2nd Qtr 10-Q
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 June 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 July 31, 2006, there were 116,409,896 shares of common stock
outstanding.
TABLE
OF
CONTENTS
|
|
Page
No.
|
|
|
|
Part
I.
|
Financial
Information:
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Statements of Income--Three Months and Six
|
|
|
Months Ended June 30, 2006 and 2005
|
3
|
|
|
|
|
Consolidated
Statements of Comprehensive Income--
|
|
|
Three Months and Six Months Ended June 30, 2006 and 2005
|
4
|
|
|
|
|
Consolidated
Balance Sheets--June 30, 2006 and December
31, 2005
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows-- Six
Months Ended June 30, 2006 and 2005
|
6
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity--Six
Months Ended June 30, 2006 and 2005
|
7
|
|
|
|
|
Notes
to Consolidated Financial Statements*
|
8-13
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
and Results of Operations
|
14-22
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
|
|
|
Item
4.
|
Controls
and Procedures
|
24
|
|
|
|
Part
II.
|
Other
Information:
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
25
|
|
|
|
Item 1A.
|
Risk
Factors
|
25
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
25
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
25-26
|
|
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
26
|
|
|
|
Signature
|
|
26
|
____________
*
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
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars,
except per share amounts, and
shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$
|
609,131
|
|
|
606,413
|
|
|
1,220,780
|
|
|
1,201,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation
and amortization)
|
|
|
216,466
|
|
|
194,873
|
|
|
439,418
|
|
|
386,866
|
|
Selling,
general and administrative
|
|
|
95,596
|
|
|
95,206
|
|
|
191,536
|
|
|
189,460
|
|
Depreciation
and amortization
|
|
|
131,820
|
|
|
130,452
|
|
|
266,385
|
|
|
262,627
|
|
Total
operating expenses
|
|
|
443,882
|
|
|
420,531
|
|
|
897,339
|
|
|
838,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
165,249
|
|
|
185,882
|
|
|
323,441
|
|
|
362,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(50,639
|
)
|
|
(49,647
|
)
|
|
(100,725
|
)
|
|
(102,272
|
)
|
Income
from unconsolidated cellular entity
|
|
|
2,076
|
|
|
724
|
|
|
4,149
|
|
|
2,037
|
|
Nonrecurring
gains
|
|
|
118,649
|
|
|
-
|
|
|
118,649
|
|
|
-
|
|
Other
income (expense)
|
|
|
2,734
|
|
|
1,220
|
|
|
5,258
|
|
|
2,755
|
|
Total
other income (expense)
|
|
|
72,820
|
|
|
(47,703
|
)
|
|
27,331
|
|
|
(97,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
238,069
|
|
|
138,179
|
|
|
350,772
|
|
|
265,262
|
|
Income
tax expense
|
|
|
85,701
|
|
|
53,061
|
|
|
128,979
|
|
|
100,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
152,368
|
|
|
85,118
|
|
|
221,793
|
|
|
164,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$
|
1.32
|
|
|
.65
|
|
|
1.86
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$
|
1.26
|
|
|
.64
|
|
|
1.80
|
|
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
|
$
|
.0625
|
|
|
.06
|
|
|
.125
|
|
|
.12
|
|
AVERAGE
BASIC SHARES OUTSTANDING
|
|
|
115,441
|
|
|
130,299
|
|
|
118,917
|
|
|
131,241
|
|
AVERAGE
DILUTED SHARES OUTSTANDING
|
|
|
121,636
|
|
|
135,345
|
|
|
124,798
|
|
|
136,257
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
152,368
|
|
|
85,118
|
|
|
221,793
|
|
|
164,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME, NET
OF TAX:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of $799, $194, ($25) and ($76) tax
|
|
|
1,282
|
|
|
310
|
|
|
(41
|
)
|
|
(122
|
)
|
Unrealized
gain (loss) on investments, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($133), $198, ($92) and $122 tax
|
|
|
(213
|
)
|
|
316
|
|
|
(148
|
)
|
|
196
|
|
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, $66,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$117 and $85 tax
|
|
|
94
|
|
|
106
|
|
|
188
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
153,531
|
|
|
85,850
|
|
|
221,792
|
|
|
160,764
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
June
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,769
|
|
|
158,846
|
|
Accounts
receivable, less allowance of $20,441 and $21,721
|
|
|
214,989
|
|
|
236,714
|
|
Materials
and supplies, at average cost
|
|
|
6,389
|
|
|
6,998
|
|
Other
|
|
|
17,105
|
|
|
20,458
|
|
Total
current assets
|
|
|
240,252
|
|
|
423,016
|
|
|
|
|
|
|
|
|
|
NET
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
