UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
quarterly period ended September 30, 2006
or
*
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
Commission
File Number: 1-7784
CenturyTel,
Inc.
(Exact
name of registrant as specified in its charter)
Louisiana
|
72-0651161
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
100
CenturyTel Drive, Monroe, Louisiana 71203
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code: (318) 388-9000
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No
*
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
|
Accelerated
filer *
|
Non-accelerated
filer *
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes *
No
x
As
of
October 31, 2006, there were 114,786,866 shares of common stock
outstanding.
CenturyTel,
Inc.
|
Page
No.
|
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3
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4
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5
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6
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7
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8-14
|
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15-23
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24
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25
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26
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26
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26
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27
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27
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_____________
*
All
references to “Notes” in this quarterly report refer to these Notes to
Consolidated Financial Statements.
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
|
|
Three
months
ended
September 30,
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$
|
620,083
|
|
|
657,085
|
|
|
1,840,863
|
|
|
1,858,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
|
226,831
|
|
|
222,724
|
|
|
666,249
|
|
|
609,590
|
|
Selling,
general and administrative
|
|
|
94,212
|
|
|
99,593
|
|
|
285,748
|
|
|
289,053
|
|
Depreciation
and amortization
|
|
|
129,840
|
|
|
133,526
|
|
|
396,225
|
|
|
396,153
|
|
Total
operating expenses
|
|
|
450,883
|
|
|
455,843
|
|
|
1,348,222
|
|
|
1,294,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
169,200
|
|
|
201,242
|
|
|
492,641
|
|
|
563,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(47,857
|
)
|
|
(49,904
|
)
|
|
(148,582
|
)
|
|
(152,176
|
)
|
Income
from unconsolidated cellular entity
|
|
|
891
|
|
|
1,270
|
|
|
5,040
|
|
|
3,307
|
|
Other
income (expense)
|
|
|
1,927
|
|
|
(4,214
|
)
|
|
125,834
|
|
|
(1,459
|
)
|
Total
other income (expense)
|
|
|
(45,039
|
)
|
|
(52,848
|
)
|
|
(17,708
|
)
|
|
(150,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
124,161
|
|
|
148,394
|
|
|
474,933
|
|
|
413,656
|
|
Income
tax expense
|
|
|
47,678
|
|
|
56,983
|
|
|
176,657
|
|
|
157,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
76,483
|
|
|
91,411
|
|
|
298,276
|
|
|
256,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$
|
.66
|
|
|
.70
|
|
|
2.53
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$
|
.65
|
|
|
.68
|
|
|
2.45
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
|
$
|
.0625
|
|
|
.06
|
|
|
.1875
|
|
|
.18
|
|
AVERAGE
BASIC SHARES OUTSTANDING
|
|
|
115,221
|
|
|
130,150
|
|
|
117,685
|
|
|
130,877
|
|
AVERAGE
DILUTED SHARES OUTSTANDING
|
|
|
120,448
|
|
|
135,916
|
|
|
123,348
|
|
|
136,143
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE
INCOME
(UNAUDITED)
|
|
Three
months
ended
September 30,
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
76,483
|
|
|
91,411
|
|
|
298,276
|
|
|
256,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
OF TAX:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment, net of $75, $175, $50 and $99
tax
|
|
|
121
|
|
|
281
|
|
|
80
|
|
|
159
|
|
Unrealized
gain (loss) on investments, net of $33, $283, ($60) and $405
tax
|
|
|
52
|
|
|
453
|
|
|
(96
|
)
|
|
649
|
|
Derivative
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss on derivatives hedging the variability of cash flows, net
of ($2,606)
tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,181
|
)
|
Reclassification
adjustment for losses included in net income, net of $59, $59,
$176 and $144 tax
|
|
|
94
|
|
|
94
|
|
|
282
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
76,750
|
|
|
92,239
|
|
|
298,542
|
|
|
253,003
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
(UNAUDITED)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
32,694
|
|
|
158,846
|
|
Accounts
receivable, less allowance of $19,371 and $21,721
|
|
|
215,114
|
|
|
236,714
|
|
Materials
and supplies, at average cost
|
|
|
6,963
|
|
|
6,998
|
|
Other
|
|
|
13,775
|
|
|
20,458
|
|
Total
current assets
|
|
|
268,546
|
|
|
423,016
|
|
|
|
|
|
|
|
|
|
NET
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
7,866,852
|
|
|
7,801,377
|
|
Accumulated
depreciation
|
|
|
(4,736,812
|
)
|
|
(4,496,891
|
)
|
Net
property, plant and equipment
|
|
|
3,130,040
|
|
|
3,304,486
|
|
|
|
|
|
|
|
|
|
GOODWILL
AND OTHER ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,431,136
|
|
|
3,432,649
|
|
Other
|
|
|
575,904
|
|
|
602,556
|
|
Total
goodwill and other assets
|
|
|
4,007,040
|
|
|
4,035,205
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,405,626
|
|
|
7,762,707
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
194,117
|
|
|
276,736
|
|
Accounts
payable
|
|
|
108,230
|
|
|
104,444
|
|
Accrued
expenses and other liabilities
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
56,229
|
|
|
60,521
|
|
Income
taxes
|
|
|
64,348
|
|
|
110,521
|
|
Other
taxes
|
|
|
66,120
|
|
|
58,660
|
|
Interest
|
|
|
56,026
|
|
|
71,580
|
|
Other
|
|
|
17,920
|
|
|
14,851
|
|
Advance
billings and customer deposits
|
|
|
51,220
|
|
|
48,917
|
|
Total
current liabilities
|
|
|
614,210
|
|
|
746,230
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
2,417,807
|
|
|
2,376,070
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
|
|
1,068,570
|
|
|
1,023,134
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value, authorized 350,000,000 shares, issued and
outstanding 115,399,940 and 131,074,399 shares
|
|
|
115,400
|
|
|
131,074
|
|
Paid-in
capital
|
|
|
71,439
|
|
|
129,806
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(9,353
|
)
|
|
(9,619
|
)
|
Retained
earnings
|
|
|
3,120,092
|
|
|
3,358,162
|
|
Preferred
stock - non-redeemable
|
|
|
7,461
|
|
|
7,850
|
|
Total
stockholders’ equity
|
|
|
3,305,039
|
|
|
3,617,273
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
7,405,626
|
|
|
7,762,707
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
(UNAUDITED)
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
298,276
|
|
|
256,145
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
396,225
|
|
|
396,153
|
|
Gain
on asset dispositions
|
|
|
(118,649
|
)
|
|
(3,500
|
)
|
Income
from unconsolidated cellular entity
|
|
|
(5,040
|
)
|
|
(3,307
|
)
|
Deferred
income taxes
|
|
|
33,713
|
|
|
33,418
|
|
Changes
in current assets and current liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
20,141
|
|
|
(2,267
|
)
|
Accounts
payable
|
|
|
3,786
|
|
|
(33,227
|
)
|
Accrued
income and other taxes
|
|
|
(30,853
|
)
|
|
75,722
|
|
Other
current assets and other current liabilities, net
|
|
|
(7,315
|
)
|
|
(10,861
|
)
|
Retirement
benefits
|
|
|
25,332
|
|
|
13,989
|
|
Excess
tax benefits from share-based compensation
|
|
|
(7,860
|
)
|
|
-
|
|
(Increase)
decrease in other noncurrent assets
|
|
|
5,396
|
|
|
(4,207
|
)
|
Increase
(decrease) in other noncurrent liabilities
|
|
|
(502
|
)
|
|
2,496
|
|
Other,
net
|
|
|
9,858
|
|
|
12,815
|
|
Net
cash provided by operating activities
|
|
|
622,508
|
|
|
733,369
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Payments
for property, plant and equipment
|
|
|
(213,034
|
)
|
|
(281,958
|
)
|
Proceeds
from redemption of Rural Telephone Bank stock
|
|
|
122,819
|
|
|
-
|
|
Proceeds
from sale of assets
|
|
|
5,865
|
|
|
4,000
|
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
(75,424
|
)
|
Distributions
from unconsolidated cellular entity
|
|
|
-
|
|
|
2,339
|
|
Investment
