Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CTL > SEC Filings for CTL > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for CENTURYLINK, INC

Form 10-Q for CENTURYLINK, INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, references in this report to "CenturyLink," "we," "us" and "our" refer to CenturyLink, Inc. and its consolidated subsidiaries, including Qwest Communications International Inc. and its consolidated subsidiaries (referred to as "Qwest") for periods on or after April 1, 2011 and including SAVVIS, Inc. and its consolidated subsidiaries (referred to as "Savvis") for periods on or after July 15, 2011.

All references to "Notes" in this Item 2 refer to the Notes to Consolidated Financial Statements included in Item 1 of this quarterly report.

Certain statements in this report constitute forward-looking statements. See the last paragraph of this Item 2 and "Risk Factors" in Item 1A of Part II of this report for a discussion of certain factors that could cause our actual results to differ from our anticipated results.

Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the first nine months of the year are not indicative of the results of operations that might be expected for the entire year.

We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line (including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless, and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security monitoring services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.

As of September 30, 2012, we operated 13.9 million access lines in 37 states, and served 5.8 million broadband subscribers. During the second quarter of 2012, we updated our methodology for counting broadband subscribers to include residential, business and wholesale subscribers instead of only residential and small business subscribers. We have restated our previously reported amounts to reflect this change. Our access line count includes only those access lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. Our counting methodology also excludes unbundled loops and includes stand-alone broadband subscribers. Our counting methodology may not be comparable to those of other companies. We also operate 53 data centers throughout North America, Europe and Asia.

Our consolidated financial statements include the accounts of CenturyLink, Inc. ("CenturyLink") and its majority-owned subsidiaries. These subsidiaries include Savvis beginning July 15, 2011, and Qwest beginning April 1, 2011. For more information, see Note 2-Acquisitions. Due to the significant size of these acquisitions, direct comparisons of our consolidated results of operations for the three and nine months ended September 30, 2012 to the three and nine months ended September 30, 2011 are less meaningful than usual. We discuss below, under "Segment Results", certain trends that we believe are significant to the combined company.

In the discussion that follows, we refer to the incremental business activities that we now operate as a result of the Savvis acquisition and the Qwest acquisition as "Legacy Savvis" and "Legacy Qwest", respectively. References to "Legacy CenturyLink", when used in reference to a comparison of our consolidated results for the nine months ended September 30, 2012 and 2011, mean the business we


Table of Contents

operated prior to the Qwest and Savvis acquisitions, and, when used in reference to a comparison of our consolidated results for the three months ended September 30, 2012 and 2011, mean the business we operated immediately prior to the Savvis acquisition on July 15, 2011.

We have incurred operating expenses related to our acquisition of Savvis in July 2011, Qwest in April 2011 and Embarq Corporation ("Embarq") in July 2009. These expenses are reflected in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations as summarized below.

                                              Three Months Ended         Nine Months Ended
                                                 September 30,             September 30,
                                             2012           2011         2012         2011
                                                         (Dollars in millions)
Cost of services and products (exclusive
of depreciation and amortization):
Integration and other expenses
associated with acquisitions                 $     4              14          13          39
Severance expenses, accelerated
recognition of share-based awards and
retention compensation associated with
acquisitions                                       -               3           -          18

                                             $     4              17          13          57

Selling, general and administrative:
Integration and other expenses
associated with acquisitions                 $     9              89          22         211
Severance expenses, accelerated
recognition of share-based awards and
retention compensation associated with

acquisitions 4 (2) 33 137

$ 13 87 55 348

This table does not include costs incurred by Qwest or Savvis prior to being acquired by us. Based on current plans and information, we estimate that, in relation to our Qwest acquisition, we expect integration expenses to be between $600 to $700 million (which includes approximately $455 million of cumulative expenses incurred through September 30, 2012) and our capital expenditures associated with integration activities will approximate $200 million (which includes approximately $52 million of cumulative capital expenditures incurred through September 30, 2012). We anticipate that the amount of our integration costs in future quarters will vary substantially based on integration activities conducted during those periods and could in certain cases be significantly higher than those incurred by us during the three months ended September 30, 2012.

