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Section 1: 8-K (8-K)

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CTL 8-K November 8, 2018
Section 1: 8-K (8-K)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):
November 8, 2018
395696123_ctllogoa01a07.jpg 
CenturyLink, Inc.
(Exact name of registrant as specified in its charter)
 
 
Louisiana
 
001-7784
 
72-0651161
 
 
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
 
 
100 CenturyLink Drive
Monroe, Louisiana
 
71203
(Address of principal executive offices)
 
(Zip Code)
(318) 388-9000
(Telephone number, including area code)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of any registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 



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Item 2.02.
Results of Operations and Financial Condition.

On November 8, 2018, CenturyLink, Inc. ("CenturyLink" or "we" or "us" or "our") issued a press release announcing operating results for the third quarter of 2018. A copy of the press release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference. More complete information about our operating results will be included in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, which we expect to file shortly with the U.S. Securities and Exchange Commission.

Forward-Looking Statements
Except for historical and factual information, the matters set forth in Exhibit 99.1 are forward-looking statements as defined by the federal securities laws, and are subject to the “safe harbor” protections thereunder. These forward-looking statements are not guarantees of future results and are based on current expectations only, and are subject to various uncertainties. Actual events and results may differ materially from those anticipated by us in those statements. Factors that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements are described in Exhibit 99.1. We may change our intentions or plans discussed in our forward-looking statements without notice at any time and for any reason.

Item 9.01.
Financial Statements and Exhibits.

(d)
The following exhibit is furnished with this Current Report on Form 8-K:
 
Exhibit No.
  
Description
Exhibit 99.1





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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, CenturyLink, Inc., has duly caused this Current Report to be signed on its behalf by the undersigned officer hereunto duly authorized.
 
 
CenturyLink, Inc.
 
 
 
 
 
 
Dated: November 8, 2018
By:
/s/ Eric J. Mortensen
 
 
Eric J. Mortensen
 
 
Senior Vice President and Controller
 


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(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit


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CenturyLink Reports Third Quarter 2018 Results

Third Quarter Highlights
Reiterated full year 2018 outlook for Adjusted EBITDA of $9.00 to $9.15 billion
Updated full year 2018 Capital Expenditure outlook to $3.15 to $3.25 billion
and full year 2018 Free Cash Flow outlook to $4.00 to $4.20 billion
Achieved Net Income of $272 million
Generated Adjusted EBITDA of $2.287 billion, excluding integration-related expenses and special items of $59 million
Expanded Adjusted EBITDA margin, excluding integration-related expenses and special items, to 39.3% from 35.5% in Pro Forma Third Quarter 2017
Generated Net Cash Provided by Operating Activities of $1.787 billion
Generated Free Cash Flow of $1.163 billion, excluding cash paid for integration-related expenses and special items of $60 million
Exited Third Quarter 2018 with $790 million of annualized run-rate Adjusted EBITDA synergies related to the acquisition of Level 3


MONROE, La., November 8, 2018 CenturyLink, Inc. (NYSE: CTL) today reported results for the third quarter 2018.
“A year into the close of the Level 3 acquisition, we are pleased with our integration accomplishments to date, highlighted by significant synergy achievement and Adjusted EBITDA margin expansion,” said Jeff Storey, president and CEO of CenturyLink. “We are now transitioning our focus to transforming the business, through product evolution, digitalizing interactions with our customers and a simplified environment for our employees, all of which are intended to drive profitable revenue growth.”
Total revenue was $5.82 billion for the third quarter 2018, compared to $6.03 billion for the third quarter 2017 on a pro forma basis.
Diluted earnings per share was $0.25 for the third quarter 2018, compared to diluted earnings per share of $0.18 for third quarter 2017. Diluted earnings per share for the third quarter 2018, excluding $55 million of after-tax integration-related expenses and special items was, $0.30.





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Financial Results
 

Pro Forma (1)
Metric
Third Quarter
Third Quarter
($ in millions, except per share data)
2018
2017
Medium & Small Business Revenue
$
860

896

Enterprise Revenue
1,278

1,311

International & Global Accounts Revenue
892

918

Wholesale & Indirect Revenue
1,255

1,302

Consumer Revenue
1,355

1,420

Regulatory Revenue
178

186

Total Revenue
$
5,818

6,033

Cost of Services and Products
2,672

2,914

Selling, General and Administrative Expenses
967

1,064

Share-based Compensation Expenses
49

54

Adjusted EBITDA (2)
2,228

2,109

Adjusted EBITDA, Excluding Integration-related Expenses and Special Items (2), (3)
2,287

2,140

Adjusted EBITDA Margin (2)
38.3
%
35.0
%
Adjusted EBITDA Margin, Excluding Integration-related Expenses and Special Items (2), (3)
39.3
%
35.5
%
Net Cash Provided by Operating Activities
1,787

1,649

Capital Expenditures
684

1,075

Capital Expenditures, Excluding Integration-related Capital Expenditures and Special Items (4)
665

