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CenturyLink Reports Third Quarter 2012 Earnings

Date : 11/08/2012 @ 2:34AM
Source : PR Newswire (US)
Stock : Centurylink, Inc. (CTL)
Quote : 39.77  -0.13 (-0.33%) @ 5:30AM
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CenturyLink Reports Third Quarter 2012 Earnings

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CenturyLink Reports Third Quarter 2012 Earnings

MONROE, La., Nov. 7, 2012 /PRNewswire/ -- CenturyLink, Inc. (NYSE: CTL) today reported strong operating revenues, operating cash flow and free cash flow for third quarter 2012.

(Logo: http://photos.prnewswire.com/prnh/20090602/DA26511LOGO)

"CenturyLink's  third quarter results reflect our continued progress toward top line revenue stabilization, successful integration of the Qwest and Savvis operations and alignment of our operating costs with our revenue and growth opportunities," said Glen F. Post, III, chief executive officer and president.

"Our Enterprise Markets-Network team achieved recurring revenue growth for the third straight quarter driven by solid customer retention and the increasing revenue contribution from enterprise customers added earlier this year. We continue to see strong demand for network services from enterprise customers as we recorded solid quarterly bookings and exited the quarter with a strong sales funnel.

"Our strategic revenues continued to increase in our Regional Markets and Enterprise Markets operations; however, as previously discussed, we did experience modest strategic Wholesale Markets revenue compression as wireless carriers continue to migrate from copper-based to fiber-based connections.

"We are pleased with the continued progress we made during the third quarter toward stabilizing top-line revenue and we believe our continued investment in our key strategic opportunities will help drive enhanced shareholder value," Post said.

Third Quarter Highlights

  • Improved year-over-year actual-to-pro forma revenue trend to a 1.3% rate of decline (1.4% rate of decline excluding data integration revenue), compared to a 4.6% decline in pro forma third quarter 2011.
  • Achieved free cash flow of $905 million, excluding special items and integration-related capital expenditures.
  • Added more than 44,000 high-speed Internet customers; ended third quarter 2012 with over 5.8 million subscribers[3].
  • Reduced access line loss by 22% compared to third quarter 2011, as the line loss trend improved during third quarter 2012 to a 5.8% annual decline compared to a 7.1% annual decline in third quarter 2011.
  • Expanded the number of Prism TV subscribers by 11% in third quarter 2012 from second quarter 2012, ending the quarter with more than 104,000 subscribers in service.
  • Generated sequential recurring revenue growth in our Enterprise Markets - Network and Enterprise Markets - Data Hosting segments.
  • Opened a data center[4] in Singapore, bringing total data centers to 53 throughout North America, Europe and Asia, with total sellable floor space of approximately 1.4 million square feet.

Consolidated Third Quarter Financial Results

Operating revenues for third quarter 2012 were $4.57 billion compared to $4.60 billion in third 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 $58 million of incremental revenue contributions from the Savvis acquisition completed July 15, 2011 and increases in strategic revenues, primarily resulting from business customer demand for high-bandwidth data services and growth in high-speed Internet and Prism TV subscribers.

Comparing pro forma 2011 to third quarter 2012, operating revenues declined 1.3% from $4.63 billion a year ago to $4.57 billion this quarter, due to the decline in legacy revenues more than offsetting the increase in strategic revenues as discussed above.

Operating expenses, excluding special items, decreased to $3.86 billion from $3.94 billion in third quarter 2011, primarily due to lower personnel-related costs, operating taxes and depreciation and amortization expense, partially offset by $50 million of incremental operating costs associated with the Savvis acquisition included in the current quarter.

Comparing pro forma 2011 to third quarter 2012, operating expenses, excluding special items, decreased to $3.86 billion in third quarter 2012 from pro forma third quarter 2011 operating expenses of $3.98 billion.

Operating cash flow (as defined in our attached supplemental schedules), excluding special items, increased slightly to $1.90 billion from $1.88 billion in third quarter 2011, primarily due to lower personnel-related costs and the Savvis acquisition contribution to operating cash flow, which was partially offset by the decline in legacy revenues. For third quarter 2012, CenturyLink achieved an operating cash flow margin, excluding special items, of 41.5% versus 41.0% in third quarter 2011.

Third quarter 2012 operating cash flow of $1.90 billion, excluding special items, was flat from pro forma third quarter 2011. Operating cash flow margin, excluding special items, was 41.5% in third quarter 2012 compared to 40.9% in pro forma third quarter 2011.

Adjusted Net Income and Adjusted Diluted Earnings Per Share (Adjusted Diluted EPS)

Adjusted Net Income and Adjusted Diluted EPS exclude the after-tax impact of special items, the non-cash after-tax impact of the amortization of intangibles, and the non-cash after-tax impact to interest expense of the assignment of fair value to debt outstanding related to the Embarq, Qwest and Savvis transactions.

