News Releases

News Releases
CenturyLink reports third quarter 2017 results
Includes separate results for CenturyLink and Level 3 Communications

MONROE, La., Nov. 8, 2017 /PRNewswire/ -- CenturyLink, Inc. (NYSE: CTL) reports results for CenturyLink and Level 3 Communications1 for third quarter 2017.

CenturyLink logo. (PRNewsfoto/CenturyLink, Inc.)

CenturyLink - Third Quarter 2017 Results

"We're excited to have completed the Level 3 acquisition last week. We believe this combination creates one of the world's most powerful networks. Together, we have a compelling set of assets, the scale to compete globally and the opportunity to drive significant operational efficiencies," said Glen F. Post, III, CenturyLink chief executive officer.

"Although below our expectations, CenturyLink's third quarter 2017 high bandwidth services revenue increased more than five percent on a normalized basis year-over-year. This, together with Level 3's performancereflects the continuing growth in demand for bandwidth and supports our belief that our increased scale and reach creates even greater potential for us to win in the marketplace. In addition, our commitment to enable market-leading customer experience and drive efficiencies into our business gives us great opportunity to grow adjusted EBITDA and free cash flow," concluded Post.

  • Achieved operating revenues of approximately $4.0 billion
  • Generated operating income of $487 million
  • Generated adjusted EBITDA2 of $1.40 billion, excluding special items2
  • Achieved net income of $92 million and diluted EPS of $0.17
  • Generated adjusted net income2 of $228 million and adjusted diluted EPS2 of $0.42, excluding special items

Operating revenues for third quarter 2017 were $4.03 billion compared to $4.38 billion in third quarter 2016. Core revenues3 for third quarter 2017 were $3.60 billion compared to $3.92 billion in third quarter 2016 driven by the decline in legacy3,4 revenues, as well as the approximate $150 million revenue reduction due to the May 1, 2017 sale of the data centers and colocation business (Colocation Sale).

Enterprise segment5 revenues were $2.17 billion, a decrease of 11.2% from third quarter 2016, primarily due to the revenue reduction associated with the Colocation Sale, as well as the decline in legacy and data integration revenues. Excluding the impacts of the Colocation Sale and contracted price reductions for a wholesale customer in second quarter 2017, Enterprise strategic revenues grew 4.2% and high-bandwidth data services revenues increased 5.5% year-over-year.

Consumer segment5 revenues were $1.39 billion, a decrease of 5.8% from third quarter 2016, primarily due to a decline in legacy voice revenues, as well as lower video revenues due to the restructuring of a satellite video contract in first quarter 2017. Broadband revenue was flat year-over-year primarily driven by higher average revenue per unit (ARPU) offsetting the approximately 100,000 broadband subscriber decline primarily due to a significant decrease in lower speed sales.

Operating expenses6 decreased to $3.55 billion from $3.79 billion in third quarter 2016, driven by a reduction in depreciation expense, along with expense reductions related to the Colocation Sale and lower salaries and wages expense related to the headcount reduction in fourth quarter 2016. Excluding special items, operating expenses were $3.55 billion compared to $3.78 billion in third quarter 2016.

Operating income decreased to $487 million from $593 million in third quarter 2016 primarily due to the decline in higher margin legacy revenues.

Adjusted EBITDA2 excluding special items, decreased to $1.40 billion from $1.60 billion in third quarter 2016 primarily due to the decline in higher margin legacy revenues.

Net income and diluted earnings per share (EPS) were $92 million and $0.17, respectively, for third quarter 2017, compared to $152 million and $0.28, respectively, for third quarter 2016. The decrease in net income and diluted EPS was due primarily to the decline in operating income.

Adjusted net income2 and adjusted diluted EPSexclude the after-tax impact of special items, the non-cash after-tax impact of the amortization of certain intangible assets related to major acquisitions closed since mid-2009, and the non-cash after-tax impact to interest expense relating to the assignment of fair value to the outstanding debt assumed in connection with those acquisitions. Excluding these items, CenturyLink's adjusted net income for third quarter 2017 was $228 million compared to adjusted net income of $305 million in third quarter 2016. Third quarter 2017 adjusted diluted EPS was $0.42 compared to $0.56 in the year-ago period due to lower adjusted net income.

The accompanying financial schedules provide additional details regarding CenturyLink's special items and reconciliations of non-GAAP financial measures for the three and nine months ended September 30, 2017 and 2016.

Level 3 Communications1 - Third Quarter 2017 Results

"Level 3 delivered a solid third quarter with continued margin expansion and strong Free Cash Flow generation," said Jeff Storey, CenturyLink president and chief operating officer. "As a combined company, we are focused on executing against our integration plans, delivering a differentiated customer experience and driving profitable growth."

  • Net Income was $157 million
  • Adjusted EBITDA2 grew to $752 million, excluding $31 million of CenturyLink acquisition-related expenses
  • Generated Cash Flows from Operating Activities of $701 million and Free Cash Flow2 of $379 million, excluding $10 million of cash used for CenturyLink acquisition-related expenses

Total revenue was $2.059 billion for third quarter 2017, compared to $2.033 billion for the third quarter 2016.  Total Core Network Services (CNS) revenue was $1.963 billion in third quarter 2017, increasing 1.8% year-over-year on a reported basis, and 1.5% year-over-year on a constant currency basis.

For third quarter 2017, total Enterprise CNS revenue, excluding UK Government revenue, was $1.453 billion, which grew 3.4% year-over-year on a reported basis, and 3.3% year-over-year on a constant currency basis.

In the third quarter 2017, Level 3 generated net income of $157 million and basic earnings per share of $0.43.

These Level 3 results are included in a supplemental schedule attached hereto and are also available on CenturyLink's investor relations Web site at ir.centurylink.com.

 

Outlook

 

The company anticipates standalone CenturyLink full-year 2017 results to be below its full-year guidance provided in February of this year (adjusted for the Colocation Sale), primarily due to lower strategic revenue growth during the course of the year and higher capital expenditures than originally anticipated.

CenturyLink is reiterating standalone Level 3 full-year 2017 outlook for Adjusted EBITDA of $2.94 to $3.00 billion and Free Cash Flow of $1.10 to $1.16 billion. All other Level 3 outlook measures also remain unchanged.

All 2017 guidance figures and 2017 outlook statements included in this release (i) speak as of November 8, 2017 only, (ii) include the financial impact of CenturyLink's sale of its data centers and colocation business effective May 1, 2017, (iii) exclude the effects of special items, future impairment charges, future changes in regulation, future changes in tax laws, accounting rules or our accounting policies, unforeseen litigation or contingencies, integration expenses associated with the Level 3 acquisition and other major acquisitions, any changes in our expected pension fundings, any changes in operating or capital plans or other unforeseen events or circumstances that impact our financial performance, and any future mergers, acquisitions, divestitures, joint ventures or other similar business transactions. All 2017 guidance figures and 2017 outlook statements for standalone CenturyLink exclude the financial impact of acquiring Level 3 on November 1, 2017. See "Forward Looking Statements" below. For additional information on how we define certain of the terms used above, see "Reconciliation to GAAP" below and the attached schedules.

Investor Call

As previously announced, CenturyLink's management will host a conference call at 4:00 p.m. Central Time today, November 8, 2017. The conference call will be streamed live over CenturyLink's website at ir.centurylink.com. Additional information regarding third quarter 2017 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 +1 877-283-5145 (U.S. Domestic) or +1 312-281-1200 (International).