Effective April 1, 2012, in order to more effectively leverage the strategic assets from our recent acquisitions of Embarq, Qwest and Savvis to better serve our business and government customers, we internally restructured our business into the following operating segments:


Regional markets, which consists primarily of providing products and services to residential consumers, state and local governments, small to medium-sized businesses and enterprise customers that in each case are located mainly within one of our six regions;


Wholesale markets, which consists primarily of providing products and services to other domestic and international communications providers;


Enterprise markets-network, which consists primarily of providing network communications products and services to national and international enterprise and government customers; and


Table of Contents


Enterprise markets-data hosting, which consists primarily of providing colocation, managed hosting and cloud services to national and international enterprise and government customers.

We report financial information separately for each of these segments; however, as described in further detail below, our segment information does not include capital expenditures, total assets, or certain revenues and expenses that we manage on a centralized basis. As we continue to integrate our recent acquisitions, we plan to make additional changes to the way we assess performance and make decisions about allocating resources, which could further change our segment reporting. Our segment results are not necessarily indicative of the results of operations that our segments would have achieved had they operated as stand-alone entities during the periods presented. For additional information about our segments, see Note 9-Segment Information and "Results of Operations-Segment Results" below.

Results of Operations

    The following table summarizes the results of our consolidated operations
for the three and nine months ended September 30, 2012 and 2011, presented in a
manner that we believe will be useful for understanding the relevant trends
affecting our business. Our operating results include operations of Savvis for
periods after July 15, 2011 and Qwest for periods after April 1, 2011.

                                    Three Months Ended             Nine Months Ended
                                       September 30,                 September 30,
                                   2012             2011            2012          2011
                                    (Dollars in millions except per share amounts)
   Operating revenues            $     4,571           4,596           13,793     10,698
   Operating expenses                  3,835           4,048           11,746      9,206

   Operating income                      736             548            2,047      1,492
   Other income (expense)              (314)           (317)          (1,171)      (736)
   Income tax expense                    152              93              332        292

   Net income                    $       270             138              544        464

   EARNINGS PER COMMON SHARE
   Basic                         $       .43             .22              .88        .91
   Diluted                       $       .43             .22              .87        .91

The following table summarizes certain of our operational metrics:

                                  As of September 30,      Increase /
                                   2012          2011      (Decrease)     % Change
                                                  (in thousands)
        Broadband subscribers         5,807       5,579            228           4%
        Access lines                 13,946      14,803          (857)         (6)%
        Employees                      46.5        49.3          (2.8)         (6)%

During the second quarter of 2012, we updated our methodology for counting broadband subscribers to include residential, business and wholesale subscribers instead of only residential and small business subscribers. We have restated our previously reported amounts to reflect this change.

During the last several years, we have experienced revenue declines (excluding the impact of acquisitions) primarily due to declines in access lines, intrastate access rates and minutes of use. Prior to its acquisition, Qwest had experienced similar declines in its revenues. To mitigate these declines, we remain focused on efforts to, among other things:


promote long-term relationships with our customers through bundling of integrated services;


Table of Contents


provide new services, such as video, cloud hosting, managed hosting, colocation services and other additional services that may become available in the future due to advances in technology or improvements in our infrastructure;


provide our broadband and premium services to a higher percentage of our customers;


pursue acquisitions of additional assets if available at attractive prices;


increase usage of our networks; and


market our products and services to new customers.

Operating Revenues

We currently categorize our products, services and revenues among the following four categories:


Strategic services, which include primarily broadband, private line (including special access which we market to wholesale and business customers who require dedicated equipment to transmit large amounts of data between sites), Multi-Protocol Label Switching ("MPLS") (which is a data networking technology that can deliver the quality of service required to support real-time voice and video), hosting (including cloud hosting and managed hosting), colocation, Ethernet, video (including resold satellite and our facilities-based video services), voice over Internet Protocol ("VoIP") and Verizon Wireless services;


Legacy services, which include primarily local, long-distance, switched access, public access, integrated services digital network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations);


Data integration, which includes the sale of telecommunications equipment located on customers' premises and related professional services, such as network management, installation and maintenance of data equipment and building of proprietary fiber-optic broadband networks for our government and business customers; and


Other, which consists primarily of universal service fund ("USF") revenue and surcharges. Unlike the first three revenue categories, other revenues are not included in our segment revenues.

Our total operating revenues increased for the nine months ended September 30, 2012 due primarily to our acquisitions of Qwest and Savvis.

