MONROE, La., Aug. 4 /PRNewswire-FirstCall/ -- CenturyLink, Inc. (NYSE: CTL) announces operating results for second quarter 2010, which include the effect of the Embarq acquisition completed July 1, 2009.

  • Increased operating revenues more than 179% to $1.772 billion as a result of the Embarq acquisition.
  • Generated free cash flow of more than $428 million in second quarter 2010, excluding nonrecurring items (free cash flow is defined in the attached financial schedules).
  • Achieved approximately $75 million in operating cost synergies from the Embarq acquisition during second quarter 2010; expect to achieve approximately $330 million in annual run rate synergies by year end 2010.
  • Added more than 29,000 high-speed Internet customers compared to pro forma second quarter 2009 growth of approximately 28,000.
  • Improved access line losses by 22% compared to pro forma second quarter 2009.

 

Second Quarter Highlights
(Excluding nonrecurring items reflected in the attached financial schedules)
(In thousands, except per share amounts and subscriber data)

       
 

Quarter Ended
6/30/10

Quarter Ended
6/30/09

% Change
 

 


Operating Revenues
Operating Cash Flow (1)
Net Income (2)
Diluted Earnings Per Share
Average Diluted Shares Outstanding
Capital Expenditures (3)

$
$
$
$

$

1,772,030
922,073
265,680
.88
300,605
195,046

 


$
$
$
$

$


634,469
303,593
83,299
.83
99,450
85,305

 


179.3
203.7
218.9
6.0
202.3
128.6


%
%
%
%
%
%

 


Access Lines (4)
High-Speed Internet Customers

 

6,767,000
2,336,000

   


1,961,000
681,000

 


245.1
243.0


%
%

 

(1)  Operating Cash Flow is a non-GAAP financial measure. A reconciliation of this item to comparable GAAP measures is included in the attached financial schedules.

(2)  All references to net income contained in this release represent net income attributable to CenturyLink, Inc.  

(3)  Includes capital expenditures of $5.9 million in second quarter 2010 and $13.5 million in second quarter 2009 related to the Embarq integration.

(4)  Both periods reflect line count methodology adjustments to standardize legacy CenturyLink and Embarq line counts.

 
                 

 

"CenturyLink achieved solid operating revenues and our employees continued to do an excellent job of containing costs, resulting in the generation of strong cash flows during the quarter in spite of a very competitive marketplace and economic conditions that remain challenging," Glen F. Post, III, chief executive officer and president, said. "We continue to make solid progress toward our $375 million operating expense synergy target from the Embarq acquisition, generating total operating expense synergies of $75 million during the quarter and exiting the quarter with a $315 million annual synergy run rate."

 
 

 

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

$1.560 to $1.600 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 financial measures that may be discussed during the earnings call described below will be available in the Investor Relations portion of the Company's Web site at www.centurylink.com. Investors are urged to consider these non-GAAP measures in addition to, and not in substitution for, measures prepared in accordance with GAAP.

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 solicitation 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.

CenturyLink, Inc.

 

CONSOLIDATED STATEMENTS OF INCOME

 

THREE MONTHS ENDED JUNE 30, 2010 AND 2009

 

(UNAUDITED)

 
                                     
     

Three months ended June 30, 2010

 

Three months ended June 30, 2009

         
             

As adjusted

         

As adjusted

     

Increase

 
         

Less

 

excluding

     

Less

 

excluding

     

(decrease)

 
         

non-

 

non-

     

non-

 

non-

 

Increase

 

excluding

 
     

As

 

recurring

 

recurring

 

As

 

recurring

 

recurring

 

(decrease)

 

nonrecurring

 

In thousands, except per share amounts

 

reported

 

items

 

items

 

reported

 

items

 

items

 

as reported

 

items

 
                                     

OPERATING REVENUES*

                                 
 

Voice

$

790,580

     

790,580

 

247,427

     

247,427

 

219.5%

 

219.5%

 
 

Data

 

472,999

     

472,999

 

142,923

     

142,923

 

230.9%

 

230.9%

 
 

Network access

 

274,956

     

274,956

 

150,542

     

150,542

 

82.6%

 

82.6%

 
 

Other

 

233,495

     

233,495

 

93,577

     

93,577

 

149.5%

 

149.5%

 
     