in unconsolidated cellular entity
|
|
|
(5,222
|
)
|
|
-
|
|
Other,
net
|
|
|
(1,865
|
)
|
|
(1,069
|
)
|
Net
cash used in investing activities
|
|
|
(91,437
|
)
|
|
(352,112
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Payments
of debt
|
|
|
(38,946
|
)
|
|
(516,093
|
)
|
Net
proceeds from issuance of long-term debt
|
|
|
-
|
|
|
344,173
|
|
Proceeds
from issuance of common stock
|
|
|
65,339
|
|
|
47,486
|
|
Repurchase
of common stock
|
|
|
(669,853
|
)
|
|
(530,700
|
)
|
Settlement
of equity units
|
|
|
-
|
|
|
398,164
|
|
Cash
dividends
|
|
|
(21,976
|
)
|
|
(23,909
|
)
|
Excess
tax benefits from share-based compensation
|
|
|
7,860
|
|
|
-
|
|
Other,
net
|
|
|
353
|
|
|
908
|
|
Net
cash used in financing activities
|
|
|
(657,223
|
)
|
|
(279,971
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(126,152
|
)
|
|
101,286
|
|
Cash
and cash equivalents at beginning of period
|
|
|
158,846
|
|
|
167,215
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
32,694
|
|
|
268,501
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
181,445
|
|
|
88,951
|
|
Interest
paid (net of capitalized interest of $1,506 and $2,066)
|
|
$
|
162,630
|
|
|
161,910
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS'
EQUITY
(UNAUDITED)
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
COMMON
STOCK
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
131,074
|
|
|
132,374
|
|
Issuance
of common stock through dividend reinvestment, incentive and benefit
plans
and other
|
|
|
2,539
|
|
|
2,124
|
|
Issuance
of common stock upon settlement of equity units
|
|
|
-
|
|
|
12,881
|
|
Repurchase
of common stock
|
|
|
(18,234
|
)
|
|
(16,409
|
)
|
Conversion
of preferred stock into common stock
|
|
|
21
|
|
|
7
|
|
Balance
at end of period
|
|
|
115,400
|
|
|
130,977
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
129,806
|
|
|
222,205
|
|
Issuance
of common stock through dividend reinvestment, incentive and benefit
plans
|
|
|
62,800
|
|
|
45,362
|
|
Issuance
of common stock upon settlement of equity units
|
|
|
-
|
|
|
385,283
|
|
Repurchase
of common stock
|
|
|
(137,249
|
)
|
|
(514,291
|
)
|
Conversion
of preferred stock into common stock
|
|
|
368
|
|
|
118
|
|
Excess
tax benefits from share-based compensation
|
|
|
7,860
|
|
|
-
|
|
Share-based
compensation and other
|
|
|
7,854
|
|
|
1,626
|
|
Balance
at end of period
|
|
|
71,439
|
|
|
140,303
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(9,619
|
)
|
|
(8,334
|
)
|
Change
in other comprehensive loss, net of tax
|
|
|
266
|
|
|
(3,142
|
)
|
Balance
at end of period
|
|
|
(9,353
|
)
|
|
(11,476
|
)
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
3,358,162
|
|
|
3,055,545
|
|
Net
income
|
|
|
298,276
|
|
|
256,145
|
|
Repurchase
of common stock (through 2006 accelerated share repurchase
program)
|
|
|
(514,370
|
)
|
|
-
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
Common
stock - $.1875 and $.18 per share, respectively
|
|
|
(21,689
|
)
|
|
(23,611
|
)
|
Preferred
stock
|
|
|
(287
|
)
|
|
(298
|
)
|
Balance
at end of period
|
|
|
3,120,092
|
|
|
3,287,781
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - NON-REDEEMABLE
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
7,850
|
|
|
7,975
|
|
Conversion
of preferred stock into common stock
|
|
|
(389
|
)
|
|
(125
|
)
|
Balance
at end of period
|
|
|
7,461
|
|
|
7,850
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
$
|
3,305,039
|
|
|
3,555,435
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2006
(UNAUDITED)
(1)
|
Basis
of Financial Reporting
|
Our
consolidated financial statements include the accounts of CenturyTel, Inc.
and
its majority-owned subsidiaries. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
rules
and regulations of the Securities and Exchange Commission; however, in the
opinion of management, the disclosures made are adequate to make the information
presented not misleading. The consolidated financial statements and footnotes
included in this Form 10-Q should be read in conjunction with the consolidated
financial statements and notes thereto included in our annual report on Form
10-K for the year ended December 31, 2005.
The
financial information for the three months and nine months ended September
30,
2006 and 2005 has not been audited by independent certified public accountants;
however, in the opinion of management, all adjustments necessary to present
fairly the results of operations for the three-month and nine-month periods
have
been included therein. The results of operations for the first nine months
of
the year are not necessarily indicative of the results of operations which
might
be expected for the entire year.
(2)
|
Goodwill
and Other Intangible
Assets
|
Goodwill
and other intangible assets as of September 30, 2006 and December 31, 2005
were
composed of the following:
|
|
Sept.
30,
|
|
Dec.
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,431,136
|
|
|
3,432,649
|
|
|
|
|
|
|
|
|
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
Customer
base
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
25,094
|
|
|
25,094
|
|
Accumulated
amortization
|
|
|
(6,604
|
)
|
|
(5,349
|
)
|
Net
carrying amount
|
|
$
|
18,490
|
|
|
19,745
|
|
|
|
|
|
|
|
|
|
Contract
rights
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
4,187
|
|
|
4,187
|
|
Accumulated
amortization
|
|
|
(2,908
|
)
|
|
(1,861
|
)
|
Net
carrying amount
|
|
$
|
1,279
|
|
|
2,326
|
|
|
|
|
|
|
|
|
|
Intangible
asset not subject to amortization
|
|
$
|
36,690
|
|
|
36,690
|
|
As
of
September 30, 2006, we completed the annual impairment test of goodwill required
under Statement of Financial Accounting Standards No. 142 and determined
that
our goodwill is not impaired.
Goodwill
decreased due to the sale of our Arizona telephone properties in May 2006
(see
Note 11 for additional information).
Total
amortization expense related to the intangible assets subject to amortization
for the first nine months of 2006 was $2.3 million and is expected to be
$3.1
million for all of 2006, $2.6 million in 2007 and $1.7 million annually
thereafter through 2010.
(3)
|
Postretirement
Benefits
|
We
sponsor health care plans that provide postretirement benefits to all qualified
retired employees.
Net
periodic postretirement benefit cost for the three months and nine months
ended
September 30, 2006 and 2005 included the following components:
|
|
Three
months
ended
September 30,
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,746
|
|
|
1,572
|
|
|
5,237
|
|
|
4,717
|
|
Interest
cost
|
|
|
4,745
|
|
|
4,180
|
|
|
14,235
|
|
|
12,539
|
|
Expected
return on plan assets
|
|
|
(610
|
)
|
|
(610
|
)
|
|
(1,829
|
)
|
|
(1,830
|
)
|
Amortization
of unrecognized actuarial loss
|
|
|
930
|
|
|
729
|
|
|
2,790
|
|
|
2,187
|
|
Amortization
of unrecognized prior service cost
|
|
|
(217
|
)
|
|
(469
|
)
|
|
(650
|
)
|
|
(1,407
|
)
|
Net
periodic postretirement benefit cost
|
|
$
|
6,594
|
|
|
5,402
|
|
|
19,783
|
|
|
16,206
|
|
We
contributed $9.6 million to our postretirement health care plan in the first
nine months of 2006 and expect to contribute approximately $13 million for
the
full year.
(4)
|
Defined
Benefit Retirement Plans
|
We
sponsor defined benefit pension plans for substantially all employees. We
also
sponsor a Supplemental Executive Retirement Plan to provide certain officers
with supplemental retirement, death and disability benefits.
Net
periodic pension expense for the three months and nine months ended September
30, 2006 and 2005 included the following components:
|
|
Three
months
ended
September 30,
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4,778
|
|
|
3,833
|
|
|
13,261
|
|
|
11,512
|
|
Interest
cost
|
|
|
7,078
|
|
|
5,992
|
|
|
19,455
|
|
|
18,004
|
|
Expected
return on plan assets
|
|
|
(8,163
|
)
|
|
(7,306
|
)
|
|
(24,530
|
)
|
|
(21,919
|
)
|
Recognized
net losses
|
|
|
3,527
|
|
|
1,560
|
|
|
7,367
|
|
|
4,693
|
|
Net
amortization and deferral
|
|
|
(104
|
)
|
|
81
|
|
|
(98
|
)
|
|
248
|
|
Net
periodic pension expense
|
|
$
|
7,116
|
|
|
4,160
|
|
|
15,455
|
|
|
12,538
|
|
The
amount of the 2006 contribution to our pension plans will be determined based
on
a number of factors, including the results of the 2006 actuarial valuation.
