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Press Release -- February 13th, 2013
Source: CenturyLink
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CenturyLink Reports Fourth Quarter And Full-Year 2012 Earnings

Achieved fourth quarter operating revenues of $4.58 billion and full-year operating revenues of $18.4 billion, in line with guidance
Improved year-over-year rate of revenue decline to 1.5% in fourth quarter 2012 compared to 3.2% year-over-year decline in fourth quarter 2011
Realized strong growth in high-speed Internet subscribers of more than 41,000 during fourth quarter 2012
Achieved Adjusted Diluted EPS1 of $0.67 compared to $0.55 in fourth quarter 2011
Generated Free Cash Flow(1) of $610 million, excluding special items

MONROE, La., Feb. 13, 2013 /PRNewswire/ — CenturyLink, Inc. (CTL) today reported solid operating revenues, operating cash flow and free cash flow for fourth quarter and full-year 2012.

“We are pleased with our fourth quarter and full-year results, which reflect the continued execution of our strategy to focus on investing in our key growth drivers to further stabilize our top-line revenue while aligning our operating costs with revenue and growth opportunities. Our investments in broadband, PrismTM TV, fiber-to-the-tower and data hosting continue to provide a broad base of organic revenue growth opportunities and helped drive pro forma full-year operating revenue improvement to a 1.7% decline in 2012 compared to a 3.8% decline a year ago,” said Glen F. Post, III, chief executive officer and president.

“We realized solid strategic data and hosting revenue growth during 2012 driven by strong demand from our business customers for high bandwidth data services, colocation and managed services, including cloud. The December commercial launch of our new savvisdirect product, which meets the increasing demand for a simplified approach to cloud computing, reflects the combined strength of our strategic asset portfolio and employee innovation.

“We remain focused on delivering innovative communications and hosted IT solutions that meet the needs of customers, and we continue to expect further improvement in our top-line revenue trend this year and to reach revenue stabilization in 2014,” Post concluded.

Fourth Quarter Highlights

  • Improved year-over-year revenue trend to a 1.5% rate of decline compared to a 3.2% decline in fourth quarter 2011.
  • Achieved free cash flow of $610 million, excluding special items and integration-related capital expenditures.
  • Ended fourth quarter 2012 with approximately 5.85 million high-speed Internet subscribers2; adding more than 41,000 customers in the fourth quarter.
  • Improved access line loss trend during fourth quarter 2012 to a 5.7% annual decline compared to a 6.6% annual decline in fourth quarter 2011.
  • Added more than 10,000 CenturyLink® PrismTM TV subscribers in fourth quarter 2012, ending the quarter with nearly 115,000 subscribers in service.
  • Generated sequential recurring revenue growth in our Enterprise Markets – Network segment.
  • Opened a new data center3 in Frankfurt, Germany, bringing total data centers to 54 throughout North America, Europe and Asia, with total sellable floor space of approximately 1.4 million square feet.

Consolidated Fourth Quarter Financial Results

Operating revenues for fourth quarter 2012 were $4.58 billion compared to $4.65 billion in fourth quarter 2011. This decrease was driven by lower legacy services revenues primarily due to the impact of access line losses and lower access revenues, partially offset by increases in strategic revenues resulting primarily from strong business customer demand for high-bandwidth data services, colocation and managed hosting services and growth in high-speed Internet and CenturyLink® PrismTM TV subscribers.

Operating expenses, excluding special items, decreased to $3.89 billion from $4.06 billion in fourth quarter 2011. The year-over-year decrease was primarily due to lower personnel-related costs, professional fees and depreciation and amortization expense, which were partially offset by higher colocation and managed hosting expense and network costs.

Operating cash flow (as defined in our attached supplemental schedules), excluding special items, increased to $1.91 billion from $1.85 billion in fourth quarter 2011. This increase was primarily the result of lower personnel-related costs and professional fees being partially offset by the impact of the decline in legacy revenues. For fourth quarter 2012, CenturyLink achieved an operating cash flow margin, excluding special items, of 41.7% versus 39.7% in fourth 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 our Embarq, Qwest and Savvis acquisitions.

Excluding the items outlined above, CenturyLink’s Adjusted Net Income for fourth quarter 2012 was $415 million compared to Adjusted Net Income of $343 million in fourth quarter 2011. Fourth quarter 2012 Adjusted Diluted EPS was $0.67 compared to Adjusted Diluted EPS of $0.55 in the year-ago period. See the attached schedules for additional information.

