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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, 2003
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.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
[X] Yes [ ] No
As of July 31, 2003, there were 143,909,263 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,
2003 and 2002 3
Consolidated Statements of Comprehensive Income--
Three Months and Six Months Ended June 30, 2003
and 2002 4
Consolidated Balance Sheets--
June 30, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 2003 and 2002 6
Consolidated Statements of Stockholders' Equity--
Six Months Ended June 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-27
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 28-29
Item 4. Controls and Procedures 29
Part II. Other Information:
Item 1. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of
Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 30-31
Signature 31
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,
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 514,972 380,499 1,026,350 753,230
Other 75,176 58,203 144,328 108,390
- ---------------------------------------------------------------------------------------------------------------
Total operating revenues 590,148 438,702 1,170,678 861,620
- ---------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses (exclusive
of depreciation and amortization) 284,962 230,033 562,721 436,877
Corporate overhead costs allocable to
discontinued operations (See Note 4) - 5,134 - 9,932
Depreciation and amortization 116,805 94,004 234,803 186,231
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 401,767 329,171 797,524 633,040
- ---------------------------------------------------------------------------------------------------------------
OPERATING INCOME 188,381 109,531 373,154 228,580
- ---------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (55,957) (54,157) (111,549) (104,805)
Income from unconsolidated cellular entity 1,590 1,960 3,159 2,360
Nonrecurring gains and losses - 3,709 - 3,709
Other income and expense 974 2,485 42 217
- ---------------------------------------------------------------------------------------------------------------
Total other income (expense) (53,393) (46,003) (108,348) (98,519)
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 134,988 63,528 264,806 130,061
Income tax expense 47,621 22,046 93,520 45,462
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 87,367 41,482 171,286 84,599
DISCONTINUED OPERATIONS (See Note 4)
Income from discontinued operations, net of
$20,888 and $36,418 tax - 37,281 - 64,931
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 87,367 78,763 171,286 149,530
===============================================================================================================
BASIC EARNINGS PER SHARE
From continuing operations $ .61 .29 1.20 .60
From discontinued operations $ - .26 - .46
Basic earnings per share $ .61 .56 1.20 1.06
DILUTED EARNINGS PER SHARE
From continuing operations $ .60 .29 1.19 .59
From discontinued operations $ - .26 - .46
Diluted earnings per share $ .60 .55 1.19 1.05
DIVIDENDS PER COMMON SHARE $ .055 .0525 .11 .105
===============================================================================================================
AVERAGE BASIC SHARES OUTSTANDING 143,329 141,243 143,109 141,136
===============================================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 144,475 142,705 144,136 142,679
===============================================================================================================
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,
- --------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 87,367 78,763 171,286 149,530
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Minimum pension liability adjustment:
Minimum pension liability adjustment, net
of ($7,946) and ($2,462) tax 14,758 - 4,572 -
Derivative instruments:
Net gains (losses) on derivatives hedging
the variability of cash flows, net
of ($137) and $36 tax 255 - (67) -
Reclassification adjustment for losses
included in net income, net of ($314)
and ($487) tax 583 - 905 -
- --------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 102,963 78,763 176,696 149,530
==============================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 24,322 3,661
Accounts receivable, less allowance of $22,982 and $33,962 238,089 272,992
Materials and supplies, at average cost 9,417 10,150
Other 10,910 9,099
- ------------------------------------------------------------------------------------------------
Total current assets 282,738 295,902
- ------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,473,683 3,531,645
- ------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,428,699 3,427,281
Other 507,928 515,580
- ------------------------------------------------------------------------------------------------
Total investments and other assets 3,936,627 3,942,861
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,693,048 7,770,408
================================================================================================
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 118,941 70,737
Accounts payable 103,640 64,825
Accrued expenses and other liabilities
Salaries and benefits 71,572 63,937
Income taxes 55,537 40,897
Other taxes 40,687 28,183
Interest 63,816 59,045
Other 21,177 18,596
Advance billings and customer deposits 44,162 41,884
- ------------------------------------------------------------------------------------------------
Total current liabilities 519,532 388,104
- ------------------------------------------------------------------------------------------------
LONG-TERM DEBT 3,137,772 3,578,132
- ------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 765,220 716,168
- ------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000 shares,
issued and outstanding 143,818,273 and 142,955,839 shares 143,818 142,956
Paid-in capital 558,228 537,804
Accumulated other comprehensive loss, net of tax (31,293) (36,703)
Retained earnings 2,592,796 2,437,472
Unearned ESOP shares (1,000) (1,500)
Preferred stock - non-redeemable 7,975 7,975
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 3,270,524 3,088,004
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,693,048 7,770,408
================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months
ended June 30,
- -----------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 171,286 149,530
Adjustments to reconcile net income to net cash provided
by operating activities from continuing operations:
Income from discontinued operations, net of tax - (64,931)
Depreciation and amortization 234,803 186,231
Income from unconsolidated cellular entity (3,159) (2,360)
Deferred income taxes 43,841 29,259
Nonrecurring gains and losses - (3,709)
Changes in current assets and current liabilities:
Accounts receivable 36,053 34,958
Accounts payable 38,338 7,610
Accrued income and other taxes 27,144 10,045
Other current assets and other current liabilities, net 14,408 19,423
Increase in other noncurrent assets (11,501) (14,408)
Increase in other noncurrent liabilities 8,324 12,393
Other, net 19,536 14,256
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities from
continuing operations 579,073 378,297
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Payments for property, plant and equipment (154,258) (179,033)
Acquisitions, net of cash acquired (35,584) (43,768)
Distributions from unconsolidated cellular entity 1,104 2,861
Other, net (1,536) 3,413
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities from
continuing operations (190,274) (216,527)
- -----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt - 503,249
Payments of debt (397,916) (416,498)
Proceeds from settlement of interest rate hedge contract 22,315 -
Proceeds from issuance of common stock 20,929 8,577
Cash dividends (15,962) (15,020)
Equity unit issuance costs - (15,867)
Other, net 2,496 1,221
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities from
continuing operations (368,138) 65,662
- -----------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations (See Note 4) - 71,142
- -----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 20,661 298,574
Cash and cash equivalents at beginning of period 3,661 3,496
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 24,322 302,070
=====================================================================================================
Supplemental cash flow information:
Income taxes paid $ 42,322 25,389
=====================================================================================================
Interest paid (net of capitalized interest of $37 and $840) $ 106,741 100,260
=====================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months
ended June 30,
- -----------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 142,956 141,233
Issuance of common stock through dividend reinvestment,
incentive and benefit plans 862 428
- -----------------------------------------------------------------------------------------------------
Balance at end of period 143,818 141,661
- -----------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 537,804 524,668
Equity unit issuance costs and contract adjustment payments - (24,271)
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 20,067 8,149
Amortization of unearned compensation and other 357 1,393
- -----------------------------------------------------------------------------------------------------
Balance at end of period 558,228 509,939
- -----------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX
Balance at beginning of period (36,703) -
Change in other comprehensive loss, net of tax 5,410 -
- -----------------------------------------------------------------------------------------------------
Balance at end of period (31,293) -
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 2,437,472 1,666,004
Net income 171,286 149,530
Cash dividends declared
Common stock - $.055 and $.0525 per share, respectively (15,763) (14,821)
Preferred stock (199) (199)
- -----------------------------------------------------------------------------------------------------
Balance at end of period 2,592,796 1,800,514
- -----------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (1,500) (2,500)
Release of ESOP shares 500 500
- -----------------------------------------------------------------------------------------------------
Balance at end of period (1,000) (2,000)
- -----------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 7,975
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,270,524 2,458,089
=====================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
(1) Basis of Financial Reporting
The consolidated financial statements of CenturyTel, Inc. and its
subsidiaries (the "Company") include the accounts of CenturyTel, Inc.
