CTL
$22.64
Centurylink
($.17)
(.75%)
Earnings Details
4th Quarter December 2016
Wednesday, February 08, 2017 4:15:00 PM
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Summary

Centurylink Misses

Centurylink (CTL) reported 4th Quarter December 2016 earnings of $0.54 per share on revenue of $4.3 billion. The consensus earnings estimate was $0.56 per share on revenue of $4.3 billion. The Earnings Whisper number was $0.57 per share. Revenue fell 4.2% compared to the same quarter a year ago.

The company said it expects first quarter earnings of $0.51 to $0.57 per share on revenue of $4.23 billion to $4.29 billion and 2017 earnings of $2.10 to $2.30 per share on revenue of $17.05 billion to $17.30 billion. The current consensus earnings estimate is $0.59 per share on revenue of $4.31 billion for the quarter ending March 31, 2017 and $2.29 per share on revenue of $17.19 billion for the year ending December 31, 2017.

CenturyLink Inc, together with its subsidiaries, is an integrated communications company engaged primarily in providing a broad array of communications services including local and long distance voice, data, Internet access & broadband services etc.

Results
Reported Earnings
$0.54
Earnings Whisper
$0.57
Consensus Estimate
$0.56
Reported Revenue
$4.29 Bil
Revenue Estimate
$4.33 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

CenturyLink Reports Fourth Quarter And Full-Year 2016 Results

CenturyLink, Inc. (CTL) today reported results for fourth quarter and full-year 2016.

https://mma.prnewswire.com/media/325657/centurylink_logo.jpg

"CenturyLink achieved significant progress on our operational initiatives in 2016; however, full-year 2016 operating revenues and cash flows were below our expectations, primarily due to lower strategic revenue growth," said Glen F. Post, III, CenturyLink chief executive officer and president. "We are not satisfied with these results and are making progress in a number of areas focused on continuing to improve our customer experience and further positioning CenturyLink for long-term growth."

"We saw continued improvement in our broadband customer trend during the second half of 2016 and achieved modest Consumer broadband customer growth in the fourth quarter. We also continued to enhance the broadband speeds across our network and achieved nearly 5% year-over-year growth in Business high-bandwidth data services revenue in the second half of 2016. Additionally, we recently realigned our organization into primary customer-facing units enabling faster decision making and market responsiveness, increased accountability and an enhanced customer experience. Finally, our pending acquisition of Level 3 and pending sale of our data centers and associated colocation business align with our network-first focus while enhancing our opportunities to deliver complementary hosting, cloud and managed services. As we look to the future, we believe we are well positioned to drive profitable growth and shareholder value," concluded Post.

Fourth Quarter 2016 Consolidated Financial Results

Operating revenues for fourth quarter 2016 were $4.29 billion compared to $4.48 billion in fourth quarter 2015 as the declines in legacy3,4 voice and low-bandwidth data services revenues were partially offset by growth in strategic revenues3,4.

Operating expenses increased to $3.90 billion from $3.73 billion in fourth quarter 2015, primarily driven by Level 3 acquisition costs and an increase in severance costs, which were partially offset by lower depreciation and amortization expenses. Excluding special items (primarily severance and Level 3 acquisition costs), operating expenses were $3.70 billion compared to $3.71 billion in fourth quarter 2015.

Operating income decreased to $392 million from $751 million in fourth quarter 2015 primarily due to the revenue and expense items described above.

Operating cash flow (as defined in our attached supplemental schedules), excluding special items, decreased to $1.59 billion from $1.82 billion in fourth quarter 2015 due to the decline in operating revenues outlined above.

Net income and diluted earnings per share (EPS) were $42 million and $0.08, respectively, for fourth quarter 2016, compared to $338 million and $0.62, respectively, for fourth quarter 2015. The decrease in net income and diluted EPS was due to the decline in operating income.

Adjusted net income and adjusted diluted EPS (as reflected in our attached supplemental schedule) exclude the after-tax impact of special items, the non-cash after-tax impact of the amortization of certain intangible assets related to major acquisitions 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 fourth quarter 2016 was $292 million compared to adjusted net income of $434 million in fourth quarter 2015. Fourth quarter 2016 adjusted diluted EPS was $0.54 compared to $0.80 in the year-ago period due to lower adjusted net income.

Full-Year 2016 Consolidated Financial Results

Operating revenues decreased to $17.5 billion from $17.9 billion in 2015. The decline in operating revenues was driven by lower voice, low-bandwidth data services and data integration revenues. These revenue declines were partially offset by increases in strategic revenues resulting primarily from increased business customer demand for high-bandwidth data services, along with growth in broadband and CenturyLink? PrismTM TV revenues.