Our
minimum required contribution to our pension plans for 2006 is approximately
$1.1 million.
(5)
|
Stock-based
Compensation
|
Effective
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (Revised 2004), “Share-Based Payments” (“SFAS 123(R)”). SFAS
123(R) requires us to measure our cost of awarding employees with equity
instruments based upon the fair value of the award on the grant date. Such
cost
will be recognized as compensation expense over the period during which the
employee is required to provide service in exchange for the award. Compensation
cost is also recognized over the applicable remaining vesting period for
any
outstanding options that were not fully vested as of January 1, 2006. We
did not
have any unvested outstanding options as of January 1, 2006 since our Board
of
Directors accelerated the vesting of all unvested options effective as of
December 31, 2005, as described below. We elected the modified prospective
transition method as permitted by SFAS 123(R); accordingly, prior period
results
have not been restated.
We
currently maintain programs which allow the Board of Directors, through its
Compensation Committee, to grant incentives to certain employees and our
outside
directors in any one or a combination of several forms, including incentive
and
non-qualified stock options; stock appreciation rights; restricted stock;
and
performance shares. As of September 30, 2006, we had reserved approximately
8.7
million shares of common stock which may be issued in connection with incentive
awards made in the future under our current incentive programs. We also offer
an
Employee Stock Purchase Plan whereby employees can purchase our common stock
at
a 15% discount based on the lower of the beginning or ending stock price
during
recurring six-month periods stipulated in such program.
As
of
December 31, 2005, we had approximately 6.0 million options outstanding from
prior grants, all of which were issued with exercise prices either equal
to or
exceeding the then-current market price. All of these options were exercisable
as a result of actions taken by our Board of Directors in December 2005 to
accelerate the vesting of all unvested options outstanding, effective as
of
December 31, 2005, in order to eliminate the recognition of compensation
expense
which otherwise would have been required upon the effectiveness of SFAS
123(R).
In
the
first nine months of 2006, certain of our employees were granted an aggregate
of
985,575 stock options with exercise prices at market value. All of these
options
expire ten years after the date of grant and have a three-year vesting period.
The weighted average fair value of each option was estimated as of the date
of
grant to be $12.74 using a Black-Scholes option pricing model using the
following assumptions: dividend yield - .7%; expected volatility - 30%; weighted
average risk free interest rate - 4.65% (rates ranged from 4.28% to 5.22%);
and
expected term - 7 years (executive officers) and 5 years (all other employees).
In
the
first nine months of 2005, certain of our employees were granted an aggregate
of
990,125 stock options with exercise prices at market value. The weighted
average
fair value of each option was estimated as of the date of grant to be $12.68
using a Black-Scholes option pricing model using the following assumptions:
dividend yield - .7%; expected volatility - 30%; weighted average risk free
interest rate - 4.16% (rates ranged from 3.90% to 4.20%); and expected term
- 7
years.
The
expected volatility was based on the historical volatility of our common
stock
over the 7- and 5- year terms mentioned above. The expected term was determined
based on the historical exercise and forfeiture rates for similar
grants.
Stock
option transactions during the first nine months of 2006 were as
follows:
|
|
Number
of
options
|
|
Average
price
|
|
Remaining
contractual
term
(in years)
|
|
Aggregate
intrinsic
value
|
|
Outstanding
December 31, 2005
|
|
|
5,995,458
|
|
$
|
30.63
|
|
|
|
|
|
|
|
Granted
|
|
|
985,575
|
|
|
35.87
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,070,170
|
)
|
|
28.58
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(20,185
|
)
|
|
36.55
|
|
|
|
|
|
|
|
Outstanding
September 30, 2006
|
|
|
4,890,678
|
|
$
|
32.53
|
|
|
6.3
|
|
$
|
34,921,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
September 30, 2006
|
|
|
3,928,453
|
|
$
|
31.71
|
|
|
5.5
|
|
$
|
31,254,000
|
|
In
addition, during the first nine months of 2006, we issued 293,943 shares
of
restricted stock to certain employees and our outside directors at a
weighted-average price of $36.02 per share. During the first nine months
of
2005, we issued 286,123 shares of restricted stock at a weighted-average
price
of $33.47 per share. Such restricted stock vests over a five-year period
(for
employees) and a three-year period (for outside directors). Nonvested restricted
stock transactions during the first nine months of 2006 were as
follows:
|
|
Number
of
shares
|
|
Average
grant
date
fair value
|
|
Nonvested
at January 1, 2006
|
|
|
511,919
|
|
$
|
30.92
|
|
Granted
|
|
|
293,943
|
|
|
36.02
|
|
Vested
|
|
|
(74,523
|
)
|
|
32.89
|
|
Forfeited
|
|
|
(3,780
|
)
|
|
33.56
|
|
Nonvested
at September 30, 2006
|
|
|
727,559
|
|
$
|
32.77
|
|
The
total
compensation cost for share-based payment arrangements for the first nine
months
of 2006 was $8.9 million ($5.7 million after-tax; $.05 per diluted share).
We
recognized approximately $3.3 million of tax benefit related to such
arrangements in the first nine months of 2006. As of September 30, 2006,
there
was $24.7 million of total unrecognized compensation cost related to the
share-based payment arrangements, which is expected to be recognized over
a
weighted-average period of 3.2 years.
We
received net cash proceeds of $59.2 million during the first nine months
of 2006
in connection with option exercises. The total intrinsic value of options
exercised (the amount by which the market price of the stock on the date
of
exercise exceeded the market price of the stock on the date of grant) was
$20.1
million during the first nine months of 2006 and $16.2 million during the
first
nine months of 2005. The excess tax benefit realized from stock options
exercised and restricted stock released during the first nine months of 2006
was
$7.9 million. The total fair value of restricted stock that vested during
the
first nine months of 2006 was $2.5 million.
Prior
to
January 1, 2006, we accounted for our stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees”. Generally, we did not recognize any
stock-based compensation expense for stock options in our consolidated
statements of income prior to 2006. If compensation cost for our options
had
been determined consistent with SFAS 123(R), our net income and earnings
per
share on a pro forma basis for the three months and nine months ended September
30, 2005 would have been as follows:
|
|
Three
months
ended
September
30, 2005
|
|
Nine
months
ended
September
30, 2005
|
|
|
|
(Dollars
in thousands,
except
per share amounts)
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
91,411
|
|
|
256,145
|
|
Less:
Total stock-based employee compensation expense determined under
fair
value based method,
net of tax
|
|
|
(1,740
|
)
|
|
(7,643
|
)
|
Pro
forma net income
|
|
$
|
89,671
|
|
|
248,502
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.70
|
|
|
1.95
|
|
Pro
forma
|
|
$
|
.69
|
|
|
1.90
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.68
|
|
|
1.91
|
|
Pro
forma
|
|
$
|
.67
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
We
are an
integrated communications company engaged primarily in providing an array
of
communications services to our customers, including local exchange, long
distance, Internet access and broadband services. We strive to maintain our
customer relationships by, among other things, bundling our service offerings
to
provide our customers with a complete offering of integrated communications
services. As a result of increased bundling of our local exchange and long
distance service offerings, beginning in the first quarter of 2006, we have
combined the revenues of such offerings into a category entitled “Voice”. Prior
periods have been restated to insure comparability. Our operating revenues
for
our products and services include the following components:
|
|
Three
months
ended
September 30,
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$
|
216,180
|
|
|
225,857
|
|
|
650,415
|
|
|
672,065
|
|
Network
access
|
|
|
219,820
|
|
|
257,586
|
|
|
666,652
|
|
|
727,268
|
|
Data
|
|
|
91,473
|
|
|
88,911
|
|
|
259,158
|
|
|
237,866
|
|
Fiber
transport and CLEC
|
|
|
37,487
|
|
|
36,361
|
|
|
109,318
|
|
|
78,240
|
|
Other
|
|
|
55,123
|
|
|
48,370
|
|
|
155,320
|
|
|
143,341
|
|
Total
operating revenues
|
|
$
|
620,083
|
|
|
657,085
|
|
|
1,840,863
|
|
|
1,858,780
|
|
We
derive
our voice revenues by providing local exchange telephone and retail long
distance services to our customers in our local exchange service
areas.
We
derive
our network access revenues primarily from (i) providing services to various
carriers and customers in connection with the use of our facilities to originate
and terminate their interstate and intrastate voice and data transmissions
and
(ii) receiving universal support funds which allows us to recover a portion
of
our costs under federal and state cost recovery mechanisms.