("CenturyTel") 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 which are
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 the Company's annual report on Form 10-K for the year
ended December 31, 2002. Certain 2002 amounts have been reclassified to be
consistent with the Company's 2003 presentation.
The unaudited financial information for the three months and six months
ended June 30, 2003 and 2002 has not been audited by independent certified
public accountants; however, in the opinion of management, all adjustments
(which include only normal recurring 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.
As a result of the Company's August 1, 2002 sale of substantially all of
its wireless operations (see Note 4), such operations have been reflected as
discontinued operations for the three months and six months ended June 30, 2002.
In its December 31, 2002 consolidated balance sheet, the Company reflected as
"assets held for sale" a minority interest in a cellular partnership that it had
previously agreed to sell to ALLTEL Corporation upon the satisfaction of various
closing conditions. In light of the failure of the parties to agree upon whether
the closing conditions were met, the Company determined during the first quarter
of 2003 to retain such investment; therefore, for reporting purposes, this
investment (and its related earnings) has been reclassified from discontinued
operations to continuing operations on the accompanying financial statements as
of and for the three months and six months ended June 30, 2003. Prior periods
have been restated to reflect this investment (and its related earnings) as part
of continuing operations.
(2) Net Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
June 30, Dec. 31,
2003 2002
- ------------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 6,467,310 6,347,900
Accumulated depreciation (3,332,200) (3,136,107)
- ------------------------------------------------------------------------------
3,135,110 3,211,793
- ------------------------------------------------------------------------------
Other, at cost 550,938 521,292
Accumulated depreciation (212,365) (201,440)
- ------------------------------------------------------------------------------
338,573 319,852
- ------------------------------------------------------------------------------
$ 3,473,683 3,531,645
==============================================================================
Approximately $16.5 million of net property, plant and equipment was
transferred from other operations to telephone operations during the first
quarter of 2003.
(3) Acquisitions
On July 1, 2002, the Company completed the acquisition of approximately
300,000 telephone access lines in the state of Alabama from Verizon
Communications, Inc. ("Verizon") for approximately $1.022 billion cash. On
August 31, 2002, the Company completed the acquisition of approximately 350,000
telephone access lines in the state of Missouri from Verizon for approximately
$1.179 billion cash. The assets purchased included (i) telephone access lines
and related property and equipment comprising Verizon's local exchange
operations in predominantly rural markets throughout Alabama and Missouri, (ii)
Verizon's assets used to provide digital subscriber line ("DSL") and other high
speed data services within the purchased exchanges and (iii) approximately 2,800
route miles of fiber optic cable within the purchased exchanges. The acquired
assets did not include Verizon's cellular, personal communications services
("PCS"), long distance, dial-up Internet, or directory publishing operations, or
rights under various Verizon contracts, including those relating to customer
premise equipment. The Company did not assume any liabilities of Verizon other
than (i) those associated with contracts, facilities and certain other assets
transferred in connection with the purchase and (ii) certain employee-related
liabilities, including liabilities for postretirement health benefits.
The following pro forma information represents the consolidated results of
continuing operations of the Company for the six months ended June 30, 2002 as
if the Verizon acquisitions had been consummated as of January 1, 2002.
Six months
ended June 30, 2002
---------------------
(Dollars in thousands)
(unaudited)
Operating revenues from continuing operations $ 1,127,934
Income from continuing operations $ 106,029
Basic earnings per share from
continuing operations $ .75
Diluted earnings per share from
continuing operations $ .74
The pro forma information is based on various assumptions and estimates.
The pro forma information makes no pro forma adjustments to reflect any assumed
consummation of the Company's sale of its wireless operations described in Note
4 (or any use of the sale proceeds therefrom) at a date earlier than the actual
closing date of August 1, 2002. The pro forma information is not necessarily
indicative of the operating results that would have occurred if the Verizon
acquisitions had been consummated as of January 1, 2002, nor is it necessarily
indicative of future operating results. The pro forma information does not give
effect to any potential revenue enhancements or cost synergies or other
operating efficiencies that could result from the acquisitions. The actual
results of operations of the Verizon properties are included in the consolidated
financial statements only from the respective dates of acquisition.
In June 2003, the Company purchased the assets of a fiber transport
company for $39.4 million cash (of which $35.6 million was paid at acquisition
and the remaining $3.8 million was paid as a deposit in 2002). This acquisition
is not expected to have a material effect on the Company's results of
operations. The Company agreed in July 2003 to purchase additional fiber
transport assets for $20 million, subject to various purchase price adjustments,
and hopes to complete this acquisition late in the third quarter of 2003.
(4) Discontinued Operations
On August 1, 2002, the Company sold substantially all of its wireless
operations principally to an affiliate of ALLTEL Corporation for an aggregate of
approximately $1.59 billion in cash. As a result, such operations for the three
months and six months ended June 30, 2002 have been reflected as discontinued
operations in the Company's consolidated financial statements. Proceeds from the
sale of the wireless operations were used to partially fund the Company's
acquisitions of telephone properties in Alabama and Missouri during the third
quarter of 2002.
