Goldman Sachs TMT Leveraged Finance Conference Tony Thomas, CFO March 29, 2011
Dec 22, 2015
Goldman Sachs TMT Leveraged Finance Conference
Tony Thomas, CFOMarch 29, 2011
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“Safe Harbor” Statement
Regulation G DisclaimerThis presentation includes certain non-GAAP financial measures, which have been adjusted to include or exclude items that are related to strategic activities or other events, specific to the time and opportunity available. For the periods presented, Windstream‘s strategic activities included the acquisitions of D&E Communications Inc. ("D&E") on November 10, 2009, Lexcom, Inc. ("Lexcom") on December 1, 2009, NuVox, Inc. ("NuVox") on February 8, 2010, and Iowa Telecommunication Services, Inc. ("Iowa Telecom") on June 2, 2010. In addition, Windstream sold its out-of-territory product distribution operations on August 21, 2009. Windstream believes the presentation of supplemental measures of operating performance provides a more meaningful comparison of our operating performance for the periods presented. A reconciliation of the non-GAAP financial measures used in this presentation to the most directly comparable GAAP measure has been included in the appendix of this presentation. The non-GAAP financial measures used by Windstream may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance or liquidity prepared in accordance with GAAP.
Safe Harbor StatementWindstream claims the protection of the safe-harbor contained in the Private Securities Litigation Reform Act of 1995 for forward-looking statements set forth in this press release. Forward-looking statements, including Windstream’s updated financial outlook for 2010 and expected pension contribution in 2011, are subject to uncertainties that could cause actual future events and results to differ materially from those expressed in the forward-looking statements. These forward-looking statements are based on estimates, projections, beliefs, and assumptions that Windstream believes are reasonable but are not guarantees of future events and results. Actual future events and results of Windstream may differ materially from those expressed in these forward-looking statements as a result of a number of important factors. Factors that could cause actual results to differ materially from those contemplated in Windstream's forward-looking statements include, among others: further adverse changes in economic conditions in the markets served by Windstream; the extent, timing and overall effects of competition in the communications business; continued voice line loss; the impact of new, emerging or competing technologies; the adoption of intercarrier compensation and/or universal service reform proposals by the Federal Communications Commission or Congress that results in a significant loss of revenue to Windstream; the risks associated with the integration of acquired businesses or the ability to realize anticipated synergies, cost savings and growth opportunities; for Windstream's competitive local exchange carrier operations, adverse effects on the availability, quality of service and price of facilities and services provided by other incumbent local exchange carriers on which Windstream's competitive local exchange carrier services depend; the availability and cost of financing in the corporate debt markets; the potential for adverse changes in the ratings given to Windstream’s debt securities by nationally accredited ratings organizations; the effects of federal and state legislation, and rules and regulations governing the communications industry; material changes in the communications industry that could adversely affect vendor relationships with equipment and network suppliers and customer relationships with wholesale customers; unfavorable results of litigation; unfavorable rulings by state public service commissions in proceedings regarding universal service funds, intercarrier compensation or other matters that could reduce revenues or increase expenses; the effects of work stoppages; the impact of equipment failure, natural disasters or terrorist acts; earnings on pension plan investments significantly below Windstream's expected long term rate of return for plan assets; changes in federal, state and local tax laws and rates; and those additional factors under the caption “Risk Factors” in Windstream’s Form 10-K for the year ended Dec. 31, 2009, and in subsequent filings with the Securities and Exchange Commission. In addition to these factors, actual future performance, outcomes and results may differ materially because of more general factors including, among others, general industry and market conditions and growth rates, economic conditions, and governmental and public policy changes. Windstream undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause Windstream’s actual results to differ materially from those contemplated in the forward-looking statements should be considered in connection with information regarding risks and uncertainties that may affect Windstream’s future results included in filings by Windstream with the Securities and Exchange Commission at www.sec.gov.
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Windstream Overview
The Industry
► The ILEC industry is undergoing significant consolidation driven by companies seeking to stabilize cash flow as residential voice and regulatory revenues continue to decline
The Company
► Windstream – a consolidator and telecom leader with attractive markets in 29 states, revenues of $4.2B and adjusted OIBDA of $2.1B
The Opportunity
► Windstream is executing a strategy focused on improving the top line
— expanding services in growing areas (business and broadband)— stabilizing consumer revenues
4
THESIS
Building a Next Generation Communications Company
Windstream Today…
…Delivering best-in-class
results…
#1
…Executing a successful strategy…
…with key initiatives to improve the
business
5
► Spin off► Traditional RLEC
business model
The Transformation of Windstream
2006 2007-2010 2011+
Traditional Rural ILEC Transformation Path to Growth
► Focused on growth in business & broadband
► Improved financial trends
► Focus on execution and integration
► Investing for growth
6
Windstream Today . . . . .