1,066

Unlevered Cash Flow (2)
1,612

977

Unlevered Cash Flow, Excluding Integration-related Capital Expenditures and Special Items (2), (4), (5)
1,672

1,003

Free Cash Flow (2)
1,103

574

Free Cash Flow, Excluding Integration-related Capital Expenditures and Special Items (2), (4), (5)
1,163

600

Net Income
272

187

Net Income per Common Share - Diluted
$
0.25

$
0.18

Weighted Average Shares Outstanding (in millions) - Diluted
1,072.4

1,063.9

 
 
 
(1)  Reference to "pro forma" figures throughout this release assume the Level 3 acquisition and the colocation and data center sale took place on January 1, 2017. For a description of adjustments made in connection with preparing these pro forma figures, see the attached schedule in the Non-GAAP metrics section of this release.
(2)  See the attached schedules for definitions of non-GAAP metrics and reconciliation to GAAP figures.
(3)  Excludes (i) $41 million of integration-related expenses and $18 million of special items for the third quarter of 2018 and (ii) $68 million of integration-related expenses and $(37) million of special items for the third quarter of 2017.
(4)  Excludes (i) integration-related capital expenditures of $19 million in the third quarter of 2018 and (ii) integration-related capital expenditures of $9 million in the third quarter of 2017.
(5)  Excludes cash paid (i) for integration-related expenses and special items of $60 million for the third quarter of 2018 and (ii) for integration-related expense of $26 million for the third quarter of 2017.

As of January 1, 2018, the company prospectively adopted the new revenue recognition standard (ASC 606). The adoption of this new standard positively affected total revenue in the third quarter 2018 by approximately $15 million, with a $12 million positive effect on Consumer revenue and an overall $3 million positive effect on Business revenue. Within Business, the revenue recognition standard had a benefit of approximately $3 million to the Medium and Small Business unit and approximately $5 million to the International and Global Accounts business unit. The Enterprise business unit was negatively

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impacted by $3 million and the Wholesale and Indirect business unit was negatively affected by $2 million.


 
 
Pro Forma (2)
 
Revenue
Third Quarter
Third Quarter
Percent
($ in millions)
2018 (1)
2017
Change
By Business Unit
 
 
 
Medium and Small Business
$
860

896

(4
)%
Enterprise
1,278

1,311

(3
)%
International and Global Accounts
892

918

(3
)%
Wholesale and Indirect
1,255

1,302

(4
)%
Consumer
1,355

1,420

(5
)%
Regulatory
178

186

(4
)%
Total Revenue
$
5,818

6,033

(4
)%
 
 
 
 
By Service Type (3)
 
 
 
IP and Data Services
$
1,796

1,801

 %
Transport and Infrastructure
2,051

2,091

(2
)%
Voice and Collaboration
1,640

1,790

(8
)%
IT and Managed Services
153

165

(7
)%
Regulatory
178

186

(4
)%
Total Revenue
$
5,818

6,033

(4
)%
 
 
 
 
(1)  Third quarter 2018 revenue includes the effects of Revenue Recognition Standard ASC 606.
(2)  Reference to "pro forma" figures throughout this release assume the Level 3 acquisition and the colocation and data center sale took place on January 1, 2017. For description of adjustments made in connection with preparing these pro forma figures, see the attached schedule in the Non-GAAP metrics section of this release.
(3)  The categorization of pro forma revenue by service type was reclassified to conform to the current period presentation.

Cash Flow
Free Cash Flow, excluding integration-related expenses and special items, was $1.163 billion in the third quarter 2018, compared to $600 million in the third quarter 2017 on a pro forma basis.

As of September 30, 2018, CenturyLink had cash and cash equivalents of $390 million.

During the third quarter 2018, the company received a tax refund of $392 million and made a $400 million contribution to its pension plan. Year-to-date, the company has contributed a total of $500 million to the pension plan.
Integration Synergies and Expenses
CenturyLink exited the third quarter 2018 with approximately $790 million of annualized run-rate Adjusted EBITDA synergies, related to the Level 3 acquisition, compared to $675 million as of the end of the second quarter 2018.
 
Integration-related expenses and special items in the third quarter 2018 were $94 million, of which $59 million impacted Adjusted EBITDA and $60 million impacted Free Cash Flow.

