CenturyLink Reports Third Quarter 2018 Results
MONROE, La., Nov. 8, 2018 /PRNewswire/ -- 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, $0.30.
Financial Results
Pro Forma (1)
Metric Third Quarter Third Quarter
($ 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 38.3 35.0
Margin (2) % %
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 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 $
860 896 (4)
Small
Business %
Enterprise 1,278 1,311 (3)
%
International 892 918 (3)
and Global
Accounts %
Wholesale 1,255 1,302 (4)
and
Indirect %
Consumer 1,355 1,420 (5)
%
Regulatory 178 186 (4)
%
Total $
5,818 6,033 (4)
Revenue
%
By Service
Type (3)
IP and Data
Services $
1,796 1,801 %
Transport 2,051 2,091 (2)
and
Infrastructure %
Voice and 1,640 1,790 (8)
Collaboration
%
IT and 153 165 (7)
Managed
Services %
Regulatory 178 186 (4)
%
Total $
5,818 6,033 (4)
Revenue
%
(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.
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.
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.
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, 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-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 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.
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 Increase / Nine months ended Increase /
September 30, (decrease) September 30, (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 967 710 36 3,191 2,404 33
administrative % %
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 55 22 150
expenses and special items(2) %
% 192 167 15
NET INCOME EXCLUDING INTEGRATION- $
327 114 187
RELATED EXPENSES AND SPECIAL ITEMS %
% $
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.
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
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.
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.
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.
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 Actual YTD
Forma
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 Actual YTD
Forma
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 $55 million of
restructuring reserve
impairment for Q2 2018.
CenturyLink, Inc.
Pro Forma Consolidated Statements of Income
(UNAUDITED)
($ in millions)
Three Months Ended September 30, 2017
Actual Predecessor Adjustments Pro Forma
Consolidated Level 3 Combined
CenturyLink 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
(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.
CenturyLink, Inc.
Pro Forma Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
($ in millions)
Three Months Ended September 30, 2017
Actual Consolidated Predecessor Pro Forma Combined
CenturyLink Level 3 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.
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)
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 38.3 35.0
margin
%
%
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 $2
million of additional
expenses that impact net
income.
(2) Refer to Non-GAAP Special
Items table for details of
the integration-related
expenses and special items
included above.
Outlook
To enhance the information in our outlook with respect to non-GAAP metrics, we are providing a range for certain GAAP measures that are components of the reconciliation of the non-GAAP metrics. The provision of these ranges is in no way meant to indicate that CenturyLink is explicitly or implicitly providing an outlook on those GAAP components of the reconciliation. In order to reconcile the non-GAAP financial metric to GAAP, CenturyLink has to use ranges for the GAAP components that arithmetically add up to the non-GAAP financial metric. While CenturyLink feels reasonably comfortable about the outlook for its non-GAAP financial metrics, it fully expects that the ranges used for the GAAP components will vary from actual results. We will consider our outlook of non-GAAP financial metrics to be accurate if the specific non-GAAP metric is met or exceeded, even if the GAAP components of the reconciliation are different from those provided in an earlier reconciliation.
CenturyLink, Inc.
2018 OUTLOOK (1)
(UNAUDITED)
($ 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.
View original content to download multimedia:http://www.prnewswire.com/news-releases/centurylink-reports-third-quarter-2018-results-300746955.html
SOURCE CenturyLink, Inc.
