CenturyLink Reports Second Quarter 2012 Earnings
CenturyLink Reports Second Quarter 2012 Earnings
Achieved operating revenues of $4.61 billion, exceeding guidance
Improved annual rate of revenue decline to 1.2% in second quarter 2012
compared to 3.8% and 2.7% annual declines in pro forma[1]second quarter 2011
and first quarter 2012, respectively
Achieved Adjusted Diluted EPS1, 2 of $0.65 compared to $0.69 in pro forma
second quarter 2011
Generated Free Cash Flow[2] of $779 million, excluding special items
PR Newswire
MONROE, La., Aug. 8, 2012
MONROE, La., Aug. 8, 2012 /PRNewswire/ -- CenturyLink, Inc. (NYSE: CTL) today
reported strong operating revenues, operating cash flow and free cash flow for
second quarter 2012.
(Logo: http://photos.prnewswire.com/prnh/20090602/DA26511LOGO)
"CenturyLink continued to generate solid results in the second quarter,
maintaining our top-line revenue trend improvement and strong cash flow
generation," said Glen F. Post, III, chief executive officer and president.
"We successfully completed our operating group restructuring during the second
quarter without disrupting the positive sales momentum across our business and
believe that CenturyLink is even better positioned to serve our enterprise
customers across the United States and internationally.
"We experienced continued broadband and Prism™ TV subscriber growth in the
second quarter, in spite of typical lower seasonal demand, while continuing to
improve customer retention as our annual access line loss rate of decline
slowed to 6.1% this quarter from 7.4% in the pro forma year-ago period. We
generated 5.8% sequential and 7.9% year-over-year growth in colocation and
managed hosting revenues and grew strategic data revenues across our Regional
Markets Group (RMG) and Enterprise Markets Group (EMG).
"As we enter the second half of 2012, we remain focused on investing in
broadband expansion and enhancement, Prism™ TV, fiber-to-the-tower and managed
hosting and cloud computing services in order to maximize the opportunities
for future revenue growth," said Post.
Second Quarter Highlights
CenturyLink continued to improve its top-line revenue trend, deliver solid
subscriber results, invest in key strategic initiatives and meet its Qwest and
Savvis synergy targets in second quarter 2012. Among the quarter's highlights:
o Improved year-over-year actual-to-pro forma revenue trend to a 1.2% rate
of decline (1.7% rate of decline excluding data integration revenue),
compared to a 3.8% decline in pro forma second quarter 2011.
o Achieved free cash flow of $779 million, excluding special items and
integration-related capital expenditures.
o Reduced access line loss by 22% as the line loss trend improved during
second quarter 2012 to a 6.1% annual decline compared to a 7.4% annual
decline in pro forma second quarter 2011.
o Added more than 18,000 high-speed Internet customers reflecting expected
second quarter seasonality; ended second quarter 2012 with 5.76 million
subscribers[3].
o Expanded the number of Prism™ TV subscribers by 11% in second quarter 2012
from first quarter 2012 and increased penetration of available homes in
our markets to more than 9%.
o Generated sequential recurring revenue growth in our Enterprise Markets
Group's Network Services and Data Hosting Services, along with strong
bookings in both operating groups.
o As of June 30, 2012, we had more than 50 data centers[4] in North America,
Europe and Asia, with total sellable floor space of approximately 1.4
million square feet.
Consolidated Second Quarter Financial Results
Operating revenues for second quarter 2012 were $4.61 billion compared to
$4.41 billion in second quarter 2011. This increase was primarily due to $278
million of revenue contributions from the Savvis acquisition completed July
15, 2011, increases in strategic revenues, primarily driven by business
customer demand for high-bandwidth data services, growth in high-speed
Internet and Prism™ TV subscribers and higher data integration revenues. These
increases were more than offset by declines in legacy services revenues
primarily due to the impact of access line losses and lower access revenues.
Second quarter 2012 operating revenues compared to pro forma second quarter
2011 operating revenues declined 1.2% from $4.67 billion a year ago to $4.61
billion this quarter, due to the decline in legacy revenues more than
offsetting the increase in strategic revenues and data integration revenues as
discussed above.
Operating expenses, excluding special items, increased to $3.92 billion from
$3.67 billion in second quarter 2011, primarily due to $292 million of
operating costs associated with the Savvis acquisition and higher data
integration costs. These increases were partially offset by lower
personnel-related costs, along with lower than anticipated depreciation and
amortization expense as a result of one-time true-up adjustments.
Operating expenses, excluding special items, decreased to $3.92 billion in
second quarter 2012 from pro forma second quarter 2011 operating expenses of
$3.94 billion.
Operating cash flow (as defined in our supplemental schedules), excluding
special items, decreased to $1.90 billion from $1.92 billion in second quarter
2011, primarily due to the decline in legacy revenues, which was partially
offset by the Savvis acquisition contribution to operating cash flow. For
second quarter 2012, CenturyLink achieved an operating cash flow margin,
excluding special items, of 41.2% versus 43.5% in second quarter 2011,
reflecting the impact that the lower margins of Savvis and the legacy revenues
decline had on CenturyLink's consolidated operating cash flow margin in the
second quarter 2012.
Second quarter 2012 operating cash flow of $1.90 billion, excluding special
items, declined 4.0% from pro forma $1.98 billion in the second quarter 2011,
primarily due to the decline in legacy revenues. Operating cash flow margin,
excluding special items, was 41.2% in second quarter 2012 compared to 42.4% in
pro forma second quarter 2011.