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2018 Business Outlook
“We are pleased with our performance and are reiterating our full year outlook for Adjusted EBITDA of $9.00 to $9.15 billion,” said Neel Dev, CenturyLink’s executive vice president and chief financial officer.  “Based on lower year to date spending, we are updating our outlook for full year 2018 Capital Expenditures to $3.15 to $3.25 billion. Additionally, driven by our lower capital spending, we are updating our full year 2018 outlook for Free Cash Flow to $4.00 to $4.20 billion from $3.60 to $3.80 billion.”
2018 Metric (1), (2)
Updated Outlook
Previous Outlook
Adjusted EBITDA
$9.00 to $9.15 billion
$9.00 to $9.15 billion
Free Cash Flow
$4.00 billion to $4.20 billion
$3.60 to $3.80 billion
Dividends (3)
$2.30 billion
$2.30 billion
Free Cash Flow after Dividends
$1.70 billion to $1.90 billion
$1.30 billion to $1.50 billion
GAAP Interest Expense
$2.25 billion
$2.25 billion
Cash Interest
$2.10 billion
$2.10 billion
Capital Expenditures
$3.15 billion to $3.25 billion
~16% of Revenue
Depreciation and Amortization
$5.10 to $5.30 billion
$5.10 to $5.30 billion
Non-cash Compensation Expense
$200 million
$200 million
Cash Income Taxes (4)
$100 million
$100 million
Full Year Effective Income Tax Rate
~18%
~18%
 
 
 
(1)  See the attached schedules for definitions of non-GAAP metrics and reconciliation to GAAP figures.
(2)  Outlook measures in this release and the accompanying schedules (i) exclude integration-related expenses, (ii) exclude the effects of special items, future changes in our operating or capital allocation plans, unforeseen changes in regulation, laws or litigation, and other unforeseen events or circumstances impacting our financial performance and (iii) speak only as of Nov. 8, 2018. See "Forward Looking Statements" below.
(3)  Dividends is defined as dividends paid as disclosed in the Consolidated Statements of Cash Flows. Assumes continued payment of dividends at the current rates based on the number of shares outstanding on September 30, 2018. Payments of all dividends are at the discretion of the board of directors.
(4)  Cash income taxes are exclusive of all material prior period refunds.


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Investor Call
CenturyLink’s management will host a conference call at 5:00 p.m. ET today, November 8, 2018. The conference call will be streamed live over CenturyLink's website at ir.centurylink.com. Additional information regarding third quarter 2018 results, including the presentation management will review during the conference call, will be available on the Investor Relations website prior to the call. If you are unable to join the call via the Web, the call can be accessed live at +1 877-283-5145 (U.S. Domestic) or +1 312-281-1200 (International).

A telephone replay of the call will be available beginning at 7:00 p.m. ET on November 8, 2018, and ending February 6, 2019, at 6:00 p.m. ET. The replay can be accessed by dialing +1 800-633-8284 (U.S. Domestic) or +1 402-977-9140 (International), reservation code 21897318. A webcast replay of the call will also be available on our website beginning at 7:00 p.m. ET on November 8, 2018 and ending February 6, 2019 at 6:00 p.m. ET.
 
Media Relations Contact:                         Investor Relations Contact:
D. Nikki Wheeler                             Mark Stoutenberg Nikki.Wheeler@CenturyLink.com                     Mark.Stoutenberg@CenturyLink.com
+1 720-888-0560                             +1 720-888-1662
 


About CenturyLink
CenturyLink (NYSE: CTL) is the second largest U.S. communications provider to global enterprise customers. With customers in more than 60 countries and an intense focus on the customer experience, CenturyLink strives to be the world’s best networking company by solving customers’ increased demand for reliable and secure connections. The company also serves as its customers’ trusted partner, helping them manage increased network and IT complexity and providing managed network and cyber security solutions that help protect their business.

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Forward Looking Statements
Except for historical and factual information, the matters set forth in this release and other of our oral or written statements identified by words such as “estimates,” “expects,” “anticipates,” “believes,” “plans,” “intends,” and similar expressions are forward-looking statements as defined by the federal securities laws, and are subject to the “safe harbor” protections thereunder. These forward-looking statements are not guarantees of future results and are based on current expectations only, are inherently speculative, and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the effects of competition from a wide variety of competitive providers, including decreased demand for our legacy offerings and increased pricing pressures; the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete; the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, universal service, broadband deployment, data protection and net neutrality; our ability to timely realize the anticipated benefits of our recently-completed combination with Level 3, including our ability to attain anticipated cost savings, to use Level 3’s net operating losses in the amounts projected, to retain key personnel and to avoid unanticipated integration disruptions; our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakages or similar events impacting our network or the availability and quality of our services; our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix; possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed broadband service; our ability to successfully maintain the quality and profitability of our existing product and service offerings, to provision them efficiently to our customers, and to introduce profitable new offerings on a timely and cost-effective basis; our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments, periodic share repurchases, dividends, pension contributions and other benefits payments; changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise; our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; increases in the costs of our pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations; adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise; our ability to meet the terms and conditions of our debt obligations; our ability to maintain favorable relations with our key business partners, customers, suppliers, vendors, landlords and financial institutions; our ability to effectively manage our network buildout projects and our other expansion opportunities; our ability to collect our receivables from financially troubled customers; any adverse developments in legal or regulatory proceedings involving us; changes in tax, communications, pension, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels; the effects of changes in accounting policies or practices, including changes that could potentially require future impairment charges; the effects of adverse weather, terrorism or other natural or man-made disasters; the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in general market, labor, economic or geo-political conditions, or in public policy; and other risks referenced from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”). For all the reasons set forth above and in our SEC filings, you are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-

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looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans without notice at any time and for any reason.