The following tables summarize our operating revenues:

                                 Three Months Ended
                                   September 30,              Increase / (Decrease)
                                  2012         2011      CenturyLink     Savvis     Total
                                             (Dollars in millions)
    Strategic services          $   2,101       1,960             100         41       141
    Legacy services                 2,045       2,223           (178)          -     (178)
    Data integration                  168         166               2          -         2
    Other                             257         247              10          -        10

    Total operating revenues    $   4,571       4,596            (66)         41      (25)


Table of Contents

                              Nine Months Ended
                                September 30,                  Increase / (Decrease)
                               2012        2011      CenturyLink     Qwest     Savvis     Total
                                                   (Dollars in millions)
 Strategic services          $   6,237      4,229             216     1,207        585     2,008
 Legacy services                 6,284      5,494           (458)     1,248          -       790
 Data integration                  483        349              18       116          -       134
 Other                             789        626              31       132          -       163

 Total operating revenues    $  13,793     10,698           (193)     2,703        585     3,095

As noted in the tables above, total operating revenues decreased $25 million for the three months ended September 30, 2012 due primarily to a decline in legacy services revenues relating principally to the continuing loss of access lines in our markets. We believe the decline in the number of access lines was primarily due to the displacement of traditional wireline telephone services by other competitive products and services. We estimate that our access lines loss will be between 5.6% and 6.0% in 2012. Our legacy services revenues were also negatively impacted in 2012 by the continued migration of customers to bundled service offerings at lower effective rates. The decreases in our legacy services revenues were partially offset by higher revenues from strategic services revenues. Ethernet, MPLS, Internet Protocol Television ("IPTV"), Competitive Local Exchange Carriers ("CLEC") and broadband services accounted for a majority of the growth in strategic services revenues.

Legacy CenturyLink operating revenues decreased $193 million during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily due to the factors cited above for the three months ended September 30, 2012.

Further analysis of our operating revenues by segment is provided below in "Segment Results."

Operating Expenses

    Our operating expenses increased substantially for the nine months ended
September 30, 2012, in comparison to 2011 primarily due to our acquisitions of
Qwest and Savvis.

    The following tables summarize our operating expenses:

                                    Three Months Ended
                                      September 30,               Increase / (Decrease)
                                     2012         2011      CenturyLink      Savvis     Total
                                                     (Dollars in millions)
Cost of services and products
(exclusive of depreciation and
amortization)                      $   1,943       1,950             (29)         22       (7)
Selling, general and
administrative                           748         870            (132)         10     (122)
Depreciation and amortization          1,144       1,228             (96)         12      (84)

Total operating expenses           $   3,835       4,048            (257)         44     (213)


Table of Contents

                               Nine Months Ended
                                 September 30,                  Increase / (Decrease)
                                2012        2011      CenturyLink     Qwest     Savvis     Total
                                                    (Dollars in millions)
Cost of services and
products (exclusive of
depreciation and
amortization)                 $    5,732     4,357            (12)     1,082        305     1,375
Selling, general and
administrative                     2,454     2,075           (257)       483        153       379
Depreciation and
amortization                       3,560     2,774           (117)       741        162       786

Total operating expenses      $   11,746     9,206           (386)     2,306        620     2,540

For the three and nine months ended September 30, 2012, Legacy CenturyLink cost of services and products (exclusive of depreciation and amortization) were slightly lower as compared to the comparable periods in 2011. During the periods, we experienced decreases in severance and salaries and wages, which were partially offset by increases in customer premise equipment and maintenance costs, network expense, and contractor costs.

Legacy CenturyLink's selling, general and administrative expenses decreased for the three and nine months ended September 30, 2012 primarily due to a decrease in severance and integration expenses relating to our recent acquisitions, as well as a decrease in salaries, wages, and employee benefits due to a reduction in headcount. As discussed in the "overview" section, our selling general and administrative expenses for the three and nine months ended September 30, 2011 included substantial severance and integration costs related to the Qwest acquisition. See Note 2-Acquisitions.

Effective January 1, 2012, we changed our rates of capitalized labor as we transitioned certain of Qwest's legacy systems to our historical company systems. This transition resulted in an estimated $30 million to $45 million increase in the amount of labor capitalized as an asset compared to the amount that would have been capitalized if Qwest had continued to use its legacy systems and a corresponding estimated $30 million to $45 million decrease in operating expenses for the nine months ended September 30, 2012. This change is expected to result in an estimated operating expense reduction of approximately $35 million to $60 million for the year ending December 31, 2012.