Adjusted Net Income and Adjusted Diluted Earnings Per Share (Adjusted Diluted
EPS)
Adjusted Net Income and Adjusted Diluted EPS exclude the after-tax impact of
special items, the non-cash after-tax impact of the amortization of
intangibles, and the non-cash after-tax impact to interest expense of the
assignment of fair value to debt outstanding related to the Embarq, Qwest and
Savvis transactions.
Excluding the items outlined above, CenturyLink's Adjusted Net Income for
second quarter 2012 was $403 million compared to pro forma Adjusted Net Income
of $428 million in second quarter 2011. Second quarter 2012 Adjusted Diluted
EPS was $0.65 compared to pro forma Adjusted Diluted EPS of $0.69 in the
year-ago period. See the attached schedules for additional information.
GAAP Results – Second Quarter
Under generally accepted accounting principles (GAAP), net income for second
quarter 2012 was $74 million compared to $115 million for second quarter 2011,
and diluted earnings per share for second quarter 2012 was $0.12 compared to
$0.19 for second quarter 2011. Second quarter 2012 net income and diluted
earnings per share reflect net after-tax impacts of $123 million ($0.20 per
share) related to losses on the early retirement of debt, $7 million ($0.01
per share) related to severance, integration and retention costs associated
with the Qwest and Savvis acquisitions and $14 million ($0.02 per share)
related to severance associated with recent expense reduction initiatives.
Second quarter 2011 net income and diluted earnings per share reflect
after-tax integration, severance, and retention costs associated with the
Embarq, Qwest and Savvis acquisitions of $184 million ($0.31 per share),
partially offset by a favorable settlement of an operating tax issue of $11
million ($0.02 per share) and the benefit from a reduction of an NOL valuation
allowance of $14 million ($0.02 per share).
Segment Results / Highlights
The following segment results reflect the operating group restructuring we
announced in late March and outlined in our first quarter 2012 earnings
release. The attached Supplemental Pro Forma Segment Data schedule provides
selected financial information for the four segments discussed below, along
with restated historical quarterly segment financial information retroactive
to first quarter 2011.
Regional Markets Group (RMG)
RMG continued to improve revenue and access line trends in local markets by
leveraging CenturyLink's local operating model.
o Strategic revenues for RMG were $894 million in the quarter, a 5.8%
increase over pro forma second quarter 2011. Excluding the impact of
private line services, the adjusted growth rate was more than 7%.
o Generated $2.48 billion in total revenues, a decrease of 2.6% from pro
forma second quarter 2011, reflecting the continued decline in legacy
services.
o Approximately 50% of new Prism™ TV subscribers added in the past twelve
months have been new customers to CenturyLink.
o Ended the second quarter with over 94,000 Prism™ ^ TV subscribers in
service.
Wholesale Markets Group (WMG)
WMG generated modest strategic revenue growth as increases in fiber-based
revenue more than offset the expected decline in copper-based revenue as a
result of the continued expansion of carrier bandwidth consumption.
o Strategic revenues for WMG were $572 million in the quarter, a 2.1%
increase over pro forma second quarter 2011, driven by wireless carrier
bandwidth expansion and Ethernet sales.
o Generated $944 million in total revenues, a decrease of 4.1% from pro
forma second quarter 2011, reflecting the continued decline in legacy
services primarily driven by lower switched access minutes of use
associated with access line loss and displacement of access minutes by
alternative forms of communication such as email, social media, texting,
wireless and VoIP.
o Completed approximately 1,350 fiber builds during the second quarter and
over 2,000 year-to-date, ending the quarter with about 12,150
fiber-connected towers. We currently remain on track to complete 4,000 to
5,000 fiber builds in 2012.
Enterprise Markets Group (EMG) – Network Services
EMG – Network Services achieved solid growth in recurring revenue sales in the
second quarter.
o Strategic revenues for EMG were $333 million in the quarter, a 2.8%
increase over pro forma second quarter 2011 driven by strength in high
bandwidth services. Excluding the impact of private line services, the
adjusted growth rate was approximately 7%.
o Generated $648 million in total revenues, an increase of 2.0% from pro
forma second quarter 2011, reflecting growth in high-bandwidth broadband
offerings and data integration revenues partially offset by declines in
legacy services revenues.
o Bookings in second quarter 2012 were higher than anticipated driven by
strategic services growth in MPLS[5] and Ethernet.
Enterprise Markets Group (EMG) – Data Hosting Services
EMG – Data Hosting (primarily Savvis operations) improved revenue growth in
managed hosting (including cloud), and colocation with strength in traditional
managed hosting solutions and financials and consumer brands verticals.
o Operating revenues were $277 million in the quarter, a 6.5% increase from
pro forma second quarter 2011. Colocation revenues were $112 million, a
4.7% increase from pro forma second quarter 2011 and managed hosting
revenues of $107 million grew 11.5% over the same period.
o Announced 2012 planned data center expansions in seven markets, of which
four were online in the second quarter.
Integration Update
During second quarter 2012, CenturyLink incurred pre-tax transaction,
integration, severance and retention costs of $12 million ($7 million net
after-tax) related to the Qwest and Savvis acquisitions.
CenturyLink ended second quarter 2012 with an annualized operating expense
synergy run rate of approximately $380 million from the Qwest acquisition. We
currently remain on track to exit 2012 with approximately $465 million in
annual run-rate synergies related to the Qwest acquisition.
Guidance – Third Quarter 2012 and Full Year 2012
CenturyLink expects third quarter 2012 operating revenues to be negatively
impacted by the decline in access revenues as a result of the implementation
of the Federal Communications Commission's USF/ICC Transformation Order
(Order) and the reduction effective July 1, 2012, in the monthly universal
service contribution rate assessed to end users, which will be partially
offset by the implementation of Access Recovery Charges in accordance with the
Order. Operating expenses are also anticipated to increase in third quarter
2012 compared to second quarter 2012 due to the normal seasonality of outside
plant maintenance and utility costs, data center expansion operating costs and
the return of depreciation and amortization expense to expected levels, which
will be partially offset by other operating efficiencies.