Improving revenue mix – percent from broadband and business (1)
Key operating and financial metrics vs. peers
Well positioned competitively
Solid free cash flow generation
60%in growth segments
#1AttractiveMarkets
$818M
(1) Pro forma for the 4Q10(2) Free cash flow for 2010. Presented on a GAAP basis and defined as Adjusted OIBDA less cash interest, cash taxes,
cash pension contributions and capital expenditures
7
Strong Rural Footprint with Robust Network in 29 States
8
Business Services Consumer Services
► Dedicated Internet services
► Integrated VoIP & data solutions
► Cloud computing & cloud storage
► Managed services and data center co-location
► Voice & long-distance solutions
► Fiber transport /wireless backhaul
A Next Generation Telecom Company
► High-speed Internet
— 90% of footprint addressable
— Speeds up to 10-12 Mb, depending on market
► Broadband features (TechHelp, security, data back-up)
► Digital TV via DISH offering
► Voice and long-distance
9 9
Delivering Industry-Leading Returns to Shareholders
WIN has generated a 65% total return since inceptionJuly 17, 2006 – March 25, 2011
VZ WIN CTL T S&P Telecom
S&P Q FTR
67% 65%
46%
37%
26%18%
11%3%
Source: Bloomberg
10
THESIS
Building a Next Generation Communications Company
The new Windstream…
…Delivering best-in-class
results…
#1
…Executing a successful strategy…
…with key initiatives to improve
the business
11
Executing Successful Strategy
Goal
Protect and
sustain free cash
flow
Strategy
1. Improve revenue trends
2. Ensure disciplined expense management
3. Pursue selective acquisition strategy
Business & Broadband Revenues Grew 3.2% in
4Q10
3.2%
-2.2%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%
1Q10 2Q10 3Q10 4Q10
Total Revenue
Business and Broadband Revenue
12
STRATEGY #1: IMPROVE REVENUE TRENDS
60% of Revenues from Growth Services
Key Growth Drivers
► Business revenues grew 2% in 4Q
—Advanced data and integrated solutions up 8% Integrated VoIP and data
services Ethernet Internet access Managed services
—Special access (fiber transport / wireless backhaul) up 3%
► Consumer broadband revenue grew 10% in 4Q
—Broadband customers growing 6%
—Selling faster broadband speeds
—Growth in broadband features
YOY Revenue Trends
Note: Pro forma results from 4Q10
STRATEGY #1: IMPROVE REVENUE TRENDS
Stabilizing Consumer Revenues
Key Consumer Initiatives Resulting in. . .
ImproveRetentionAction
Increase distribution channels
Offer video service
Improve service levels
Expand bundling penetration
Create product sets► Price for Life► Greenstreak
-6%
-5%
-4%
-3%
-2%
-1%
0%
1Q10 2Q10 3Q10 4Q10
YOY Change in Consumer Revenue
Improving Consumer Revenue
Trends
13
ImproveCompetitiveness
14
STRATEGY #1: IMPROVE REVENUE TRENDS
Stronger Revenue Mix and Improving Consumer Channel = Improving Revenue Trends
Improving Revenue Trends
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
-5.1%-5.6%
-5.9%
-3.7%
-2.6%-2.7%
-1.2%
-2.2%
Stronger Revenue Mix1
Broadband and Business
Residential
Switched Access/USF
2007 2010
38%
34%
28%
58%
25%
17%
1. 2007 data presented on an actual basis; 2010 pro forma
Excludes NuVox, Iowa, Hosted Solutions and Q-Comm
Pro forma for all acquisitions
15
STRATEGY #2: DISCIPLINED EXPENSE MANAGEMENT
Disciplined Expense Management Resulting in Strong, Stable OIBDA Margin
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q440%
42%
44%
46%
48%
50%
52%
50.8%Adjusted
OIBDA margin
(ex pension)
Notes: Adjusted OIBDA excludes the impact of restructuring charges, pension expense and restricted stock expense
2010
Expense Initiatives► Deal Synergies► Network grooming► Procurement► Improved processes► Technological efficiencies► Organizational discipline
2009
16
STRATEGY #3: SELECTIVE ACQUISITIONS
Pursuing a Selective Acquisition Strategy
Advance strategy to improve revenue trends
Opportunity to generate meaningful synergies
Located in attractive markets
Favorable competitive environment
Well-positioned network
Maintain leverage in same range
Criteria
16
Free cash flow accretive
17
STRATEGY #3: SELECTIVE ACQUISITIONS
Completed Eight Targeted Acquisitions in Four Years
► NuVox► Iowa Telecommunications► Q-Comm► Hosted Solutions
► D&E Communications► Lexcom
► Valor► CT Communications
2006-2007 2010
2008-2009
18
STRATEGY #3: SELECTIVE ACQUISITIONS
Powerful Impact of Acquisitions on Windstream
Expanded free cash flow
Advanced strategy to expand services to broadband and business customers
Added over $2B in revenues
Created $200M in opex and capex synergies
Slight increase in leverage but positions WIN to improve financial trends
19
Goal: PROTECT AND SUSTAIN FREE CASH FLOW
A Powerful Cash Flow Business
Free cash flow(2)
2010Payout Ratio
2010Adjusted
OIBDA(1) 2010
57%$818M$2.06BFlat YOY
(1) Pro forma for all acquisitions. Adjusted OIBDA excludes pension expense, restructuring, and restricted stock expense(2) Free cash flow presented on a GAAP basis and defined as Adjusted OIBDA less cash interest, cash taxes, cash pension contributions and capital expenditures
20
THESIS
Building a Next Generation Communications Company
The new Windstream…
…Executing a successful strategy…
…Delivering best-in-class
results…
#1
…with key initiatives to improve the
business
