Operating revenues for second quarter 2010 were $1.772 billion compared to $634.5 million in second quarter 2009. This increase was primarily due to $1.23 billion of revenue contribution from the Embarq acquisition completed July 1, 2009. Additionally, revenue increases primarily driven by growth in high-speed Internet customers and data transport demand from wireless providers were more than offset by revenue declines primarily due to the impact of access line losses, lower switched access revenues, and lower universal service funds receipts, along with the elimination of $54 million of revenues in second quarter 2010, associated with the mid-2009 discontinuance of regulatory accounting for certain regulated operating entities.
Operating expenses, excluding nonrecurring items, were $1.208 billion compared to $459.4 million in second quarter 2009, primarily due to $825 million of operating costs associated with the Embarq acquisition (net of synergies), which more than offset $54 million of reduced operating expenses associated with the discontinuance of regulatory accounting reflected in second quarter 2010.
Operating cash flow, excluding nonrecurring items, increased 203.7% to $922.1 million from $303.6 million in second quarter 2009, primarily due to the Embarq acquisition. For second quarter 2010, CenturyLink achieved an operating cash flow margin, excluding nonrecurring items, of 52.0% versus 47.8% in second quarter 2009.
“We remain focused on positioning CenturyLink as the broadband provider of choice in our markets by enhancing our broadband products portfolio through deploying higher speeds in key markets and expanding the availability of Ethernet and IP-based product offerings,” Post said. “We continue to strengthen our capabilities to grow data revenues across all customer segments.”
Net income, excluding nonrecurring items, was $265.7 million in second quarter 2010 compared to $83.3 million in second quarter 2009, primarily driven by the Embarq acquisition. Diluted earnings per share, excluding nonrecurring items, was $.88 for second quarter 2010, a 6.0% increase from the $.83 reported in second quarter 2009. This increase was primarily due to the higher net income as discussed above, partially offset by the 202.3% increase in average diluted shares outstanding as a result of our all-stock acquisition of Embarq.
For the first six months of 2010, operating revenues, excluding nonrecurring items, were $3.572 billion compared to $1.270 billion during the same period in 2009, a 181.3% increase. Operating cash flow, excluding nonrecurring items, was $1.857 billion for the first six months of 2010, a 204.9% increase from the $609.1 million during the same period a year ago. Net income, excluding nonrecurring items, increased to $544.9 million from $165.2 million in 2009, while diluted earnings per share, excluding nonrecurring items, increased 10.4% to $1.81 from $1.64 in 2009.
Under generally accepted accounting principles (GAAP), net income for second quarter 2010 was $238.8 million compared to $69.0 million for second quarter 2009, and diluted earnings per share for second quarter 2010 was $.79 compared to $.68 for second quarter 2009.
Second quarter 2010 net income and diluted earnings per share reflect after-tax costs of $11.1 million ($.04 per share) related to integration costs associated with the Embarq acquisition, $8.2 million ($.03 per share) associated with Embarq severance related costs, and $7.6 million ($.02 per share) related to transaction and integration costs associated with the pending Qwest acquisition.
Net income under GAAP for the first six months of 2010 was $491.4 million, compared to $136.2 million for the first six months of 2009, and diluted earnings per share for the first six months of 2010 was $1.63 compared to $1.35 for the first six months of 2009. See the accompanying financial schedules for details of the Company’s nonrecurring items for the six months ended June 30, 2010 and 2009.
Outlook. For third quarter 2010, CenturyLink expects total revenues of $1.720 to $1.745 billion and diluted earnings per share of $.77 to $.81.
For full year 2010, CenturyLink is updating its prior free cash flow and diluted earnings per share guidance as follows:
| | Prior Guidance | Revised Guidance |
| Free Cash Flow | $1.525 to $1.575 billion | |
| Diluted Earning Per Share | $3.20 to $3.30 | $3.30 to $3.40 |
This increased guidance reflects the favorable second quarter results and lower operating expenses than previously anticipated for the second half of 2010.
The Company continues to expect 2010 capital expenditures to be between $825 and $875 million.
