file10q.htm
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, 2007
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]
|
|
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, 2007, there
were 108,218,198 shares of common stock outstanding.
CenturyTel,
Inc.
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, 2007 and 2006
|
3
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income--
|
|
|
|
Three
Months and Six Months Ended June 30, 2007 and 2006
|
4
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets--June 30, 2007 and
|
|
|
|
December
31, 2006
|
5
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows--
|
|
|
|
Six
Months Ended June 30, 2007 and 2006
|
6
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity--
|
|
|
|
Six
Months Ended June 30, 2007 and 2006
|
7
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements*
|
8-15
|
|
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial
|
|
|
|
|
Condition
and Results of Operations
|
16-23
|
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
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|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
25
|
|
|
|
|
|
Part
II.
|
|
Other
Information
|
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
26
|
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
26
|
|
|
|
|
|
|
Item
4. |
|
Submission
of Matters to a Vote of Security Holders |
26-27
|
|
|
|
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
27-28
|
|
|
|
|
|
Signature
|
|
|
28
|
__________________________________________
*
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars,
except per share amounts, and
shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES
|
|
$ |
689,991
|
|
|
|
608,907
|
|
|
|
1,290,846
|
|
|
|
1,220,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation
and amortization)
|
|
|
226,388
|
|
|
|
216,191
|
|
|
|
439,919
|
|
|
|
438,746
|
|
Selling,
general and administrative
|
|
|
97,456
|
|
|
|
95,596
|
|
|
|
188,913
|
|
|
|
191,536
|
|
Depreciation
and amortization
|
|
|
134,311
|
|
|
|
132,127
|
|
|
|
262,095
|
|
|
|
266,999
|
|
Total
operating expenses
|
|
|
458,155
|
|
|
|
443,914
|
|
|
|
890,927
|
|
|
|
897,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
231,836
|
|
|
|
164,993
|
|
|
|
399,919
|
|
|
|
322,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(57,667 |
) |
|
|
(50,639 |
) |
|
|
(104,628 |
) |
|
|
(100,725 |
) |
Other
income (expense)
|
|
|
8,080
|
|
|
|
123,459
|
|
|
|
13,370
|
|
|
|
128,056
|
|
Total
other income (expense)
|
|
|
(49,587 |
) |
|
|
72,820
|
|
|
|
(91,258 |
) |
|
|
27,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX EXPENSE
|
|
|
182,249
|
|
|
|
237,813
|
|
|
|
308,661
|
|
|
|
350,248
|
|
Income
tax expense
|
|
|
69,984
|
|
|
|
85,603
|
|
|
|
118,526
|
|
|
|
128,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
112,265
|
|
|
|
152,210
|
|
|
|
190,135
|
|
|
|
221,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$ |
1.03
|
|
|
|
1.32
|
|
|
|
1.73
|
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$ |
1.00
|
|
|
|
1.26
|
|
|
|
1.67
|
|
|
|
1.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER COMMON SHARE
|
|
$ |
.065
|
|
|
|
.0625
|
|
|
|
.13
|
|
|
|
.125
|
|
AVERAGE
BASIC SHARES OUTSTANDING
|
|
|
108,405
|
|
|
|
115,441
|
|
|
|
109,718
|
|
|
|
118,917
|
|
AVERAGE
DILUTED SHARES OUTSTANDING
|
|
|
113,721
|
|
|
|
121,636
|
|
|
|
115,015
|
|
|
|
124,798
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Three
months
ended
June 30,
|
|
|
Six
months
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
112,265
|
|
|
|
152,210
|
|
|
|
190,135
|
|
|
|
221,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME, NET OF TAX:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability adjustment,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of $799 and ($25) tax
|
|
|
-
|
|
|
|
1,282
|
|
|
|
-
|
|
|
|
(41 |
) |
Unrealized
gain (loss) on investments, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$355,
($133), $304 and ($92) tax
|
|
|
570
|
|
|
|
(213 |
) |
|
|
488
|
|
|
|
(148 |
) |
Derivative
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss on derivatives hedging the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
variability
of cash flows, net of $294 tax
|
|
|
-
|
|
|
|
-
|
|
|
|
471
|
|
|
|
-
|
|
Reclassification
adjustment for losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income, net of $61, $59,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$120
and $117 tax
|
|
|
99
|
|
|
|
94
|
|
|
|
193
|
|
|
|
188
|
|
Items
related to employee benefit plans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net actuarial loss, net of $5,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
$5,973 tax
|
|
|
9,233
|
|
|
|
-
|
|
|
|
9,582
|
|
|
|
-
|
|
Amortization
of net actuarial loss,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of $908 and $1,815 tax
|
|
|
1,456
|
|
|
|
-
|
|
|
|
2,912
|
|
|
|
-
|
|
Amortization
of net prior service credit,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of ($178) and ($356) tax
|
|
|
(285 |
) |
|
|
-
|
|
|
|
(571 |
) |
|
|
-
|
|
Amortization
of unrecognized transition asset,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of ($14) and ($28) tax
|
|
|
(22 |
) |
|
|
-
|
|
|
|
(44 |
) |
|
|
-
|
|
Net
change in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss),
net of tax
|
|
|
11,051
|
|
|
|
1,163
|
|
|
|
13,031
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
123,316
|
|
|
|
153,373
|
|
|
|
203,166
|
|
|
|
221,469
|
|
* Reflected
in 2007 due to the December 31, 2006 adoption of SFAS 158.