The Strategy is Delivering Best-In-Class Operating Results…
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WIN CBB CTL T Q VZ FTR
39% 38% 37%33% 33% 32% 30%
CTL WIN T Q CBB VZ FTR
7.1% 6.5%
4.4%3.6% 3.4% 2.8%
0.1%
WIN VZ Q T FTR CBB
13% 13%11% 11%
9%
4%
Video Penetration ofTotal Access Lines
HSI Penetration ofTotal Access Lines
Year-over-Year Changein Access Lines
Internet Customer ChangeYear-Over-Year
WIN CBB CTL VZ FTR Q T
-3.6%
-6.8%-7.6%-8.2%-9.0%-10.8%-11.6%
Leadingresults
Notes:• Results as of 12/31/10• Windstream results are pro forma for NuVox, Inc., Iowa Telecom, Q-Comm, and Hosted
Solutions• Verizon and Frontier results are pro forma for the sale of Verizon lines
…And Driving Strong Financial Results
22
Year-over-YearChange in Revenue
Year-over-YearChange in OIBDA
WIN VZ T Q CTL FTR
-2.2%-2.8%
-3.2% -3.2%
-6.4% -6.5%
VZ WIN T Q CTL FTR1.2%
0.2%
-1.7% -2.1%
-5.5%
-9.5%
Notes:• Results as of 12/31/10• Windstream results are pro forma for D&E Communications, Lexcom, Inc. , NuVox, Inc., and Iowa
Telecom• AT&T and Verizon results are for the wireline segment only• Verizon and Frontier results are pro forma for the sale of Verizon lines• OIBDA excludes one-time charges for WIN, Q, and CTL
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2011 Guidance
Total Revenues $4,139 $4,015 – $4,140 -3% to 0%
OIBDA $1,975 $1,985 – $2,045 1% to 4%
Adjusted OIBDA $2,064 $2,045 – $2,105 -1% to 2%
Capex $490 $520 - $580
Dividend payout 57% 52% to 59%
Notes: • For 2010, revenue, OIBDA, adjusted OIBDA and Capex are presented on a pro forma basis• The 2010 dividend payout ratio is presented on an actual basis, reflecting the acquisitions from the time that they were acquired• Adjusted OIBDA excludes pension, restricted stock, restructuring expense• As provided on February 18, 2011
23
$ in millions 2010 2011 Guidance Change
24
Attractive Growth Opportunities in 2011
24
$M 2010 Pro Forma2011 Guidance ChangeA Closer Look at 2011 Capex Guidance
► Pro forma capex was $490M in 2010
► The midpoint of our 2011 capex guidance is $550M
► WIN will spend ~$40M related to the broadband stimulus grants in 2011:
—Awarded a total of $180M in grants to invest in our broadband network
—WIN will contribute a total of $60M, resulting in $240M in investments in our broadband network over the next few years
►The remaining incremental capex will be invested in success-based growth opportunities related to fiber to the cell projects and data center services & expansion which should contribute to improved financial performance
►Absent the stimulus capex, the midpoint of 2011 guidance is only 4% higher than the baseline 2010 capex
25
THESIS
Building a Next Generation Communications Company
The new Windstream…
…Executing a successful strategy…
…Delivering best-in-class
results…
#1
…with key initiatives to improve the
business
26
Our focus is execution
Key Initiatives for 2011
Completeintegration
of
acquisitions
Invest for
growth
Deleveragethe
balance sheet
1 2 3
27
PRIORITY #1
Integration of Acquisitions On Track
Company Close Date Synergies Integration Status
November 2009
December 2009
February 2010
June 2010
December 2010
December 2010
$25M
$5M
$25M
$30M
$2M
$21M
Completed
Completed
Completed
Completed
Completed by 1H11
Completed by 1H11
► Synergies achieved 2010: $55M► Incremental synergies 2011:
$45M
28
PRIORITY #2
Invest for Growth
Success Based Fiber Initiatives
► Increasing bandwidth demand is driving network transport from wireless providers and businesses
► Investments are success-based with attractive returns
Data Center Services
► Cloud computing, managed services and data center colocation are natural complements to our business portfolio
► Enhance speeds with VDSL & ADSL2+ bonded— Enable 20 Mb speeds to certain markets
► Expand availability from 90% to 93% (stimulus projects)
Grow Broadband
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PRIORITY #3
Deleveraging the Balance Sheet
Reasons this is achievable
► Expect excess FCF of ~$350M to $460M in 2011
► WIN plans to pay down ~$135M related to 2011 debt maturities
► Revolver borrowings will provide further flexibility to reduce debt
► Will improve net leverage by making pension contribution using WIN stock
Series1Currentleverage
Target(In line with
historic range)
3.55X 3.2XTo 3.4X
29
Note: Leverage is defined as Total Debt to Adjusted OIBDA. Proforma for all acquisitions
$139
30
Improving Maturity Profile and Liquidity Position
$444 $11
$1,021
$810
$710
$1,100
$400$500
$700
$450$600
$100
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2023Thereafter
Sr. Notes
Bank Debt
$44
$1604
Note: Maturity profile excludes discount on long-term debt
1Q11 Activities
• Increased revolver availability from $750M to $1.25 billion• Completed tender for all of the $400M Valor 2015 notes using proceeds
from the $200M 2020 notes and ~$200M in revolver borrowings• Tendered for a portion of the 2016 notes using proceeds from the new 2021
and 2023 notes (currently estimate the paydown to be ~$1.030 billion)
Increased revolver
availability to $1.25B
New notes
due 2021 (2016 refi)
New notes due
2023 (2016 refi)
$200M add-on notes due 2020 (Valor
refi)$350
31
Why Invest in Windstream?