Operating expenses decreased to $15.1 billion from $15.3 billion in 2015 primarily driven by lower depreciation and amortization expenses partially offset by Level 3 acquisition costs and an increase in severance costs. Excluding special items (primarily severance and Level 3 acquisition costs), operating expenses declined to $14.9 billion in 2016 from $15.1 billion in 2015.

Operating income decreased to $2.3 billion from $2.6 billion in 2015 primarily due to the revenue and expense items described above.

Operating cash flow, excluding special items, was $6.5 billion in 2016 compared to $7.0 billion in 2015. The operating cash flow decline was driven by the decline in operating revenues outlined above.

Net income and diluted earnings per share (EPS) were $626 million and $1.16, respectively, for 2016, compared to $878 million and $1.58, respectively, for 2015. The decrease in net income and diluted EPS was due to the decline in operating income.

Adjusted net income and adjusted diluted EPS, (as reflected in our attached supplemental schedule) exclude the after-tax impact of special items, the non-cash after-tax impact of the amortization of certain intangible assets related to major acquisitions 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 decreased to $1.3 billion in 2016 from $1.5 billion in 2015. Adjusted diluted EPS for 2016 was $2.45 compared to $2.71 in 2015 primarily due to lower 2016 adjusted net income.

The accompanying financial schedules provide additional details regarding the company’s special items and reconciliations of non-GAAP financial measures for the three months and twelve months ended December 31, 2016 and 2015.

Fourth Quarter 2016 Segment Financial Results5

Business segment revenues were $2.55 billion, a decrease of 4.1% from fourth quarter 2015, primarily due to a decline in legacy revenues, which was partially offset by 3.0% growth in high-bandwidth data revenues. Strategic revenues were $1.23 billion in the quarter, an increase of 1.1% from fourth quarter 2015.

Consumer segment revenues were $1.45 billion, a decrease of 4.3% from fourth quarter 2015, primarily due to a decline in legacy voice revenues, which was partially offset by growth in PrismTM TV revenues. Strategic revenues were $784 million in the quarter, a 1.4% increase over fourth quarter 2015.

Realignment into Customer-Facing Organizations

In January 2017, CenturyLink implemented an organization change designed to better align its customer-facing organizations into three business units: Consumer; Enterprise; and IT and Managed Services. These organizations are fully integrated with Sales, Marketing and Service Delivery support teams to enable faster decision-making, market responsiveness and deeper accountability. This organization change is expected to create greater focus on the customer experience in each business unit and accelerate strategic revenue growth. CenturyLink also expanded its Product Development and Technology function to include Network Operations, Planning, Design and Construction to better support this new organizational structure.

Guidance - First Quarter and Full-Year 2017

CenturyLink expects growth in strategic revenues and data integration revenues in first quarter 2017 to be offset by anticipated declines in legacy revenues, resulting in lower operating revenues and core revenues compared to fourth quarter 2016. The company expects first quarter 2017 operating cash flow to be lower than fourth quarter 2016 due to the anticipated decline in revenues and higher operating expenses primarily related to employee benefits and marketing costs, as well as approximately $40 million of fourth quarter 2016 favorable expense adjustments that are not expected to reoccur in first quarter 2017.

First Quarter 2017 (excluding special items)

Operating Revenues
$4.23 to $4.29 billion
Core Revenues
$3.80 to $3.86 billion
Operating Cash Flow
$1.49 to $1.55 billion
Adjusted Diluted EPS
$0.51 to $0.57

CenturyLink anticipates lower operating revenues and core revenues in full-year 2017 compared to full-year 2016 due to expected legacy revenue declines more than offsetting anticipated increases in strategic revenue. Operating cash flow is expected to decline from full-year 2016 primarily driven by the continued decline in legacy voice and low-bandwidth data services revenues. The company also anticipates lower depreciation and amortization expense for full-year 2017 compared to full-year 2016. Free cash flow in full-year 2017 is expected to decline from full-year 2016 due to the lower level of operating cash flow and an increase in cash income taxes for the year, partially offset by lower capital expenditures.