The Company expects fourth quarter 2012 operating cash flow to increase
compared to third quarter 2012 due to anticipated continued growth in
strategic revenues and lower outside plant maintenance and utility costs.
Third Quarter 2012
Operating Revenue $4.54 to $4.59 billion
Operating Cash Flow (excl special $1.82 to $1.86 billion
items)
Adjusted Diluted EPS (excl special $0.54 to $0.59
items)
Full Year 2012 Previous Guidance Current Guidance
Operating Revenue $18.2 to $18.4 $18.3 to $18.4
billion billion
Operating Cash Flow (excl special $7.45 to $7.65 $7.5 to $7.65
items) billion billion
Adjusted Diluted EPS (excl special $2.35 to $2.55 $2.45 to $2.55
items)
Capital Expenditures[6] $2.6 to $2.8 billion $2.7 to $2.8 billion
Free Cash Flow (excl special items) $3.2 to $3.4 billion $3.25 to $3.4
billion
All 2012 outlook figures included in this release exclude the effects of
special items, future changes in regulation, integration expenses associated
with the Qwest and Savvis acquisitions, any changes in operating or capital
plans and any future mergers, acquisitions, divestitures, buybacks or other
similar business transactions. In addition, all outlook figures are based on
acquisition-related fair value estimates for Savvis that remain subject to
finalization. All assets and liabilities of Savvis have been assigned a fair
value pursuant to business combination accounting rules. Such fair value
assignments for Savvis have not been finalized and are subject to further
adjustment before becoming final.
Investor Call
As previously announced, CenturyLink's management will host a conference call
at 4:00 p.m. Central Time today, August 8, 2012. Interested parties can access
the call by dialing 866-802-4328. The call will be accessible for replay
through August 15, 2012, by calling 888-266-2081 and entering the access code
1584532. Investors can also listen to CenturyLink's earnings conference call
and replay by accessing the Investor Relations portion of the Company's Web
site at www.centurylink.com through August 30, 2012.
Reconciliation to GAAP
This release includes certain non-GAAP financial measures, including but not
limited to operating cash flow, free cash flow, adjustments to GAAP measures
to exclude the effect of special items and certain pro forma combined
operating results. 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 financial
measures that may be discussed during the earnings call described below will
be available in the Investor Relations portion of the Company's Web site at
www.centurylink.com. Investors are urged to consider these non-GAAP measures
in addition to, and not in substitution for, measures prepared in accordance
with GAAP.
About CenturyLink
CenturyLink is the third largest telecommunications company in the United
States and is recognized as a leader in the network services market by
technology industry analyst firms. The company is a global leader in cloud
infrastructure and hosted IT solutions for enterprise customers. CenturyLink
provides data, voice and managed services in local, national and select
international markets through its high-quality advanced fiber optic network
and multiple data centers for businesses and consumers. The company also
offers advanced entertainment services under the CenturyLink™ Prism™ TV and
DIRECTV brands. Headquartered in Monroe, La., CenturyLink is an S&P 500
company and is included among the Fortune 500 list of America's largest
corporations. For more information, visit www.centurylink.com.
Forward Looking Statements
Certain non-historical statements made in this release and future oral or
written statements or press releases by us or our management are intended to
be forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on
current expectations only, and are subject to a number of risks, uncertainties
and assumptions, many of which are beyond our control. Actual events and
results may differ materially from those anticipated, estimated or projected
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 timing, success and overall effects of competition
from a wide variety of competitive providers; the risks inherent in rapid
technological change; the effects of ongoing changes in the regulation of the
communications industry (including recent reforms and changes by the Federal
Communications Commission regarding intercarrier compensation and the
Universal Service Fund, among other things); our ability to effectively adjust
to changes in the communications industry and changes in the composition of
our markets and product mix caused by our recent acquisitions of Savvis, Qwest
and Embarq; our ability to successfully integrate the operations of Savvis and
Qwest into our operations, including the possibility that the anticipated
benefits from these acquisitions cannot be fully realized in a timely manner
or at all, or that integrating the acquired operations will be more difficult,
disruptive or costly than anticipated; our ability to use the net operating
loss carryovers of Qwest in projected amounts; the effects of changes in our
assignment of the Savvis purchase price to identifiable assets or liabilities
after the date hereof; our ability to effectively manage our expansion
opportunities, including retaining and hiring key personnel; possible changes
in the demand for, or pricing of, our products and services; our ability to
successfully introduce new product or service offerings on a timely and
cost-effective basis; our continued access to credit markets on favorable
terms; our ability to collect our receivables from financially troubled
communications companies; any adverse developments in legal proceedings
involving us; our ability to pay a $2.90 per common share dividend annually,
which may be affected by changes in our cash requirements, capital spending
plans, cash flows or financial position; unanticipated increases or other
changes in our future cash requirements, whether caused by unanticipated
increases in capital expenditures, increases in pension funding requirements
or otherwise; our ability to successfully negotiate collective bargaining
agreements on reasonable terms without work stoppages; the effects of adverse
weather; other risks referenced from time to time in our filings with the
Securities and Exchange Commission (the "SEC"); and the effects of more
general factors such as changes in interest rates, in tax rates, in accounting
policies or practices, in operating, medical, pension or administrative costs,
in general market, labor or economic conditions, or in legislation, regulation
or public policy. These and other uncertainties related to our business, our
July 2011 acquisition of Savvis, our April 2011 acquisition of Qwest and our
July 2009 acquisition of Embarq are described in greater detail in Item 1A to
our Form 10-K for the year ended December 31, 2011, as updated and
supplemented by our subsequent SEC reports. You should be aware that new
factors may emerge from time to time and it is not possible for us to identify
all such factors nor can we predict the impact of each such factor on the
business or the extent to which any one or more factors may cause actual
results to differ from those reflected in any forward-looking statements. You
are further cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this release. We undertake no
obligation to update any of our forward-looking statements for any reason.
