Lumen(US:LUMN)2024-04-30 21:06Part I. Financial Information Financial Statements Lumen Technologies reported Q1 2024 operating revenue of $3.29 billion, net income of $57 million, and $1.1 billion in operating cash flow, reflecting a decline in revenue but improved cash generation Note 1: Background and Accounting Policies Lumen, a technology and communications company, updated its depreciation method and extended the economic life of fiber assets, decreasing Q1 2024 depreciation expense by $16 million - Effective January 1, 2024, the company changed its depreciation method for ILEC and certain CLEC fixed assets to a straight-line method for individual assets, which had an immaterial impact for the quarter43 - The estimated economic life of owned fiber network assets was extended from 25 to 30 years, resulting in a $16 million decrease in depreciation expense for Q1 202444 Note 3: Revenue Recognition Total Q1 2024 revenue was $3.29 billion, a decrease from prior year, with $6.9 billion in future revenue expected from existing performance obligations Total Revenue by Segment (Q1 2024 vs Q1 2023) | Segment | Q1 2024 Revenue (Millions) | Q1 2023 Revenue (Millions) | | :--- | :--- | :--- | | Business Segment | | | | Grow | $1,059 | $1,134 | | Nurture | $777 | $913 | | Harvest | $582 | $706 | | Other | $173 | $215 | | Total Business | $2,591 | $2,968 | | Mass Markets Segment | | | | Fiber Broadband | $170 | $152 | | Other Broadband | $315 | $369 | | Voice and Other | $214 | $249 | | Total Mass Markets | $699 | $770 | | Total Revenue | $3,290 | $3,738 | - As of March 31, 2024, the company expects to recognize $6.9 billion in future revenue from unsatisfied performance obligations associated with existing customer contracts64 Note 5: Long-Term Debt and Credit Facilities Lumen completed a debt restructuring under a TSA, extending maturities by $10.2 billion and raising $1.325 billion in new capital, but increasing the average interest rate to 7.73% and yielding a $275 million gain on debt extinguishment - On March 22, 2024, the company completed transactions under a Transaction Support Agreement (TSA) with creditors, which included establishing new credit facilities, exchanging a substantial portion of existing notes, and raising new capital7576 - The TSA transactions reduced total debt maturities due on or before December 31, 2027, by approximately $10.2 billion, but increased the weighted average interest rate on consolidated long-term debt from 6.23% to 7.73%82 - The company recognized a net gain on early retirement of debt of $275 million in Q1 2024, related to the TSA transactions85 Note 10: Segment Information Lumen reports two segments, Business and Mass Markets, with Q1 2024 Business segment revenue at $2.59 billion and Mass Markets at $699 million, contributing to total segment adjusted EBITDA of $1.73 billion Segment Adjusted EBITDA (Q1 2024 vs Q1 2023) | Segment | Q1 2024 Adj. EBITDA (Millions) | Q1 2023 Adj. EBITDA (Millions) | | :--- | :--- | :--- | | Business | $1,355 | $1,595 | | Mass Markets | $376 | $414 | | Total Segment Adj. EBITDA | $1,731 | $2,009 | Note 11: Commitments, Contingencies and Other Items Lumen faces various legal proceedings, including shareholder lawsuits, tax disputes, and litigation related to the Marshall Fire, with $81 million accrued for contingencies - As of March 31, 2024, the company has accrued $81 million for litigation and non-income tax contingencies141 - The company is defending against multiple putative shareholder class action lawsuits alleging misstatements related to its Quantum Fiber business and environmental issues from lead-sheathed cables144145 - Lumen is involved in litigation related to the Marshall Fire in Colorado, with preliminary damage claims exceeding $2 billion, and is also subject to federal investigations regarding the use of Huawei equipment in its networks154156 Consolidated Statements of Operations (Unaudited) | | Three Months Ended March 31, | | :--- | :--- | :--- | | | 2024 | 2023 | | | (Millions USD) | | | Operating Revenue | $3,290 | $3,738 | | Total operating expenses | 3,245 | 3,348 | | Operating Income | 45 | 390 | | Total other income, net | 57 | 290 | | Net Income | $57 | $511 | | Diluted EPS | $0.06 | $0.52 | Consolidated Balance Sheet Highlights (Unaudited) | | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | | (Millions USD) | | | Cash and cash equivalents | $1,580 | $2,234 | | Total Assets | $33,173 | $34,018 | | Long-Term Debt | $18,591 | $19,831 | | Total Stockholders' Equity | $504 | $417 | Consolidated Statements of Cash Flows (Unaudited) | | Three Months Ended March 31, | | :--- | :--- | :--- | | | 2024 | 2023 | | | (Millions USD) | | | Net cash provided by operating activities | $1,102 | $595 | | Net cash used in investing activities | ($698) | ($616) | | Net cash used in financing activities | ($1,060) | ($86) | | Net decrease in cash | ($656) | ($107) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 12% YoY revenue decline to the EMEA divestiture and legacy service declines, while highlighting the March 2024 debt restructuring and