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
43,525
|
|
|
|
25,668
|
|
Accounts
receivable, less allowance of $19,773 and $20,905
|
|
|
214,810
|
|
|
|
227,346
|
|
Materials
and supplies, at average cost
|
|
|
6,977
|
|
|
|
6,628
|
|
Other
|
|
|
29,094
|
|
|
|
30,475
|
|
Total
current assets
|
|
|
294,406
|
|
|
|
290,117
|
|
|
|
|
|
|
|
|
|
|
NET
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
8,560,266
|
|
|
|
7,893,760
|
|
Accumulated
depreciation
|
|
|
(5,355,716 |
) |
|
|
(4,784,483 |
) |
Net
property, plant and equipment
|
|
|
3,204,550
|
|
|
|
3,109,277
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
AND OTHER ASSETS
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,999,526
|
|
|
|
3,431,136
|
|
Other
|
|
|
775,054
|
|
|
|
610,477
|
|
Total
goodwill and other assets
|
|
|
4,774,580
|
|
|
|
4,041,613
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
8,273,536
|
|
|
|
7,441,007
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
424,307
|
|
|
|
155,012
|
|
Short-term
debt
|
|
|
87,000
|
|
|
|
23,000
|
|
Accounts
payable
|
|
|
135,185
|
|
|
|
129,350
|
|
Accrued
expenses and other liabilities
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
|
57,749
|
|
|
|
54,100
|
|
Income
taxes
|
|
|
22,143
|
|
|
|
60,522
|
|
Other
taxes
|
|
|
60,038
|
|
|
|
46,890
|
|
Interest
|
|
|
83,704
|
|
|
|
73,725
|
|
Other
|
|
|
32,735
|
|
|
|
23,352
|
|
Advance
billings and customer deposits
|
|
|
57,413
|
|
|
|
51,614
|
|
Total
current liabilities
|
|
|
960,274
|
|
|
|
617,565
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
2,735,073
|
|
|
|
2,412,852
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS AND OTHER LIABILITIES
|
|
|
1,441,155
|
|
|
|
1,219,639
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $1.00 par value, authorized 350,000,000 shares,
|
|
|
|
|
|
|
|
|
issued
and outstanding 108,201,274 and 113,253,889 shares
|
|
|
108,201
|
|
|
|
113,254
|
|
Paid-in
capital
|
|
|
81,666
|
|
|
|
24,256
|
|
Accumulated
other comprehensive loss, net of tax
|
|
|
(91,911 |
) |
|
|
(104,942 |
) |
Retained
earnings
|
|
|
3,031,639
|
|
|
|
3,150,933
|
|
Preferred
stock - non-redeemable
|
|
|
7,439
|
|
|
|
7,450
|
|
Total
stockholders’ equity
|
|
|
3,137,034
|
|
|
|
3,190,951
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
8,273,536
|
|
|
|
7,441,007
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
190,135
|
|
|
|
221,470
|
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
262,095
|
|
|
|
266,999
|
|
Gain
on asset dispositions
|
|
|
-
|
|
|
|
(118,649 |
) |
Deferred
income taxes
|
|
|
30,005
|
|
|
|
22,151
|
|
Changes
in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
24,316
|
|
|
|
21,641
|
|
Accounts
payable
|
|
|
1,106
|
|
|
|
(2,707 |
) |
Accrued
income and other taxes
|
|
|
27,071
|
|
|
|
(28,113 |
) |
Other
current assets and other current liabilities, net
|
|
|
18,342
|
|
|
|
8,719
|
|
Retirement
benefits
|
|
|
14,647
|
|
|
|
14,926
|
|
Excess
tax benefits from share-based compensation
|
|
|
(6,312 |
) |
|
|
(4,947 |
) |
Decrease
in other noncurrent assets
|
|
|
3,653
|
|
|
|
297
|
|
Increase
(decrease) in other noncurrent liabilities
|
|
|
(11,667 |
) |
|
|
2,286
|
|
Other,
net
|
|
|
4,634
|
|
|
|
2,244
|
|
Net
cash provided by operating activities
|
|
|
558,025
|
|
|
|
406,317
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired
|
|
|
(307,424 |
) |
|
|
-
|
|
Payments
for property, plant and equipment
|
|
|
(106,856 |
) |
|
|
(130,455 |
) |
Proceeds
from redemption of Rural Telephone Bank stock
|
|
|
-
|
|
|
|
122,819
|
|
Proceeds
from sale of assets
|
|
|
-
|
|
|
|
5,865
|
|
Investment
in unconsolidated cellular entity
|
|
|
-
|
|
|
|
(5,222 |
) |
Other,
net
|
|
|
1,523
|
|
|
|
(1,296 |
) |
Net
cash used in investing activities
|
|
|
(412,757 |
) |
|
|
(8,289 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments
of debt
|
|
|
(667,132 |
) |
|
|
(12,559 |
) |
Net
proceeds from issuance of long-term debt
|
|
|
741,840
|
|
|
|
-
|
|
Net
proceeds from the issuance of short-term debt
|
|
|
64,000
|
|
|
|
-
|
|
Proceeds
from issuance of common stock
|
|
|
42,292
|
|
|
|
41,206
|
|
Repurchase
of common stock
|
|
|
(302,033 |
) |
|
|
(573,888 |
) |
Cash
dividends
|
|
|
(14,480 |
) |
|
|
(14,661 |
) |
Excess
tax benefits from share-based compensation
|
|
|
6,312
|
|
|
|
4,947
|
|
Other,
net
|
|
|
1,790
|
|
|
|
(150 |
) |
Net
cash used in financing activities
|
|
|
(127,411 |
) |
|
|
(555,105 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
17,857
|
|
|
|
(157,077 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
25,668
|
|
|
|
158,846
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
43,525
|
|
|
|
1,769
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
72,928
|
|
|
|
132,666
|
|
Interest
paid (net of capitalized interest of $522 and $1,005)
|
|
$ |
96,227
|
|
|
|
96,562
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
|
|
|
|
|
|
Six
months
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
COMMON
STOCK
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
113,254
|
|
|
|
131,074
|
|
Issuance
of common stock through dividend reinvestment,
|
|
|
|
|
|
|
|
|
incentive
and benefit plans and other
|
|
|
1,552
|
|
|
|
1,740
|
|
Repurchase
of common stock
|
|
|
(6,606 |
) |
|
|
(16,523 |
) |
Conversion
of preferred stock into common stock
|
|
|
1
|
|
|
|
10
|
|
Balance
at end of period
|
|
|
108,201
|
|
|
|
116,301
|
|
|
|
|
|
|
|
|
|
|
PAID-IN
CAPITAL
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
24,256
|
|
|
|
129,806
|
|
Issuance
of common stock through dividend
|
|
|
|
|
|
|
|
|
reinvestment,
incentive and benefit plans
|
|
|
40,740
|
|
|
|
39,466
|
|
Repurchase
of common stock
|
|
|
-
|
|
|
|
(71,362 |
) |
Conversion
of preferred stock into common stock
|
|
|
10
|
|
|
|
179
|
|
Excess
tax benefits from share-based compensation
|
|
|
6,312
|
|
|
|
4,947
|
|
Share-based
compensation and other
|
|
|
10,348
|
|
|
|
4,891
|
|
Balance
at end of period
|
|
|
81,666
|
|
|
|
107,927
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(104,942 |
) |
|
|
(9,619 |
) |
Change
in other comprehensive loss, net of tax
|
|
|
13,031
|
|
|
|
(1 |
) |
Balance
at end of period
|
|
|
(91,911 |
) |
|
|
(9,620 |
) |
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
3,150,933
|
|
|
|
3,358,162
|
|
Net
income
|
|
|
190,135
|
|
|
|
221,793
|
|
Repurchase
of common stock
|
|
|
(295,427 |
) |
|
|
(486,003 |
) |
Cumulative
effect of adoption of FIN 48 (see Note 7)
|
|
|
478
|
|
|
|
-
|
|
Cash
dividends declared
|
|
|
|
|
|
|
|
|
Common
stock - $.13 and $.125 per share, respectively
|
|
|
(14,294 |
) |
|
|
(14,467 |
) |
Preferred
stock
|
|
|
(186 |
) |
|
|
(194 |
) |
Balance
at end of period
|
|
|
3,031,639
|
|
|
|
3,079,291
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK - NON-REDEEMABLE
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
7,450
|
|
|
|
7,850
|
|
Conversion of preferred stock into common stock
|
|
|
(11 |
) |
|
|
(189 |
) |
Balance at end of period
|
|
|
7,439
|
|
|
|
7,661
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
$ |
3,137,034
|
|
|
|
3,301,560
|
|
See
accompanying notes to consolidated financial statements.
CenturyTel,
Inc.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
(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, 2006.
The
financial information for the
three months and six months ended June 30, 2007 and 2006 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.