7,844,529
|
|
|
7,801,377
|
|
Accumulated
depreciation
|
|
|
(4,672,522
|
)
|
|
(4,496,891
|
)
|
Net
property, plant and equipment
|
|
|
3,172,007
|
|
|
3,304,486
|
|
|
|
|
|
|
|
|
|
GOODWILL
AND OTHER ASSETS
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,431,136
|
|
|
3,432,649
|
|
Other
|
|
|
590,589
|
|
|
602,556
|
|
Total
goodwill and other assets
|
|
|
4,021,725
|
|
|
4,035,205
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,433,984
|
|
|
7,762,707
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
381,455
|
|
|
276,736
|
|
Accounts
payable
|
|
|
101,891
|
|
|
104,444
|
|
Accrued
expenses and other liabilities
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
59,057
|
|
|
60,521
|
|
Income
taxes
|
|
|
79,625
|
|
|
110,521
|
|
Other
taxes
|
|
|
56,496
|
|
|
58,660
|
|
Interest
|
|
|
74,738
|
|
|
71,580
|
|
Other
|
|
|
15,547
|
|
|
14,851
|
|
Advance
billings and customer deposits
|
|
|
51,287
|
|
|
48,917
|
|
Total
current liabilities
|
|
|
820,096
|
|
|
746,230
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
2,239,263
|
|
|
2,376,070
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
|
|
1,073,065
|
|
|
1,023,134
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value, authorized 350,000,000 shares,
|
|
|
|
|
|
|
|
issued
and outstanding 116,300,908 and 131,074,399 shares
|
|
|
116,301
|
|
|
131,074
|
|
Paid-in
capital
|
|
|
107,927
|
|
|
129,806
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(9,620
|
)
|
|
(9,619
|
)
|
Retained
earnings
|
|
|
3,079,291
|
|
|
3,358,162
|
|
Preferred
stock - non-redeemable
|
|
|
7,661
|
|
|
7,850
|
|
Total
stockholders’ equity
|
|
|
3,301,560
|
|
|
3,617,273
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
7,433,984
|
|
|
7,762,707
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
221,793
|
|
|
164,734
|
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
266,385 |
|
|
262,627 |
|
Nonrecurring
gains
|
|
|
(118,649
|
)
|
|
-
|
|
Income
from unconsolidated cellular entity
|
|
|
(4,149
|
)
|
|
(2,037
|
)
|
Deferred
income taxes
|
|
|
22,352
|
|
|
25,947
|
|
Changes
in current assets and current liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
21,641
|
|
|
7,860
|
|
Accounts
payable
|
|
|
(2,553
|
)
|
|
(236
|
)
|
Accrued
income and other taxes
|
|
|
(28,113
|
)
|
|
12,184
|
|
Other
current assets and other current liabilities, net
|
|
|
8,719
|
|
|
(854
|
)
|
Retirement
benefits
|
|
|
14,926
|
|
|
12,517
|
|
Excess
tax benefits from share-based compensation
|
|
|
(4,947
|
)
|
|
-
|
|
(Increase)
decrease in other noncurrent assets
|
|
|
969
|
|
|
(1,477
|
)
|
Increase
(decrease) in other noncurrent liabilities
|
|
|
1,550
|
|
|
(584
|
)
|
Other,
net
|
|
|
6,393
|
|
|
(1,768
|
)
|
Net
cash provided by operating activities
|
|
|
406,317
|
|
|
478,913
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Payments
for property, plant and equipment
|
|
|
(130,455
|
)
|
|
(176,914
|
)
|
Proceeds
from redemption of Rural Telephone Bank stock
|
|
|
122,819
|
|
|
-
|
|
Proceeds
from sale of assets
|
|
|
5,865
|
|
|
-
|
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
(73,152
|
)
|
Distributions
from unconsolidated cellular entity
|
|
|
-
|
|
|
2,339
|
|
Investment
in unconsolidated cellular entity
|
|
|
(5,222
|
)
|
|
-
|
|
Other,
net
|
|
|
(1,296
|
)
|
|
(2,955
|
)
|
Net
cash used in investing activities
|
|
|
(8,289
|
)
|
|
(250,682
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Payments
of debt
|
|
|
(12,559
|
)
|
|
(511,625
|
)
|
Net
proceeds from issuance of long-term debt
|
|
|
-
|
|
|
344,173
|
|
Proceeds
from issuance of common stock
|
|
|
41,206
|
|
|
20,457
|
|
Repurchase
of common stock
|
|
|
(573,888
|
)
|
|
(530,700
|
)
|
Settlement
of equity units
|
|
|
-
|
|
|
398,164
|
|
Cash
dividends
|
|
|
(14,661
|
)
|
|
(15,956
|
)
|
Excess
tax benefits from share-based compensation
|
|
|
4,947
|
|
|
-
|
|
Other,
net
|
|
|
(150
|
)
|
|
503
|
|
Net
cash used in financing activities
|
|
|
(555,105
|
)
|
|
(294,984
|
)
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(157,077
|
)
|
|
(66,753
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
158,846
|
|
|
167,215
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,769
|
|
|
100,462
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
132,666
|
|
|
87,013
|
|
Interest
paid (net of capitalized interest of $1,005 and $1,281)
|
|
$
|
96,562
|
|
|
96,347
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
Six
months
|
|
|
|
ended
June 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
|
|
|
1,740
|
|
|