1,772,030

 

-

 

1,772,030

 

634,469

 

-

 

634,469

 

179.3%

 

179.3%

 
                                     

OPERATING EXPENSES

                                 
 

Cost of services and products  

 

589,420

 

11,798

(1)

577,622

 

235,732

     

235,732

 

150.0%

 

145.0%

 
 

Selling, general and administrative

 

301,671

 

29,336

(1)

272,335

 

120,742

 

25,598

(3)

95,144

 

149.8%

 

186.2%

 
 

Depreciation and amortization

 

357,951

     

357,951

 

128,552

     

128,552

 

178.4%

 

178.4%

 
     

1,249,042

 

41,134

 

1,207,908

 

485,026

 

25,598

 

459,428

 

157.5%

 

162.9%

 
                                     

OPERATING INCOME

 

522,988

 

(41,134)

 

564,122

 

149,443

 

(25,598)

 

175,041

 

250.0%

 

222.3%

 
                                     

OTHER INCOME (EXPENSE)

                                 
 

Interest expense

 

(143,249)

     

(143,249)

 

(44,937)

 

1,700

(4)

(46,637)

 

218.8%

 

207.2%

 
 

Other income (expense)

 

7,308

     

7,308

 

7,635

 

1,600

(4)

6,035

 

(4.3%)

 

21.1%

 
 

Income tax expense

 

(147,921)

 

14,225

(2)

(162,146)

 

(42,813)

 

8,029

(5)

(50,842)

 

245.5%

 

218.9%

 
                                     

NET INCOME

 

239,126

 

(26,909)

 

266,035

 

69,328

 

(14,269)

 

83,597

 

244.9%

 

218.2%

 

Less: Net income attributable to noncontrolling interests

 

(355)

     

(355)

 

(298)

     

(298)

 

19.1%

 

19.1%

 

NET INCOME ATTRIBUTABLE TO CENTURYLINK, INC.

$

238,771

 

(26,909)

 

265,680

 

69,030

 

(14,269)

 

83,299

 

245.9%

 

218.9%

 
                                     

BASIC EARNINGS PER SHARE

$

0.79

 

(0.09)

 

0.88

 

0.68

 

(0.14)

 

0.83

 

16.2%

 

6.0%

 

DILUTED EARNINGS PER SHARE

$

0.79

 

(0.09)

 

0.88

 

0.68

 

(0.14)

 

0.83

 

16.2%

 

6.0%

 
                                     

AVERAGE SHARES OUTSTANDING

                                 
 

Basic

 

300,058

     

300,058

 

99,414

     

99,414

 

201.8%

 

201.8%

 
 

Diluted

 

300,605

     

300,605

 

99,450

     

99,450

 

202.3%

 

202.3%

 
                                     

DIVIDENDS PER COMMON SHARE

$

0.725

     

0.725

 

0.70

     

0.70

 

3.6%

 

3.6%

 
                                     

NONRECURRING ITEMS

 

  (1) - Includes integration costs associated with our acquisition of Embarq ($17.9 million); severance and related costs due to workforce reductions ($13.2 million);  and transaction and other costs associated with our pending acquisition of Qwest ($10.0 million).

 

  (2) - Income tax benefit of Item (1).    

 

  (3) - Includes integration costs associated with our acquisition of Embarq ($22.5 million) and costs associated with a legal settlement ($3.1 million).    

 

  (4) - Favorable resolution of transaction tax audit issues related to our wireless operations sold in 2002.    

 

  (5) - Income tax benefit of Items (3) and (4).    

 
   

*  Subscriber line charge revenues have been reclassified to "Voice" revenues from "Network access" revenues for all periods presented.  In addition, revenues previously disclosed as "Fiber transport and CLEC" revenues are now included in "Other" revenues.

 
   
                                   

 

CenturyLink, Inc.

