CenturyLink Reports Fourth Quarter and Full Year 2018 Results

Highlights
– Delivered solid results for the fourth quarter and full year 2018
– Reducing annual dividend to $1.00 from $2.16 per share, lowering leverage target to 2.75 to 3.25 times Net Debt to Adjusted EBITDA and accelerating the timeframe to be within the target range
– Achieved the originally projected annualized run-rate Adjusted EBITDA synergies of $850 million related to the acquisition of Level 3 as of the end of 2018, two years earlier than anticipated
– Announced additional annualized run-rate savings of $800 million to $1.0 billion of synergies and transformation initiatives projected to be realized over the next three years
– Reported Net Loss of ($1.733) billion for the full year 2018, which includes the effects of a non-cash goodwill impairment charge for the consumer business of $2.726 billion in the Fourth Quarter 2018
– Generated Adjusted EBITDA of $9.040 billion for the Full Year 2018, excluding integration-related expenses and special items of $438 million
– Expanded Adjusted EBITDA margin, excluding integration-related expenses and special items, to 39.8% in Fourth Quarter 2018, from 36.8% in Pro Forma Fourth Quarter 2017
– Generated Net Cash Provided by Operating Activities of $7.032 billion for the full year 2018
– Generated Free Cash Flow of $4.215 billion for the full year 2018, excluding cash paid for integration-related expenses and special items of $358 million

MONROE, La., Feb. 13, 2019 /PRNewswire/ — CenturyLink, Inc. (NYSE:CTL, news, filings) today reported results for the fourth quarter and full year December 31, 2018.

“CenturyLink’s focus on disciplined execution in 2018 enabled us to make significant progress integrating Level 3, including achieving our originally announced synergy target more than two years earlier than expected,” said Jeff Storey, president and CEO of CenturyLink. “In 2019, we are shifting our focus from integration to transformation. We are focused on profitable revenue growth in our business markets and believe the scope and scale of our global assets, along with our innovative product portfolio, position us to succeed.

“In addition to this focus on growth, we are shifting our capital allocation priorities and reducing the annual dividend to $1.00 from the current $2.16. Strong business fundamentals allow us to make the important decision to lower our leverage target to 2.75x to 3.25x Net Debt to Adjusted EBITDA and accelerate our timeframe to reach that target, while still returning significant cash to shareholders and continuing to invest in revenue and EBITDA growth initiatives.”

Total revenue was $5.78 billion for the fourth quarter 2018, compared to $6.01 billion for the fourth quarter 2017 on a pro forma basis.

Diluted loss per share was ($2.26) for the fourth quarter 2018, compared to diluted earnings per share of $1.06 for pro forma fourth quarter 2017. Diluted earnings per share for the fourth quarter 2018 was $0.37 excluding the consumer goodwill impairment charge, after-tax integration-related expenses and other special items.

(1) References to “pro forma” figures throughout this release assume the Level 3 acquisition and the colocation and data center sale took place on January 1, 2017. For a description of adjustments made in connection with preparing these pro forma figures, see the attached schedule in the Non-GAAP metrics section of this release.
(2) See the attached schedules for definitions of non-GAAP metrics and reconciliation to GAAP figures.
(3) Excludes (i) $112 million of integration-related expenses for the fourth quarter of 2018, (ii) $218 million of transaction and integration-related expenses for the fourth quarter of 2017, and (iii) $438 million of integration-related and special items for the full year 2018 and (iv) $438 million of transaction and integration-related and special items for the pro forma full year 2017.
(4) Excludes cash paid (i) for integration-related expenses and special items of $111 million for the fourth quarter of 2018, (ii) for integration-related expense of $404 million for the fourth quarter of 2017, (iii) for integration-related expenses and special items of $358 million for the full year 2018 and (iv) for integration-related expenses of $467 million for the pro forma full year 2017.

