CenturyLink, Inc. — Form 10-Q Summary
Entity note: The filing is for CenturyLink, Inc., not an entity identified in the filing as Lumen Technologies, Inc. It covers the quarter and six months ended June 30, 2014; the financial statements are unaudited. Unless stated otherwise, amounts are in millions of dollars.
Business context and reporting period
CenturyLink provided communications services to consumer, business, wholesale and hosting customers. At quarter-end, it reported 12.7 million access lines, 6.1 million broadband subscribers and 57 data centers. The filing says first-half results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4,541 | $4,525 | $9,079 | $9,038 |
| Operating income | $655 | $715 | $1,308 | $1,497 |
| Net income | $193 | $269 | $396 | $567 |
| Diluted EPS | $0.34 | $0.44 | $0.69 | $0.92 |
| Operating cash flow | Not presented quarterly | $2,509 | $2,856 | |
| Capital expenditure and capitalized software | Not presented quarterly | $1,401 | $1,410 |
- Revenue was nearly flat year over year, while Q2 operating income fell about 8% and net income fell about 28%. For the first half, operating income declined about 13% and net income about 30%.
- Calculated operating margin was approximately 14.4% in Q2 2014 versus 15.8% in Q2 2013; first-half margin was approximately 14.4% versus 16.6%. These are derived from reported revenue and operating income.
- First-half operating cash flow less capital expenditure and capitalized software was approximately $1.1 billion, compared with $1.4 billion in 2013; this is a simple derived measure, not a company-defined free-cash-flow figure.
- At June 30, cash was $181; current assets were $3,598 and current liabilities $4,443. Total debt was approximately $20.96 billion, including $1.19 billion of current maturities. Stockholders’ equity was $16.60 billion.
- CenturyLink had $845 million drawn on its $2.0 billion revolving credit facility and reported about $1.2 billion of borrowing capacity available. It said it was in compliance with material debt covenants.
- Dividends declared were $0.54 per share per quarter. First-half dividends paid were $616 million; share repurchases were $493 million.
Material changes versus the prior comparable period
- Strategic-services revenue rose 5% in both Q2 and the first half; legacy-services revenue fell 6% in both periods. Data-integration revenue rose 12% in Q2 and 18% for the first half.
- Access lines declined 4.7% year over year to 12.7 million, while broadband subscribers rose 2.5% to 6.1 million.
- Segment income declined in consumer, business and wholesale for the first half; hosting revenue grew but hosting income fell 3%. First-half segment margins were 61% consumer, 38% business, 68% wholesale and 24% hosting, each lower than the prior year except wholesale, which was unchanged.
- First-half operating cash flow decreased $347 million, partly reflecting a $235 million payment to settle a Dutch bankruptcy proceeding. Financing cash outflow was lower year over year, mainly because of reduced share repurchases.
- The company repurchased 14.9 million shares for $478 million in the first half. Its prior $2 billion program ended in May; a new 24-month program authorized up to $1 billion.
Outlook, management commentary, risks and unusual items
- Management estimated 2014 access-line losses of 4.4%–5.0%. For the remaining six months of 2014, it anticipated approximately $1.6 billion of capital investment, up to $618 million in common dividends at the then-current rate, and about $62 million of pension contributions.
- Approximately $600 million of debt maturities, $11 million of scheduled principal payments and $67 million of capital-lease and other obligation payments were due in the remainder of 2014. A $600 million Qwest Corporation note maturity was scheduled for October 1, 2014; refinancing was subject to market conditions.
- Management expected federal net operating loss benefits to be substantially depleted by 2015, after which cash taxes were expected to increase substantially. It expected to continue quarterly dividends, subject to board discretion, and to pursue share repurchases subject to market conditions.
- Q2 included a $16 million office-building impairment charge in selling, general and administrative expense and a $14 million impairment charge on 700 MHz spectrum licenses in other expense. A definitive agreement to sell the spectrum for $39 million was signed in July, subject to regulatory approval and other conditions; a building sale agreement for $14 million was also signed in July.
- Changes to estimated lives of network equipment increased first-half depreciation expense by about $39 million; the company estimated an approximately $78 million increase for full-year 2014. Changes to certain intangible-asset lives increased first-half amortization expense by about $23 million.
- Key risks include continued legacy-voice and access-line declines, competitive pricing and technology substitution, high debt and refinancing needs, regulatory changes, pension and healthcare funding, cyber/network disruptions, and uncertain litigation outcomes. The company disclosed several pending matters, including securities and shareholder derivative actions and an appeal of a Dutch court ruling in its favor in a claim seeking approximately $299 million.
- The company was evaluating the effect of the new revenue-recognition standard and had not yet estimated its impact. Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant and issuer identity: this source filing names CenturyLink, Inc., despite the request metadata naming Lumen Technologies, Inc.
- Track whether strategic-service growth and broadband gains can offset continuing access-line, legacy-service and wholesale declines without further margin erosion.
- Review debt maturities, refinancing progress, credit ratings and compliance with leverage covenants, particularly around the October 2014 maturity.
- Monitor cash available after capital spending, dividends, pension contributions, taxes and share repurchases, including the expected depletion of tax-loss carryforwards.
- Check the closing and proceeds of the spectrum and building sales, and developments in significant litigation and regulatory proceedings.