The following table represents certain summary income statement
information related to the Company's wireless operations reflected as
discontinued operations for 2002.
Three months ended Six months ended
June 30, 2002 June 30, 2002
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 106,272 208,693
- -----------------------------------------------------------------------------------------
Operating income (1) $ 51,409 86,425
Income from unconsolidated cellular entities 10,722 21,836
Minority interest expense (4,039) (6,910)
Other income and (expense) 77 (2)
- -----------------------------------------------------------------------------------------
Pre-tax income from discontinued operations 58,169 101,349
Income tax expense (20,888) (36,418)
- -----------------------------------------------------------------------------------------
Income from discontinued operations, net of tax $ 37,281 64,931
=========================================================================================
(1) Excludes corporate overhead costs of $5.1 million and $9.9 million for
the three months and six months ended June 30, 2002, respectively,
allocated to the wireless operations.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations for 2002.
Six months ended
June 30, 2002
- -------------------------------------------------------------------------------
(Dollars in thousands)
Cash provided by operating activities $ 83,904
Cash used in investing activities (12,762)
- -------------------------------------------------------------------------------
Net cash provided by discontinued operations $ 71,142
===============================================================================
(5) Goodwill and Other Intangible Assets
The following information relates to the Company's goodwill as of June 30,
2003 and December 31, 2002:
June 30, Dec. 31,
2003 2002
- -----------------------------------------------------------------------------
(Dollars in thousands)
Carrying amount of goodwill
Telephone segment $ 3,383,441 3,382,113
Other operations 45,258 45,168
- -----------------------------------------------------------------------------
Total goodwill $ 3,428,699 3,427,281
=============================================================================
The Company also has certain intangible assets that are subject to
amortization in accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"). These intangible
assets relate to certain customer base assets acquired in connection with the
acquisitions of properties from Verizon in 2002. The gross carrying amount (and
accumulated amortization) of these assets was $22.7 million ($1.5 million) as of
June 30, 2003 and $22.7 million ($729,000) as of December 31, 2002. Total
amortization expense for the first six months of 2003 was $757,000 and is
expected to be $1.5 million annually for each of the next five years.
In connection with its acquisitions of properties from Verizon in 2002,
the Company allocated $35.3 million of the purchase price as an intangible asset
associated with franchise costs. Such asset has an indefinite life and is not
subject to amortization currently.
(6) Stock-based Compensation
The Company accounts for employee stock compensation plans using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," as allowed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Options have been granted to employees at a price
either equal to or exceeding the then-current market price. Accordingly, the
Company has not recognized compensation cost in connection with issuing stock
options.
If compensation cost for CenturyTel's options had been recognized in
accordance with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for the three months and six months ended June 30, 2003 and 2002
would have been as follows:
Three months Six months
ended June 30, ended June 30,
- -------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 87,367 78,763 171,286 149,530
Less: Total stock-based employee compensation
expense determined under fair value based
method, net of tax $ (3,346) (4,141) (6,880) (7,626)
- -------------------------------------------------------------------------------------------------------
Pro forma net income $ 84,021 74,622 164,406 141,904
=======================================================================================================
Basic earnings per share
As reported $ .61 .56 1.20 1.06
Pro forma $ .59 .53 1.15 1.00
Diluted earnings per share
As reported $ .60 .55 1.19 1.05
Pro forma $ .58 .52 1.14 .99
- -------------------------------------------------------------------------------------------------------
(7) Business Segments
The Company's only separately reportable business segment is its telephone
operations. The operating income of this segment is reviewed by the Company's
chief operating decision maker to assess performance and make business
decisions. Due to the August 1, 2002 sale of the Company's wireless operations,
such operations (which were previously reported as a separate segment) are
classified as discontinued operations (see Note 4). Other operations include,
but are not limited to, the Company's non-regulated long distance operations,
Internet operations, competitive local exchange carrier operations and fiber
transport operations.
Three months Six months
ended June 30, ended June 30,
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Telephone $ 514,972 380,499 1,026,350 753,230
Other operations 75,176 58,203 144,328 108,390
- -------------------------------------------------------------------------------------------------------------------
Total operating revenues $ 590,148 438,702 1,170,678 861,620
===================================================================================================================
Operating income
Telephone $ 173,582 103,709 345,957 221,677
Other operations 14,799 10,956 27,197 16,835
Corporate overhead costs allocable to
discontinued operations (See Note 4) - (5,134) - (9,932)
- --------------------------------------------------------------------------------------------------------------------
Total operating income $ 188,381 109,531 373,154 228,580
===================================================================================================================
Operating income $ 188,381 109,531 373,154 228,580
Interest expense (55,957) (54,157) (111,549) (104,805)
Income from unconsolidated cellular entity 1,590 1,960 3,159 2,360
Nonrecurring gains and losses - 3,709 - 3,709
Other income and expense 974 2,485 42 217
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense $ 134,988 63,528 264,806 130,061
===================================================================================================================
June 30, Dec. 31,
2003 2002
- ------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Telephone $ 6,823,141 6,962,713
Other operations 869,907 807,695
- ------------------------------------------------------------------------------
Total assets $ 7,693,048 7,770,408
==============================================================================
(8) Accounting Pronouncements
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
which addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred and be capitalized as part of the book
value of the long-lived asset.
Although the Company generally has had no legal obligation to remove
obsolete assets, depreciation rates of certain assets established by regulatory
authorities for the Company's telephone operations subject to Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"), have historically included a component for
removal costs in excess of the related estimated salvage value. Notwithstanding
the adoption of SFAS 143, SFAS 71 requires the Company to continue to reflect
this accumulated liability for removal costs in excess of salvage value even
though there is no legal obligation to remove the assets. For the Company's
telephone operations acquired from Verizon in 2002 and its other operations
(neither of which are subject to SFAS 71), the Company has not accrued a
liability for anticipated removal costs in the past. For these reasons, the
adoption of SFAS 143 did not have a material effect on the Company's financial
statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS 150"), which
provides standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for pre-existing instruments as of the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have
a material impact on the Company's financial condition or results of operations.