Full-Year 2017 (excluding special items)

Operating Revenues
$17.05 to $17.3 billion
Core Revenues
$15.25 to $15.5 billion
Operating Cash Flow
$6.15 to $6.35 billion
Adjusted Diluted EPS
$2.10 to $2.30
Free Cash Flow
$1.55 to $1.75 billion
Capital Expenditures
$2.6 billion

All 2017 guidance figures and 2017 outlook statements included in this release (i) speak as of February 8, 2017 only, (ii) exclude the financial impact of acquiring Level 3 and the colocation business sale during 2017, (iii) exclude the impact of any share repurchases made after December 31, 2016 and (iv) 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 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. We are not able, without unreasonable efforts, to reconcile our non-GAAP guidance figures appearing above under "Guidance - First Quarter and Full-Year 2017" to their most directly comparable GAAP guidance financial measures, principally due to the time and expense associated with predicting with a reasonable degree of certainty information on special items, future impairment charges, integration expenses or the impact of pending acquisitions or dispositions. Although we cannot at this time assess the magnitude of these adjustments, they could be material. 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 3:30 p.m. Central Time today, February 8, 2017. Interested parties can access the call by dialing 866-531-7958 and entering the Conference ID 45027021. The call will be accessible for replay through February 16, 2017, by dialing 855-859-2056. Investors can also listen to CenturyLink’s earnings conference call and webcast replay by accessing the Investor Relations portion of the company’s website at www.centurylink.com through March 2, 2017. Financial, statistical and other information related to the call will also be posted to our website.

Reconciliation to GAAP

This release includes certain non-GAAP historical and forward-looking financial measures, including but not limited to operating cash flow, free cash flow, core revenues, adjusted net income, adjusted diluted EPS and adjustments to GAAP measures to exclude the effect of special items. In addition to providing key metrics for management to evaluate the company’s performance, we believe these measurements assist investors in their understanding of period-to-period operating performance and in identifying historical and prospective trends.

Reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the attached financial schedules. Reconciliation of additional non-GAAP historical financial measures that may be discussed during the call described above, along with further descriptions of non-GAAP financial measures, will be available in the Investor Relations portion of the company’s website at www.centurylink.com and in the 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 determine or calculate its non-GAAP measures differently from other companies.

About CenturyLink

CenturyLink (CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses and their lives through innovative technology solutions. CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network. Visit www.centurylink.com for more information.

