Business context and reporting period
This is CenturyLink, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019 (NYSE: CTL); the filing predates the company’s Lumen Technologies name. CenturyLink provides communications, network, broadband, voice, and IT services to business, wholesale, and residential customers. Comparisons below are against the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.606 billion | $5.818 billion | $16.831 billion | $17.665 billion |
| Operating income (loss) | $950 million | $894 million | $(3.573) billion | $2.411 billion |
| Net income (loss) | $302 million | $272 million | $(5.492) billion | $679 million |
| Diluted earnings (loss) per share | $0.28 | $0.25 | $(5.13) | $0.63 |
| Adjusted EBITDA, as reported | $2.223 billion | $2.228 billion | $6.666 billion | $6.413 billion |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4.771 billion | $5.036 billion |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $2.688 billion | $2.260 billion |
Q3 operating margin was approximately 16.9%, versus 15.4% a year earlier. Nine-month operating results include a $6.506 billion non-cash, non-tax-deductible goodwill impairment; excluding that charge, reported operating income would have been $2.933 billion. Nine-month operating cash flow less capital expenditures was approximately $2.083 billion, down from $2.776 billion.
At September 30, cash and cash equivalents were $1.404 billion, total current assets $4.589 billion, and current liabilities $6.589 billion. Long-term debt was $33.381 billion, with $1.744 billion of current maturities; total debt in the debt note was $35.125 billion, down from $36.061 billion at December 31, 2018. The company reported approximately $1.5 billion of available revolver capacity and said it was in material compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue fell 4% in Q3 and 5% for the first nine months. Declines in traditional voice, wholesale and business transport, and consumer voice and other services more than offset growth in IP and data services and broadband.
- Q3 cost of services and products declined 3%, SG&A declined 14%, and depreciation and amortization declined 4%; management attributed savings largely to lower headcount and network, customer equipment, and other operating costs.
- Nine-month adjusted EBITDA increased to $6.666 billion from $6.413 billion, while total segment adjusted EBITDA declined to $12.005 billion from $12.535 billion. Lower unallocated operations and other costs contributed to the increase in consolidated adjusted EBITDA.
- Interest expense declined 6% for the nine months, reflecting lower debt. The company issued $1.0 billion of 4.625% notes due 2027 and used cash and proceeds for debt refinancing and repayment activity.
- Cash dividends paid in the first nine months declined to $829 million from $1.735 billion. The declared dividend was $0.25 per share in Q3 2019, compared with $0.54 in Q3 2018.
- Adoption of the new lease standard in 2019 added operating lease assets and liabilities; the company did not restate prior-period balance sheet amounts.
Outlook, commentary, risks, and unusual items
- Management estimated 2019 capital expenditures of approximately $3.5 billion to $3.8 billion, excluding integration and transformation capital. It expected quarterly dividends of approximately $270 million at the then-current $0.25-per-share rate, subject to board discretion.
- The filing gives no earnings or revenue forecast. Management described ongoing pressure from competition, customer migration away from traditional voice and private line, pricing compression, and declines in mature services. Broadband revenue was a relative growth area; management continued network investment and cost-efficiency efforts.
- The $6.506 billion goodwill impairment followed first-quarter impairment testing triggered by the reorganization and stock-price decline. Management warned further declines in profitability, cash flows, or sustained low share prices could lead to additional impairment.
- Disclosure controls were not effective at September 30 because of a material weakness involving the existence and accuracy of revenue transactions. A separate weakness related to fair-value measurement of certain acquired assets and liabilities was remediated in Q2; management expected to complete remediation of the remaining weakness by December 31, 2019.
- Litigation and non-income-tax contingency accruals totaled approximately $133 million. The filing describes, among other matters, consumer billing and sales-practices proceedings, switched-access disputes, municipal tax claims, and foreign tax matters. Potential Brazilian tax losses could be up to $37 million above accruals; outcomes of several proceedings were described as unpredictable.
- Approximately $9.2 billion of floating-rate debt was unhedged. The company estimated a 100-basis-point LIBOR increase would reduce annual pretax earnings by approximately $92 million. Interest-rate swaps covered $4.0 billion of floating-rate debt.
- Other risks include debt refinancing and ratings, pension and post-retirement obligations, CAF Phase II buildout spending, foreign-exchange exposure, and competitive and regulatory changes. The company had approximately $7.3 billion of federal NOL carryforwards, subject to limitations, and said these could reduce federal cash taxes if usable as projected.
Important facts for investors to verify
- Whether revenue declines stabilize, particularly in consumer voice, wholesale transport, SMB, and other mature services, and whether broadband and IP/data growth persists.
- How much recurring cash generation remains after capital expenditures, debt service, dividends, and benefit obligations; compare actual spending with the $3.5–$3.8 billion 2019 capex estimate.
- Debt maturities, refinancing terms, covenant restrictions, ratings, and the company’s ability to maintain liquidity while managing its substantial debt load.
- Progress and independent validation of remediation for the revenue-control material weakness, including whether the stated year-end target is met.
- Impairment assumptions and the possibility of additional goodwill charges, along with the resolution and cash impact of significant legal and tax contingencies.