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Reconciliation to GAAP
This release includes certain non-GAAP historical and forward-looking financial measures, including but not limited to adjusted EBITDA, free cash flow, unlevered cash flow, pro forma financial data and adjustments to GAAP measures to exclude the effect of special items. In addition to providing key metrics for management to evaluate the company’s performance, we believe these measurements assist investors in their understanding of period-to-period operating performance and in identifying historical and prospective trends.
Reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the attached financial schedules. Reconciliation of additional non-GAAP historical financial measures that may be discussed during the call described above, along with further descriptions of non-GAAP financial measures, will be available in the Investor Relations portion of the company’s website at www.centurylink.com and in the associated current report on form 8-K. Non-GAAP measures are not presented to be replacements or alternatives to the GAAP measures, and investors are urged to consider these non-GAAP measures in addition to, and not in substitution for, measures prepared in accordance with GAAP. CenturyLink may present or calculate its non-GAAP measures differently from other companies.



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CenturyLink, Inc.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
($ in millions, except per share amounts; shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Increase / (decrease)
 
Nine months ended September 30,
 
Increase / (decrease)
 
 
 
2018
 
2017
 
 
2018
 
2017
 

 
 
 
 
 
 
 
 
 
 
 
 
OPERATING REVENUE
 
$
5,818

 
4,034

 
44
%
 
$
17,665

 
12,333

 
43
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services and products
 
2,672

 
1,927

 
39
%
 
8,205

 
5,705

 
44
 %
 
Selling, general and administrative
 
967

 
710

 
36
%
 
3,191

 
2,404

 
33
 %
 
Depreciation and amortization
 
1,285

 
910

 
41
%
 
3,858

 
2,739

 
41
 %
 
Total operating expenses
 
4,924

 
3,547

 
39
%
 
15,254

 
10,848

 
41
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
894

 
487

 
84
%
 
2,411

 
1,485

 
62
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER (EXPENSE) INCOME
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(557
)
 
(362
)
 
54
%
 
(1,638
)
 
(1,000
)
 
64
 %
 
Other income (expense), net
 
(8
)
 
14

 
nm

 
29

 
1

 
nm

 
Income tax expense
 
(57
)
 
(47
)
 
21
%
 
(123
)
 
(214
)
 
(43
)%
NET INCOME
 
$
272

 
92

 
196
%
 
$
679

 
272

 
150
 %
BASIC EARNINGS PER SHARE
 
$
0.25

 
0.17

 
47
%
 
$
0.64

 
0.50

 
28
 %
DILUTED EARNINGS PER SHARE
 
$
0.25

 
0.17

 
47
%
 
$
0.63

 
0.50

 
26
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
1,066,904

 
541,521
 
97
%
 
1,065,410

 
541,113
 
97
 %
 
Diluted
 
1,072,351

 
541,963
 
98
%
 
1,069,726

 
541,879
 
97
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DIVIDENDS PER COMMON SHARE(1)
 
$
0.54

 
0.54

 
%
 
$
1.62

 
1.62

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exclude: integration-related expenses and special items(2)
 
55

 
22

 
150
%
 
192

 
167

 
15
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME EXCLUDING INTEGRATION-RELATED EXPENSES AND SPECIAL ITEMS
 
$
327

 
114

 
187
%
 
$
871

 
439

 
98
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
DILUTED EARNINGS PER SHARE EXCLUDING INTEGRATION-RELATED EXPENSES AND SPECIAL ITEMS
 
$
0.30

 
0.21

 
 
 
$
0.81

 
0.81

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Dividends per common share based on actuals previously reported
 
 
(2) Net of income tax effect. Refer to Non-GAAP Special Items for detail of special items included.
 
 
 
nm - Percentages greater than 200% and comparisons between positive and negative values are considered not meaningful.

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CenturyLink, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
(UNAUDITED)
($ in millions)
 
 
 September 30, 2018
 
 
 December 31, 2017
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
390

 
551

Restricted cash
3

 
5

Other current assets
3,721

 
3,638

   Total current assets
4,114

 
4,194

 
 
 
 
NET PROPERTY, PLANT AND EQUIPMENT
 
 
 
Property, plant and equipment
52,661

 
51,204

Accumulated depreciation
(26,493
)
 
(24,352
)
   Net property, plant and equipment
26,168

 
26,852

 
 
 
 
GOODWILL AND OTHER ASSETS
 
 
 
Goodwill
30,770

 
30,475

Restricted cash
27

 
31

Other, net
12,292

 
14,059

    Total goodwill and other assets
43,089

 
44,565

 
 
 
 
TOTAL ASSETS
$
73,371

 
75,611

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
778

 
443

Other current liabilities
4,508

 
4,414

    Total current liabilities
5,286

 
4,857

 
 
 
 