Full-Year Results

For the full-year 2012, operating revenues increased to $18.4 billion from $15.4 billion for 2011. Operating cash flow, excluding special items, was $7.7 billion for 2012 compared to $6.5 billion in 2011. Net income, excluding special items, was $947 million in 2012 compared to $867 million in 2011. Full year 2012 earnings per share, excluding special items, was $1.52 compared to $1.62 for the prior year. The decrease in 2012 earnings per share compared to 2011 is due to a higher average share count in 2012. Full-year 2011 results include Qwest and Savvis operations from the April 1, 2011 and July 15, 2011 transaction closing dates, respectively.

Full-year 2012 operating revenues of $18.4 billion declined 1.7% from operating revenues of $18.7 billion for pro forma full-year 20114. Operating cash flow, excluding special items, was $7.7 billion for 2012 compared to $7.8 billion in pro forma 2011. Adjusted Net Income, excluding special items, was $1.66 billion in 2012 compared to $1.63 billion in pro forma 2011. Adjusted Diluted EPS, excluding special items, was $2.67 in 2012 compared to $2.64 for pro forma 2011. The decline in operating revenues and operating cash flow was driven by growth in lower-margin strategic revenues being more than offset by a reduction in higher-margin legacy voice and access revenues.

GAAP Results – Fourth Quarter and Full-Year

Under generally accepted accounting principles (GAAP), net income for fourth quarter 2012 was $233 million compared to $109 million for fourth quarter 2011, and diluted earnings per share for fourth quarter 2012 was $0.37 compared to $0.18 for fourth quarter 2011. Fourth quarter 2012 net income and diluted earnings per share reflect after-tax integration, severance, and retention costs associated with the Qwest and Savvis acquisitions and costs associated with reduction in force initiatives partially offset by a gain on the sale of non-operating investments and the early retirement of debt, which aggregated $7 million ($0.01 per share). Fourth 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 and costs associated with the early retirement of Qwest Corporation debt, which aggregated $42 million ($0.07 per share).

Net income under GAAP for full-year 2012 was $777 million compared to $573 million for full-year 2011, and diluted earnings per share for full-year 2012 was $1.25 compared to $1.07 for full-year 2011. For details regarding the Company’s special items for the three and twelve months ended December 31, 2012 and 2011, please see the accompanying financial schedules.

Segment Results / Highlights

Regional Markets

The Regional Markets segment realized continued strategic revenue growth driven by increased high-speed Internet and CenturyLink® PrismTM TV subscribers and higher revenue from strategic business data services.

  • Strategic revenues were $914 million in the quarter, a 3.6% increase over fourth quarter 2011.
  • Generated $2.45 billion in total revenues, a decrease of 3.9% from fourth quarter 2011, reflecting the continued decline in legacy services tempered by the impact of Access Recovery Charges implemented effective July 1, 2012 in accordance with the CAF Order5.
  • Added more than 10,000 CenturyLink® PrismTM TV subscribers during fourth quarter with more than 90% attachment rate of broadband services.

Wholesale Markets

The Wholesale Markets segment completed approximately 1,175 fiber-to-the-tower builds during the fourth quarter, ending the year with more than 14,700 fiber-connected towers.

  • Strategic revenues of $572 million in the quarter increased slightly compared to fourth quarter 2011, as wireless carrier bandwidth expansion and higher Ethernet sales offset declines in copper-based revenue.
  • Generated $908 million in total revenues, a decrease of 5.5% from fourth quarter 2011, reflecting the continued decline in legacy revenues primarily driven by the implementation of access rate reductions effective July 1, 2012 in accordance with the CAF Order5 and lower long distance and switched access minutes of use.
  • Completed more than 4,500 fiber builds in 2012 and expect to complete 4,000 to 5,000 fiber builds in 2013.

Enterprise Markets – Network

The Enterprise Markets – Network segment achieved solid growth in recurring revenue sales in the fourth quarter and continues to experience solid sales momentum from enterprise and government customers.

  • Strategic revenues were $346 million in the quarter, a 7.8% increase over fourth quarter 2011, driven by strength in high-bandwidth offerings such as MPLS6 and Ethernet services. Excluding the impact of private line services, the adjusted growth rate was nearly 13%.
  • Generated $671 million in total revenues, an increase of 5.7% from fourth quarter 2011, reflecting growth in high-bandwidth offerings and data integration revenues.
  • Achieved recurring revenue growth of 4.5% year-over-year and the fourth straight sequential quarter of recurring revenue growth.

Enterprise Markets – Data Hosting

The Enterprise Markets – Data Hosting segment (primarily Savvis operations) grew managed hosting (including cloud) and colocation services revenue, with strength in core managed hosting products and in the financial and consumer brands verticals.