Excluding the items outlined above, CenturyLink's Adjusted Net Income for third quarter 2012 was $413 million compared to pro forma Adjusted Net Income of $377 million in third quarter 2011. Third quarter 2012 Adjusted Diluted EPS was $0.66 compared to pro forma Adjusted Diluted EPS of $0.61 in the year-ago period. See the attached schedules for additional information.

GAAP Results – Third Quarter

Under generally accepted accounting principles (GAAP), net income for third quarter 2012 was $270 million compared to $138 million for third quarter 2011, and diluted earnings per share for third quarter 2012 was $0.43 compared to $0.22 for third quarter 2011. Third quarter 2012 net income and diluted earnings per share reflect $33 million ($0.05 per share) due to a favorable out-of-period adjustment to depreciation expense related to the fair value previously assigned to Embarq plant assets, an income tax benefit from the reversal of a valuation allowance and a gain on the sale of a non-operating investment, which were partially offset by severance, integration and retention costs associated with the Embarq, Qwest and Savvis acquisitions and severance associated with recent expense reduction initiatives.  

Third quarter 2011 net income and diluted earnings per share reflect after-tax integration, severance, and retention costs associated with the Embarq, Qwest and Savvis acquisitions of $70 million ($0.12 per share).

Segment Results / Highlights

Regional Markets
The Regional Markets segment continued to improve revenue and access line trends in local markets by leveraging CenturyLink's local operating model.

  • Strategic revenues were $912 million in the quarter, a 7.9% increase over pro forma third quarter 2011. Excluding the impact of private line services, the adjusted growth rate was more than 9%.
  • Generated $2.47 billion in total revenues, a decrease of 2.1% from pro forma third quarter 2011, reflecting the continued decline in traditional legacy services tempered by Access Recovery Charges implemented effective July 1, 2012 in accordance with the CAF Order[5].
  • Achieved strong business strategic data and network managed services growth.
  • Added more than 10,000 Prism TV subscribers during third quarter with over 90% attachment rate of broadband services.

Wholesale Markets
The Wholesale Markets segment strategic revenues declined modestly from pro forma third quarter 2011 primarily due to wireless carrier migration from private line to Ethernet services. The Company is progressing well in its fiber-to-the-tower builds and currently expects to complete 4,000 to 4,500 fiber builds in 2012.

  • Strategic revenues were $568 million in the quarter, slightly lower than pro forma third quarter 2011, driven by wireless carrier bandwidth expansion and higher Ethernet sales offset by declines in copper-based revenue.
  • Generated $908 million in total revenues, a decrease of 7.6% from pro forma third quarter 2011, reflecting the implementation of the CAF Order rate reduction and continued decline in legacy services primarily driven by lower long distance and switched access minutes of use associated with access line loss and displacement of access minutes by alternative forms of communication.
  • Completed approximately 1,335 fiber builds during the third quarter and more than 3,300 year-to-date, ending the quarter with approximately 13,500 fiber-connected towers.

Enterprise Markets – Network
The Enterprise Markets – Network segment achieved solid growth in recurring revenue sales in the third quarter.

  • Strategic revenues were $341 million in the quarter, a 7.2% increase over pro forma third quarter 2011 driven by strength in high-bandwidth offerings such as MPLS[6] and Ethernet services. Excluding the impact of private line services, the adjusted growth rate was more than 13%.
  • Generated $658 million in total revenues, an increase of 5.6% from pro forma third quarter 2011, reflecting growth in high-bandwidth offerings and data integration revenues partially offset by declines in legacy services revenues.
  • Achieved a third straight quarter of sequential 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 media verticals.

  • Operating revenues were $280 million in the quarter, an 8.1% increase from pro forma third quarter 2011. Colocation revenues were $113 million, a 7.6% increase from pro forma third quarter 2011, and managed hosting revenues were $107 million, representing a 9.2% increase over the same period a year ago.
  • Continued to expand global geographic reach in key markets with opening of new data center in Singapore and expansion of data center in New York/New Jersey market.
  • Closed acquisition of certain assets of Ciber's IT Outsourcing (ITO) business in mid-October, which enhances and expands CenturyLink's capabilities in areas such as application-management services and help-desk support.
  • Announced in October forthcoming launch of savvisdirect[7], expanding CenturyLink's portfolio of cloud services to businesses of all sizes.

Integration Update

During third quarter 2012, CenturyLink incurred pre-tax integration, severance and retention costs of $17 million ($10 million net after-tax) related to the Embarq, Qwest and Savvis acquisitions.

CenturyLink ended third quarter 2012 with an annualized operating expense synergy run rate of approximately $450 million from the Qwest acquisition. CenturyLink currently expects to exit 2012 with approximately $480 million in annual run-rate synergies related to the Qwest acquisition as operating expense savings are being achieved earlier than anticipated.

