CenturyLink, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for CenturyLink, Inc., the company now known as Lumen Technologies, Inc. It covers the quarter and six months ended June 30, 2015; amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
CenturyLink provided communications services to residential and business customers, including broadband, voice, data networking, hosting, colocation, video and wireless services. At quarter-end, it reported approximately 12.1 million access lines, 6.1 million broadband subscribers and 59 data centers. Results are unaudited; management cautioned that first-half results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Operating revenue | $4.419bn | $4.541bn | $8.870bn | $9.079bn |
| Operating income | $549m | $655m | $1.198bn | $1.308bn |
| Net income | $143m | $193m | $335m | $396m |
| Diluted EPS | $0.26 | $0.34 | $0.60 | $0.69 |
| Operating margin | 12.4% | 14.4% | 13.5% | 14.4% |
For the first half, operating cash flow was $2.481bn, capital spending on property, plant, equipment and capitalized software was $1.272bn, and investing cash outflow was $1.258bn. Operating cash flow less that capital spending was approximately $1.209bn, versus $1.108bn in the prior-year period. Financing cash outflow was $1.196bn, including $609m of dividends paid and $277m of share repurchases. Cash rose to $155m from $128m at year-end 2014.
At June 30, total debt was $20.353bn, including $1.519bn of current maturities; long-term debt excluding current maturities was $18.834bn. Cash was $155m. The company reported approximately $1.7bn of available capacity under its $2.0bn revolving credit facility and said it was in compliance with material debt covenants. Stockholders’ equity was $14.587bn. The quarterly dividend declared was $0.54 per share.
Material changes versus the prior comparable period
- Q2 revenue declined 3% and first-half revenue declined 2%. Growth in strategic services was outweighed by declines in legacy services and data integration.
- Q2 net income fell 26%; first-half net income fell 15%. First-half operating income decreased $110m, while operating expenses declined $99m.
- Strategic-services revenue rose 2% in both Q2 and the first half. Legacy-services revenue fell 7% in Q2 and 6% in the first half; data-integration revenue declined 24% and 22%, respectively.
- Business segment income fell 11% in Q2 and 8% in the first half; consumer segment income fell 2% and 1%, respectively. Q2 segment margins were 43% for Business and 59% for Consumer, versus 46% and 60% a year earlier.
- Access lines fell 4.7% year over year to 12.109m, while broadband subscribers increased 0.9% to 6.108m and Prism TV subscribers increased 20.6% to 258,000.
Outlook, management commentary, risks and unusual items
- Management estimated 2015 access-line losses of 4.4%–5.0%. It expected strategic-services contributions in the Business segment to improve in the second half, while recognizing continued competitive and pricing pressure.
- Management expected approximately $1.5bn of capital investment in the remaining six months of 2015 and approximately $3.0bn for 2016, including any CAF Phase 2 investment. It anticipated up to $608m of dividends for the second half, assuming the $0.54 quarterly rate and then-current share count; dividends and repurchases remained subject to board discretion and other factors.
- The FCC had offered up to $514m annually for six years under CAF Phase 2. As of the filing, CenturyLink anticipated accepting more than $300m across at least two dozen states and was evaluating approximately $200m in other states. The election deadline was August 27, 2015. Management expected 2015 support to exceed replaced legacy subsidies by $50m–$200m, depending on elections.
- CenturyLink expected substantial use of its approximately $1.6bn of federal net operating losses during 2015 and warned that cash federal taxes would increase substantially after those benefits were largely depleted.
- Notable items included $15m of regulatory fines associated with a 911 system outage during the first half, and an $8m impairment charge related to office buildings held for sale. Changes to estimated useful lives of certain network assets increased first-half depreciation by approximately $24m; the company estimated a $48m full-year increase, expected to be offset by depreciation declines from aging and retired plant.
- Key risks included ongoing legacy-revenue and access-line declines, intense competition, technology transition and network investment needs, substantial debt and refinancing exposure, pension and post-retirement obligations, potential effects of new FCC Title II internet rules, and uncertainty over switched-access charge disputes. The company warned that access-charge outcomes could adversely affect results; several other lawsuits and regulatory matters remained pending. It had not accrued for certain cases where loss was not considered probable or reasonably estimable.
Important facts for investors to verify
- Whether strategic-services growth can offset continued declines in legacy and data-integration revenue, and whether the projected access-line loss rate is realized.
- The final CAF Phase 2 elections, resulting subsidy levels, deployment obligations and associated capital requirements.
- Debt maturities, refinancing terms, covenant headroom, ratings and the company’s capacity to sustain dividends and repurchases as federal cash taxes rise.
- Developments in switched-access disputes, FCC regulation and other material litigation, including any resulting liabilities or revenue effects.
- Actual capital spending, operating cash flow, pension funding needs and progress in improving segment and consolidated margins.