Windstream Corporation ( WIN - Analyst Report ) has reported second quarter 2012 adjusted earnings per share of 12 cents, in line with the Zacks Consensus Estimate. Adjusted earnings for the quarter were down 37% from the year-ago earnings of 19 cents.

Adjusted earnings exclude $12 million in merger and integration expense and $6 million related to restructuring expenses.

Including these costs, the company reported GAAP earnings per share of 9 cents, down 53% year over year.

Pro forma revenue decreased 1.2% year over year to $1,537.8 million in the second quarter, and missed our expectation of $1,541 million. On a GAAP basis, revenue grew 49.3% year over year.

Adjusted OIBDA (excluding non-cash pension expense, non-cash stock-based compensation and restructuring charges) dropped 2.8% year over year to $578.2 million in the second quarter.

Subscriber Statistics

During the second quarter, total access lines, which include voice lines, high-speed Internet and digital television customers dropped 3.6% year over year to 3.13 million. Windstream lost 28,700 access lines. Voice lines declined 4.2% year over year to $2.9 million.

Windstream added as many as 2,200 new high-speed Internet customers, bringing its total customer base to 1.36 million (up 1.9% year over year). Video customers increased to 441,400 from 439,300.

Liquidity

Windstream exited the second quarter with cash and cash equivalents of $37.5 million, down from $52.1 million in the prior-year quarter. Long-term debt and capital lease obligations were $8,794.3 million compared to $8,936.7 million at the year-end 2011.

The company generated adjusted free cash flow of $135 million. Capital expenditure was $276 million in the second quarter compared to $223.9 million in the year-ago quarter.

Dividend

The company’s board of directors announced a quarterly dividend of 25 cents payable on October 15 to stockholders of record as of September 28.

Our Analysis

We believe Windstream remains poised to gain from high-speed Internet services that are benefiting from increased market traction. Additionally, the company’s acquisition of PAETEC will also be aided by expanding service offerings, increasing wireless data backhaul services and offering managed services and cloud computing.

Further, Windstream’s deleveraging initiatives and refinancing activities are expected to generate healthy cash flows, subsequently attracting investors through a high dividend payout.

However, we remain on the sidelines due to competitive pressure from peers like Frontier Communications ( FTR - Analyst Report ) , a highly leveraged balance sheet as well as continued access-line erosion, which could partially be offset by broadband opportunities.

We are currently maintaining our long-term Neutral recommendation on Windstream supported by a Zacks #3 Rank (Hold).