Embarq Corporation Provides Financial Outlook For 2006
Overland Park, KS — 05/04/2006, Embarq Corporation (NYSE: EQ WI), the new company formed in connection with Sprint Nextel Corporation’s (NYSE: S) spin-off of its local communications business, today provided its financial outlook for 2006. The spin-off of Embarq is expected to be completed on May 17, 2006.
Historical operating results for the businesses comprising Embarq have been previously reported in three different manners. Each form of reporting was necessary for compliance with generally accepted accounting principles and the requirements of the Securities and Exchange Commission (SEC). A reconciliation of these forms of reporting is provided in the attached tables.
* Local Segment – Results reported on this basis represent the performance of the local operations as managed and reported by Sprint Nextel.
* Embarq Historical – Results reported on this basis represent the combined performance of the specific legal entities that will be spun-off from Sprint Nextel. The performance of these entities for the periods reported in Embarq’s Form 10 and Form S-1 filings does not include in-territory residential long distance results that were included in the Local Segment reporting defined above.
* Embarq Pro Forma – Results reported on this basis represent Embarq Historical reporting, as defined above, adjusted to reflect the operations as if the spin-off had occurred on January 1, 2005. Pro forma adjustments include such items as the transfer of in-territory residential and business long distance customers from Sprint Nextel to Embarq, the contribution by Sprint Nextel of shared assets, and the apportionment of defined benefit plan assets and liabilities between Sprint Nextel and Embarq. Consistent with SEC regulations, Embarq’s 2005 pro forma financial information does not include adjustments to reflect the higher levels of non-recurring separation expenses and incremental expenses associated with corporate support functions that the company expects to incur in 2006.
As an independent company, Embarq expects its 2006 performance to be influenced by several key factors.
* Continued competition from wireless providers and increasing competition from cable providers are expected to drive an increased level of access line losses in 2006. On a year-over-year basis, access lines are expected to decline between 5.5% and 7.5%.
* Refreshed offers and more focused marketing programs are expected to drive strong high-speed Internet subscriber growth in 2006. On a year-over-year basis, high-speed Internet lines in service are expected to increase by approximately 40%, however, the resulting increase in data revenue will be partially offset by up-front selling and installation costs.
* The launch of MVNO wireless service under the EMBARQTM brand is expected to make a small contribution to revenue in 2006, but is expected to be dilutive to earnings due to up-front customer acquisition costs.
* Product distribution revenues are expected to decline in 2006 as a result of the spin-off from Sprint Nextel and the exit from certain low margin customer markets. This revenue decline is not expected to have a material effect on earnings.
* Annual expenses associated with corporate support functions are expected to increase by approximately $80 million in 2006. The increase in these expenses is expected to grow to $100 million per year by 2008.
* Non-recurring separation expenses, which include costs associated with launching the EMBARQTM brand and establishing information technology systems, are expected to increase by $100 million to approximately $125 million in 2006.
* Productivity improvements in Embarq’s core operations are expected to partially offset the net negative impact of the items outlined above.
In light of these factors, Embarq expects net operating revenues to decline from $6.7 billion in 2005, as reported on a pro forma basis, to between $6.4 billion and $6.5 billion in 2006. Operating income is expected to decline from the 2005 pro forma level of $1.76 billion to between $1.45 billion and $1.55 billion in 2006. Depreciation and amortization in 2006 is expected to be approximately $1.05 billion. This guidance assumes the spin-off occurred on January 1, 2006 and is provided for the purpose of evaluating trends in Embarq’s operating performance. As indicated above in the description of Embarq Pro Forma reporting, 2005 operating income reported on a pro forma basis includes lower levels of both non-recurring separation expenses and incremental expenses associated with corporate support functions than are included in Embarq’s 2006 operating income estimates.
In the 2006 results that will be reflected in its 2006 Form 10-K, Embarq expects to report net operating revenues of $6.2 billion to $6.3 billion, compared to $6.3 billion in 2005 reported on an Embarq Historical basis. Reported operating income is expected to decline from the 2005 Embarq Historical level of $1.55 billion to between $1.35 billion and $1.45 billion in 2006. Reported depreciation and amortization in 2006 is expected to be approximately $1.01 billion. This guidance assumes the spin-off occurs on May 17, 2006. The primary difference between the 2006 results expected to be reported in Embarq’s 2006 Form 10-K and the guidance referenced in the paragraph above is that the 2006 results expected to be reported in Embarq’s 2006 Form 10-K will not include in-territory residential or business long distance results for the periods prior to and including May 17, 2006.
Embarq has filed a registration statement (including a prospectus) with the SEC (File No. 333-131747) for the registered public offering of senior notes, to which this communication relates. Before you invest in that offering, you should read the prospectus in that registration statement and other documents Embarq has filed with the SEC for more complete information about Embarq and the offering. You may obtain these documents free of charge by visiting EDGAR on the SEC web site at www.sec.gov. Alternatively, the issuer will arrange to send to you the prospectus if you request it by calling toll-free 1-866-591-1964.
You may review the most recent prospectus for the offering of senior notes filed with the SEC prior to the date of this release by clicking here: http://www.sec.gov/Archives/edgar/data/1350031/000119312506099225/ds1a.htm
Embarq has filed a registration statement (including a prospectus) with the SEC (File No. 333-133343) for restricted stock and restricted stock units to be issued to Sprint Nextel employees, to which this communication relates. Such employees should read the prospectus in that registration statement and other documents Embarq has filed with the SEC for more complete information about Embarq and the offering. You may obtain these documents free of charge by visiting EDGAR on the SEC web site at www.sec.gov. Alternatively, the issuer will arrange to send to you the prospectus if you request it by calling toll-free 1-866-591-1964.
You may review the most recent prospectus for the restricted stock and restricted stock units filed with the SEC prior to the date of this release by clicking here: www.sec.gov/Archives/edgar/data/1350031/000119312506099236/ds1a.htm
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
The matters discussed in this document that are not historical or current facts deal with potential future circumstances and developments, in particular relating to future business developments and financial results. This discussion is qualified by the inherent risks and uncertainties surrounding future events generally and also may differ materially from actual future experience involving any one or more of such matters. Such risks and uncertainties include: the receipt of satisfactory tax opinions, the effect of the spin-off on future operations and financial results, and the risks that are described in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” contained in the Registration Statement on Form S-1 of Embarq, as filed with the Securities and Exchange Commission on February 10, 2006, as amended. In addition to the factors mentioned above and within the Registration Statement on Form S-1, economic, competitive, regulatory, technological, capital market and other factors could affect the forward-looking statements in this document. Forward-looking statements speak only as of the date they were made, and Embarq undertakes no obligation to update or revise any forward-looking statements in light of new information or future events.
Following the completion of its spin-off from Sprint Nextel, Embarq will provide a suite of communications services, consisting of local and long distance voice and data services, including high-speed Internet access to consumer, business and wholesale customers. Embarq will also provide wireless, entertainment, logistics and other communications-related services and equipment. The company will have approximately 20,000 employees at the time of its spin-off from Sprint Nextel and expects to be listed on the NYSE and rank among the Fortune 500.
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