We
derive
our data revenues primarily by providing Internet access services (both digital
subscriber line (“DSL”) and dial-up services) and data transmission services
over special circuits and private lines in our local exchange service
areas.
Our
fiber
transport and CLEC revenues include revenues from our fiber transport,
competitive local exchange carrier and security monitoring
businesses.
We
derive
other revenues primarily by (i) leasing, selling, installing and maintaining
customer premise telecommunications equipment and wiring, (ii) providing
billing
and collection services for third parties, (iii) participating in the
publication of local directories and (iv) offering our video and wireless
services.
(7)
|
Accelerated
Share Repurchase Program
|
On
February 21, 2006, our Board of Directors approved a stock repurchase program
authorizing us to repurchase up to $1.0 billion of our common stock and
terminated the approximately $13 million remaining balance of our existing
$200
million share repurchase program approved in February 2005. In February 2006,
we
repurchased the first $500 million of common stock through accelerated share
repurchase agreements entered into with various investment banks, repurchasing
and retiring approximately 14.36 million shares of common stock at an average
initial price of $34.83 per share. We funded repurchases under these agreements
principally through short-term borrowings, which as of September 30, 2006,
had
been repaid in full.
As
part
of the accelerated share repurchase transactions, we simultaneously entered
into
forward contracts with the investment banks whereby the investment banks
purchased an aggregate of 14.36 million shares of our common stock during
the
terms of the contracts. At the end of the repurchase period in mid-July 2006,
we
paid an aggregate of approximately $28.4 million cash to the investment banks
since the investment banks’ weighted average purchase price during the
repurchase period ($37.10) was higher than the initial average price. We
reflected such settlement amount as an adjustment to retained earnings in
our
financial statements for the third quarter of 2006.
In
connection with calculating our diluted earnings per share, we assumed the
accelerated share repurchase market price adjustment would be settled through
our issuance of additional shares of common stock, which was allowed at our
discretion in the agreements. Accordingly, the estimated shares issuable
based
on the fair value of the forward contract were included in the weighted average
shares outstanding for the computation of diluted earnings per share for
the
periods ended September 30, 2006.
(8)
|
Reduction
in Workforce
|
On
March
1, 2006 and August 30, 2006, we announced reductions of our workforce which
aggregated approximately 400 jobs, or 6% of our workforce, primarily due
to
increased competitive pressures and the loss of access lines over the last
several years. For the nine months ended September 30, 2006, we incurred
a net
pre-tax charge of approximately $7.5 million (consisting of a $9.4 million
charge to operating expenses, net of a $1.9 million favorable revenue impact
related to such expenses) in connection with the severance and related costs.
Of
the $9.4 million charged to operating expenses, approximately $8.6 million
was
reflected in cost of services and products and $845,000 was reflected in
selling, general and administrative expenses. The following table reflects
additional information regarding the severance-related liability for the
first
nine months of 2006 (in thousands):
Balance
at December 31, 2005
|
|
$
|
-
|
|
Amount
accrued to expense
|
|
|
9,431
|
|
Amount
paid
|
|
|
(5,964
|
)
|
Balance
at September 30, 2006
|
|
$
|
3,467
|
|
(9)
|
Commitments
and Contingencies
|
In
Barbrasue
Beattie and James Sovis, on behalf of themselves and all others similarly
situated, v. CenturyTel, Inc.,
filed
on October 28, 2002, in the United States District Court for the Eastern
District of Michigan (Case No. 02-10277), the plaintiffs allege that we unjustly
and unreasonably billed customers for inside wire maintenance services, and
seek
unspecified monetary damages and injunctive relief under various legal theories
on behalf of a purported class of over two million customers in our telephone
markets. On March 10, 2006, the Court certified a class of plaintiffs and
issued
a ruling that the billing descriptions we used for these services during
an
approximately 18-month period between October 2000 and May 2002 were legally
insufficient. We have appealed this decision. The Court’s order does not specify
the award of damages, the scope of which remains subject to significant
fact-finding. At this time, we cannot reasonably estimate the amount or range
of
possible loss; however, we believe it to be significantly below the amount
of
revenues billed for such services during the above-specified period. We do
not
believe that the ultimate outcome of this litigation will have a material
adverse effect on our financial position or results of operations.
The
Telecommunications Act of 1996 allows local exchange carriers to file access
tariffs on a streamlined basis and, if certain criteria are met, deems those
tariffs lawful. Tariffs that have been “deemed lawful” in effect nullify an
interexchange carrier’s ability to seek refunds should the earnings from the
tariffs ultimately result in earnings above the authorized rate of return
prescribed by the FCC. Certain of our telephone subsidiaries file interstate
tariffs with the FCC using this streamlined filing approach. For certain
of
these tariffs, we initially record as a liability our earnings in excess
of the
authorized rate of return, and may thereafter recognize as revenues some
or all
of these amounts at the end of the applicable settlement period as our legal
entitlement thereto becomes certain. As of September 30, 2006, the amount
of our
earnings in excess of the authorized rate of return reflected as a liability
on
the balance sheet for the 2003/2004 monitoring period aggregated approximately
$44 million. The settlement period related to the 2003/2004 monitoring period
lapses on September 30, 2007.
As
discussed below in Note 11, we received approximately $122.8 million in cash
from the dissolution of the Rural Telephone Bank (“RTB”). Some portion of the
gain recognized in connection with the receipt of these proceeds, while not
estimable at this time, is currently or may be subject to review by regulatory
authorities which may result in alternative accounting treatment.
In
March
2006, we filed a complaint against AT&T Corp. and AT&T Communications,
Inc. (collectively, “AT&T”) in the United States District Court for the
District of New Jersey. This lawsuit currently includes twenty-four other
local
exchange company plaintiffs. Our complaint seeks recovery from AT&T of
unpaid and underpaid access charges for calls made using AT&T’s prepaid
calling cards and calls that used Internet Protocol (“IP”) for a portion of
their transmission. We believe AT&T improperly classified certain of the
prepaid calling card calls as interstate traffic rather than intrastate traffic,
thereby depriving us of the higher access rates associated with intrastate
calls. We also believe that AT&T improperly classified the calls that used
IP for a portion of their transmission as local calls, thereby depriving
us of
access rates entirely. At this time, the likely outcome of the case cannot
be
predicted, nor can a reasonable estimate of the amount of recovery, if any,
be
made. Accordingly, we have not recognized any revenue with respect to this
matter in our consolidated financial statements.
From
time
to time, we are involved in other proceedings incidental to our business,
including administrative hearings of state public utility commissions relating
primarily to rate making, actions relating to employee claims, occasional
grievance hearings before labor regulatory agencies and miscellaneous third
party tort actions. The outcome of these other proceedings is not predictable.
However, we do not believe that the ultimate resolution of these other
proceedings, after considering available insurance coverage, will have a
material adverse effect on our financial position, results of operations
or cash
flows.
(10)
|
Accounting
Pronouncements
|
In
June
2006, the Financial Accounting Standards Board issued Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the
accounting for uncertainty in income taxes recognized in financial statements.
FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting
and disclosing in the financial statements tax positions taken or expected
to be
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently assessing the impact, if any, of FIN
48 but
we do not expect such impact to have a material adverse effect on our
consolidated financial position or results of operations.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”).
SFAS 157 defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. SFAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and is effective for fiscal years beginning after November 15, 2007. We are
currently evaluating the impact of adopting SFAS 157.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 158, “Employers’ Accounting for Defined
Benefit Plans and Other Postretirement Plans” (“SFAS 158”). SFAS 158 will
require us to recognize the overfunded or underfunded status of our defined
benefit and postretirement plans as an asset or liability on our balance
sheet
and to recognize changes in that funded status in the year in which the changes
occur through equity. We will be required to initially recognize the
requirements of SFAS 158 in our December 31, 2006 balance sheet. If the
requirements of SFAS 158 were applied to December 31, 2005 balances, we would
have reduced our noncurrent assets by approximately $73 million, increased
our
noncurrent liabilities by approximately $134 million, decreased our deferred
tax
liabilities by approximately $79 million and decreased our stockholders’ equity
by approximately $128 million. However, the effect at December 31, 2006 (the
adoption date) or any other future date could significantly differ depending
on
the measurement of pension and postretirement assets and obligations at such
date.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB
108 addresses how the effects of prior year uncorrected misstatements should
be
considered when quantifying misstatements in current year financial statements.
