CenturyLink Reports Second Quarter 2018 Results
MONROE, La., Aug. 8, 2018 /PRNewswire/ -- CenturyLink, Inc. (NYSE: CTL) today reported results for the second quarter 2018.
"Our continued progress on integration efforts contributed to a solid quarter, with strong growth in Adjusted EBITDA and Free Cash Flow," said Jeff Storey, president and CEO of CenturyLink. "Across the company, we are focused on profitable growth and providing a better experience for our customers and employees."
Total revenue was $5.90 billion for the second quarter 2018, compared to $6.04 billion for the second quarter 2017 on a pro forma basis.
Diluted earnings per share was $0.27 for the second quarter 2018, compared to diluted earnings per share of $0.06 for the second quarter 2017. Diluted earnings per share for the second quarter 2018, excluding the benefit of $10 million of after-tax integration-related expenses and special items, was $0.26.
Financial Results
Metric Second Quarter Pro Forma(1)
2018
($ in millions, except per share
data) Second Quarter
2017
--- ----
Business Revenue $4,365 $4,419
Consumer Revenue $1,352 $1,436
Regulatory Revenue $185 $185
Total Revenue $5,902 $6,040
Cost of Products and Services $2,730 $2,868
Selling, General and Administrative
Expenses $1,115 $1,251
Share-based Compensation Expenses $54 $61
Adjusted EBITDA(2) $2,111 $2,007
Adjusted EBITDA, Excluding
Integration-related Expenses and
Special Items(2), (3) $2,271 $2,155
Adjusted EBITDA Margin(2) 35.8% 33.2%
Adjusted EBITDA Margin, Excluding
Integration-related Expenses and
Special Items (2), (3) 38.5% 35.7%
Cash Flow from Operating Activities $1,582 $1,246
Capital Expenditures $771 $1,158
Capital Expenditures, Excluding
Integration-related Expenses and
Special Items(4) $755 $1,149
Unlevered Cash Flow(2) $1,377 $580
Unlevered Cash Flow, Excluding
Integration-related Expenses and
Special Items(2), (4), (5) $1,485 $594
Free Cash Flow(2) $811 $88
Free Cash Flow, Excluding
Integration-related Expenses and
Special Items(2), (4), (5) $919 $102
Net Income $292 $69
Net Income per Common Share -
Diluted $0.27 $0.06
Weighted Average Shares Outstanding
(in millions) -Diluted 1,068.8 1,063.6
(1) Reference to "pro forma" figures
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) $160 million of
integration-related expenses and
no special items for the second
quarter of 2018 and (ii) $40
million of integration-related
expenses and $108 million of
special items for the second
quarter of 2017.
(4) Excludes (i) integration-related
capital expenditures of $16
million in the second quarter of
2018 and (ii) special item-
related capital expenditures of $9
million in the second quarter of
2017.
(5) Excludes cash paid (i) for
integration-related expenses of
$108 million for the second
quarter of 2018 and (ii) for
acquisition-related expenses of
$14 million for the second
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 negatively affected total revenue in the second quarter 2018 by approximately $11 million, with a $27 million negative effect on Consumer revenue and an overall $16 million positive effect on Business revenue. Within Business, the revenue recognition standard had a benefit of approximately $14 million to the Medium and Small Business unit and approximately $4 million to the International and Global Accounts business unit. The Enterprise and the Wholesale and Indirect business units were affected minimally.
Second Pro Forma(2) Percent
Quarter Change
Metric 2018(1) Second
Quarter
($ in millions) 2017
-------------- ----
By Business Unit
Medium and Small
Business $884 $893 (1%)
Enterprise $1,295 $1,296 --
International and
Global Accounts $903 $911 (1%)
Wholesale and
Indirect $1,283 $1,319 (3%)
Consumer $1,352 $1,436 (6%)
Regulatory $185 $185 --
Total Revenue $5,902 $6,040 (2%)
By Service Type(3)
IP and Data
Services $1,833 $1,795 2%
Transport and
Infrastructure $2,064 $2,103 (2%)
Voice and
Collaboration $1,658 $1,803 (8%)
IT and Managed
Services $162 $154 5%
Regulatory $185 $185 --
Total Revenue $5,902 $6,040 (2%)
(1) Second Quarter 2018 revenue includes
the effects of Revenue Recognition
Standard ASC 606.