[1] See the attached pro forma statements of income for more information about
our pro forma results discussed in this release.
[2] See attachments for non-GAAP reconciliations.
[3] Effective this quarter, CenturyLink modified its high-speed Internet
reporting to include consumer, business and wholesale subscribers instead of
only consumer and small business subscribers.
[4] We define a "data center" as any facility where we market, sell and
deliver either colocation services or multi-tenant managed services, or both.
[5] Multiprotocol Label Switching
[6] Excludes approximately $80 million of integration-related capital
expenditures
CenturyLink, Inc.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED)
(Dollars in millions, except per share amounts; shares in thousands)
Three months ended June 30, 2012 Three months ended June 30, 2011
Increase
As As (decrease)
adjusted adjusted
Less excluding Less excluding Increase excluding
As special special As special special (decrease) special
reported items items reported items items as items
reported
OPERATING
REVENUES
Strategic $ 2,076 2,076 1,726 1,726 20.3% 20.3%
Legacy 2,100 2,100 2,280 2,280 (7.9%) (7.9%)
Data 170 170 152 152 11.8% 11.8%
integration
Other 266 266 248 248 7.3% 7.3%
4,612 - 4,612 4,406 - 4,406 4.7% 4.7%
OPERATING
EXPENSES
Cost of
services and 1,912 9 (1) 1,903 1,781 26 (4) 1,755 7.4% 8.4%
products
Selling,
general and 835 26 (1) 809 968 234 (4) 734 (13.7%) 10.2%
administrative
Depreciation
and 1,208 1,208 1,177 1,177 2.6% 2.6%
amortization
3,955 35 3,920 3,926 260 3,666 0.7% 6.9%
OPERATING 657 (35) 692 480 (260) 740 36.9% (6.5%)
INCOME
OTHER INCOME
(EXPENSE)
Interest (335) (335) (280) 5 (5) (285) 19.6% 17.5%
expense
Other income (199) (202) (2) 3 (14) (16) (6) 2 1,321.4% 50.0%
(expense)
Income tax (49) 93 (3) (142) (71) 111 (7) (182) (31.0%) (22.0%)
expense
NET INCOME $ 74 (144) 218 115 (160) 275 (35.7%) (20.7%)
BASIC EARNINGS $ 0.12 (0.23) 0.35 0.19 (0.27) 0.46 (36.8%) (23.9%)
PER SHARE
DILUTED
EARNINGS PER $ 0.12 (0.23) 0.35 0.19 (0.27) 0.46 (36.8%) (23.9%)
SHARE
AVERAGE SHARES
OUTSTANDING
Basic 619,887 619,887 598,884 598,884 3.5% 3.5%
Diluted 621,839 621,839 600,259 600,259 3.6% 3.6%
DIVIDENDS PER $ 0.725 0.725 0.725 0.725 - -
COMMON SHARE
SPECIAL ITEMS
Includes severance costs associated with recent reduction in force
initiatives ($23 million), integration, severance, and retention
(1) - costs associated with our acquisition of Qwest ($10 million) and
integration, severance, and retention costs associated with our
acquisition of Savvis ($2 million).
(2) - Loss associated with early retirement of debt.
(3) - Income tax benefit of Items (1) and (2).
Includes integration, severance, and retention costs associated with
our acquisition of Qwest, along with restructuring charges ($245
(4) - million); integration and severance costs associated with
our acquisition of Embarq ($25 million); transaction and other costs
associated with our acquisition of Savvis ($2 million); net of a
favorable settlement of an operating tax issue ($13 million).
(5) - Reflects the interest component of a favorable settlement of an
operating tax issue.
(6) - Expense associated with terminating a bridge credit facility related
to the Savvis acquisition.
(7) - Income tax benefit of Items (4) through (6) and a benefit from the
reduction of an NOL valuation allowance ($14 million).
CenturyLink, Inc.
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED)
(Dollars in millions, except per share amounts; shares in thousands)
Six months ended June 30, 2012 Six months ended June 30, 2011
Increase
As As (decrease)
adjusted adjusted
Less excluding Less excluding Increase excluding
As special special As special special (decrease) special
reported items items reported items items as items
reported
OPERATING
REVENUES
Strategic $ 4,132 4,132 2,265 2,265 82.4% 82.4%
Legacy 4,243 4,243 3,275 3,275 29.6% 29.6%
Data 315 315 183 183 72.1% 72.1%
integration
Other 532 532 379 379 40.4% 40.4%
9,222 - 9,222 6,102 - 6,102 51.1% 51.1%
OPERATING
EXPENSES
Cost of
services and 3,789 21 (1) 3,768 2,407 40 (4) 2,367 57.4% 59.2%
products
Selling,
general and 1,706 96 (1) 1,610 1,205 255 (4) 950 41.6% 69.5%
administrative
Depreciation
and 2,416 2,416 1,546 1,546 56.3% 56.3%
amortization
7,911 117 7,794 5,158 295 4,863 53.4% 60.3%
OPERATING 1,311 (117) 1,428 944 (295) 1,239 38.9% 15.3%
INCOME
OTHER INCOME
(EXPENSE)
Interest (678) (678) (408) 5 (5) (413) 66.2% 64.2%
expense
Other income (179) (189) (2) 10 (11) (16) (6) 5 1,527.3% 100.0%
(expense)
Income tax (180) 119 (3) (299) (199) 124 (7) (323) (9.5%) (7.4%)
expense
NET INCOME $ 274 (187) 461 326 (182) 508 (16.0%) (9.3%)
BASIC EARNINGS $ 0.44 (0.30) 0.74 0.72 (0.40) 1.12 (38.9%) (33.9%)
PER SHARE
DILUTED
EARNINGS PER $ 0.44 (0.30) 0.74 0.72 (0.40) 1.12 (38.9%) (33.9%)
SHARE
AVERAGE SHARES
OUTSTANDING
Basic 619,048 619,048 451,358 451,358 37.2% 37.2%
Diluted 621,095 621,095 452,369 452,369 37.3% 37.3%
DIVIDENDS PER $ 1.45 1.45 1.45 1.45 - -
COMMON SHARE
SPECIAL ITEMS
Includes severance costs associated with recent reduction in force
initiatives ($66 million), integration, severance, and retention costs
(1) - associated with our acquisition of Qwest ($46 million) and integration,
severance, and retention costs associated with our acquisition of
Savvis ($5 million).