Excluding the effects of the acquisitions of Qwest and Savvis, depreciation and amortization expense for Legacy CenturyLink decreased due to annual updates of our depreciation rates for capitalized assets and an out-of-period accounting adjustment, partially offset by net growth in capital assets.

Further analysis of our operating expenses by segment is provided below in "Segment Results."


Table of Contents

Other Consolidated Results

    The following tables summarize our total other income (expense) and income
tax expense:

                                   Three Months Ended
                                     September 30,              Increase / (Decrease)
                                    2012         2011      CenturyLink     Savvis     Total
                                                    (Dollars in millions)
  Interest expense                $   (326)       (324)             (1)          3         2
  Other income (expense)                 12           7               5          -         5

  Total other income (expense)    $   (314)       (317)             (6)          3       (3)

  Income tax expense                    152          93              nm         nm        59




                                 Nine Months Ended
                                   September 30,                 Increase / (Decrease)
                                  2012        2011      CenturyLink     Qwest    Savvis    Total
                                                     (Dollars in millions)
Interest expense                $  (1,004)     (732)               87      169        16      272
Net loss on early retirement
of debt                              (194)       (1)              201      (8)         -      193
Other income (expense)                  27       (3)             (30)      (1)         1     (30)

Total other income (expense)    $  (1,171)     (736)              258      160        17      435

Income tax expense                     332       292               nm       nm        nm       40


nm-We believe it is not meaningful to attribute changes in income tax expense to the acquisitions of Savvis or Qwest.

Interest Expense

Interest expense for the three months ended September 30, 2012 was fairly flat when compared to a year ago. However, this was due substantially to a significant reduction in the amortization of Qwest debt premiums recorded at acquisition as a result of various debt redemptions offset by a significant net reduction in bond coupon interest due to several refinancings along with increased capitalized interest. See "Liquidity and Capital Resources" for the details of the debt redemptions and refinancing.

Interest expense for the nine months ended September 30, 2012 increased by $272 million compared to the year ago period. This increase is primarily due to the 2012 period containing nine months of Qwest interest expense compared to the 2011 period only containing six months.

The increase in interest expense attributable to Legacy CenturyLink was due primarily to the issuance of $2 billion in notes in June 2011 to fund the cash portion of the acquisition of Savvis.

Net Loss on Early Retirement of Debt

In the second quarter of 2012, our subsidiaries Embarq and QC completed premium-priced cash tender offers for the purchase of certain of their respective outstanding debt securities, resulting in an aggregate loss of $193 million. Also in the second quarter of 2012, Embarq and our subsidiary Qwest Communications International Inc. ("QCII") redeemed certain of their respective outstanding debt securities which resulted in a net loss of $9 million.

In the first quarter of 2012, QCII redeemed certain of its outstanding debt securities, which resulted in a gain of $8 million.


Table of Contents

Other Income (Expense)

Other income (expense) reflects certain items not directly related to our core operations, including our share of income from our 49% interest in a cellular partnership, interest income, gains and losses from non-operating asset dispositions and impairments and foreign currency gains and losses. Other income (expense) was greater for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 due primarily to a gain on the sale of our auction rate securities. Other income (expense) was greater for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 due to gains on the sales of our auction rate securities and the recognition of a one-time $16 million fee paid in June 2011 relating to the acquisition of Savvis.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2012 and 2011 was $332 million and $292 million, respectively. The effective tax rate for the nine months ended September 30, 2012 was 37.9% compared to 38.7% for the comparative prior year period. The 2012 year-to-date effective tax rate reflects the reversal of a valuation allowance related to the auction rate securities, while the 2011 year-to-date effective tax rate reflects the effects of a valuation allowance reversal related to a state net operating loss, which is partially offset by the effects of non-deductible transaction costs.


Table of Contents

Segment Results

     General

    We have restated previously reported segment results due to the
above-described reorganization of our business. Segment results are summarized
below:

                                          Three Months Ended       Nine Months Ended
                                            September 30,            September 30,
                                           2012         2011        2012        2011
                                                    (Dollars in millions)
     Total segment revenues              $   4,314       4,349       13,004     10,072
     Total segment expenses                  2,037       2,043        6,039      4,428
. . .
  Add CTL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CTL - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.