A telephone replay of the call will be available beginning at 7:00 p.m. CST on November 8, 2017, and ending November 15, 2017, at 11:59 p.m. CST. The replay can be accessed by dialing +1 800-633-8284 (U.S. Domestic) or +1 402-977-9140 (International), reservation code 21860392. A webcast replay of the call will also be available on our website beginning at 7:00 p.m. CST on November 8, 2017, and ending February 6, 2018 at 7:00 p.m. CST.

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, adjusted free cash flow, unlevered cash flow, core revenues, adjusted net income, adjusted diluted EPS and adjustments to GAAP measures to exclude the effect of special items or currency fluctuations. 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 current report on form 8-K that we intend to file later today. 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 and, as noted in Note 2 below, calculates certain of its non-GAAP measures differently from Level 3.

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 if one or more of these risks or uncertainties materialize, or if our 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 legacy offerings and increased pricing pressures; the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete; 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, access charges, universal service, broadband deployment, data protection and net neutrality; our ability to timely realize the anticipated benefits of our recently-completed acquisition of Level 3, including our ability to attain anticipated cost savings, to use Level 3's net operating losses in the amounts projected, to retain key personnel and to avoid unanticipated integration disruptions; 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 broadband service; our ability to successfully maintain the quality and profitability of our existing product and service offerings, to provision them efficiently to our customers, and to introduce new offerings on a timely and cost-effective basis; the adverse impact on our business and network from possible equipment failures, service outages, security breaches or similar events impacting our network; our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our debt repayments, capital expenditures, operating costs, periodic share repurchases, 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; 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 maintain favorable relations with our key business partners, customers, suppliers, vendors, landlords and financial institutions; our ability to effectively manage our network buildout project and our other expansion opportunities; 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 or practices, including potential future impairment charges; the effects of terrorism, adverse weather or other natural or man-made disasters; the effects of more general factors such as changes in interest rates, in operating costs, in general market, labor, economic or geo-political conditions, or in public policy; and other risks referenced from time to time in our filings with the U.S. Securities and Exchange Commission (the "SEC"). For all the reasons set forth above and in our SEC filings, you are cautioned not to place undue reliance upon any of our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any of our 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.

(1)

On November 1, 2017, CenturyLink acquired Level 3 Communications, Inc. through successive merger transactions, including a merger of Level 3 into its successor-in-interest, Level 3 Parent, LLC.

(2)

See attachments for reconciliations of non-GAAP figures used by CenturyLink and Level 3 to comparable GAAP figures. As illustrated in these attached reconciliation statements, CenturyLink and Level 3 have historically defined their respective non-GAAP measures differently.

(3)

Core revenues is a non-GAAP measure defined as strategic revenues plus legacy revenues (excludes data integration and other revenues) as described further in the attached schedules.  Strategic revenues primarily include broadband, Multiprotocol Label Switching (MPLS), Ethernet, colocation, hosting, cloud, video, VoIP and IT services.  Legacy revenues primarily include voice, private line (including special access), switched access and other ancillary services.

(4)

Beginning second quarter 2017, certain legacy services, specifically dark fiber network leasing, were reclassified from legacy services to strategic services. Beginning second quarter 2016, private line (including special access) revenues were reclassified from strategic services to legacy services. All historical periods have been restated to reflect this change.

(5)

All references to segment data herein reflect certain adjustments described in the attached schedules.

(6)

In first quarter 2017, CenturyLink elected to adopt the accounting rules (ASU 2017-07) which modified the presentation of net periodic pension and postretirement benefit costs. All historical periods have been restated to reflect this change.

   
   

 

 

 

CenturyLink, Inc.

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(UNAUDITED)

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

                         
   

Three months ended
September 30,

 

Increase /
(decrease)

 

Nine months ended
September 30,

 

Increase /
(decrease)

   

2017

 

2016

   

2017

 

2016

 

OPERATING REVENUES *

                     
 

Strategic

$

1,892

   

2,027

   

(7)

%

 

5,820

   

6,070

   

(4)

%

 

Legacy

1,705

   

1,888

   

(10)

%

 

5,235

   

5,790

   

(10)

%

 

Data integration

134

   

163

   

(18)

%

 

385

   

402

   

(4)

%

 

Other

303

   

304

   

%

 

893

   

919

   

(3)

%

 

Total operating revenues

4,034

   

4,382

   

(8)

%

 

12,333

   

13,181

   

(6)

%

                         

OPERATING EXPENSES

                     
 

Cost of services and products

1,927

   

1,996

   

(3)

%

 

5,705

   

5,845

   

(2)

%

 

Selling, general and administrative **

710

   

798

   

(11)

%

 

2,404

   

2,450

   

(2)

%

 

Depreciation and amortization

910

   

995

   

(9)

%

 

2,739

   

2,958

   

(7)

%

 

Total operating expenses

3,547

   

3,789

   

(6)

%

 

10,848

   

11,253

   

(4)

%

                         

OPERATING INCOME

487

   

593

   

(18)

%

 

1,485

   

1,928

   

(23)

%

                       

OTHER (EXPENSE) INCOME

                     
 

Interest expense

(362)

   

(327)

   

11

%

 

(1,000)

   

(998)

   

%

 

Other income (expense), net **

14

   

(17)

   

(182)

%

 

1

   

16

   

(94)

%

 

Income tax expense

(47)

   

(97)

   

(52)

%

 

(214)

   

(362)

   

(41)

%

NET INCOME

$

92

   

152

   

(39)

%

 

272

   

584

   

(53)

%

BASIC EARNINGS PER SHARE

$

0.17

   

0.28

   

(39)

%

 

0.50

   

1.08

   

(54)

%

DILUTED EARNINGS PER SHARE

$

0.17

   

0.28

   

(39)

%

 

0.50

   

1.08

   

(54)

%

                         

AVERAGE SHARES OUTSTANDING

       
 

Basic

541,521

   

539,806

   

%

 

541,113

   

539,411

   

%

 

Diluted

541,963

   

540,917

   

%

 

541,879

   

540,493

   

%

                         

DIVIDENDS PER COMMON SHARE

$

0.54

   

0.54

   

%

 

1.62

   

1.62

   

%

                       

____________________________________

   

*

During the second quarter of 2017, CenturyLink  determined that certain of its legacy services, specifically its dark fiber network leasing, are more closely aligned with CenturyLink's strategic services than with its legacy services. As a result, CenturyLink now reflects these operating revenues as strategic services, and CenturyLink has reclassified certain prior period amounts to conform to this change. The revision resulted in an increase of revenue from strategic services and a corresponding decrease in revenue from legacy services of $12 million and $36 million for the three and nine months ended September 30, 2016, respectively.

**

In the first quarter of 2017, CenturyLink adopted ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). ASU 2017-07 modified the presentation of net periodic pension and postretirement benefit costs and requires the service cost component to be reported separately from the other components in order to provide more useful information. Under ASU 2017-07, the service cost component of net periodic pension and postretirement benefit costs is required to be presented in the same expense category as the related salary and wages for the employee. The other components of the net periodic pension and postretirement benefit costs are required to be recognized in other (expense) income, net in CenturyLink's consolidated statements of operations. This change was applied on a retrospective basis to all previous periods to match the current period presentation. This retrospective application resulted in a $2 million and $11 million reduction in operating income and a corresponding decrease in other (expense) income, net for the three and nine months ended September 30, 2016, respectively.