  • Operating revenues were $292 million in the quarter, a 12.7% increase from fourth quarter 2011. Colocation revenues were $114 million, a 9.6% increase from fourth quarter 2011, and managed hosting revenues were $120 million, representing a 21.2% increase over the same period a year ago. Managed hosting revenues include approximately $13 million of revenues contributed by the Ciber global IT outsourcing, or ITO, assets acquired October 15, 2012.
  • Continued to expand global geographic reach in key markets with opening of new data center in Frankfurt, Germany.
  • Achieved strong bookings in fourth quarter –the highest quarterly bookings level in four years.
  • Launched savvisdirect7, expanding CenturyLink’s portfolio of cloud services to businesses of all sizes and announced the limited release of Savvis Symphony Cloud Storage and the availability of Savvis Symphony Database in Europe.

Integration Update

During fourth quarter 2012, CenturyLink incurred pre-tax integration, severance and retention costs of $14 million ($9 million after-tax) related to the Qwest and Savvis acquisitions.

CenturyLink ended 2012 with an annualized operating expense synergy run rate of approximately $480 million from the Qwest acquisition. Based on current expectations, CenturyLink anticipates exiting 2013 with approximately $600 million in annual run-rate synergies related to the Qwest acquisition.

Changes in Capital Allocation Strategy

We have announced today certain capital allocation initiatives. Please see separate press release for further detail.

Guidance – First Quarter 2013 and Full-Year 2013

The Company expects first quarter 2013 revenue and operating cash flow to decrease compared to fourth quarter 2012 primarily due to the decline in legacy and data integration revenues. The Company also anticipates a decline in depreciation and amortization expense in the first quarter of 2013 driven primarily by the impact of the annual review and update of depreciation and amortization rates. This anticipated lower level of depreciation and amortization expense is expected to more than offset the decrease in operating cash flow and result in an increase in Adjusted Diluted EPS in first quarter 2013 compared to fourth quarter 2012.

CenturyLink anticipates full-year 2013 operating cash flow and free cash flow to decline from full-year 2012 primarily driven by the impact of the decline in legacy revenues, along with a lower level of incremental synergies in 2013 compared to the level of incremental synergies achieved in 2012. The Company also anticipates a decline in depreciation and amortization expense for full-year 2013 compared to full-year 2012.

First Quarter 2013
Operating Revenue $4.46 to $4.51 billion
Operating Cash Flow (excl special items) $1.83 to $1.88 billion
Adjusted Diluted EPS (excl special items) $0.67 to $0.72
Full-Year 2013
Operating Revenue $18.1 to $18.3 billion
Annual percent change in Operating Revenue -0.5% to -1.5%
Operating Cash Flow (excl special item(s) $7.3 to $7.5 billion
Adjusted Diluted EPS (excl special items) $2.50 to $2.70
Capital Expenditures8 $2.8 to $3.0 billion
Free Cash Flow (excl special items) $3.0 to $3.2 billion

All 2013 guidance figures and 2013 outlook statements included in this release (i) speak as of February 13, 2013 only, (ii) include the impact of the Ciber ITO assets acquired on October 15, 2012, (iii) exclude the potential impact of our stock buyback program separately announced today and (iv) exclude the effects of special items, future changes in regulation or accounting rules, integration expenses associated with the Qwest and Savvis acquisitions, any changes in operating or capital plans, the impact of litigation expenses or other unforeseen events or circumstances that impact our financial performance, and any future mergers, acquisitions, divestitures or other similar business transactions. See “Forward Looking Statements” below. For additional information on how we define certain of the terms used above, see the attached schedules.

Investor Call

As previously announced, CenturyLink’s management will host a conference call at 4:00 p.m. Central Time today, February 13, 2013. Interested parties can access the call by dialing 866-847-7859. The call will be accessible for replay through February 20, 2013, by calling 888-266-2081 and entering the access code 1601920. Investors can also listen to CenturyLink’s earnings conference call and replay by accessing the Investor Relations portion of the Company’s Web site atwww.centurylink.com through March 6, 2013.