Guidance – Fourth Quarter 2012 and Full Year 2012

The Company expects fourth quarter 2012 operating cash flow to increase compared to third quarter 2012 due to anticipated continued growth in strategic revenues and lower outside plant maintenance and utility costs.

Fourth Quarter 2012



Operating Revenue

$4.56 to $4.61 billion

Operating Cash Flow (excl special items)

$1.90 to $1.94 billion

Adjusted Diluted EPS (excl special items)

$0.64 to $0.69



Full Year 2012

Previous Guidance

Current Guidance

Operating Revenue

$18.3 to $18.4 billion

$18.35 to $18.4 billion

Operating Cash Flow (excl special items)

$7.5 to $7.65 billion

$7.64 to $7.68 billion

Adjusted Diluted EPS (excl special items)

$2.45 to $2.55

$2.64 to $2.69

Capital Expenditures[8]

$2.7 to $2.8 billion

$2.75 to $2.85 billion

Free Cash Flow (excl special items)

$3.25 to $3.4 billion

$3.3 to $3.4 billion

2013 Outlook

CenturyLink's operating and capital investment in its key strategic initiatives is driving strategic revenue growth and the Company expects to continue to invest in these key initiatives in the future.

CenturyLink anticipates further improvement in top line revenues in 2013, currently expecting the annual rate of revenue decline for full year 2013 compared to full year 2012 to be in the -0.5% to -1.5% range. Additionally, the Company expects to reach top line revenue stabilization in 2014.  Similar to what the Company anticipates experiencing in 2012, operating and free cash flows are anticipated to be lower in 2013 primarily due to the Company's continued shift in its legacy and strategic revenue mix and investment in key strategic initiatives. In addition, the Company expects a lower level of incremental synergies in 2013 compared to the level of incremental synergies anticipated to be achieved in 2012.

CenturyLink expects to provide 2013 guidance in mid-February when it reports fourth quarter and full year 2012 results.

All 2012 guidance figures and 2013 outlook statements included in this release (i) speak as of November 7, 2012 only, (ii) include the impact of the Ciber ITO assets acquired on October 15, 2012, and (iii) exclude the effects of special items, future changes in regulation or accounting rules, integration expenses associated with the Qwest, Savvis and Ciber acquisitions, any changes in operating or capital plans and any future mergers, acquisitions, divestitures, buybacks or other similar business transactions. See "Forward Looking Statements" below.

Investor Call

As previously announced, CenturyLink's management will host a conference call at 4:00 p.m. Central Time today, November 7, 2012. Interested parties can access the call by dialing 866-244-4518. The call will be accessible for replay through November 14, 2012, by calling 888-266-2081 and entering the access code 1592908. Investors can also listen to CenturyLink's earnings conference call and replay by accessing the Investor Relations portion of the Company's Web site at www.centurylink.com through November 28, 2012.

Reconciliation to GAAP

This release includes certain non-GAAP financial measures, including but not limited to operating cash flow, free cash flow, adjustments to GAAP measures to exclude the effect of special items and certain pro forma combined operating results. In addition to providing key metrics for management to evaluate the Company's performance, we believe these measurements assist investors in their understanding of period-to-period operating performance and in identifying historical and prospective trends. Reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the attached financial schedules. Reconciliation of additional non-GAAP financial measures that may be discussed during the earnings call described below will be available in the Investor Relations portion of the Company's Web site at www.centurylink.com. Investors are urged to consider these non-GAAP measures in addition to, and not in substitution for, measures prepared in accordance with GAAP.

About CenturyLink

CenturyLink is the third largest telecommunications company in the United States and is recognized as a leader in the network services market by technology industry analyst firms. The Company is a global leader in cloud infrastructure and hosted IT solutions for enterprise customers. CenturyLink provides data, voice and managed services in local, national and select international markets through its high-quality advanced fiber optic network and multiple data centers for businesses and consumers. The company also offers advanced entertainment services under the CenturyLink Prism TV and DIRECTV brands. Headquartered in Monroe, La., CenturyLink is an S&P 500 company and is included among the Fortune 500 list of America's largest corporations. For more information, visit www.centurylink.com.

Forward Looking Statements

Certain non-historical statements made in this release and future oral or written statements or press releases by us or our management are intended to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations only, and are subject to a number of risks, uncertainties and assumptions, many of which are beyond our control. Actual events and results may differ materially from those anticipated, estimated or projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the timing, success and overall effects of competition from a wide variety of competitive providers; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry (including recent reforms and changes by the Federal Communications Commission regarding intercarrier compensation and the Universal Service Fund, among other things); our ability to 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 a $2.90 per common share dividend annually, which may be affected by changes in our cash requirements, capital spending plans, cash flows or financial position; unanticipated increases or other changes in our future cash requirements, whether caused by unanticipated increases in capital expenditures, increases in pension funding requirements or otherwise; 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-K for the year ended December 31, 2011, as updated and supplemented by our subsequent SEC reports. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. You are further cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release. We undertake no obligation to update any of our forward-looking statements for any reason.