 

 

 

CenturyLink, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

(UNAUDITED)

(Dollars in millions)

 

As of
September 30, 2017

 

As of
December 31, 2016

ASSETS

     

CURRENT ASSETS

     

Cash and cash equivalents

$

160

   

222

 

Other current assets

2,534

   

4,940

 

   Total current assets

2,694

   

5,162

 
       

NET PROPERTY, PLANT AND EQUIPMENT

     

Property, plant and equipment

41,352

   

39,194

 

Accumulated depreciation

(23,718)

   

(22,155)

 

   Net property, plant and equipment

17,634

   

17,039

 
       

GOODWILL AND OTHER ASSETS

     

Goodwill

19,638

   

19,650

 

Restricted cash

6,004

   

2

 

Other, net

4,566

   

5,164

 

    Total goodwill and other assets

30,208

   

24,816

 
       

TOTAL ASSETS

$

50,536

   

47,017

 
       

LIABILITIES AND STOCKHOLDERS' EQUITY

     

CURRENT LIABILITIES

     

Current maturities of long-term debt

$

124

   

1,503

 

Other current liabilities

3,142

   

3,846

 

    Total current liabilities

3,266

   

5,349

 
       

LONG-TERM DEBT

24,854

   

18,185

 

DEFERRED CREDITS AND OTHER LIABILITIES

9,456

   

10,084

 

STOCKHOLDERS' EQUITY

12,960

   

13,399

 
       

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

50,536

   

47,017

 
       

 

 

 

 

CenturyLink, Inc.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

 

(UNAUDITED)

 

(Dollars in millions)

         
   

Nine months ended

   

September 30, 2017 *

 

September 30, 2016 *

 

OPERATING ACTIVITIES

     
 

Net income

$

272

   

584

 
 

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

     
 

 Depreciation and amortization

2,739

   

2,958

 
 

 Deferred income taxes

(243)

   

32

 
 

 Loss on the sale of data centers and colocation business

82

   

 
 

 Impairment of assets held for sale

11

   

1

 
 

 Provision for uncollectible accounts

127

   

144

 
 

 Net loss on early retirement of debt

5

   

27

 
 

 Share-based compensation

64

   

60

 
 

 Changes in current assets and liabilities, net

(209)

   

(129)

 
 

 Retirement benefits

(181)

   

(143)

 
 

 Changes in other noncurrent assets and liabilities, net

(54)

   

(41)

 
 

 Other, net

87

   

19

 
 

Net cash provided by operating activities

2,700

   

3,512

 
 

INVESTING ACTIVITIES

     
 

Payments for property, plant and equipment and capitalized software

(2,363)

   

(2,010)

 
 

Cash paid for acquisitions

(5)

   

(24)

 
 

Proceeds from the sale of data centers and colocation business, less cash sold

1,467

   

 
 

Proceeds from sale of property

51

   

22

 
 

Net cash used in investing activities

(850)

   

(2,012)

 
 

FINANCING ACTIVITIES

     
 

Net proceeds from issuance of long-term debt

6,608

   

2,161

 
 

Proceeds from financing obligation

356

   

 
 

Payments of long-term debt

(1,612)

   

(2,436)

 
 

Net payments on 2012 credit facility and revolving line of credit

(370)

   

(325)

 
 

Dividends paid

(881)

   

(876)

 
 

Proceeds from issuance of common stock

5

   

5

 
 

Shares withheld to satisfy tax withholdings

(16)

   

(15)

 
 

Net cash provided by (used in) financing activities

4,090

   

(1,486)

 
 

Net increase in cash, cash equivalents and restricted cash

5,940

   

14

 

*

Cash, cash equivalents and restricted cash at beginning of period

224

   

128

 

*

Cash, cash equivalents and restricted cash at end of period

$

6,164

   

142

 
         

*

In the second quarter of 2017, CenturyLink adopted Accounting Standards Update ("ASU") 2016-18, "Restricted Cash (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2016-18"), which requires that a statement of cash flows explain the change in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents as compared to the prior presentation, which explained only the change in cash and cash equivalents. ASU 2016-18 is effective January 1, 2018, but early adoption is permitted and requires retrospective application of the requirements to all previous periods presented.  This change was applied on a retrospective basis to all previous periods to match the current period presentation with immaterial impact.

 

CenturyLink, Inc.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

(Dollars in millions)

                         
   

Three months ended September 30, 2017

 

Three months ended September 30, 2016

           

As adjusted

         

As adjusted

       

Less

 

excluding

     

Less

 

excluding

   

As

 

special

 

special

 

As

 

special

 

special

   

reported

 

items

 

items

 

reported

 

items

 

items

Adjusted EBITDA and adjusted EBITDA margin

                     
 

Operating income *

$

487

   

 

(1)

487

   

593

   

(8)

 

(2)

601

 
 

Add: Depreciation and amortization

910

   

   

910

   

995

   

   

995

 
 

Adjusted EBITDA

$

1,397

   

   

1,397

   

1,588

   

(8)

   

1,596

 
                         
 

Revenues

$

4,034

   

   

4,034

   

4,382

   

   

4,382

 
                         
 

Operating income margin (operating income divided by revenues)

12.1

%

     

12.1

%

 

13.5

%

     

13.7

%

                         
 

Adjusted EBITDA margin (adjusted EBITDA divided by revenues)

34.6

%

     

34.6

%

 

36.2

%

     

36.4

%

                         

Adjusted free cash flow

                     
 

Adjusted EBITDA

       

$

1,397

           

1,596

 
 

Less: Capital expenditures (3)

       

(749)

           

(740)

 
 

Less: Cash paid for interest, net of amounts capitalized

       

(293)

           

(262)

 
 

Less: Pension and postretirement impacts (4)

       

(125)

           

(115)

 
 

Less: Cash paid for income taxes, net

       

(118)

           

(323)

 
 

Less: Ongoing EBITDA impacts of ASC 840-40 on sale of data centers

       

(25)

           

 
 

Add: Share-based compensation

       

21

           

20

 
 

Add:  Other (expense) income, net *

       

1

           

10

 
 

Adjusted free cash flow (5)

       

$

109

           

186

 
                         

____________________________________________

SPECIAL ITEMS

(1) -

Costs related to CenturyLink's acquisition of Level 3 ($37 million) offset by a favorable adjustment to the loss associated with the sale of CenturyLink's data centers and colocation business $37 million.

(2) -

Includes severance costs associated with reduction in force initiatives ($4 million), integration costs associated with CenturyLink's acquisition of Qwest ($1 million), costs associated with a large billing system integration project ($7 million), less an offsetting gain on the sale of a building $4 million.

   

ADJUSTED FREE CASH FLOW

(3) -

Excludes $4 million in third quarter 2017 and $6 million in third quarter 2016 of capital expenditures related to the integration of Qwest and Savvis.

(4) -

2017 includes net periodic pension benefit expense of $1 million, net periodic postretirement benefit expense of $34 million, contributions to our qualified pension plan trust of ($100 million) and ($1 million) of benefits paid to participants of CenturyLink's non-qualified pension plans.  Postretirement contributions included benefits paid by company ($74 million) offset by participant contributions $13 million and direct subsidy receipts $2 million.

-

2016 includes net periodic pension benefit income of ($18 million), net periodic postretirement benefit expense of $36 million, contributions to our qualified pension plan trust of ($100 million) and ($2 million) of benefits paid to participants of CenturyLink's non-qualified pension plans.  Postretirement contributions included benefits paid by company ($47 million) offset by participant contributions $14 million and direct subsidy receipts $2 million.

(5) -

Excludes special items identified in items (1) and (2).