SAB 108 requires companies to quantify misstatements using a balance sheet
approach and income statement approach and to evaluate whether either approach
results in quantifying an error that is material in light of the relevant
quantitative and qualitative factors. SAB 108 is effective for fiscal years
ending on or after November 15, 2006. We are currently evaluating the impact
of
adopting SAB 108 but we do not expect that it will have a material effect
on our
consolidated financial statements.
(11)
|
Gain
on asset dispositions
|
In
April
2006, upon dissolution of the RTB, we received $122.8 million in cash for
redemption of our investment in stock of the RTB and recorded a pre-tax gain
of
approximately $117.8 million in the second quarter of 2006 related to this
transaction. In May 2006, we sold the assets of our local exchange operations
in
Arizona for approximately $5.9 million cash and recorded a pre-tax gain of
approximately $866,000 in the second quarter of 2006. Such gains are included
in
“Other income (expense)” on our Consolidated Statements of Income.
On
November 1, 2006, our 1996 rights agreement (and each preference share purchase
right issued thereunder) lapsed in accordance with its stated
terms.
CenturyTel,
Inc.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") included herein should be read in conjunction with MD&A and the
other information included in our annual report on Form 10-K for the year
ended
December 31, 2005. The results of operations for the three months and nine
months ended September 30, 2006 are not necessarily indicative of the results
of
operations which might be expected for the entire year.
We
are an
integrated communications company engaged primarily in providing local exchange,
network access, long distance, Internet access and broadband services to
customers in 25 states. We derive our revenues from providing (i) local exchange
and long distance telephone services, (ii) network access services, (iii)
data
services, which includes both DSL and dial-up Internet services, as well
as
special access and private line services, (iv) fiber transport, competitive
local exchange and security monitoring services and (v) other related services.
For additional information on our revenue sources, see Note 6 to our financial
statements included in Item 1 of Part I of this quarterly report.
As
previously disclosed, we anticipate our diluted earnings per share for the
remainder of 2006 compared to 2005 will be negatively impacted as a result
of
(i) lower Universal Service Fund and intrastate revenues, (ii) declines in
access lines, (iii) declines in the amount of revenue recorded related to
prior
year settlement agreements, (iv) the recognition of stock option expense
in
accordance with SFAS 123(R) and (v) expenses associated with expanding
our video and wireless service offerings. See below for additional
information.
On
June
30, 2005, we acquired fiber assets in 16 metropolitan markets from KMC Telecom
Holdings, Inc. (“KMC”).
In
the
first quarter of 2006, we announced a reduction of our workforce of
approximately 275 jobs and, in connection therewith, incurred a net pre-tax
charge of approximately $4.9 million (consisting of a $6.2 million charge
to
operating expenses, net of a $1.3 million favorable revenue impact related
to
such expenses) for the severance and related costs. In the third quarter
of
2006, we announced a further reduction of our workforce of approximately
125
jobs and, in connection therewith, incurred a net pre-tax charge of
approximately $2.6 million (consisting of a $3.3 million charge to operating
expenses, net of a $651,000 favorable revenue impact related to such expenses)
for the severance and related costs. See Note 8.
In
the
second quarter of 2006, we (i) recorded a one-time pre-tax gain of approximately
$117.8 million upon redemption of our investment in the stock of the Rural
Telephone Bank (“RTB”) and (ii) sold our local exchange operations in Arizona.
See Note 11.
In
addition to historical information, this management’s discussion and analysis
includes certain forward-looking statements that 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;
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 ability to collect
our receivables from financially troubled communications companies; 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; and the effects of more general factors such as changes
in
interest rates, in tax rates, in accounting policies or practices, in operating,
medical or administrative costs, in general market, labor or economic
conditions, or in legislation, regulation or public policy. These
and other uncertainties related to the business are described in greater
detail
in Item 1A to our Form 10-K for the year ended December 31, 2005, as updated
by
Part II of this report below. You are cautioned not to place undue reliance
on
these forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to update any of our forward-looking
statements for any reason.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2006 Compared
to
Three Months Ended September 30, 2005
Net
income was $76.5 million and $91.4 million for the third quarter of 2006
and
2005, respectively. Diluted earnings per share for the third quarter of 2006
and
2005 was $.65 and $.68, respectively. The decline in the number of average
diluted shares outstanding is primarily attributable to share repurchases
that
have occurred subsequent to September 30, 2005.
|
|
Three
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
169,200
|
|
|
201,242
|
|
Interest
expense
|
|
|
(47,857
|
)
|
|
(49,904
|
)
|
Income
from unconsolidated cellular entity
|
|
|
891
|
|
|
1,270
|
|
Other
income (expense)
|
|
|
1,927
|
|
|
(4,214
|
)
|
Income
tax expense
|
|
|
(47,678
|
)
|
|
(56,983
|
)
|
Net
income
|
|
$
|
76,483
|
|
|
91,411
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
.66
|
|
|
.70
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
.65
|
|
|
.68
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
115,221
|
|
|
130,150
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
120,448
|
|
|
135,916
|
|
Operating
income decreased $32.0 million (15.9%) due to a $37.0 million (5.6%) decrease
in
operating revenues partially offset by a $5.0 million (1.1%) decrease in
operating expenses. As described further below, during the third quarter
of
2005, we recognized approximately $35.9 million of revenue settlements for
prior
periods that will not recur in 2006.
Operating
Revenues
|
|
Three
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Voice
|
|
$
|
216,180
|
|
|
225,857
|
|
Network
access
|
|
|
219,820
|
|
|
257,586
|
|
Data
|
|
|
91,473
|
|
|
88,911
|
|
Fiber
transport and CLEC
|
|
|
37,487
|
|
|
36,361
|
|
Other
|
|
|
55,123
|
|
|
48,370
|
|
|
|
$
|
620,083
|
|
|
657,085
|
|
The
$9.7
million (4.3%) decrease in voice revenues is primarily due to (i) a $5.6
million
decrease due to a 4.8% decline in the average number of access lines served
by
us during the third quarter of 2006 (as adjusted in the manner described
below)
compared to the third quarter of 2005; (ii) a $10.6 million decrease due
to a
decline in the average rate we charged our long distance customers; and (iii)
an
$8.1 million decline as a result of a decrease in minutes of use in extended
area calling plans in certain areas and the effect of rate reductions. Such
decreases were partially offset by (i) a $12.0 million increase in long distance
revenues primarily attributable to a 7.5% increase in the average number
of long
distance lines served and increased long distance minutes of use and (ii)
a $3.0
million increase due to providing custom calling features to more
customers.
Excluding
the net impact of removing test lines from our access line counts and a positive
adjustment related to database conversion and clean-up, access lines declined
29,000 (1.4%) during the third quarter of 2006 compared to a decline of 23,000
(1.0%) during the third quarter of 2005. We believe the decline in the number
of
access lines during 2006 and 2005 is primarily due to the displacement of
traditional wireline telephone services by other competitive services. Based
on
current conditions and anticipated competition, we expect access lines to
decline between 4.5% and 5.5% for 2006.
Network
access revenues decreased $37.8 million (14.7%) in the third quarter of 2006
primarily due to (i) the recognition of approximately $24.5 million in prior
year revenue settlements in the third quarter of 2005; (ii) a $5.1 million
decrease as a result of lower intrastate access revenues due to a reduction
in
intrastate minutes (partially due to the displacement of minutes by wireless,
electronic mail and other optional calling services); (iii) a $3.7 million
decrease in the partial recovery of operating costs through revenue sharing
arrangements and return on rate base; and (iv) a $3.4 million decrease in
revenues from the federal Universal Service Fund primarily due to an increase
in
the nationwide average cost per loop factor used by the Federal Communications
Commission to allocate funds among all recipients. We believe that intrastate
minutes will continue to decline, although we cannot precisely estimate the
magnitude of such decreases.
Data
revenues increased $2.6 million (2.9%) in the third quarter of 2006 primarily
due to a $16.2 million increase in DSL-related revenues primarily due to
growth
in the number of DSL customers. Such increase was partially offset by
approximately $11.4 million of prior year revenue settlements recognized
in the
third quarter of 2005.
Fiber
transport and CLEC revenues increased $1.1 million (3.1%) which was primarily
attributable to growth in our incumbent fiber transport business.
Other
revenues increased $6.8 million (14.0%) primarily due to a $3.0 million increase
in revenues of our video and wireless reseller service offerings and a $3.4
million increase (of which $2.8 million related to prior years) in revenues
related to the finalization of certain E-911 contracts.