 

CONSOLIDATED STATEMENTS OF INCOME

 

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

 

(UNAUDITED)

 
                                     
     

Six months ended June 30, 2010

 

Six months ended June 30, 2009

         
             

As adjusted

         

As adjusted

     

Increase

 
         

Less

 

excluding

     

Less

 

excluding

     

(decrease)

 
         

non-

 

non-

     

non-

 

non-

 

Increase

 

excluding

 
     

As

 

recurring

 

recurring

 

As

 

recurring

 

recurring

 

(decrease)

 

nonrecurring

 

In thousands, except per share amounts

 

reported

 

items

 

items

 

reported

 

items

 

items

 

as reported

 

items

 
                                     

OPERATING REVENUES*

                                 
 

Voice

$

1,603,456

     

1,603,456

 

497,621

     

497,621

 

222.2%

 

222.2%

 
 

Data

 

940,439

     

940,439

 

282,860

     

282,860

 

232.5%

 

232.5%

 
 

Network access

 

561,184

     

561,184

 

303,110

 

1,028

(3)

302,082

 

85.1%

 

85.8%

 
 

Other

 

467,377

     

467,377

 

187,263

     

187,263

 

149.6%

 

149.6%

 
     

3,572,456

 

-

 

3,572,456

 

1,270,854

 

1,028

 

1,269,826

 

181.1%

 

181.3%

 
                                     

OPERATING EXPENSES

                                 
 

Cost of services and products  

 

1,208,525

 

24,222

(1)

1,184,303

 

470,363

     

470,363

 

156.9%

 

151.8%

 
 

Selling, general and administrative

 

584,600

 

53,401

(1)

531,199

 

230,587

 

40,238

(4)

190,349

 

153.5%

 

179.1%

 
 

Depreciation and amortization

 

711,113

     

711,113

 

256,124

     

256,124

 

177.6%

 

177.6%

 
     

2,504,238

 

77,623

 

2,426,615

 

957,074

 

40,238

 

916,836

 

161.7%

 

164.7%

 
                                     

OPERATING INCOME

 

1,068,218

 

(77,623)

 

1,145,841

 

313,780

 

(39,210)

 

352,990

 

240.4%

 

224.6%

 
                                     

OTHER INCOME (EXPENSE)

                                 
 

Interest expense

 

(285,474)

     

(285,474)

 

(96,969)

 

1,700

(5)

(98,669)

 

194.4%

 

189.3%

 
 

Other income (expense)

 

17,808

     

17,808

 

5,817

 

(6,400)

(6)

12,217

 

206.1%

 

45.8%

 
 

Income tax expense

 

(308,469)

 

24,089

(2)

(332,558)

 

(85,920)

 

14,897

(7)

(100,817)

 

259.0%

 

229.9%

 
                                     

NET INCOME

 

492,083

 

(53,534)

 

545,617

 

136,708

 

(29,013)

 

165,721

 

260.0%

 

229.2%

 

Less: Net income attributable to noncontrolling interests

 

(711)

     

(711)

 

(524)

     

(524)

 

35.7%

 

35.7%

 

NET INCOME ATTRIBUTABLE TO CENTURYLINK, INC.

$

491,372

 

(53,534)

 

544,906

 

136,184

 

(29,013)

 

165,197

 

260.8%

 

229.9%

 
                                     

BASIC EARNINGS PER SHARE

$

1.63

 

(0.18)

 

1.81

 

1.35

 

(0.29)

 

1.64

 

20.7%

 

10.4%

 

DILUTED EARNINGS PER SHARE

$

1.63

 

(0.18)

 

1.81

 

1.35

 

(0.29)

 

1.64

 

20.7%

 

10.4%

 
                                     

AVERAGE SHARES OUTSTANDING

                                 
 

Basic

 

299,736

     

299,736

 

99,270

     

99,270

 

201.9%

 

201.9%

 
 

Diluted

 

300,301

     

300,301

 

99,297

     

99,297

 

202.4%

 

202.4%

 
                                     

DIVIDENDS PER COMMON SHARE

$

1.45

     

1.45

 

1.40

     

1.40

 

3.6%

 

3.6%

 
                                     

NONRECURRING ITEMS

 

  (1) - Includes integration costs associated with our acquisition of Embarq ($39.5 million); severance and related costs due to workforce reductions ($28.1 million); and transaction and other costs associated with our pending acquisition of Qwest ($10.0 million).  

 

  (2) - Income tax benefit of Item (1), net of a $4.0 million one-time charge to income tax expense as a result of a change in the tax treatment of Medicare subsidy receipts.    

 

  (3) - Revenue impact of settlement loss related to Supplemental Executive Retirement Plan.    