Positioning
Performance
Cash Flow
A different path
► Successful repositioning in faster growth segments driving improving revenue trends
Solid track record
► Industry leading performance, successful integration of acquisitions
Strong, sustainable FCF
► Making success-based capital investments in growth opportunities while improving the balance sheet and returning cash to shareholders
Q&A32
Appendix
33
34
Reconciliations of Non-Gaap Financial Measures
Windstream CorporationReconciliations of Non-GAAP Financial Measures
GAAP Adjusted Free Cash Flow and Dividend Payout Ratio:
Twelve Twelve
(Millions, except per share amounts) Months Ended Months Ended
Amounts are as reported under GAAP December 31, 2010 December 31, 2009
Operating income from continuing operations 1,030.3$ 956.9$
Depreciation and amortization 693.6 537.8
As reported OIBDA 1,723.9 1,494.7
Merger and integration expense 77.3 22.3
Pension expense 61.9 91.8
Restructuring expense 7.7 9.1
Stock-based compensation 17.0 17.4
As reported adjusted OIBDA 1,887.8 1,635.3
Pension contribtion (41.0) -
Capital expenditures (415.2) (298.1)
Cash paid for interest expense (493.3) (395.5)
Cash paid for taxes (120.6) (118.7)
Adjusted free cash flow (A) 817.7$ 823.0$
Dividends paid on common shares (B) 464.6$
Dividend Payout Ratio (B)/(A) 57%
35
2011 Financial Guidance
Windstream financial guidance for 2011: 2010(Dollars in millions) Results
Pro forma revenues and sales 4,139$ 4,015$ - 4,140$ -3% 0%
Pro forma OIBDA (1) 1,975$ 1,985$ - 2,045$ 1% 4%
Pension expense 62 41 41 Restructuring expense 8 - - Stock-based compensation expense 19 19 19
Pro forma adjusted OIBDA 2,064$ 2,045$ - 2,105$ -1% 2%
Capital expenditures 490$ 520$ - 580$ 6% 18%
Expected Dividend Payout Ratio(Dollars in millions)Pro forma adjusted OIBDA 2,045$ 2,105$
Subtract:Expected capital expenditures 580 - 520 Expected cash paid for interest expense 552 - 552 Expected cash taxes 50 - 60
Expected adjusted free cash flow 863$ - 973$ Expected dividends paid on common shares 509$ - 509$
Expected dividend payout ratio 59% - 52%
Notes:(1) OIBDA is operating income before depreciation and amortization.
2011Guidance Range
2011 PercentGuidance Range Change
36
Pro Forma Supplemental Information
WINDSTREAM CORPORATIONUNAUDITED PRO FORMA CONSOLIDATED RESULTS (NON-GAAP) (A) QUARTERLY SUPPLEMENTAL INFORMATIONfor the quarterly periods in the years 2010 and 2009(In millions)
FINANCIAL RESULTS: Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.Service revenues:
Business 1,945.8$ 492.8$ 487.8$ 484.1$ 481.1$ 1,935.4$ 483.6$ 482.4$ 485.7$ 483.7$ Consumer 1,439.4 354.9 359.9 360.5 364.1 1,497.0 365.8 370.6 377.7 382.9 Wholesale 660.9 159.1 163.5 164.7 173.6 703.7 180.9 173.5 170.6 178.7
Total service revenues 4,046.1 1,006.8 1,011.2 1,009.3 1,018.8 4,136.1 1,030.3 1,026.5 1,034.0 1,045.3 Product sales 92.8 23.4 26.8 19.8 22.8 95.3 23.1 24.3 23.6 24.3
Total revenues and sales 4,138.9$ 1,030.2$ 1,038.0$ 1,029.1$ 1,041.6$ 4,231.4$ 1,053.4$ 1,050.8$ 1,057.6$ 1,069.6$
Costs and expenses:Cost of services 1,505.6$ 374.3$ 381.2$ 374.4$ 375.7$ 1,580.1$ 387.3$ 397.7$ 399.8$ 395.3$ Cost of products sold 78.9 18.0 22.7 18.8 19.4 83.9 19.6 21.6 20.8 21.9 Selling, general, administrative and other 571.5 135.1 140.2 146.5 149.7 617.5 150.1 154.5 156.5 156.4 Restructuring charges 7.7 7.0 0.2 0.5 - 9.1 1.8 7.5 (0.1) (0.1) Total costs and expenses excluding depreciation and amortization 2,163.7 534.4 544.3 540.2 544.8 2,290.6 558.8 581.3 577.0 573.5
