CenturyLink, Inc. (now Lumen Technologies, Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with Q1 2013 unless otherwise noted. The filing issuer is CenturyLink, Inc. Financial amounts are in millions of dollars except per-share data.
Business context
CenturyLink provided communications services to residential, business, governmental and wholesale customers, including broadband, voice, video, networking, managed hosting and colocation. It reported four segments: Consumer, Business, Wholesale and Hosting. At quarter-end it reported 12.9 million access lines, 6.1 million broadband subscribers and 56 data centers.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $4,538 | $4,513 |
| Operating income | $653 | $782 |
| Operating margin | 14.4% | 17.3% |
| Net income | $203 | $298 |
| Diluted EPS | $0.35 | $0.48 |
| Operating cash flow | $1,380 | $1,387 |
| Capital expenditures and capitalized software | $670 | $663 |
| Cash flow less capital expenditures | $710 | $724 |
| Dividends declared per share | $0.54 | $0.54 |
Revenue increased 1%, while operating income fell 16% and net income fell 32%. Higher service and product costs contributed to the margin decline; interest expense rose to $331 million from $316 million. Other income declined to $9 million from $39 million, mainly because Q1 2013 included a $32 million wireless-spectrum sale gain. The effective tax rate was 38.7%, versus 41.0%.
At March 31, cash was $219 million, total debt was approximately $20.9 billion (about $21 billion as described in MD&A), and current maturities were $1.126 billion. The $2.0 billion revolving credit facility had $755 million drawn and approximately $1.2 billion of borrowing capacity available; the company reported compliance with debt covenants. Cash increased $51 million during the quarter. Financing cash use included $309 million of dividends and $328 million of share repurchases.
Material changes and segment performance
- Strategic-services revenue rose 5% to $2,281 million, and data-integration revenue rose 24% to $174 million. Legacy-services revenue fell 6% to $1,829 million.
- Access lines declined 5% year over year; broadband subscribers increased 2.4%. Management estimated full-year 2014 access-line losses of 4.8%–5.7%.
- Consumer revenue was nearly flat at $1,509 million; segment income fell 4% to $926 million.
- Business revenue rose 4% to $1,559 million, but segment income fell 8% to $593 million as expenses increased 13%.
- Wholesale revenue fell 5% to $862 million and segment income fell 7% to $586 million, reflecting ongoing legacy and private-line declines.
- Hosting revenue increased 6% to $354 million, but segment income fell 7% to $80 million as expenses grew faster than revenue.
Outlook, commentary, risks and unusual items
- Management expected approximately $2.3 billion of capital expenditures during the remaining nine months of 2014, focused in part on broadband, video, hosting, fiber infrastructure and software development. It also anticipated up to $933 million in dividends over that period at the then-current rate, and approximately $630 million of debt maturities.
- The company expected to continue quarterly dividends of $0.54 per share, subject to board discretion. A new authorization to repurchase up to $1 billion of stock was to begin after completion of the existing program; timing and amounts remained dependent on market conditions.
- Management expected substantial use of federal net operating loss carryforwards by 2015, after which cash tax payments were expected to increase. It anticipated approximately $120 million in pension contributions during the remaining nine months of 2014.
- Effective January 2014, revised useful-life estimates for certain network equipment increased Q1 depreciation by approximately $19 million and were expected to increase 2014 depreciation by approximately $78 million. The Q1 after-tax impact was an estimated $12 million, or $0.02 per share. Prior changes to intangible-asset lives increased Q1 amortization by approximately $23 million, reducing net income by an estimated $14 million, or $0.02 per share.
- The company paid approximately $235 million in February to settle the KPNQwest Dutch bankruptcy proceeding. A separate Cargill/Citibank appeal remained pending; plaintiffs alleged approximately €219 million in damages, and the company said liability was not probable. Other disclosed proceedings included retiree-benefit claims, access-charge disputes, securities and derivative actions, and fiber right-of-way class actions.
- Key stated risks included access-line and legacy-revenue erosion, competition and technology substitution, regulatory changes to access charges and universal-service rules, substantial debt and refinancing needs, credit-rating pressure, pension and healthcare funding, cybersecurity and network outages, and execution of acquisitions and network integration. The company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in strategic services and broadband can offset continued declines in access lines and legacy revenue without further margin compression.
- Debt maturities, refinancing access and borrowing costs, including the scheduled $600 million Qwest Corporation notes due October 2014 and covenant headroom.
- Capacity to fund capital investment, dividends, repurchases and pension contributions as federal tax benefits are used up.
- Actual effects of revised depreciation and amortization estimates, and whether segment expense trends improve.
- Developments and potential financial exposure from the pending litigation and regulatory proceedings; several outcomes and liabilities are uncertain.
Management cautioned that first-quarter results are not necessarily indicative of full-year results; the filing did not provide specific full-year earnings or revenue guidance.