 

  (4) - Includes integration costs associated with the acquisition of Embarq ($29.4 million), settlement loss related to Supplemental Executive Retirement Plan ($7.7 million) and costs associated with a legal settlement ($3.1 million).  

 

  (5) - Favorable resolution of transaction tax audit issues related to our wireless operation sold in 2002.    

 

  (6) - Includes costs associated with terminating our $800 million bridge credit facility related to the Embarq acquisition ($8.0 million) net of favorable resolution of transaction tax audit issues ($1.6 million).    

 

  (7) - Includes $5.8 million income tax benefit caused by a reduction to our deferred tax asset valuation allowance and $15.8 million income tax benefit related to items (3) through (6); net of $6.7 million income tax expense due to the nondeductible portion of settlement payments related to the
Supplemental Executive Retirement Plan.    

 
   

*  Subscriber line charge revenues have been reclassified to "Voice" revenues from "Network access" revenues for all periods presented.  In addition, revenues previously  

 
 

disclosed as "Fiber transport and CLEC" revenues are now included in "Other" revenues.

                           
                                   

 
 

CenturyLink, Inc.

 
 

CONSOLIDATED BALANCE SHEETS

 
 

JUNE 30, 2010 AND DECEMBER 31, 2009

 
 

(UNAUDITED)

 
             
     

June 30,

 

December 31,

 
     

2010

 

2009

 
     

(in thousands)

 
 

ASSETS

         

CURRENT ASSETS

         
 

Cash and cash equivalents

$

186,357

 

161,807

 
 

Other current assets

 

897,293

 

961,784

 
 

  Total current assets

 

1,083,650

 

1,123,591

 
             

NET PROPERTY, PLANT AND EQUIPMENT

         
 

Property, plant and equipment

 

15,876,487

 

15,556,763

 
 

Accumulated depreciation

 

(7,010,016)

 

(6,459,624)

 
 

  Net property, plant and equipment

 

8,866,471

 

9,097,139

 
             

GOODWILL AND OTHER ASSETS

         
 

Goodwill

 

10,260,640

 

10,251,758

 
 

Other

 

1,988,823

 

2,090,241

 
 

   Total goodwill and other assets

 

12,249,463

 

12,341,999

 
             
             

TOTAL ASSETS

$

22,199,584

 

22,562,729

 
             
             
 

LIABILITIES AND EQUITY

         

CURRENT LIABILITIES

         
 

Current maturities of long-term debt

$

496,559

 

500,065

 
 

Other current liabilities

 

1,133,027

 

1,207,130

 
 

   Total current liabilities

 

1,629,586

 

1,707,195

 
             

LONG-TERM DEBT

 

7,178,646

 

7,253,653

 

DEFERRED CREDITS AND OTHER LIABILITIES

 

3,840,256

 

4,135,082

 

STOCKHOLDERS' EQUITY

 

9,551,096

 

9,466,799

 
             

TOTAL LIABILITIES AND EQUITY

$

22,199,584

 

22,562,729

 
           

 

CenturyLink, Inc.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

SIX MONTHS ENDED JUNE 30, 2010 AND 2009

 

(UNAUDITED)

 
                     
                     
             

Six Months

 

Six Months

 
             

Ended

 

Ended

 

In thousands

   

June 30, 2010

 

June 30, 2009

 
                     

OPERATING ACTIVITIES

           
 

Net income

 

$

492,083

 

136,708

 
 

Adjustments to reconcile net income to net

           
   

cash provided by operating activities:

           
     

Depreciation and amortization

   

711,113

 

256,124

 
     

Deferred income taxes

   

(17,467)

 

25,831

 
     

Share-based compensation

   

18,126

 

9,859

 
     

Income from unconsolidated cellular entity

   

(9,787)

 

(9,914)

 
     

Distributions from unconsolidated cellular entity

   

9,134

 

9,602

 
     

Changes in current assets and current liabilities, net

   

(21,357)

 

63,622

 
     

Retirement benefits

   

(279,509)

 

(14,537)

 
     

Excess tax benefits from share-based compensation

   

(3,636)

 

(753)

 
     

(Increase) decrease in other noncurrent assets

   

(19,112)

 

2,542

 
     

Increase (decrease) in other noncurrent liabilities

   

1,581

 

(4,823)

 
     

Other, net

   

-

 