During
the fourth quarter of 2006, in
accordance with Staff Accounting Bulletin No. 108, “Considering the Effect of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Results” (“SAB 108”), we identified two misstatements that previously
were deemed immaterial using the income statement approach that were deemed
material upon application of the balance sheet approach. We recorded
the cumulative effect of such adjustments as an adjustment to retained earnings
(as of January 1, 2006). We have adjusted our results of operations for the
first three quarters of 2006 to reflect the ongoing application of the
adjustments recorded pursuant to SAB 108. Such adjustments were
immaterial to each quarter. For additional information, see our
annual report on Form 10-K for the year ended December 31, 2006.
On
April 30, 2007, we acquired all of
the outstanding stock of Madison River Communications Corp. (“Madison River”)
from Madison River Telephone Company, LLC for an initial aggregate purchase
price of $322 million cash. In connection with the acquisition, we
also paid all of Madison River’s existing indebtedness (including accrued
interest), which approximated $522 million. Madison River operates
approximately 164,000 predominantly rural access lines in four states with
more
than 30% high-speed Internet penetration and its network includes access to
a
2,400 route mile fiber network.
We
are accounting for the acquisition
of Madison River as a purchase under the guidance of Statement of Financial
Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) and Statement
of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain
Types of Regulation” (“SFAS 71”). SFAS 141 requires us to record the
assets acquired and liabilities assumed at their respective fair
values. In accordance with SFAS 71, we recorded the fixed assets of
Madison River’s regulated telephone operations at historical book value since
those values are used to develop the rates we charge to our customers (which
are
approved by regulatory authorities).
We
have reflected the results of
operations of the Madison River properties in our consolidated results of
operations beginning May 1, 2007.
The
total cost of the Madison River
acquisition through June 30, 2007 is composed of the following components
(amounts in thousands):
Cash
paid at closing (1)
|
|
$ |
322,187
|
|
Closing
costs (2)
|
|
|
5,217
|
|
Total
purchase price
|
|
$ |
327,404
|
|
(1) Excludes
the cash payment of $671,000 we received in accordance with the purchase
agreement subsequent to June 30, 2007 upon finalization of the working capital
portion
of
the
purchase price.
(2) Closing
costs primarily consist of advisory and legal fees incurred in connection with
the acquisition.
The
values assigned to the assets
acquired and liabilities assumed at acquisition are based on a preliminary
purchase price allocation. The final allocation of the purchase price
will be based on values as determined by an independent third-party valuation,
which we expect will be completed by the end of third quarter
2007. The actual valuation may differ significantly from the
preliminary allocation. The purchase price has been allocated to the
assets acquired and liabilities assumed on a preliminary basis as follows
(amounts in thousands):
Current
assets (1)
|
|
$ |
33,761
|
|
Net
property, plant and equipment
|
|
|
242,822
|
|
Identifiable
intangible assets
|
|
|
|
|
Customer
list
|
|
|
148,800
|
|
Goodwill
|
|
|
568,390
|
|
Other
assets
|
|
|
9,827
|
|
Current
liabilities (2)
|
|
|
(22,200 |
) |
Long-term
debt (2)
|
|
|
(520,000 |
) |
Deferred
income taxes
|
|
|
(111,174 |
) |
Other
liabilities
|
|
|
(22,822 |
) |
Total
purchase price
|
|
$ |
327,404
|
|
|
|
|
|
|
(1)
|
Includes
approximately
$20.0 million of acquired cash and cash
equivalents.
|
(2)
|
We
paid all the
long-term debt and $2.2 million of related accrued interest (included
in
“current liabilities” in the above table) immediately after
closing.
|
(3)
|
Goodwill
and Other Intangible
Assets
|
Goodwill
and other intangible assets
as of June 30, 2007 and December 31, 2006 were composed of the
following:
|
|
June
30,
|
|
|
Dec.
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
3,999,526
|
|
|
|
3,431,136
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets subject to amortization
|
|
|
|
|
|
|
|
|
Customer
base
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
173,894
|
|
|
|
25,094
|
|
Accumulated
amortization
|
|
|
(9,858 |
) |
|
|
(7,022 |
) |
Net
carrying amount
|
|
$ |
164,036
|
|
|
|
18,072
|
|
|
|
|
|
|
|
|
|
|
Contract
rights
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
4,186
|
|
|
|
4,186
|
|
Accumulated
amortization
|
|
|
(4,186 |
) |
|
|
(3,256 |
) |
Net
carrying amount
|
|
$ |
-
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
Intangible
asset not subject to amortization
|
|
$ |
36,690
|
|
|
|
36,690
|
|
Goodwill
and
intangible assets increased in 2007 due to the Madison River
acquisition.
Total
amortization expense related to
the intangible assets subject to amortization for the first six months
of 2007
was $3.8 million and is expected to be $10.6 million in 2007 and $13.7
million
annually thereafter through 2011. Such amortization expense includes
estimates based on a preliminary purchase price allocation for the Madison
River
acquisition, which may differ significantly from the final allocation.
See Note
2.
(4)
|
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, 2007 and 2006 included
the following components:
|
|
Three
months
|
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1,732
|
|
|
|
1,783
|
|
|
|
3,450
|
|
|
|
3,491
|
|
Interest
cost
|
|
|
5,039
|
|
|
|
4,846
|
|
|
|
10,057
|
|
|
|
9,490
|
|
Expected
return on plan assets
|
|
|
(620 |
) |
|
|
(623 |
) |
|
|
(1,241 |
) |
|
|
(1,219 |
) |
Amortization
of unrecognized actuarial loss
|
|
|
899
|
|
|
|
950
|
|
|
|
1,798
|
|
|
|
1,860
|
|
Amortization
of unrecognized prior service cost
|
|
|
(505 |
) |
|
|
(221 |
) |
|
|
(1,010 |
) |
|
|
(433 |
) |
Net
periodic postretirement benefit cost
|
|
$ |
6,545
|
|
|
|
6,735
|
|
|
|
13,054
|
|
|
|
13,189
|
|
We
contributed $6.4 million to our postretirement health care plan in the
first six
months of 2007 and expect to contribute approximately $13 million for the
full
year.
(5)
|
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, 2007 and 2006 included the following
components:
|
|
Three
months
|
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4,609
|
|
|
|
4,220
|
|
|
|
9,226
|
|
|
|
8,483
|
|
Interest
cost
|
|
|
7,071
|
|
|
|
6,160
|
|
|
|
13,976
|
|
|
|
12,377
|
|
Expected
return on plan assets
|
|
|
(9,170 |
) |
|
|
(8,183 |
) |
|
|
(18,219 |
) |
|
|
(16,367 |
) |
Recognized
net losses
|
|
|
291
|
|
|
|
1,962
|
|
|
|
556
|
|
|
|
3,840
|
|
Net
amortization and deferral
|
|
|
1,301
|
|
|
|
(123 |
) |
|
|
3,260
|
|
|
|
6
|
|
Net
periodic pension expense
|
|
$ |
4,102
|
|
|
|
4,036
|
|
|
|
8,799
|
|
|
|
8,339
|
|
The
amount of the 2007 contribution
to our pension plans will be determined based on a number of factors, including
the results of the 2007 actuarial valuation. At this time, the amount
of the 2007 contribution is not known.