LONG-TERM DEBT
35,749

 
37,283

DEFERRED CREDITS AND OTHER LIABILITIES
9,533

 
9,980

STOCKHOLDERS' EQUITY
22,803

 
23,491

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
73,371

 
75,611

 
 
 
 


10



 
CenturyLink, Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
 
(UNAUDITED)
 
($ in millions)
 
 
 
 
 
 
 
Nine months ended
 
 
September 30, 2018
 
September 30, 2017 *
 
OPERATING ACTIVITIES
 
 
 
 
Net cash provided by operating activities
$
5,036

 
2,700

 
INVESTING ACTIVITIES
 
 
 
 
Capital expenditures
(2,260
)
 
(2,363
)
 
Proceeds from the sale of data centers and colocation business, less cash sold

 
1,467

 
Proceeds from sale of property, plant and equipment and other assets
125

 
51

 
Other investing, net
(61
)
 
(5
)
 
Net cash used in investing activities
(2,196
)
 
(850
)
 
FINANCING ACTIVITIES
 
 
 
 
Net proceeds from issuance of long-term debt
130

 
6,608

 
Proceeds from financing obligation

 
356

 
Payments of long-term debt
(1,539
)
 
(1,612
)
 
Net payments on revolving line of credit
185

 
(370
)
 
Dividends paid
(1,735
)
 
(881
)
 
Other financing, net
(48
)
 
(11
)
 
Net cash (used in) provided by financing activities
(3,007
)
 
4,090

 
Net increase in cash, cash equivalents, restricted cash and securities
(167
)
 
5,940

 
Cash, cash equivalents, restricted cash, and securities at beginning of period *
587

 
224

 
Cash, cash equivalents restricted cash, and securities at end of period *
$
420

 
6,164

 
 
 
 
 
*
In the second quarter of 2017, CenturyLink adopted Accounting Standards Update ("ASU") 2016-18, "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2016-18"), which requires that a statement of cash flows explain the change in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents as compared to the prior presentation, which explained only the change in cash and cash equivalents. ASU 2016-18 became effective January 1, 2018. This change was applied on a retrospective basis to all previous periods to match the current period presentation with immaterial impact.

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CenturyLink, Inc.
OPERATING METRICS
(UNAUDITED)
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
June 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
Operating Metrics
 
 
 
 
 
 
Consumer broadband subscribers
 
4,843

 
4,906

 
5,137

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer broadband subscribers are customers that purchase broadband connection service through their existing telephone lines, stand-alone telephone lines, or fiber-optic cables. Our methodology for counting our consumer broadband subscribers includes only those lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. It also excludes unbundled loops and includes stand-alone consumer broadband subscribers. We count lines when we install the service.


12



Description of Non-GAAP Metrics

Pursuant to Regulation G, the company is hereby providing definitions of non-GAAP financial metrics and reconciliations to the most directly comparable GAAP measures.

The following describes and reconciles those financial measures as reported under accounting principles generally accepted in the United States (GAAP) with those financial measures as adjusted by the items detailed below and presented in the accompanying news release. These calculations are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP. In keeping with its historical financial reporting practices, the company believes that the supplemental presentation of these calculations provides meaningful non-GAAP financial measures to help investors understand and compare business trends among different reporting periods on a consistent basis.

We use the term Special items as a non-GAAP measure to describe items that impacted a period’s statement of income for which investors may want to give special consideration due to their magnitude, nature or both. We do not use the term non-recurring because while some of these items are special because they are unusual and infrequent, others may recur in future periods.
Adjusted EBITDA ($) is defined as net income (loss) from the Statements of Income before income tax (expense) benefit, total other income (expense), depreciation and amortization and non-cash stock compensation expense.

Adjusted EBITDA Margin (%) is defined as Adjusted EBITDA divided by total revenue.

Management believes that Adjusted EBITDA and Adjusted EBITDA Margin are relevant and useful metrics to provide to investors, as they are an important part of CenturyLink’s internal reporting and are key measures used by Management to evaluate profitability and operating performance of CenturyLink and to make resource allocation decisions. Management believes such measures are especially important in a capital-intensive industry such as telecommunications. Management also uses Adjusted EBITDA and Adjusted EBITDA Margin (and similarly uses these terms excluding acquisition-related expenses) to compare CenturyLink’s performance to that of its competitors and to eliminate certain non-cash and non-operating items in order to consistently measure from period to period its ability to fund capital expenditures, fund growth, service debt and determine bonuses. Adjusted EBITDA excludes non-cash stock compensation expense because of the non-cash nature of this item. Adjusted EBITDA also excludes interest income, interest expense and income taxes, and in our view constitutes an accrual-based measure that has the effect of excluding period-to-period changes in working capital and shows profitability without regard to the effects of capital or tax structure. Adjusted EBITDA also excludes depreciation and amortization expense because these non-cash expenses primarily reflect the impact of historical capital investments, as opposed to the cash impacts of capital expenditures made in recent periods, which may be evaluated through cash flow measures. Adjusted EBITDA excludes the gain (or loss) on extinguishment and modification of debt and other, net because these items are not related to the primary operations of CenturyLink.