Operating
Expenses
|
|
Three
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$
|
226,831
|
|
|
222,724
|
|
Selling,
general and administrative
|
|
|
94,212
|
|
|
99,593
|
|
Depreciation
and amortization
|
|
|
129,840
|
|
|
133,526
|
|
|
|
$
|
450,883
|
|
|
455,843
|
|
Cost
of
services and products increased $4.1 million (1.8%) primarily due to (i)
a $3.2
million increase in costs associated with growth in our long distance business;
(ii) a $3.6 million increase in expenses associated with our video and wireless
reseller service offerings; and (iii) $3.1 million of severance and related
costs associated with our workforce reduction. Such increases were partially
offset by a $5.9 million decrease due to expenses incurred in the third quarter
of 2005 as a result of Hurricanes Katrina and Rita.
Selling,
general and administrative expenses decreased $5.4 million (5.4%) primarily
due
to a $5.1 million reduction in bad debt expense and a $3.9 million decrease
in
operating taxes (primarily due to a $2.5 million one-time charge in the third
quarter of 2005). Such decreases were partially offset by a $2.6 million
increase in salaries and benefits.
Depreciation
and amortization decreased $3.7 million (2.8%) primarily due to a $5.3 million
reduction in depreciation expense due to certain assets becoming fully
depreciated and a $1.7 million decrease due to rate reductions in certain
jurisdictions. Such decreases were partially offset by a $3.4 million increase
due to higher levels of plant in service.
Interest
Expense
Interest
expense decreased $2.0 million (4.1%) in the third quarter of 2006 compared
to
the third quarter of 2005. A $3.1 million reduction due to decreased average
debt outstanding was partially offset by a $900,000 increase due to higher
average interest rates.
Income
From Unconsolidated Cellular Entity
Income
from unconsolidated cellular entity, which represents our share of the income
from our 49% interest in a cellular partnership, was $891,000 and $1.3 million
in the third quarter of 2006 and 2005, respectively.
Other
Income (Expense)
Other
income (expense) includes the effects of certain items not directly related
to
our core operations, including interest income and allowance for funds used
during construction. Other income (expense) was $1.9 million income for the
third quarter of 2006 compared to $4.2 million expense for the third quarter
of
2005. The third quarter of 2005 included a $9.9 million pre-tax charge due
to
the impairment of a non-operating investment. The third quarter of 2005 also
included a $3.5 million gain from the sale of a non-operating investment.
Interest income decreased $1.5 million in the third quarter of 2006 compared
to
the third quarter of 2005 due to a decrease in average cash
balances.
Income
Tax Expense
The
effective income tax rate was 38.4% for both the three months ended September
30, 2006 and 2005.
Nine
Months Ended September 30, 2006 Compared
to
Nine Months Ended September 30, 2005
Net
income was $298.3 million and $256.1 million for the first nine months of
2006
and 2005, respectively. Diluted earnings per share for the first nine months
of
2006 and 2005 was $2.45 and $1.91, respectively. Included in net income (and
diluted earnings per share) for the first nine months of 2006 was approximately
$72.4 million ($.59 per share) related to nonrecurring gains, substantially
all
of which related to the redemption of our RTB stock. See Note 11 for additional
information. The decline in the number of average diluted shares outstanding
is
primarily attributable to share repurchases that have occurred since the
beginning of 2005.
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars,
except per share amounts,
and
shares in thousands)
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
492,641
|
|
|
563,984
|
|
Interest
expense
|
|
|
(148,582
|
)
|
|
(152,176
|
)
|
Income
from unconsolidated cellular entity
|
|
|
5,040
|
|
|
3,307
|
|
Other
income (expense)
|
|
|
125,834
|
|
|
(1,459
|
)
|
Income
tax expense
|
|
|
(176,657
|
)
|
|
(157,511
|
)
|
Net
income
|
|
$
|
298,276
|
|
|
256,145
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
2.53
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
2.45
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
117,685
|
|
|
130,877
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
123,348
|
|
|
136,143
|
|
Operating
income decreased $71.3 million (12.6%) due to a $17.9 million (1.0%) decrease
in
operating revenues and a $53.4 million (4.1%) increase in operating expenses.
As
described further below, the first nine months of 2005 included the recognition
of approximately $35.9 million of revenue settlements for prior
periods that will not recur in 2006.
Operating
Revenues
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Voice
|
|
$
|
650,415
|
|
|
672,065
|
|
Network
access
|
|
|
666,652
|
|
|
727,268
|
|
Data
|
|
|
259,158
|
|
|
237,866
|
|
Fiber
transport and CLEC
|
|
|
109,318
|
|
|
78,240
|
|
Other
|
|
|
155,320
|
|
|
143,341
|
|
|
|
$
|
1,840,863
|
|
|
1,858,780
|
|
The
$21.7
million (3.2%) decrease in voice revenues is primarily due to (i) a $16.8
million decrease due to a 4.7% decline in the average number of access lines
(as
adjusted in the manner described below); (ii) a $22.1 million decrease due
to a
decline in the average rate we charged our long distance customers; and (iii)
a
$21.0 million decline as a result of a decrease in minutes of use in extended
area calling plans in certain areas and the effect of rate reductions. Such
decreases were partially offset by (i) a $30.7 million increase in long distance
revenues primarily attributable to an 8.3% increase in the average number
of
long distance lines and increased long distance minutes of use and (ii) a
$6.5
million increase due to providing custom calling features to more
customers.
Excluding
(i) the sale of our Arizona telephone operations in May 2006 and (ii) the
net
impact of removing test lines from our access line counts and a positive
adjustment related to database conversion and clean-up, access lines declined
73,000 (3.3%) during the first nine months of 2006 compared to a decline
of
63,000 (2.7%) during the first nine months of 2005. We believe the decline
in
the number of access lines during 2006 and 2005 is primarily due to the
displacement of traditional wireline telephone services by other competitive
services. Based on current conditions and anticipated competition, we expect
access lines to decline between 4.5% and 5.5% for 2006.
Network
access revenues decreased $60.6 million (8.3%) in the first nine months of
2006
primarily due to (i) a $28.2 million decline attributable to the recognition
of
prior year revenues (of which $24.5 million was recorded in the third quarter
of
2005); (ii) a $10.1 million decrease in revenues from the federal Universal
Service Fund primarily due to an increase in the nationwide average cost
per
loop factor used by the Federal Communications Commission to allocate funds
among all recipients; (iii) an $11.3 million decrease as a result of lower
intrastate access revenues due to a reduction in intrastate minutes (partially
due to the displacement of minutes by wireless, electronic mail and other
optional calling services); and (iv) a $7.0 million decrease in the partial
recovery of operating costs through revenue sharing arrangements and return
on
rate base. We believe that intrastate minutes will continue to decline, although
we cannot precisely estimate the magnitude of such decreases.
Data
revenues increased $21.3 million (9.0%) substantially due to a $37.8 million
increase in DSL-related revenues primarily due to growth in the number of
DSL
customers. Such increase was partially offset by a decrease in prior year
revenue settlements due to the recognition of approximately $11.4 million
of
revenue in the third quarter of 2005 and a $3.9 million decrease due to a
decrease in the number of dial-up Internet customers.
Fiber
transport and CLEC revenues increased $31.1 million (39.7%), of which $25.2
million was due to revenues from the fiber assets acquired on June 30, 2005
from
KMC and $5.7 million was attributable to growth in our incumbent fiber transport
business.
Other
revenues increased $12.0 million (8.4%) primarily due to an $8.5 million
increase in revenues of our video and wireless reseller service offerings
and a
$3.0 million increase attributable to higher directory revenues.
Operating
Expenses
|
|
Nine
months
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$
|
666,249
|
|
|
609,590
|
|
Selling,
general and administrative
|
|
|
285,748
|
|
|
289,053
|
|
Depreciation
and amortization
|
|
|
396,225
|
|
|
396,153
|
|
|
|
$
|
1,348,222
|
|
|
1,294,796
|
|
Included
in aggregate operating expenses is a charge of approximately $9.4 million
(most
of which is reflected in “Cost of services and products”) related to severance
and related costs associated with our March and August 2006 reductions in
workforce. See Note 8 for additional information.
Cost
of
services and products increased $56.7 million (9.3%) primarily due to (i)
a
$19.0 million increase in expenses incurred by the properties acquired from
KMC;
(ii) a $13.7 million increase in costs associated with growth in our long
distance business; (iii) a $10.9 million increase in expenses associated
with
our video and wireless reseller service offerings; (iv) $8.6 million of
severance and related costs associated with our workforce reduction; and
(v) a
$6.2 million increase in Internet expenses primarily due to growth in the
number
of DSL customers.