*

In the first quarter of 2017, CenturyLink adopted ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). ASU 2017-07 modified the presentation of net periodic pension and postretirement benefit costs and requires the service cost component to be reported separately from the other components in order to provide more useful information. Under ASU 2017-07, the service cost component of net periodic pension and postretirement benefit costs is required to be presented in the same expense category as the related salary and wages for the employee. The other components of the net periodic pension and postretirement benefit costs are required to be recognized below operating income in other (expense) income, net in CenturyLink's consolidated statements of operations. This change was applied on a retrospective basis to all previous periods to match the current period presentation. This retrospective application resulted in a $2 million reduction in operating income and a corresponding decrease in total other expense, net for the three months ended September 30, 2016.

 

CenturyLink, Inc.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

(Dollars in millions)

                         
   

Nine months ended September 30, 2017

 

Nine months ended September 30, 2016

           

As adjusted

         

As adjusted

       

Less

 

excluding

     

Less

 

excluding

   

As

 

special

 

special

 

As

 

special

 

special

   

reported

 

items

 

items

 

reported

 

items

 

items

Adjusted EBITDA and adjusted EBITDA margin

                     
 

Operating income *

$

1,485

   

(141)

 

(1)

1,626

   

1,928

   

(42)

 

(3)

1,970

 
 

Add: Depreciation and amortization

2,739

   

(6)

 

(2)

2,745

   

2,958

   

   

2,958

 
 

Adjusted EBITDA

$

4,224

   

(147)

   

4,371

   

4,886

   

(42)

   

4,928

 
                         
 

Revenues

$

12,333

   

   

12,333

   

13,181

   

   

13,181

 
                         
 

Operating income margin (operating income divided by revenues)

12.0

%

     

13.2

%

 

14.6

%

     

14.9

%

                         
 

Adjusted EBITDA margin (adjusted EBITDA divided by revenues)

34.2

%

     

35.4

%

 

37.1

%

     

37.4

%

                         

Adjusted free cash flow

                     
 

Adjusted EBITDA

       

$

4,371

           

4,928

 
 

Less: Capital expenditures (4)

       

(2,358)

           

(1,995)

 
 

Less: Cash paid for interest, net of amounts capitalized

       

(917)

           

(922)

 
 

Less: Pension and postretirement impacts (5)

       

(181)

           

(143)

 
 

Less: Cash paid for income taxes, net

       

(378)

           

(344)

 
 

Less: Ongoing EBITDA impacts of ASC 840-40 on sale of data centers

       

(40)

           

 
 

Add: Share-based compensation

       

64

           

60

 
 

Add:  Other (expense) income, net *

       

(12)

           

43

 
 

Adjusted free cash flow (6)

       

$

549

           

1,627

 

________________________________________________

SPECIAL ITEMS

(1) -

Costs related to CenturyLink's acquisition of Level 3 ($65 million), a loss associated with the sale of CenturyLink's data centers and colocation business ($82 million), partially offset by the termination of depreciation and amortization expense related to CenturyLink's sale of the data centers and colocation business $50 million, which were substantially offset by additional depreciation expense adjustment recorded on real estate assets CenturyLink was required to reflect on its balance sheet as a result of not meeting the requirement of sale leaseback accounting ($44 million).

(2) -

Termination of depreciation and amortization expense related to CenturyLink's sale of the data centers and colocation business ($50 million), which were substantially offset by additional depreciation expense adjustment recorded of $44 million on real estate assets CenturyLink was required to reflect on its balance sheet as a result of not meeting the requirement of sale leaseback accounting.

(3) -

Includes severance costs associated with reduction in force initiatives ($25 million), integration costs associated with CenturyLink's acquisition of Qwest ($8 million) and costs associated with a large billing system integration project ($13 million), less an offsetting gain on the sale of a building $4 million.

   

ADJUSTED FREE CASH FLOW

(4) -

Excludes $5 million in 2017 and $15 million in 2016 of capital expenditures related to the integration of Qwest and Savvis.

(5) -

2017 includes net periodic pension benefit expense of $4 million, net periodic postretirement benefit expense of $102 million, contributions to our pension plan trust of ($100 million) and ($4 million) of benefits paid to participants of CenturyLink's non-qualified pension plans.  Postretirement contributions included benefits paid by company ($231 million) offset by participant contributions $41 million and direct subsidy receipts $7 million.

-

2016 includes net periodic pension benefit income of ($56 million), net periodic postretirement benefit expense of $107 million, contributions to our pension plan trust of ($100 million) and ($5 million) of benefits paid to participants of CenturyLink's non-qualified pension plans.  Postretirement contributions included benefits paid by company ($136 million) offset by participant contributions $43 million and direct subsidy receipts $4 million.

(6) -

Excludes special items identified in items (1), (2) and (3).

*

In the first quarter of 2017, CenturyLink adopted ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" ("ASU 2017-07"). ASU 2017-07 modified the presentation of net periodic pension and postretirement benefit costs and requires the service cost component to be reported separately from the other components in order to provide more useful information. Under ASU 2017-07, the service cost component of net periodic pension and postretirement benefit costs is required to be presented in the same expense category as the related salary and wages for the employee. The other components of the net periodic pension and postretirement benefit costs are required to be recognized in other (expense) income, net in CenturyLink's consolidated statements of operations. This change was applied on a retrospective basis to all previous periods to match the current period presentation. This retrospective application resulted in a $11 million reduction in operating income and a corresponding decrease in total other expense, net for the nine months ended September 30, 2016.

 

 

 

CenturyLink, Inc.

 

SUPPLEMENTAL NON-GAAP INFORMATION - ADJUSTED DILUTED EPS

 

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

 

(UNAUDITED)

 

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

 
                   
   

Three months ended

 

Nine months ended

 
   

September
30, 2017

 

September
30, 2016

 

September
30, 2017

 

September
30, 2016

 
                   

Net Income

$

92

   

152

   

272

   

584

   
                   

Less Special Items:

               
 

Special items (excluding tax items)

(31)

 

(1)

 

(35)

 

(3)

 

(172)

 

(5)

 

(69)

 

(7)

 
 

Special income tax items and income tax effect of other special items

9

 

(2)

 

13

 

(4)

 

35

 

(6)

 

26

 

(8)

 

Total impact of special items

(22)

   

(22)

   

(137)

   

(43)

   
                   

Net income, excluding special items

114

   

174

   

409

   

627

   
                   

Add back certain items arising from purchase accounting:

               

Amortization of customer base intangibles:

               
 

Qwest

167

   

183

   

513

   

561

   
 

Embarq

10

   

15

   

40

   

55

   
 

Savvis

7

   

15

   

22

   

46

   
                   

Amortization of fair value adjustment of long-term debt:

               
 

Embarq

   

   

1

   

3

   
 

Qwest

   

(3)

   

(5)

   

(12)

   
                   

Subtotal

184

   

210

   

571

   

653

   

Tax effect of items arising from purchasing accounting

(70)

   

(79)

   

(217)

   

(247)

   

Net adjustment, after taxes

114

   

131

   

354

   

406

   
                   

Net income, as adjusted for above items

$

228

   

305

   

763

   

1,033

   
                   

Weighted average diluted shares outstanding

542.0

 

540.9

 

541.9

 

540.5

 
                   

Diluted EPS
(excluding special items)

$

0.21

   

0.32

   

0.75

   

1.16

   
                   

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

$

0.42

   

0.56

   

1.41

   

1.91

   

 

 

 

The above non-GAAP schedule presents adjusted net income and adjusted diluted earnings per share (both excluding special items) by adding back to net income and diluted earnings per share certain non-cash expense items that arise as a result of the application of business combination accounting rules to CenturyLink's major acquisitions since mid-2009. Such presentation is not in accordance with generally accepted accounting principles but CenturyLink's management believes the presentation is useful to analysts and investors to understand the impacts of growing CenturyLink's business through acquisitions.