1,061
|
|
Issuance
of common stock upon settlement of equity units
|
|
|
-
|
|
|
12,881
|
|
Repurchase
of common stock
|
|
|
(16,523
|
)
|
|
(16,409
|
)
|
Conversion
of preferred stock into common stock
|
|
|
10
|
|
|
-
|
|
Balance
at end of period
|
|
|
116,301
|
|
|
129,907
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
129,806
|
|
|
222,205
|
|
Issuance
of common stock through dividend
reinvestment, incentive and benefit plans
|
|
|
39,466
|
|
|
19,396
|
|
Issuance
of common stock upon settlement of equity units
|
|
|
-
|
|
|
385,283
|
|
Repurchase
of common stock
|
|
|
(71,362
|
)
|
|
(514,291
|
)
|
Conversion
of preferred stock into common stock
|
|
|
179
|
|
|
-
|
|
Excess
tax benefits from share-based compensation
|
|
|
4,947
|
|
|
-
|
|
Amortization
of unearned compensation and other
|
|
|
4,891
|
|
|
613
|
|
Balance
at end of period
|
|
|
107,927
|
|
|
113,206
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(9,619
|
)
|
|
(8,334
|
)
|
Change
in other comprehensive loss, net of tax
|
|
|
(1
|
)
|
|
(3,970
|
)
|
Balance
at end of period
|
|
|
(9,620
|
)
|
|
(12,304
|
)
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
3,358,162
|
|
|
3,055,545
|
|
Net
income
|
|
|
221,793
|
|
|
164,734
|
|
Repurchase
of common stock (through 2006 accelerated share repurchase
program)
|
|
|
(486,003
|
)
|
|
-
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
Common
stock - $.125 and $.12 per share, respectively
|
|
|
(14,467
|
)
|
|
(15,757
|
)
|
Preferred
stock
|
|
|
(194
|
)
|
|
(199
|
)
|
Balance
at end of period
|
|
|
3,079,291
|
|
|
3,204,323
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - NON-REDEEMABLE
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
7,850
|
|
|
7,975
|
|
Conversion
of preferred stock into common stock
|
|
|
(189
|
)
|
|
-
|
|
Balance
at end of period
|
|
|
7,661
|
|
|
7,975
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
$
|
3,301,560
|
|
|
3,443,107
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE
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 six months ended June 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 six-month periods
have
been included therein. The results of operations for the first six 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 June 30, 2006 and December 31, 2005 were
composed of the following:
|
|
June
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
|
|
|
(6,186
|
)
|
|
(5,349
|
)
|
Net
carrying amount
|
|
$
|
18,908
|
|
|
19,745
|
|
|
|
|
|
|
|
|
|
Contract
rights
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
4,187
|
|
|
4,187
|
|
Accumulated
amortization
|
|
|
(2,559
|
)
|
|
(1,861
|
)
|
Net
carrying amount
|
|
$
|
1,628
|
|
|
2,326
|
|
|
|
|
|
|
|
|
|
Intangible
asset not subject to amortization
|
|
$
|
36,690
|
|
|
36,690
|
|
Goodwill
decreased due to the sale of our Arizona telephone properties in May 2006
(see
Note 10 for additional information).
Total
amortization expense related to the intangible assets subject to amortization
for the first six months of 2006 was $1.5 million and is expected to be $3.1
million annually in 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 six months
ended
June 30, 2006 and 2005 included the following components:
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,783
|
|
|
1,480
|
|
|
3,491
|
|
|
3,145
|
|
Interest
cost
|
|
|
4,846
|
|
|
4,130
|
|
|
9,490
|
|
|
8,359
|
|
Expected
return on plan assets
|
|
|
(623
|
)
|
|
(643
|
)
|
|
(1,219
|
)
|
|
(1,220
|
)
|
Amortization
of unrecognized actuarial loss
|
|
|
950
|
|
|
769
|
|
|
1,860
|
|
|
1,458
|
|
Amortization
of unrecognized prior service cost
|
|
|
(221
|
)
|
|
(451
|
)
|
|
(433
|
)
|
|
(938
|
)
|
Net
periodic postretirement benefit cost
|
|
$
|
6,735
|
|
|
5,285
|
|
|
13,189
|
|
|
10,804
|
|
We
contributed $6.4 million to our postretirement health care plan in the first
six
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 six months ended June
30, 2006
and 2005 included the following components:
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4,220
|
|
|
3,804
|
|
|
8,483
|
|
|
7,679
|
|
Interest
cost
|
|
|
6,160
|
|
|
6,200
|
|
|
12,377
|
|
|
12,012
|
|
Expected
return on plan assets
|
|
|
(8,183
|
)
|
|
(7,357
|
)
|
|
(16,367
|
)
|
|
(14,613
|
)
|
Recognized
net losses
|
|
|
1,962
|
|
|
1,816
|
|
|
3,840
|
|
|
3,133
|
|
Net
amortization and deferral
|
|
|
(123
|
)
|
|
89
|
|
|
6
|
|
|
167
|
|
Net
periodic pension expense
|
|
$
|
4,036
|
|
|
4,552
|
|
|
8,339
|
|
|
8,378
|
|
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.