OIBDA (B) 1,975.2 495.8 493.7 488.9 496.8 1,940.8 494.6 469.5 480.6 496.1 Depreciation and amortization 839.4 207.5 206.3 209.9 215.7 867.2 216.1 216.2 218.0 216.9
Operating income 1,135.8$ 288.3$ 287.4$ 279.0$ 281.1$ 1,073.6$ 278.5$ 253.3$ 262.6$ 279.2$
Operating Income Margin (C) 27.4% 28.0% 27.7% 27.1% 27.0% 25.4% 26.4% 24.1% 24.8% 26.1%OIBDA margin (D) 47.7% 48.1% 47.6% 47.5% 47.7% 45.9% 47.0% 44.7% 45.4% 46.4%
SUPPLEMENTAL INFORMATION:OIBDA 1,975.2$ 495.8$ 493.7$ 488.9$ 496.8$ 1,940.8$ 494.6$ 469.5$ 480.6$ 496.1$
Pension expense 62.3 15.6 15.5 15.4 15.8 92.5 23.9 23.0 22.8 22.8 Restructuring charges 7.7 7.0 0.2 0.5 - 9.1 1.8 7.5 (0.1) (0.1) Stock-based compensation 18.9 4.6 4.7 4.8 4.8 26.2 5.7 5.6 8.0 6.9
Adjusted OIBDA (E) 2,064.1$ 523.0$ 514.1$ 509.6$ 517.4$ 2,068.6$ 526.0$ 505.6$ 511.3$ 525.7$ Adjusted OIBDA margin (F) 49.9% 50.8% 49.5% 49.5% 49.7% 48.9% 49.9% 48.1% 48.3% 49.1%
Revenues by type:Voice and long distance 1,502.9$ 362.9$ 372.3$ 380.6$ 387.1$ 1,638.3$ 394.8$ 404.4$ 415.8$ 423.3$ Data and integrated solutions 1,232.5 318.4 310.5 304.4 299.2 1,162.3 294.7 291.3 289.0 287.3 Special access 505.6 129.6 127.3 124.5 124.2 491.3 125.5 122.6 123.1 120.1 Switched access and USF 617.0 149.2 152.8 153.4 161.6 652.3 168.6 161.1 157.1 165.5 Miscellaneous 188.1 46.7 48.3 46.4 46.7 191.9 46.7 47.1 49.0 49.1 Product sales 92.8 23.4 26.8 19.8 22.8 95.3 23.1 24.3 23.6 24.3
Total revenues and sales 4,138.9$ 1,030.2$ 1,038.0$ 1,029.1$ 1,041.6$ 4,231.4$ 1,053.4$ 1,050.8$ 1,057.6$ 1,069.6$
Revenues from business and broadband:Consumer broadband 429.2$ 111.0$ 109.4$ 104.6$ 104.2$ 392.6$ 100.8$ 97.8$ 97.2$ 96.8$ Business service revenue 1,945.8 492.8 487.8 484.1 481.1 1,935.4 483.6 482.4 485.7 483.7 Business product sales 40.9 10.8 12.0 7.8 10.3 46.3 11.3 12.4 11.0 11.6 Business and broadband revenues 2,415.9$ 614.6$ 609.2$ 596.5$ 595.6$ 2,374.3$ 595.7$ 592.6$ 593.9$ 592.1$ Business and broadband as a percent of total revenues 58.4% 59.7% 58.7% 58.0% 57.2% 56.1% 56.6% 56.4% 56.2% 55.4%
Capital expenditures 490.0$ 159.1$ 127.2$ 122.5$ 81.2$ 487.4$ 133.1$ 120.6$ 116.7$ 117.0$
(A)
(B)(C)(D)(E)(F)
OIBDA margin is calculated by dividing OIBDA by total revenues and sales.Adjusted OIBDA adjusts OIBDA for the impact of restructuring charges, pension expense and stock-based compensation.Adjusted OIBDA margin is calculated by dividing adjusted OIBDA by total revenues and sales.
2010 2009
Pro forma results adjusts results of operations under GAAP to include the acquisitions of D&E Communications, Inc. ("D&E"), Lexcom Inc. ("Lexcom"), NuVox, Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions) and Q-Comm Corporation ("Q-Comm"), and to exclude the results of the disposed out-of-territory product distribution operations and all merger and integration costs related to strategic transactions. Q-Comm results of operations only include those entities acquired from Q-Comm.
OIBDA is operating income before depreciation and amortization.Operating income margin is calculated by dividing operating income by total revenues and sales.