Selling,
general and administrative expenses decreased $3.3 million (1.1%) primarily
due
to a $7.9 million reduction in bad debt expense; a $6.7 million reduction
in
information technology expenses; and a $5.5 million decrease in operating
taxes.
These decreases were partially offset by a $7.4 million increase in expenses
incurred from the properties acquired from KMC and a $7.4 million increase
in
salaries and benefits.
Depreciation
and amortization increased $72,000 primarily due to a $13.8 million increase
due
to higher levels of plant in service and a $3.0 million increase due to
depreciation and amortization of the properties acquired from KMC. Such
increases were substantially offset by a $15.6 million reduction in depreciation
expense due to certain assets becoming fully depreciated.
Interest
Expense
Interest
expense decreased $3.6 million (2.4%) in the first nine months of 2006 compared
to the first nine months of 2005. An $8.0 million reduction due to decreased
average debt outstanding and the $1.2 million one-time charge incurred in
the
first quarter of 2005 discussed in the next paragraph were partially offset
by a
$6.2 million increase due to higher average interest rates.
In
February 2005, we remarketed substantially all of our $500 million of
outstanding Series J senior notes due 2007 at an interest rate of 4.628%.
In
connection with the remarketing, we purchased and retired approximately $400
million of the notes, resulting in approximately $100 million remaining
outstanding. Included in interest expense for the first quarter of 2005 was
a
one-time charge of $1.2 million related to the write-off of unamortized deferred
debt costs related to the portion of the Series J notes retired. See Other
Income (Expense) for additional amounts that were expensed in the first quarter
of 2005 related to this transaction.
Income
From Unconsolidated Cellular Entity
Income
from unconsolidated cellular entity, which represents our share of the income
from our 49% interest in a cellular partnership, was $5.0 million and $3.3
million in the first nine months of 2006 and 2005, respectively.
Other
Income (Expense)
Other
income (expense) includes the effects of certain items not directly related
to
our core operations, including gains/losses from asset dispositions, interest
income and allowance for funds used during construction. Other income (expense)
was $125.8
million
income for the first nine months of 2006 compared to $1.5 million expense
for
the nine months of 2005. The first nine months of 2006 included nonrecurring
pre-tax gains of approximately $118.6 million, substantially all of which
relates to the redemption of our RTB stock upon dissolution of the RTB. See
Note
11 for additional information. The first nine months of 2005 included a $9.9
million pre-tax charge due to the impairment of a non-operating investment
and a
$4.8 million debt extinguishment expense related to purchasing and retiring
approximately $400 million of Series J senior notes. The first nine months
of
2005 was favorably impacted by (i) $3.2 million of non-recurring interest
income
related to the settlement of various income tax audits and (ii) a $3.5 million
gain from the sale of a non-operating investment.
Income
Tax Expense
The
effective income tax rate was 37.2% and 38.1% for the nine months ended
September 30, 2006 and 2005, respectively. Income tax expense was reduced
by
approximately $6.4 million in the first nine months of 2006 due to the
resolution of various income tax audit issues. Income tax expense for the
first
nine months of 2005 was reduced by approximately $1.3 million as a result
of the
settlement of various income tax audits.
LIQUIDITY
AND CAPITAL RESOURCES
Excluding
cash used for acquisitions, we rely on cash provided by operations to fund
our
operating and capital expenditures. Our operations have historically provided
a
stable source of cash flow which has helped us continue our long-term program
of
capital improvements.
Net
cash
provided by operating activities was $622.5 million during the first nine
months
of 2006 compared to $733.4 million during the first nine months of 2005.
Our
accompanying consolidated statements of cash flows identify major differences
between net income and net cash provided by operating activities for each
of
these periods. As relief from the effects of Hurricane Katrina, certain of
our
affected subsidiaries were granted a deferral from making their remaining
2005
estimated federal income and excise tax payments until 2006. In the first
nine
months of 2006, we made payments of approximately $75 million to satisfy
our
remaining 2005 estimated payments. For additional information relating to
our
operations, see Results of Operations.
Net
cash
used in investing activities was $91.4 million and $352.1 million for the
nine
months ended September 30, 2006 and 2005, respectively. Payments for property,
plant and equipment were $68.9 million less in the first nine months of 2006
than in the comparable period during 2005. Our budgeted capital expenditures
for
2006 total approximately $325 million. We received approximately $122.8 million
from the redemption of our RTB stock upon dissolution of the RTB during 2006.
See Note 11 for additional information. We paid approximately $75.4 million
cash
in 2005 to acquire certain fiber assets in 16 markets from KMC.
Net
cash
used in financing activities was $657.2 million during the first nine months
of
2006 compared to $280.0 million during the first nine months of 2005. We
repurchased 18.2 million shares (for $669.9 million) and 16.4 million shares
(for $530.7 million) in the first nine months of 2006 and 2005, respectively,
substantially all of which was repurchased in accordance with previously
announced stock repurchase programs. The 2006 repurchases include 14.36 million
shares repurchased (for a total price of approximately $528.4 million) under
accelerated share repurchase agreements with investment banks (see Note 7
for
additional information). We initially funded purchases under these agreements
principally through borrowings under our $750 million credit facility and
cash
on hand and subsequently refinanced the credit facility borrowings through
the
issuance of short-term commercial paper, which as of September 30, 2006,
had
been repaid in full.
In
the
first quarter of 2005, we paid $100 million to retire our Series E senior
notes
at their scheduled maturity with cash on hand.
In
February 2005, we remarketed substantially all of our $500 million of
outstanding Series J senior notes due 2007 at an interest rate of 4.628%.
We
received no proceeds in connection with the remarketing as all proceeds were
placed into a trust to secure the obligation of our equity unit holders to
purchase common stock from us on May 16, 2005. In connection with the
remarketing, we purchased and retired approximately $400 million of the notes,
resulting in approximately $100 million remaining outstanding. We incurred
a
pre-tax charge of approximately $6 million in the first quarter of 2005 related
to purchasing and retiring the notes. Proceeds to purchase such notes came
from
the February 2005 issuance of $350 million of 5% senior notes, Series M,
due
2015 and cash on hand.
On
May
16, 2005, upon settlement of 15.9 million of our outstanding equity units,
we
received proceeds of approximately $398.2 million and issued approximately
12.9
million common shares. In late May 2005, we entered into accelerated share
repurchase agreements with investment banks whereby we repurchased and retired
12.9 million shares of common stock for an initial aggregate price of $416.5
million, the proceeds of which came from the settlement of the equity units
mentioned above and cash on hand.
We
have
available a five-year, $750 million revolving credit facility which expires
in
March 2010. Up to $150 million of the credit facility can be used for letters
of
credit, which reduces the amount available for other extensions of credit.
Available borrowings under our credit facility are also effectively reduced
by
any outstanding borrowings under our commercial paper program. Our commercial
paper program borrowings in turn are effectively limited to the total amount
available under our credit facility. As of September 30, 2006, we had no
outstanding indebtedness under our credit facility or commercial paper program.
In
May
2006, Standard & Poor’s downgraded our long-term debt rating from BBB+ to
BBB with a negative outlook, citing the continued loss of access
lines.
In
July
2006, we paid a deposit of approximately $59 million in order to participate
in
the Advanced Wireless Services (“AWS”) spectrum auction. We were successful in
obtaining spectrum in six markets for an aggregate of $468,000. Upon completion
of the auction in September 2006, we received approximately $58.5 million
cash
as reimbursement from our initial deposit.
OTHER
MATTERS
Accounting
for the Effects of Regulation
We
currently account for our regulated telephone operations (except for the
properties acquired from Verizon in 2002) in accordance with the provisions
of
Statement of Financial Accounting Standards No. 71, “Accounting for the Effects
of Certain Types of Regulation” (“SFAS 71”). While we continuously monitor the
ongoing applicability of SFAS 71 to our regulated telephone operations due
to
the changing regulatory, competitive and legislative environments, we believe
that SFAS 71 still applies. However, it is possible that changes in regulation
or legislation or anticipated changes in competition or in the demand for
regulated services or products could result in our telephone operations not
being subject to SFAS 71 in the future. In that event, implementation of
Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71," would require the write-off of previously established regulatory
assets
and liabilities. SFAS 101 further provides that the carrying amounts of
property, plant and equipment are to be adjusted only to the extent the assets
are impaired and that impairment shall be judged in the same manner as for
nonregulated enterprises.
If
our
regulated operations cease to qualify for the application of SFAS 71, we
do not
expect to record an impairment charge related to the carrying value of the
property, plant and equipment of our regulated telephone operations.