(9) Commitments and Contingencies
Certain legal proceedings in which the Company is involved are discussed
in Part II, Item 8, of the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, and Part I, Item 1, of the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2003. From time to time,
the Company is involved in other litigation incidental to its business,
including administrative hearings of state public utility commissions relating
primarily to rate making and competition related issues, actions relating to
employee claims, occasional grievance hearings before labor regulatory agencies
and miscellaneous third party tort actions.
(10) Derivative Instruments
In May 2003, the Company terminated its fair value interest rate hedge
associated with $500 million aggregate principal amount of its Series H senior
notes, due 2010. In connection with such termination, the Company received
approximately $22.3 million in cash upon settlement, which represented the fair
value of the hedge at the termination date. Such amount will be amortized as a
reduction of interest expense through 2010, the maturity date of the Series H
notes.
In May 2003, the Company entered into a fair value interest rate hedge
associated with $250 million of its $500 million aggregate principal amount of
Series L senior notes, due 2012, that pay interest at a fixed rate of 7.875%.
This hedge is a "fixed to variable" interest rate swap that effectively converts
the Company's fixed rate interest payment obligations under these notes into
obligations to pay variable rates equal to the six-month London InterBank
Offered Rate ("LIBOR") plus 3.50% with settlement and rate reset dates occurring
each six months through the expiration of the hedge in August 2012. As of June
30, 2003, the Company realized an interest rate of 4.74% related to such hedge.
Interest expense was reduced by $1.1 million during the six months ended June
30, 2003 as a result of this hedge. The fair value of such hedge at June 30,
2003 was $7.6 million and is reflected on the accompanying balance sheet as both
as asset (included in "Other assets") and as an increase to the Company's
underlying long-term debt.
In July 2003, the Company entered into three separate fair value interest
rate hedges associated with the remaining $250 million of its $500 million
aggregate principal amount of Series L notes that pay variable rates that range
from the six-month LIBOR plus 3.229% to the six-month LIBOR plus 3.67%. All
three of these hedges are effective beginning August 15, 2003 and have the same
settlement and rate reset provisions that govern the Company's above-described
$250 million hedge.
Item 2.
CenturyTel, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the Company's annual report on Form 10-K for
the year ended December 31, 2002. The results of operations for the three months
and six months ended June 30, 2003 are not necessarily indicative of the results
of operations which might be expected for the entire year.
CenturyTel, Inc. and its subsidiaries (the "Company") is a regional
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and data services to customers in 22 states.
On July 1, 2002, the Company acquired the local exchange telephone
operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama
for approximately $1.022 billion cash. On August 31, 2002, the Company acquired
the local exchange telephone operations of Verizon in the state of Missouri for
approximately $1.179 billion cash. The results of operations for the Verizon
assets acquired are reflected in the Company's consolidated results of
operations subsequent to each respective acquisition.
On August 1, 2002, the Company sold substantially all of its wireless
operations to an affiliate of ALLTEL Corporation ("Alltel") and certain other
purchasers in exchange for an aggregate of approximately $1.59 billion in cash.
As a result, the Company's wireless operations for the three months and six
months ended June 30, 2002 have been reflected as discontinued operations on the
Company's consolidated statements of income and cash flows. For further
information, see the subsections entitled "Discontinued Operations" below.
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the Company's
ability to effectively manage its growth, including integrating newly-acquired
businesses into the Company's operations, hiring adequate numbers of qualified
staff and successfully upgrading its billing and other information systems; the
risks inherent in rapid technological change; the effects of ongoing changes in
the regulation of the communications industry; the effects of greater than
anticipated competition in the Company's markets; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product or service offerings on a timely and
cost-effective basis; the Company's ability to collect its receivables from
financially troubled communications companies; and the effects of more general
factors such as changes in interest rates, in general market 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 1
to the Company's Annual Report on Form 10-K for the year ended December 31,
2002. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to update any of its forward-looking statements for any reason.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 Compared
to Three Months Ended June 30, 2002
Net income (and diluted earnings per share) was $87.4 million ($.60) and
$78.8 million ($.55) for the second quarter of 2003 and 2002, respectively.
Income from continuing operations was $87.4 million for the second quarter of
2003 and $41.5 million for the second quarter of 2002. Diluted earnings per
share from continuing operations was $.60 during the second quarter of 2003
compared to $.29 during the second quarter of 2002.
Three months
ended June 30,
- -------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income
Telephone $ 173,582 103,709
Other 14,799 10,956
Corporate overhead costs allocable to discontinued operations - (5,134)
- -------------------------------------------------------------------------------------------------
188,381 109,531
Interest expense (55,957) (54,157)
Income from unconsolidated cellular entity 1,590 1,960
Nonrecurring gains and losses - 3,709
Other income and expense 974 2,485
Income tax expense (47,621) (22,046)
- -------------------------------------------------------------------------------------------------
Income from continuing operations 87,367 41,482
Discontinued operations, net of tax - 37,281
- -------------------------------------------------------------------------------------------------
Net income $ 87,367 78,763
=================================================================================================
Basic earnings per share
From continuing operations $ .61 .29
From discontinued operations $ - .26
Basic earnings per share $ .61 .56
Diluted earnings per share
From continuing operations $ .60 .29
From discontinued operations $ - .26
Diluted earnings per share $ .60 .55
- -------------------------------------------------------------------------------------------------
Average basic shares outstanding 143,329 141,243
=================================================================================================
Average diluted shares outstanding 144,475 142,705
=================================================================================================
Contributions to operating revenues and operating income by the Company's
telephone and other operations for the three months ended June 30, 2003 and 2002
were as follows:
Three months
ended June 30,
- --------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.3% 86.7
Other operations 12.7% 13.3
Operating income
Telephone operations 92.1% 94.7
Other operations 7.9% 10.0
Corporate overhead costs allocable to discontinued operations -% (4.7)
- --------------------------------------------------------------------------------------------
Telephone Operations
The Company conducts its telephone operations in rural, suburban and
small urban communities in 22 states. As of June 30, 2003, approximately 91% of
the Company's 2.4 million access lines were in Wisconsin, Missouri, Alabama,
Arkansas, Washington, Michigan, Louisiana, Colorado, Ohio and Oregon. The
operating revenues, expenses and income of the Company's telephone operations
for the three months ended June 30, 2003 and 2002 are summarized below.