At
this time, the amount of the 2006 contribution is not known.
(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
the
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 June 30, 2006, we had reserved approximately
9.4
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 at a price 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 six months of 2006, certain of our employees were granted an aggregate
of
960,375 stock options 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
$12.75 using a Black-Scholes option pricing model using the following
assumptions: dividend yield - .7%; expected volatility - 30%; weighted
average
risk free interest rate - 4.64% (rates ranged from 4.28% to 5.04%); and
expected
term - 7 years (executive officers) and 5 years (all other employees).
In
the first six
months of 2005, certain of our employees were granted an aggregate of
907,925
stock options at market value. The weighted average fair value of each
option
was estimated as of the date of grant to be $12.65 using a Black-Scholes
option
pricing model using the following assumptions: dividend yield - .7%;
expected
volatility - 30%; weighted average risk free interest rate - 4.18% (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 six months of 2006 were as
follows:
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Number
|
|
Average
|
|
contractual
|
|
intrinsic
|
|
|
|
of
options
|
|
price
|
|
term
(in years)
|
|
value
|
|
Outstanding
December 31, 2005
|
|
|
5,995,458
|
|
$
|
30.63
|
|
|
|
|
|
|
|
Granted
|
|
|
960,375
|
|
|
35.82
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,305,115
|
)
|
|
27.94
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(14,720
|
)
|
|
35.75
|
|
|
|
|
|
|
|
Outstanding
June 30, 2006
|
|
|
5,635,998
|
|
$
|
32.13
|
|
|
6.5
|
|
$
|
28,317,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
June 30, 2006
|
|
|
4,687,173
|
|
$
|
31.38
|
|
|
5.9
|
|
$
|
27,052,000
|
|
In
addition, during the first six 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 six 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 six months of 2006 were as
follows:
|
|
Number
|
|
Average
grant
|
|
|
|
of
shares
|
|
date
fair value
|
|
Nonvested
at January 1, 2006
|
|
|
511,919
|
|
$
|
30.92
|
|
Granted
|
|
|
293,943
|
|
|
36.02
|
|
Vested
|
|
|
(73,302
|
)
|
|
32.88
|
|
Forfeited
|
|
|
(714
|
)
|
|
32.54
|
|
Nonvested
at June 30, 2006
|
|
|
731,846
|
|
$
|
32.77
|
|
The
total
compensation cost for share-based payment arrangements for the first
six months
of 2006 was $6.0 million ($3.8 million after-tax; $.03 per diluted share).
We
recognized approximately $2.2 million of tax benefit related to such
arrangements in the first half of 2006. As of June 30, 2006, there was
$27.3
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 3.5 years.
We
received net cash proceeds of $36.5 million during the first six 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 $12.6
million during the first six months of 2006 and $5.4 million during the
first
six months of 2005. The excess tax benefit realized from stock options
exercised
and restricted stock released during the first six months of 2006 was
$4.9
million. The total fair value of restricted stock that vested during
the first
half of 2006 was $2.4 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 six months ended
June 30,
2005 would have been as follows:
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
|
|
ended
|
|
|
|
June
30, 2005
|
|
June
30, 2005
|
|
|
|
(Dollars
in thousands, except
per share amounts)
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
85,118
|
|
|
164,734
|
|
Less:
Total stock-based employee compensation expense
determined
under fair value based method, net of tax
|
|
|
(1,685
|
)
|
|
(5,903
|
)
|
Pro
forma net income
|
|
$
|
83,433
|
|
|
158,831
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.65
|
|
|
1.25
|
|
Pro
forma
|
|
$
|
.64
|
|
|
1.21
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
.64
|
|
|
1.23
|
|
Pro
forma
|
|
$
|
.63
|
|
|
1.18
|
|
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
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$
|
216,786
|
|
|
221,708
|
|
|
434,235
|
|
|
446,208
|
|
Network
access
|
|
|
221,586
|
|
|
239,404
|
|
|
446,832
|
|
|
469,682
|
|
Data
|
|
|
84,447
|
|
|
76,049
|
|
|
167,685
|
|
|
148,955
|
|
Fiber
transport and CLEC
|
|
|
36,051
|
|
|
21,636
|
|
|
71,831
|
|
|
41,879
|
|
Other
|
|
|
50,261
|
|
|
47,616
|
|
|
100,197
|
|
|
94,971
|
|
Total
operating revenues
|
|
$
|
609,131
|
|
|
606,413
|
|
|
1,220,780
|
|
|
1,201,695
|
|
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 new 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. We used cash generated from
operations during 2006 and the proceeds received from the redemption
of our
investment in stock of the Rural Telephone Bank (see Note 10) to reduce
indebtedness during the second quarter of 2006.