(2) Reference to "pro forma" figures
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.
(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 $919 million in the second quarter 2018, compared to $102 million in the second quarter 2017 on a pro forma basis.
As of June 30, 2018, CenturyLink had cash and cash equivalents of $700 million.
For the year-to-date, the company has contributed a total of $500 million to the pension plan. During the second quarter 2018, the company received a tax refund of $314 million and made its previously planned $100 million contribution to the pension plan. Following the close of the quarter, the company received an additional tax refund of $392 million and made a $400 million additional pension plan contribution.
Integration Synergies and Expenses
CenturyLink exited the second quarter 2018 with approximately $675 million of annualized run-rate Adjusted EBITDA synergies, related to the Level 3 acquisition, compared to $215 million as of the end of the first quarter 2018.
Integration-related expenses and special items in the second quarter 2018 were $162 million, of which $160 million impacted Adjusted EBITDA and $108 million impacted Free Cash Flow. As of the end of the second quarter 2018, CenturyLink incurred a total of approximately $395 million in Level 3 integration-related expenses.
2018 Business Outlook
"With our strong synergy attainment in the first half of 2018 along with our continued focus on profitable revenue growth, we are increasing our outlook for full year 2018 Adjusted EBITDA and Free Cash Flow," said Sunit Patel, CenturyLink's executive vice president and chief financial officer.
"We now expect full year 2018 Adjusted EBITDA of $9.00 to $9.15 billion, compared to our previous outlook of $8.75 to $8.95 billion. In addition, we increased our Free Cash Flow outlook to $3.60 to $3.80 billion from $3.15 to $3.35 billion."
The company has also updated full year 2018 outlook measures for Free Cash Flow after Dividends and for the Full Year Effective Tax Rate.
2018
Metric(1),
(2) Updated Outlook Previous Outlook
----------- --------------- ----------------
Adjusted
EBITDA $9.00 to $9.15 billion $8.75 to $8.95 billion
Free
Cash
Flow $3.60 to $3.80 billion $3.15 to $3.35 billion
Dividends(3) $2.30 billion $2.30 billion
Free
Cash
Flow
after
Dividends $1.30 billion to $1.50 billion $850 million to $1.05 billion
GAAP
Interest
Expense $2.25 billion $2.25 billion
Cash
Interest $2.10 billion $2.10 billion
Capital
Expenditures ~16% of Revenue ~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% ~25%
(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 Aug. 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 June 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.
Investor Call
CenturyLink's management will host a conference call at 5:00 p.m. ET today, August 8, 2018. The conference call will be streamed live over CenturyLink's website at ir.centurylink.com. Additional information regarding second 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 August 8, 2018, and ending November 6, 2018, 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 21892066. A webcast replay of the call will also be available on our website beginning at 7:00 p.m. ET on August 8, 2018 and ending November 6, 2018 at 6:00 p.m. ET.
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.
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, 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 potential 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-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.
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 both GAAP and Non-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. 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.