7,944

 
       

Net cash provided by operating activities

   

881,169

 

482,205

 
                     

INVESTING ACTIVITIES

           
 

Payments for property, plant and equipment

   

(362,226)

 

(130,801)

 
 

Other, net

   

2,263

 

210

 
     

Net cash provided by investing activities

   

(359,963)

 

(130,591)

 
                     

FINANCING ACTIVITIES

           
 

Payments of debt

   

(78,513)

 

(394,666)

 
 

Proceeds from issuance of common stock

   

26,432

 

7,295

 
 

Repurchase of common stock

   

(13,394)

 

(4,786)

 
 

Cash dividends

   

(436,916)

 

(141,105)

 
 

Excess tax benefits from share-based compensation

   

3,636

 

753

 
 

Other, net

   

2,099

 

(3,288)

 
       

Net cash provided by financing activities

   

(496,656)

 

(535,797)

 
                     

Net increase (decrease) in cash and cash equivalents

   

24,550

 

(184,183)

 

Cash and cash equivalents at beginning of period

   

161,807

 

243,327

 
                     

Cash and cash equivalents at end of period

 

$

186,357

 

59,144

 
                   

 

CenturyLink, Inc.

 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

 

(UNAUDITED)

 
                             
                             
     

Three months ended June 30, 2010

 

Three months ended June 30, 2009

 
             

As adjusted

         

As adjusted

 
         

Less

 

excluding

     

Less

 

excluding

 
         

non-

 

non-

     

non-

 

non-

 

In thousands

 

As

 

recurring

 

recurring

 

As

 

recurring

 

recurring

 
     

reported

 

items

 

items

 

reported

 

items

 

items

 

Operating cash flow and cash flow margin

                         
 

Operating income

$

522,988

 

(41,134)

(1)

564,122

 

149,443

 

(25,598)

(3)

175,041

 
 

Add:  Depreciation and amortization

 

357,951

     

357,951

 

128,552

     

128,552

 
 

Operating cash flow  

$

880,939

 

(41,134)

 

922,073

 

277,995

 

(25,598)

 

303,593

 
                             
 

Revenues  

$

1,772,030

 

-

 

1,772,030

 

634,469

 

-

 

634,469

 
                             
 

Operating income margin (operating income divided by revenues)

 

29.5%

     

31.8%

 

23.6%

     

27.6%

 
                             
 

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

 

49.7%

     

52.0%

 

43.8%

     

47.8%

 
                             
                             

Free cash flow (prior to debt service requirements and dividends)

                         
 

Net income attributable to CenturyLink, Inc.

$

238,771

 

(26,909)

(2)

265,680

 

69,030

 

(14,269)

(4)

83,299

 
 

Add:  Depreciation and amortization  

 

357,951

     

357,951

 

128,552

     

128,552

 
 

Less:  Capital expenditures  

 

(195,046)

     

(195,046)

 

(85,305)

     

(85,305)

 
 

Free cash flow

$

401,676

 

(26,909)

 

428,585

 

112,277

 

(14,269)

 

126,546

 
                             
 

Free cash flow

$

401,676

         

112,277

         
 

Deferred income taxes

 

(2,098)

         

8,582

         
 

Changes in current assets and current liabilities

 

(197,543)

         

30,591

         
 

Decrease in other noncurrent assets

 

5,985

         

2,848

         
 

Increase (decrease) in other noncurrent liabilities

 

(421)

         

(2,044)

         
 

Retirement benefits

 

5,298

         

8,960

         
 

Excess tax benefits from share-based compensation

 

(1,446)

         

(418)

         
 

Other, net

 

13,209

         

5,937

         
 

Add:  Capital expenditures

 

195,046

         

85,305

         
 

Net cash provided by operating activities

$

419,706

         

252,038

         
                             
                             

NONRECURRING ITEMS

 

  (1) - Includes integration costs associated with our acquisition of Embarq ($17.9 million); severance and related costs due to workforce reductions ($13.2 million); and transaction and other costs associated with our pending acquisition of Qwest
($10.0 million).

 

  (2) - After-tax impact of Item (1).    

 

  (3) - Includes integration costs associated with the acquisition of Embarq ($22.5 million) and costs associated with a legal settlement ($3.1 million).    

