CenturyLink, Inc. Form 10-Q — quarter ended September 30, 2012
Entity note: The supplied filing is for CenturyLink, Inc., not Lumen Technologies, Inc. It covers the third quarter and first nine months of 2012. Results include Qwest from April 1, 2011 and Savvis from July 15, 2011, so year-over-year comparisons—especially for the nine-month period—are affected by acquisition timing.
Business context and reporting period
CenturyLink provided communications, broadband, network, managed hosting, colocation, cloud, video and related services. At quarter-end it reported 13.9 million access lines, 5.8 million broadband subscribers and 53 data centers. The company reorganized its reporting into regional markets, wholesale markets, enterprise network and enterprise data hosting segments during 2012.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $4.571 billion | $4.596 billion | $13.793 billion | $10.698 billion |
| Operating income | $736 million | $548 million | $2.047 billion | $1.492 billion |
| Net income | $270 million | $138 million | $544 million | $464 million |
| Diluted EPS | $0.43 | $0.22 | $0.87 | $0.91 |
| Operating margin | 16.1% | 11.9% | 14.8% | 13.9% |
- Q3 revenue declined about 0.5% year over year; strategic-services growth was offset by falling legacy-services revenue. Nine-month revenue rose about 29%, principally because Qwest and Savvis were included for more of 2012.
- Q3 strategic-services revenue was $2.101 billion versus $1.960 billion; legacy-services revenue was $2.045 billion versus $2.223 billion. Management cited access-line losses, customer migration to lower-priced bundles, competition and product substitution.
- For the first nine months, cash from operations was $4.686 billion, capital spending and capitalized software were $2.024 billion, and cash used in investing was $1.863 billion. Cash from operations less capital spending was approximately $2.662 billion, a simple derived measure.
- Cash was $194 million at September 30, 2012. Current assets were $3.833 billion against current liabilities of $4.931 billion, a reported working-capital deficit of approximately $1.1 billion. The company reported $1.72 billion available under its revolving credit facility.
- Total debt was $20.706 billion, including $1.198 billion of current maturities; long-term debt excluding current maturities was $19.508 billion. Debt declined from $21.836 billion at December 31, 2011. The company reported compliance with debt covenants.
- Dividends declared were $0.725 per share for Q3 and $2.175 per share for the first nine months. Management expected to continue the $2.90 annual dividend, subject to board discretion.
Material changes and unusual items
- Q3 net income included a $45 million reduction in depreciation expense correcting an error from 2011 and the first half of 2012. The correction increased Q3 net income by $28 million, or about $0.05 per share, and nine-month net income by $18 million, or about $0.03 per share. Management deemed the prior-period error immaterial.
- A change in capitalized-labor rates reduced operating expenses by an estimated $30 million to $45 million for the first nine months; the company estimated a $35 million to $60 million reduction for full-year 2012. A change in equipment-life and salvage-value estimates added $20 million of depreciation expense year to date.
- Early debt retirements generated a $194 million net loss in the first nine months, including $193 million from premium-priced tenders. The company issued debt and a term loan while refinancing or retiring other obligations.
- Capital expenditures were $2.024 billion through September; management estimated full-year 2012 capital expenditures of $2.8 billion to $2.9 billion. The company also estimated total Qwest integration expenses of $600 million to $700 million, including approximately $455 million incurred through September, plus about $200 million of integration capital expenditures.
Outlook, risks and contingencies
- Management estimated 2012 access-line losses of 5.6% to 6.0%. It emphasized growth in broadband, Ethernet, MPLS, video and hosting, while warning that legacy voice and access revenues would continue to face pressure.
- The annual goodwill impairment review was not complete following segment reorganization. Management did not anticipate impairment but planned to finalize its analysis before year-end.
- The filing identifies substantial leverage, refinancing needs, competition, regulatory changes to intercarrier compensation and universal-service funding, integration execution, pension obligations, and dividend sustainability as risks. About $2.7 billion of debt securities were due within 36 months.
- Qwest-related KPNQwest litigation included a claim for approximately €4.2 billion (about $5.4 billion); CenturyLink had not accrued a liability and said the outcome and any probable loss could not be reasonably estimated. Other proceedings included retiree-benefit and fiber-right-of-way matters; an accrual for the latter was described as immaterial.
- Collective bargaining agreements covering approximately 28% of employees expired October 6, 2012. Negotiations were ongoing, with predecessor agreements extended and advance notice required before termination.
- Management reported effective disclosure controls and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the filing supplied is CenturyLink, Inc., while the request names Lumen Technologies, Inc.
- Assess earnings quality and comparability, particularly the $28 million Q3 benefit from the depreciation correction, capitalized-labor changes, and acquisition-related effects.
- Review debt maturities, refinancing capacity, revolver availability, covenant headroom and the sustainability of the $2.90 annual dividend alongside capital spending.
- Track access-line attrition, legacy-revenue declines, strategic-services growth and segment margins on a comparable basis.
- Monitor the KPNQwest claims, goodwill impairment assessment, integration spending, pension funding and labor negotiations.