projected 2024 capital expenditures of $2.7 billion to $2.9 billion Results of Operations Consolidated operating revenue decreased 12% to $3.29 billion, partly due to the EMEA sale, while SG&A expenses rose $102 million from debt restructuring fees, leading to a significant drop in net income to $57 million Revenue by Segment (Q1 2024 vs Q1 2023) | Segment | Q1 2024 Revenue (Millions) | Q1 2023 Revenue (Millions) | % Change | | :--- | :--- | :--- | :--- | | Business Segment | $2,591 | $2,968 | (13)% | | Mass Markets Segment | $699 | $770 | (9)% | | Total | $3,290 | $3,738 | (12)% | - SG&A expenses increased by $102 million YoY, mainly due to a $143 million increase in legal and professional fees associated with the company's debt restructuring transactions192 - The company recognized a net gain on early retirement of debt of $275 million in Q1 2024, compared to a $609 million gain in Q1 2023196198 Segment Results Business segment revenue declined 13% to $2.59 billion, impacted by the EMEA divestiture and broad product category declines, while Mass Markets revenue fell 9% despite Fiber Broadband growth Business Segment Revenue by Product (Q1 2024 vs Q1 2023) | Product Category | Q1 2024 Revenue (Millions) | Q1 2023 Revenue (Millions) | % Change | | :--- | :--- | :--- | :--- | | Grow | $1,059 | $1,134 | (7)% | | Nurture | $777 | $913 | (15)% | | Harvest | $582 | $706 | (18)% | | Other | $173 | $215 | (20)% | | Total | $2,591 | $2,968 | (13)% | Mass Markets Segment Revenue by Product (Q1 2024 vs Q1 2023) | Product Category | Q1 2024 Revenue (Millions) | Q1 2023 Revenue (Millions) | % Change | | :--- | :--- | :--- | :--- | | Fiber Broadband | $170 | $152 | 12% | | Other Broadband | $315 | $369 | (15)% | | Voice and Other | $214 | $249 | (14)% | | Total | $699 | $770 | (9)% | Liquidity and Capital Resources As of March 31, 2024, Lumen held $1.6 billion in cash and projects $2.7 billion to $2.9 billion in 2024 capital expenditures, benefiting from a $729 million tax refund and recent debt restructuring - As of March 31, 2024, the company had $1.6 billion in cash and cash equivalents and $715 million of available borrowing capacity under its revolving credit facilities211 - Projected capital expenditures for the full year 2024 are between $2.7 billion and $2.9 billion213 - In January 2024, the company received a federal income tax cash refund of $729 million, including interest228 Quantitative and Qualitative Disclosures About Market Risk Lumen faces market risk from interest rate changes on its $6.1 billion unhedged floating-rate debt, where a 100 basis point SOFR increase would reduce annual pre-tax earnings by $61 million - The company has approximately $6.1 billion of unhedged floating-rate debt. A hypothetical 100 basis point increase in SOFR would decrease annual pre-tax earnings by about $61 million254 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during Q1 2024 - Based on an evaluation as of March 31, 2024, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective260 - No material changes to the company's internal control over financial reporting occurred during the first quarter of 2024261 Part II. Other Information Legal Proceedings This section incorporates by reference detailed legal proceedings from Note 11, emphasizing that ultimate outcomes may materially differ from current expectations - Information regarding legal proceedings is incorporated by reference from Note 11—Commitments, Contingencies and Other Items264 Risk Factors New risks include the potential failure to realize full benefits from the March 2024 debt restructuring due to higher costs and restrictive covenants, and risks associated with a pending reverse stock split proposal - The company may not realize all anticipated benefits from its March 22, 2024 debt transactions due to substantial expenses, higher interest rates, and more restrictive covenants, which could limit future financing and dedicate cash flow to debt payments266267 - A pending proposal to implement a reverse stock split carries risks, including potentially decreased liquidity of the common stock and higher trading costs268269 Unregistered Sales of Equity Securities and Use of Proceeds Lumen did not repurchase common stock in Q1 2024 but withheld 1,444,352 shares from employees to cover tax obligations related to stock-based awards - The company did not repurchase any shares of its outstanding common stock during the three months ended March 31, 2024270 Shares Withheld for Taxes (Q1 2024) | Period | Total Number of Shares Withheld | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | Jan-24 | 61,117 | $1.65 | | Feb-24 | 19,176 | $1.52 | | Mar-24 | 1,364,059 | $1.62 | | Total | 1,444,352 | | Exhibits This section lists exhibits filed with the Form 10-Q, including supplemental indentures, new credit agreements from the March 2024 debt restructuring, and CEO/CFO certifications - Filed exhibits include numerous supplemental indentures and credit agreements related to the March 22, 2024 debt transactions, CEO/CFO certifications, and financial statements in Inline XBRL format274276279