CenturyLink, Inc.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(UNAUDITED)
($ in millions, except per share amounts; shares in thousands)
Three months ended June 30, Increase / Six months ended June 30, Increase /
(decrease) (decrease)
-----------
2018 2017 2018 2017
---- ---- ---- ----
OPERATING REVENUES $5,902 4,090 44% $11,847 8,299 43%
------ ----- ------- -----
OPERATING EXPENSES
Cost of services and products 2,730 1,890 44% 5,533 3,778 46%
Selling, general and administrative 1,115 884 26% 2,224 1,694 31%
Depreciation and amortization 1,290 949 36% 2,573 1,829 41%
Total operating expenses 5,135 3,723 38% 10,330 7,301 41%
OPERATING INCOME 767 367 109% 1,517 998 52%
OTHER (EXPENSE) INCOME
Interest expense (546) (320) 71% (1,081) (638) 69%
Other income (expense), net 16 (7) nm 37 (13) nm
Income tax benefit (expense) 55 (23) nm (66) (167) (60)%
NET INCOME $292 17 nm $407 180 126%
==== === ==== ===
BASIC EARNINGS PER SHARE $0.27 0.03 nm $0.38 0.33 15%
DILUTED EARNINGS PER SHARE $0.27 0.03 nm $0.38 0.33 15%
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,064,711 541,361 97% 1,064,663 540,909 97%
Diluted 1,068,819 542,151 97% 1,068,414 541,836 97%
DIVIDENDS PER COMMON SHARE(1) $0.54 0.54 - % $1.08 1.08 - %
Add back: integration-related
expenses and special items(2) (10) 114 nm 137 145 (6)%
NET INCOME EXCLUDING INTEGRATION-
RELATED EXPENSES AND SPECIAL ITEMS $282 131 115% $544 325 67%
==== === ==== ===
DILUTED EARNINGS PER SHARE EXCLUDING
INTEGRATION-RELATED EXPENSES AND
SPECIAL ITEMS $0.26 0.24 $0.51 0.60
(1) Dividends per common share based on actuals previously reported.
(2) Net of income tax effect. Refer to Non-GAAP Special Items for detail of special items included.
nm - Percentages greater than 200% and comparisons between positive and negative values are considered not meaningful.
CenturyLink, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2018 AND DECEMBER 31, 2017
(UNAUDITED)
($ in millions)
June 30, 2018 December 31,
2017
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $700 551
Restricted cash 5 5
Other current assets 3,746 3,638
Total current assets 4,451 4,194
----- -----
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 52,366 51,204
Accumulated depreciation (25,872) (24,352)
Net property, plant and
equipment 26,494 26,852
------ ------
GOODWILL AND OTHER ASSETS
Goodwill 30,715 30,475
Restricted cash 27 31
Other, net 12,659 14,059
------
Total goodwill and other assets 43,401 44,565
------ ------
TOTAL ASSETS $74,346 75,611
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-
term debt $437 443
Other current liabilities 4,084 4,414
----- -----
Total current liabilities 4,521 4,857
----- -----
LONG-TERM DEBT 36,878 37,283
DEFERRED CREDITS AND OTHER
LIABILITIES 9,958 9,980
STOCKHOLDERS' EQUITY 22,989 23,491
------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $74,346 75,611
======= ======
CenturyLink, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(UNAUDITED)
($ in millions)
Six months ended
June 30, 2018 June 30,
2017 *
------------- --------
OPERATING ACTIVITIES
Net income $407 180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,573 1,829
Deferred income taxes 400 (126)
Loss on the sale of data centers and colocation business - 119
Impairment of assets 28 11
Provision for uncollectible accounts 83 78
Share-based compensation 95 43
Changes in current assets and liabilities, net (561) (318)
Retirement benefits (195) (56)
Changes in other noncurrent assets and liabilities, net 400 (92)
Other, net 19 74
Net cash provided by operating activities 3,249 1,742
----- -----
INVESTING ACTIVITIES
Capital expenditures (1,576) (1,610)
Proceeds from the sale of data centers and colocation business, less cash sold - 1,473
Proceeds from sale of property, plant and equipment and other assets 125 48
Other investing, net (61) (5)
--- ---
Net cash used in investing activities (1,512) (94)
------ ---
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 130 6,608
Proceeds from financing obligation - 378
Payments of long-term debt (123) (1,530)
Net payments on revolving line of credit (405) (370)
Dividends paid (1,156) (590)
Other financing, net (36) (11)
--- ---
Net cash (used in) provided by financing activities (1,590) 4,485
Effect of exchange rates on cash, cash equivalents, restricted cash and securities (2) -
--- ---
Net increase in cash, cash equivalents, restricted cash and securities 145 6,133
Cash, cash equivalents, restricted cash, and securities at beginning of period * 587 224
--- ---
Cash, cash equivalents restricted cash, and securities at end of period * $732 6,357
==== =====
* 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.
CenturyLink, Inc.