[1] See the attached pro forma statements of income for more information about our pro forma results discussed in this release.
[2] See attachments for non-GAAP reconciliations.
[3] Effective 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.
[4] We define a "data center" as any facility where we market, sell and deliver either colocation services or multi-tenant managed services, or both.
[5] 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 $65 million of integration-related capital expenditures

 

 

 

 CenturyLink, Inc. 

 CONSOLIDATED STATEMENTS OF INCOME 

 THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 

 (UNAUDITED) 

 (Dollars in millions, except per share amounts; shares in thousands) 






















 Three months ended September 30, 2012 


 Three months ended September 30, 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 

$

2,101




2,101


1,960




1,960


7.2%


7.2%


 Legacy 


2,045




2,045


2,223




2,223


(8.0%)


(8.0%)


 Data integration 


168




168


166




166


1.2%


1.2%


 Other 


257




257


247




247


4.0%


4.0%




4,571


-


4,571


4,596


-


4,596


(0.5%)


(0.5%)



















 OPERATING EXPENSES 


















 Cost of services and products  


1,943


4

(1)

1,939


1,950


20

(5)

1,930


(0.4%)


0.5%


 Selling, general and administrative 


748


15

(1)

733


870


89

(5)

781


(14.0%)


(6.1%)


 Depreciation and amortization 


1,144


(45)

(2)

1,189


1,228




1,228


(6.8%)


(3.2%)




3,835


(26)


3,861


4,048


109


3,939


(5.3%)


(2.0%)



















 OPERATING INCOME 


736


26


710


548


(109)


657


34.3%


8.1%



















 OTHER INCOME (EXPENSE) 


















 Interest expense 


(326)




(326)


(324)




(324)


0.6%


0.6%


 Other income (expense) 


12


6

(3)

6


7




7


71.4%


(14.3%)


 Income tax expense 


(152)


1

(4)

(153)


(93)


39

(6)

(132)


63.4%


15.9%



















 NET INCOME 

$

270


33


237


138


(70)


208


95.7%


13.9%



















 BASIC EARNINGS PER SHARE 

$

0.43


0.05


0.38


0.22


(0.12)


0.34


95.5%


11.8%

 DILUTED EARNINGS PER SHARE 

$

0.43


0.05


0.38


0.22


(0.12)


0.34


95.5%


11.8%



















 AVERAGE SHARES OUTSTANDING 


















 Basic 


621,148




621,148


612,277




612,277


1.4%


1.4%


 Diluted 


623,296




623,296


613,686




613,686


1.6%


1.6%



















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 ($2 million), integration, severance, and retention costs associated with our acquisition of Qwest ($16 million)  and integration, severance, and retention costs associated with our acquisition of Savvis ($4 million); partially offset with a $3 million credit related to tax incentives for the Embarq integration. 

 (2) - 

Out-of-period depreciation adjustment ($45 million) to correct an overstatement of depreciation in prior quarters. 

 (3) - 

Gain on the sale of a non-operating investment ($6 million). 

 (4) -  

Income tax expense of Items (1) through (3) ($12 million) and benefit from the reversal of a valuation allowance $11 million. 

 (5) - 

Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($65 million); integration and severance costs associated with our acquisition of Embarq ($24 million); and transaction and other costs associated with our acquisition

of Savvis ($20 million).

 (6) - 

Income tax benefit of Item (5). 

 

 

 

 CenturyLink, Inc. 

 CONSOLIDATED STATEMENTS OF INCOME 

 NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 

 (UNAUDITED) 

 (Dollars in millions, except per share amounts; shares in thousands) 






















 Nine months ended September 30, 2012 


 Nine months ended September 30, 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 

$

6,237




6,237


4,229




4,229


47.5%


47.5%


 Legacy 


6,284




6,284


5,494




5,494


14.4%


14.4%


 Data integration 


483




483


349




349


38.4%


38.4%


 Other 


789




789


626




626


26.0%


26.0%




13,793


-


13,793


10,698


-


10,698


28.9%


28.9%



















 OPERATING EXPENSES 


















 Cost of services and products  


5,732


25

(1)

5,707


4,357


60

(5)

4,297


31.6%


32.8%


 Selling, general and administrative 


2,454


111

(1)

2,343


2,075


344

(5)

1,731


18.3%


35.4%


 Depreciation and amortization 


3,560


(30)

(2)

3,590


2,774




2,774


28.3%


29.4%




11,746


106


11,640


9,206


404


8,802


27.6%


32.2%



















 OPERATING INCOME 


2,047


(106)


2,153


1,492


(404)


1,896


37.2%


13.6%



















 OTHER INCOME (EXPENSE) 


















 Interest expense 


(1,004)




(1,004)


(732)


5

(6)

(737)