Three months
ended June 30,
- ---------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------
Operating revenues
Local service $ 189,264 125,357
Network access 280,827 220,702
Other 44,881 34,440
- ---------------------------------------------------------------------------------
514,972 380,499
- ---------------------------------------------------------------------------------
Operating expenses
Plant operations 125,951 96,147
Customer operations 42,243 32,385
Corporate and other 60,899 58,099
Depreciation and amortization 112,297 90,159
- ---------------------------------------------------------------------------------
341,390 276,790
- ---------------------------------------------------------------------------------
Operating income $ 173,582 103,709
=================================================================================
Telephone operating income increased $69.9 million (67.4%) due to an
increase in operating revenues of $134.5 million (35.3%) which was partially
offset by an increase in operating expenses of $64.6 million (23.3%).
Of the $63.9 million increase in local service revenues, $58.7 million
was due to the properties acquired from Verizon in the third quarter of 2002. Of
the remaining $5.2 million increase, $2.3 million was due to increased provision
of custom calling features and $1.5 million was due to increased rates in
certain jurisdictions.
Network access revenues increased $60.1 million in the second quarter of
2003, of which $58.1 million was due to the properties acquired from Verizon in
the third quarter of 2002. The remaining $2.0 million increase is primarily due
to a $3.6 million increase in the partial recovery of higher operating expenses
through revenue sharing arrangements in which the Company participates with
other telephone companies. Such increase was partially offset by a $1.5 million
decrease in revenues from the federal Universal Service Fund due to favorable
adjustments recorded in the second quarter of 2002 (retroactive to January 1,
2002) as a result of Federal Communications Commission actions to resize the
fund. Decreased intrastate revenues resulting from reduced intrastate minutes
were offset by higher intrastate revenues due to revised settlement factors with
other carriers effective in the second quarter of 2003.
Other revenues increased $10.4 million during the second quarter of 2003
primarily due to $10.9 million of revenues from the properties acquired from
Verizon in the third quarter of 2002.
Access lines declined 3,800 (0.16%) during the three months ended June
30, 2003 compared to 1,160 (0.06%) during the three months ended June 30, 2002.
The Company believes the decline in the number of access lines during 2003 is
primarily due to soft general economic conditions in the Company's markets and
the displacement of traditional wireline telephone services by other competitive
services. Based on current conditions, the Company expects to incur a decline in
access lines of 1 to 2% on an annualized basis for 2003.
Plant operations expenses increased $29.8 million (31.0%), of which $33.4
million was due to the properties acquired from Verizon in the third quarter of
2002. Such increase was partially offset by a $2.3 million decrease in
information technology expenses and a $1.1 million decrease in repairs and
maintenance expenses.
During the second quarter of 2003 customer operations expenses increased
$9.9 million (30.4%), of which $10.6 million was due to the properties acquired
from Verizon in the third quarter of 2002.
Corporate and other expenses increased $2.8 million (4.8%) in the second
quarter of 2003 compared to the second quarter of 2002. The properties acquired
from Verizon in the third quarter of 2002 contributed $15.9 million of the
increase which was substantially offset by a $12.3 million decrease in the
provision for uncollectible receivables. The Company recorded a $15.0 million
reserve for uncollectible receivables in the second quarter of 2002, primarily
related to the bankruptcy of MCI (formerly WorldCom, Inc.).
Depreciation and amortization increased $22.1 million (24.6%), of which
$21.8 million was due to the properties acquired from Verizon in the third
quarter of 2002. The remaining increase is primarily due to an increase in
depreciation expense due to higher levels of plant in service.
Other Operations
Other operations include the results of continuing operations of the
Company which are not included in the telephone segment including, but not
limited to, the Company's non-regulated long distance operations, Internet
operations, competitive local exchange carrier ("CLEC") operations and fiber
transport operations. In June 2003, the Company acquired the assets of a fiber
optic transport business for $39.4 million cash (which the Company operates
under the name LightCore). The operating revenues, expenses and income of the
Company's other operations for the three months ended June 30, 2003 and 2002 are
summarized below.
Three months
ended June 30,
- ---------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 43,201 34,462
Internet 19,850 14,706
Other 12,125 9,035
- ---------------------------------------------------------------------------
75,176 58,203
- ---------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 55,869 43,402
Depreciation and amortization 4,508 3,845
- ---------------------------------------------------------------------------
60,377 47,247
- ---------------------------------------------------------------------------
Operating income $ 14,799 10,956
===========================================================================
The $8.7 million increase in long distance revenues was primarily
attributable to the growth in the number of customers and increased minutes of
use ($9.8 million), primarily due to penetration of the markets acquired from
Verizon in 2002. Such increase was partially offset by a decrease in the average
rate charged by the Company ($1.1 million). The number of long distance
customers as of June 30, 2003 and 2002 was 720,400 and 536,400, respectively.
Internet revenues increased $5.1 million due primarily to growth in the number
of customers, principally due to the expansion of the Company's DSL product
offering. Other revenues increased $3.1 million primarily due to $2.5 million of
revenues associated with the Company's LightCore operations.
Cost of sales and operating expenses increased $12.5 million primarily
due to (i) a $5.6 million increase in expenses associated with the Company's
long distance operations (of which $3.5 million was due to increased minutes of
use); (ii) a $3.1 million increase in expenses associated with the Company's
Internet operations due to an increase in the number of customers and (iii) a
$1.5 million increase in expenses associated with the Company's LightCore
operations.
Depreciation and amortization increased $663,000 (17.2%) primarily due to
increased depreciation expense in the Company's Internet and fiber transport
businesses.
Interest Expense
Interest expense increased $1.8 million (3.3%) in the second quarter of
2003 compared to the second quarter of 2002 due to increased average debt
outstanding, primarily as a result of indebtedness incurred to acquire certain
properties from Verizon in the third quarter of 2002.
Income From Unconsolidated Cellular Entity
Income from unconsolidated cellular entity decreased $370,000 in the
second quarter of 2003 due to decreased profitability of the cellular
partnership in which the Company owns a 49% minority interest.
Nonrecurring Gains and Losses
In the second quarter of 2002, the Company recorded a pre-tax gain of
$3.7 million from the sale of a Personal Communications Services license.
Other Income and Expense
Other income and expense decreased $1.5 million in the second quarter of
2003 compared to the second quarter of 2002 primarily due to a $448,000
reduction in capitalized interest and a $372,000 charge recorded in the second
quarter of 2003 related to the ineffective portion of an interest rate hedge.