OPERATING METRICS
(UNAUDITED)
(In thousands)
June 30, March 31, June 30,
2018 2018 2017
--------- ---------- ---------
Operating Metrics
Consumer broadband
subscribers 4,906 4,986 5,226
CenturyLink's methodology for counting broadband subscribers may not be comparable to those of other companies.
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 impairment charges and non-cash stock compensation expense because of the non-cash nature of these items. 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 impairment charges, 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.
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.
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 2Q18 2Q17 2Q17 2Q18 2Q17
------------------ ---- ---- ---- ---- ----
Loss on sale of
data centers and
colocation
business $ - 108 108 - 119
OTT/Stream
impairment of
content
commitment and
hardware,
software, and
internal labor
(1) - - - 42 -
--- --- --- --- ---
Total special
items impacting
adjusted EBITDA - 108 108 42 119
Plus: integration-
related expenses
impacting
adjusted EBITDA
(2) 160 18 40 225 28
Total integration-
related expenses
and special items
impacting
adjusted EBITDA $160 126 148 267 147
---- --- --- --- ---
Actual QTD Pro Forma Actual YTD
---------- ---------
Integration-
Related Expenses
and Special Items
Impacting Net
Income 2Q18 2Q17 2Q17 2Q18 2Q17
------------------ ---- ---- ---- ---- ----
Loss on sale of
data centers and
colocation
business $ - 108 108 - 119
OTT/Stream
impairment of
content
commitment and
hardware,
software, and
internal labor
(1) - - - 42 -
Additional
depreciation
expense for real
estate assets not
meeting the
requirement of
sale leaseback
accounting - 44 44 - 44
Total special
items impacting
net income - 152 152 42 163
Plus: integration-
related expenses
impacting net
income (2) 162 18 40 233 28
--- --- ---
Total integration-
related expenses
and special items
impacting net
income 162 170 192 275 191
--- --- --- --- ---
Income tax effect
of integration-
related expenses
and special items
(1) (42) (56) (73) (72) (46)
Tax benefit from
carryback losses (142) - - (142) -
Impact of tax
reform 12 - - 76 -
Total integration-
related expenses
and special items
impacting net
income, net of
tax $(10) 114 119 137 145
==== === === === ===
(1) Tax effect calculated using the annualized effective tax rate, excluding any non-recurring discrete items in place for each period, which was 38% for 2017, 26.4% for
Q1 2018, and 26.1% for Q2 2018. Tax effect was 38% for 2017, adjusted for tax benefits related to the sale of the data centers and colocation business.
(2) Includes $55 million of restructuring reserve impairment for Q2 2018.
CenturyLink, Inc.
Consolidated Statements of Income
(UNAUDITED)
($ in millions)
Three Months Ending June 30, 2017
Actual Predecessor Adjustments Pro Forma
Consolidated Level 3 Combined
CenturyLink Company (1)
------------- ------------ ----------- ------------
OPERATING REVENUES
Operating revenues $4,090 2,062 (60) (a) 6,092
Less: colocation sold to Cyxtera and
not retained - - (52) (52)
--- --- --- ---
Total operating revenues 4,090 2,062 (112) 6,040
----- ----- ---- -----
OPERATING EXPENSES
Cost of services and products 1,890 1,035 (57) (a) 2,868
Selling, general and administrative 884 367 - 1,251
Depreciation and amortization 949 307 57 (b) 1,313
Less estimated net costs of
colocation sold to Cyxtera and not
retained - - (25) (25)
--- --- --- ---
Total operating expenses 3,723 1,709 (25) 5,407
----- ----- --- -----
OPERATING INCOME 367 353 (87) 633
OTHER (EXPENSE) INCOME
Interest expense (320) (129) (76) (c) (525)
Other expense, net (7) (1) (2) (d) (10)
Income tax expense (23) (69) 63 (e) (29)
--- --- ---
NET INCOME $17 154 (102) 69
=== === ==== ===
DILUTED EARNINGS PER COMMON SHARE 0.06
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,063.6
Pro Forma Reconciliation for Non-GAAP Adjusted EBITDA
-----------------------------------------------------
Acquisition/integration related
expenses $18 22 - 40
Loss on sale of data centers and
colocation business 108 - - 108
Additional depreciation expense for
real estate assets not meeting the
requirement of sale leaseback
accounting 44 - - 44
Share-based compensation expense 22 39 - 61
(1) These pro forma figures have not
been prepared in conformity with SEC
rules governing the preparation of
pro forma financial data under
Regulation S-X.
