CenturyLink, Inc. (now Lumen Technologies) — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The filing registrant was CenturyLink, Inc. Level 3 was acquired on November 1, 2017, so reported year-over-year growth largely reflects its inclusion in 2018 and is not directly comparable. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $5,818 | $4,034 | $17,665 | $12,333 |
| Operating income | $894 | $487 | $2,411 | $1,485 |
| Net income | $272 | $92 | $679 | $272 |
| Diluted EPS | $0.25 | $0.17 | $0.63 | $0.50 |
| Operating cash flow | — | $5,036 | $2,700 | |
| Capital expenditures | — | $2,260 | $2,363 |
- Q3 revenue grew 44%; nine-month revenue grew 43%. Level 3 contributed $1.984 billion in Q3 and $6.071 billion for the nine-month period. Legacy CenturyLink revenue continued to decline in several categories.
- Q3 operating margin was approximately 15.4%, versus 12.1% a year earlier. Reportable-segment adjusted EBITDA was $2.671 billion, with a 47% margin; business segment margin was 43% and consumer segment margin was 61%.
- Nine-month operating cash flow less capital expenditures was approximately $2.776 billion, compared with $337 million in 2017. The improvement included Level 3 cash generation and about $700 million of tax refunds, partly offset by $500 million in pension contributions.
- Interest expense rose to $557 million in Q3 from $362 million, primarily due to acquisition-related debt and higher LIBOR. The company also recorded a $33 million Q3 loss on early debt retirement.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $390 million; total debt, including current maturities, was approximately $36.527 billion. Debt was down from $37.726 billion at December 31, 2017.
- Current assets were $4.114 billion and current liabilities were $5.286 billion. The company reported approximately $1.6 billion of available borrowing capacity under its revolving facility.
- Nine-month dividends paid were $1.735 billion. The quarterly dividend was $0.54 per share; management estimated approximately $577 million of cash dividends per quarter at the then-current share count.
- The company reported $13.3 billion of floating-rate debt; a 100-basis-point increase in LIBOR was estimated to reduce annual pretax earnings by $133 million.
Changes, outlook and risks
- Consumer revenue declined 5% year over year in Q3 and in the first nine months, chiefly due to traditional voice declines. Consumer broadband subscribers fell 6% year over year to 4.843 million. Management cited continued competitive pressure, customer migration, and pricing pressure across traditional and newer services.
- Management estimated 2018 capital expenditures of $3.15–$3.25 billion, including CAF Phase 2 and integration investment. No earnings or revenue guidance was provided in the supplied filing text. Management expected to continue quarterly dividends at the current rate, subject to Board discretion.
- Management planned to close substantially all remaining retail stores in Q4 2018, citing expected cost reductions and redeployment of capital to higher-growth initiatives. It also expected to complete Level 3 purchase-price accounting in Q4; it did not expect subsequent adjustments to be material.
- Level 3 integration expenses were $277 million for the first nine months; cumulative acquisition-related expenses reached $600 million through September 30. Management identified realizing synergies, retaining key personnel, and avoiding integration disruption as risks.
- The company had not finalized its accounting for the Tax Cuts and Jobs Act and said further tax adjustments in Q4 could be material. It provisionally expected to use acquired and other net operating losses to reduce federal cash taxes over the next several years, but stated full utilization was not assured.
- Material legal and contingent matters include consumer billing-practices and securities litigation, state tax disputes, switched-access disputes, and other claims. Accrued litigation contingencies totaled approximately $138 million; some potential exposures were unaccrued or uncertain.
- Management reported compliance with material debt covenants and effective disclosure controls. It also expected the new lease standard, planned for adoption January 1, 2019, to materially affect the financial statements, though the impact was not yet quantified.
Important facts for investors to verify
- Separate organic performance from Level 3’s acquired revenue and confirm trends in Legacy CenturyLink business and consumer operations.
- Assess debt repayment capacity, refinancing needs, floating-rate exposure, and whether operating cash flow can sustain capital investment and dividends.
- Track integration costs and realized cost savings, and confirm that acquisition purchase accounting and tax estimates are finalized as expected.
- Monitor traditional voice and broadband customer losses, competitive pricing, and progress against CAF Phase 2 buildout requirements.
- Review developments in significant litigation and tax contingencies, and quantify the balance-sheet effect of lease-standard adoption when disclosed.