CenturyLink, Inc. (now Lumen Technologies) — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. The filing was made under CenturyLink, Inc.; the company described itself as an integrated communications provider serving consumer, business, government and wholesale customers.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $4.451 billion | $4.538 billion | Down 2% |
| Operating income | $649 million | $653 million | Down $4 million |
| Operating margin | 14.6% | 14.4% | Up approximately 0.2 points |
| Net income | $192 million | $203 million | Down 5% |
| Diluted EPS | $0.34 | $0.35 | Down $0.01 |
| Operating cash flow | $1.336 billion | $1.380 billion | Down $44 million |
| Capital expenditures and capitalized software | $616 million | $670 million | Down $54 million |
Operating cash flow less reported property, plant and equipment and capitalized software payments was approximately $720 million, versus $710 million a year earlier. Cash and cash equivalents were $155 million at quarter-end, compared with $128 million at December 31, 2014. Current assets were $3.468 billion and current liabilities $3.579 billion.
Total debt was $20.456 billion, including $202 million of current maturities; long-term debt excluding current maturities was $20.254 billion. The company had $300 million drawn on its $2.0 billion revolving credit facility and reported approximately $1.7 billion of available borrowing capacity. It stated that it was in compliance with material debt covenants.
Declared dividends were $0.54 per common share, unchanged from the prior-year quarter; cash dividends paid were $304 million. The company repurchased 4.5 million shares for $170 million during the quarter.
Material changes and operating trends
- Strategic services revenue increased 2% to $2.320 billion; legacy services fell 6% to $1.735 billion; data integration declined 20% to $139 million. Strategic growth, including broadband, Ethernet, MPLS and facilities-based video, partly offset losses in legacy and equipment-related revenue.
- Access lines declined 4.8% year over year to 12.270 million, while broadband subscribers increased 1.0% to 6.117 million. The company estimated full-year 2015 access-line losses of 4.4%–5.0%.
- Business segment revenue declined 3% to $2.697 billion and segment income fell 5% to $1.213 billion; margin eased to 45% from 46%. Consumer revenue declined 1% to $1.497 billion and segment income fell 1% to $908 million; margin remained 61%.
- Consolidated operating expenses decreased 2% to $3.802 billion. Depreciation and amortization fell 6%, primarily from fully depreciated or retired assets and declining amortization of acquired customer relationships and software. SG&A rose 1%.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management anticipated approximately $2.4 billion of capital investment during the remaining nine months of 2015 and up to $916 million of common dividends, based on the then-current dividend and share count.
- Management expected a substantial portion of approximately $1.6 billion in federal net operating loss carryforwards to be used during 2015, after which cash federal tax payments were expected to increase substantially.
- The company had not decided whether to accept FCC Connect America Fund Phase 2 offers, with an election deadline of August 27, 2015. Accepting all available support—up to $514 million annually for six years—could provide approximately $169 million more annual support than replaced subsidies, but was expected to require over $500 million in additional annual capital expenditures. Forgoing support could put a substantial portion of expected 2015 high-cost support at risk after future auctions. Management said the program could materially affect revenue, expenses and cash flows.
- Changes to estimated network-asset lives added approximately $12 million to Q1 depreciation expense and were expected to add about $48 million for 2015, substantially offset by other depreciation declines. The Q1 net-income effect was estimated at $7 million, or $0.01 per share.
- SG&A included $15 million of regulatory fines associated with a 911 system outage and $8 million of impairment charges related to office buildings expected to be sold. The fines also affected the reported effective tax rate.
- Key risks include continuing legacy-service and access-line declines, competitive and pricing pressure in broadband, cloud and video, high debt and refinancing needs, pension and post-retirement obligations, and regulatory uncertainty. The company anticipated negative operational effects from the FCC’s new Title II internet rules, whose impact remained uncertain.
- Contingencies include access-charge disputes that could require refunds or reduce future charges; retiree-benefit litigation; and patent cases. The filing reports the Fulghum court of appeals ruling and dismissal with prejudice of a consolidated securities class action, with appeal possible. The company had not accrued liabilities for certain matters it considered not probable or not reasonably estimable.
Important facts for investors to verify
- Whether strategic-service growth can offset ongoing access-line, legacy-revenue and data-integration declines.
- The final CAF Phase 2 election, required network investment, subsidy accounting and resulting cash-flow and revenue effects.
- Debt maturities, refinancing access, credit ratings and capacity to sustain dividends and repurchases as tax payments rise.
- Progress on broadband and cloud competitiveness, video economics and the effect of new regulation and access-charge proceedings.
- Potential cash exposure from litigation, pension and post-retirement obligations, and the company’s estimates of asset lives and impairment risk.