(a) Adjustment reflects the elimination
of operating revenues and expenses
for existing commercial transactions
between CenturyLink and Level 3 and
elimination of Level 3 deferred
revenues.
(b) Depreciation expense decreased on
Level 3's property, plant and
equipment resulting from decreased
PP&E fair value. Increase in
amortization expense resulting from
increase intangible asset fair
value.
(c) Adjustments reflect the net increase
in interest expense resulting from
(i) interest on the new debt to
finance the combination and the
amortization of the related debt
issuance costs; (ii) the elimination
of Level 3's historical amortization
of debt discount and amortization of
debt issuance costs; and (iii) a
reduction in interest expense from
the accretion of the purchase
accounting associated with
reflecting Level 3's long-term debt
based on its estimated fair value.
The Q4 2017 adjustment also includes
the reclassification of Level 3
interest income from Interest
expense to Other income/(expense),
net.
(d) Adjustments reflect the removal of
CenturyLink's interest income earned
on funds held in escrow for the
purpose of the acquisition of Level
3; the Q4 2017 adjustment includes
the reclassification of Level 3
interest income from Interest
expense to Other income/(expense),
net.
(e) Income tax effect of Pro Forma
adjustments was based on the
effective tax rate of 38%.
CenturyLink, Inc.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
($ in millions)
Three Months Ending June 30, 2017
Actual Predecessor Pro Forma
Consolidated Level 3 Combined
CenturyLink Company(1)
------------- ------------ ----------
OPERATING ACTIVITIES
Net cash provided
by operating
activities $685 561 1,246
---- --- -----
INVESTING ACTIVITIES
Capital
expenditures (830) (328) (1,158)
Cash paid for
acquisitions (5) - (5)
Proceeds from the
sale of data
centers and
colocation
business, less
cash sold 1,473 - 1,473
Proceeds from sale
of property, plant
and equipment and
other 3 - 3
Purchase of
marketable
securities - (1,127) (1,127)
Other, net (3) - (3)
Net cash (used in)
provided by
investing
activities 638 (1,455) (817)
--- ------ ----
FINANCING ACTIVITIES
Net proceeds from
the issuance of
long-term debt 6,608 - 6,608
Proceeds from
financing
obligation 378 - 378
Payments of
financing
obligations (4) - (4)
Payments of long-
term debt (1,495) (2) (1,497)
Net proceeds on
credit facility
and revolving line
of credit (375) - (375)
Dividends paid (294) - (294)
Proceeds from the
issuance of stock 1 - 1
Shares withheld to
satisfy tax
withholdings (1) - (1)
--- --- ---
Net cash provided
by (used in)
financing
activities 4,818 (2) 4,816
Effect of exchange
rates on cash,
cash equivalents,
restricted cash
and securities - 1 1
--- --- ---
Net (decrease)
increase in cash,
cash equivalents,
restricted cash
and securities 6,141 (895) 5,246
Cash, cash
equivalents,
restricted cash
and securities at
beginning of
period 216 1,985 2,201
Cash, cash
equivalents,
restricted cash
and securities at
end of period $6,357 1,090 7,447
====== ===== =====
Pro Forma Reconciliation for Non-GAAP Cash Flow:
------------------------------------------------
Cash interest paid $369 129 498
Interest income (3) (3) (6)
Cash integration-
related expenses
(3) 11 3 14
Integration-
related capital
expenditures - 6 6
Special item-
related capital
expenditures(2) 3 - 3
(1) The Pro Forma statement of cash
flows was derived by summing the cash
flows of legacy CenturyLink and legacy
Level 3. There were no Pro Forma
adjustments made related to the sale
of the legacy CenturyLink data centers
and colocation business.
(2) Capital expenditures related to
colocation business are considered
special items.