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 successfully complete our pending acquisition of Level 3, including the timely receipt of all requisite financing and all shareholder and regulatory approvals free of any detrimental conditions, and to timely realize the anticipated benefits of the transaction, 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 capital expenditures, operating costs, periodic share repurchases, dividends, pension contributions and other benefits payments, and debt repayments; 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, 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) See attachments for reconciliations of non-GAAP figures to comparable GAAP figures.
(2) Beginning first quarter 2016, CenturyLink revised its free cash flow calculation. See attachments for non-GAAP reconciliations.
(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, Optical Wavelength, colocation, hosting, cloud, video, VoIP and IT services.
Legacy revenues primarily include voice, private line (including special access), switched access and Integrated Services Digital Network ("ISDN") and other ancillary services.
(4) 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.
CenturyLink, Inc.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015
(UNAUDITED)
(Dollars in millions, except per share amounts; shares in thousands)
Three months ended December 31, 2016
Three months ended December 31, 2015
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
$
2,016
--
2,016
1,992
--
1,992
1.2
%
1.2
%
Legacy
1,846
--
1,846
2,036
--
2,036
(9.3)
%
(9.3)
%
Data integration
131
--
131
140
--
140
(6.4)
%
(6.4)
%
Other
296
--
296
308
--
308
(3.9)
%
(3.9)
%
Total operating revenues
4,289
--
4,289
4,476
--
4,476
(4.2)
%
(4.2)
%
OPERATING EXPENSES
Cost of services and products
1,929
2
(1)
1,927
1,915
3
(4)
1,912
0.7
%
0.8
%
Selling, general and administrative 1,010
236
(1)
774
757
12
(4)
745
33.4
%
3.9
%
Depreciation and amortization
958
(36)
(2)
994
1,053
--
1,053
(9.0)
%
(5.6)
%
Total operating expenses
3,897
202
3,695
3,725
15
3,710
4.6
%
(0.4)
%
OPERATING INCOME
392
(202)
594
751
(15)
766
(47.8) %
(22.5) %
OTHER (EXPENSE) INCOME
Interest expense
(320)
--
(320)
(328)
--
(328)
(2.4)
%
(2.4)
%
Other (expense) income, net
2
--
2
7
--
7
(71.4) %
(71.4) %
Income tax expense
(32)
77
(3)
(109)
(92)
60
(5)
(152)
(65.2) %
(28.3) %
NET INCOME
$
42
(125)
167
338
45
293
(87.6) %
(43.0) %
BASIC EARNINGS PER SHARE
$
0.08
(0.23)
0.31
0.62
0.08
0.54
(87.1) %
(42.6) %
DILUTED EARNINGS PER SHARE
$
0.08
(0.23)
0.31
0.62
0.08
0.54
(87.1) %
(42.6) %
AVERAGE SHARES OUTSTANDING
Basic
539,965
539,965
541,605
541,605
(0.3)
%
(0.3)
%
Diluted
541,235
541,235
542,493
542,493
(0.2)
%
(0.2)
%
DIVIDENDS PER COMMON SHARE
$
0.54
0.54
0.54
0.54
--
%
--
%
SPECIAL ITEMS
(1)- Includes severance costs associated with recent headcount reductions ($164 million), integration costs associated with our acquisition of Qwest ($2 million), costs associated with a large billing system integration project ($2 million), costs related to our pending acquisition of Level 3 ($52 million), costs associated with our pending sale of the colocation business ($7 million) and the impairment of a building ($11 million).
(2)- Termination of depreciation expense related to our pending sale of the colocation business ($36 million).
(3)- Income tax benefit of Items (1) and (2).
(4)- Includes severance costs associated with reduction in force initiatives ($9 million) and integration costs associated with our acquisition of Qwest ($6 million).
(5)- Income tax benefit of Item (4).
*
During the second quarter of 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our business low-bandwidth data services, specifically our private line (including special access) services in our business segment, are more closely aligned with our legacy services than with our strategic services. As a result, we reflect these operating revenues as legacy services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in a reduction of revenue from strategic services and a corresponding increase in revenue from legacy services of $379 million for the three months ended December 31, 2015.
CenturyLink, Inc.
CONSOLIDATED STATEMENTS OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015
(UNAUDITED)
(Dollars in millions, except per share amounts; shares in thousands)
Twelve months ended December 31, 2016
Twelve months ended December 31, 2015
As adjusted
As adjusted
Increase
excluding
excluding
(decrease)
Less
special
Less
special
Increase
excluding
As
special
items
As
special
items
(decrease)
special
reported
items
(Non-GAAP)
reported
items
(Non-GAAP)
as reported items
OPERATING REVENUES *
Strategic
$
8,050
--
8,050
7,753
--
7,753
3.8
%
3.8
%
Legacy
7,672
--
7,672
8,338
--
8,338
(8.0)
%
(8.0)
%
Data integration
533
--
533
577
--
577
(7.6)
%
(7.6)
%
Other
1,215
--
1,215
1,232
--
1,232
(1.4)
%
(1.4)
%
Total operating revenues
17,470
--
17,470
17,900
--
17,900
(2.4)
%
(2.4)
%
OPERATING EXPENSES
Cost of services and products
7,774
7
(1)
7,767
7,778
14
(5)
7,764
(0.1)
%
--
%
Selling, general and administrative 3,449
273
(1)
3,176
3,328
152
(5)
3,176
3.6
%
--
%
Depreciation and amortization
3,916
(36)
(2)
3,952
4,189
--
4,189
(6.5)
%
(5.7)
%
Total operating expenses
15,139
244
14,895
15,295
166
15,129
(1.0)
%
(1.5)
%
OPERATING INCOME
2,331
(244)
2,575
2,605
(166)
