Why CenturyLink Stock Dropped 10% This Morning, Then Came Back Up
What happened
Two weeks after CenturyLink (NYSE: CTL) lost more than 10% in a day after reporting a sales miss and a dividend cut, the telecommunications services provider posted another 10%-plus drop this morning on reports that its 10-K filing with the SEC will be delayed.
That's the bad news. The good news is that as the day wore on and the shock wore off, CenturyLink recovered to end the day down "only" 6.3%.
So what
CenturyLink filed a 10-K with the SEC today, informing the commission that "it is unable to file its Form 10-K within the prescribed time period provided by the applicable rules of the Securities and Exchange Commission without unreasonable effort and expense."
"Recently identified material weaknesses in internal controls over the Company's revenue recording processes and the procedures for measuring fair value of assets and liabilities assumed in connection with the Level 3 Communications, Inc. acquisition," said CenturyLink, referring to its October 2016 purchase of the internet backbone operator, "have created the need to conduct additional review and testing with respect to those processes prior to finalizing the assessment and the audits of the effectiveness of internal control over financial reporting as of December 31, 2018 and of the Company's financial statements as of and for the year ended December 31, 2018."
Stated more simply, CenturyLink's accounting is a mess and it needs to figure out which numbers go where. This isn't a huge surprise, given the scale of the acquisition, which was valued at $34 billion including debt that came with Level 3. But it is a bit disconcerting that, nearly 18 months after the fact, CenturyLink still hasn't gotten its math worked out.
Now what
The good news is that, "notwithstanding the Company's inability to file the Form 10-K within the prescribed time period, the Company currently does not expect any material changes to the financial results disclosed in the Company's earnings release dated February 13, 2019." So in the best case, this will just be a run-of-the-mill delay in filing, and it won't necessarily involve a restatement of prior years' earnings for CenturyLink.
That's a small blessing to be sure, and there's no guarantee there will be no restatement, but this was apparently good enough news to cut the stock's decline today almost in half.
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