(6)
|
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 recognize as compensation expense our cost of awarding employees
with equity instruments by allocating the fair value of the award on the
grant
date over the period during which the employee is required to provide service
in
exchange for the award.
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, 2007, we had reserved approximately 6.2
million shares of common stock which may be issued in connection with
outstanding incentive awards 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.
Stock
option awards are generally
granted with an exercise price equal to the market price of CenturyTel’s shares
at the date of grant. Our outstanding options generally have a
three-year vesting period and all of them expire ten years after the date
of
grant. The fair value of each stock option award is estimated as of
the date of grant using a Black-Scholes option pricing model. During
the first six months of 2007, 948,920 options were granted with a
weighted average exercise price of $48.50 per share and a weighted average
grant
date fair value of $14.67 per share.
As
of June 30, 2007, outstanding and
exercisable stock options were as follows:
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
of
options
|
|
|
price
|
|
|
term
(in years)
|
|
|
value
|
|
Outstanding
|
|
|
3,680,843
|
|
|
$ |
36.70
|
|
|
|
7.2
|
|
|
$ |
45,450,000
|
|
Exercisable
|
|
|
2,104,158
|
|
|
$ |
32.83
|
|
|
|
5.7
|
|
|
$ |
34,129,000
|
|
Our
outstanding restricted stock awards generally vest over a five-year period
(for
employees) and a three-year period (for outside directors). As
of June 30, 2007, there were 864,895 shares of nonvested restricted stock
outstanding at an average grant date fair value of $36.91 per
share.
The
total compensation cost for all
share-based payment arrangements for the first six months of 2007 and 2006
was
$10.3 million and $6.0 million, respectively. As of June 30, 2007,
there was $38.8 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.
(7)
|
Income
Tax Uncertainties
|
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 requires us, effective January 1, 2007, to recognize and measure tax
benefits
taken or expected to be taken in a tax return and disclose uncertainties
in
income tax positions.
Upon
the initial adoption of FIN 48,
we recorded a cumulative effect adjustment to retained earnings as of January
1,
2007 (which increased retained earnings by approximately $478,000 as of
such
date) related to certain previously recognized liabilities that did not
meet the
criteria for recognition upon the adoption of FIN 48.
As
of January 1, 2007, we had
approximately $55.9 million of unrecognized tax benefits reflected on our
balance sheet, substantially all of which is included as a component of
“Deferred credits and other liabilities”. Such amount was reflected
in “Accrued income taxes” as of December 31, 2006. As of June
30, 2007, we had approximately $57.7 million of unrecognized tax benefits
reflected on our balance sheet, which includes approximately $6.5 million
allocated on a preliminary basis to unrecognized tax benefits in connection
with
our Madison River acquisition. If we were to prevail on all
unrecognized tax benefits recorded on our balance sheet, approximately
$49.0
million would benefit the effective tax rate.
Our
policy is to reflect
interest and penalties associated with unrecognized tax benefits as income
tax
expense. We had accrued interest and penalties (presented before
related tax benefits) of approximately $20.7 million as of January 1, 2007
and
$27.8 million as of June 30, 2007.
We
file
income tax returns, including returns for our subsidiaries, with federal,
state
and local jurisdictions. Our uncertain income tax positions are
related to tax years that are currently under or remain subject to examination
by the relevant taxing authorities. Our open income tax years by
major jurisdiction are as follows.
|
Jurisdiction
|
Open
tax years
|
|
Federal
|
1998-current
|
|
State
|
|
|
Georgia
|
2002-current
|
|
Louisiana
|
1997-current
|
|
Minnesota
|
2001-current
|
|
Montana
|
2000-current
|
|
Oregon
|
2001-current
|
|
Wisconsin
|
2001-current
|
|
All
other states
|
2002-current
|
Additionally,
it is possible that certain jurisdictions in which we do not believe
we have an
income tax filing responsibility, and accordingly did not file a return,
may
attempt to assess a liability. Since the period for assessing
additional liability typically begins upon the filing of a return, it
is
possible that certain jurisdictions could assess tax for years prior
to
2002.
Based
on (i) the potential outcomes
of these ongoing examinations, (ii) the expiration of statute of limitations
for
specific jurisdictions, (iii) the negotiated settlement of certain disputed
issues, or (iv) a jurisdiction’s administrative practices, it is reasonably
possible that the related unrecognized tax benefits for tax positions
previously
taken may materially change within the next 12 months. However, based
on the status of such examinations and the protocol of finalizing audits
by the
relevant tax authorities (which could include formal legal proceedings),
we do
not believe it is possible to reasonably estimate the amount or range
of the
impact of such changes, if any, at this time.
On
March 29, 2007, we publicly issued
$500 million of 6.0% Senior Notes, Series N, due 2017 and $250 million
of 5.5%
Senior Notes, Series O, due 2013. Our $741.8 million of net proceeds
from the sale of these Senior Notes were used to pay a substantial portion
of
the approximately $844 million of cash that was needed in order to (i)
pay the
purchase price for the acquisition of Madison River on April 30, 2007
($322
million) and (ii) pay off Madison River’s existing indebtedness (including
accrued interest) at closing ($522 million). We funded the remainder
of these cash outflows from borrowings under our commercial paper program
and
cash on hand. See Note 2 for additional information concerning the
acquisition of Madison River.
In
anticipation of the debt offerings
mentioned above, we had previously entered into four cash flow hedges
that
effectively locked in the interest rate on an aggregate of $400 million
of
debt. We locked in the interest rate on (i) $200 million of 10-year
debt at 5.0675% and (ii) $200 million of 10-year debt at 5.05%. In
March 2007, upon settlement of the hedges, we received an aggregate of
$765,000
(reflected in “Accumulated other comprehensive loss” on the balance sheet),
which is being amortized as a reduction of interest expense over the
10-year
term of the debt.
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. Our
operating revenues for our products and services include the following
components:
|
|
|
|
|
|
|
|
|
Three
months
ended
June 30,
|
|
|
Six
months
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
219,803
|
|
|
|
216,485
|
|
|
|
428,878
|
|
|
|
433,499
|
|
Network
access
|
|
|
266,202
|
|
|
|
221,663
|
|
|
|
477,601
|
|
|
|
446,986
|
|
Data
|
|
|
108,206
|
|
|
|
84,447
|
|
|
|
204,070
|
|
|
|
167,685
|
|
Fiber
transport and CLEC
|
|
|
40,714
|
|
|
|
36,051
|
|
|
|
79,040
|
|
|
|
71,831
|
|
Other
|
|
|
55,066
|
|
|
|
50,261
|
|
|
|
101,257
|
|
|
|
100,197
|
|
Total
operating revenues
|
|
$ |
689,991
|
|
|
|
608,907
|
|
|
|
1,290,846
|
|
|
|
1,220,198
|
|
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. In March 2006, we
filed a complaint against a carrier for recovery of unpaid and underpaid
access
charges for calls made using the carrier’s prepaid calling cards and calls that
used Internet Protocol for a portion of their transmission. The
carrier filed a counterclaim against us, asserting that we improperly
billed
them terminating intrastate access charges on certain wireless roaming
traffic. In April 2007, we entered into a settlement agreement with
the carrier and received approximately $49 million cash from them related
to the
issues described above. This amount is reflected in our second
quarter 2007 results of operations as a component of “Network access”
revenues.
