CenturyLink, Inc. (10-K) — FY 2014
Entity and period: The supplied filing is CenturyLink, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed February 24, 2015; it is not a quarterly filing. Although the request identifies Lumen Technologies, the registrant named in this filing is CenturyLink.
Business context
CenturyLink provided communications, broadband, video, hosting, cloud, colocation and IT services to residential, business, government and wholesale customers. At year-end it reported approximately 12.4 million access lines, 6.1 million broadband subscribers and 58 data centers. Effective November 1, 2014, it reorganized reporting into Business and Consumer segments.
Financial and operating performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $18.031 billion | $18.095 billion |
| Operating income | $2.410 billion | $1.453 billion |
| Operating margin | 13.4% | 8.0% |
| Net income (loss) | $772 million | $(239) million |
| Diluted EPS | $1.36 | $(0.40) |
| Cash from operations | $5.188 billion | $5.559 billion |
| Capital expenditures and capitalized software | $3.047 billion | $3.048 billion |
| Cash and cash equivalents at year-end | $128 million | $168 million |
| Total long-term debt, including current maturities | $20.671 billion | $20.966 billion |
Revenue was nearly flat, down less than 1%. Strategic-services revenue rose 4% to $9.200 billion, while legacy-services revenue declined 6% to $7.138 billion. Access lines fell 4.7%; broadband subscribers increased 1.5%. Operating income improved primarily because 2013 included a $1.092 billion non-cash goodwill impairment and a $235 million litigation settlement charge. The 2014 results included a $63 million pension settlement charge and a $60 million tax benefit. Operating cash flow declined about 7% year over year; cash flow less reported capital expenditures was approximately $2.141 billion, before dividends, repurchases and other financing needs.
Fourth-quarter 2014 revenue was $4.438 billion, operating income $483 million and net income $188 million, compared with $4.542 billion, $641 million and $239 million, respectively, in fourth-quarter 2013. The fourth quarter included the tax benefit and pension settlement noted above.
Margins, segments, debt and liquidity
Total segment margin declined to 50% from 52%. Business segment revenue decreased 1% to $11.034 billion and margin fell to 45% from 48%; Consumer revenue was nearly unchanged at $5.994 billion and margin eased to 60% from 61%. Management attributed segment income pressure to customers shifting from higher-margin legacy services to lower-margin strategic services, alongside higher costs.
Interest expense was $1.311 billion, up 1%. The company had $128 million of cash and stated approximately $1.3 billion of remaining borrowing capacity under its $2.0 billion revolving credit facility at year-end; $725 million was drawn. It reported compliance with material debt covenants. Approximately $3.4 billion of debt, excluding capital lease and other obligations, was scheduled to mature during the three years ending December 31, 2017. The company’s ratings were below investment grade at CenturyLink, Inc. (S&P BB; Moody’s Ba2; Fitch BB+) and investment grade at Qwest Corporation (BBB-, Baa3, BBB-).
The board’s annual common dividend rate was $2.16 per share. The 2014 repurchase program authorized up to $1.0 billion; approximately $800 million remained available at year-end. These distributions are discretionary and subject to board decisions and cash needs.
Outlook, risks and unusual items
- Management estimated 2015 capital expenditures of approximately $3.0 billion and expected 2015 access-line losses of 4.4%–5.0%.
- Management expected substantially all $1.6 billion of federal NOLs to be used during 2015. It estimated 2015 income tax liability of $300–$400 million and 2016 tax payments of $1.1–$1.3 billion, subject to assumptions and tax-law changes. Extension of bonus depreciation would materially reduce these estimates.
- The company had not decided whether to accept CAF Phase 2 rural broadband funding. Accepting all available support was projected to provide about $500 million annually for six years, but could require more than $500 million annually in additional capital spending. Rejecting or failing to win funding could put approximately $344 million of annual high-cost USF support at risk beginning in 2016. Funding accounting and timing remained uncertain.
- Competition, technology substitution and regulation continued to pressure legacy voice and access revenues. Management expected strategic-services growth but noted price pressure in hosting, cloud, colocation and private-line offerings.
- Benefit plans were significantly underfunded: the reported accounting deficits were $2.471 billion for pension plans and $3.477 billion for post-retirement plans. New mortality assumptions increased benefit obligations by approximately $1.3 billion and were expected to add about $159 million to 2015 expense.
- Material risks included high leverage, refinancing and credit-rating risk, substantial network investment needs, cyberattacks and service disruptions, regulatory and litigation outcomes, pension funding, and the ability to sustain dividends. Significant proceedings included access-charge disputes, retiree-benefit litigation, securities and derivative suits, and patent cases; outcomes were uncertain. A $235 million KPNQwest-related settlement was paid in 2014.
Most important facts for investors to verify
- Confirm the issuer and period: this is CenturyLink’s FY 2014 10-K, not a filing submitted under the name Lumen Technologies, and its annual results should not be mistaken for Q4-only results.
- Review the drivers of declining legacy revenue and whether strategic-services growth can offset access-line losses without further margin erosion.
- Assess operating cash flow after capital investment, dividends, repurchases, debt service and rising cash taxes as NOLs are depleted.
- Track CAF Phase 2 participation decisions, required build-out spending, support recognition and any loss of legacy subsidies.
- Evaluate debt maturities, refinancing access, covenant headroom, pension and post-retirement funding exposure, and material legal contingencies.