Business context and reporting period
The supplied filing is CenturyLink, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013; the filing does not identify the registrant as Lumen Technologies. CenturyLink provided communications services across consumer, business, wholesale and data hosting markets. At quarter-end it reported 13.3 million access lines, 5.9 million broadband subscribers and 55 data centers.
Financial performance and position
Amounts below are in millions of dollars except per-share data, percentages and where noted.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $4,525 | $4,612 | $9,038 | $9,222 |
| Operating income | $715 | $657 | $1,497 | $1,311 |
| Operating margin | 15.8% | 14.2% | 16.6% | 14.2% |
| Net income | $269 | $74 | $567 | $274 |
| Diluted EPS | $0.44 | $0.12 | $0.92 | $0.44 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2,856 | $2,799 |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $1,410 | $1,305 |
First-half operating cash flow less capital expenditures was $1,446 million, versus $1,494 million in the prior-year period. Cash and cash equivalents were $214 million at June 30, 2013. Total debt was $20.585 billion, including $302 million of current maturities; long-term debt excluding current maturities was $20.283 billion. The company had $1.955 billion available under its $2.0 billion revolving credit facility. Current assets were $3.648 billion and current liabilities $3.748 billion.
First-half dividends paid were $661 million. The declared dividend was $0.54 per share for Q2, following the board’s 25.5% reduction in the quarterly rate earlier in 2013. The company repurchased 24 million shares for $851 million during the first half.
Material changes versus the prior comparable period
- Revenue declined 2% in both Q2 and the first half, chiefly as legacy services weakened. Strategic services grew 4% in both periods, while legacy services fell 7% in Q2 and 8% year to date.
- Access lines fell 5.8% year over year to 13.331 million; broadband subscribers increased 2.5% to 5.909 million. Management estimated 2013 access-line losses of 5.7%–6.1%.
- Operating expenses declined 4% in Q2 and 5% in the first half. Lower depreciation and amortization contributed materially; operating income increased despite lower revenue.
- Net income rose substantially versus 2012, when results included a $202 million Q2 loss on early debt retirement. That prior-year unusual item explains part of the reported earnings improvement. First-half 2013 also included a $33 million favorable IRS settlement and a $32 million gain on wireless spectrum sales.
- Segment results were reorganized into four segments and prior-year segment figures were restated. First-half data hosting revenue grew 8%, but segment income fell 12% and margin declined to 21.1% from 25.8%, reflecting investment and higher costs.
- Total debt was broadly similar to December 31, 2012 ($20.585 billion versus $20.605 billion), but the current portion declined and long-term debt excluding current maturities increased. CenturyLink issued $1.0 billion of 5.625% notes due 2020; Qwest Corporation issued $775 million of 6.125% notes due 2053 and repaid $750 million of floating-rate notes at maturity.
Outlook, commentary, risks and contingencies
- Management estimated capital spending of $1.5 billion–$1.6 billion for the second half of 2013 and anticipated no more than $660 million of common dividends over that period at the then-current rate. It expected to continue buybacks subject to market conditions; no specific remaining-period repurchase amount was provided.
- Management said strategic-service growth—including broadband, Ethernet, MPLS, video and colocation—partly offsets continuing legacy revenue declines. It expected salary, wage and benefit costs to rise in the second half as it hired for growth initiatives.
- The company expected to use substantially all federal NOLs and certain deferred tax attributes by 2015; it warned that cash federal tax payments would then rise substantially. It did not expect further required pension contributions in the remainder of 2013 after contributing $147 million in the first quarter.
- CenturyLink reported credit-rating downgrades after announcing its capital-allocation changes and said these raised borrowing costs and could constrain capital-market access. It reported compliance with debt covenants at June 30. Its credit facility requires debt-to-EBITDA ratios no higher than 4.0:1.0 for CenturyLink and 2.85:1.0 for Qwest Corporation.
- Key business risks include access-line attrition, competition and price pressure, regulatory changes, execution of growth and integration initiatives, capital needs, debt refinancing, pension obligations, and the anticipated depletion of tax attributes. Data hosting also faces pricing pressure and power, lease-renewal and capacity risks.
- Material legal matters include KPNQwest litigation seeking approximately €4.2 billion (about $5.5 billion) in one proceeding and approximately €219 million (about $285 million) in another; the company had not accrued liabilities for these matters. A post-quarter Comcast suit sought about $80 million under a tax-sharing agreement; no liability was accrued. Securities and derivative actions concerning disclosures about financial condition and the dividend were in preliminary stages and unaccrued. The filing states that a probable amount was accrued for fiber-right-of-way litigation, but that amount was not material.
- Approximately 13,500 employees were covered by expired collective bargaining agreements. A tentative four-year agreement covering about 12,000 employees was reached July 30, 2013, subject to union-member approval.
Important facts for investors to verify
- Confirm the issuer and filing identity: the provided 10-Q is for CenturyLink, Inc., despite the request metadata naming Lumen Technologies.
- Review the sustainability of revenue and cash generation amid continuing access-line losses, and whether strategic-service growth can offset legacy-service declines.
- Assess debt maturities, refinancing costs, credit ratings and covenant headroom, alongside planned capital spending, dividends and share repurchases.
- Track the final approval and costs of the labor agreement, the depletion and use of NOLs, and required pension funding beyond 2013.
- Monitor the outcomes and potential financial exposure of the disclosed litigation, particularly the KPNQwest claims and shareholder actions.