We
derive our data revenues primarily
by providing Internet access services (both high-speed (“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, as well
as other
new product offerings.
(10)
|
Gain
on Asset Dispositions
|
In
April 2006, upon dissolution of
the Rural Telephone Bank (“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.
(11)
|
Recent
Accounting Pronouncement
|
In
June 2006, the Financial
Accounting Standards Board issued EITF 06-3, “How Taxes Collected From Customers
and Remitted to Governmental Authorities Should be Presented in the Income
Statement” (“EITF 06-3”), which requires disclosure of the accounting policy for
any tax assessed by a governmental authority that is directly imposed
on a
revenue-producing transaction. We adopted the disclosure requirements
of EITF 06-3 effective January 1, 2007.
We
collect various taxes from our
customers and subsequently remit such funds to governmental
authorities. Substantially all of these taxes are recorded through
the balance sheet. We are required to contribute to several universal
service fund programs and generally include a surcharge amount on our
customers’
bills which is designed to recover our contribution costs. Such
amounts are reflected on a gross basis in our statement of income (included
in
both operating revenues and expenses) and aggregated approximately $20
million
for both the six months ended June 30, 2007 and 2006.
(12)
|
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 class
certification decision, although we cannot predict the length of time
before
this appeal will be adjudicated. Our preliminary analysis indicates
that we billed approximately $10 million for inside wire maintenance
services
under the billing descriptions and time periods specified in the District
Court
ruling described above. Should other billing descriptions be
determined to be inadequate or if claims are allowed for additional time
periods, the amount of our potential exposure could increase
significantly. The Court’s order does not specify the award of
damages, the scope of which remains subject to additional fact-finding
and
resolution of what we believe are valid defenses to plaintiff’s
claims. Accordingly, we cannot reasonably estimate the amount or
range of possible loss at this time. However, considering the
one-time nature of any adverse claim, we do not believe that the ultimate
outcome of this litigation will have a material adverse effect on our
financial
position or on-going 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. Since July 2004,
we have recognized billings from our tariffs as revenues since we believe
such
tariffs are “deemed lawful”. For those billings from tariffs prior to
July 2004, we initially recorded 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
of June 30, 2007, 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 $43 million. The
settlement period related to the 2003/2004 monitoring period lapses on
September
30, 2007.
During
2006, we received
approximately $122.8 million in cash from the dissolution of the
RTB. Some portion of the gain recognized in connection with the
receipt of these proceeds, while not estimable at this time, may be subject
to
review by regulatory authorities which may result in us recording 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
July 2007, we called for
redemption on August 14, 2007 all of our $165 million aggregate principal
amount
4.75% convertible senior debentures, Series K, due 2032 at a redemption
price of
$1,023.80 per $1,000 principal amount of debentures, plus accrued and
unpaid
interest through August 13, 2007. In accordance with the indenture,
holders may elect to convert their debentures into shares of CenturyTel
common
stock at a conversion price of $40.455 per share prior to August 10,
2007.
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, 2006.
The
results of operations for the three months and six months ended June
30, 2007
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 an array of communications services,
including local and long distance voice, Internet access and broadband
services,
to customers in 25 states. We currently derive our revenues from
providing (i) local exchange and long distance voice services, (ii) network
access services, (iii) data services, which includes both high-speed
(“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 9 to our financial statements
included in Item 1 of Part I of this quarterly report.
On
April 30, 2007, we acquired all of
the outstanding stock of Madison River Communications Corp. (“Madison
River”). See Note 2 for additional information. We have
reflected the results of operations of the Madison River properties in
our
consolidated results of operations beginning May 1, 2007.
In
April 2007, we entered into a
settlement agreement with a carrier and received approximately $49 million
cash
(see Note 9). Such amount has been reflected in our second quarter
2007 results of operations as a component of “Network access”
revenues.
Effective
January 1, 2007, we changed our relationship with our provider of satellite
television service from a revenue sharing arrangement to an agency
relationship
and, in connection therewith, we received in the second quarter of
2007 a
non-recurring reimbursement of $5.9 million, of which $4.1 million
was reflected
as a reduction of cost of services and the remainder was reflected
as
revenues. This change has also resulted in us recognizing lower
recurring revenues and lower recurring operating costs compared to
our prior
method of accounting for this arrangement.
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 successfully integrating newly-acquired businesses
into
our operations and 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 continued access to credit markets on favorable
terms;
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, 2006. You should be aware that new factors may emerge
from time to time and it is not possible for us to identify all such
factors nor
can we predict the impact of each such factor on the business or the
extent to
which any one or more factors may cause actual results to differ from
those
reflected in any forward-looking statements. You are further
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, 2007 Compared
to
Three Months Ended June 30, 2006
Net
income was $112.3 million and
$152.2 million for the second quarter of 2007 and 2006,
respectively. Diluted earnings per share for the second quarter of
2007 and 2006 was $1.00 and $1.26, respectively. We recorded a
$49.0 million one-time increase to operating revenues in second quarter
2007
($.27 per share) upon settlement of a dispute with a
carrier. 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. The decline in the number of average
diluted shares outstanding is attributable to share repurchases that
have
occurred after June 30, 2006.
|
|
Three
months
|
|
|
|
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars,
except per share amounts,
|
|
|
|
and
shares in thousands)
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
231,836
|
|
|
|
164,993
|
|
Interest
expense
|
|
|
(57,667 |
) |
|
|
(50,639 |
) |
Other
income (expense)
|
|
|
8,080
|
|
|
|
123,459
|
|
Income
tax expense
|
|
|
(69,984 |
) |
|
|
(85,603 |
) |
Net
income
|
|
$ |
112,265
|
|
|
|
152,210
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
1.03
|
|
|
|
1.32
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
1.00
|
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
108,405
|
|
|
|
115,441
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
113,721
|
|
|
|
121,636
|
|
Operating
income increased $66.8
million (40.5%) as an $81.1 million (13.3%) increase in operating revenues
was
partially offset by a $14.2 million (3.2%) increase in operating
expenses.
Operating
Revenues
|
|
Three
months
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Voice
|
|
$ |
219,803
|
|
|
|
216,485
|
|
Network
access
|
|
|
266,202
|
|
|
|
221,663
|
|
Data
|
|
|
108,206
|
|
|
|
84,447
|
|
Fiber
transport and CLEC
|
|
|
40,714
|
|
|
|
36,051
|
|
Other
|
|
|
55,066
|
|
|
|
50,261
|
|
|
|
$ |
689,991
|
|
|
|
608,907
|
|
Of
the $3.3
million (1.5%) increase in voice revenues, approximately $10.9 million was
attributable to the Madison River properties acquired April 30,
2007. The remaining $7.6 million decrease was primarily due to (i) a
$5.3 million decrease due to a 5.0% decline in the average number of access
lines (normalized for acquisitions, dispositions and previously-disclosed
adjustments made during 2006) and (ii) a $2.0 million decline in our long
distance revenues primarily due to a decrease in the average rate we charge
our
customers.