37.2%


36.2%


 Other income (expense) 


(167)


(183)

(3)

16


(4)


(16)

(7)

12


4075.0%


33.3%


 Income tax expense 


(332)


126

(4)

(458)


(292)


163

(8)

(455)


13.7%


0.7%



















 NET INCOME 

$

544


(163)


707


464


(252)


716


17.2%


(1.3%)



















 BASIC EARNINGS PER SHARE 

$

0.88


(0.26)


1.14


0.91


(0.50)


1.41


(3.3%)


(19.1%)

 DILUTED EARNINGS PER SHARE 

$

0.87


(0.26)


1.13


0.91


(0.50)


1.41


(4.4%)


(19.9%)



















 AVERAGE SHARES OUTSTANDING 


















 Basic 


619,748




619,748


504,919




504,919


22.7%


22.7%


 Diluted 


621,828




621,828


506,063




506,063


22.9%


22.9%



















DIVIDENDS PER COMMON SHARE

$

2.175




2.175


2.175




2.175


-


-

 

 

 SPECIAL ITEMS 

 (1) - 

Includes severance costs associated with recent reduction in force initiatives ($68 million), integration, severance, and retention costs associated with our acquisition of Qwest ($62 million)  and integration, severance, and retention costs associated with our acquisition of Savvis ($9 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 in prior quarters. 

 (3) - 

Net loss associated with early retirement of debt ($194 million), partially offset by a gain on the sale of a non-operating investment $11 million. 

 (4) - 

Income tax benefit of Items (1) through (3) and benefit from the reversal of a valuation allowance ($11 million). 

 (5) - 

Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($316 million); integration and severance costs associated with our acquisition of Embarq ($79 million); transaction and other costs associated with our acquisition of Savvis ($22 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. 

 (8) - 

Income tax benefit of Items (5) through (7) and a benefit from the reduction of an NOL valuation allowance ($14 million). 

 

 

 CenturyLink, Inc. 

 CONDENSED CONSOLIDATED BALANCE SHEETS 

 SEPTEMBER 30, 2012 AND DECEMBER 31, 2011 

 (UNAUDITED) 

 (Dollars in millions) 










September 30,


December 31,




2012


2011








ASSETS





CURRENT ASSETS






Cash and cash equivalents

$

194


128


Other current assets


3,639


3,389


   Total current assets


3,833


3,517







NET PROPERTY, PLANT AND EQUIPMENT






Property, plant and equipment


31,288


29,585


Accumulated depreciation


(12,275)


(10,141)


   Net property, plant and equipment


19,013


19,444







GOODWILL AND OTHER ASSETS






Goodwill


21,732


21,732


Other


10,054


11,351


    Total goodwill and other assets


31,786


33,083







TOTAL ASSETS

$

54,632


56,044














LIABILITIES AND STOCKHOLDERS' EQUITY





CURRENT LIABILITIES






Current maturities of long-term debt

$

1,198


480


Other current liabilities


3,733


3,537


    Total current liabilities


4,931


4,017







LONG-TERM DEBT


19,508


21,356

DEFERRED CREDITS AND OTHER LIABILITIES


9,996


9,844

STOCKHOLDERS' EQUITY


20,197


20,827







TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

54,632


56,044

 

 

 

 CenturyLink, Inc. 

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

 NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 

 (UNAUDITED) 

 (Dollars in millions) 





Nine Months


Nine Months



Ended


 Ended 



 September 30, 2012 


 September 30, 2011 






 OPERATING ACTIVITIES 







 Net income 


$

544


464


 Adjustments to reconcile net income to net cash provided by operating activities: 













 Depreciation and amortization 



3,560


2,774



 Deferred income taxes 



260


298



 Provision for uncollectible accounts 



144


94



 Loss on early retirement of debt 



194


1



 Changes in current assets and current liabilities, net 



111


43



 Retirement benefits 



(179)


(170)



 Changes in other noncurrent assets and liabilities 



91


21



 Other, net 



(39)


(52)




 Net cash provided by operating activities 



4,686


3,473






 INVESTING ACTIVITIES 







 Payments for property, plant and equipment and capitalized software 



(2,024)


(1,511)


 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 




133


-


 Other, net 



28


14



 Net cash used in investing activities 



(1,863)


(2,749)














 FINANCING ACTIVITIES 









 Net proceeds from issuance of long-term debt 



3,363


3,159


 Payments of long-term debt 



(4,529)


(1,442)


 Early retirement of debt costs 



(324)


(13)


 Net borrowings (payments) on credit facility 



3


(365)


 Dividends paid 



(1,357)


(1,105)


 Net proceeds from issuance of common stock 



91


79


 Repurchase of common stock 



(20)


(31)


 Other, net 



14


(41)



 Net cash (used in) provided by financing activities 



(2,759)


241














 Effect of exchange rate changes on cash and cash equivalents 



2


(15)














 Net increase in cash and cash equivalents 



66


950

 Cash and cash equivalents at beginning of period 



128


173














 Cash and cash equivalents at end of period 


$

194


1,123

 

 

 

 CenturyLink, Inc. 

