CenturyLink, Inc. (now Lumen Technologies, Inc.) — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited quarterly results, including the fourth quarter. The registrant filed under the name CenturyLink, Inc.
Business context
CenturyLink was an integrated communications provider serving residential, business, government and wholesale customers, with wireline, broadband, network, video and data-hosting services. At year-end it reported 13.0 million access lines, 6.0 million broadband subscribers and 55 data centers. Its four reported segments were Consumer, Business, Wholesale and Data Hosting.
Financial and operating metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Operating revenue | $18.095 billion | $18.376 billion |
| Operating income | $1.453 billion | $2.713 billion |
| Net income (loss) | ($239 million) | $777 million |
| Diluted EPS | ($0.40) | $1.25 |
| Cash from operating activities | $5.559 billion | $6.065 billion |
| Capital expenditures and capitalized software | $3.048 billion | $2.919 billion |
| Cash from operations less capital expenditures | $2.511 billion | $3.146 billion |
| Cash and cash equivalents at year-end | $168 million | $211 million |
| Total long-term debt, including current maturities | $20.966 billion | $20.605 billion |
| Total assets | $51.787 billion | $53.940 billion |
| Stockholders’ equity | $17.191 billion | $19.289 billion |
Revenue declined 1.5% year over year. Operating margin was approximately 8.0%, versus 14.8% in 2012; the comparison is heavily affected by 2013 impairment and litigation charges. The company had $1.275 billion available under its $2.0 billion revolving credit facility at year-end and $725 million drawn. Approximately 94% of debt excluding capital lease and other obligations bore fixed interest rates.
Fourth quarter: Revenue was $4.542 billion, operating income $641 million, net income $239 million and diluted EPS $0.41. The year-earlier quarter recorded revenue of $4.583 billion, operating income of $666 million, net income of $233 million and diluted EPS of $0.37.
Material changes versus prior period
- Net results moved from $777 million of income to a $239 million loss. The principal unusual charges were a $1.092 billion non-cash, non-tax-deductible goodwill impairment in Data Hosting and a $235 million pre-tax KPNQwest litigation settlement charge.
- Strategic-services revenue rose 5% to $8.822 billion, while legacy-services revenue fell 7% to $7.617 billion. Total revenue nevertheless declined, as strategic growth did not offset legacy declines.
- Access lines fell 5.4% to 13.002 million; broadband subscribers increased 2.4% to 5.991 million. Data Hosting revenue grew 6%, but segment income fell 11% and margin declined from 25% to 21%.
- Operating cash flow fell $506 million, and cash from operations less capital expenditures decreased to $2.511 billion. The company spent $1.586 billion repurchasing shares during 2013.
- Quarterly dividend was reduced from $0.725 to $0.54 per share in 2013. Annual dividends declared were $2.16 per share, versus $2.90 in 2012.
Outlook, risks and unusual items
- Management estimated 2014 access-line losses of 5.2%–5.7%, capital expenditures of approximately $3.0 billion, and dividends of up to $1.26 billion at the then-current rate. These are estimates, not guaranteed results.
- Approximately $630 million of debt maturities and $22 million of scheduled debt principal payments were expected in 2014. Management expected to refinance a substantial portion of maturing debt, subject to market conditions. About $2.6 billion of debt securities were due over the 36 months following the filing.
- The 2013 KPNQwest settlement was finalized in February 2014; Qwest paid approximately €171 million (about $235 million). A separate Cargill/Citibank appeal remained pending; plaintiffs alleged approximately €219 million in damages, with potential recovery affected by the settlement.
- Key risks include continuing wireline substitution and competitive pricing, reductions in switched-access revenue under regulatory reforms, costly network modernization and integration, data-center competition and power/lease costs, pension and post-retirement obligations, and the company’s substantial debt. Management disclosed that CenturyLink’s senior unsecured debt ratings had fallen below investment grade at two rating agencies.
- Federal net operating losses were expected to be substantially used by 2015, after which cash taxes could increase. Pension plans were underfunded by $1.055 billion and post-retirement plans by $3.153 billion on an accounting basis at year-end.
- KPMG issued an unqualified opinion on the financial statements and internal controls; management also reported effective internal control over financial reporting at December 31, 2013.
Important facts for investors to verify
- Whether strategic-service growth can offset ongoing access-line and legacy-revenue declines, including the trajectory of broadband subscribers and access-line losses.
- Data Hosting performance, margins and assumptions underlying the $1.092 billion goodwill impairment; remaining goodwill in that segment was $689 million.
- Cash generation after capital spending, dividends and share repurchases, alongside refinancing needs, credit ratings and debt-covenant headroom.
- Final outcomes and cash effects of the Cargill/Citibank appeal and other litigation, as well as pension and post-retirement funding requirements.
- Delivery against 2014 capital-spending and access-line-loss estimates, and the effect of NOL utilization ending on expected cash taxes.