Normalized
for the adjustments
mentioned above, access lines declined 29,300 (1.4%) during the second quarter
of 2007 compared to a decline of 24,100 (1.1%) during the second quarter
of
2006. We believe the decline in the number of access lines during
2007 and 2006 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 5.0% and
6.0%
for 2007.
Network
access revenues increased $44.5
million (20.1%) in the second quarter of 2007 primarily due to the $49.0
million
of one-time revenue recorded in second quarter 2007 upon settlement of a
dispute
with a carrier and $8.3 million of revenues contributed by Madison
River. Such increases were partially offset by a $12.8 million
decrease in network access revenues for our incumbent telephone operations,
principally due to (i) a $7.1 million decrease in 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 (ii) a
$3.3
million reduction in the partial recovery of lower operating costs through
revenue sharing arrangements and return on rate base. We believe that intrastate
minutes will continue to decline in 2007, although we cannot estimate the
magnitude of such decrease.
Data
revenues increased $23.8 million
(28.1%) substantially due to (i) an $18.9 million increase in DSL-related
revenues due primarily to growth in the number of DSL customers and (ii)
$8.5
million of revenues contributed by Madison River. Such increases were
partially offset by a $2.8 million decrease in special access revenues and
a
$1.3 million decrease in dial-up Internet revenues due to a decline in the
number of dial-up customers.
Fiber
transport and CLEC revenues
increased $4.7 million (12.9%), of which $3.7 million was due to growth in
our
incumbent fiber transport business and $1.3 million was contributed by Madison
River.
Other
revenues increased $4.8 million
(9.6%) primarily due to $3.1 million of revenues contributed by Madison
River. In connection with receiving a one-time reimbursement as
a result of our above-mentioned change in accounting for our relationship
with
our satellite television service provider, we recorded a $1.9 million
one-time increase to revenues in the second quarter of 2007. The
impact of the change in the arrangement to recurring revenues resulted in
a $1.9
million decrease in revenues in second quarter 2007 compared to
2006.
Operating
Expenses
|
|
Three
months
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$ |
226,388
|
|
|
|
216,191
|
|
Selling,
general and administrative
|
|
|
97,456
|
|
|
|
95,596
|
|
Depreciation
and amortization
|
|
|
134,311
|
|
|
|
132,127
|
|
|
|
$ |
458,155
|
|
|
|
443,914
|
|
Cost
of services and products increased
$10.2 million (4.7%) primarily due to (i) $12.1 million of costs incurred
by the
Madison River properties, (ii) a $5.5 million increase in DSL-related expenses
primarily due to growth in the number of DSL customers, and (iii) a $3.7
million
increase in expenses associated with pole attachments primarily due to rate
increases. Such increases were partially offset by (i) a $7.4 million
decrease in expenses associated with our satellite television service offering
due to a change in our arrangement as mentioned above (such reduction includes
a
$4.1 million one-time reimbursement of costs received from the service provider
in the second quarter of 2007 in connection with the change in the arrangement)
and (ii) a $3.9 million decrease in salaries and benefits due to fewer incumbent
employees resulting from our 2006 workforce reduction.
Selling,
general and administrative
expenses increased $1.9 million (1.9%) primarily due to $4.6 million of costs
incurred by Madison River and a $4.0 million increase in salaries and
benefits. Such increases were substantially offset by a $5.3 million
reduction in bad debt expense and a $1.6 million decrease in information
technology expenses.
Depreciation
and amortization increased
$2.2 million (1.7%) as a $7.2 million increase due to depreciation and
amortization incurred by Madison River and a $3.7 million increase due to
higher
levels of plant in service were substantially offset by a $7.6 million reduction
in depreciation expense due to certain assets becoming fully
depreciated.
Interest
Expense
Interest
expense increased $7.0 million
(13.9%) in the second quarter of 2007 compared to the second quarter of 2006
primarily due to an increase in average debt outstanding caused by the March
2007 issuance of $750 million of senior notes used to fund the Madison River
acquisition (see Note 8).
Other
Income (Expense)
Other
income (expense) includes the
effects of certain items not directly related to our core operations, including
gains/losses from nonoperating asset dispositions and impairments, our share
of
the income from our 49% interest in a cellular partnership, interest income
and
allowance for funds used during construction. Other income (expense)
was $8.1 million for the second quarter of 2007 compared to $123.5 million
for
the second quarter of 2006. The second quarter of 2006 included
nonrecurring pre-tax gains of $118.6 million, substantially all of which
related
to the redemption of our RTB stock upon dissolution of the RTB. Our
share of income from our 49% interest in a cellular partnership increased
$2.5
million in the second quarter of 2007 compared to the second quarter of 2006
(primarily due to one-time favorable adjustments in 2007).
Income
Tax Expense
The
effective income tax rate was 38.4%
and 36.0% for the three months ended June 30, 2007 and 2006,
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, 2007 Compared
to
Six Months Ended June 30, 2006
Net
income was $190.1 million and
$221.5 million for the first six months of 2007 and 2006,
respectively. Diluted earnings per share for the first six months of
2007 and 2006 was $1.67 and $1.79, respectively. We recorded a $49.0
million one-time increase to operating revenues in 2007 ($.26 per share)
upon
settlement of a dispute with a carrier. 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. The decline in the
number of average diluted shares outstanding is attributable to share
repurchases that have occurred since the beginning of 2006.
|
|
|
|
|
|
Six
months
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars,
except per share amounts,
|
|
|
|
and
shares in thousands)
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
399,919
|
|
|
|
322,917
|
|
Interest
expense
|
|
|
(104,628 |
) |
|
|
(100,725 |
) |
Other
income (expense)
|
|
|
13,370
|
|
|
|
128,056
|
|
Income
tax expense
|
|
|
(118,526 |
) |
|
|
(128,778 |
) |
Net
income
|
|
$ |
190,135
|
|
|
|
221,470
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
1.73
|
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
1.67
|
|
|
|
1.79
|
|
|
|
|
|
|
|
|
|
|
Average
basic shares outstanding
|
|
|
109,718
|
|
|
|
118,917
|
|
|
|
|
|
|
|
|
|
|
Average
diluted shares outstanding
|
|
|
115,015
|
|
|
|
124,798
|
|
Operating
income increased $77.0
million (23.8%) due to a $70.6 million (5.8%) increase in operating revenues
and
a $6.4 million (0.7%) decrease in operating expenses.
Operating
Revenues
|
|
Six
months
|
|
|
ended
June 30,
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Voice
|
|
$ |
428,878
|
|
|
|
433,499
|
|
Network
access
|
|
|
477,601
|
|
|
|
446,986
|
|
Data
|
|
|
204,070
|
|
|
|
167,685
|
|
Fiber
transport and CLEC
|
|
|
79,040
|
|
|
|
71,831
|
|
Other
|
|
|
101,257
|
|
|
|
100,197
|
|
|
|
$ |
1,290,846
|
|
|
|
1,220,198
|
|
The
$4.6
million (1.1%) decrease in voice revenues is primarily due to (i) a $10.4
million decrease due to a 5.0% decline in the average number of access lines
(normalized for acquisitions, dispositions and previously-disclosed adjustments
made during 2006); (ii) a $3.9 million decline as a result of a decrease in
revenues associated with extended area calling plans and (iii) a $2.4 million
decrease in our long distance revenues primarily due to a decrease in the
average rate we charge our customers. Such decreases were partially
offset by $10.9 million of revenues attributable to the Madison River properties
acquired April 30, 2007.
