CenturyLink, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. The filing is by CenturyLink, the company identified in the source filing; it is not filed under the name Lumen Technologies. Dollar amounts below are in millions unless stated otherwise.
Business context
CenturyLink provided communications services to business and residential customers, including broadband, voice, Ethernet, hosting, colocation and video. At quarter-end it reported 11.231 million access lines, 5.950 million broadband subscribers, 318,000 Prism TV subscribers and 58 data centers.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $4,382 | $4,554 | $13,181 | $13,424 |
| Operating income | $595 | $656 | $1,939 | $1,854 |
| Net income | $152 | $205 | $584 | $540 |
| Diluted EPS | $0.28 | $0.37 | $1.08 | $0.97 |
| Operating margin | 13.6% | 14.4% | 14.7% | 13.8% |
For the nine months, operating cash flow was $3,512, capital expenditures were $2,010 and cash flow after capital expenditures was $1,502, versus $3,956, $2,039 and $1,917, respectively, in 2015. Cash and equivalents were $140 at September 30, 2016. Current assets of $2,728 compared with current liabilities of $4,733. The company reported $1,990 of available borrowing capacity under its $2 billion revolving credit facility.
Balance-sheet debt was $19,718, including $1,534 of current maturities and $18,184 of long-term debt. The filing also gives aggregate principal debt, excluding unamortized discounts and issuance costs, of $20,045. Stockholders’ equity was $13,892. The quarterly dividend declared was $0.54 per share; $876 of dividends were paid during the first nine months.
Material changes and operating trends
- Third-quarter revenue fell 4%, while nine-month revenue fell 2%. Legacy-services revenue declined 8% in both comparisons, reflecting access-line losses, weaker voice and private-line demand, and competitive substitution.
- Strategic-services revenue rose 4% in Q3 and 5% year to date, supported by Ethernet, MPLS, broadband pricing and video; hosting and broadband customer losses partly offset growth. Total access lines declined 6% year over year and broadband subscribers declined 2%; Prism TV subscribers increased 18%.
- Q3 operating income decreased 9% and net income decreased 26% year over year. For the first nine months, operating income increased 5% and net income increased 8%, notwithstanding lower revenue.
- Q3 segment income declined in both businesses: business segment income was $1,062, down 4%, and consumer segment income was $816, down 6%. Segment margins were 41% and 55%, respectively, versus 42% and 58% in Q3 2015.
- Operating cash flow fell $444 year to date, primarily reflecting higher cash taxes and working-capital movements. Capital expenditures were broadly level with the prior year.
Outlook, risks and unusual items
- Management estimated full-year 2016 access-line losses of 5%–6%, cash income taxes of $350–$450, and approximately $1.0 billion of capital investment for the final quarter. It expected CAF Phase 2 support, about $500 million annually for six years, to be substantially offset by declining prior support and not materially change full-year 2016 other operating revenue versus 2015.
- The company planned to reduce its workforce by approximately 3,000 employees and expected a fourth-quarter 2016 severance and termination-benefit charge of $150–$200 million.
- On October 31, 2016, CenturyLink agreed to acquire Level 3 in a cash-and-stock transaction: Level 3 shareholders would receive $26.50 cash and 1.4286 CenturyLink shares per share. The companies anticipated a close by the end of Q3 2017, subject to shareholder and regulatory approvals. CenturyLink could owe a $472 million termination fee in certain circumstances. Rating agencies placed CenturyLink debt ratings on negative watch or review following the announcement.
- On November 3, 2016, the company agreed to sell its data-center and colocation business for cash and equity valued at $2.3 billion, subject to adjustments and assumption of related capital leases. Closing was expected in Q1 2017. The company said a material pretax loss was possible and the tax impact was likely material, but neither was yet reliably estimated.
- Material exposures include substantial debt, declining legacy revenue, competitive and technology pressures, rising cash taxes as federal NOLs are used, pension and post-retirement obligations, and regulatory uncertainty. Pending matters include switched-access charge disputes and Missouri municipal tax litigation; the company said an adverse outcome in the Missouri matter could produce tax liability well above its established contingency.
- The company reported compliance with material debt covenants and effective disclosure controls as of September 30, 2016. It had made a voluntary $100 million pension trust contribution in Q3, despite expecting no required qualified-pension contribution for the remainder of 2016.
Important facts for investors to verify
- Whether strategic-services growth can offset continued legacy revenue and access-line declines, and the effect of customer losses and pricing pressure on margins.
- Cash generation after capital expenditures, upcoming tax payments, dividend sustainability and the company’s capacity to service and refinance debt, particularly in light of the proposed Level 3 acquisition.
- Final approval, financing, integration costs, ratings impact and expected benefits of the Level 3 transaction; separately, final proceeds, tax consequences and gain or loss on the data-center sale.
- Actual workforce-reduction costs and timing, and progress against CAF infrastructure requirements and any related funding repayments or penalties.
- Developments in switched-access disputes, Missouri tax cases, regulatory proceedings and other contingencies that could affect cash flow or reported results.