There are limitations to using Adjusted EBITDA as a financial measure, including the difficulty associated with comparing companies that use similar performance measures whose calculations may differ from CenturyLink’s calculations. Additionally, this financial measure does not include certain significant items such as interest income, interest expense, income taxes, depreciation and amortization, non-cash stock compensation expense, the gain (or loss) on extinguishment and modification of debt and net other income (expense). Adjusted EBITDA and Adjusted EBITDA Margin (either with or without acquisition-related expense adjustments) should not be considered a substitute for other measures of financial performance reported in accordance with GAAP.

13




Unlevered Cash Flow is defined as net cash provided by (used in) operating activities less capital expenditures, plus cash interest paid and less interest income all as disclosed in the Statements of Cash Flows or the Statements of Income. Management believes that Unlevered Cash Flow is a relevant metric to provide to investors, as it is an indicator of the operational strength and performance of CenturyLink and, measured over time, provides management and investors with a sense of the underlying business’ growth pattern and ability to generate cash. Unlevered Cash Flow excludes cash used for acquisitions and debt service and the impact of exchange rate changes on cash and cash equivalents balances.

There are material limitations to using Unlevered Cash Flow to measure CenturyLink’s cash performance as it excludes certain material items such as payments on and repurchases of long-term debt, interest income, cash interest expense and cash used to fund acquisitions. Comparisons of CenturyLink’s Unlevered Cash Flow to that of some of its competitors may be of limited usefulness since CenturyLink does not currently pay a significant amount of income taxes due to net operating loss carryforwards, and therefore, currently generates higher cash flow than a comparable business that does pay income taxes. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to accounts receivable and accounts payable and capital expenditures. Unlevered Cash Flow should not be used as a substitute for net change in cash and cash equivalents in the Consolidated Statements of Cash Flows.

Free Cash Flow is defined as net cash provided by (used in) operating activities less capital expenditures as disclosed in the Statements of Cash Flows. Management believes that Free Cash Flow is a relevant metric to provide to investors, as it is an indicator of the CenturyLink’s ability to generate cash to service its debt. Free Cash Flow excludes cash used for acquisitions, principal repayments and the impact of exchange rate changes on cash and cash equivalents balances.

There are material limitations to using Free Cash Flow to measure CenturyLink’s performance as it excludes certain material items such as principal payments on and repurchases of long-term debt and cash used to fund acquisitions. Comparisons of CenturyLink’s Free Cash Flow to that of some of its competitors may be of limited usefulness since CenturyLink does not currently pay a significant amount of income taxes due to net operating loss carryforwards, and therefore, generates higher cash flow than a comparable business that does pay income taxes. Additionally, this financial measure is subject to variability quarter over quarter as a result of the timing of payments related to interest expense, accounts receivable and accounts payable and capital expenditures. Free Cash Flow should not be used as a substitute for net change in cash and cash equivalents on the Consolidated Statements of Cash Flows.





14



CenturyLink, Inc.
Non-GAAP Integration-Related Expenses and Special Items
(UNAUDITED)
($ in millions)
 
 
 
 
 
Actual QTD
 
Pro Forma
 
Actual YTD
Integration-Related Expenses and Special Items Impacting Adjusted EBITDA
3Q18
3Q17
 
3Q17
 
3Q18
3Q17
(Gain) Loss on sale of data centers and colocation business
$

(37
)
 
(37
)
 

82

OTT/Stream impairment of content commitment and hardware, software, and internal labor (1)
18


 

 
60


Total special items impacting adjusted EBITDA
18

(37
)
 
(37
)
 
60

82

Plus: integration-related expenses impacting adjusted EBITDA (2)
41

67

 
68

 
266

95

Total integration-related expenses and special items impacting adjusted EBITDA
$
59

30

 
31


326

177

 
 
 
 
 
 
 
 
 
Actual QTD
 
Pro Forma
 
Actual YTD
Integration-Related Expenses and Special Items Impacting Net Income
3Q18
3Q17
 
3Q17
 
3Q18
3Q17
(Gain) Loss on sale of data centers and colocation business
$

(37
)
 
(37
)
 

82

OTT/Stream impairment of content commitment and hardware, software, and internal labor (1)
18


 

 
60


Additional depreciation expense for real estate assets not meeting the requirement of sale leaseback accounting


 

 

44

Early debt retirement costs
33


 

 
33


Total special items impacting net income
51

(37
)
 
(37
)
 
93

126

Plus: integration-related expenses impacting net income (2)
43

67

 
68

 
276

95

Total integration-related expenses and special items impacting net income
94

30

 
31

 
369

221

Income tax effect of integration-related expenses and special items (1)
(19
)
(8
)
 
(12
)
 
(91
)
(54
)
Tax benefit from carryback losses


 

 
(142
)

Impact of tax reform
7


 

 
83


FIN 48 release due to statute expiration
(27
)

 

 
(27
)

Total integration-related expenses and special items impacting net income, net of tax
$
55

22

 
19

 
192

167

 
 
 
 
 
 
 
 
(1) Tax effect calculated using the annualized effective statutory tax rate, excluding any non-recurring discrete items, which was 38% for 2017, 26.4% for the three months ended Q1 2018, 26.1% for the six months ended Q2 2018 and 24.6% for the nine months ended Q3 2018.
(2) Includes $55 million of restructuring reserve impairment for Q2 2018.