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 will
reflect such settlement amount as an adjustment to equity 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 at June 30, 2006 was included
in the
weighted average shares outstanding for the computation of diluted earnings
per
share for the periods ended June 30, 2006.
(8)
|
Reduction
in Workforce
|
On
March
1, 2006, we announced a reduction of our workforce of approximately 275
jobs, or
4% of our workforce, primarily due to increased competitive pressures
and the
loss of access lines over the last several years. We incurred a one-time
net
pre-tax charge of approximately $4.9 million in the first quarter of
2006
(consisting of a $6.2 million charge to operating expenses, net of a
$1.3
million favorable revenue impact related to such expenses) in connection
with
the severance and related costs. Of the $6.2 million charged to operating
expenses, approximately $5.5 million was reflected in cost of services
and
products and $682,000 was reflected in selling, general and administrative
expenses. The following table reflects additional information regarding
the
severance-related liability for the first six months of 2006 (in
thousands):
Balance
at December 31, 2005
|
|
$
|
-
|
|
Amount
accrued to expense
|
|
|
6,176
|
|
Amount
paid
|
|
|
(5,638
|
)
|
Balance
at June 30, 2006
|
|
$
|
538
|
|
(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 money 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 those
tariffs
that have not yet been “deemed lawful,” 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 more certain.
As of
June 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. We will
continue to monitor the legal status of any proceedings that could
impact our
entitlement to these funds.
As
discussed below in Note 10, we received approximately $122.8 million
in cash
from the dissolution of the Rural Telephone Bank (“RTB”). Some portion of these
proceeds, while not estimable at this time, may be subject to review
by
regulatory authorities who may require us to record a portion thereof
as a
regulatory liability.
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.
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. We used the cash to reduce our indebtedness.
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.
Item
2.
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 six
months
ended June 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
new
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 one-time
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
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.
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
term
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 June 30, 2006 Compared
to
Three Months Ended June 30, 2005
Net
income was $152.4 million and $85.1 million for the second quarter of 2006
and
2005, respectively. Diluted earnings per share for the second quarter of
2006
and 2005 was $1.26 and $.64, respectively. Included in net income (and diluted
earnings per share) for the second quarter 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 10 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.
|
|
Three
months
|
|
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
165,249
|
|
|
185,882
|
|
Interest
expense
|
|
|
(50,639
|
)
|
|
(49,647
|
)
|
Income
from unconsolidated cellular entity
|
|
|
2,076
|
|
|
724
|
|
Nonrecurring
gains
|
|
|
118,649
|
|
|
-
|
|
Other
income (expense)
|
|
|
2,734
|
|
|
1,220
|
|
Income
tax expense
|
|
|
(85,701
|
)
|
|
(53,061
|
)
|
Net
income
|
|
$
|
152,368
|
|
|
85,118
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.32
|
|
|
.65
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.26
|
|
|
.64
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
115,441
|
|
|
130,299
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
121,636
|
|
|
135,345
|
|
Operating
income decreased $20.6 million (11.1%) as a $2.7 million (.4%) increase in
operating revenues was more than offset by a $23.4 million (5.6%) increase
in
operating expenses.
Operating
Revenues
|
|
Three
months
|
|
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Voice
|
|
$
|
216,786
|
|
|
221,708
|
|
Network
access
|
|
|
221,586
|
|
|
239,404
|
|
Data
|
|
|
84,447
|
|
|
76,049
|
|
Fiber
transport and CLEC
|
|
|
36,051
|
|
|
21,636
|
|
Other
|
|
|
50,261
|
|
|
47,616
|
|
|
|
$
|
609,131
|
|
|
606,413
|
|
The
$4.9
million (2.2%) decrease in voice revenues is primarily due to (i) a $5.7
million
decrease due to a 4.7% decline in the average number of access lines served
by
us during the second quarter of 2006 compared to the second quarter of 2005;
(ii) a $7.0 million decrease due to a decline in the average rate we charged
our
long distance customers; and (iii) a $4.7 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 an
$11.5
million increase in long distance revenues primarily attributable to an 8.7%
increase in the average number of long distance lines served and increased
long
distance minutes of use.
Excluding
the sale of our Arizona telephone properties in May 2006, access lines declined
21,500 (1.0%) during the second quarter of 2006 compared to a decline of
25,200
(1.1%) during the second 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 $17.8 million (7.4%) in the second quarter of 2006
primarily due to (i) a $6.5 million decline attributable to the recognition
of
prior year revenues in the second quarter of 2005; (ii) a $4.9
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;
and
(iii) a $3.3 million decrease as a result of lower intrastate revenues due
to a
reduction in intrastate minutes (partially due to the displacement of minutes
by
wireless, electronic mail and other optional calling services). We believe
that
intrastate minutes will continue to decline in 2006, although we cannot
precisely estimate the magnitude of such decreases.
Data
revenues increased $8.4 million (11.0%) substantially due to a $9.2 million
increase in Internet revenues due primarily to growth in the number of DSL
customers, partially offset by a decrease in the number of dial-up
customers.