37
Pro Forma Supplemental Information
WINDSTREAM CORPORATIONUNAUDITED PRO FORMA CONSOLIDATED RESULTS (NON-GAAP) (A)QUARTERLY SUPPLEMENTAL INFORMATIONfor the quarterly periods in the years 2010 and 2009(In thousands)
Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.ACCESS LINES:
Total access lines sum of (1) 3,317.3 3,317.3 3,353.1 3,384.3 3,414.7 3,439.6 3,439.6 3,475.5 3,505.5 3,550.9 YOY change in total access lines -3.6% -3.6% -3.5% -3.5% -3.8% -4.4% -4.4% -4.7% -4.8% -4.6%Net total access line losses (122.3) (35.8) (31.2) (30.4) (24.9) (158.1) (35.9) (30.0) (45.4) (46.8)
KEY OPERATING METRICS:Voice lines (1) 3,045.8 3,045.8 3,087.0 3,120.1 3,154.8 3,181.9 3,181.9 3,219.5 3,250.6 3,296.0 YOY change in voice lines -4.3% -4.3% -4.1% -4.0% -4.3% -4.9% -4.9% -5.3% -5.6% -5.5%Net voice line losses (136.1) (41.2) (33.1) (34.7) (27.1) (163.7) (37.6) (31.1) (45.4) (49.6)
High-speed Internet 1,302.9 1,302.9 1,290.7 1,275.1 1,260.3 1,223.9 1,223.9 1,195.7 1,168.0 1,151.5 Advanced data and integrated solutions (1) 173.6 173.6 169.4 168.9 165.9 164.3 164.3 163.0 162.1 162.5 Total data and integrated solutions 1,476.5 1,476.5 1,460.1 1,444.0 1,426.2 1,388.2 1,388.2 1,358.7 1,330.1 1,314.0 YOY change in high-speed Internet 6.5% 6.5% 7.9% 9.2% 9.4% 9.6% 9.6% 8.9% 9.7% 10.9% YOY change in advanced data and integrated solutions 5.7% 5.7% 3.9% 4.2% 2.1% 2.6% 2.6% 6.0% 9.6% 12.1%Net high-speed Internet additions 79.0 12.2 15.6 14.8 36.4 107.0 28.2 27.7 16.5 34.6 Net advanced data and integrated solution additions (losses) 9.3 4.2 0.5 3.0 1.6 4.1 1.3 0.9 (0.4) 2.3
Special access circuits (1) 97.9 97.9 96.7 95.3 94.0 93.4 93.4 93.0 92.8 92.4 YOY change in special access circuits 4.8% 4.8% 4.0% 2.7% 1.7% 1.6% 1.6% 1.5% 2.2% 1.8%Net special access circuit additions 4.5 1.2 1.4 1.3 0.6 1.5 0.4 0.2 0.4 0.5
Digital television customers 433.5 433.5 433.3 422.9 414.8 402.0 402.0 391.6 380.4 366.3
Total connections 5,053.7 5,053.7 5,077.1 5,082.3 5,089.8 5,065.5 5,065.5 5,062.8 5,053.9 5,068.7
OPERATING METRICS BY CUSTOMER TYPE:Consumer:
Voice lines 2,038.8 2,038.8 2,070.0 2,094.2 2,118.6 2,134.8 2,134.8 2,156.5 2,175.1 2,211.4 High-speed Internet 1,168.5 1,168.5 1,157.3 1,143.2 1,129.9 1,095.0 1,095.0 1,067.6 1,041.4 1,026.7 Digital television customers 433.5 433.5 433.3 422.9 414.8 402.0 402.0 391.6 380.4 366.3 Total consumer connections 3,640.8 3,640.8 3,660.6 3,660.3 3,663.3 3,631.8 3,631.8 3,615.7 3,596.9 3,604.4
YOY change in consumer connections 0.2% 0.2% 1.2% 1.8% 1.6% 1.2% 1.2% 0.7% 0.4% 0.8%
Business:Voice lines 976.2 976.2 985.8 993.9 1,003.0 1,013.9 1,013.9 1,029.7 1,041.9 1,051.6 High-speed Internet 134.4 134.4 133.4 131.9 130.4 128.9 128.9 128.1 126.6 124.8 Advanced data and integrated solutions 173.6 173.6 169.4 168.9 165.9 164.3 164.3 163.0 162.1 162.5 Special access circuits 97.9 97.9 96.7 95.3 94.0 93.4 93.4 93.0 92.8 92.4 Total business connections 1,382.1 1,382.1 1,385.3 1,390.0 1,393.3 1,400.5 1,400.5 1,413.8 1,423.4 1,431.3
YOY change in business connections -1.3% -1.3% -2.0% -2.3% -2.7% -2.7% -2.7% -2.0% -0.8% 0.2%
Wholesale voice lines 30.8 30.8 31.2 32.0 33.2 33.2 33.2 33.3 33.6 33.0 YOY change in wholesale connections -7.2% -7.2% -6.3% -4.8% 0.6% -1.2% -1.2% -2.9% -3.4% -18.9%
(A) Pro forma results adjusts results of operations under GAAP to include the acquisitions of D&E Communications, Inc. ("D&E"), Lexcom Inc. ("Lexcom"), NuVox, Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions") and Q-Comm Corporation ("Q-Comm") . Q-Comm results of operations only include those entities acquired from Q-Comm.