 SELECTED SEGMENT FINANCIAL INFORMATION 

 THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 

 (UNAUDITED) 

 (Dollars in millions) 




Three months ended September 30,



Nine months ended September 30, 






2012


2011



2012


2011

Total segment revenues


$

4,314


4,349



13,004


10,072

Total segment expenses



2,037


2,043



6,039


4,428

Total segment income


$

2,277


2,306



6,965


5,644

Total segment income margin (segment income divided by segment revenues)


52.8%


53.0%



53.6%


56.0%














Regional Markets Segment











Revenues













Strategic services


$

912


845



2,693


2,008


Legacy services



1,491


1,599



4,541


4,018


Data integration



65


78



197


173





$

2,468


2,522



7,431


6,199

Expenses













Direct



$

1,002


1,028



2,945


2,455


Allocated




77


64



213


137





$

1,079


1,092



3,158


2,592














Segment income


$

1,389


1,430



4,273


3,607

Segment income margin



56.3%


56.7%



57.5%


58.2%














Wholesale Markets Segment











Revenues













Strategic services


$

568


574



1,724


1,344


Legacy services



340


408



1,089


1,000





$

908


982



2,813


2,344

Expenses













Direct



$

38


44



131


122


Allocated




235


263



715


586





$

273


307



846


708














Segment income


$

635


675



1,967


1,636

Segment income margin



69.9%


68.7%



69.9%


69.8%














Enterprise Markets - Network Segment











Revenues













Strategic services


$

341


318



998


646


Legacy services



214


216



654


476


Data integration



103


88



286


176





$

658


622



1,938


1,298

Expenses













Direct



$

189


183



572


369


Allocated




277


296



830


592





$

466


479



1,402


961














Segment income


$

192


143



536


337

Segment income margin



29.2%


23.0%



27.7%


26.0%














Enterprise Markets - Data Hosting Segment











Revenues













Strategic services


$

280


223



822


231





$

280


223



822


231

Expenses













Direct



$

236


184



687


195


Allocated




(17)


(19)



(54)


(28)





$

219


165



633


167














Segment income


$

61


58



189


64

Segment income margin



21.8%


26.0%



23.0%


27.7%















During the second quarter of 2012, we restructured our four operating segments to more effectively leverage the strategic assets from our recent acquisitions of Embarq, Qwest and Savvis.  We also revised our methodology for how we allocate our expenses to our segments to better align segment expenses with related revenues.  In addition, we now allocate certain expenses from our enterprise markets-data hosting segment to our other three segments.  We have restated prior periods to reflect these changes in our methodology.

 

 

 

 CenturyLink, Inc. 

 RECONCILIATION OF NON-GAAP FINANCIAL MEASURES 

 (UNAUDITED) 

 (Dollars in millions) 
































 Three months ended September 30, 2012 


 Three months ended September 30, 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 

$

736


26

(1)

710


548


(109)

(3)

657


 Add:  Depreciation and amortization 


1,144


(45)

(2)

1,189


1,228


-


1,228


 Operating cash flow  

$

1,880


(19)


1,899


1,776


(109)


1,885
















 Revenues  

$

4,571


-


4,571


4,596


-


4,596
















 Operating income margin (operating income divided by revenues) 


16.1%




15.5%


11.9%




14.3%
















 Operating cash flow margin (operating cash flow divided by revenues) 


41.1%




41.5%


38.6%




41.0%





























 Free cash flow  














 Operating cash flow 





$

1,899






1,885


 Less: Cash (paid) refunded for income taxes 






(28)






1


 Less: Cash paid for interest, net of amounts capitalized 






(268)






(300)


 Less: Capital expenditures (4) 






(704)






(712)


 Other income (expense) 






6






7


 Free cash flow (5) 






905






881

 

 

 SPECIAL ITEMS 

 (1) - 

Includes severance costs associated with recent reduction in force initiatives ($2 million), integration, severance, and retention costs associated with our acquisition of Qwest ($16 million) and integration, severance, retention costs associated with our acquisition of Savvis ($4 million); partially offset with a $45 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 ($45 million) to correct an overstatement of depreciation in prior quarters. 

 (3) - 

Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($65 million); integration and severance costs associated with our acquisition of Embarq ($24 million); transaction and other costs associated with our acquisition of Savvis ($20 million).

 (4) - 

Excludes $15 million in third quarter 2012 and $9 million in third quarter 2011 of capital expenditures related to the integration of Embarq, Qwest and Savvis. 

 (5) - 

Excludes special items identified in items (1) to (3) and the impact of pension contributions of $32 million for third quarter 2012. 

 

 

 

 CenturyLink, Inc. 