Fiber
transport and CLEC revenues increased $14.4 million (66.6%), of which $12.9
million was due to revenues from the fiber assets acquired on June 30, 2005
from
KMC and $1.4 million was attributable to growth in our incumbent fiber transport
business.
Other
revenues increased $2.6 million (5.6%) primarily due to a $2.8 million increase
in revenues of our new video and wireless reseller service
offerings.
Operating
Expenses
|
|
Three
months
|
|
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$
|
216,466
|
|
|
194,873
|
|
Selling,
general and administrative
|
|
|
95,596
|
|
|
95,206
|
|
Depreciation
and amortization
|
|
|
131,820
|
|
|
130,452
|
|
|
|
$
|
443,882
|
|
|
420,531
|
|
Cost
of
services and products increased $21.6 million (11.1%) primarily due to (i)
a
$9.8 million increase in expenses incurred by the properties acquired from
KMC;
(ii) a $6.6 million increase in costs associated with growth in our long
distance business; (iii) a $3.8 million increase in expenses associated with
our
new video and wireless reseller service offerings; and (iv) a $2.4 million
increase in Internet expenses primarily due to growth in the number of DSL
customers.
Selling,
general and administrative expenses increased $390,000 (.4%) primarily due
to a
$3.2 million increase in expenses incurred from the properties acquired from
KMC
which was substantially offset by a $2.9 million reduction in bad debt
expense.
Depreciation
and amortization increased $1.4 million (1.0%) primarily due to a $5.3 million
increase due to higher levels of plant in service and a $1.4 million increase
due to depreciation and amortization of the properties acquired from KMC.
Such
increases were substantially offset by a $3.7 million reduction in depreciation
expense due to certain assets becoming fully depreciated and a $2.2 million
decrease due to rate reductions in certain jurisdictions.
Interest
Expense
Interest
expense increased $992,000 (2.0%) in the second quarter of 2006 compared
to the
second quarter of 2005. A $2.6 million increase due to higher average interest
rates was substantially offset by a $2.1 million reduction due to decreased
average debt outstanding.
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 $2.1 million and $724,000
in the second quarter of 2006 and 2005, respectively.
Nonrecurring
Gains
The
second quarter 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 10 for additional
information.
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 $2.7 million for the second
quarter of 2006 compared to $1.2 million for the second quarter of 2005.
Income
Tax Expense
The
effective income tax rate was 36.0% and 38.4% for the three months ended
June
30, 2006 and 2005, respectively. Income tax expense was reduced by approximately
$6.4 million in the second quarter of 2006 due to the resolution of various
income tax audit issues.
Six
Months Ended June 30, 2006 Compared
to
Six Months Ended June 30, 2005
Net
income was $221.8 million and $164.7 million for the first six months of
2006
and 2005, respectively. Diluted earnings per share for the first six months
of
2006 and 2005 was $1.80 and $1.23, respectively. Included in net income (and
diluted earnings per share) for the first six months of 2006 was approximately
$72.4 million ($.58 per share) related to nonrecurring gains, substantially
all
of which related to the redemption of our RTB stock. See Note 10 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.
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars,
except per share amounts, and shares in thousands)
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
323,441
|
|
|
362,742
|
|
Interest
expense
|
|
|
(100,725
|
)
|
|
(102,272
|
)
|
Income
from unconsolidated cellular entity
|
|
|
4,149
|
|
|
2,037
|
|
Nonrecurring
gains
|
|
|
118,649
|
|
|
-
|
|
Other
income (expense)
|
|
|
5,258
|
|
|
2,755
|
|
Income
tax expense
|
|
|
(128,979
|
)
|
|
(100,528
|
)
|
Net
income
|
|
$
|
221,793
|
|
|
164,734
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.86
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.80
|
|
|
1.23
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
118,917
|
|
|
131,241
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
124,798
|
|
|
136,257
|
|
Operating
income decreased $39.3 million (10.8%) as a $19.1 million (1.6%) increase
in
operating revenues was more than offset by a $58.4 million (7.0%) increase
in
operating expenses.
Operating
Revenues
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Voice
|
|
$
|
434,235
|
|
|
446,208
|
|
Network
access
|
|
|
446,832
|
|
|
469,682
|
|
Data
|
|
|
167,685
|
|
|
148,955
|
|
Fiber
transport and CLEC
|
|
|
71,831
|
|
|
41,879
|
|
Other
|
|
|
100,197
|
|
|
94,971
|
|
|
|
$
|
1,220,780
|
|
|
1,201,695
|
|
The
$12.0
million (2.7%) decrease in voice revenues is primarily due to (i) an $11.2
million decrease due to a 4.6% decline in the average number of access lines;
(ii) a $12.2 million decrease due to a decline in the average rate we charged
our long distance customers; and (iii) a $13.2 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
$19.4 million increase in long distance revenues primarily attributable to
an
8.8% increase in the average number of long distance lines and increased
long
distance minutes of use and (ii) a $3.4 million increase due to our providing
custom calling features to more customers.