Income Tax Expense
The effective income tax rate from continuing operations was 35.3% and
34.7% for the three months ended June 30, 2003 and 2002, respectively.
Discontinued Operations
On August 1, 2002, the Company sold substantially all of its wireless
operations in exchange for $1.59 billion in cash. As a result, such operations
for the three months ended June 30, 2002 have been reflected as discontinued
operations in the Company's consolidated financial statements. The following
table summarizes certain information concerning the Company's wireless
operations for 2002.
Three months
ended June 30, 2002
- ------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 106,272
Operating expenses, exclusive of corporate overhead costs $ (54,863)
Income from unconsolidated cellular entities $ 10,722
Minority interest expense $ (4,039)
Other income and (expense) $ 77
Income tax expense $ (20,888)
Income from discontinued operations, net of tax $ 37,281
RESULTS OF OPERATIONS
Six Months Ended June 30, 2003 Compared
to Six Months Ended June 30, 2002
Net income (and diluted earnings per share) was $171.3 million ($1.19) and
$149.5 million ($1.05) for the six months ended June 30, 2003 and 2002,
respectively. Income from continuing operations was $171.3 million for the first
six months of 2003 and $84.6 million for the first six months of 2002. Diluted
earnings per share from continuing operations was $1.19 during the six months
ended June 30, 2003 compared to $.59 during the six months ended June 30, 2002.
Six months
ended June 30,
- --------------------------------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 345,957 221,677
Other 27,197 16,835
Corporate overhead costs allocable to discontinued operations - (9,932)
- -------------------------------------------------------------------------------------------------------------------
373,154 228,580
Interest expense (111,549) (104,805)
Income from unconsolidated cellular entity 3,159 2,360
Nonrecurring gains and losses - 3,709
Other income and expense 42 217
Income tax expense (93,520) (45,462)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations 171,286 84,599
Discontinued operations, net of tax - 64,931
- ------------------------------------------------------------------------------------------------------------------
Net income $ 171,286 149,530
==================================================================================================================
Basic earnings per share
From continuing operations $ 1.20 .60
From discontinued operations $ - .46
Basic earnings per share $ 1.20 1.06
Diluted earnings per share
From continuing operations $ 1.19 .59
From discontinued operations $ - .46
Diluted earnings per share $ 1.19 1.05
- ------------------------------------------------------------------------------------------------------------------
Average basic shares outstanding 143,109 141,136
==================================================================================================================
Average diluted shares outstanding 144,136 142,679
==================================================================================================================
Contributions to operating revenues and operating income by the Company's
telephone and other operations for the six months ended June 30, 2003 and 2002
were as follows:
Six months
ended June 30,
- ------------------------------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.7% 87.4
Other operations 12.3% 12.6
Operating income
Telephone operations 92.7% 97.0
Other operations 7.3% 7.4
Corporate overhead costs allocable to discontinued operations -% (4.4)
- ------------------------------------------------------------------------------------------------------------------
Telephone Operations
The Company conducts its telephone operations in rural, suburban and
small urban communities in 22 states. As of June 30, 2003, approximately 91% of
the Company's 2.4 million access lines were in Wisconsin, Missouri, Alabama,
Arkansas, Washington, Michigan, Louisiana, Colorado, Ohio and Oregon. The
operating revenues, expenses and income of the Company's telephone operations
for the six months ended June 30, 2003 and 2002 are summarized below.
Six months
ended June 30,
- -----------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 376,648 249,234
Network access 558,808 437,278
Other 90,894 66,718
- -----------------------------------------------------------------------------------------
1,026,350 753,230
- -----------------------------------------------------------------------------------------
Operating expenses
Plant operations 248,489 187,233
Customer operations 82,967 62,323
Corporate and other 123,353 102,495
Depreciation and amortization 225,584 179,502
- -----------------------------------------------------------------------------------------
680,393 531,553
- -----------------------------------------------------------------------------------------
Operating income $ 345,957 221,677
=========================================================================================
Telephone operating income increased $124.3 million (56.1%) due to an
increase in operating revenues of $273.1 million (36.3%) which was partially
offset by an increase in operating expenses of $148.8 million (28.0%).
Of the $127.4 million increase in local service revenues, $117.1 million
was due to the properties acquired from Verizon in the third quarter of 2002. Of
the remaining $10.3 million increase, $4.3 million was due to increased
provision of custom calling features and $3.2 million was due to increased rates
in certain jurisdictions.
Network access revenues increased $121.5 million in the first six months
of 2003, of which $114.5 million was due to the properties acquired from Verizon
in the third quarter of 2002. The remaining $7.0 million increase is primarily
due to an $8.2 million increase in the partial recovery of higher operating
expenses through revenue sharing arrangements in which the Company participates
with other telephone companies; a $3.7 million increase in revenues from the
federal Universal Service Fund; and a $2.7 million increase due to an increase
in the number of circuits provided to other carriers. Such increases were
substantially offset by a $6.5 million decrease in intrastate revenues due to
(i) a reduction in intrastate minutes (partially due to the displacement of
minutes by wireless and instant messaging services) and (ii) decreased access
rates in certain jurisdictions.
Other revenues increased $24.2 million during the first six months of
2003 primarily due to $22.7 million of revenues from the properties acquired
from Verizon in the third quarter of 2002.
Access lines declined 11,200 (0.5%) during the six months ended June 30,
2003 compared to a decline of 2,500 (0.14%) during the six months ended June 30,
2002. The Company believes the decline in the number of access lines during 2003
and 2002 is primarily due to soft general economic conditions in the Company's
markets and the displacement of traditional wireline telephone services by other
competitive services. Based on current conditions, the Company expects to incur
a decline in access lines of 1 to 2% on an annualized basis for 2003.
Plant operations expenses increased $61.3 million (32.7%), of which $66.0
million was due to the properties acquired from Verizon in the third quarter of
2002 and $2.7 million was due to increased salaries and benefits. Such increases
were partially offset by a $4.3 million decrease in information technology
expenses and a $1.7 million decrease in repairs and maintenance expenses.
During the six months ended June 30, 2003 customer operations expenses
increased $20.6 million (33.1%), of which $21.2 million was due to the
properties acquired from Verizon in the third quarter of 2002.
