CenturyLink, Inc. 10-Q Summary — Second Quarter 2018
Reporting period: Three and six months ended June 30, 2018. This filing is by CenturyLink, Inc., now known as Lumen Technologies. The company provides communications, broadband, network, IT, and related services to business and residential customers.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $5.902 billion | $4.090 billion | $11.847 billion | $8.299 billion |
| Operating income | $767 million | $367 million | $1.517 billion | $998 million |
| Net income | $292 million | $17 million | $407 million | $180 million |
| Diluted EPS | $0.27 | $0.03 | $0.38 | $0.33 |
| Operating cash flow | Not separately stated | Not separately stated | $3.249 billion | $1.742 billion |
| Capital expenditures | Not separately stated | Not separately stated | $1.576 billion | $1.610 billion |
- Q2 operating margin was approximately 13.0% versus 9.0% in the prior-year quarter; net margin was approximately 4.9% versus 0.4%.
- Reported segment adjusted EBITDA was $2.624 billion in Q2 and $5.204 billion for the first half. Business segment margin was 42% in both periods; consumer segment margin was 58% in Q2 and 57% for the first half.
- Interest expense was $546 million in Q2 and $1.081 billion for the first half, substantially higher year over year primarily because of debt issued or assumed for the Level 3 acquisition.
- Cash and cash equivalents were $700 million at June 30, 2018. Total long-term debt, including current maturities, was $37.315 billion; $36.878 billion was classified as long-term debt excluding current maturities. The company had $2.168 billion of revolving-credit capacity available and reported compliance with material debt covenants.
- For the first half, operating cash flow less capital expenditures was approximately $1.673 billion, a simple calculation from reported figures. Dividends paid were $1.156 billion.
Changes versus the prior comparable period
- Revenue rose 44% in Q2 and 43% for the first half, largely reflecting Level 3, acquired November 1, 2017. Level 3 contributed $2.025 billion of Q2 revenue and $4.087 billion for the first half. Consequently, year-over-year comparisons are not like-for-like.
- Growth in business-segment revenue and adjusted EBITDA primarily reflects Level 3. Legacy CenturyLink continued to face declines in traditional voice and private-line services; the consumer segment’s revenue fell 6% in Q2 and 5% for the first half.
- Consumer broadband subscribers declined 320,000 year over year to 4.906 million. The 2017 comparison also included $1.473 billion of proceeds from the sale of data centers and colocation operations in investing cash flow; there were no comparable sale proceeds in the first half of 2018.
Outlook, commentary, and risks
- Management estimated 2018 capital expenditures at approximately 16% of consolidated revenue, including CAF Phase 2 and integration investment. It expected quarterly common dividends to remain $0.54 per share, subject to board discretion, or approximately $577 million per quarter at the then-current share count. No specific earnings guidance was provided in the filing.
- Management expected Level 3 net operating losses to significantly reduce federal cash taxes for several years, subject to tax limitations. The company received a $314 million federal tax refund in Q2 and reported a separate $392 million refund received in Q3 2018.
- Level 3 integration remained a key execution risk: the company reported $232 million of integration-related expenses in the first half and $555 million of cumulative acquisition-related expenses through June 30, 2018. Acquisition fair-value allocations were preliminary and could change materially.
- Management cited competition, pricing pressure, technology shifts, traditional voice and access-line losses, and consumer broadband competition as ongoing business risks. The company also expected continued pricing pressure in business cloud and colocation offerings and declining consumer video revenue.
- Other significant exposures include high debt and floating-rate borrowing costs, pension and post-retirement obligations, CAF network-buildout commitments, and the need to complete integration. The company made a voluntary $100 million pension contribution in Q2 and another $400 million in Q3.
- Legal matters include consumer and securities litigation and government inquiries related to alleged retail billing and sales practices; switched-access disputes; tax litigation; and other claims. The company had accrued approximately $138 million for contingencies, but stated that unaccrued or inadequately accrued losses could remain possible. Potential Brazilian tax assessments could exceed established accruals by up to $35 million.
- Tax accounting under the 2017 Tax Cuts and Jobs Act remained provisional; management expected to complete its analysis in Q4 2018 and said later adjustments could be material. The company also expected adoption of the new lease standard in 2019 to materially affect its balance sheet.
Most important facts for investors to verify
- How much of reported revenue and profit growth reflects Level 3 versus underlying performance, synergies, and integration costs.
- Whether cash generation can support debt service, capital investment, dividends, and pension contributions, and how refinancing costs respond to interest rates and credit ratings.
- Trends in consumer broadband subscribers, legacy voice and private-line declines, and business-segment pricing and margins.
- Final Level 3 purchase accounting, the use and limitations of acquired tax-loss carryforwards, and the eventual impact of tax reform and lease-standard adoption.
- Developments in sales-practices litigation, tax disputes, and other contingencies, including outcomes that could exceed recorded accruals.