These 2010 outlook figures exclude the effects of nonrecurring items, future changes in regulation, future integration expenses associated with the Embarq acquisition, integration and transaction expenses associated with the pending Qwest acquisition, any future changes in operating or capital plans related thereto, and any future mergers, acquisitions, divestitures or other similar business transactions.
Embarq Integration Update. CenturyLink completed the billing and customer care conversion of legacy Embarq customers in North Carolina in late April and has now completed the conversion of approximately 25 percent of the legacy Embarq customers. CenturyLink expects to complete an additional large billing conversion later this year, and expects to complete the final two legacy Embarq customer billing conversions by the end of third quarter 2011.
CenturyLink incurred $31.1 million of pre-tax integration and other costs related to the Embarq acquisition during second quarter 2010. The Company also incurred approximately $5.9 million of integration-related capital expenditures during the second quarter.
CenturyLink achieved approximately $75 million in operating cost synergies during second quarter 2010 and expects to achieve approximately $330 million in annual run rate synergies by year end 2010.
Qwest Transaction. On April 22, CenturyLink and Qwest Communications International Inc. (NYSE: Q) announced that their boards of directors approved a definitive agreement under which CenturyLink will acquire Qwest in a tax-free, stock-for-stock transaction. Qwest shareholders will receive 0.1664 CenturyLink shares for each share of Qwest common stock they own at closing, which is expected to occur in the first half of 2011, subject to various closing conditions. Upon closing of the transaction, CenturyLink shareholders are expected to own approximately 50.5% and Qwest shareholders are expected to own approximately 49.5% of the combined company.
CenturyLink and Qwest filed the requisite notification and report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with the Antitrust Division of the Department of Justice and the Federal Trade Commission and received clearance thereon on July 15, 2010 to proceed with the transaction.
The transaction requires approval from regulatory commissions in 21 states and the District of Columbia. Six state approvals have been received to date. The Federal Communications Commission also is required to approve the transaction.
CenturyLink and Qwest filed a definitive joint proxy statement-prospectus with the Securities and Exchange Commission on July 19, 2010, which included notices by both companies of special meetings of shareholders on Tuesday, August 24, 2010, to vote on the merger. The record date for determining shareholders entitled to vote at the special meetings was July 13, 2010. The transaction is expected to close in the first half of 2011, subject to receipt of the above-mentioned governmental consents and approvals, as well as approval by both companies’ shareholders.
Shareholder Returns. CenturyLink returned approximately $219 million to shareholders in the second quarter through cash dividends paid on June 21, 2010, to shareholders of record as of June 8, 2010. In accordance with their definitive merger agreement, CenturyLink and Qwest shall coordinate with each other through the closing date to designate the record dates and payment dates for the two companies’ respective quarterly dividends, such that neither CenturyLink shareholders nor Qwest shareholders shall receive more than one quarterly dividend during any calendar quarter. Thus, the timing of CenturyLink’s future dividends may deviate from historical dates.
Reconciliation to GAAP. This release includes certain non-GAAP financial measures, including but not limited to operating cash flow, free cash flow, adjustments to GAAP measures to exclude the effect of nonrecurring items and certain pro forma combined operating results. In addition to providing key metrics for management to evaluate the Company’s performance, we believe these measurements assist investors in their understanding of period-to-period operating performance and in identifying historical and prospective trends. Reconciliations of non-GAAP financial measures to the most comparable GAAP measures are included in the attached financial schedules. Reconciliation of additional non-GAAP fi nancial measures that may be discussed during the earnings call described below will be available in the Investor Relations portion of the Company’s Web site at www.centurylink.com. Investors are urged to consider these non-GAAP measures in addition to, and not in substitution for, measures prepared in accordance with GAAP.
Investor Call. As previously announced, CenturyLink’s management will host a conference call at 10:30 a.m. Central Time today. Interested parties can access the call by dialing 866.238.1665. Management will be reviewing an investor presentation during today’s call, which is available at ir.centurylink.com or on the Investor Relations section of the corporate Web site at www.centurylink.com.
The call will be accessible for replay through August 10, 2010, by calling 888.266.2081 and entering the conference ID number 1469356. Investors can also listen to CenturyLink’s earnings conference call and replay by accessing the Investor Relations portion of the Company’s Web site at www.centurylink.com through August 24, 2010.
