million. The declared quarterly dividend was $0.25 per share, compared with $0.54 in the prior-year quarter.

Material changes versus the prior comparable period

• Revenue fell $298 million, with declines in six of eight categories. Consumer revenue decreased $128 million (8%); Wholesale decreased $73 million (7%). Broadband revenue rose 1%, while consumer voice revenue fell 12%.
• Revenue pressure reflected legacy voice and private-line declines, customer churn, pricing pressure, network consolidation, and lower regulatory and other revenue. IP and data services increased 1%.
• Operating cash flow declined $485 million, primarily reflecting changes in accounts payable and accrued expenses. Capital spending increased $126 million.
• Long-term debt excluding current maturities was $34.858 billion, down from $35.409 billion at December 31, 2018. Q1 included $153 million of long-term debt payments and $145 million of net revolving-credit borrowing.
• The company adopted the new lease standard on January 1, 2019. At March 31 it reported $1.952 billion of operating lease assets and $2.062 billion of operating lease liabilities classified as long-term, in addition to current operating lease liabilities.

Outlook, risks, contingencies and unusual items

• Management estimated 2019 capital expenditures of $3.5–$3.8 billion, excluding integration and transformation capital. It expected quarterly dividends of approximately $271 million at the then-current $0.25-per-share rate, subject to board discretion.
• Management cited continued competition, migration away from traditional voice and private-line services, pricing pressure, broadband competition, and declining video revenue. It expected these trends to continue. No specific revenue or earnings guidance was provided in the supplied filing text.
• The company had approximately $13.3 billion of floating-rate debt exposed to LIBOR; a hypothetical 100-basis-point increase would reduce annual pretax earnings by $133 million. Swaps hedged $2.5 billion of floating-rate debt at a fixed 2.48% rate through March 2022.
• Material legal and tax matters included consumer and securities litigation concerning alleged sales practices, switched-access disputes, Missouri tax suits, and Brazilian tax assessments. The filing cited potential Brazilian exposure of up to $37 million beyond established accruals and approximately $10 million of exposure in Peruvian tax litigation. Outcomes were described as uncertain.
• Management said disclosure controls were not effective at March 31 because of previously disclosed material weaknesses in internal control over financial reporting. Remediation was underway, with completion expected before year-end 2019.
• The company reported $121 million accrued for litigation and non-income-tax contingencies. It also identified environmental exposure at approximately 200 properties, while noting that additional liabilities or changing requirements could adversely affect the business.

Important facts for investors to verify

• Whether the goodwill impairment assumptions and reporting-unit valuations remain supportable, and whether further impairment indicators arise.
• Whether revenue declines stabilize, particularly in Consumer, Wholesale, voice, and transport and infrastructure offerings, and whether cost reductions protect adjusted EBITDA and cash generation.
• Debt refinancing needs, covenant restrictions, floating-rate exposure, and the adequacy of liquidity for planned capital expenditures, dividends, and debt service.
• Progress and independent testing of internal-control remediation, given management’s conclusion that disclosure controls were ineffective.
• Developments in material litigation, tax disputes, CAF Phase II investment obligations, pension and post-retirement obligations, and the sustainability of the dividend.