2010 2009
38
Pro Forma Supplemental Information
WINDSTREAM CORPORATIONUNAUDITED CONSOLIDATED RESULTS (NON-GAAP)QUARTERLY SUPPLEMENTAL INFORMATIONfor the quarterly periods in 2010(In millions)
Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.ADJUSTED FREE CASH FLOW (A):
Operating income 1,030.3$ 259.1$ 270.2$ 254.2$ 246.8$ Depreciation and amortization 693.6 190.6 179.9 167.7 155.4
As reported OIBDA 1,723.9 449.7 450.1 421.9 402.2 Merger and integration expense 77.3 25.8 11.5 16.8 23.2 Pension expense 61.9 15.4 15.5 15.3 15.7 Restructuring expense 7.7 7.0 0.2 0.5 - Stock-based compensation 17.0 5.0 4.5 4.0 3.5
As reported adjusted OIBDA 1,887.8 502.9 481.8 458.5 444.6
Adjustments:Pension contribution (41.0) - (41.0) - - Capital expenditures (415.2) (142.5) (113.3) (98.9) (60.5) Cash paid for interest expense (493.3) (72.7) (171.0) (81.0) (168.6) Cash paid for taxes (120.6) 1.0 (34.0) (80.5) (7.1)
Adjusted free cash flow 817.7$ 288.7$ 122.5$ 198.1$ 208.4$
Dividends paid 464.6$ 120.8$ 120.6$ 114.0$ 109.2$ Dividend payout ratio 56.8%
Weighted average common shares 468.0 Common stock outstanding 504.3
As ofDEBT LEVERAGE RATIO: December 31, 2010
Long-term debt, including current maturities 7,325.8$ Cash and cash equivalents 42.3 Net debt 7,283.5$
TwelveMonths Ended
December 31, 2010Pro forma adjusted OIBDA 2,064.1$
Pro forma leverage ratio 3.55 Pro forma net leverage ratio 3.53
(A)
2010
The adjusted free cash flow reflects the combined operations of Windstream with D&E Communications, Inc. ("D&E"), Lexcom Inc. ("Lexcom"), NuVox, Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions") and Q-Comm Corporation ("Q-Comm") for the periods following their respective acquisition dates, as reported under GAAP.
39
Reconciliations of Non Gaap Financial Measures
Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.Reconciliation of Revenues under GAAP to Pro forma Revenues:Revenues and sales under GAAP 3,712.0$ 981.0$ 965.8$ 917.3$ 847.9$ 2,996.6$ 754.4$ 734.3$ 752.9$ 755.0$ Pro forma adjustments:
D&E revenues and sales prior to acquisition - - - - - 123.3 16.1 35.5 35.8 35.9 Lexcom revenues and sales prior to acquisition - - - - - 39.8 7.3 10.5 11.1 10.9 Out-of-territory product distribution operations revenues and sales - - - - - (38.5) - (8.2) (17.6) (12.7) NuVox revenues and sales prior to acquisition 57.3 - - - 57.3 564.8 140.7 140.5 141.0 142.6 Iowa Telecom revenues and sales prior to acquisition 109.2 - - 42.3 66.9 270.7 65.9 68.3 66.2 70.3 Hosted Solutions revenues and sales prior to acquisition 48.3 9.1 13.4 12.9 12.9 49.0 12.6 12.2 12.0 12.2 Q-Comm revenues and sales prior to acquisition 213.7 40.5 59.2 57.0 57.0 227.7 56.8 58.1 56.8 56.0 Elimination of Windstream revenues from Q-Comm prior to acquisition (1.6) (0.4) (0.4) (0.4) (0.4) (2.0) (0.4) (0.4) (0.6) (0.6)
Pro forma revenues and sales 4,138.9$ 1,030.2$ 1,038.0$ 1,029.1$ 1,041.6$ 4,231.4$ 1,053.4$ 1,050.8$ 1,057.6$ 1,069.6$
Reconciliation of Operating Income under GAAP to Pro forma adjusted OIBDA Operating income from continuing operations under GAAP 1,030.3$ 259.1$ 270.2$ 254.2$ 246.8$ 956.9$ 234.5$ 225.4$ 244.4$ 252.6$ Pro forma adjustments:
D&E pre-acquisition operating income, excluding M&I costs - - - - - 23.2 4.0 7.8 2.6 8.8 D&E intangible asset impairment - - - - - 5.5 - - 5.5 - D&E intangible asset amortization adjustment - - - - - (3.5) (0.6) (0.9) (1.0) (1.0) Lexcom pre-acquisition operating income, excluding M&I costs - - - - - 13.7 2.6 3.3 4.1 3.7 Lexcom intangible asset amortization adjustment - - - - - (1.5) (0.3) (0.4) (0.4) (0.4) Operating income from disposed out-of-territory product distribution operations - - - - - (0.9) - 0.1 (0.8) (0.2) NuVox pre-acquisition operating income, excluding M&I costs 4.1 - - - 4.1 35.8 13.3 8.6 3.5 10.4 NuVox intangible asset amortization adjustment (1.5) - - - (1.5) (14.7) (3.9) (3.3) (3.6) (3.9) Iowa Telecom pre-acquisition operating income, excluding M&I costs 23.9 - - 9.8 14.1 59.0 14.0 15.1 12.8 17.1 Iowa Telecom intangible asset amortization adjustment (11.2) - - (4.7) (6.5) (28.4) (6.8) (6.9) (7.3) (7.4) Hosted Solutions pre-acquisition operating income, excluding M&I costs 10.9 2.2 3.1 2.9 2.7 10.1 2.8 2.3 2.4 2.6 Hosted Solutions intangible asset amortization adjustment (9.0) (1.3) (2.5) (2.6) (2.6) (10.0) (2.3) (2.5) (2.6) (2.6) Q-Comm pre-acquisition operating income, excluding M&I costs 50.1 8.8 15.7 13.6 12.0 49.5 11.7 14.3 12.7 10.8 Q-Comm intangible asset amortization adjustment (39.1) (6.3) (10.6) (11.0) (11.2) (43.4) (10.4) (10.6) (11.1) (11.3) M&I costs 77.3 25.8 11.5 16.8 23.2 22.3 19.9 1.0 1.4 -