As of January 1, 2018, the company prospectively adopted the new revenue recognition standard (ASC 606). The adoption of this new standard negatively affected total revenue in the fourth quarter 2018 by approximately $28 million, with a $25 million negative effect on Consumer revenue and an overall $3 million negative effect on Business revenue. Within Business, the revenue recognition standard had a negative effect of approximately $8 million on the Medium and Small Business unit, less than $1 million on the International and Global Accounts business unit and $1 million on the Wholesale and Indirect business unit, and a positive effect of $6 million on the Enterprise business unit.

(1) Fourth quarter and full year December 31, 2018 revenue include the effects of Revenue Recognition Standard ASC 606.

(2) References to “pro forma” figures throughout this release assume the Level 3 acquisition and the colocation and data center sale took place on January 1, 2017. For description of adjustments made in connection with preparing these pro forma figures, see the attached schedule in the Non-GAAP metrics section of this release.

(3) The categorization of pro forma revenue by service type was reclassified to conform to the current period presentation.
Cash Flow

Free Cash Flow, excluding integration-related expenses and special items, was $1.192 billion in the fourth quarter 2018, compared to $861 million in the fourth quarter 2017 on a pro forma basis.

As of December 31, 2018, CenturyLink had cash and cash equivalents of $488 million.

Dividend and Capital Allocation Update

After extensive review, the Board of Directors plans to reduce the company’s annual dividend to $1.00 from $2.16, beginning with the Board’s next dividend declaration. Under this revised capital allocation policy, the company plans to reduce the net leverage target to a range of 2.75x to 3.25x in a specified timeframe of approximately three years and continue to fund its growth and transformation initiatives. The company expects to return more than $1 billion annually to shareholders through the $1.00 annual dividend.

Consumer Goodwill Impairment

Each year, the company is required under GAAP to prepare a goodwill impairment analysis of all of its business units. The analysis compares the fair value of the equity for each of the reporting units to the carrying value of equity for each reporting unit. The analysis takes into account the Weighted Average Cost of Capital and market multiples of the Market Participants, along with the company’s forecasts. Based on this analysis, the company recorded a $2.726 billion goodwill impairment for its Consumer business unit.

2019 Business Outlook

“Looking to 2019, we expect to continue to grow Adjusted EBITDA and expand Adjusted EBITDA margins,” said Neel Dev, CenturyLink’s executive vice president and chief financial officer.  “From a starting point of $8.94 billion, which excludes approximately $100 million of Adjusted EBITDA associated with the new lease accounting standard, we expect Adjusted EBITDA to grow to $9.0 to $9.2 billion for the full year 2019.

“Beyond the $850 million of acquisition-related synergies we have already captured, we expect to realize an additional $800 million to $1.0 billion of run-rate Adjusted EBITDA synergies and transformation savings over the next three years. We expect to incur $450 to $650 million in one-time costs to achieve these savings.”

2019 Reporting Changes

As a result of organization changes made in January 2019, the company is making changes to revenue reporting categories in 2019 to align with how the business is being managed.

The indirect channel, which primarily targets small to medium-sized enterprises, will move from the Wholesale and Indirect Business unit to the Small and Medium Business unit.  The company is also moving State and Local Government customers from the Small and Medium Business unit to the Enterprise Business unit to gain efficiencies by managing all government customers in a single organization.

In addition, the new reporting structure reflects changes made to customer assignments between all five customer-facing business units.

For the Business segment, pro forma for these business unit changes, fourth quarter 2018 revenue was:

Additionally, the company is making changes to the Service Type reporting to make it easier for investors to evaluate changes to consumer product revenue.

The company will report Consumer revenue in the following categories: Broadband; Voice; Regulatory (includes CAF II and other support funds); and Other, which includes Retail Video and other miscellaneous services.

For the Business segment, the company will use the same structure used in 2018, with minor changes between the four service types.

Pro forma for these changes, fourth quarter 2018 services revenue was:

Investor Call

CenturyLink’s management will host a conference call at 5:00 p.m. ET today, February 13, 2019. The conference call will be streamed live over CenturyLink’s website at ir.centurylink.com. Additional information regarding fourth quarter 2018 results, including the presentation management will review during the conference call, will be available on the Investor Relations website prior to the call. If you are unable to join the call via the Web, the call can be accessed live at +1 877-283-5643 (U.S. Domestic) or +1 312-281-1201 (International).

