CenturyLink, Inc. — 2015 Form 10-K
Entity and period: The supplied filing is CenturyLink, Inc.’s annual report for the fiscal year ended December 31, 2015, not a filing under the name Lumen Technologies. It reports full-year results; selected fourth-quarter figures are noted below.
Business context and reporting period
CenturyLink was an integrated communications provider serving residential, business, wholesale and government customers across 37 states, with 11.7 million access lines, 6.0 million high-speed Internet subscribers, 285,000 Prism TV subscribers and 59 data centers at year-end. Its reportable segments were Business and Consumer.
Financial and operating metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Operating revenue | $17.900 billion | $18.031 billion |
| Operating income | $2.605 billion | $2.410 billion |
| Operating margin | 14.6% | 13.4% |
| Net income | $878 million | $772 million |
| Diluted EPS | $1.58 | $1.36 |
| Cash from operations | $5.152 billion | $5.188 billion |
| Capital expenditures and capitalized software | $2.872 billion | $3.047 billion |
| Cash and cash equivalents at year-end | $126 million | $128 million |
| Total long-term debt, including current maturities | $20.225 billion | $20.503 billion |
| Total assets | $47.604 billion | $49.103 billion |
| Stockholders’ equity | $14.060 billion | $15.023 billion |
Revenue mix shifted: strategic services rose 2% to $9.343 billion; legacy services fell 6% to $6.752 billion; data integration fell 17% to $573 million; and other revenue rose 23% to $1.232 billion, primarily reflecting CAF support. The Business segment’s margin declined to 43% from 45%; Consumer’s was 60% in both years.
Fourth-quarter 2015 revenue was $4.476 billion, operating income $751 million and net income $338 million, compared with $4.438 billion, $483 million and $188 million, respectively, in fourth-quarter 2014.
Liquidity included approximately $1.7 billion of available capacity under the $2.0 billion revolving facility at year-end. The company reported $1.503 billion of 2016 debt maturities. The board declared a $0.54-per-share quarterly dividend in February 2016; continuation was subject to board discretion.
Material changes versus prior period
- Revenue decreased 1% year over year, while operating income increased 8% and net income increased 14%.
- Strategic-service growth did not offset legacy-service and data-integration declines. Access lines fell 5.2% to 11.748 million; high-speed Internet subscribers edged down to 6.048 million. Prism TV subscribers increased from 242,000 to 285,000.
- Operating expenses declined 2%, including a 5% decrease in depreciation and amortization. 2015 operating results included $215 million of incremental CAF Phase 2 revenue versus the prior support program.
- Cash from operations fell $36 million. The company spent $800 million repurchasing shares during 2015 and paid $1.198 billion in dividends.
Outlook, commentary, risks and unusual items
- Management expected 2016 capital expenditures of approximately $3.0 billion, including CAF Phase 2 buildout, and estimated 2016 cash income taxes of $400 million–$600 million as tax-loss carryforwards were depleted.
- Management estimated access-line losses of 5%–6% for full-year 2016. It cited continuing wireline voice declines, competition and pricing pressure, and pressure in private-line, hosting, colocation and data-integration services.
- CAF Phase 2 provides approximately $500 million annually for six years to support deployment to about 1.2 million rural locations in 33 states. Continued funding depends on meeting buildout and service milestones; penalties could apply for noncompliance. The company also sought deadline relief related to $40 million of earlier CAF Phase 1 funding; without relief, a substantial portion could be repayable.
- CenturyLink was exploring strategic alternatives for its data-center and colocation operations, including a possible partnership, joint venture or sale; no outcome was stated.
- Material risks include high debt and refinancing needs, declining legacy revenues, regulatory uncertainty, required network investment, cyberattacks and service outages, pension and post-retirement obligations, and pending legal matters. A 911 outage resulted in $15 million of regulatory fines.
- Unusual comparative items include 2014’s $60 million tax benefit and $63 million pension settlement charge, and 2013’s $1.092 billion goodwill impairment and $235 million litigation settlement charge. No goodwill impairment was recorded in 2015.
Important facts for investors to verify
- Whether strategic-service growth and CAF revenue can offset continuing legacy revenue declines, and whether 2016 access-line losses match management’s estimate.
- Expected CAF-related capital spending, buildout progress and any exposure to funding reductions or repayment penalties, including the unresolved Phase 1 deadline request.
- Debt maturities, refinancing terms, covenant compliance, credit ratings and the company’s ability to fund debt service, capital spending and dividends amid higher cash taxes.
- Funding needs for underfunded pension and post-retirement plans, and sensitivity of obligations to investment returns, discount rates and other assumptions.
- Developments in the data-center strategic review and the pending access-charge, retiree-benefit and intellectual-property proceedings; outcomes and potential financial effects are not fully predictable from the supplied text.