15



CenturyLink, Inc.
Pro Forma Consolidated Statements of Income
(UNAUDITED)
($ in millions)
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
Actual Consolidated CenturyLink
Predecessor Level 3
Adjustments
 
Pro Forma Combined Company (1)
OPERATING REVENUES
 
 
 
 
 
Operating revenues
$
4,034

2,059

(61
)
(a)
6,032

Colocation sold to Cyxtera and not retained


1

 
1

Total operating revenues
4,034

2,059

(60
)
 
6,033

 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
Cost of services and products
1,927

1,046

(59
)
(a)
2,914

Selling, general and administrative
710

354


 
1,064

Depreciation and amortization
910

310

48

(b)
1,268

Total operating expenses
3,547

1,710

(11
)
 
5,246

 
 
 
 
 
 
OPERATING INCOME
487

349

(49
)
 
787

 
 
 
 
 
 
OTHER (EXPENSE) INCOME
 
 
 
 
 
Interest expense
(362
)
(128
)
(38
)
(c)
(528
)
Other expense, net
14

12

(13
)
(d)
13

Income tax expense
(47
)
(76
)
38

(e)
(85
)
NET INCOME
$
92

157

(62
)
 
187

 
 
 
 
 
 
DILUTED EARNINGS PER COMMON SHARE
 
 
 
 
0.18

 
 
 
 
 
 
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
1,063.9

 
 
 
 
 
 
Pro Forma Reconciliation for Non-GAAP Adjusted EBITDA
Acquisition/integration related expenses
$
67

31

(30
)
(f)
68

Loss on sale of data centers and colocation business
(37
)


 
(37
)
Share-based compensation expense
21

33


(g)
54


16



 
(1) These pro forma figures have not been prepared in conformity with SEC rules governing the preparation of pro forma financial data under Regulation S-X.
(a)
Adjustment reflects the elimination of operating revenues and expenses for existing commercial transactions between CenturyLink and Level 3 and elimination of Level 3 deferred revenues.
(b)
Depreciation expense decreased on Level 3's property, plant and equipment resulting from decreased PP&E fair value. Increase in amortization expense resulting from increase intangible asset fair value.
(c)
Adjustments reflect the net increase in interest expense resulting from (i) interest on the new debt to finance the combination and the amortization of the related debt issuance costs; (ii) the elimination of Level 3's historical amortization of debt discount and amortization of debt issuance costs; and (iii) a reduction in interest expense from the accretion of the purchase accounting associated with reflecting Level 3's long-term debt based on its estimated fair value.
(d)
Adjustments reflect the removal of CenturyLink's interest income earned on funds held in escrow for the purpose of the acquisition of Level 3; the Q4 2017 adjustment includes the reclassification of Level 3 interest income from Interest expense to Other income/(expense), net.
(e)
Income tax effect of Pro Forma adjustments was based on the effective tax rate of 38%.
(f)
Pro Forma adjustments relate to integration related interest income and expense as such items would not have been incurred in 2017 under the Pro Forma perspective that assumes the Level 3 acquisition occurred on January 1, 2016.
(g)
Adjustment reflects the removal of share-based compensation expense that would not have been incurred in 2017 under the Pro Forma perspective that assumes the Level 3 acquisition occurred on January 1, 2016.


17



CenturyLink, Inc.
Pro Forma Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
($ in millions)
 
 
 
 
 
Three Months Ended September 30, 2017
 
Actual Consolidated CenturyLink
Predecessor Level 3
Pro Forma Combined Company(1)
OPERATING ACTIVITIES
 
 
 
Net cash provided by operating activities
$
958

691

1,649

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(753
)
(322
)
(1,075
)
Proceeds from the sale of data centers and colocation business, less cash sold
(6
)

(6
)
Proceeds from sale of property, plant and equipment and other
3

1

4

Maturity of marketable securities

1,127

1,127

Net cash (used in) provided by investing activities
(756
)
806

50

FINANCING ACTIVITIES
 
 
 
Proceeds from financing obligation
(22
)

(22
)
Payments of financing obligations
4


4

Payments of long-term debt
(86
)
(302
)
(388
)
Dividends paid
(291
)

(291
)
Proceeds from the issuance of stock
1


1

Other financing, net
(1
)
1


Net cash used in financing activities
(395
)
(301
)
(696
)
Net (decrease) increase in cash, cash equivalents, restricted cash and securities
(193
)
1,196

1,003

Cash, cash equivalents, restricted cash and securities at beginning of period
6,357

1,090

7,447

Cash, cash equivalents, restricted cash and securities at end of period
$
6,164

2,286

8,450

 
 
 
 
Pro Forma Reconciliation for Non-GAAP Cash Flow:
Cash interest paid
$
293

130

423

Interest income
(14
)
(6
)
(20
)
Cash integration-related expenses 
16

10

26

Integration-related capital expenditures
5

4

9

(1) The Pro Forma statement of cash flows was derived by summing the cash flows of legacy CenturyLink and legacy Level 3. There were no Pro Forma adjustments made related to the sale of the legacy CenturyLink data centers and colocation business.
 