A telephone replay of the call will be available beginning at 7:00 p.m. ET on February 13, 2019, and ending May 14, 2019, at 6:00 p.m. ET. The replay can be accessed by dialing +1 800-633-8284 (U.S. Domestic) or +1 402-977-9140 (International), reservation code 21913386. A webcast replay of the call will also be available on our website beginning at 7:00 p.m. ET on February 13, 2019 and ending May 8, 2019 at 6:00 p.m. ET.

About CenturyLink

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

Forward Looking Statements

Except for historical and factual information, the matters set forth in this release and other of our oral or written statements identified by words such as “estimates,” “expects,” “anticipates,” “believes,” “plans,” “intends,” and similar expressions are forward-looking statements as defined by the federal securities laws, and are subject to the “safe harbor” protections thereunder. These forward-looking statements are not guarantees of future results and are based on current expectations only, are inherently speculative, and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control.  Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the effects of competition from a wide variety of competitive providers, including decreased demand for our traditional wireline service offerings and increased pricing pressures; the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete; our ability to attain our key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems, strengthening our relationships with customers and attaining projected cost savings; our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakage or similar events impacting our network or the availability and quality of our services; the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, special access, universal service, broadband deployment, data protection and net neutrality; our ability to timely realize the anticipated benefits of our November 2017 combination with Level 3, including our ability to use Level 3’s net operating losses in the amounts projected; our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix; possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed data transmission services; our ability to successfully maintain the quality and profitability of our existing product and service offerings and to introduce profitable new offerings on a timely and cost-effective basis; our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments, dividends, pension contributions and other benefits payments; changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise; our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; the negative impact of increases in the costs of our pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations; adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise; our ability to meet the terms and conditions of our debt obligations, including our ability to make transfers of cash in compliance therewith; our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords and financial institutions; our ability to collect our receivables from financially troubled customers; any adverse developments in legal or regulatory proceedings involving us; changes in tax, communications, pension, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels; the effects of changes in accounting policies, practices or assumptions, including changes that could potentially require future impairment charges; the effects of adverse weather, terrorism or other natural or man-made disasters; the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in public policy, in the views of financial analysts or in general market, labor, economic or geo-political conditions; and other risks referenced from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”).  For all the reasons set forth above and in our SEC filings, you are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans without notice at any time and for any reason.

Reconciliation to GAAP

This release includes certain non-GAAP historical and forward-looking financial measures, including but not limited to Adjusted EBITDA, free cash flow, unlevered cash flow, pro forma financial data and adjustments to GAAP measures to exclude the effect of integration-related expenses and special items. In addition to providing key metrics for management to evaluate the company’s performance, we believe these measurements assist investors in their understanding of period-to-period operating performance and in identifying historical and prospective trends.

Reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the attached financial schedules. Reconciliation of additional non-GAAP historical financial measures that may be discussed during the call described above, along with further descriptions of non-GAAP financial measures, will be available in the Investor Relations portion of the company’s website at www.centurylink.com and in the associated current report on form 8-K. Non-GAAP measures are not presented to be replacements or alternatives to the GAAP measures, and investors are urged to consider these non-GAAP measures in addition to, and not in substitution for, measures prepared in accordance with GAAP. CenturyLink may present or calculate its non-GAAP measures differently from other companies.

Description of Non-GAAP Metrics

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

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

We use the term Special items as a non-GAAP measure to describe items that impacted a period’s statement of income for which investors may want to give special consideration due to their magnitude, nature or both. We do not use the term non-recurring because while some of these items are special because they are unusual and infrequent, others may recur in future periods.

Adjusted EBITDA ($) is defined as net income (loss) from the Statements of Income before income tax (expense) benefit, total other income (expense), depreciation and amortization, share-based compensation expense and goodwill impairment.

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

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

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

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

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

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

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

Outlook

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

⁽¹⁾ Footnotes (1) and (2) from the outlook table included at page 5 are incorporated herein by reference.

SOURCE CenturyLink, Inc.

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