(2) - Net loss associated with early retirement of debt ($194 million) and
gain on the sale of a non-operating investment ($5 million).
(3) - Income tax benefit of Items (1) and (2).
Includes integration, severance, and retention costs associated with
our acquisition of Qwest, along with restructuring charges ($251
(4) - million); integration and severance costs associated with
our acquisition of Embarq ($55 million); transaction and other costs
associated with our acquisition of Savvis ($2 million); net of a
favorable settlement of an operating tax issue ($13 million).
(5) - Reflects the interest component of a favorable settlement of an
operating tax issue.
(6) - Expense associated with terminating a bridge credit facility related to
the Savvis acquisition.
(7) - Income tax benefit of Items (4) through (6) and a benefit from the
reduction of an NOL valuation allowance ($14 million).
CenturyLink, Inc.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2012 AND DECEMBER 31, 2011
(UNAUDITED)
(Dollars in millions)
June 30, December 31,
2012 2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 281 128
Other current assets 3,566 3,389
Total current assets 3,847 3,517
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 30,623 29,585
Accumulated depreciation (11,569) (10,141)
Net property, plant and equipment 19,054 19,444
GOODWILL AND OTHER ASSETS
Goodwill 21,732 21,732
Other 10,457 11,351
Total goodwill and other assets 32,189 33,083
TOTAL ASSETS $ 55,090 56,044
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,903 480
Other current liabilities 3,304 3,537
Total current liabilities 5,207 4,017
LONG-TERM DEBT 19,682 21,356
DEFERRED CREDITS AND OTHER LIABILITIES 9,890 9,844
STOCKHOLDERS' EQUITY 20,311 20,827
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,090 56,044
CenturyLink, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED)
(Dollars in millions)
Six Months Six Months
Ended Ended
June 30, June 30,
2012 2011
OPERATING ACTIVITIES
Net income $ 274 326
Adjustments to reconcile net income to
net
cash provided by operating
activities:
Depreciation and amortization 2,416 1,546
Deferred income taxes 137 174
Provision for uncollectible 103 61
accounts
Loss on early retirement of debt 194 1
Changes in current assets and current (188) 73
liabilities, net
Retirement benefits (163) (129)
Changes in other noncurrent assets and 53 (10)
liabilities
Other, net (27) (24)
Net cash provided by operating 2,799 2,018
activities
INVESTING ACTIVITIES
Payments for property, plant and equipment and (1,305) (790)
capitalized software
Cash acquired in Qwest acquisition, net of - 419
$5 cash paid
Other, net 130 9
Net cash used in investing (1,175) (362)
activities
FINANCING ACTIVITIES
Net proceeds from issuance of long-term 3,361 2,602
debt
Payments of long-term debt (3,630) (857)
Early retirement of debt costs (324) (13)
Net payments on credit facility (27) (365)
Dividends paid (905) (657)
Proceeds from issuance of common stock 65 58
Repurchase of common stock (20) (30)
Other, net 7 (21)
Net cash (used in) provided by financing (1,473) 717
activities
Effect of exchange rate changes on cash and 2 -
cash equivalents
Net increase in cash and cash 153 2,373
equivalents
Cash and cash equivalents at beginning of 128 173
period
Cash and cash equivalents at end of $ 281 2,546
period
CenturyLink, Inc.