Corporate and other expenses increased $20.9 million (20.4%) primarily
due to a $36.4 million increase associated with the properties acquired from
Verizon in the third quarter of 2002 and a $3.0 million increase in information
technology expenses. Such increases were partially offset by a $17.7 million
decrease in the provision for uncollectible receivables. The first six months of
2002 was adversely impacted by the establishment of a $15.0 million reserve for
uncollectible receivables primarily related to the bankruptcy of MCI (formerly
WorldCom, Inc.). The first six months of 2003 was positively impacted by a $5.0
million reduction in the provision for uncollectible receivables due to the
partial recovery of amounts previously written off related to the bankruptcy of
MCI.
Depreciation and amortization increased $46.1 million (25.7%), of which
$43.5 million was due to the properties acquired from Verizon in the third
quarter of 2002. The remaining increase is primarily due to an increase in
depreciation expense due to higher levels of plant in service.
Other Operations
Other operations include the results of continuing operations of the
Company which are not included in the telephone segment including, but not
limited to, the Company's non-regulated long distance operations, Internet
operations, competitive local exchange carrier ("CLEC") operations and fiber
transport operations. In June 2003, the Company acquired the assets of a fiber
optic transport business for $39.4 million cash (which the Company operates
under the name LightCore). The operating revenues, expenses and income of the
Company's other operations for the six months ended June 30, 2003 and 2002 are
summarized below.
Six months
ended June 30,
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 85,761 66,279
Internet 37,876 27,267
Other 20,691 14,844
- --------------------------------------------------------------------------------
144,328 108,390
- --------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 107,912 84,826
Depreciation and amortization 9,219 6,729
- --------------------------------------------------------------------------------
117,131 91,555
- --------------------------------------------------------------------------------
Operating income $ 27,197 16,835
================================================================================
The $19.5 million increase in long distance revenues was primarily
attributable to the growth in the number of customers and increased minutes of
use ($21.7 million), primarily due to penetration of the markets acquired from
Verizon in 2002. Such increase was partially offset by a decrease in the average
rate charged by the Company ($2.2 million). The number of long distance
customers as of June 30, 2003 and 2002 was 720,400 and 536,400, respectively.
Internet revenues increased $10.6 million due primarily to growth in the number
of customers, principally due to the expansion of the Company's DSL product
offering. Other revenues increased $5.8 million primarily due to (i) a $2.7
million increase in revenues in the Company's CLEC business primarily due to an
increased number of customers, including those acquired in connection with
certain CLEC operations purchased on February 28, 2002, and (ii) $2.5 million of
revenues associated with the Company's LightCore operations.
Cost of sales and operating expenses increased $23.1 million primarily
due to (i) a $12.3 million increase in expenses associated with the Company's
long distance operations (of which $7.7 million was due to increased minutes of
use and $1.5 million was due to an increase in marketing expenses); (ii) a $6.4
million increase in expenses associated with the Company's Internet operations
due to an increase in the number of customers and (iii) a $2.0 million increase
in expenses associated with the Company's CLEC operations primarily due to the
expansion of the business and costs associated with operating properties
acquired in the first quarter of 2002.
Depreciation and amortization increased $2.5 million (37.0%) primarily
due to increased depreciation expense in the Company's Internet, fiber transport
and CLEC businesses.
Interest Expense
Interest expense increased $6.7 million (6.4%) in the first six months of
2003 compared to the first six months of 2002 due to increased average debt
outstanding, primarily as a result of indebtedness incurred to acquire certain
properties from Verizon in the third quarter of 2002.
Income From Unconsolidated Cellular Entity
Income from unconsolidated cellular entity increased $799,000 in the
first six months of 2003 due to improved profitability of the cellular
partnership in which the Company owns a 49% minority interest.
Nonrecurring Gains and Losses
In the second quarter of 2002, the Company recorded a pre-tax gain of
$3.7 million from the sale of a Personal Communications Services license.
Income Tax Expense
The effective income tax rate from continuing operations was 35.3% and
35.0% for the six months ended June 30, 2003 and 2002, respectively.
Discontinued Operations
On August 1, 2002, the Company sold substantially all of its wireless
operations in exchange for $1.59 billion in cash. As a result, such operations
for the six months ended June 30, 2002 have been reflected as discontinued
operations in the Company's consolidated financial statements. The following
table summarizes certain information concerning the Company's wireless
operations for 2002.
Six months
ended June 30, 2002
- ---------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 208,693
Operating expenses, exclusive of corporate overhead costs $ (122,268)
Income from unconsolidated cellular entities $ 21,836
Minority interest expense $ (6,910)
Other income and (expense) $ (2)
Income tax expense $ (36,418)
Income from discontinued operations, net of tax $ 64,931
ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
which addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred and be capitalized as part of the book
value of the long-lived asset.
Although the Company generally has had no legal obligation to remove
obsolete assets, depreciation rates of certain assets established by regulatory
authorities for the Company's telephone operations subject to Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"), have historically included a component for
removal costs in excess of the related estimated salvage value. Notwithstanding
the adoption of SFAS 143, SFAS 71 requires the Company to continue to reflect
this accumulated liability for removal costs in excess of salvage value even
though there is no legal obligation to remove the assets. For the Company's
telephone operations acquired from Verizon in 2002 and its other operations
(neither of which are subject to SFAS 71), the Company has not accrued a
liability for anticipated removal costs in the past. For these reasons, the
adoption of SFAS 143 did not have a material effect on the Company's financial
statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS 150"), which
provides standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for pre-existing instruments as of the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have
a material impact on the Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to fund its operating and capital expenditures. The Company's
operations have historically provided a stable source of cash flow which has
helped the Company continue its long-term program of capital improvements.
Net cash provided by operating activities from continuing operations was
$579.1 million during the first six months of 2003 compared to $378.3 million
during the first six months of 2002. The Company's accompanying consolidated
statements of cash flows identify major differences between net income and net
cash provided by operating activities for each of these periods. For additional
information relating to the continuing operations of the Company, see Results of
Operations.
Net cash used in investing activities from continuing operations was
$190.3 million and $216.5 million for the six months ended June 30, 2003 and
2002, respectively. Payments for property, plant and equipment were $24.8
million less in the first six months of 2003 than in the comparable period
during 2002. Capital expenditures for the six months ended June 30, 2003 were
$131.4 million for telephone operations and $22.9 million for other operations.