Additionally, upon the discontinuance of SFAS 71, we would be required to
revise
the lives of our property, plant and equipment to reflect the estimated useful
lives of the assets. We do not expect such revisions in asset lives, or the
elimination of other regulatory assets and liabilities, to have a material
unfavorable impact on our results of operations. For regulatory purposes,
the
accounting and reporting of our telephone subsidiaries would not be affected
by
the discontinued application of SFAS 71.
Recent
Product Developments
During
2005, we began offering co-branded satellite television service to virtually
all
households in our local exchange service areas, except for the LaCrosse,
Wisconsin market, where we initiated our switched digital television service.
We
continue to monitor the results from this initial launch of switched digital
television service and currently plan to initiate a second switched digital
video trial in early 2007. In mid-2005, we began reselling wireless services
and, by the end of September 2006, we offered wireless service though this
reselling arrangement to markets serving approximately 30% of our residential
access lines.
CenturyTel,
Inc.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES
ABOUT MARKET RISK
We
are
exposed to market risk from changes in interest rates on our long-term debt
obligations. We have estimated our market risk using sensitivity analysis.
Market risk is defined as the potential change in the fair value of a fixed-rate
debt obligation due to a hypothetical adverse change in interest rates. Fair
value on long-term debt obligations is determined based on a discounted cash
flow analysis, using the rates and maturities of these obligations compared
to
terms and rates currently available in the long-term financing markets. The
results of the sensitivity analysis used to estimate market risk are presented
below, although the actual results may differ from these estimates.
At
September 30, 2006, the fair value of our long-term debt was estimated to
be
$2.6 billion based on the overall weighted average rate of our debt of 6.8%
and
an overall weighted maturity of 9 years compared to terms and rates currently
available in long-term financing markets. Market risk is estimated as the
potential decrease in fair value of our long-term debt resulting from a
hypothetical increase of 68 basis points in interest rates (ten percent of
our
overall weighted average borrowing rate). Such an increase in interest rates
would result in approximately a $102.1 million decrease in fair value of
our
long-term debt at September 30, 2006. As of September 30, 2006, after giving
effect to interest rate swaps currently in place, approximately 81% of our
long-term debt obligations were fixed rate.
We
seek
to maintain a favorable mix of fixed and variable rate debt in an effort
to
limit interest costs and cash flow volatility resulting from changes in rates.
From time to time, we use derivative instruments to (i) lock-in or swap our
exposure to changing or variable interest rates for fixed interest rates
or (ii)
to swap obligations to pay fixed interest rates for variable interest rates.
We
have established policies and procedures for risk assessment and the approval,
reporting and monitoring of derivative instrument activities. We do not hold
or
issue derivative financial instruments for trading or speculative purposes.
Management periodically reviews our exposure to interest rate fluctuations
and
implements strategies to manage the exposure.
At
September 30, 2006, we had outstanding four fair value interest rate hedges
associated with the full $500 million aggregate principal amount of our Series
L
senior notes, due 2012, that pay interest at a fixed rate of 7.875%. These
hedges are “fixed to variable” interest rate swaps that effectively convert our
fixed rate interest payment obligations under these notes into obligations
to
pay variable rates that range from the six-month London InterBank Offered
Rate
(“LIBOR”) plus 3.229% to the six-month LIBOR plus 3.67%, with settlement and
rate reset dates occurring each six months through the expiration of the
hedges
in August 2012. During the first nine months of 2006, we realized an average
interest rate under these hedges of 9.02%. Interest expense was increased
by
$4.3 million during the first nine months of 2006 as a result of these hedges.
The aggregate fair market value of these hedges was $19.6 million at September
30, 2006 and is reflected both as a liability and as a decrease in our
underlying long-term debt on the September 30, 2006 balance sheet. With respect
to each of these hedges, market risk is estimated as the potential change
in the
fair value of the hedge resulting from a hypothetical 10% increase in the
forward rates used to determine the fair value. A hypothetical 10% increase
in
the forward rates would result in a $13.1 million decrease in the fair value
of
these hedges at September 30, 2006, and would also increase our interest
expense.
Certain
shortcomings are inherent in the method of analysis presented in the computation
of fair value of financial instruments. Actual values may differ from those
presented if market conditions vary from assumptions used in the fair value
calculations. The analysis above incorporates only those risk exposures that
existed as of September 30, 2006.
CenturyTel,
Inc.
CONTROLS
AND PROCEDURES
We
maintain disclosure controls and procedures designed to provide reasonable
assurances that information required to be disclosed by us in the reports
we
file under the Securities Exchange Act of 1934 is timely recorded, processed,
summarized and reported as required. Our Chief Executive Officer, Glen F.
Post,
III, and our Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated
our
disclosure controls and procedures as of September 30, 2006. Based on the
evaluation, Messrs. Post and Ewing concluded that our disclosure controls
and
procedures have been effective in providing reasonable assurance that they
have
been timely alerted of material information required to be filed in this
quarterly report. Since the date of Messrs. Post’s and Ewing’s most recent
evaluation, there have been no significant changes in our internal controls
or
in other factors that could significantly affect these controls. The design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events and contingencies, and there can be no assurance
that any design will succeed in achieving its stated goals. Because of inherent
limitations in any control system, misstatements due to error or fraud could
occur and not be detected.
PART
II. OTHER INFORMATION
CenturyTel,
Inc.
See
Note
9 included in Part I, Item 1, of this report.
We
expect
that changes in the nationwide average cost per loop factors implemented
in
March 2006 by the FCC to allocate support funds will reduce our receipts
from
the main support program administered by the federal Universal Service Fund
by
approximately $12 million to $16 million in 2006 compared to 2005.
The
statement above updates and supercedes the disclosure of risk factors contained
in Item 1A of our annual report on Form 10-K for the year ended December
31,
2005. Except as modified by the superceding statement above, we continue
to
remain subject to the risks described in such annual report.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
In
February 2006, our Board of Directors authorized a $1.0 billion share repurchase
program under which, in February 2006, we repurchased $500 million (or
approximately 14.36 million shares) of our common stock under accelerated
share
repurchase agreements with certain investment banks at an initial average
price
of $34.83. The investment banks completed their repurchases in mid-July 2006
and
in connection therewith we paid an aggregate of approximately $28.4 million
cash
to the investment banks since their weighted average purchase price during
the
repurchase period ($37.10) was higher than the initial average price.
In
August
2006, we began repurchasing our common stock in open-market transactions
under
the remaining $500 million of our $1.0 billion program. The following table
reflects our repurchases of common stock during the third quarter of
2006.
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Per
Share
|
|
Total
Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
|
Approximate
Dollar
Value
of
Shares (or
Units)
that
May
Yet Be
Purchased
Under
the Plans
or
Programs*
|
|
|
|
|
|
|
|
|
|
|
|
July
1 - July 31, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
500,000,000
|
|
August
1 - August 31, 2006
|
|
|
873,285
|
|
$
|
39.30
|
|
|
873,285
|
|
$
|
465,681,862
|
|
Sept.
1 - Sept. 30, 2006
|
|
|
837,869
|
|
$
|
39.68
|
|
|
837,869
|
|
$
|
432,435,308
|
|
Total
|
|
|
1,711,154
|
|
$
|
39.48
|
|
|
1,711,154
|
|
$
|
432,435,308
|
|
______________
*Authority
to purchase under this program runs through June 30, 2007.
|
Exhibits
and Reports on Form 8-K
|
|
|
Computations
of Earnings Per Share.
|
|
|
Registrant’s
Chief Executive Officer certification pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
|
|
Registrant’s
Chief Financial Officer certification pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
|
|
Registrant’s
Chief Executive Officer and Chief Financial Officer certification
pursuant
to Section
906 of the Sarbanes-Oxley Act of
2002.
|
The
following item was reported in the Form 8-K filed July 21, 2006:
Item
8.01
and 9.01 - Other Events and Financial Statements and Exhibits. Completion
of our
accelerated share repurchase program and intentions regarding the upcoming
AWS
auction.
The
following items were reported in the Form 8-K filed July 27, 2006:
Items
2.02 and 9.01 - Results of Operations and Financial Condition and Financial
Statements and Exhibits. News release announcing second quarter 2006 operating
results.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CenturyTel,
Inc.
|
|
|
|
|
|
|
Date:
November 8, 2006
|
/s/
Neil A. Sweasy
|
|
|
Neil
A. Sweasy
|
|
Vice
President and Controller
|
|
(Principal
Accounting Officer)
|
27