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 CenturyLinkTMPrismTM 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 successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; 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; our ability to successfully integrate recently acquired operations into our incumbent operations, including the possibility that the anticipated benefits from our recent 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; 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 common share dividends in amounts previously indicated, 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; 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 and our recent acquisitions are described in greater detail in Item 1A to our Form 10-Q for the quarter ended September 30, 2012, 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 attachments for non-GAAP reconciliations.
2 Effective second quarter 2012, CenturyLink modified its high-speed Internet reporting to include consumer, business and wholesale subscribers instead of only consumer and small business subscribers.
3 We define a “data center” as any facility where we market, sell and deliver either colocation services or multi-tenant managed services, or both.
4 The pro forma figures assume we acquired Qwest and Savvis as of January 1, 2010, as explained further in the attached schedules.
5 Federal Communications Commission’s Connect America and Intercarrier Compensation Reform Order (the CAF Order) adopted on October 27, 2011
6 Multiprotocol Label Switching
7 savvisdirect is CenturyLink’s highly scalable and easy-to-use cloud services platform designed for business of all sizes that is immediately accessible to business users, IT administrators and developers through an intuitive, user-friendly Web portal
8 Excludes approximately $70 million of integration-related capital expenditures
 CenturyLink, Inc.
 CONSOLIDATED STATEMENTS OF INCOME
 THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011
 (UNAUDITED)
 (Dollars in millions, except per share amounts; shares in thousands)
 Three months ended December 31, 2012  Three months ended December 31, 2011
 As adjusted  As adjusted  Increase
 excluding  excluding  (decrease)
 Less  special  Less  special  Increase  excluding
 As  special  items  As  special  items  (decrease)  special
 reported  items  (Non-GAAP)  reported  items  (Non-GAAP)  as reported  items
 OPERATING REVENUES
 Strategic $ 2,124 2,124 2,033 2,033 4.5% 4.5%
 Legacy 2,003 2,003 2,178 2,178 (8.0%) (8.0%)
 Data integration 189 189 188 188 0.5% 0.5%
 Other 267 267 254 254 5.1% 5.1%
4,583 4,583 4,653 4,653 (1.5%) (1.5%)
 OPERATING EXPENSES
 Cost of services and products 1,907 9 (1) 1,898 1,968 10 (4) 1,958 (3.1%) (3.1%)
 Selling, general and administrative 790 18 (1) 772 900 51 (4) 849 (12.2%) (9.1%)
 Depreciation and amortization 1,220 1,220 1,252 1,252 (2.6%) (2.6%)
3,917 27 3,890 4,120 61 4,059 (4.9%) (4.2%)
 OPERATING INCOME 666 (27) 693 533 (61) 594 25.0% 16.7%
 OTHER INCOME (EXPENSE)
 Interest expense (315) (315) (340) (340) (7.4%) (7.4%)
 Other income (expense) 23 18 (2) 5 (1) (6) (5) 5 (2400.0%) 0.0%
 Income tax expense (141) 2 (3) (143) (83) 25 (6) (108) 69.9% 32.4%
 NET INCOME $ 233 (7) 240 109 (42) 151 113.8% 58.9%
 BASIC EARNINGS PER SHARE $ 0.37 (0.01) 0.39 0.18 (0.07) 0.24 105.6% 62.5%
 DILUTED EARNINGS PER SHARE $ 0.37 (0.01) 0.38 0.18 (0.07) 0.24 105.6% 58.3%
 AVERAGE SHARES OUTSTANDING
 Basic 621,578 621,578 616,575 616,575 0.8% 0.8%
 Diluted 623,654 623,654 618,510 618,510 0.8% 0.8%
DIVIDENDS PER COMMON SHARE $ 0.725 0.725 0.725 0.725
 SPECIAL ITEMS
 (1) – Includes severance costs associated with recent reduction in force initiatives ($13 million), integration, severance and retention costs associated with our acquisition of Qwest ($9 million) and integration, severance, and retention costs associated with our acquisition of Savvis ($5 million).
 (2) – Gain on the sale of non-operating investments ($3 million) and early retirement of debt ($15 million).
 (3) – Income tax benefit of Items (1) and (2) and effect of rate adjustment on first three quarters of year.
 (4) – Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($55 million); integration and severance costs associated with our acquisition of Embarq ($2 million); and transaction and other costs associated with our acquisition of Savvis ($4 million).
 (5) – Cost associated with early retirement of Qwest debt.
 (6) – Income tax benefit of Items (4) and (5).
 CenturyLink, Inc.
 CONSOLIDATED STATEMENTS OF INCOME
 TWELVE MONTHS ENDED DECEMBER 31, 2012 AND 2011
 (UNAUDITED)
 (Dollars in millions, except per share amounts; shares in thousands)
 Twelve months ended December 31, 2012  Twelve months ended December 31, 2011
 As adjusted  As adjusted  Increase
 excluding  excluding  (decrease)
 Less  special  Less  special  Increase  excluding
 As  special  items  As  special  items  (decrease)  special
 reported  items  (Non-GAAP)  reported  items  (Non-GAAP)  as reported  items
 OPERATING REVENUES
 Strategic $ 8,361 8,361 6,262 6,262 33.5% 33.5%
 Legacy 8,287 8,287 7,672 7,672 8.0% 8.0%
 Data integration 672 672 537 537 25.1% 25.1%
 Other 1,056 1,056 880 880 20.0% 20.0%
18,376 18,376 15,351 15,351 19.7% 19.7%
 OPERATING EXPENSES
 Cost of services and products 7,639 34 (1) 7,605 6,325 70 (5) 6,255 20.8% 21.6%
 Selling, general and administrative 3,244 129 (1) 3,115 2,975 395 (5) 2,580 9.0% 20.7%
 Depreciation and amortization 4,780 (30) (2) 4,810 4,026 4,026 18.7% 19.5%