2,771
(10.5) %
(7.1)
%
OTHER (EXPENSE) INCOME
Interest expense
(1,318)
--
(1,318)
(1,312)
--
(1,312)
0.5
%
0.5
%
Other income (expense), net
7
(27)
(3)
34
23
--
23
(69.6) %
47.8
%
Income tax expense
(394)
103
(4)
(497)
(438)
115
(6)
(553)
(10.1) %
(10.1) %
NET INCOME
$
626
(168)
794
878
(51)
929
(28.7) %
(14.5) %
BASIC EARNINGS PER SHARE
$
1.16
(0.31)
1.47
1.58
(0.09)
1.68
(26.6) %
(12.5) %
DILUTED EARNINGS PER SHARE
$
1.16
(0.31)
1.47
1.58
(0.09)
1.67
(26.6) %
(12.0) %
AVERAGE SHARES OUTSTANDING
Basic
539,549
539,549
554,278
554,278
(2.7)
%
(2.7)
%
Diluted
540,679
540,679
555,093
555,093
(2.6)
%
(2.6)
%
DIVIDENDS PER COMMON SHARE
$
2.16
2.16
2.16
2.16
--
%
--
%
SPECIAL ITEMS
(1)- Includes severance costs associated with recent headcount reductions ($189 million), integration costs associated with our acquisition of Qwest ($10 million), costs associated with a large billing system integration project ($15 million), costs related to our pending acquisition of Level 3 ($52 million), costs associated with our pending sale of the colocation business ($7 million) and the impairment of a building ($11 million), less an offsetting gain on the sale of a building $4 million.
(2)- Termination of depreciation expense related to our pending sale of the colocation business ($36 million).
(3)- Net loss associated with early retirement of debt ($27 million).
(4)- Income tax benefit of Items (1), (2) and (3).
(5)- Includes severance costs associated with reduction in force initiatives ($99 million), integration costs associated with our acquisition of Qwest ($32 million), the impairment of office buildings ($8 million), regulatory fines associated with a 911 system outage ($15 million) and litigation and other adjustments associated with pre-acquisition activities of Qwest and Embarq ($12 million).
(6)- Income tax benefit of Item (5).
*
During the second quarter of 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our business low-bandwidth data services, specifically our private line (including special access) services in our business segment, are more closely aligned with our legacy services than with our strategic services. As a result, we reflect these operating revenues as legacy services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in a reduction of revenue from strategic services and a corresponding increase in revenue from legacy services of $1.586 billion for the twelve months ended December 31, 2015.
CenturyLink, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2016 AND DECEMBER 31, 2015
(UNAUDITED)
(Dollars in millions)
December 31,
December 31,
2016
2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
222
126
Other current assets
4,940
2,524
Total current assets
5,162
2,650
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment
39,194
38,785
Accumulated depreciation
(22,155)
(20,716)
Net property, plant and equipment
17,039
18,069
GOODWILL AND OTHER ASSETS
Goodwill
19,650
20,742
Other, net
5,166
6,143
Total goodwill and other assets
24,816
26,885
TOTAL ASSETS
$
47,017
47,604
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
$
1,503
1,503
Other current liabilities
3,846
3,101
Total current liabilities
5,349
4,604
LONG-TERM DEBT
18,185
18,722
DEFERRED CREDITS AND OTHER LIABILITIES
10,084
10,218
STOCKHOLDERS’ EQUITY
13,399
14,060
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $
47,017
47,604
CenturyLink, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015
(UNAUDITED)
(Dollars in millions)
Twelve months ended
Twelve months ended
December 31, 2016
December 31, 2015
OPERATING ACTIVITIES
Net income
$
626
878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
3,916
4,189
Impairment of assets
13
9
Deferred income taxes
11
350
Provision for uncollectible accounts
192
177
Net loss on early retirement of debt
27
--
Share-based compensation
80
73
Changes in current assets and liabilities, net
(108)
(321)
Retirement benefits
(152)
(141)
Changes in other noncurrent assets and liabilities, net
(23)
(78)
Other, net
26
16
Net cash provided by operating activities
4,608
5,152
INVESTING ACTIVITIES
Payments for property, plant and equipment and capitalized software
(2,981)
(2,872)
Cash paid for acquisitions
(39)
(4)
Proceeds from sale of property and intangible assets
30
31
Other, net
(4)
(8)
Net cash used in investing activities
(2,994)
(2,853)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
2,161
989
Payments of long-term debt
(2,462)
(966)
Net payments on credit facility and revolving line of credit
(40)
(315)
Early retirement of debt costs
--
(1)
Dividends paid
(1,167)
(1,198)
Proceeds from issuance of common stock
6
11
Repurchase of common stock and shares withheld to satisfy tax withholdings
(16)
(819)
Other, net
--
(2)
Net cash used in financing activities
(1,518)
(2,301)
Net increase (decrease) in cash and cash equivalents
96
(2)
Cash and cash equivalents at beginning of period
126
128
Cash and cash equivalents at end of period
$
222
126
CenturyLink, Inc.
SELECTED SEGMENT FINANCIAL INFORMATION
THREE MONTHS AND TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015
(UNAUDITED)
(Dollars in millions)
Three months ended December 31,
Twelve months ended December 31,
2016
2015
2016
2015
Total segment revenues
$
3,993
4,168
16,255
16,668
Total segment expenses
2,100
2,085
8,492
8,461
Total segment income
$
1,893
2,083
7,763
8,207