(1)

Costs related to CenturyLink's acquisition of Level 3 ($37million) offset by a favorable adjustment to the loss associated with the sale of CenturyLink's data centers and colocation business $37 million, interest expense ($44 million) related to CenturyLink's $6 billion term loan secured financing for the acquisition of Level 3 and interest income $13 million earned from the pre-funded escrow established with the term loan proceeds.

(2)

Income tax benefit of Items (1).

(3)

Includes severance costs associated with reduction in force initiatives ($4 million), integration costs associated with CenturyLink's acquisition of Qwest ($1 million), costs associated with a large billing system integration project ($7 million) and a net loss associated with early retirement of debt ($27 million), less an offsetting gain on the sale of a building $4 million.

(4)

Income tax benefit of Item (3).

(5)

Costs related to CenturyLink's acquisition of Level 3 ($65 million), interest expense ($44 million) related to CenturyLink's $6 billion term loan secured financing for the acquisition of Level 3 and interest income $13 million earned from the pre-funded escrow, a loss associated with the sale of CenturyLink's data centers and colocation business ($82 million), partially offset by the termination of depreciation and amortization expense related to CenturyLink's sale of the data centers and colocation business $50 million, which were substantially offset by additional depreciation expense adjustment recorded on real estate assets CenturyLink was required to reflect on its balance sheet as a result of not meeting the requirement of sale leaseback accounting ($44 million).

(6)

Income tax benefit of Item (5) $73 million, net of a tax benefit related to the sale of CenturyLink's data centers and colocation business ($38 million).

(7)

Includes severance costs associated with reduction in force initiatives ($25 million), integration costs associated with CenturyLink's acquisition of Qwest ($8 million) and costs associated with a large billing system integration project ($13 million) and a net loss associated with early retirement of debt ($27 million), less an offsetting gain on the sale of a building $4 million.

(8)

Income tax benefit of Item (7).

 

 

 

CenturyLink, Inc.

SELECTED SEGMENT FINANCIAL INFORMATION

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(UNAUDITED)

(Dollars in millions)

                   
     

Three months ended
September 30,

 

Nine months ended
September 30,

     

2017

 

2016

 

2017

 

2016

Total reportable segment revenues

 

$

3,558

   

3,916

   

10,943

   

11,776

 

Total reportable segment expenses

 

1,913

   

2,068

   

5,720

   

6,009

 

Total reportable segment income

 

$

1,645

   

1,848

   

5,223

   

5,767

 

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

 

46.2

%

 

47.2

%

 

47.7

%

 

49.0

%

                   

Enterprise

               

Revenues

               
 

Strategic services *

 

$

949

   

1,078

   

3,031

   

3,224

 
 

Legacy services *

 

1,092

   

1,205

   

3,341

   

3,699

 
 

Data integration

 

130

   

161

   

370

   

398

 
 

Total revenues

 

2,171

   

2,444

   

6,742

   

7,321

 

Expenses

               
 

Total expenses

 

1,292

   

1,425

   

3,907

   

4,116

 
                   

Segment income

 

$

879

   

1,019

   

2,835

   

3,205

 

Segment income margin

 

40.5

%

 

41.7

%

 

42.0

%

 

43.8

%

                   

Consumer

               

Revenues

               
 

Strategic services

 

$

774

   

789

   

2,306

   

2,363

 
 

Legacy services

 

613

   

683

   

1,894

   

2,091

 
 

Data integration

 

   

   

1

   

1

 
 

Total revenues

 

1,387

   

1,472

   

4,201

   

4,455

 

Expenses

               
 

Total expenses

 

621

   

643

   

1,813

   

1,893

 
                   

Segment income

 

$

766

   

829

   

2,388

   

2,562

 

Segment income margin

 

55.2

%

 

56.3

%

 

56.8

%

 

57.5

%

   

*

During the second quarter of 2017, CenturyLink  determined that certain of its legacy services, specifically its dark fiber network leasing, are more closely aligned with CenturyLink's strategic services than with its legacy services. As a result, CenturyLink now reflects these operating revenues as strategic services, and CenturyLink has reclassified certain prior period amounts to conform to this change. The revision resulted in an increase of revenue from strategic services and a corresponding decrease in revenue from legacy services of $12 million and $36 million for the three and nine months ended September 30, 2016, respectively.

                   
 

In January 2017, CenturyLink implemented a new organizational structure designed to further strengthen its ability to attain its operational, strategic and financial goals. Prior to this reorganization, CenturyLink operated and reported as two segments, business and consumer. As a result of this reorganization, CenturyLink reassigned its information technology, managed hosting, cloud hosting and hosting area network services from its former business segment to a new non-reportable operating segment. In addition, CenturyLink changed the name of the predecessor business segment to enterprise segment. As of September 30, 2017 CenturyLink had the following two reportable segments: enterprise and consumer.

 

 

CenturyLink, Inc.

REVENUES

(UNAUDITED)

(Dollars in millions)

                   
     

Three months ended

 

Nine months ended

     

September 30,
2017

 

September 30,
2016

 

September 30,
2017

 

September 30,
2016

Strategic services *

               
 

Enterprise high-bandwidth data services (1)

 

$

767

   

744

   

2,296

   

2,235

 
 

Other enterprise strategic services (2)

 

182

   

334

   

735

   

989

 
 

IT and managed services (3)

 

169

   

160

   

483

   

483

 
 

Consumer broadband services (4)

 

673

   

674

   

1,995

   

2,023

 
 

Other consumer strategic services (5)

 

101

   

115

   

311

   

340

 
 

 Total strategic services revenues

 

1,892

   

2,027

   

5,820

   

6,070

 
                 

Legacy services *

               
 

Enterprise voice services (6)

 

551

   

601

   

1,682

   

1,834

 
 

Enterprise low-bandwidth data services (7)

 

289

   

339

   

905

   

1,056

 
 

Other enterprise legacy services (8)

 

252

   

265

   

754

   

809

 
 

Consumer voice services (6)

 

541

   

605

   

1,678

   

1,854

 
 

Other consumer legacy services (9)

 

72

   

78

   

216

   

237

 
 

 Total legacy services revenues

 

1,705

   

1,888

   

5,235

   

5,790

 
                   

Data integration

               
 

  Enterprise data integration

 

130

   

161

   

370

   

398

 
 

  IT and managed services data integration

 

4

   

2

   

14

   

3

 
 

  Consumer data integration

 

   

   

1

   

1

 
 

Total data integration revenues

 

134

   

163

   

385

   

402

 
                 

Other revenues

               
 

  High-cost support revenue (10)

 

165

   

171

   

501

   

518

 
 

  Other revenue (11)

 

138

   

133

   

392

   

401

 
 

Total other revenues

 

303

   

304

   

893

   

919

 
                 

Total revenues

 

$

4,034

   

4,382

   

12,333

   

13,181

 

 

____________________

(1)

 

Includes MPLS, Ethernet and wavelength revenue

(2)

 

Includes primarily colocation, broadband, VOIP, video and fiber lease revenue

(3)

 

Includes primarily IT services, managed hosting, cloud hosting and hosting area network revenue

(4)

 

Includes broadband and related services revenue

(5)

 

Includes video and other revenue

(6)

 

Includes local and long-distance voice revenue

(7)

 

Includes private line (including special access) revenue

(8)

 

Includes UNEs, public access, switched access and other ancillary revenue

(9)

 

Includes other ancillary revenue

(10)

 

Includes CAF Phase 1, CAF Phase 2 and federal and state USF support revenue

(11)

 

Includes USF surcharges

*

During the second quarter of 2017, CenturyLink  determined that certain of its legacy services, specifically its dark fiber network leasing, are more closely aligned with CenturyLink's strategic services than with its legacy services. As a result, CenturyLink now reflects these operating revenues as strategic services, and CenturyLink has reclassified certain prior period amounts to conform to this change. The revision resulted in an increase of revenue from strategic services and a corresponding decrease in revenue from legacy services of $12 million and $36 million for the three and nine months ended September 30, 2016, respectively.