15,663 133 15,530 13,326 465 12,861 17.5% 20.8%
 OPERATING INCOME 2,713 (133) 2,846 2,025 (465) 2,490 34.0% 14.3%
 OTHER INCOME (EXPENSE)
 Interest expense (1,319) (1,319) (1,072) 5 (6) (1,077) 23.0% 22.5%
 Other income (expense) (144) (165) (3) 21 (5) (22) (7) 17 2780.0% 23.5%
 Income tax expense (473) 128 (4) (601) (375) 188 (8) (563) 26.1% 6.7%
 NET INCOME $ 777 (170) 947 573 (294) 867 35.6% 9.2%
 BASIC EARNINGS PER SHARE $ 1.25 (0.27) 1.52 1.07 (0.55) 1.62 16.8% (6.2%)
 DILUTED EARNINGS PER SHARE $ 1.25 (0.27) 1.52 1.07 (0.55) 1.62 16.8% (6.2%)
 AVERAGE SHARES OUTSTANDING
 Basic 620,205 620,205 532,780 532,780 16.4% 16.4%
 Diluted 622,285 622,285 534,121 534,121 16.5% 16.5%
DIVIDENDS PER COMMON SHARE $ 2.90 2.90 2.90 2.90
 SPECIAL ITEMS
 (1) – Includes severance costs associated with recent reduction in force initiatives ($81 million), integration, severance, and retention costs associated with our acquisition of Qwest ($71 million) and integration, severance, and retention costs associated with our acquisition of Savvis ($14 million); partially offset with a $3 million credit related to tax incentives for the Embarq integration.
 (2) – Out-of-period depreciation adjustment ($30 million) to correct an overstatement of depreciation.
 (3) – Net loss associated with early retirement of debt ($179 million), partially offset by gains on the sales of non-operating investments $14 million.
 (4) – Income tax benefit of Items (1) through (3) and benefit from the reversal of a valuation allowance ($14 million).
 (5) – Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($371 million); integration and severance costs associated with our acquisition of Embarq ($81 million); and transaction and other costs associated with our acquisition of Savvis ($26 million); net of a favorable settlement of an operating tax issue $13 million.
 (6) – Reflects the interest component of a favorable settlement of an operating tax issue.
 (7) – Expense associated with terminating a bridge credit facility related to the Savvis acquisition ($16 million) and costs associated with early retirement of Qwest debt ($6 million).
 (8) – Income tax benefit of Items (5) through (7) and a benefit from the reduction of a valuation allowance ($14 million).
 CenturyLink, Inc.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 DECEMBER 31, 2012 AND 2011
 (UNAUDITED)
 (Dollars in millions)
December 31, December 31,
2012 2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 211 128
Other current assets 3,396 3,389
   Total current assets 3,607 3,517
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 32,086 29,585
Accumulated depreciation (13,054) (10,141)
   Net property, plant and equipment 19,032 19,444
GOODWILL AND OTHER ASSETS
Goodwill 21,691 21,691
Other, net 9,642 11,351
    Total goodwill and other assets 31,333 33,042
TOTAL ASSETS $ 53,972 56,003
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,205 480
Other current liabilities 3,390 3,544
    Total current liabilities 4,595 4,024
LONG-TERM DEBT 19,400 21,356
DEFERRED CREDITS AND OTHER LIABILITIES 10,688 9,796
STOCKHOLDERS’ EQUITY 19,289 20,827
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 53,972 56,003
 CenturyLink, Inc.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 TWELVE MONTHS ENDED DECEMBER 31, 2012 AND 2011
 (UNAUDITED)
 (Dollars in millions)
Twelve Months Twelve Months
 Ended  Ended
 December 31, 2012  December 31, 2011
 OPERATING ACTIVITIES
 Net income $ 777 573
 Adjustments to reconcile net income to net cash provided by operating activities:
 Depreciation and amortization 4,780 4,026
 Deferred income taxes 394 395
 Provision for uncollectible accounts 187 153
 Net loss on early retirement of debt 179 8
 Changes in current assets and current liabilities, net (225) (205)
 Retirement benefits (169) (688)
 Changes in other noncurrent assets and liabilities 162 (6)
 Other, net (20) (55)
 Net cash provided by operating activities 6,065 4,201
 INVESTING ACTIVITIES
 Payments for property, plant and equipment and capitalized software (2,919) (2,411)
 Cash paid for Savvis acquisition, net of $94 cash acquired (1,671)
 Cash acquired in Qwest acquisition, net of $5 cash paid 419
 Proceeds from sale of property and intangible assets 191
 Other, net 38 16
 Net cash used in investing activities (2,690) (3,647)
 FINANCING ACTIVITIES
 Net proceeds from issuance of long-term debt 3,362 4,102
 Payments of long-term debt (5,118) (2,984)
 Early retirement of debt costs (346) (114)
 Net borrowings (payments) on credit facility 543 (88)
 Dividends paid (1,811) (1,556)
 Net proceeds from issuance of common stock 110 103
 Repurchase of common stock (37) (31)
 Other, net 2 (9)
 Net cash used in financing activities (3,295) (577)
 Effect of exchange rate changes on cash and cash equivalents 3 (22)
 Net increase (decrease) in cash and cash equivalents 83 (45)
 Cash and cash equivalents at beginning of period 128 173
 Cash and cash equivalents at end of period $ 211 128
 CenturyLink, Inc.
 SELECTED SEGMENT FINANCIAL INFORMATION
 THREE MONTHS AND TWELVE MONTHS ENDED DECEMBER 31, 2012 AND 2011
 (UNAUDITED)
 (Dollars in millions)
Pro forma (*)
Twelve months
ended
Three months ended December 31, Twelve months ended December 31, December 31, 2011
2012 2011 2012 2011
Total segment revenues $ 4,316 4,399 17,320 14,471 17,690
Total segment expenses 2,055 2,085 8,094 6,513 8,167
Total segment income $ 2,261 2,314 9,226 7,958 9,523