 

  (4) - Includes after-tax impact of integration costs associated with the acquisition of Embarq ($14.4 million) and the after-tax impact of a legal settlement ($1.9 million),  net of after-tax favorable impact due to the resolution of transaction tax audit
issues related to our wireless operations sold in 2002 ($2.0 million).

 
                           

 

CenturyLink, Inc.

 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

 

(UNAUDITED)

 
                             
                             
     

Six months ended June 30, 2010

 

Six months ended June 30, 2009

 
             

As adjusted

         

As adjusted

 
         

Less

 

excluding

     

Less

 

excluding

 
         

non-

 

non-

     

non-

 

non-

 

In thousands

 

As

 

recurring

 

recurring

 

As

 

recurring

 

recurring

 
     

reported

 

items

 

items

 

reported

 

items

 

items

 

Operating cash flow and cash flow margin

                         
 

Operating income

$

1,068,218

 

(77,623)

(1)

1,145,841

 

313,780

 

(39,210)

(3)

352,990

 
 

Add:  Depreciation and amortization

 

711,113

     

711,113

 

256,124

     

256,124

 
 

Operating cash flow  

$

1,779,331

 

(77,623)

 

1,856,954

 

569,904

 

(39,210)

 

609,114

 
                             
 

Revenues  

$

3,572,456

 

-

 

3,572,456

 

1,270,854

 

1,028

(4)

1,269,826

 
                             
 

Operating income margin (operating income divided by revenues)

 

29.9%

     

32.1%

 

24.7%

     

27.8%

 
                             
 

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

 

49.8%

     

52.0%

 

44.8%

     

48.0%

 
                             
                             

Free cash flow (prior to debt service requirements and dividends)

                         
 

Net income attributable to CenturyLink, Inc.

$

491,372

 

(53,534)

(2)

544,906

 

136,184

 

(29,013)

(5)

165,197

 
 

Add:  Depreciation and amortization  

 

711,113

     

711,113

 

256,124

     

256,124

 
 

Less:  Capital expenditures  

 

(362,226)

     

(362,226)

 

(130,801)

     

(130,801)

 
 

Free cash flow

$

840,259

 

(53,534)

 

893,793

 

261,507

 

(29,013)

 

290,520

 
                             
 

Free cash flow

$

840,259

         

261,507

         
 

Deferred income taxes

 

(17,467)

         

25,831

         
 

Changes in current assets and current liabilities

 

(21,357)

         

63,622

         
 

(Increase) decrease in other noncurrent assets

 

(19,112)

         

2,542

         
 

Increase (decrease) in other noncurrent liabilities

 

1,581

         

(4,823)

         
 

Retirement benefits

 

(279,509)

         

(14,537)

         
 

Excess tax benefits from share-based compensation

 

(3,636)

         

(753)

         
 

Other, net

 

18,184

         

18,015

         
 

Add:  Capital expenditures

 

362,226

         

130,801

         
 

Net cash provided by operating activities

$

881,169

         

482,205

         
                             
                             
                             

NONRECURRING ITEMS

 

  (1) - Includes integration costs associated with our acquisition of Embarq ($39.5 million); severance and related costs due to workforce reductions ($28.1 million); and transaction and other costs associated with our pending acquisition of Qwest
($10.0 million).

 

  (2) - Includes after-tax impact of Item (1), net of a $4.0 million one-time charge to income tax expense as a result of a change in the tax treatment of Medicare subsidy receipts.    

 

  (3) - Includes (i) integration costs associated with the acquisition of Embarq ($29.4 million), (ii) settlement loss related to Supplemental Executive Retirement Plan, including revenue impact ($6.7 million); and (iii) costs associated with a legal
settlement ($3.1 million).

 

  (4) - Revenue impact of settlement loss related to Supplemental Executive Retirement Plan.    

 

  (5) - Includes (i) $19.1 million after-tax impact of integration costs associated with the acquisition of Embarq; (ii) $6.7 million income tax expense due to the nondeductible portion of settlement payments related to the Supplemental Executive
Retirement Plan; (iii) $5.0 million after-tax charge associated with terminating our $800 million bridge credit facility related to the Embarq acquisition; (iv) $4.1 million after-tax impact of settlement loss related to Supplemental Executive Retirement Plan,
including revenue impact; and (v) after-tax impact of a legal settlement ($1.9 million).  These unfavorable items were partially offset by $5.8 million income tax benefit caused by a reduction to our deferred tax asset valuation allowance and $2.0 million
after-tax favorable impact due to the resolution of transaction tax audit issues related to our wireless operations sold in 2002.    

