CenturyLink, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing is for CenturyLink, Inc.; the supplied company metadata says Lumen Technologies, Inc., a name not used by the registrant in this filing.
Business context
CenturyLink provided communications services across consumer, business, wholesale and hosting segments. At quarter-end it reported 12.5 million access lines, 6.1 million broadband subscribers and 58 data centers. The company described a continuing shift from legacy voice and access services toward broadband, Ethernet, video, managed hosting and other strategic services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4.514bn | $4.515bn | $13.593bn | $13.553bn |
| Operating income (loss) | $619m | ($685m) | $1.927bn | $812m |
| Net income (loss) | $188m | ($1.045bn) | $584m | ($478m) |
| Diluted EPS | $0.33 | ($1.76) | $1.02 | ($0.79) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $3.937bn | $4.408bn |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $2.113bn | $2.211bn |
Operating margin was approximately 13.7% in Q3 2014, versus a loss in Q3 2013; the prior-year quarter included a $1.1bn goodwill impairment. Nine-month operating margin was approximately 14.2%, versus 6.0% in 2013. Nine-month operating cash flow less capital expenditures was approximately $1.824bn, down from $2.197bn, a derived measure rather than a reported GAAP subtotal.
At September 30, cash was $734m; total debt was $21.151bn, including $1.169bn current maturities. The company had $1.4bn of available capacity under its $2bn revolving credit facility and reported compliance with debt covenants. Current liabilities were $4.577bn and current assets $4.018bn. Quarterly dividends declared were $0.54 per share.
Material changes and segment trends
- Revenue was essentially flat in Q3 and up less than 1% for the nine-month period. Strategic-services revenue rose 4% in Q3 and 5% year to date; legacy-services revenue fell 7% and 6%, respectively.
- Access lines declined 4.7% year over year, while broadband subscribers increased 2.0%. Management estimated full-year 2014 access-line losses of 4.4%–5.0%.
- Nine-month segment income fell to $6.458bn from $6.743bn, with total segment margin declining to 50% from 53%. Business and wholesale segment income weakened; hosting revenue grew, but nine-month hosting income was nearly flat.
- Operating cash flow declined $471m year over year, partly reflecting a $235m litigation-settlement payment in early 2014. The company repurchased $558m of shares in the nine-month period, including $109m under its then-current $1bn program.
Outlook, risks and unusual items
- Management estimated approximately $930m of capital expenditures for the final three months of 2014 and expected up to $308m of dividends at the then-current rate. It anticipated additional share repurchases subject to market conditions; no full-year earnings guidance is provided in the filing.
- CenturyLink said federal net operating loss carryforwards were expected to be substantially depleted by the end of 2015, potentially increasing cash taxes. It also expected approximately $26m of pension contributions in 2015.
- The company issued $500m of Qwest Corporation notes due 2054 at 6.875%, receiving $483m net proceeds. Qwest paid $600m of notes at maturity on October 1, 2014, after quarter-end.
- A goodwill impairment assessment begun October 31, 2014 was incomplete at the report date. Management noted the prior assessed fair value of consumer-segment equity exceeded carrying value by only 8%; hosting equity equaled carrying value after its 2013 impairment.
- Key risks include continued legacy-service and access-line declines, competition and technology substitution, pricing pressure, substantial leverage and refinancing needs, pension obligations, regulatory changes, cyber/network disruption, and uncertain litigation. The Cargill/Citibank plaintiffs were appealing a ruling that had denied their claims; the company stated liability was not probable. Other claims include retiree-benefit and securities/shareholder suits, for which no liability was accrued because an estimate was not considered appropriate.
- Management reported disclosure controls were effective at September 30, 2014, and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the incomplete 2014 goodwill assessment resulted in an impairment charge, particularly for consumer and hosting.
- Execution and cash-flow impact of access-line losses, strategic-service growth, and the expected 2014 capital-spending plan.
- Debt maturities, refinancing terms, credit ratings, covenant headroom, and the post-quarter $600m debt repayment.
- Cash-tax increases as NOLs are used, and future pension and post-retirement funding requirements.
- Developments in material litigation and regulatory proceedings, including intercarrier compensation and Connect America Fund rules.
- Whether the stated dividend and share-repurchase plans remain affordable alongside investment and debt obligations.