 

 

 

CenturyLink, Inc.

OPERATING METRICS

(UNAUDITED)

               
               
     

As of

 

As of

 

As of

     

September 30, 2017

 

June 30, 2017

 

September 30, 2016

               
     

(In thousands)

Operating Metrics

           

Broadband subscribers

 

5,767

   

5,868

   

5,950

 

Access lines

 

10,506

   

10,733

   

11,231

 
               
               
 

CenturyLink's methodology for counting broadband subscribers and access lines may not be comparable to those of other companies.

 

Level 3 Parent, LLC

FINANCIAL RESULTS

THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(UNAUDITED)

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

     
   

Three months ended September 30,

   

2017

 

2016 (1)

         

Core Network Services Revenue

$

1,963

   

1,929

 

Wholesale Voice Services Revenue

96

   

104

 
 

Total Revenue

2,059

   

2,033

 

Network Access Costs

678

   

675

 

Network Access Margin

67.1

%

 

66.8

%

Network Related Expenses (NRE) (2)

340

   

331

 

Selling, General & Administrative Expenses (SG&A) (2)

320

   

311

 

Non-cash Compensation Expense

33

   

43

 

Adjusted EBITDA (3)

721

   

716

 

Adjusted EBITDA, excluding acquisition-related expenses (3) (4)

752

   

716

 

Adjusted EBITDA Margin (3)

35.0

%

 

35.2

%

Adjusted EBITDA Margin, excluding acquisition-related expenses (3) (4)

36.5

%

 

35.2

%

Cash Flows from Operating Activities (5)

691

   

645

 

Capital Expenditures

322

   

364

 

Capital Expenditures, excluding acquisition-related capital expenditures (6)

318

   

364

 

Unlevered Cash Flow (3)

493

   

407

 

Unlevered Cash Flow, excluding acquisition-related expenses (3) (5)

503

   

407

 

Free Cash Flow (3)

369

   

281

 

Free Cash Flow, excluding acquisition-related expenses (3) (5)

379

   

281

 

Net Income

$

157

   

143

 

Net Income per Common Share - Basic

$

0.43

   

0.40

 

Weighted Average Shares Outstanding - Basic

363,471

   

359,561

 
         

(1) -

The reported third quarter 2016 results have been adjusted to reflect changes made to customer assignments between the wholesale and enterprise channels as of the beginning of 2017.

(2) -

Excludes non-cash compensation expense.

(3) -

See schedule of non-GAAP metrics for definitions and reconciliation to GAAP measures.

(4) -

In the third quarter 2017, acquisition-related expenses were $31 million.

(5) -

In the third quarter 2017, cash paid for acquisition-related expenses was $10 million.

(6) -

In the third quarter 2017, acquisition-related capital expenditures were $4 million.

 

 

 

Level 3 Parent, LLC

CORE NETWORK SERVICE REVENUE

(UNAUDITED)

(Dollars in millions)

                 
           

3Q17 /
3Q16
Percent
Change

 

3Q17 /
3Q16
Percent
Change,
Constant
Currency

           
   

3Q17

 

3Q16 (1)

 

North America

$

1,597

   

$

1,573

   

2

%

 

2

%

 

Wholesale

404

   

412

   

(2)

%

 

(2)

%

 

Enterprise

1,193

   

1,161

   

3

%

 

3

%

                 

EMEA

$

184

   

$

180

   

2

%

 

1

%

 

Wholesale

57

   

58

   

(2)

%

 

(5)

%

 

Enterprise

113

   

105

   

8

%

 

6

%

 

UK Government

14

   

17

   

(18)

%

 

(14)

%

                 

Latin America

$

182

   

$

176

   

3

%

 

3

%

 

Wholesale

35

   

37

   

(5)

%

 

(8)

%

 

Enterprise

147

   

139

   

6

%

 

6

%

                 

Total CNS Revenue

$

1,963

   

$

1,929

   

2

%

 

2

%

 

Wholesale CNS

496

   

507

   

(2)

%

 

(3)

%

 

Enterprise CNS

1,467

   

1,422

   

3

%

 

3

%

 

 

   

(1) -

The reported third quarter 2016 results have been adjusted to reflect changes made to customer assignments between the wholesale and enterprise channels as of the beginning of 2017.

 

 

Level 3 Parent, LLC and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

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

 

           
 

Three Months Ended

 

September 30,
2017

 

June 30,
2017

 

September 30,
2016

Revenue

$

2,059

   

2,061

   

2,033

 
           

Costs and Expenses

         

Network access costs

678

   

675

   

675

 

Network related expenses

345

   

337

   

337

 

Depreciation and amortization

333

   

330

   

319

 

Selling, general and administrative expenses

348

   

366

   

348

 

Total Costs and Expenses

1,704

   

1,708

   

1,679

 
           

Operating Income

355

   

353

   

354

 
           

Other Income (Expense):

         

Interest income

6

   

3

   

1

 

Interest expense

(134)

   

(132)

   

(139)

 

Other, net

6

   

(1)

   

1

 

Total Other Expense

(122)

   

(130)

   

(137)

 
           

Income Before Income Taxes

233

   

223

   

217

 
           

Income Tax Expense

(76)

   

(69)

   

(74)

 
           

Net Income

$

157

   

154

   

143

 
           

Basic Earnings per Common Share:

         

Net Income per Share

$

0.43

   

0.42

   

0.40

 

Weighted-Average Shares Outstanding (in thousands)

363,471

   

362,385

   

359,561

 
           

Diluted Earnings per Common Share:

         

Net Income per Share

$

0.43

   

0.42

   

0.39

 

Weighted-Average Shares Outstanding (in thousands)

365,323

   

365,002

   

361,907

 

 

 

 

 

Level 3 Parent, LLC and Subsidiaries

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(Dollars in millions)

 

           
 

September 30,
2017

 

June 30,
2017

 

September 30,
2016

           

Assets

         
           

Current Assets:

         

Cash and cash equivalents

$

2,252

   

1,056

   

1,569

 

Marketable securities

   

1,127

   

 

Restricted cash and securities

5

   

5

   

8

 

Receivables, less allowances for doubtful accounts

750

   

707

   

749

 

Other

136

   

141

   

131

 

Total Current Assets

3,143

   

3,036

   

2,457

 
           

Property, Plant and Equipment, net

10,485

   

10,392

   

10,167

 

Restricted Cash and Securities

29

   

29

   

31

 

Goodwill

7,741

   

7,737

   

7,736

 

Other Intangibles, net

761

   

809

   

967

 

Deferred Tax Assets

3,162

   

3,235

   

3,339

 

Other Assets

52

   

49

   

49

 

Total Assets

$

25,373

   

25,287

   