Excluding
the sale of our Arizona telephone operations in May 2006, access lines declined
43,900 (2.0%) during the first six months of 2006 compared to a decline of
40,300 (1.7%) during the first six 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 $22.9 million (4.9%) in the first six months of
2006
primarily due to (i) an $8.9
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;
(ii) a
$6.7 million decrease as a result of lower intrastate 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 (iii)
a $5.9
million decline attributable to the recognition of prior year revenues in
the
second quarter of 2005. We believe that intrastate minutes will continue
to
decline in 2006, although we cannot precisely estimate the magnitude of such
decreases. Such decreases were partially offset by a $2.9 million increase
due
to the implementation of a billing charge which the FCC permitted us to begin
assessing to our customers in the second quarter of 2005 to recover a portion
of
our network upgrade costs incurred in order to provide local number portability
services.
Data
revenues increased $18.7 million (12.6%) substantially due to a $18.3 million
increase in Internet revenues due primarily to growth in the number of DSL
customers, partially offset by a decrease in the number of dial-up
customers.
Fiber
transport and CLEC revenues increased $30.0 million (71.5%), of which $26.4
million was due to revenues from the fiber assets acquired on June 30, 2005
from
KMC and $3.5 million was attributable to growth in our incumbent fiber transport
business.
Other
revenues increased $5.2 million (5.5%) primarily due to a $5.2 million increase
in revenues of our new video and wireless reseller service
offerings.
Operating
Expenses
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$
|
439,418
|
|
|
386,866
|
|
Selling,
general and administrative
|
|
|
191,536
|
|
|
189,460
|
|
Depreciation
and amortization
|
|
|
266,385
|
|
|
262,627
|
|
|
|
$
|
897,339
|
|
|
838,953
|
|
Included
in aggregate operating expenses is a one-time charge of $6.2 million (most
of
which is reflected in “Cost of services and products”) related to severance and
related costs associated with our March 2006 reduction in workforce. See
Note 8
for additional information.
Cost
of
services and products increased $52.6 million (13.6%) primarily due to (i)
a
$20.1 million increase in expenses incurred by the properties acquired from
KMC;
(ii) a $10.5 million increase in costs associated with growth in our long
distance business; (iii) a $7.4 million increase in expenses associated with
our
new video and wireless reseller service offerings; (iv) $5.5 million of
severance and related costs associated with our workforce reduction; and
(v) a
$5.3 million increase in Internet expenses primarily due to growth in the
number
of DSL customers.
Selling,
general and administrative expenses increased $2.1 million (1.1%) primarily
due
to a $6.6 million increase in expenses incurred from the properties acquired
from KMC which was substantially offset by a $4.7 million reduction in bad
debt
expense.
Depreciation
and amortization increased $3.8 million (1.4%) primarily due to a $9.8 million
increase due to higher levels of plant in service and a $2.8 million increase
due to depreciation and amortization of the properties acquired from KMC.
Such
increases were substantially offset by an $8.7 million reduction in depreciation
expense due to certain assets becoming fully depreciated.
Interest
Expense
Interest
expense decreased $1.5 million (1.5%) in the first six months of 2006 compared
to the first six months of 2005. A $4.2 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
$4.5 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 $4.1 million and $2.0
million in the first six months of 2006 and 2005, respectively.
Nonrecurring
Gains
The
second quarter 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 10 for additional
information.
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 $5.3 million for the first
six
months of 2006 compared to $2.8 million for the six months of 2005. The first
six months of 2005 included a one-time $4.8 million debt extinguishment expense
related to purchasing and retiring approximately $400 million of the Series
J
notes, as mentioned above. The first six months of 2005 was favorably impacted
by $3.2 million of non-recurring interest income related to the settlement
of
various income tax audits.
Income
Tax Expense
The
effective income tax rate was 36.8% and 37.9% for the six months ended June
30,
2006 and 2005, respectively. Income tax expense was reduced by approximately
$6.4 million in the first six months of 2006 due to the resolution of various
income tax audit issues. Income tax expense for the first six 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 $406.3 million during the first six
months
of 2006 compared to $478.9 million during the first six 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
six
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 $8.3 million and $250.7 million for the
six
months ended June 30, 2006 and 2005, respectively. Payments for property,
plant
and equipment were $46.5 million less in the first six months of 2006 than
in
the comparable period during 2005. Our budgeted capital expenditures for
2006
total approximately $325 million. We have invested significant amounts
in our
wireline network in the last several years and believe we are in a position
to
move closer to maintenance capital expenditure levels for the foreseeable
future
for our wireline properties. Our capital expenditure budget also includes
amounts for expanding our new service offerings and our data networks.
We
received approximately $128.7 million cash from asset dispositions in 2006,
of
which approximately $122.8 million was from the redemption of
our
RTB stock upon dissolution of the RTB and $5.9 million was from the sale
of our
local exchange operations in Arizona. See Note 10 for additional information.
