CenturyLink, Inc. — Form 10-Q summary
Period: Quarter ended March 31, 2012. The supplied filing is CenturyLink, Inc.’s 2012 first-quarter report; it is not filed under the name Lumen Technologies. All amounts below are in U.S. dollars unless stated otherwise.
Business context and comparability
CenturyLink provided communications, broadband, network, hosting and related services. Its consolidated results included Qwest from April 1, 2011 and Savvis from July 15, 2011, so reported year-over-year growth largely reflects acquisitions and is not directly comparable with the 2011 quarter. In Q1 2012, Qwest and Savvis contributed $2.7 billion and $266 million of revenue, respectively. CenturyLink operated 14.4 million access lines, served 5.6 million broadband subscribers and operated 51 data centers.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $4.610 billion | $1.696 billion |
| Operating income | $654 million | $464 million |
| Net income | $200 million | $211 million |
| Diluted EPS | $0.32 | $0.69 |
| Operating cash flow | $1.583 billion | $670 million |
| Capital expenditures | $678 million | $211 million |
| Cash and cash equivalents | $1.530 billion at March 31 | $128 million at December 31, 2011 |
| Total debt | $22.867 billion | $21.836 billion at December 31, 2011 |
- Operating margin was approximately 14.2%, versus 27.4% a year earlier; the comparison is heavily affected by the acquisitions and their accounting effects. Interest expense increased to $343 million from $128 million.
- Simple operating cash flow less capital expenditures was approximately $905 million, compared with $459 million; this is not a company-defined free-cash-flow measure. Management attributed much of the operating cash-flow increase to Qwest and Savvis.
- Net income fell despite higher operating income, with higher interest expense and a much larger weighted-average share count among the relevant factors. The filing’s pro forma comparison for Q1 2011, assuming both acquisitions had occurred earlier, showed revenue of $4.737 billion and net income of $275 million, versus Q1 2012 actual revenue of $4.610 billion and net income of $200 million.
- Current assets were $4.882 billion and current liabilities $5.643 billion, a $761 million working-capital deficit. Current debt maturities were $2.2 billion. Cash was unusually high after debt issuance intended in part to repay debt.
- The declared quarterly dividend was $0.725 per share. Management expected to maintain an annual $2.90 dividend, subject to Board discretion.
Material changes and operating trends
- Revenue rose substantially due to the Qwest and Savvis acquisitions. Legacy CenturyLink revenue declined $55 million, or 3.2%, primarily from lower legacy-service revenue and access-line losses. Management estimated 2012 access-line losses of 5.9%–6.6%.
- Strategic-services revenue was $2.056 billion, compared with $539 million; legacy-services revenue was $2.143 billion, compared with $995 million. The filing attributes much of the increases to acquired businesses. Broadband and private-line services supported organic strategic-services growth, while traditional voice and access services continued to weaken.
- Segment margins were 58% for regional markets, 37% for business markets, 71% for wholesale markets and 21% for Savvis operations. The segment reporting and expense-allocation methods changed during the quarter, and prior-period segment results were not recast.
- Q1 2012 included $39 million of acquisition-related expenses. Management estimated total Qwest transaction and integration operating expenses of $800 million–$1 billion, including approximately $429 million incurred through March 31, 2012, plus about $200 million of integration capital expenditures, of which approximately $32 million had been incurred.
Outlook, risks and unusual items
- Management estimated 2012 capital expenditures of $2.7 billion–$2.9 billion and expected fiber investment, including fiber to towers, to be slightly lower than in 2011.
- Labor capitalization changes reduced Q1 operating expenses by an estimated $15 million–$20 million and were expected to reduce full-year 2012 expenses by $60 million–$80 million. The filing estimated a Q1 net-income benefit of $9 million–$12 million. Changes to estimated equipment lives and salvage values added about $10 million of Q1 depreciation expense, with about $40 million expected for 2012.
- CenturyLink issued $2.05 billion of senior notes in March, with approximately $2.032 billion net proceeds, and redeemed $800 million of Qwest notes. After quarter-end, it increased its revolving credit facility from $1.7 billion to $2.0 billion and extended its maturity to April 2017; no borrowings were outstanding at the reported dates. The company said it was in compliance with debt covenants. Consolidated debt was approximately $22.9 billion, and about $5.5 billion was due over the following three years.
- Management expected to contribute approximately $70 million to pension plans during the remaining nine months of 2012 and estimated 2013 required and voluntary contributions of about $500 million, subject to market, actuarial and legal factors.
- CenturyLink had not finalized Savvis acquisition-date fair values; the final valuations could differ significantly from preliminary estimates. Goodwill was $21.726 billion at March 31, 2012.
- Significant disclosed risks included continued competition and access-line erosion, regulation and access-rate changes, acquisition integration and synergy execution, refinancing and leverage, pension funding, and data-center power, lease and operating risks. More than 40% of employees were union-represented; agreements covering approximately 14,000 represented employees expired during the remainder of 2012.
- Legal matters included KPNQwest litigation seeking approximately €4.2 billion (about $5.6 billion) in damages; no liability was accrued, and management said the outcome could not be estimated. The filing also described disputes over approximately $34 million of VoIP termination-access charges and other litigation. A separate Cargill/Citibank claim of about €219 million was denied by the Dutch court, subject to appeal.
Important facts for investors to verify
- How much of reported growth and cash generation is sustainable excluding acquired businesses, and whether legacy revenue declines continue.
- Progress on Qwest and Savvis integration, remaining costs, realized synergies and final Savvis purchase-price allocation.
- Debt maturities, refinancing costs, covenant headroom and the effect of the working-capital deficit on liquidity.
- Whether operating cash flow can support planned capital spending, pension funding and the $2.90 annual dividend.
- Developments in material litigation, FCC and state regulatory proceedings, labor negotiations, and the stated 2012 access-line-loss estimate.