CenturyLink, Inc. (requested company: Lumen Technologies, Inc.) — Q2 2019 Form 10-Q
Business context and period. This is CenturyLink, Inc.’s quarterly report for the three and six months ended June 30, 2019. The company provided communications services to residential and business customers in more than 60 countries. The filing identifies the issuer as CenturyLink, not Lumen Technologies.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $5.578 billion | $5.902 billion | $11.225 billion | $11.847 billion |
| Operating income (loss) | $976 million | $767 million | $(4.523) billion | $1.517 billion |
| Net income (loss) | $371 million | $292 million | $(5.794) billion | $407 million |
| Diluted earnings (loss) per share | $0.35 | $0.27 | $(5.41) | $0.38 |
| Adjusted EBITDA, company-reported segment measure | $2.215 billion | $2.111 billion | $4.443 billion | $4.185 billion |
| Operating cash flow | Not separately stated for the quarter | $2.883 billion | $3.249 billion |
Q2 operating margin was approximately 17.5%, compared with 13.0% a year earlier; net margin was approximately 6.7%, versus 4.9%. Revenue fell 5% in both Q2 and the first half. The first-half loss chiefly reflects a $6.506 billion non-cash, non-tax-deductible goodwill impairment recorded in Q1; excluding the impairment, the filing reports no adjusted net income figure.
For the first half, capital expenditures were $1.731 billion, leaving approximately $1.152 billion of cash from operations less capital expenditures (a simple calculation, not a company-reported free-cash-flow measure). Cash and cash equivalents were $410 million at June 30. Total debt was $34.788 billion, including current maturities; the company also reported approximately $1.5 billion of available revolving-credit capacity. Debt was down from $36.061 billion at December 31, 2018. Stockholders’ equity was $13.692 billion, down from $19.828 billion.
Material changes versus the prior comparable period
- Q2 revenue declined $324 million, primarily amid continuing decreases in traditional voice and other business services. Consumer broadband revenue grew 2%, but consumer voice fell 13%; business voice and collaboration, transport and infrastructure, and IT and managed services also declined.
- Cost of services and products declined 10% and SG&A declined 14% in Q2, reflecting lower staffing, network and voice costs, marketing, and other expenses. These savings supported higher Q2 adjusted EBITDA despite lower revenue.
- First-half operating cash flow decreased $366 million year over year, while capital expenditures rose $155 million. Cash used in financing decreased, in part because dividends were reduced.
- The quarterly dividend was $0.25 per share; dividends declared were $0.50 per share for the first half, versus $1.08 in the first half of 2018. Management said it expected to continue the current quarterly rate, subject to Board discretion.
Outlook, risks, contingencies, and unusual items
- Management estimated 2019 capital expenditures of approximately $3.5–$3.8 billion, excluding integration and transformation capital. It did not provide a quantified revenue, earnings, or cash-flow forecast in this filing.
- Management described persistent revenue pressure from customer migration away from traditional voice, customer losses, price compression, competition, and technology shifts. It also cited continued competition in broadband, cloud, colocation, and newer data services.
- CenturyLink reported approximately $13.2 billion of LIBOR-based floating-rate debt, of which $4.0 billion was hedged with interest-rate swaps. A 100-basis-point LIBOR increase on the $9.2 billion unhedged amount was estimated to reduce annual pre-tax earnings by approximately $92 million.
- The company recorded the $6.506 billion goodwill impairment after a stock-price decline and internal reorganization triggered testing. Management cautioned that weaker profitability, cash flows, or sustained low share prices could lead to further impairments.
- Litigation and non-income-tax contingencies accrued were approximately $134 million. Matters include consumer sales-practices and securities litigation, switched-access disputes, tax claims, and a government-contract qui tam action; outcomes for several proceedings were described as uncertain.
- Disclosure controls were deemed ineffective at June 30 because of a material weakness in controls over the existence and accuracy of revenue transactions. Management expected remediation before year-end 2019. A separate weakness concerning fair-value measurement of acquired assets and liabilities was reported as remediated during Q2.
- Other relevant exposures include pension and post-retirement obligations, debt covenant and refinancing risks, foreign-currency volatility, and CAF Phase II network buildout requirements. The filing states that the company was in material compliance with debt covenants at June 30.
Most important facts for investors to verify
- Whether revenue declines and customer losses persist, and whether broadband and business data growth can offset legacy-service erosion.
- Whether operating cost reductions translate into durable cash generation as capital spending and debt maturities continue.
- Debt repayment, refinancing access, covenant headroom, interest-rate exposure, and the sustainability of the $0.25 quarterly dividend.
- Progress in remediating the revenue-control material weakness and the results of subsequent control testing.
- Potential additional goodwill impairment and developments in material legal, tax, pension, and regulatory exposures.