(3) Consolidated CenturyLink cash
integration-related expenses in the
three months ended December 31, 2017
includes the Citi transaction fee paid
in cash related to the acquisition.
CenturyLink, Inc.
Non-GAAP Cash Flow Reconciliation
(UNAUDITED)
($ in millions)
Actual Pro Forma
------ ---------
2Q18 2Q17
----
Net cash
provided by
operating
activities $1,582 1,246
Capital
expenditures (771) (1,158)
---- ------
Free cash flow 811 88
Cash interest
paid 570 498
Interest income (4) (6)
Unlevered cash
flow $1,377 580
====== ===
Free cash flow $811 88
Add back: cash
integration-
related
expenses 99 14
Add back:
special items 9 -
Free cash flow
excluding cash
integration-
related
expenses and
special items $919 102
==== ===
Unlevered cash
flow $1,377 580
Add back: cash
integration-
related
expenses 99 14
Add back:
special items 9 -
--- ---
Unlevered cash
flow excluding
cash
integration-
related
expenses and
special items $1,485 594
====== ===
Capital
expenditures $(771) (1,158)
Less:
integration-
related
capital
expenditures 16 6
Less: special
item related
capital
expenditures - 3
--- ---
Capital
expenditures,
excluding
integration-
related
capital
expenditures
and special
items $(755) (1,149)
===== ======
CenturyLink, Inc.
Adjusted EBITDA Non-GAAP Reconciliation
(UNAUDITED)
($ in millions)
Actual Pro Forma
------ ---------
2Q18 2Q17
---- ----
Net
income $292 69
Income
tax
(benefit)
expense (55) 29
Total
other
expense 530 535
Depreciation
and
amortization
expense 1,290 1,313
Share-
based
compensation
expenses 54 61
Adjusted
EBITDA $2,111 2,007
====== =====
Add
back:
integration-
related
expenses
(1) $160 40
Add
back:
special
items
(2) - 108
--- ---
Adjusted
EBITDA
excluding
integration-
related
expenses
and
special
items $2,271 2,155
====== =====
Total
revenues $5,902 6,040
Adjusted
EBITDA
margin 35.8% 33.2%
Adjusted
EBITDA
excluding
integration-
related
expenses
and
special
items
margin 38.5% 35.7%
(1) In the second quarter of 2018, integration-related expenses include
$160 million of expenses that impact adjusted EBITDA and $2 million of
additional expenses that impact net income. In the first quarter of
2018, integration-related expenses include $65 million of expenses that
impact adjusted EBITDA and $6 million of additional expenses that impact
net income.
(2) Refer to Non-GAAP Special Items table for details of the
integration-related expenses and special items included above.
Outlook
To enhance the information in our outlook with respect to non-GAAP metrics, we are providing a range for certain GAAP measures that are components of the reconciliation of the non-GAAP metrics. The provision of these ranges is in no way meant to indicate that CenturyLink is explicitly or implicitly providing an outlook on those GAAP components of the reconciliation. In order to reconcile the non-GAAP financial metric to GAAP, CenturyLink has to use ranges for the GAAP components that arithmetically add up to the non-GAAP financial metric. While CenturyLink feels reasonably comfortable about the outlook for its non-GAAP financial metrics, it fully expects that the ranges used for the GAAP components will vary from actual results. We will consider our outlook of non-GAAP financial metrics to be accurate if the specific non-GAAP metric is met or exceeded, even if the GAAP components of the reconciliation are different from those provided in an earlier reconciliation.
CenturyLink, Inc.
2018 OUTLOOK
(UNAUDITED)
($ in millions)
Adjusted EBITDA Outlook
Twelve Months Ended December 31, 2018
Range
Low High
--- ----
Net income $690 1,150
Income tax expense 150 260
Total other expense 2,200 2,100
Depreciation and
amortization expense 5,300 5,100
Non-cash compensation
expense 210 190
Integration-related
expenses 450 350
---
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 $7,350 7,450
Capital expenditures,
excluding: integration
projects (3,750) (3,650)
Free cash flow $3,600 3,800
====== =====
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SOURCE CenturyLink, Inc.
