CenturyLink, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; comparisons are with the third quarter and nine months ended September 30, 2012. The filing identifies the registrant as CenturyLink, Inc. (not Lumen Technologies, Inc.). It provides unaudited consolidated results.
Business context
CenturyLink provided communications services to residential, business, governmental and wholesale customers, as well as hosting and colocation services. At quarter-end, it reported 13.2 million access lines, 5.9 million broadband subscribers and 55 data centers. Its segments were consumer, business, wholesale and data hosting.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $4.515 billion | $4.571 billion | $13.553 billion | $13.793 billion |
| Operating income (loss) | $(685) million | $736 million | $812 million | $2.047 billion |
| Net income (loss) | $(1.045) billion | $270 million | $(478) million | $544 million |
| Diluted earnings (loss) per share | $(1.76) | $0.43 | $(0.79) | $0.87 |
| Operating cash flow | Not provided separately | Not provided separately | $4.408 billion | $4.686 billion |
- Revenue mix: Q3 strategic services revenue rose 4% to $2.189 billion, while legacy services declined 6% to $1.915 billion. Total revenue fell 1% in Q3 and 2% year to date.
- Margins: Total segment margin was 50.7% in Q3 versus 52.0% a year earlier; year-to-date margin was 52.2% versus 52.7%. Data hosting margin fell to 19.9% from 24.8% in Q3.
- Cash investment: Nine-month capital expenditures and capitalized software were $2.211 billion, up from $2.024 billion. Operating cash flow less these expenditures was approximately $2.197 billion, versus $2.662 billion in the prior-year period.
- Debt and liquidity: Total long-term debt, including current maturities, was $20.582 billion at September 30. Cash was $266 million; $1.8 billion was available under the $2.0 billion revolving credit facility, with $200 million drawn. The company reported compliance with debt covenants.
- Balance sheet: Current assets were $3.812 billion and current liabilities were $3.978 billion. Stockholders’ equity was $16.714 billion, down from $19.289 billion at year-end 2012.
- Shareholder returns: The quarterly dividend was reduced 25.5% to $0.54 per share. The company repurchased 35.2 million shares for $1.24 billion during the first nine months; $764 million remained authorized at September 30.
Material changes and unusual items
- A preliminary, noncash and nondeductible $1.1 billion goodwill impairment was recorded for data hosting. Testing was incomplete at filing, and the company expected to finalize it before reporting fourth-quarter 2013 results; any adjustment could be material.
- Q3 SG&A included a $233 million charge related to a tentative settlement of KPNQwest trustee litigation. In October 2013, Qwest reached a tentative oral settlement agreement for €172 million (approximately $233 million); final documentation and court approval remained outstanding.
- Access lines declined 5.7% year over year, while broadband subscribers increased 2.3%. Management estimated 2013 access-line losses of 5.7%–6.1%.
- Segment results show mixed performance: consumer and wholesale revenue declined; business revenue was nearly flat; data hosting revenue grew, but its expenses increased faster.
Outlook, commentary and risks
- Management expected $750 million–$850 million of capital investment during the remainder of 2013 and dividends of up to $325 million, based on the then-current quarterly rate and share count. Further repurchases were subject to market conditions.
- Management focused on broadband, video, Ethernet, MPLS, cloud and hosting growth to offset continuing declines in traditional voice and access services. It noted competitive pricing pressure and uncertainty around the timing and returns of growth initiatives.
- Federal net operating losses and certain other tax benefits were expected to be substantially depleted by 2015, potentially increasing cash tax payments.
- Approximately 37% of employees were represented by unions. New four-year agreements covering approximately 12,000 employees became effective October 25, 2013.
- Key risks included substantial debt, credit-rating downgrades and refinancing needs; access-line and legacy-revenue erosion; regulatory changes; pension funding; competition and technology shifts; and significant litigation. CenturyLink’s debt ratings had been downgraded by two agencies following its capital-allocation changes.
- Management reported disclosure controls were effective and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Final data-hosting goodwill impairment valuation and any subsequent adjustment to the $1.1 billion preliminary charge.
- Whether the KPNQwest settlement was finalized, its payment timing, and any effects on liquidity or debt covenants.
- Progress in stabilizing legacy revenue and access-line losses, and whether strategic-service growth can offset those declines without further margin erosion.
- Debt maturities, credit ratings, covenant headroom, and the company’s capacity to fund capital spending, dividends, pension obligations and repurchases.
- Actual cash taxes as NOLs are used, and whether the announced capital-investment and shareholder-return plans were achieved.