Total segment income margin (segment income divided by segment revenues)
52.4% 52.6% 53.3% 55.0% 53.8%
Regional Markets Segment
Revenues
Strategic services $ 914 882 3,607 2,890 3,417
Legacy services 1,455 1,575 5,996 5,593 6,468
Data integration 76 87 273 260 296
$ 2,445 2,544 9,876 8,743 10,181
Expenses
Direct $ 994 1,014 3,939 3,469 4,010
Allocated 66 67 279 204 261
$ 1,060 1,081 4,218 3,673 4,271
Segment income $ 1,385 1,463 5,658 5,070 5,910
Segment income margin 56.6% 57.5% 57.3% 58.0% 58.0%
Wholesale Markets Segment
Revenues
Strategic services $ 572 571 2,296 1,915 2,266
Legacy services 335 389 1,424 1,389 1,663
Data integration 1 1 1 1 1
$ 908 961 3,721 3,305 3,930
Expenses
Direct $ 38 52 169 174 186
Allocated 233 261 948 847 1,032
$ 271 313 1,117 1,021 1,218
Segment income $ 637 648 2,604 2,284 2,712
Segment income margin 70.2% 67.4% 70.0% 69.1% 69.0%
Enterprise Markets – Network Segment
Revenues
Strategic services $ 346 321 1,344 967 1,289
Legacy services 213 214 867 690 897
Data integration 112 100 398 276 361
$ 671 635 2,609 1,933 2,547
Expenses
Direct $ 209 199 781 568 738
Allocated 280 290 1,110 882 1,166
$ 489 489 1,891 1,450 1,904
Segment income $ 182 146 718 483 643
Segment income margin 27.1% 23.0% 27.5% 25.0% 25.2%
Enterprise Markets – Data Hosting Segment
Revenues
Strategic services $ 292 259 1,114 490 1,032
$ 292 259 1,114 490 1,032
Expenses
Direct $ 253 220 940 415 848
Allocated (18) (18) (72) (46) (74)
$ 235 202 868 369 774
Segment income $ 57 57 246 121 258
Segment income margin 19.5% 22.0% 22.1% 24.7% 25.0%
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 information presented above reflects the operations of CenturyLink, Qwest and Savvis assuming their respective results of operations had been combined as of January 1, 2010. Pro forma adjustments include the elimination of intercompany billings and the elimination of certain deferred revenues and costs. 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 Qwest and Savvis mergers had been consummated as of January 1, 2010.
CenturyLink, Inc.
 ADJUSTED AND PRO FORMA STATEMENTS OF INCOME – NON-GAAP
 TWELVE MONTHS ENDED DECEMBER 31, 2012 AND PRO FORMA TWELVE MONTHS ENDED DECEMBER 31, 2011
 (UNAUDITED)
 (Dollars in millions, except per share amounts, shares in thousands)
Pro forma*
Twelve months Twelve months
ended ended
December 31, 2012 December 31, 2011
(excluding (excluding
special items)(1) special items)(1)
OPERATING REVENUES
 Strategic services $ 8,361 7,995
 Legacy services 8,287 9,037
 Data integration 672 658
 Other 1,056 1,002
18,376 18,692
 OPERATING EXPENSES
 Cash expenses 10,720 (A) 10,910 (B)
 Depreciation and amortization 4,810 4,953
15,530 15,863
 OPERATING INCOME 2,846 2,829
 OTHER INCOME (EXPENSE)
 Interest expense (1,319) (1,331) (C)
 Other income (expense) 21 (D) 22 (E)
 Income tax expense (601) (F) (613) (F)
 NET INCOME $ 947 907
 DILUTED EARNINGS PER SHARE $ 1.52 1.46
 WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 622,285 615,800
 OPERATING CASH FLOW
 Operating income $ 2,846 2,829
 Add:  Depreciation and amortization 4,810 4,953
 Operating cash flow $ 7,656 7,782
*The pro forma information presented above reflects the operations of CenturyLink, Qwest and Savvis assuming their respective 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 assigned to intangible assets (primarily customer relationship); (iii) adjustments to depreciation to reflect the fair value 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 Qwest and Savvis mergers had been consummated as of January 1, 2010.
(1) Summary description of special items for 2012 and 2011 excluded from above schedule:
(A) Excludes severance costs associated with recent reduction in force initiatives ($81 million), integration, severance, and retention costs associated with our acquisition of Qwest ($71 million) and integration, severance and retention costs associated with our acquisition of Savvis ($14 million); partially offset with a $3 million credit related to tax incentives for the Embarq acquisition.
(B) Excludes integration and severance costs associated with the Qwest and Embarq acquisitions incurred by CenturyLink; realignment, severance and merger related costs incurred by Qwest; and merger related costs incurred by Savvis ($482 million).
(C) Excludes the interest component of a favorable settlement of an operating tax issue ($5 million).
(D) Excludes net loss associated with early retirement of debt ($179 million); partially offset by gains on the sales of non-operating investments $14 million.
(E) Excludes expense associated with terminating a bridge credit facility related to the Savvis acquisition ($16 million) and costs associated with early retirement of Qwest debt ($6 million).
(F) Excludes tax effect of above items (A) to (E) and a benefit from the reduction of a valuation allowance ($14 million) in 2012 and ($14 million) in 2011.
CenturyLink, Inc.
 RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
 (UNAUDITED)
 (Dollars in millions)
 Three months ended December 31, 2012  Three months ended December 31, 2011
 As adjusted  As 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 income $ 666 (27) (1) 693 533 (61) (2) 594
 Add:  Depreciation and amortization 1,220 1,220 1,252 1,252
 Operating cash flow $ 1,886 (27) 1,913 1,785 (61) 1,846
 Revenues $ 4,583 4,583 4,653 4,653
 Operating income margin (operating income divided by revenues) 14.5% 15.1% 11.5% 12.8%
 Operating cash flow margin (operating cash flow divided by revenues) 41.2% 41.7% 38.4% 39.7%
 