SELECTED SEGMENT FINANCIAL INFORMATION
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED)
(Dollars in millions)
Three months ended Six months ended
June 30, June 30,
2012 2011 2012 2011
Total segment revenues $ 4,346 4,158 $ 8,690 5,723
Total segment expenses 2,024 1,821 4,002 2,385
Total segment income $ 2,322 2,337 $ 4,688 3,338
Total segment income margin
(segment income
divided by segment 53.4% 56.2% 53.9% 58.3%
revenues)
Regional Markets Segment
Revenues
Strategic services $ 894 843 $ 1,781 1,163
Legacy services 1,510 1,631 3,050 2,419
Data integration 73 66 132 95
$ 2,477 2,540 $ 4,963 3,677
Expenses
Direct $ 981 980 $ 1,943 1,427
Allocated 67 63 136 73
$ 1,048 1,043 $ 2,079 1,500
Segment income $ 1,429 1,497 $ 2,884 2,177
Segment income margin 57.7% 58.9% 58.1% 59.2%
Wholesale Markets Segment
Revenues
Strategic services $ 572 556 $ 1,152 766
Legacy services 372 424 753 596
$ 944 980 $ 1,905 1,362
Expenses
Direct $ 45 46 $ 93 78
Allocated 241 258 480 323
$ 286 304 $ 573 401
Segment income $ 658 676 $ 1,332 961
Segment income margin 69.7% 69.0% 69.9% 70.6%
Enterprise Markets - Network
Segment
Revenues
Strategic services $ 333 319 $ 657 328
Legacy services 218 225 440 260
Data integration 97 86 183 88
$ 648 630 $ 1,280 676
Expenses
Direct $ 199 185 $ 383 186
Allocated 280 287 553 296
$ 479 472 $ 936 482
Segment income $ 169 158 $ 344 194
Segment income margin 26.1% 25.1% 26.9% 28.7%
Enterprise Markets - Data
Hosting Segment
Revenues
Strategic services $ 277 8 $ 542 8
$ 277 8 $ 542 8
Expenses
Direct $ 230 11 $ 451 11
Allocated (19) (9) (37) (9)
$ 211 2 $ 414 2
Segment income $ 66 6 $ 128 6
Segment income margin 23.8% 75.0% 23.6% 75.0%
During the second quarter of 2012, we restructured our four operating segments
to more effectively leverage the strategic assets from our recent acquisitions
of Embarq, Qwest and Savvis. We also revised our methodology for how we
allocate our expenses to our segments to better align segment expenses with
related revenues. In addition, we now allocate certain expenses from our
enterprise markets-data hosting segment to our other three segments. We have
restated prior periods to reflect these changes in our methodology.
CenturyLink, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
(Dollars in millions)
Three months ended June 30, 2012 Three months ended June 30, 2011
As As
adjusted adjusted
Less excluding Less excluding
As special special As special special
reported items items reported items items
Operating
cash flow and
cash flow
margin
Operating $ 657 (35) (1) 692 480 (260) (2) 740
income
Add:
Depreciation 1,208 - 1,208 1,177 - 1,177
and
amortization
Operating $ 1,865 (35) 1,900 1,657 (260) 1,917
cash flow
Revenues $ 4,612 - 4,612 4,406 - 4,406
Operating
income
margin
(operating 14.2% 15.0% 10.9% 16.8%
income
divided by
revenues)
Operating
cash flow
margin
(operating 40.4% 41.2% 37.6% 43.5%
cash flow
divided by
revenues)
Free cash
flow
Operating $ 1,900 1,917
cash flow
Less: Cash
paid for
income (30) 104
taxes, net
of refunds
Less: Cash
paid for
interest, (485) (390)
net of
amounts
capitalized
Less:
Capital (609) (566)
expenditures
(3)
Other
income 3 2
(expense)
Free cash 779 1,067
flow (4)
SPECIAL ITEMS
Includes severance costs associated with recent reduction in force
initiatives ($23 million), integration, severance, and retention costs
(1) - associated with our acquisition of Qwest ($10 million) and integration,
severance, and retention costs associated with our acquisition of Savvis
($2 million).
Includes integration, severance, and retention costs associated with our
acquisition of Qwest, along with restructuring charges ($245 million);
(2) - integration and severance costs associated with our acquisition of
Embarq ($25 million); transaction and other costs associated with our
acquisition of Savvis ($2 million); net of a favorable settlement of an
operating tax issue ($13 million).
Excludes $18 million in second quarter 2012 and $13 million in second
(3) - quarter 2011 of capital expenditures related to the integration of
Embarq and Qwest.
(4) - Excludes special items identified in items (1) to (3).
CenturyLink, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
(Dollars in millions)
Six months ended June 30, 2012 Six months ended June 30, 2011
As As
adjusted adjusted
Less excluding Less excluding
As special special As special special
reported items items reported items items
Operating
cash flow and
cash flow
margin
Operating $ 1,311 (117) (1) 1,428 944 (295) (2) 1,239
income
Add:
Depreciation 2,416 - 2,416 1,546 - 1,546
and
amortization
Operating $ 3,727 (117) 3,844 2,490 (295) 2,785
cash flow
Revenues $ 9,222 - 9,222 6,102 - 6,102
Operating
income
margin
(operating 14.2% 15.5% 15.5% 20.3%
income
divided by
revenues)
Operating
cash flow
margin
(operating 40.4% 41.7% 40.8% 45.6%
cash flow
divided by
revenues)
Free cash
flow
Operating $ 3,844 2,785
cash flow
Less: Cash
paid for
income (31) 99
taxes, net
of refunds
Less: Cash
paid for
interest, (729) (460)
net of
amounts
capitalized
Less:
Capital (1,277) (773)
expenditures
(3)
Other
income 10 5
(expense)
Free cash 1,817 1,656
flow (4)
SPECIAL ITEMS
Includes severance costs associated with recent reduction in force
initiatives ($66 million), integration, severance, and retention costs
(1) - associated with our acquisition of Qwest ($46 million) and integration,
severance, and retention costs associated with our acquisition of Savvis
($5 million).
Includes integration, severance, and retention costs associated with our
acquisition of Qwest, along with restructuring charges ($251 million);
(2) - integration and severance costs associated with our acquisition of
Embarq ($55 million); transaction and other costs associated with our
acquisition of Savvis ($2 million); net of a favorable settlement of an
operating tax issue ($13 million).
Excludes $28 million for the six months ended June 30, 2012 and $17
(3) - million for the six months ended June 30, 2011 of capital expenditures
related to the integration of Embarq and Qwest.
Excludes (i) special items identified in items (1) to (3) above and (ii)
(4) - the impact of pension contributions of $100 million for the six months
ended June 30, 2011.
CenturyLink, Inc.