Normalized
for the adjustments
mentioned above, access lines declined 53,200 (2.5%) during the first six months
of 2007 compared to a decline of 47,900 (2.2%) during the first six months
of
2006. We believe the decline in the number of access lines during
2007 and 2006 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 5.0% and 6.0% for 2007.
Network
access revenues increased $30.6
million (6.8%) in the first six months of 2007 primarily due to the $49.0
million of one-time revenue recorded in second quarter 2007 upon settlement
of a
dispute with a carrier and $8.3 million of revenues contributed by Madison
River. Such increases were partially offset by a $26.7 million
decrease in network access revenues for our incumbent telephone operations,
principally due to (i) an $11.2 million decrease in the partial recovery of
lower operating costs through revenue sharing arrangements and return on rate
base and (ii) a $9.0 million decrease in 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 2007, although we cannot estimate
the magnitude of such decrease.
Data
revenues increased $36.4 million
(21.7%) substantially due to (i) a $36.6 million increase in DSL-related
revenues due primarily to growth in the number of DSL customers and (ii) $8.5
million of revenues contributed by Madison River. Such increases were
partially offset by a $6.3 million decrease in special access revenues primarily
due to certain customers disconnecting circuits and a $2.4 million decrease
in
dial-up Internet revenues due to a decline in the number of dial-up
customers.
Fiber
transport and CLEC revenues
increased $7.2 million (10.0%), of which $8.3 million was due to growth in
our
incumbent fiber transport business and $1.3 million was contributed by Madison
River. Such increases were partially offset by a $2.7 million
decrease in CLEC revenues primarily due to customer disconnects.
Other
revenues increased $1.1 million
(1.1%). Such increase was primarily due to $3.1 million of revenues
contributed by Madison River. In connection with receiving a one-time
reimbursement as a result of our above-described change in accounting for our
relationship with our satellite television service provider, we recorded a
$1.9
million one-time increase to revenues in 2007. The impact of the change in
the
arrangement to recurring revenues resulted in a $3.5 million decrease in
revenues for the six months ended June 30, 2007 compared to
2006. In addition, our directory revenues decreased $3.2
million in 2007 compared to 2006.
Operating
Expenses
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Cost
of services and products (exclusive of depreciation and
amortization)
|
|
$ |
439,919
|
|
|
|
438,746
|
|
Selling,
general and administrative
|
|
|
188,913
|
|
|
|
191,536
|
|
Depreciation
and amortization
|
|
|
262,095
|
|
|
|
266,999
|
|
|
|
$ |
890,927
|
|
|
|
897,281
|
|
Cost
of services and products increased
$1.2 million (0.3%) primarily due to (i) a $12.3 million increase in DSL-related
expenses due to growth in the number of DSL customers; (ii) $12.1 million of
costs incurred by our Madison River properties and (iii) a $4.4 million increase
in expenses associated with pole attachments primarily due to rate
increases. Such increases were substantially offset by (i) an $11.7
million decrease in salaries and benefits due to fewer incumbent employees
resulting from our 2006 workforce reduction; (ii) a $10.2 million decrease
in
expenses associated with our satellite television service offering due to a
change in our arrangement as mentioned above (such reduction includes a $4.1
million one-time reimbursement of costs received from the service provider
in
the second quarter of 2007 in connection with the change in the arrangement)
and
(iii) $5.5 million of severance and related costs associated with our 2006
workforce reduction.
Selling,
general and administrative
expenses decreased $2.6 million (1.4%) primarily due to (i) an $8.6 million
reduction in bad debt expense; (ii) a $3.7 million decrease in information
technology expenses; and (iii) a $2.3 million decrease in sales and marketing
expenses. Such decreases were partially offset by a $5.5 million
increase in salaries and benefits and $4.6 million of costs incurred by Madison
River.
Depreciation
and amortization decreased $4.9 million (1.8%) primarily due to a $14.9 million
reduction in depreciation expense due to certain assets becoming fully
depreciated and a $2.1 million reduction due to depreciation rate reductions
in
certain jurisdictions. Such decreases were substantially offset by a
$7.5 million increase
due to higher levels of plant in service and $7.2 million of depreciation and
amortization incurred by Madison River.
Interest
Expense
Interest
expense increased $3.9 million
(3.9%) in the first six months of 2007 compared to the first six months of
2006. A $7.8 million increase due to increased average debt
outstanding (primarily due to the $750 million of senior notes issued in March
2007 to fund the Madison River acquisition) was partially offset by a $2.9
million decrease due to lower average interest rates.
Other
Income (Expense)
Other
income (expense) includes the
effects of certain items not directly related to our core operations, including
gains/losses from nonoperating asset dispositions and impairments, our share
of
the income from our 49% interest in a cellular partnership, interest income
and
allowance for funds used during construction. Other income (expense)
was $13.4 million for the first six months of 2007 compared to $128.1 million
for the first six months of 2006. The first six months of 2006
included nonrecurring pre-tax gains of $118.6 million, substantially all of
which relates to the redemption of our RTB stock upon dissolution of the
RTB. Our share of income from our 49% interest in a cellular
partnership increased $2.4 million in the first six months of 2007 compared
to
2006 (primarily due to one-time favorable adjustments in
2007).
Income
Tax Expense
The
effective income tax rate was 38.4%
and 36.8% for the six months ended June 30, 2007 and 2006,
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.
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 $558.0 million during the first six months of 2007
compared to $406.3 million during the first six months of 2006. 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 $412.8 million and $8.3 million for the six months ended June 30, 2007
and
2006, respectively. We used $307.4 million of cash (net of cash
acquired) to purchase Madison River Communications Corp. (“Madison River”) on
April 30, 2007 (see below and Note 2 for additional
information). Payments for property, plant and equipment were $23.6
million less in the first six months of 2007 than in the comparable period
during 2006. Our budgeted capital expenditures for 2007 total
approximately $325 million. 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.
Net
cash
used in financing activities was $127.4 million during the first six months
of
2007 compared to $555.1 million during the first six months of
2006. In late March 2007, we publicly issued an aggregate of $750
million of Senior Notes (see Note 8 for additional information). The
net proceeds from the issuance of such Senior Notes aggregated approximately
$741.8 million and were used (along with cash on hand and approximately $50
million of borrowings under our commercial paper program) to (i) finance the
purchase price for the April 30, 2007 acquisition of Madison River ($322
million) and (ii) pay off Madison River’s existing indebtedness (including
accrued interest) at closing ($522 million). We invested the cash
proceeds from the debt offering in short-term cash equivalents prior to the
acquisition of Madison River.
We
repurchased 6.6 million shares (for $302.0 million) and 16.5 million shares
(for
$573.9 million) in the first six months of 2007 and 2006,
respectively. 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. 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.
As
described further in Note 13, we
have called for redemption on August 14, 2007, all of our $165 million aggregate
principal amount of convertible senior debentures, subject to the right of
holders to convert their debentures into shares of our common stock at a
conversion price of $40.455, which is equal to a conversion rate of
approximately 24.7188 shares per $1,000 principal amount of
debentures. Assuming that trading prices for our stock remain above
the $40.455 conversion price, we anticipate that all or substantially all of
the
holders will convert their debentures into stock. If we are required
to redeem any of our debentures for cash, we would fund such redemption payments
with cash on hand or short term borrowings.
