Lumen Technologies, Inc. quarterly report, Q3 FY2015

CenturyLink, Inc. — Form 10-Q Summary

Entity note: The supplied filing is for CenturyLink, Inc., not Lumen Technologies, Inc. It covers the quarter and nine months ended September 30, 2015.

Business context

CenturyLink provides communications services to business and residential customers, including voice, broadband, networking, hosting, colocation, video and data integration. It reported Business and Consumer segments; at quarter-end it had approximately 11.9 million access lines, 6.1 million high-speed Internet subscribers and 59 data centers.

Financial performance and position

• Q3 operating margin was approximately 14.4%, compared with 13.7% a year earlier. Segment income margin was 48%, down from 49%; Business margin declined to 42% from 44%, while Consumer remained 59%.
• For the first nine months, operating cash flow was $3.956B; investing cash outflow was $2.022B, including $2.039B of capital expenditure and capitalized software payments; financing cash outflow was $1.707B. Operating cash flow less those investment payments was approximately $1.917B.
• Cash was $355M at September 30, 2015, versus $128M at year-end 2014. Current assets were $3.350B and current liabilities $5.547B.
• Total debt was $20.414B, including $1.910B current maturities and $18.504B long-term debt. The company reported no borrowings under its $2B revolving credit facility and approximately $2B available capacity. It said it was in compliance with material debt covenants.
• Dividends declared were $0.54 per share for Q3 and $1.62 for the first nine months. Cash dividends paid over nine months totaled $905M; share repurchases totaled $541M.

Changes versus comparable periods

• Q3 revenue increased 1%, but nine-month revenue declined 1%. Q3 net income rose 9%, while nine-month net income fell 8%.
• Strategic-services revenue grew 1% in Q3 and 2% year to date; legacy-services revenue fell 6% in both periods. Data-integration revenue fell 17% in Q3 and 21% year to date.
• Q3 reported revenue included $158M of additional Connect America Fund Phase 2 support versus the legacy program, mostly a catch-up payment for the first seven months of 2015. Thus, headline quarterly revenue growth benefited materially from a one-time timing item.
• Access lines declined 5.0% year over year; high-speed Internet subscribers were nearly flat, while Prism TV subscribers increased 17.5%.

Outlook, commentary, risks and unusual items

• CenturyLink accepted approximately $500M per year for six years in CAF Phase 2 support to fund broadband-capable infrastructure for about 1.2 million rural locations in 33 states. It expected Q4 support revenue to exceed the legacy program by approximately $50M and preliminarily forecast 2016 capital expenditures of approximately $3B, including CAF-related spending.
• Management estimated approximately $800M of capital investment for the remaining three months of 2015. It expected federal net operating loss carryforwards to be substantially depleted by year-end 2015, increasing cash taxes thereafter.
• The company expected to continue its $0.54 quarterly dividend, subject to Board discretion. It also expected to continue discretionary repurchases; $278M remained under the program at September 30.
• A possible December 2015 pension lump-sum settlement could trigger a fourth-quarter non-cash accounting charge estimated at $100M–$200M, depending on plan assets and discount rates.
• Key pressures include competition and migration from legacy voice services, private-line declines, strategic-services pricing pressure, rising video programming and employee benefit costs, and regulatory uncertainty. The FCC’s 2015 Title II internet rules were being challenged; management anticipated possible negative operational effects.
• Risks also include substantial debt, below-investment-grade parent ratings, future refinancing and cash-tax needs, pension and post-retirement obligations, CAF buildout milestones and penalties, and pending litigation. A switched-access dispute could adversely affect results if charges must be reduced or refunded.
• After quarter-end, the company redeemed $400M of QC notes on October 13, 2015. On November 4, it announced a review of strategic alternatives for its data-center and colocation operations, including a possible sale or partnership.

Important facts for investors to verify

• Confirm the issuer identity: this filing is CenturyLink, Inc.; the request metadata names Lumen Technologies, Inc.
• Separate recurring revenue trends from the $158M CAF Phase 2 catch-up contribution and assess future funding against required rural-network investment and compliance milestones.
• Assess whether operating cash flow can sustain capital spending, debt service, dividends and repurchases as federal NOLs run down and cash taxes rise.
• Review debt maturities, refinancing access, credit ratings and covenant headroom, as well as the effects of the October 2015 redemptions.
• Track the potential pension settlement charge, benefit-plan funding exposure, material litigation and the outcome of the data-center/colocation strategic review.