24,746

 
           

Liabilities and Stockholders' Equity

         
           

Current Liabilities:

         

Accounts payable

$

704

   

693

   

728

 

Current portion of long-term debt

7

   

306

   

7

 

Accrued payroll and employee benefits

247

   

178

   

194

 

Accrued interest

95

   

97

   

135

 

Current portion of deferred revenue

276

   

262

   

263

 

Other

139

   

162

   

180

 

Total Current Liabilities

1,468

   

1,698

   

1,507

 
           

Long-Term Debt, less current portion

10,586

   

10,584

   

10,875

 

Deferred Revenue, less current portion

1,132

   

1,058

   

1,010

 

Other Liabilities

637

   

632

   

630

 

Total Liabilities

13,823

   

13,972

   

14,022

 
           

Stockholders' Equity

11,550

   

11,315

   

10,724

 

Total Liabilities and Stockholders' Equity

$

25,373

   

25,287

   

24,746

 

 

 

Level 3 Parent, LLC and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollars in millions)

 

           
 

Three Months Ended

 

September 30,
2017

 

June 30,
2017

 

September 30,
2016

Cash Flows from Operating Activities:

         

Net income

$

157

   

154

   

143

 

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

         

  Depreciation and amortization

333

   

330

   

319

 

  Non-cash compensation expense attributable to stock awards

33

   

39

   

43

 

  Accretion of debt discount and amortization of debt issuance costs

4

   

4

   

5

 

  Accrued interest on long-term debt, net

(2)

   

(4)

   

4

 

  Deferred income taxes

70

   

57

   

62

 

  Loss on sale of property, plant and equipment and other assets

6

   

   

 

  Other, net

13

   

(3)

   

(4)

 

  Changes in working capital items:

         

  Receivables

(50)

   

10

   

85

 

  Other current assets

(2)

   

(4)

   

 

  Payables

7

   

(59)

   

(33)

 

  Deferred revenue

38

   

   

(21)

 

  Other current liabilities

84

   

37

   

42

 

Net Cash Provided by Operating Activities

691

   

561

   

645

 
           

Cash Flows from Investing Activities:

         

Capital expenditures

(322)

   

(328)

   

(364)

 

Change in restricted cash and securities, net

   

4

   

 

Purchases of marketable securities

   

(1,127)

   

 

Maturity of marketable securities

1,127

   

   

 

Proceeds from sale of property, plant and equipment and other assets

1

   

   

 

Net Cash Provided by (Used in) Investing Activities

806

   

(1,451)

   

(364)

 
           

Cash Flows from Financing Activities:

         

Payments on and repurchases of long-term debt and capital leases

(302)

   

(2)

   

(2)

 

Net Cash Used in Financing Activities

(302)

   

(2)

   

(2)

 
           

Effect of Exchange Rates on Cash and Cash Equivalents

1

   

1

   

(1)

 
           

Net Change in Cash and Cash Equivalents

1,196

   

(891)

   

278

 
           

Cash and Cash Equivalents at Beginning of Period

1,056

   

1,947

   

1,291

 
           

Cash and Cash Equivalents at End of Period

$

2,252

   

1,056

   

1,569

 
           

Supplemental Disclosure of Cash Flow Information:

         

Cash interest paid

$

130

   

129

   

127

 

 

 

Level 3 Parent, LLC:

 

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.

In addition, measures referred to in the accompanying news release as being calculated "on a constant currency basis" or "in constant currency terms" are non-GAAP metrics intended to present the relevant information assuming a constant exchange rate between the two periods being compared. Such metrics are calculated by applying the currency exchange rates used in the preparation of the prior period financial results to the subsequent period results.

Level 3 Parent, LLC and Consolidated Subsidiaries

QUARTERLY CONSTANT CURRENCY

(UNAUDITED)

(Dollars in millions)

                       
     

3Q16 FX

2Q17 FX

       

3Q16 FX

 

2Q17 FX

                       
     

3Q17

Constant

Currency

       

3Q17/
3Q16
% Change

3Q17
Constant
Currency/

3Q16
%
Change(3)

3Q17/
2Q17
% Change

3Q17
Constant
Currency/

2Q17
%
Change(3)

   

3Q17

3Q17
Constant
Currency

3Q16(2)

2Q17

 
                       

North America

$

1,597

 

1,596

 

1,596

 

1,573

 

1,607

   

1.5

%

1.5

%

(0.6)

%

(0.6)

%

 

Wholesale

404

 

403

 

403

 

412

 

415

   

(1.9)

%

(1.9)

%

(2.7)

%

(2.7)

%

 

Enterprise

1,193

 

1,193

 

1,193

 

1,161

 

1,192

   

2.8

%

2.8

%

0.1

%

0.1

%

                     

EMEA

$

184

 

182

 

179

 

180

 

176

   

2.2

%

0.5

%

4.5

%

2.0

%

 

Wholesale

57

 

55

 

55

 

58

 

55

   

(1.7)

%

(4.6)

%

3.6

%

(0.9)

%

 

Enterprise

113

 

112

 

110

 

105

 

107

   

7.6

%

5.7

%

5.6

%

3.7

%

 

UK Govt

14

 

15

 

14

 

17

 

14

   

(17.6)

%

(13.8)

%

%

0.5

%

                       

Latin America

$

182

 

181

 

182

 

176

 

182

   

3.4

%

2.9

%

%

(0.2)

%

 

Wholesale

35

 

35

 

35

 

37

 

36

   

(5.4)

%

(7.7)

%

(2.8)

%

(4.1)

%

 

Enterprise

147

 

146

 

147

 

139

 

146

   

5.8

%

5.7

%

0.7

%

0.8

%

                     

Total CNS Revenue

1,963

 

1,959

 

1,957

 

1,929

 

1,965

   

1.8

%

1.5

%

(0.1)

%

(0.4)

%

 

Wholesale

496

 

493

 

493

 

507

 

506

   

(2.2)

%

(2.8)

%

(2.0)

%

(2.6)

%

 

Enterprise (1)

1,467

 

1,466

 

1,464

 

1,422

 

1,459

   

3.2

%

3.1

%

0.5

%

0.4

%

                       

Total CNS Revenue Wholesale

$

1,963

 

1,959

 

1,957

 

1,929

 

1,965

   

1.8

%

1.5

%

(0.1)

%

(0.4)

%

                     

Wholesale Voice Services

$

96

 

97

 

97

 

104

 

96

   

(7.7)

%

(6.9)

%

%

0.1

%

                     

Total Revenues

$

2,059

 

2,056

 

2,054

 

2,033

 

2,061

   

1.3

%

1.1

%

(0.1)

%

(0.3)

%

 

(1)

Includes UK Government

(2)

The 2016 results have been adjusted to reflect changes made to customer assignments between the wholesale and enterprise channels as of the beginning of 2017.

(3)

Percentages are calculated using whole numbers. Minor differences may exist due to rounding.

Consolidated Revenue is defined as total revenue from the Consolidated Statements of Income.

Core Network Services Revenue includes revenue from colocation and datacenter services, transport and fiber, IP and data services, and voice services (local and enterprise).

Network Access Costs includes leased capacity, right-of-way costs, access charges, satellite transponder lease costs and other third party costs directly attributable to providing access to customer locations from the Level 3 network, but excludes Network Related Expenses, and depreciation and amortization. Network Access Costs do not include any employee expenses or impairment expenses; these expenses are allocated to Network Related Expenses or Selling, General and Administrative Expenses.