Free cash flow

 Operating cash flow $ 1,913 1,846
 Less: Cash (paid) refunded for income taxes (23) 25
 Less: Cash paid for interest, net of amounts capitalized (408) (465)
 Less: Capital expenditures (3) (877) (896)
 Other income (expense) 5 5
 Free cash flow (4) 610 515
 SPECIAL ITEMS
 (1) – Includes severance costs associated with recent reduction in force initiatives ($13 million), integration, severance, and retention costs associated with our acquisition of Qwest ($9 million) and integration, severance and retention costs associated with our acquisition of Savvis ($5 million).
 (2) – Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($55 million); integration and severance costs associated with our acquisition of Embarq ($2 million); transaction and other costs associated with our acquisition of Savvis ($4 million).
 (3) – Excludes $18 million in fourth quarter 2012 and $4 million in fourth quarter 2011 of capital expenditures related to the integration of Embarq, Qwest and Savvis.
 (4) – Excludes special items identified in items (1) and (2) and the impact of pension contributions of $487 million for fourth quarter 2011.
CenturyLink, Inc.
 RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
 (UNAUDITED)
 (Dollars in millions)
 Twelve months ended December 31, 2012  Twelve months ended December 31, 2011
 As adjusted  As 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 income $ 2,713 (133) (1) 2,846 2,025 (465) (3) 2,490
 Add:  Depreciation and amortization 4,780 (30) (2) 4,810 4,026 4,026
 Operating cash flow $ 7,493 (163) 7,656 6,051 (465) 6,516
 Revenues $ 18,376 18,376 15,351 15,351
 Operating income margin (operating income divided by revenues) 14.8% 15.5% 13.2% 16.2%
 Operating cash flow margin (operating cash flow divided by revenues) 40.8% 41.7% 39.4% 42.4%
 Free cash flow
 Operating cash flow $ 7,656 6,516
 Less: Cash (paid) refunded for income taxes (82) 118
 Less: Cash paid for interest, net of amounts capitalized (1,405) (1,225)
 Less: Capital expenditures (4) (2,858) (2,381)
 Other income (expense) 21 17
 Free cash flow (5) 3,332 3,045
 SPECIAL ITEMS
 (1) – Includes severance costs associated with recent reduction in force initiatives ($81 million), integration, severance, and retention costs associated with our acquisition of Qwest ($71 million) and integration, severance and retention costs associated with our acquisition of Savvis ($14 million); partially offset with a $30 million out-of-period depreciation adjustment and a $3 million credit related to tax incentives for the Embarq integration.
 (2) – Out-of-period depreciation adjustment ($30 million) to correct an overstatement of depreciation.
 (3) – Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($371 million); integration and severance costs associated with our acquisition of Embarq ($81 million); transaction and other costs associated with our acquisition of Savvis ($26 million); net of a favorable settlement of an operating tax issue $13 million.
 (4) – Excludes $61 million for the twelve months ended December 31, 2012 and $30 million for the twelve months ended December 31, 2011 of capital expenditures related to the integration of Embarq, Qwest and Savvis.
 (5) – Excludes (i) special items identified in items (1) to (3) and (ii) the impact of pension contributions of $32 million for the twelve months ended December 31, 2012 and $587 million for the twelve months ended December 31, 2011.

