CenturyLink, Inc. (now Lumen Technologies, Inc.) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is issued under the name CenturyLink, Inc.; the supplied text does not identify the registrant as Lumen Technologies. It covers the full year and provides unaudited quarterly results, including Q4.
Business context and reporting period
CenturyLink was an international, facilities-based communications provider serving enterprise, wholesale, small and medium business, and residential customers. It reported five segments: International and Global Accounts, Enterprise, SMB, Wholesale, and Consumer. Its network included approximately 450,000 global fiber route miles; most revenue came from the United States. Level 3 results were included from November 1, 2017, limiting comparability with earlier periods.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Operating revenue | $22.401 billion | $23.443 billion |
| Operating income (loss) | $(2.726) billion | $570 million |
| Net income (loss) | $(5.269) billion | $(1.733) billion |
| Operating cash flow | $6.680 billion | $7.032 billion |
| Capital expenditures | $3.628 billion | $3.175 billion |
| Adjusted EBITDA | $8.771 billion | $8.602 billion |
| Long-term debt, including current maturities | $34.694 billion | $36.061 billion |
| Cash and cash equivalents at year-end | $1.690 billion | $488 million |
Revenue declined 4% year over year. Adjusted EBITDA, a non-GAAP measure, increased about 2%; it was approximately 39% of revenue, versus about 37% in 2018. The reported operating loss included a $6.506 billion non-cash, non-tax-deductible goodwill impairment charge. Excluding that charge, operating income was approximately $3.780 billion, or 17% of revenue; this is a simple calculation and not a company-reported non-GAAP measure. The 2019 net loss included $503 million of income tax expense, with the effective tax rate significantly affected by the nondeductible impairment.
Operating cash flow less capital expenditures was approximately $3.052 billion, compared with $3.857 billion in 2018. This is a simple calculation, not a reported free-cash-flow measure. Interest expense was $2.021 billion, down 7% as average debt declined. The balance sheet showed $4.768 billion of current assets and $7.258 billion of current liabilities. Approximately $1.9 billion of revolver capacity was available at year-end; much of the $1.7 billion cash balance was intended for a January 2020 debt redemption.
Debt principal maturities at year-end totaled $2.300 billion in 2020, $2.478 billion in 2021, and $4.224 billion in 2022. The company reported compliance with material debt covenants. In January 2020, it refinanced and extended maturities on major credit facilities and lowered applicable interest margins; it also issued secured notes and redeemed $1.1 billion of Qwest notes.
Material changes versus the prior comparable period
- Revenue fell 4%, principally from declining legacy voice, lower equipment sales, churn in legacy managed-services contracts, and reduced regulatory and failed-sale-leaseback revenue. IP and data services and consumer broadband partly offset declines.
- Consumer broadband revenue rose 2%, while consumer voice fell 13%. SMB revenue declined 6%, Wholesale 7%, and IGAM 2%; Enterprise revenue was flat.
- Operating cash flow decreased $352 million and capital expenditures increased $453 million. Cash dividends paid fell to $1.100 billion from $2.312 billion following the 2019 dividend reduction.
- Long-term debt declined by about $1.4 billion on the reported balance-sheet measure. Goodwill fell by $6.497 billion, largely reflecting the 2019 impairment.
- Q4 revenue was $5.570 billion, versus $5.778 billion in Q4 2018. Q4 2019 operating income was $847 million and net income was $223 million; Q4 2018 included a $2.7 billion goodwill impairment and reported an operating loss of $1.841 billion and net loss of $2.412 billion.
Guidance, outlook, risks, contingencies, and unusual items
- Investment and dividends: Management projected 2020 capital investment of $3.6–$3.9 billion, excluding integration and transformation capital, and approximately $1.1 billion of common dividends assuming continuation of the then-current $0.25 quarterly rate. The board retained discretion to change or suspend dividends.
- Transformation savings: Management’s February 2019 target was $800 million–$1.0 billion of annualized run-rate Adjusted EBITDA synergies and savings by the end of a three-year period, excluding $450–$650 million of one-time costs. The company said it was on track but gave no assurance of achievement.
- Operating outlook: Management expected continued pressure on traditional voice and other legacy services, and described broadband, fiber expansion, 5G transport, and edge computing as opportunities. The company was no longer actively marketing its consumer video product.
- Major risks: Intense price and technology competition; declining legacy demand; execution risk in integrating and modernizing networks and support systems; cybersecurity, outages and customer-billing risks; regulation and government subsidy requirements; third-party network and vendor dependence; foreign currency and international risks; and substantial debt, refinancing, covenant, and dividend risks.
- Cash and obligations: The company received about $500 million annually under CAF Phase II, subject to buildout milestones and potential penalties. It expected substantial capital spending to meet those obligations. The FCC approved the Rural Digital Opportunity Fund in January 2020; CenturyLink said it was still evaluating participation.
- Pensions and contingencies: At year-end, the qualified pension plan was underfunded by $1.724 billion and post-retirement benefits by $3.024 billion. Management expected about $236 million of direct post-retirement benefit payments in 2020. Accruals for litigation and non-income-tax contingencies totaled approximately $180 million. Pending matters include consumer billing and securities litigation, switched-access disputes, state tax matters, and foreign tax claims; outcomes are uncertain.
- Unusual items and controls: The $6.506 billion 2019 goodwill impairment followed a $2.726 billion impairment in 2018; the annual 2019 impairment test found no further impairment. The company adopted new lease accounting in 2019, recording operating lease assets and liabilities. Two material weaknesses identified in 2018—acquisition accounting and revenue transaction controls—were reported remediated in 2019. Management and the auditor concluded internal control over financial reporting was effective at year-end; the financial statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether underlying revenue and cash generation stabilize, particularly in legacy voice, Wholesale, SMB, and managed services, and whether broadband and enterprise growth can offset declines.
- How much of the $6.506 billion impairment reflects deteriorating business expectations versus valuation assumptions, and the sensitivity of goodwill to future performance and market multiples.
- Debt refinancing progress, maturity concentration, variable-rate exposure, covenant headroom, and the amount of cash actually available to the parent after subsidiary restrictions.
- Whether the 2020 capital-spending plan and targeted transformation savings are achieved without impairing network quality, customer service, or cash available for debt reduction and dividends.
- Developments in material litigation and tax proceedings, CAF buildout obligations and funding, pension and post-retirement cash requirements, and any recurrence of billing-control or cybersecurity issues.