Qwest Communications International Inc. (Q)
Q2 2010 Earnings Conference Call
August 4, 2010 9:00 AM ET
Kurt Fawkes – SVP, IR
Ed Mueller – Chairman and CEO
Teresa Taylor – EVP and COO
Joe Euteneuer – EVP and CFO
James Ratcliffe – Barclays Capital
Simon Flannery – Morgan Stanley
David Barden – Bank of America
Scott Goldman (ph) – Goldman Sachs
John Hodulik – UBS
Michael Rollins – Citi Investment Research
Timothy Horan – Oppenheimer & Co. Inc.
Mike Chacha – Raymond James
Peter Rhamey – BMO Capital Markets
Chris Larsen – Piper Jaffray
Previous Statements by Q
» Qwest Communications International Inc. Q1 2010 Earnings Call Transcript
» Qwest Communications International Inc. Q4 2009 Earnings Call Transcript
» Qwest Communications International Inc. Q3 2009 Earnings Call Transcript
Mr. Fawkes, you may begin your conference.
Yes. Thank you, Matthew, and good morning, everybody and welcome to our call. We appreciate your time and interest in what is going to be a very busy day for many of you.
We will begin today’s call with a few comments on the quarter from Ed Mueller, our Chairman and CEO. Ed will be followed by Teresa Taylor, our COO, who will review segment results and then Joe Euteneuer; our CFO will conclude the prepared remarks with a discussion of our consolidated financial results and outlook. We’ll then open it up for your questions.
As we begin our call, let me point you to slide three and remind everyone that today’s discussion contains forward-looking statements. These statements are subject to significant risk and uncertainties. These risks and uncertainties are discussed in detail in our periodic filings with the SEC and I strongly encourage you to thoroughly review our filings. I also want to point out that we do not adopt analyst’s estimates nor do we necessarily commit to updating any forward-looking statements that we will be making this morning.
To supplement the recording of our financial information, on our call today we will be discussing certain non-GAAP financial measures, including adjusted EBITDA, adjusted free cash flow, and net debt. A full reconciliation of these measures is available on our web site.
Now, we’ll move on to slide four to touch on EPS and some special items that impacted EPS in the quarter.
Our reported earnings per share for the quarter were $0.09 and that compares to $0.12 in the second quarter of 2009. Our adjusted net income this quarter also rounded to $0.09 per share. The current quarter’s earnings includes a little under $0.02 charge for merger and severance expenses. This was offset by a little over $0.01 per share gain related to the change in fair value of the company’s convertible debt option.
Under the terms of our merger agreement with CenturyLink, we have committed to redeem our convertible debt and the intrinsic value of the associated option for cash. Therefore, we have reclassified the option component of the note from equity to a liability and that’s now included in the accrued expenses noted. The value of this liability at the end of the quarter was $145 million after initially being valued at $166 million at the date of the merger announcement.
Future stock price movements are likely to cause us to recognize periodic gains or losses through the redemption of the notes. These gains or losses will have no tax impact and a result there could also be some variability in our effective tax rate as we go forward.
Reported and adjusted earnings included dilution from non-cash and OPEB expenses. In the current quarter, this dilution was $0.01 per share and in the year-ago period. We have an impact of $0.02 per share.
Now, I’m going to turn it over to Ed.
Thanks, Kurt. Good morning, everyone, and thank you for joining us today. I want to begin by saying I’m very pleased with our continued execution and performance in the quarter. In light of continued challenging market conditions, we reported expanded margins and improved year-over-year revenue trends across all segments and we generated strong cash flow.
Our performance in the quarter is a demonstration of the sharp focus we have on our key strategies to drive the top-line, while maintaining disciplined expense management to improve operating efficiencies. We delivered on key initiatives and continue to see solid growth in our strategic revenues and while we aggressively pursue broadband based services.
In the quarter, Qwest further strengthened its financial flexibility by improving the balance sheet. We launched a tender offer for our convertible debt and we are well on our way to achieving our stated debt reduction objectives.
In addition, I’m very pleased with the progress we’re making toward completion of our merger with CenturyLink. The senior leadership team for the combined company has been named and activities are underway in the planning process for the integration of the two companies.
Each of the named leaders has appointed an integrated lead, who will focus on the planning process for every functional organization. There are 10 integration leads in total. To ensure input and insights are captured from both companies, about half of the leads are from Qwest and about half are from CenturyLink.
We have reached several key milestones in the approval process with various agencies and commissions required to review the transaction. We have received approvals in six states. In addition to the FCC, we have 16 states remaining to review and approved the transaction.
In July, we received clearance from the Department of Justice and CenturyLink filed the final joint proxy statement with the SEC. The special meeting to vote on the transaction will be held on August 24th.