 RECONCILIATION OF NON-GAAP FINANCIAL MEASURES 

 (UNAUDITED) 

 (Dollars in millions) 
































 Nine months ended September 30, 2012 


 Nine months ended September 30, 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 

$

2,047


(106)

(1)

2,153


1,492


(404)

(3)

1,896


 Add:  Depreciation and amortization 


3,560


(30)

(2)

3,590


2,774


-


2,774


 Operating cash flow  

$

5,607


(136)


5,743


4,266


(404)


4,670
















 Revenues  

$

13,793


-


13,793


10,698


-


10,698
















 Operating income margin (operating income divided by revenues) 


14.8%




15.6%


13.9%




17.7%
















 Operating cash flow margin (operating cash flow divided by revenues) 


40.7%




41.6%


39.9%




43.7%





























 Free cash flow  














 Operating cash flow 





$

5,743






4,670


 Less: Cash (paid) refunded for income taxes 






(59)






100


 Less: Cash paid for interest, net of amounts capitalized 






(997)






(760)


 Less: Capital expenditures (4) 






(1,981)






(1,485)


 Other income (expense) 






16






12


 Free cash flow (5) 






2,722






2,537

 

 

 

 SPECIAL ITEMS 

 (1) - 

 Includes severance costs associated with recent reduction in force initiatives ($68 million), integration, severance, and retention costs associated with our acquisition of Qwest ($62 million) and integration, severance, retention costs associated with our acquisition of Savvis ($9 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) - 

Our-of-period depreciation adjustment ($30 million) to correct an overstatement of depreciation in prior quarters. 

 (3) - 

Includes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($316 million); integration and severance costs associated with our acquisition of Embarq ($79 million); transaction and other costs associated with our acquisition of Savvis ($22 million); net of a favorable settlement of an operating tax issue $13 million.

 (4) - 

Excludes $43 million for the nine months ended September 30, 2012 and $26 million for the nine months ended September 30, 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 nine months ended September 30, 2012 and $100 million for the nine months ended September 30, 2011. 

 

 

 

 CenturyLink, Inc.

 ADJUSTED AND PRO FORMA STATEMENTS OF INCOME - NON-GAAP

 THREE MONTHS ENDED SEPTEMBER 30, 2012 AND JUNE 30, 2012 AND PRO FORMA THREE MONTHS ENDED SEPTEMBER 30, 2011

(UNAUDITED)

 (Dollars in millions, except per share amounts, shares in thousands)









Pro forma (1)





Three months


Three months


Three months





ended    


ended


ended





September 30, 2012


June 30, 2012


September 30, 2011





(excluding


(excluding


(excluding





special items)(2)


special items)(2)


special items)(2)


OPERATING REVENUES










Strategic services


$

2101


2076


1994



Legacy services



2045


2100


2227



Data integration



168


170


166



Other



257


266


246





4571


4612


4633











 OPERATING EXPENSES 











 Cash expenses 



2,672

(A)

2,712

(B)

2,739

(C)



 Depreciation and amortization 



1,189

(D)

1,208


1,240









3,861


3,920


3,979















 OPERATING INCOME 



710


692


654















 OTHER INCOME (EXPENSE) 











 Interest expense 



(326)


(335)


(327)




 Other income (expense) 



6

(E)

3

(F)

7




 Income tax expense 



(153)

(G)

(142)

(G)

(130)

(G)














 NET INCOME 


$

237


218


204















 DILUTED EARNINGS PER SHARE 


$

0.38


0.35


0.33















 WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 



623,296


621,839


616,560















 OPERATING CASH FLOW 











 Operating income 


$

710


692


654




 Add:  Depreciation and amortization 



1,189


1,208


1,240




 Operating cash flow  


$

1,899


1,900


1,894



































As of


As of


As of


 OPERATING METRICS 



September 30, 2012


June 30, 2012


September 30, 2011




Broadband subscribers



5,807


5,763


5,579




Access lines



13,946


14,145


14,803















 

 

 

(1)

 


The pro forma information presented above reflects the operations of CenturyLink (which includes Qwest for the entire third quarter 2011) and Savvis assuming Savvis' results of operations had been combined as of January 1, 2010.  Pro forma adjustments include (i) the amortization of the fair value assigned to intangible assets (primarily customer relationship); (ii) adjustments to depreciation to reflect the fair value assigned to property, plant and equipment; and (iii) the related income tax effects.  The above pro forma information (i) has not been prepared in accordance with generally accepted accounting principles, (ii) is for illustrative purposes only, and (iii) is not necessarily indicative of the combined operating results that would have occurred if the Savvis merger had been consummated as of January 1, 2010.

(2)


Summary description of special items for Third Quarter 2012, Second Quarter 2012 and Third Quarter 2011: 


(A)

Excludes severance costs associated with recent reduction in force initiatives ($2 million),  integration, severance, and retention costs associated with our acquisition of Qwest ($16 million) and integration, severance, retention costs associated with our acquisition of Savvis ($4 million); partially offset with a $3 million credit related to tax incentives for the Embarq integration. 