ADJUSTED AND PRO FORMA STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2012 AND MARCH 31, 2012 AND PRO FORMA THREE
MONTHS ENDED JUNE 30, 2011
(UNAUDITED)
(Dollars in millions, except per share amounts, shares in thousands)
Pro forma
(1)
Three months Three months Three months
ended ended ended
June 30, March 31, June 30,
2012 2012 2011
(excluding (excluding (excluding
special special special
items)(2) items)(2) items)(2)
OPERATING
REVENUES
Strategic $ 2,076 2,056 1,989
services
Legacy services 2,100 2,143 2,282
Data 170 145 151
integration
Other 266 266 247
4,612 4,610 4,669
OPERATING
EXPENSES
Cash expenses 2,712 (A) 2,666 (B) 2,690 (C)
Depreciation and 1,208 1,208 1,245
amortization
3,920 3,874 3,935
OPERATING INCOME 692 736 734
OTHER INCOME
(EXPENSE)
Interest (335) (343) (317) (D)
expense
Other income 3 (E) 7 (F) 2 (G)
(expense)
Income tax (142) (H) (157) (H) (173) (H)
expense
NET INCOME $ 218 243 246
DILUTED EARNINGS PER $ 0.35 0.39 0.40
SHARE
WEIGHTED AVERAGE DILUTED 621,839 620,350 614,529
SHARES OUTSTANDING
OPERATING CASH
FLOW
Operating $ 692 736 734
income
Add: Depreciation 1,208 1,208 1,245
and amortization
Operating cash $ 1,900 1,944 1,979
flow
As of As of As of
OPERATING METRICS June 30, March 31, June 30,
2012 2012 2011
Broadband 5,763 5,745 5,519
subscribers
Access lines 14,145 14,379 15,057
The pro forma information presented above reflects the operations of
CenturyLink (which includes Qwest for the entire second quarter 2011)
and Savvis assuming Savvis' results of operations had been combined as
of January 1, 2010. Pro forma adjustments include (i) the elimination of
intercompany billings and the elimination of certain deferred revenues
and costs; (ii) the amortization of the fair value preliminarily
assigned to intangible assets (primarily customer relationship); (iii)
(1) adjustments to depreciation to reflect the fair value preliminarily
assigned to property, plant and equipment; (iv) adjustments to interest
expense to reflect acquisition date financing and (v) the related income
tax effects. The above pro forma information (i) has not been prepared
in accordance with generally accepted accounting principles, (ii) is for
illustrative purposes only, and (iii) is not necessarily indicative of
the combined operating results that would have occurred if the Savvis
merger had been consummated as of January 1, 2010.
(2) Summary description of special items for Second Quarter 2012, First
Quarter 2012 and Second Quarter 2011:
Excludes severance costs associated with recent reduction in force
initiatives ($23 million), integration, severance, and retention costs
(A) associated with our acquisition of Qwest ($10 million) and integration,
severance, and retention costs associated with our acquisition of Savvis
($2 million).
Excludes severance costs associated with recent expense reduction
initiatives ($43 million), integration, severance, and retention costs
(B) associated with our acquisition of Qwest ($36 million) and integration,
severance, and retention costs associated with our acquisition of Savvis
($3 million).
Excludes integration and severance costs associated with the Qwest and
(C) Embarq acquisitions incurred by CenturyLink; realignment, severance and
merger related costs incurred by Qwest and merger related costs incurred
by Savvis ($263 million).
(D) Excludes the interest component of a favorable settlement of an
operating tax issues ($5 million).
(E) Excludes net loss associated with early retirement of debt ($202
million).
(F) Excludes gain associated with early retirement of debt ($8 million) and
gain on the sale of non-operating investment securities ($5 million).
(G) Excludes expense associated with terminating a bridge facility related
to the Savvis acquisition ($16 million).
Excludes tax effect of above items (A) to (G) ($93 million for second
(H) quarter 2012 and $26 million for first quarter 2012 and $97 million for
second quarter 2011). Second quarter 2011 also excludes a benefit from
the reduction of an NOL valuation allowance ($14 million).
CenturyLink, Inc.
SUPPLEMENTAL INFORMATION - ADJUSTED DILUTED EPS
THREE MONTHS ENDED JUNE 30, 2012 AND DECEMBER 31, 2011 AND PRO FORMA THREE
MONTHS ENDED JUNE 30, 2011
(UNAUDITED)
(Dollars in millions, except per share amounts)
Pro Forma*
Three months Three months Three months
ended ended ended
June 30, 2012 March 31, 2012 June 30, 2011
(excluding (excluding (excluding
special items) special items) special items)
Net income $ 218 243 246
Add back:
Amortization of customer
base intangibles:
Qwest 244 244 260
Embarq 39 39 44
Savvis 14 15 20
Amortization of trademark
intangibles:
Qwest 16 18 21
Savvis 3 2 2
Amortization of fair
value adjustment of
long-term debt:
Embarq 1 1 1
Qwest (20) (28) (67)
Subtotal 297 291 281
Tax effect of above (112) (111) (99)
items
Net adjustment, after taxes 185 180 182
Net income, as adjusted for $ 403 423 428
above items
Weighted average diluted 621.8 620.4 614.5
shares outstanding
Diluted EPS (excluding $ 0.35 0.39 0.40
special items)
Adjusted diluted EPS as
adjusted for purchase
accounting
intangible and interest
amortizations (excluding
special items) $ 0.65 0.68 0.69
The above schedule presents adjusted net income and adjusted earnings per
share (both excluding special items) by adding back to net income and earnings
per share certain non-cash expense items that arise as a result of the
application of business combination accounting rules to recent acquisitions.