Network Related Expenses includes certain expenses associated with the delivery of services to customers and the operation and maintenance of the Level 3 network, such as facility rent, utilities, maintenance and other costs, each related to the operation of its communications network, as well as salaries, wages and related benefits (including non-cash stock-based compensation expenses) associated with personnel who are responsible for the delivery of services, operation and maintenance of its communications network, and accretion expense on asset retirement obligations, but excludes depreciation and amortization.

Network Access Margin ($) is defined as total Revenue less Network Access Costs from the Consolidated Statements of Income, and excludes Network Related Expenses.

Network Access Margin (%) is defined as Network Access Margin ($) divided by total Revenue. Management believes that network access margin is a relevant metric to provide to investors, as it is a metric that management uses to measure the margin available to Level 3 after it pays third party network services costs; in essence, a measure of the efficiency of Level 3's network.

Adjusted EBITDA is defined as net income (loss) from the Consolidated Statements of Income before income tax (expense) benefit, total other income (expense), non-cash impairment charges, depreciation and amortization and non-cash stock compensation expense.

Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by total revenue.

Level 3 Parent, LLC

ADJUSTED EBITDA METRIC

(UNAUDITED)

(Dollars in millions)

         
   

3Q17

 

3Q16

Net Income

 

$

157

   

143

 

Income Tax Expense

 

76

   

74

 

Total Other Expense

 

122

   

137

 

Depreciation and Amortization

 

333

   

319

 

Non-Cash Stock Compensation

 

33

   

43

 

Adjusted EBITDA

 

$

721

   

716

 

Add back: Acquisition-Related Expenses

 

31

   

 

Adjusted EBITDA Excluding Acquisition-Related Expenses

 

$

752

   

716

 
         

Total Revenue

 

$

2,059

   

2,033

 

Adjusted EBITDA Margin

 

35.0

%

 

35.2

%

Adjusted EBITDA Excluding Acquisition-Related Expenses Margin

 

36.5

%

 

35.2

%

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 Level 3's internal reporting and are key measures used by Management to evaluate profitability and operating performance of Level 3 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 Level 3'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 impairment charges and non-cash stock compensation expense because of the non-cash nature of these items. Adjusted EBITDA also excludes interest income, interest expense and income taxes because these items are associated with Level 3's capitalization and tax structures. 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 Level 3.

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 Level 3'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 impairment charges, 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 Consolidated Statements of Cash Flows or the Consolidated 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 Level 3 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 Level 3'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 Level 3's Unlevered Cash Flow to that of some of its competitors may be of limited usefulness since Level 3 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 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 Consolidated 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 Level 3'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 Level 3'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 Level 3's Free Cash Flow to that of some of its competitors may be of limited usefulness since Level 3 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.

Level 3 Parent, LLC

UNLEVERED CASH FLOW AND FREE CASH FLOW

(UNAUDITED)

(Dollars in millions)

         
   

3Q17

 

3Q16

Net Cash Provided by Operating Activities

 

$

691

   

645

 

Capital Expenditures

 

(322)

   

(364)

 

Free Cash Flow

 

369

   

281

 

Cash Interest Paid

 

130

   

127

 

Interest Income

 

(6)

   

(1)

 

Unlevered Cash Flow

 

$

493

   

407

 
         
         
         

Free Cash Flow

 

$

369

   

281

 

Add back: Cash Acquisition-Related Expenses

 

10

   

 

Free Cash Flow Excluding Cash Acquisition-Related Expenses

 

$

379

   

281

 
         

Unlevered Cash Flow

 

$

493

   

407

 

Add back: Cash Acquisition-Related Expenses

 

10

   

 

Unlevered Cash Flow Excluding Cash Acquisition-Related Expenses

 

$

503

   

407

 

Debt is defined as total gross debt, including capital leases from the Footnotes to the Consolidated Financial Statements.

Net Debt to Last Twelve Months (LTM) Adjusted EBITDA Ratio is defined as Debt, reduced by cash and cash equivalents and divided by LTM Adjusted EBITDA Excluding Acquisition-Related Expenses.

Level 3 Parent, LLC and Consolidated Subsidiaries

LTM ADJUSTED EBITDA

(UNAUDITED)

(Dollars in millions)

           
 

4Q16

1Q17

2Q17

3Q17

Total:

LTM

Total Revenue

$

2,032

 

2,048

 

2,061

 

2,059

 

8,200

 

Network Access Costs

(680)

 

(691)

 

(675)

 

(678)

 

(2,724)

 

Network Related Expenses

(332)

 

(336)

 

(337)

 

(345)

 

(1,350)

 

Selling, General and Administrative Expenses

(346)

 

(364)

 

(366)

 

(348)

 

(1,424)

 

Add back: Non-Cash Compensation Expenses

35

 

48

 

39

 

33

 

155

 

Adjusted EBITDA

$

709

 

705

 

722

 

721

 

2,857

 
           

Add back: Acquisition-Related Expenses

15

 

20

 

22

 

31

 

88

 

Adjusted EBITDA Excluding Acquisition-Related Expenses

$

724

 

725

 

744

 

752

 

2,945

 

 

Level 3 Parent, LLC and Consolidated Subsidiaries

NET DEBT TO LTM ADJUSTED EBITDA RATIO

AS OF SEPTEMBER 30, 2017

(UNAUDITED)

(Dollars in millions)

   

Debt

10,705

 

Cash and Cash Equivalents

(2,252)

 

Net Debt

8,453

 

LTM Adjusted EBITDA Excluding Acquisition-Related Expenses

2,945

 

Net Debt to LTM Adjusted EBITDA Ratio

2.9

 

 

Outlook

 

Metrics(1)

2017 Outlook

 

Adjusted EBITDA

$2.94 to $3.00 billion

 

Free Cash Flow

$1.10 to $1.16 billion

 

GAAP Interest Expense

$540 million

 

Cash Interest Expense

$520 million

 

Capital Expenditures

16% of Total Revenue

 

Depreciation and Amortization

$1.35 billion

 

Cash Income Tax

$40 million

 

Non-cash Compensation Expense

$170 million

 

Full Year Income Tax Rate

~38%

(1)

All outlook measures exclude CenturyLink acquisition-related expenses.

In order to provide our outlook with respect to non-GAAP metrics, we are required to indicate a range for GAAP measures that are components of the reconciliation of the non-GAAP metric. The provision of these ranges is in no way meant to indicate that Level 3 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, Level 3 has to use ranges for the GAAP components that arithmetically add up to the non-GAAP financial metric. While Level 3 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.

Level 3 Parent, LLC and Consolidated Subsidiaries

OUTLOOK

(UNAUDITED)

(Dollars in millions)

       

Adjusted EBITDA Outlook

     

Twelve Months Ended December 31, 2017

     
 

Range

 

Low

 

High

Net Income

$

500

   

590

 

Income Tax Expense

330

   

360

 

Total Other Expense

570

   

550

 

Depreciation and Amortization Expense

1,360

   

1,340

 

Non-Cash Compensation Expense

180

   

160

 

Adjusted EBITDA

$

2,940

   

3,000

 
       
       

Free Cash Flow Outlook

     

Twelve Months Ended December 31, 2017

     
 

Range

 

Low

 

High

Net Cash Provided by Operating Activities

$

2,420

   

2,520

 

Capital Expenditures

(1,320)

   

(1,360)

 

Free Cash Flow

$

1,100

   

1,160

 

 

 

SOURCE CenturyLink, Inc.

For further information: Kristina Waugh, 318-340-5627, kristina.r.waugh@centurylink.com