(B)

Excludes severance costs associated with recent reduction in force initiatives ($23 million), integration, severance, and retention costs associated with our acquisition of Qwest ($10 million) and integration, severance, and retention costs associated with our acquisition of Savvis ($2 million). 




(C)

Excludes integration, severance, and retention costs associated with our acquisition of Qwest, along with restructuring charges ($65 million); integration and severance costs associated with our acquisition of Embarq ($24 million); and transaction and other costs associated with our acquisition of Savvis ($20 million).



(D)

Excludes out-of-period depreciation adjustment ($45 million) to correct an overstatement of depreciation in prior quarters. 


(E)

Excludes gain on the sale of a non-operating investment ($6 million). 


(F)

Excludes net loss associated with early retirement of debt ($202 million).


(G)

Excludes tax effect of above items (A) to (F) ($12 million) for third quarter 2012; ($93 million) for second quarter 2012 and ($39 million) for third quarter 2011.  Third quarter 2012 also excludes a benefit from the reversal of a valuation allowance $11 million.


 

 

 

 CenturyLink, Inc. 

 SUPPLEMENTAL NON-GAAP INFORMATION - ADJUSTED DILUTED EPS 

 THREE MONTHS ENDED SEPTEMBER 30, 2012 AND JUNE 30, 2012 AND PRO FORMA THREE MONTHS ENDED SEPTEMBER 30, 2011 

 (UNAUDITED) 

 (Dollars in millions, except per share amounts) 




































Pro Forma*







Three months

Three months

Three months







ended

ended

ended







September 30, 2012

June 30, 2012

September 30, 2011







(excluding

(excluding

(excluding







special items)

special items)

special items)










Net income **




$

237

218

204










Add back:









   Amortization of customer base intangibles:







Qwest





241

244

257


Embarq





34

39

39


Savvis





15

14

20










   Amortization of trademark intangibles:







Qwest





15

16

20


Savvis





2

3

2










   Amortization of fair value adjustment of long-term debt:







Embarq





1

1

1


Qwest





(20)

(20)

(56)










        Subtotal





288

297

283

   Tax effect of above items 




(112)

(112)

(110)

Net adjustment, after taxes




176

185

173










Net income, as adjusted for above items


$

413

403

377










Weighted average diluted shares outstanding 



623.3

621.8

616.6










Diluted EPS (excluding special items)


$

0.38

0.35

0.33










Adjusted diluted EPS as adjusted for the above-listed purchase accounting intangible and interest amortizations (excluding special items)










$

0.66

0.65

0.61

 

 

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


*The pro forma information presented above reflects the operations of CenturyLink (which includes Qwest for the entire third quarter 2011) and Savvis assuming Savvis' results of operations had been combined as of January 1, 2010.  Pro forma adjustments include (i) the amortization of the fair value assigned to intangible assets (primarily customer relationship); (ii) adjustments to depreciation to reflect the fair value assigned to property, plant and equipment; and (iii) the related income tax effects.  The above pro forma information (i) has not been prepared in accordance with generally accepted accounting principles, (ii) is for illustrative purposes only, and (iii) is not necessarily indicative of the combined operating results that would have occurred if the Savvis merger had been consummated as of January 1, 2010.


**See preceding schedule for a summary description of special items.

 

 

 

 CenturyLink, Inc. 

 SUPPLEMENTAL PRO FORMA SEGMENT DATA 

 THREE MONTHS ENDED SEPTEMBER 30, 2012 AND JUNE 30, 2012  AND PRO FORMA THREE MONTHS ENDED SEPTEMBER 30, 2011 

 ASSUMING CENTURYLINK'S ACQUISITION OF SAVVIS OCCURRED JANUARY 1, 2010 

 (UNAUDITED) 

 (Dollars in millions) 










Pro forma (*)






Three months


Three months


Three months






ended


ended


ended






September 30, 2012


June 30, 2012


September 30, 2011

Total segment revenues


$

4,314


4,346


4,387

Total segment expenses



2,037


2,024


2,071

Total segment income**


$

2,277


2,322


2,316

Total segment income margin (segment income divided by segment revenues)










52.8%


53.4%


52.8%











Regional Markets Segment








Revenues










Strategic services


$

912


894


845


Legacy services



1,491


1,510


1,599


Data integration



65


73


78





$

2,468


2,477


2,522

Expenses










Direct



$

1,002


981


1,028


Allocated




77


67


64





$

1,079


1,048


1,092











Segment income


$

1,389


1,429


1,430

Segment income margin



56.3%


57.7%


56.7%











Wholesale Markets Segment








Revenues










Strategic services


$

568


574


574


Legacy services



340


370


409





$

908


944


983

Expenses










Direct