We
paid approximately $73.2 million cash in 2005 to acquire certain fiber
assets in
16 markets from KMC.
Net
cash
used in financing activities was $555.1 million during the first six months
of
2006 compared to $295.0 million during the first six months of 2005. We
repurchased 16.5 million shares (for $573.9 million) and 16.4 million shares
(for $530.7 million) in the first six 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 $500 million) under
accelerated share repurchase agreements with investment banks (see Note
7 for
additional information). We initially funded the accelerated share repurchase
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 June 30,
2006,
had been repaid in full. We used cash generated from operations during
2006 and
the $122.8 million of proceeds received from the redemption of our investment
in
stock of the RTB to reduce indebtedness. As part of the 2006 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 was higher
than the initial average price. We will reflect such settlement amount
as an
adjustment to equity.
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.
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 June 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 upcoming Advanced Wireless Services (“AWS”) spectrum auction to be held in
August 2006. We are currently evaluating our opportunities regarding this
spectrum, particularly with respect to spectrum that covers or is contiguous
to
our existing service territories. Unused deposit amounts will be returned
to us
upon completion of the auction.
We
funded
the $59 million AWS deposit and the $28.4 million accelerated share repurchase
settlement with cash on hand and short-term borrowings. As of July 31,
2006, we
had $40.0 million outstanding in short-term borrowings.
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 during 2006. In mid-2005, we began reselling wireless services
and,
by the end of June 2006, we offered wireless service though this reselling
arrangement to markets serving nearly 30% of our residential access
lines.
Item
3.
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
June
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 7.0% 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 70
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 $102.3 million decrease in fair value of our long-term debt
at
June 30, 2006. As of June 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
June
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 six months of 2006, we realized an average interest rate
under
these hedges of 9.15%. Interest expense was increased by $3.2 million during
the
first six months of 2006 as a result of these hedges. The aggregate fair
market
value of these hedges was $37.2 million at June 30, 2006 and is reflected
both
as a liability and as a decrease in our underlying long-term debt on the
June
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
$15.6
million decrease in the fair value of these hedges at June 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 June 30, 2006.
Item
4.
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 June 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.
Item
1.
|
Legal
Proceedings.
|
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.
Item
2.
|
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. With
the
completion of the accelerated share repurchase program, we retain authority
to
repurchase through June 30, 2007 the $500 million of our common stock that
remains under our $1.0 billion program.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
At
our
annual meeting of shareholders on May 11, 2006, the shareholders elected
four
Class III directors to serve until the 2009 annual meeting of shareholders
and
until their successors are duly elected and qualified.
The
following number of votes were cast for or were withheld from the following
nominees:
Class
III Nominees
|
|
For
|
|
Withheld
|
|
|
|
|
|
Fred
R. Nichols
|
|
159,984,988
|
|
12,292,580
|
Harvey
P. Perry
|
|
159,993,956
|
|
12,283,612
|
Jim
D. Reppond
|
|
155,639,592
|
|
16,637,976
|
Joseph
R. Zimmel
|
|
162,637,199
|
|
9,640,369
|
The
Class
I and Class II directors whose terms continued after the meeting
are:
Class
I
|
|
Class
II
|
|
|
|
William
R. Boles, Jr.
|
|
Virginia
Boulet
|
W.
Bruce Hanks
|
|
Calvin
Czeschin
|
C.
G. Melville, Jr.
|
|
James
B. Gardner
|
Glen
F. Post, III
|
|
Gregory
J. McCray
|
The
following represents the votes cast by the shareholders to ratify the
appointment of KPMG LLP as our independent auditor for 2006:
|
For
|
158,600,155
|
|
Against
|
9,016,662
|
|
Abstain
|
2,371,279
|
|
Broker
non-votes
|
2,289,472
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
|
A.
|
Exhibits
|
|
|
|
|
10.1
|
Form
of Restricted Stock Agreement pursuant to the 2005 Directors Stock
Plan,
entered into between CenturyTel and each of its outside directors
as of
May 12, 2006.
|
|
|
|
|
|
|
|
|
11
|
Computations
of Earnings Per Share.
|
|
|
|
|
|
|
|
|
31.1
|
Registrant’s
Chief Executive Officer certification pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
31.2
|
Registrant’s
Chief Financial Officer certification pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
32
|
Registrant’s
Chief Executive Officer and Chief Financial Officer certification
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
B.
|
Reports
on Form 8-K
|
|
|
|
|
|
|
The
following items were reported in the Form 8-K filed April 27,
2006:
|
|
|
|
|
|
|
|
|
Items
2.02 and 9.01 - Results of Operations and Financial Condition and
Financial Statements and Exhibits. News release announcing first
quarter
2006 operating results.
|
|
SIGNATURE
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:
August 2, 2006
|
/s/
Neil A. Sweasy
|
|
|
|
Neil
A. Sweasy
|
|
Vice
President and Controller
|
|
(Principal
Accounting
Officer)
|