18



CenturyLink, Inc.
Non-GAAP Cash Flow Reconciliation
(UNAUDITED)
($ in millions)
 
 
 
 
 
Actual
 
Pro Forma

3Q18
 
3Q17
Net cash provided by operating activities
$
1,787

 
1,649

Capital expenditures
(684
)
 
(1,075
)
Free cash flow
1,103

 
574

Cash interest paid
512

 
423

Interest income
(3
)
 
(20
)
Unlevered cash flow
$
1,612

 
977

 
 
 
 
Free cash flow
$
1,103

 
574

Add back: cash integration-related expenses
57

 
26

Add back: special items
3

 

Free cash flow excluding cash integration-related expenses and special items
$
1,163

 
600

 
 
 
 
Unlevered cash flow
$
1,612

 
977

Add back: cash integration-related expenses
57

 
26

Add back: special items
3

 

Unlevered cash flow excluding cash integration-related expenses and special items
$
1,672

 
1,003

 
 
 
 
Capital expenditures
$
(684
)
 
(1,075
)
Less: integration-related capital expenditures
19

 
9

Capital expenditures, excluding integration-related capital expenditures and special items
$
(665
)
 
(1,066
)



19



CenturyLink, Inc.
Adjusted EBITDA Non-GAAP Reconciliation
(UNAUDITED)
($ in millions)
 
 
 
 
Actual
Pro Forma
 
3Q18
3Q17
 
 
 
Net income
$
272

187

Income tax expense
57

85

Total other expense
565

515

Depreciation and amortization expense
1,285

1,268

Share-based compensation expenses
49

54

Adjusted EBITDA
$
2,228

2,109

 
 
 
Add back: integration-related expenses (1)
$
41

68

Add back: special items (2)
18

(37
)
Adjusted EBITDA excluding integration-related expenses and special items
$
2,287

2,140

 
 
 
Total revenue
$
5,818

6,033

 
 
 
Adjusted EBITDA margin
38.3
%
35.0
%
Adjusted EBITDA excluding integration-related expenses and special items margin
39.3
%
35.5
%
 
 
 
(1) In the third quarter of 2018, integration-related expenses include $41 million of expenses that impact adjusted EBITDA and $2 million of additional expenses that impact net income.
(2) Refer to Non-GAAP Special Items table for details of the integration-related expenses and special items included above.


20



Outlook

To enhance the information in our outlook with respect to non-GAAP metrics, we are providing a range for certain GAAP measures that are components of the reconciliation of the non-GAAP metrics. The provision of these ranges is in no way meant to indicate that CenturyLink is explicitly or implicitly providing an outlook on those GAAP components of the reconciliation. In order to reconcile the non-GAAP financial metric to GAAP, CenturyLink has to use ranges for the GAAP components that arithmetically add up to the non-GAAP financial metric. While CenturyLink feels reasonably comfortable about the outlook for its non-GAAP financial metrics, it fully expects that the ranges used for the GAAP components will vary from actual results. We will consider our outlook of non-GAAP financial metrics to be accurate if the specific non-GAAP metric is met or exceeded, even if the GAAP components of the reconciliation are different from those provided in an earlier reconciliation.

CenturyLink, Inc.
2018 OUTLOOK (1)
(UNAUDITED)
($ in millions)
 
 
 
 
Adjusted EBITDA Outlook
 
 
 
Twelve Months Ended December 31, 2018
 
 
 
 
Range
 
Low
 
High
Net income
$
720

 
1,130

Income tax expense
150

 
250

Total other expense
2,200

 
2,100

Depreciation and amortization expense
5,300

 
5,100

Non-cash compensation expense
210

 
190

Integration-related expenses
420

 
380

Adjusted EBITDA
$
9,000

 
9,150

 
 
 
 
 
 
 
 
Free Cash Flow Outlook
 
 
 
Twelve Months Ended December 31, 2018
 
 
 
 
Range
 
Low
 
High
Net cash provided by operating activities excluding integration costs
$
7,250

 
7,350

Capital expenditures, excluding: integration projects
(3,250
)
 
(3,150
)
Free cash flow
$
4,000

 
4,200

(1) Footnotes (1) and (2) from the outlook table included at page 4 are incorporated herein by reference.

21

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