Forward Looking Statements
Certain non-historical statements made in this release and future oral or written statements or press releases by us or our management are intended to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations only, and are subject to a number of risks, uncertainties and assumptions, many of which are beyond our control. Actual events and results may differ materially from those anticipated, estimated or projected if one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect. Factors that could affect actual results include but are not limited to: the timing, success and overall effects of competition from a wide variety of competitive providers; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry (including those arising out of the Federal Communication Commission’s National Broadband Plan released in the first quarter of 2010); our ability to effectively adjust to changes in the communications industry; our ability to successfully integrate Embarq into our operations, including the possibility that the anticipated benefits from the Embarq merger cannot be fully realized in a timely manner or at all, or that integrating Embarq’s operations into ours will be more difficult, disruptive or costly than anticipated; our ability to successfully complete our pending acquisition of Qwest, including timely receiving all shareholder and regulatory approvals and realizing the anticipated benefits of the transaction; our ability to effectively manage our expansion opportunities, including retaining and hiring key personnel; possible changes in the demand for, or pricing of, our products and services; our ability to successfully introduce new product or service offerings on a timely and cost-effective basis; our continued access to credit markets on favorable terms; our ability to collect our receivables from financially troubled communications companies; our ability to pay a $2.90 per common share dividend annually, which may be affected by changes in our cash requirements, capital spending plans, cash flows or financial position; unanticipated increases in our capital expenditures; our ability to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages; the effects of adverse weather; other risks referenced from time to time in this report or other of our filings with the Securities and Exchange Commission (the “SEC”); and the effects of more general factors such as changes in interest rates, in tax rates, in accounting policies or practices, in operating, medical, pension or administrative costs, in general market, labor or economic conditions, or in legislation, regulation or public policy. These and other uncertainties related to our business and our recently completed or pending acquisitions are described in greater detail in Item 1A to our Form 10-K for the year ended December 31, 2009, as updated and supplemented by our subsequent SEC reports. You should be aware that new factors may emerge from time to time and it is not possible for us to identify all such factors nor can we predict the impact of each such factor on the business or the extent to which any one or more factors may cause actual results to differ from those reflected in any forward-looking statements. You are further cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release. We undertake no obligation to update any of our forward-looking statements for any reason.
Additional Information About the Pending Qwest Merger
In connection with the proposed Qwest merger, CenturyLink has filed, and the U.S. Securities and Exchange Commission, or SEC, has declared effective, a Registration Statement on Form S-4 that includes a joint proxy statement of CenturyLink and Qwest that also constitutes a prospectus of CenturyLink. CenturyLink and Qwest began mailing the final joint proxy statement/prospectus to their respective shareholders on July 19, 2010. INVESTORS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS BECAUSE IT CONTAINS IMPORTANT INFORMATION. You may obtain the joint proxy statement/prospectus, as well as other filings containing information about CenturyLink and Qwest, free of charge, at the website maintained by the SEC at www.sec.gov. Copies of the joint proxy statement/prospectus and the filings with the SEC that are incorporated by reference in the joint proxy statement/prospectus can also be obtained, free of charge, by directing a request to CenturyLink, 100 CenturyLink Drive, Monroe, Louisiana 71203, Attention: Corporate Secretary, or to Qwest, 1801 California Street, Denver, Colorado 80202, Attention: Shareholder Relations. The respective directors and executive officers of CenturyLink and Qwest and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information regarding CenturyLink’s directors and executive officers is available in its proxy statement filed with the SEC by CenturyLink on April 7, 2010, and information regarding Qwest’s directors and executive officers is available in its proxy statement filed with the SEC by Qwest on March 17, 2010. These documents can be obtained free of charge from the sources indicated above. Other information regarding the interests of the participants in the proxy s olicitation are included in the joint proxy statement/prospectus and other relevant materials filed or to be filed with the SEC. This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful.
CenturyLink is a leading provider of high-quality broadband, entertainment and voice services over its advanced communications networks to consumers and businesses in 33 states. CenturyLink, headquartered in Monroe, La., is an S&P 500 company and is included among the Fortune 500 list of America’s largest corporations. For more information on CenturyLink, visit www.centurylink.com.
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