Such presentation is not in accordance with generally accepted accounting
principles but management believes the presentation is useful to analysts and
investors to understand the impacts of growing our business through
acquisitions.
*The pro forma information presented above reflects the operations of
CenturyLink (which includes Qwest for the entire second quarter 2011) and
Savvis assuming Savvis' results of operations had been combined as of January
1, 2010. Pro forma adjustments include (i) the elimination of intercompany
billings and the elimination of certain deferred revenues and costs; (ii) the
amortization of the fair value preliminarily assigned to intangible assets
(primarily customer relationship); (iii) adjustments to depreciation to
reflect the fair value preliminarily assigned to property, plant and
equipment; (iv) adjustments to interest expense to reflect acquisition date
financing and (v) the related income tax effects. The above pro forma
information (i) has not been prepared in accordance with generally accepted
accounting principles, (ii) is for illustrative purposes only, and (iii) is
not necessarily indicative of the combined operating results that would have
occurred if the Savvis merger had been consummated as of January 1, 2010.
CenturyLink, Inc.
SUPPLEMENTAL PRO FORMA SEGMENT DATA
2012 and 2011
ASSUMING CENTURYLINK'S ACQUISITION OF QWEST AND SAVVIS OCCURRED
JANUARY 1, 2010
(UNAUDITED)
(Dollars in millions)
Pro forma Pro Pro
(*) forma forma
(*) (*)
Three Three Three Three Three Three
months months months months months months
ended ended ended ended ended ended
June March December September June March
30, 31, 31, 2011 30, 2011 30, 31,
2012 2012 2011 2011
Total segment revenues $ 4,346 4,344 4,399 4,387 4,422 4,482
Total segment expenses 2,024 1,978 2,085 2,071 2,025 1,986
Total segment income $ 2,322 2,366 2,314 2,316 2,397 2,496
Total segment income
margin (segment income
divided by segment 53.4% 54.5% 52.6% 52.8% 54.2% 55.7%
revenues)
Regional Markets Segment
Revenues
Strategic $ 894 887 882 845 845 845
services
Legacy services 1,510 1,540 1,575 1,599 1,632 1,662
Data integration 73 59 87 78 66 65
$ 2,477 2,486 2,544 2,522 2,543 2,572
Expenses
Direct $ 981 962 1,014 1,028 980 988
Allocated 67 69 67 64 65 65
$ 1,048 1,031 1,081 1,092 1,045 1,053
Segment income $ 1,429 1,455 1,463 1,430 1,498 1,519
Segment income margin 57.7% 58.5% 57.5% 56.7% 58.9% 59.1%
Wholesale Markets
Segment
Revenues
Strategic $ 572 580 569 572 560 556
services
Legacy services 372 381 391 411 424 446
Data integration - - 1 - - -
$ 944 961 961 983 984 1,002
Expenses
Direct $ 45 48 52 44 46 44
Allocated 241 239 261 263 261 247
$ 286 287 313 307 307 291
Segment income $ 658 674 648 676 677 711
Segment income margin 69.7% 70.1% 67.4% 68.8% 68.8% 71.0%
Enterprise Markets -
Network Segment
Revenues
Strategic $ 333 324 321 318 324 326
services
Legacy services 218 222 214 217 226 240
Data integration 97 86 100 88 85 88
$ 648 632 635 623 635 654
Expenses
Direct $ 199 184 199 183 185 171
Allocated 280 273 290 296 292 288
$ 479 457 489 479 477 459
Segment income $ 169 175 146 144 158 195
Segment income margin 26.1% 27.7% 23.0% 23.1% 24.9% 29.8%
Enterprise Markets -
Data Hosting Segment
Revenues
Strategic $ 277 265 259 259 260 254
services
$ 277 265 259 259 260 254
Expenses
Direct $ 230 221 220 212 215 201
Allocated (19) (18) (18) (19) (19) (18)
$ 211 203 202 193 196 183
Segment income $ 66 62 57 66 64 71
Segment income margin 23.8% 23.4% 22.0% 25.5% 24.6% 28.0%
During the second quarter of 2012, we restructured our four operating segments
to more effectively leverage the strategic assets from our recent acquisitions
of Embarq, Qwest and Savvis. We also revised our methodology for how we
allocate our expenses to our segments to better align segment expenses with
related revenues. In addition, we now allocate certain expenses from our
enterprise markets-data hosting segment to our other three segments. We have
restated prior periods to reflect these changes in our methodology. The pro
forma segment data for 2010 has not been restated as it is deemed
impracticable to do so.
* For additional information regarding this pro forma information, including
related pro forma adjustments, please see the preceding supplemental schedule.
CenturyLink, Inc.
SUPPLEMENTAL SELECT SAVVIS REVENUE INFORMATION
THREE MONTHS ENDED JUNE 30, 2012, MARCH 31, 2012 AND PRO FORMA THREE MONTHS
ENDED JUNE 30, 2011
(UNAUDITED)
(Dollars in millions)
Pro Forma*
Three months Three months Three months
ended ended ended
June 30, 2012 March 31, 2012 June 30, 2011
Colocation revenue $ 107 103 101
Managed hosting revenue 106 99 96
*The pro forma information presented above reflects certain selected revenue
of Savvis assuming CenturyLink owned Savvis as of January 1, 2010. These
amounts reflect Savvis' historical operating results for the last full quarter
in which it operated as an independent company; no pro forma adjustments have
been made to these amounts. The above pro forma information has not been
prepared in accordance with generally accepted accounting principles and is
for illustrative purposes only.
SOURCE CenturyLink, Inc.
Website: http://www.centurytel.com
Contact: Kristina Waugh, +1-318-340-5627, kristina.r.waugh@centurylink.com
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