Pro forma operating income 1,135.8 288.3 287.4 279.0 281.1 1,073.6 278.5 253.3 262.6 279.2 Depreciation and amortization expense 693.6 190.6 179.9 167.7 155.4 537.8 138.7 133.8 133.3 132.0 D&E pre-acquisition depreciation and amortization expense - - - - - 28.4 3.4 8.6 8.4 8.0 Lexcom pre-acquisition depreciation and amortization expense - - - - - 9.4 1.9 2.5 2.4 2.6 NuVox pre-acquisition depreciation and amortization expense 9.5 - - - 9.5 92.6 22.3 22.5 23.6 24.2 Iowa Telecom pre-acquisition depreciation and amortization expense 39.1 - - 15.5 23.6 94.8 23.8 24.1 23.6 23.3 Hosted Solutions pre-acquisition depreciation and amortization expense 21.1 3.4 5.7 5.9 6.1 22.7 5.9 6.2 5.4 5.2 Q-Comm pre-acquisition depreciation and amortization expense 76.1 13.5 20.7 20.8 21.1 81.5 20.1 18.5 21.3 21.6
Pro forma OIBDA (B) 1,975.2 495.8 493.7 488.9 496.8 1,940.8 494.6 469.5 480.6 496.1 Other adjustments:
Pension expense 61.9 15.4 15.5 15.3 15.7 91.8 23.7 22.8 22.7 22.6 Pension expense of D&E prior to acquisition - - - - - 0.1 0.1 - - - Pension expense of Iowa Telecom prior to acquisition 0.2 - - 0.1 0.1 0.6 0.1 0.2 0.1 0.2 Restructuring charges 7.7 7.0 0.2 0.5 - 9.1 1.8 7.5 (0.1) (0.1) Stock-based compensation 17.0 5.0 4.5 4.0 3.5 17.4 3.1 3.7 5.4 5.2 D&E stock-based compensation prior to acquisition - - - - - 1.0 0.5 0.1 0.3 0.1 NuVox stock-based compensation prior to acquisition 0.1 - - - 0.1 2.3 1.0 0.5 0.4 0.4 Iowa Telecom stock-based compensation prior to acquisition 1.8 - - 0.7 1.1 4.8 0.9 1.1 1.7 1.1 Hosted Solutions stock-based compensation prior to acquisition 0.2 (0.2) 0.2 0.1 0.1 0.7 0.2 0.2 0.2 0.1
Pro forma adjusted OIBDA (C) 2,064.1$ 523.0$ 514.1$ 509.6$ 517.4$ 2,068.6$ 526.0$ 505.6$ 511.3$ 525.7$
(A)
(B) OIBDA is operating income before depreciation and amortization.(C)
2010 2009
Pro forma results adjusts results of operations under GAAP to include the acquisitions of D&E Communications, Inc. ("D&E"), Lexcom Inc. ("Lexcom"), NuVox, Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions") and Q-Comm Corporation ("Q-Comm"), and to exclude the results of the disposed out-of-territory product distribution operations and all merger and integration costs related to strategic transactions. Q-Comm results of operations only include those entities acquired from Q-Comm.
Pro forma adjusted OIBDA adjusts pro forma OIBDA for the impact of restructuring charges, pension expense and stock-based compensation.
40
Reconciliations of Non Gaap Financial Measures
Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Total 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.Reconciliation of Capital Expenditures under GAAP to Pro forma Capital Expenditures:Capital expenditures under GAAP 415.2$ 142.5$ 113.3$ 98.9$ 60.5$ 298.1$ 91.3$ 67.3$ 76.7$ 62.8$ Pro forma adjustments:
D&E capital expenditures prior to acquisition - - - - - 17.1 1.0 5.2 5.2 5.7 Lexcom capital expenditures prior to acquisition - - - - - 3.0 0.4 0.9 0.8 0.9 NuVox capital expenditures prior to acquisition 3.8 - - - 3.8 67.9 13.3 14.6 12.9 27.1 Iowa Telecom capital expenditures prior to acquisition 8.4 - - 5.4 3.0 25.7 8.0 6.1 7.6 4.0 Hosted Solutions capital expenditures prior to acquisition 9.4 5.1 0.8 2.6 0.9 17.5 5.6 5.7 1.6 4.6 Q-Comm capital expenditures prior to acquisition 53.2 11.5 13.1 15.6 13.0 58.1 13.5 20.8 11.9 11.9
Pro forma capital expenditures 490.0$ 159.1$ 127.2$ 122.5$ 81.2$ 487.4$ 133.1$ 120.6$ 116.7$ 117.0$
(A) Pro forma results adjusts results of operations under GAAP to include the acquisitions of D&E Communications, Inc. ("D&E"), Lexcom Inc. ("Lexcom"), NuVox, Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Hosted Solutions Acquisition, LLC ("Hosted Solutions") and Q-Comm Corporation ("Q-Comm"), and to exclude the results of the disposed out-of-territory product distribution operations and all merger and integration costs related to strategic transactions. Q-Comm results of operations only include those entities acquired from Q-Comm.
2010 2009