Total segment income margin (segment income divided by segment revenues)
47.4
%
50.0
%
47.8
%
49.2
%
Business
Revenues
Strategic services *
$
1,232
1,219
4,903
4,721
Legacy services *
1,183
1,296
4,918
5,350
Data integration
130
140
531
575
Total revenues
2,545
2,655
10,352
10,646
Expenses **
Total expenses
1,472
1,472
5,930
5,967
Segment income
$
1,073
1,183
4,422
4,679
Segment income margin
42.2
%
44.6
%
42.7
%
44.0
%
Consumer
Revenues
Strategic services
$
784
773
3,147
3,032
Legacy services
663
740
2,754
2,988
Data integration
1
--
2
2
Total revenues
1,448
1,513
5,903
6,022
Expenses **
Total expenses
628
613
2,562
2,494
Segment income
$
820
900
3,341
3,528
Segment income margin
56.6
%
59.5
%
56.6
%
58.6
%
*
During the second quarter of 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our business low-bandwidth data services, specifically our private line (including special access) services in our business segment, are more closely aligned with our legacy services than with our strategic services. As a result, we reflect these operating revenues as legacy services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in a reduction of revenue from strategic services and a corresponding increase in revenue from legacy services of $379 million and $1.586 billion (net of $3 million and $9 million of deferred revenue included in other business legacy services) for the three and twelve months ended December 31, 2015, respectively.
** During the first half of 2016, we implemented several changes with respect to the assignment of certain expenses to our reportable segments. We have recast our previously-reported segment results for the three and twelve months ended December 31, 2015, to conform to the current presentation. For the three months ended December 31, 2015, the segment expense recast resulted in an increase in consumer expenses of $16 million and a decrease in business expenses of $12 million. For the twelve months ended December 31, 2015, the segment expense recast resulted in an increase in consumer expenses of $69 million and a decrease in business expenses of $67 million.
CenturyLink, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
(Dollars in millions)
Three months ended December 31, 2016
Three months ended December 31, 2015
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
$
392
(202)
(1) 594
751
(15)
(3)
766
Add: Depreciation and amortization
958
(36)
(2) 994
1,053
--
1,053
Operating cash flow
$
1,350
(238)
1,588
1,804
(15)
1,819
Revenues
$
4,289
--
4,289
4,476
--
4,476
Operating income margin (operating income divided by revenues)
9.1
%
13.8
%
16.8
%
17.1
%
Operating cash flow margin (operating cash flow divided by revenues) 31.5
%
37.0
%
40.3
%
40.6
%
Free cash flow
Operating cash flow
$
1,588
1,819
Less: Capital expenditures (4)
(963)
(830)
Less: Cash paid for interest, net of amounts capitalized
(379)
(396)
Less: Pension and post-retirement impacts (5)
(25)
(6)
Less: Cash paid for income taxes, net of refunds
(53)
(9)
Add: Share-based compensation
20
16
Add:
Other income
2
7
Free cash flow (6)
$
190
601
SPECIAL ITEMS
(1)- Includes severance costs associated with recent headcount reductions ($164 million), integration costs associated with our acquisition of Qwest ($2 million), costs associated with a large billing system integration project ($2 million), costs related to our pending acquisition of Level 3 ($52 million), costs associated with our pending sale of the colocation business ($7 million) and the impairment of a building ($11 million); offset by the termination of depreciation expense related to our pending sale of the colocation business $36 million.
(2)- Termination of depreciation expense related to our pending sale of the colocation business ($36 million).
(3)- Includes severance costs associated with reduction in force initiatives ($9 million) and integration costs associated with our acquisition of Qwest ($6 million).
FREE CASH FLOW
(4)- Excludes $8 million in fourth quarter 2016 and $3 million in fourth quarter 2015 of capital expenditures related to the integration of Qwest and Savvis.
(5)- 2016 includes net periodic pension benefit income of ($18 million), net periodic post-retirement benefit expense of $35 million and ($2 million) of benefits paid to participants of our non-qualified pension plans.
Post-retirement contributions included benefits paid by company ($55 million) offset by participant contributions $14 million and direct subsidy receipts $1 million. Does not include $13 million of pension expense and $3 million of post-retirement benefit expense that have been treated as special items, as these expenses reflect enhanced pension and post-retirement benefits offered to certain employees that were severed during the three months ended December 31, 2016.
-
2015 includes net periodic pension benefit income of ($19 million), net periodic post-retirement benefit expense of $39 million and ($1 million) of benefits paid to participants of our non-qualified pension plans.
Post-retirement contributions included benefits paid by company ($42 million) offset by participant contributions $14 million and direct subsidy receipts $3 million.
(6)- Excludes special items identified in items (1) and (2).
CenturyLink, Inc.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
(Dollars in millions)
Twelve months ended December 31, 2016
Twelve months ended December 31, 2015