 
                           

 

CenturyLink, Inc.

 

SUPPLEMENTAL SCHEDULE RELATED TO EMBARQ MERGER (1)

 

(UNAUDITED)

 
   
         

Pro forma*

     
       

Three months

 

Three months

     
       

ended

 

ended

 

Increase

 
       

June 30, 2010

 

June 30, 2009

 

(decrease)

 
 

(Dollars in thousands)

               
                   

OPERATING REVENUES (2)

 

$

1,772,030

 

1,906,413

 

(7.0%)

 
                   

OPERATING EXPENSES

               
 

Cash expenses (3)

   

849,957

 

939,552

 

(9.5%)

 
 

Depreciation and amortization

   

357,951

 

372,404

 

(3.9%)

 
       

1,207,908

 

1,311,956

 

(7.9%)

 
                   

OPERATING INCOME

   

564,122

 

594,457

 

(5.1%)

 
                   

OTHER INCOME (EXPENSE)

               
 

Interest expense

   

(143,249)

 

(140,289)

 

2.1%

 
 

Other income (expense)

   

7,308

 

6,195

 

18.0%

 
 

Income tax expense

   

(162,146)

 

(172,780)

 

(6.2%)

 
 

Noncontrolling interests

   

(355)

 

(298)

 

19.1%

 
                   

INCOME FROM CONTINUING OPERATIONS

 

$

265,680

 

287,285

 

(7.5%)

 
                   
                   

Operating cash flow (operating income plus depreciation)

 

$

922,073

 

966,861

 

(4.6%)

 

Free cash flow (income from continuing operations plus depreciation

               
 

minus capital expenditures)

 

$

428,585

 

428,584

 

0.0%

 

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

   

52.0%

 

50.7%

     

Operating income margin (operating income divided by revenues)

   

31.8%

 

31.2%

     
                   

CAPITAL EXPENDITURES (including merger related integration capital)

 

$

195,046

 

231,105

 

(15.6%)

 
                   

SUBSCRIBER DATA

               
 

Access lines, end of period

   

6,767,000

 

7,355,000

 

(8.0%)

 
 

High-speed Internet customers, end of period

   

2,336,000

 

2,146,000

 

8.9%

 
 

Access line loss during period

   

(146,000)

 

(188,000)

 

(22.3%)

 
 

High-speed Internet customers added during period

   

29,000

 

28,000

 

3.6%

 
                   

(1)  Except as noted, excludes merger integration costs and certain other non-recurring items as further described in the other attached financial schedules.

 

(2)  Decline in operating revenues driven primarily by access line losses and declining access minutes of use.

 

(3)  Decrease in cash expenses driven primarily by lower salaries and benefits due to headcount reductions.

 
                   
                   

*  The pro forma information for the three months ended June 30, 2009 does not reflect information prepared in accordance with generally accepted

 

accounting principles.  Such information:  

 

    a)  reflects the results of operations of CenturyTel and Embarq assuming the respective results of operations had been combined on January 1, 2009;  

 

    b)  reflects a pro forma adjustment to eliminate revenues and expenses of $53 million for the second quarter of 2009 as if the discontinuance of

 

regulatory accounting implemented on July 1, 2009 had occurred in prior periods;    

 

    c)  other than as noted in (b) above, does not reflect any pro forma adjustments and has not been prepared in accordance with the rules and regulations of the Securities and Exchange Commission;      

 

    d)  excludes certain non-recurring items; and  

 

    e)  does not address the impact of the pending Qwest merger.  

 
   

 For additional pro forma financial information relating to the Embarq merger, please see our Current Report on Form 8-K/A filed

 

with the Securities and Exchange Commission on August 5, 2009.  The above pro forma information is for illustrative purposes

 

only and is not necessarily indicative of the combined operating results that would have occurred if the Embarq merger had been

 

consummated as of January 1, 2009.  Management believes the presentation of this information will assist users in their understanding

 

of period-to-period operating performance.  

 
                 

 

SOURCE CenturyLink, Inc.