Business context and reporting period
CenturyLink, Inc. (the historical company associated with the requested Lumen Technologies name) filed this unaudited Form 10-Q for the three months ended March 31, 2016. It provided communications services to residential and business customers, including voice, broadband, data, hosting and video. At quarter-end, it reported 11.6 million access lines, 6.1 million high-speed Internet subscribers, 302,000 Prism TV subscribers and 59 data centers.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Operating revenue | $4.401 billion | $4.451 billion; down 1% |
| Operating income | $694 million | $649 million; up 7% |
| Operating margin | 15.8% | 14.6% |
| Net income | $236 million | $192 million |
| Diluted EPS | $0.44 | $0.34 |
| Operating cash flow | $1.423 billion | $1.336 billion |
| Capital expenditures and capitalized software cash payments | $611 million | $616 million |
| Operating cash flow less those payments | $812 million | $720 million |
Cost of services and products fell 1% to $1.900 billion, SG&A fell 2% to $831 million, and depreciation and amortization fell 6% to $976 million. Net margin was approximately 5.4%, versus 4.3% a year earlier. Interest expense was $331 million; the effective tax rate was 37.9%, compared with 40.6%.
At March 31, cash was $438 million, current assets $2.926 billion and current liabilities $3.826 billion. The company reported $20.025 billion of debt on the balance sheet, including current maturities; principal debt excluding discounts and issuance costs was approximately $20.338 billion. Long-term debt excluding current maturities was $19.508 billion. The $2 billion revolving credit facility was undrawn, leaving $2 billion of borrowing capacity; the company said it was in compliance with material debt covenants. Shares declared dividends of $0.54 each; dividends paid during the quarter were $290 million.
Material changes versus the prior comparable period
- Revenue mix shifted: strategic services increased 1% to $2.354 billion, while legacy services declined 6% to $1.623 billion and data integration declined 17% to $116 million. Other revenue increased 20% to $308 million, primarily reflecting higher Connect America Fund support.
- Business segment revenue fell 3% to $2.604 billion and segment income fell 5% to $1.177 billion; margin declined to 45% from 46%. Consumer revenue fell 1% to $1.489 billion, segment income fell 3% to $865 million and margin declined to 58% from 59%.
- Access lines declined 5% year over year and high-speed Internet subscribers declined 1%; Prism TV subscribers increased 21%. Employees declined 4%.
- Net cash used in financing improved to $506 million from $699 million, substantially reflecting fewer share repurchases. Cash increased from $126 million at year-end to $438 million.
Outlook, management commentary, risks and unusual items
- Management estimated full-year 2016 access-line losses of 5%–6%. It did not expect CAF Phase 2 funding to materially change full-year 2016 operating revenue versus 2015, despite $52 million more revenue from the program in Q1.
- For the remaining nine months of 2016, management anticipated approximately $2.4 billion in capital investment, up to $876 million in common dividends at the current rate, approximately $1.4 billion in debt maturities, $17 million in scheduled debt principal payments and $49 million in capital-lease and other fixed payments. Estimated 2016 cash income taxes were $400 million–$600 million.
- CAF Phase 2 provides approximately $500 million annually for six years to support infrastructure deployment in 33 states and entails substantial buildout spending. Failure to meet deployment requirements could result in withheld support or penalties. Separately, the company said it may have to refund a substantial portion of $40 million received under an earlier CAF program; $27 million was recorded in current liabilities and $13 million in noncurrent liabilities.
- Credit ratings were below investment grade for CenturyLink, Inc.; Moody’s downgraded its rating to Ba3 and Qwest Corporation’s to Ba1 in March. The company cited refinancing, borrowing-cost and liquidity risks associated with leverage and ratings. Its April 2016 issuance of $1 billion of 7.5% notes was intended to help fund a June maturity; Qwest paid $235 million of notes at maturity on May 2.
- Key legal exposures include Missouri municipal tax cases: an April 2016 ruling, if upheld, would result in liability well above the recorded contingency, though the company expected its appeal to reduce ultimate exposure. A Comcast tax-sharing claim seeking about $80 million remained pending before the Colorado Supreme Court; no liability was accrued because loss was not considered probable. Switched-access disputes and patent litigation also remain unresolved.
- Management identified ongoing pressure from competition, migration away from traditional voice, private-line and hosting declines, pricing pressure, rising video-content costs and broadband regulation. The company was exploring strategic alternatives for its data-center and colocation operations. It reported effective disclosure controls as of quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported $812 million operating-cash-flow-less-capital-spending measure with the company’s cash requirements, including debt service, dividends, taxes and CAF buildout commitments.
- Review debt maturities, refinancing plans and the effect of the March rating downgrades on funding costs and available liquidity.
- Track legacy revenue and access-line declines against strategic-services growth, segment margins and management’s 5%–6% access-line-loss estimate.
- Monitor outcomes and potential financial exposure from the Missouri tax litigation, switched-access disputes, CAF deployment obligations and possible earlier-program refund.
- Assess dividend sustainability alongside management’s projected cash taxes, capital investment and debt repayments; the filing says the board may change or suspend dividends.