 
 

 CenturyLink, Inc.
 OPERATING METRICS
 (UNAUDITED)
 (In thousands)
As of As of As of
December 31, 2012 September 30, 2012 December 31, 2011
Broadband subscribers 5,848 5,807 5,652
Access lines 13,748 13,946 14,584
 CenturyLink, Inc.
 SUPPLEMENTAL NON-GAAP INFORMATION – ADJUSTED DILUTED EPS
 THREE MONTHS ENDED DECEMBER 31, 2012, SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
 (UNAUDITED)
 (Dollars in millions, except per share amounts)
Three months Three months Three months
ended ended ended
December 31, 2012 September 30, 2012 December 31, 2011
(excluding (excluding (excluding
special items) special items) special items)
Net income * $ 240 237 151
Add back:
   Amortization of customer base intangibles:
Qwest 237 241 253
Embarq 34 34 39
Savvis 15 15 20
   Amortization of trademark intangibles:
Qwest 14 15 19
Savvis 2 2 2
   Amortization of fair value adjustment of long-term debt:
Embarq 1 1
Qwest (18) (20) (31)
        Subtotal 285 288 302
   Tax effect of above items (110) (112) (110)
Net adjustment, after taxes 175 176 192
Net income, as adjusted for above items $ 415 413 343
Weighted average diluted shares outstanding 623.7 623.3 618.5
Diluted EPS (excluding special items) $ 0.38 0.38 0.24
Adjusted diluted EPS as adjusted for the above-listed purchase accounting intangible and interest amortizations (excluding special items)  

$

 

0.67

 

0.66

 

0.55

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.
*See preceding schedule for a summary description of special items.
 CenturyLink, Inc.
 SUPPLEMENTAL NON-GAAP INFORMATION – ADJUSTED DILUTED EPS
 TWELVE MONTHS ENDED DECEMBER 31 AND DECEMBER 31, 2011
 (UNAUDITED)
 (Dollars in millions, except per share amounts)
Pro Forma*
Twelve months Twelve months
ended ended
December 31, 2012 December 31, 2011
(excluding (excluding
special items) special items)
Net income ** $ 947 907
Add back:
   Amortization of customer base intangibles:
Qwest 966 1,016
Embarq 146 166
Savvis 59 80
   Amortization of trademark intangibles:
Qwest 63 76
Savvis 9 8
   Amortization of fair value adjustment of long-term debt:
Embarq 4 3
Qwest (86) (198)
        Subtotal 1,161 1,151
   Tax effect of above items (445) (426)
Net adjustment, after taxes 716 725
Net income, as adjusted for above items $ 1,663 1,632
Weighted average diluted shares outstanding 622.3 615.8
Diluted EPS (excluding special items) $ 1.52 1.46
Adjusted diluted EPS as adjusted for the above-listed purchase accounting intangible and interest amortizations (excluding special items)  

$

 

2.67

 

2.64

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, Qwest and Savvis assuming their respective 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 assigned to intangible assets (primarily customer relationship); (iii) adjustments to depreciation to reflect the fair value 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 Qwest and Savvis mergers had been consummated as of January 1, 2010.
**See preceding schedule for a summary description of special items.
 CenturyLink, Inc.
 SUPPLEMENTAL SELECT SAVVIS REVENUE INFORMATION
 THREE MONTHS ENDED DECEMBER 31, 2012, SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
 (UNAUDITED)
 (Dollars in millions)
Three months Three months Three months
ended ended ended
December 31, 2012 September 30, 2012 December 31, 2011
Colocation revenue $ 113 110 99
Managed hosting revenue 121 108 98

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