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
$
2,331
(244)
(1) 2,575
2,605
(166)
(3)
2,771
Add: Depreciation and amortization
3,916
(36)
(2) 3,952
4,189
--
4,189
Operating cash flow
$
6,247
(280)
6,527
6,794
(166)
6,960
Revenues
$
17,470
--
17,470
17,900
--
17,900
Operating income margin (operating income divided by revenues)
13.3
%
14.7
%
14.6
%
15.5
%
Operating cash flow margin (operating cash flow divided by revenues) 35.8
%
37.4
%
38.0
%
38.9
%
Free cash flow
Operating cash flow
$
6,527
6,960
Less: Capital expenditures (4)
(2,958)
(2,861)
Less: Cash paid for interest, net of amounts capitalized
(1,301)
(1,310)
Less: Pension and post-retirement impacts (5)
(168)
(141)
Less: Cash paid for income taxes, net of refunds
(397)
(63)
Add: Share-based compensation
80
73
Add:
Other income
34
23
Free cash flow (6)
$
1,817
2,681
SPECIAL ITEMS
(1)- Includes severance costs associated with recent headcount reductions ($189 million), integration costs associated with our acquisition of Qwest ($10 million), costs associated with a large billing system integration project ($15 million), costs related to our pending acquisition of Level 3 ($52 million), costs associated with our pending sale of the colocation business ($7 million) and the impairment of a building ($11 million), less an offsetting gain on the sale of a building $4 million and the termination of depreciation expense related to our pending sale of the colocation business $36 million.
(2)- Termination of depreciation expense related to our pending sale of the colocation business ($36 million).
(3)- Includes severance costs associated with reduction in force initiatives ($99 million), integration costs associated with our acquisition of Qwest ($32 million), the impairment of office buildings ($8 million), regulatory fines associated with a 911 system outage ($15 million) and litigation and other adjustments associated with pre-acquisition activities of Qwest and Embarq ($12 million).
FREE CASH FLOW
(4)- Excludes $23 million in 2016 and $11 million in 2015 of capital expenditures related to the integration of Qwest and Savvis.
(5)- 2016 includes net periodic pension benefit income of ($74 million), net periodic post-retirement benefit expense of $142 million, contributions to our pension plan trust of ($100 million) and ($7 million) of benefits paid to participants of our non-qualified pension plans.
Post-retirement contributions included benefits paid by company ($191 million) offset by participant contributions $57 million and direct subsidy receipts $5 million. Does not include $13 million of pension expense and $3 million of post-retirement benefit expense that have been treated as special items, as these expenses reflect enhanced pension and post-retirement benefits offered to certain employees that were severed during the three months ended December 31, 2016.
-
2015 includes net periodic pension benefit income of ($81 million), net periodic post-retirement benefit expense of $162 million, contributions to our pension plan trust of ($100 million) and ($6 million) of benefits paid to participants of our non-qualified pension plans.
Post-retirement contributions included benefits paid by company ($181 million) offset by participant contributions $57 million and direct subsidy receipts $8 million.
(6)- Excludes special items identified in items (1) and (2).
CenturyLink, Inc.
REVENUES
(UNAUDITED)
(Dollars in millions)
Three months ended
Twelve months ended
December 31, 2016
December 31, 2015
December 31, 2016
December 31, 2015
Strategic services *
Business high-bandwidth data services (1) $
755
733
2,990
2,816
Business hosting services (2)
295
320
1,210
1,281
Other business strategic services (3)
182
166
703
624
Consumer broadband services (4)
666
666
2,689
2,611
Other consumer strategic services (5)
118
107
458
421
Total strategic services revenues
2,016
1,992
8,050
7,753
Legacy services *
Business voice services (6)
579
632
2,413
2,588
Business low-bandwidth data services (7)
325
381
1,382
1,594
Other business legacy services (8)
279
283
1,123
1,168
Consumer voice services (6)
588
649
2,442
2,676
Other consumer legacy services (9)
75
91
312
312
Total legacy services revenues
1,846
2,036
7,672
8,338
Data integration
Business data integration
130
140
531
575
Consumer data integration
1
--
2
2
Total data integration revenues
131
140
533
577
Other revenues
High-cost support revenue (10)
170
182
688
732
Other revenue (11)
126
126
527
500
Total other revenues
296
308
1,215
1,232
Total revenues
$
4,289
4,476
17,470
17,900
(1)
Includes MPLS and Ethernet revenue
(2)
Includes colocation, hosting (including cloud hosting and managed hosting) and hosting area network revenue
(3)
Includes primarily broadband, VoIP, video and IT services 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 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our business low-bandwidth data services, specifically our private line (including special access) services in our business segment, are more closely aligned with our legacy services than with our strategic services. As a result, we reflect these operating revenues as legacy services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in a reduction of revenue from strategic services and a corresponding increase in revenue from legacy services of $379 million and $1.586 billion (net of $3 million and $9 million of deferred revenue included in other business legacy services) for the three and twelve months ended December 31, 2015, respectively. In addition, our business broadband services remain a strategic service and are included in our other business strategic services.