We
have available a five-year, $750
million revolving credit facility which expires in December 2011. 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 are effectively
limited to the total amount available under our credit facility. As
of June 30, 2007, we had $87 million outstanding under our credit facility
or
commercial paper program.
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
Competitive Developments
As
of June 30, 2007, we believe that
over 30% of our access lines faced competition from cable voice offerings,
and
we expect that figure to increase to approximately 40-45% by December 31,
2007.
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, 2007, the fair value of
our long-term debt was estimated to be $3.1 billion based on the overall
weighted average rate of our debt of 6.7% and an overall weighted maturity
of 8
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 67 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 $118 million decrease in fair value of our long-term debt at
June 30, 2007. As of June 30, 2007, after giving effect to interest
rate swaps currently in place, approximately 84% 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, 2007, 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 2007, we
realized an average interest rate under these hedges of
9.0%. Interest expense was increased by $2.8 million during the first
six months of 2007 as a result of these hedges. The aggregate fair
market value of these hedges was $28.5 million at June 30, 2007 and is reflected
both as a liability and as a decrease in our underlying long-term debt on the
June 30, 2007 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 $13.2 million decrease in the fair value of these hedges
at June 30, 2007, and would also increase our interest expense.
In
anticipation of the issuance of
Senior Notes in connection with the Madison River acquisition, we entered into
four cash flow hedges that effectively locked in the interest rate on an
aggregate of $400 million of debt. The issuance of these Senior Notes
was completed in late March 2007 with the issuance of $500 million of 6.0%
Senior Notes, due 2017, and $250 million of 5.5% Senior Notes, due
2013. We locked in the interest rate on (i) $200 million of 10-year
debt at 5.0675% and (ii) $200 million of 10-year debt at 5.05%. In
March 2007, upon settlement of the hedges, we received an aggregate of $765,000
cash, which is being amortized as a reduction of interest expense over the
10-year term of the debt.
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, 2007.
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, 2007. 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 12 included in Part I, Item 1,
of this report.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
After
completing the $500 million
accelerated share repurchase agreements with investment banks in mid-2006 as
part of our $1.0 billion share repurchase program authorized in February 2006,
we began repurchasing our common stock under the remaining $500 million of
the
program in August 2006. We completed the remaining $500 million of
the program in June 2007.
The
following table reflects the
repurchases of our common stock during the second quarter of 2007 under our
$1.0
billion program. All of these repurchases were effected in
open-market transactions in accordance with our stock repurchase
program.
|
|
|
|
|
|
|
|
Total
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Dollar
Value
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
of
Shares
|
|
|
|
|
|
|
|
|
|
Purchased
as
|
|
|
that
|
|
|
|
|
|
|
|
|
|
Part
of Publicly
|
|
|
May
Yet Be
|
|
|
|
Total
Number
|
|
|
|
|
|
Announced
|
|
|
Purchased
|
|
|
|
of
Shares
|
|
|
Average
Price
|
|
|
Plans
or
|
|
|
Under
the Plans
|
|
Period
|
|
Purchased
|
|
|
Per
Share
|
|
|
Programs
|
|
|
or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1 – April 30, 2007
|
|
|
981,600
|
|
|
$ |
45.77
|
|
|
|
981,600
|
|
|
$ |
91,378,071
|
|
May
1 – May 31, 2007
|
|
|
1,031,975
|
|
|
$ |
47.89
|
|
|
|
1,031,975
|
|
|
$ |
41,954,387
|
|
June
1 – June 30, 2007
|
|
|
856,997
|
|
|
$ |
48.95
|
|
|
|
856,997
|
|
|
$ |
-
|
|
Total
|
|
|
2,870,572
|
|
|
$ |
47.49
|
|
|
|
2,870,572
|
|
|
|
|
|
*
* * * *
* * * * * *
In
addition to the above repurchases,
we also withheld 37,893 shares of stock at an average price of $43.70 per share
to pay taxes due upon vesting of restricted stock for certain of our employees
in April 2007.
Item
4. Submission
of Matters to a Vote of Security Holders
At
our annual meeting of shareholders
on May 10, 2007, the shareholders elected four Class I directors to serve until
the 2010 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
I Nominees
|
For
|
Withheld
|
William
R. Boles, Jr
|
129,619,737
|
14,934,579
|
W.
Bruce Hanks
|
134,045,353
|
10,508,963
|
C.
G. Melville, Jr.
|
136,143,133
|
8,411,183
|
Glen
F. Post, III
|
135,817,890
|
8,736,426
|
The
Class II
and Class III directors whose terms continued after the meeting
are:
|
Class
II
|
|
|
Class
III
|
|
|
Virginia
Boulet
|
|
|
Fred
R. Nichols
|
|
|
Calvin
Czeschin
|
|
|
Harvey
P. Perry
|
|
|
James
B. Gardner
|
|
|
Jim
D. Reppond
|
|
|
Gregory
J. McCray
|
|
|
Joseph
R. Zimmel
|
|
The
following
represents the votes cast by the shareholders to ratify the appointment of
KPMG
LLP as our independent auditor for 2007:
|
For
|
|
128,302,227
|
|
|
Against
|
|
12,195,821
|
|
|
Abstain
|
|
4,056,268
|
|
The
following
represents the votes cast by the shareholders for the proposal regarding
executive compensation:
|
For
|
|
24,390,597
|
|
|
Against
|
|
105,841,147
|
|
|
Abstain
|
|
4,963,316
|
|
|
Broker
non-votes
|
|
9,359,256
|
|
For
additional information on each of these matters voted upon, see our proxy
statement dated April 4, 2007.
Item
6. Exhibits
and Reports on Form 8-K
A. Exhibits
|
4.2(l)
|
Fourth
Supplemental Indenture, dated as of March 26, 2007, to Indenture
dated
March 31, 1994, by and between CenturyTel and Regions Bank, as
trustee
(incorporated by reference to Exhibit 4.1 of our Current Report
on Form
8-K dated March 29, 2007).
|
|
4.2(m)
|
Form
of the 6.0% Senior Notes, Series N, due 2017 and 5.5% Senior Notes,
Series
O, due 2013 (included in Exhibit
4.2(l)).
|
|
10.1
|
Amendment
No. 6 to Registrant’s Key Employee Incentive Compensation Plan, dated
February 27, 2007.
|
|
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 May 3, 2007:
Items
2.02, 8.01 and 9.01 - Results of Operations and Financial Condition, Other
Events and Financial Statements and Exhibits. News release announcing
first quarter 2007 operating results and press release announcing the completion
of the acquisition of Madison River Communications Corp.
The
following items were reported in the Form 8-K filed June 28, 2007:
Items
8.01 and 9.01 – Other Events and Financial Statements and
Exhibits. Press release announcing completion of $1 billion share
repurchase program.
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 8, 2007
|
/s/
Neil
A. Sweasy
|
|
Neil
A. Sweasy
|
|
Vice
President and Controller
|
|
(Principal
Accounting Officer)
|