CenturyLink, Inc.
HOSTING REVENUES AND OPERATING METRICS
(UNAUDITED)
Three months ended
Twelve months ended
December 31, 2016
December 31, 2015
December 31, 2016
December 31, 2015
Hosting Revenue Detail
(In millions)
Colocation (1)
$
154
163
622
626
Managed Hosting / Cloud
120
136
504
570
Hosting Area Network
21
21
84
85
Total Hosting Revenue
295
320
1,210
1,281
As of
As of
As of
December 31, 2016
September 30, 2016 December 31, 2015
Hosting Data Center Metrics (1)
Number of data centers (2)
58
58
59
Sellable square feet, million sq ft
1.54
1.54
1.58
Billed square feet, million sq ft
1.04
1.03
0.99
Utilization
67
%
67
%
63
%
(1)
Relates to our data centers, which are currently held for sale.
(2)
We define a data center as any facility where we market, sell and deliver either colocation services, multi-tenant managed services, or both.
As of
As of
As of
December 31, 2016
September 30, 2016 December 31, 2015
Operating Metrics
(In thousands)
Broadband subscribers
5,945
5,950
6,048
Access lines
11,090
11,231
11,748
Prism TV subscribers
325
318
285
Our methodology for counting broadband subscribers, access lines and Prism TV subscribers may not be comparable to those of other companies.
CenturyLink, Inc.
SUPPLEMENTAL NON-GAAP INFORMATION - ADJUSTED DILUTED EPS
THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015 AND TWELVE MONTHS ENDED DECEMBER 31, 2016 AND 2015
(UNAUDITED)
(Dollars and shares in millions, except per share amounts)
Three months ended
Twelve months ended
December 31, 2016
December 31, 2015
December 31, 2016
December 31, 2015
Net Income
$
42
338
626
878
Less Special Items:
Special items (excluding tax items)
(202)
(1)
(15)
(3)
(271)
(5)
(166)
(7)
Special income tax items and income tax effect of other special items
77
(2)
60
(4)
103
(6)
115
(8)
Total impact of special items
(125)
45
(168)
(51)
Net income, excluding special items
167
293
794
929
Add back certain items arising from purchase accounting:
Amortization of customer base intangibles:
Qwest
179
195
740
799
Embarq
15
20
70
89
Savvis
10
16
56
62
Amortization of trademark intangibles
--
--
--
1
Amortization of fair value adjustment of long-term debt:
Embarq
--
2
3
6
Qwest
(3)
(6)
(15)
(23)
Subtotal
201
227
854
934
Tax effect of items arising from purchasing accounting
(76)
(86)
(323)
(356)
Net adjustment, after taxes
125
141
531
578
Net income, as adjusted for above items
$
292
434
1,325
1,507
Weighted average diluted shares outstanding
541.2
542.5
540.7
555.1
Diluted EPS
$
0.31
0.54
1.47
1.67
(excluding special items)
Adjusted diluted EPS as adjusted for the above-listed purchase accounting intangible and interest amortizations (excluding special items) $
0.54
0.80
2.45
2.71
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 our major acquisitions since mid-2009. Such presentation is not in accordance with generally accepted accounting principles but management believes the presentation is useful to analysts and investors to understand the impacts of growing our business through acquisitions.
(1)
Includes severance costs associated with recent headcount reductions ($164 million), integration costs associated with our acquisition of Qwest ($2 million), costs associated with a large billing system integration project ($2 million), costs related to our pending acquisition of Level 3 ($52 million), costs associated with our pending sale of the colocation business ($7 million) and the impairment of a building ($11 million) offset by the
termination of depreciation expense related to our pending sale of the colocation business $36 million.
(2)
Income tax benefit of Items (1).
(3)
Includes severance costs associated with reduction in force initiatives ($9 million) and integration costs associated with our acquisition of Qwest ($6 million).
(4)
Income tax benefit of Item (3).
(5)
Includes severance costs associated with recent headcount reductions ($189 million), integration costs associated with our acquisition of Qwest ($10 million), costs associated with a large billing system integration project ($15 million), costs related to our pending acquisition of Level 3 ($52 million), costs associated with our pending sale of the colocation business ($7 million), the impairment of a building ($11 million) less a offsetting gain on the sale of a building $4 million, the termination of depreciation expense related to our pending sale of the colocation business $36 million and the net loss associated with early retirement of debt ($27 million),
(6)
Income tax benefit of Item (5).
(7)
Includes severance costs associated with reduction in force initiatives ($99 million), integration costs associated with our acquisition of Qwest ($32 million), the impairment of office buildings ($8 million), regulatory fines associated with a 911 system outage ($15 million) and litigation and other adjustments associated with pre-acquisition activities of Qwest and Embarq ($12 million).
(8)
Income tax benefit of Item (7).

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SOURCE CenturyLink, Inc.

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