In June 2003, the Company acquired the assets of a fiber transport business for
$39.4 million cash (of which $35.6 million was paid at acquisition and the
remaining $3.8 million was paid as a deposit in 2002). During the first quarter
of 2002, the Company acquired the assets of certain CLEC operations for $43.8
million cash.
Net cash used in financing activities from continuing operations was
$368.1 million during the first six months of 2003. Net cash provided by
financing activities was $65.7 million during the first six months of 2002. In
May 2002, the Company issued $500 million of Equity Units. Proceeds from the
Equity Units, along with proceeds from borrowings under the Company's credit
facilities, commercial paper facilities and available cash, were used to fund
the $1.0 billion cash purchase of local exchange telephone assets in Alabama
from Verizon on July 1, 2002.
Budgeted capital expenditures for 2003 total $370 million for telephone
operations and $30 million for other operations. See Other Matters for
additional expenditures related to the Company's billing system currently under
development.
The following table contains certain information concerning the Company's
material contractual obligations as of June 30, 2003.
Payments due by period
- -------------------------------------------------------------------------------------------
Total contractual Less than After
obligations Total 1 year 1-3 years 4-5 years 5 years
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Long-term debt,
including current
maturities and capital
lease obligations $3,256,713 118,941 266,464 1,039,477 (1) 1,831,831
- -------------------------------------------------------------------------------------------
(1) Includes $500 million aggregate principal amount of the Company's senior
notes, Series J, due 2007, which the Company is committed to remarket in
2005, and $165 million aggregate principal amount of the Company's
convertible debentures, Series K, due 2032, which can be put to the
Company at various dates beginning in 2006.
As of August 1, 2003, the Company had $533.0 million of undrawn committed
bank lines of credit and the Company telephone subsidiaries had available for
use $123.0 million of commitments for long-term financing from the Rural
Utilities Service and the Rural Telephone Bank. The Company did not renew its
$267 million 364-day facility which expired in July 2003. The Company has a
commercial paper program that authorizes it to have outstanding up to $1.5
billion in commercial paper at any one time. At August 1, 2003, the Company had
no commercial paper outstanding under such program.
OTHER MATTERS
Accounting for the Effects of Regulation
The Company currently accounts for its 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 the ongoing
applicability of SFAS 71 to the Company's regulated telephone operations is
being monitored due to the changing regulatory, competitive and legislative
environments, the Company believes 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
the Company's telephone operations not being subject to SFAS 71 in the near
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.
When the Company's regulated operations no longer qualify for the
application of SFAS 71, the Company does not expect to record an impairment
charge related to the carrying value of the property, plant and equipment of its
regulated telephone operations. Additionally, upon the discontinuance of SFAS
71, the Company would be required to revise the lives of its property, plant and
equipment to reflect the estimated useful lives of the assets. The Company does
not expect such revisions in asset lives, or the elimination of other regulatory
assets and liabilities, to have a material impact on the Company's results of
operations.
Development of Billing System
The Company is in the process of developing an integrated billing and
customer care system to replace its current system. The costs to develop this
new system have been capitalized in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), and aggregated $151.0 million (before accumulated
amortization) at June 30, 2003. The Company's aggregate billing system costs are
expected to be amortized over a 20-year period. The Company began amortizing its
billing system costs in early 2003 based on the total number of customers that
the Company has migrated to the new system. The Company expects to incur
duplicative system costs until such time as it migrates all customers to the new
system. Such amortization and duplicative system costs are expected to increase
operating expenses by approximately $8-12 million for 2003.
The system remains in the development stage and has required
substantially more time and money to develop than originally anticipated. In
light of these delays and cost over-runs, the Company recently retained an
independent consultant to review the status of the project and evaluate other
alternatives. Based on preliminary discussions with its consultant to date, the
Company expects to complete all phases of the new system no later than mid-2005
at a cost in excess of the previously disclosed estimate of $180 million. The
actual time and cost required to complete the system will depend upon various
factors, including the Company's success in reaching an acceptable arrangement
with its primary project vendor. The Company currently believes completion of
the project may require it to revise its previously disclosed cost estimate by
between $50 and $60 million (of which approximately $35 to $45 million is
expected to be capitalized in accordance with SOP 98-1). The Company is in
discussions with its vendor and will update the time and cost estimates in
subsequent filings. There is no assurance, however, that the system will be
completed in accordance with this schedule or budget, or that the system will
function as anticipated. If the system does not function as anticipated, the
Company may have to write-off part or all of its remaining costs and further
explore its other billing and customer care system alternatives.
Pension and Medical Costs
The decline in equity markets in recent years, coupled with record low
interest rates and rising medical costs, have increased the Company's employee
benefits expenses, including defined benefit pension expenses and pre- and
post-retirement medical expenses. The Company expects these conditions will
result in higher pension and pre- and post-retirement medical expenses in 2003.
Based on the Company's current estimates, such costs are expected to increase
between $20 and 25 million annually in 2003 compared to 2002 amounts. As a
result of continued increases in medical costs, the Company discontinued its
practice of subsidizing post-retirement medical benefits for persons hired on or
after January 1, 2003. The Company also lowered its expected long-term return on
plan assets for its pension and post-retirement plans to range between 8 and
8.25% for 2003 compared to 8 to 10% for 2002.
Minority Interest in Cellular Partnership
In its balance sheet as of December 31, 2002 the Company reflected its
minority interest in a cellular partnership as "assets held for sale" in light
of a July 2002 agreement to sell such interest for $68 million cash, subject to
several closing conditions. In light of the failure of the parties to this
agreement to agree upon whether the closing conditions had been met, the Company
determined to retain this investment. See Note 1 to the Company's consolidated
financial statements appearing elsewhere in this report.
Item 3.
CenturyTel, Inc.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is exposed to market risk from changes in interest rates on
its long-term debt obligations. The Company has estimated its 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 of 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, 2003, the fair value of the Company's long-term debt was
estimated to be $3.6 billion based on the overall weighted average rate of the
Company's long-term debt of 6.6% and an overall weighted maturity of 11 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 the
Company's long-term debt resulting from a hypothetical increase of 66 basis
points in interest rates (ten percent of the Company's overall weighted average
borrowing rate). Such an increase in interest rates would result in
approximately a $154.4 million decrease in the fair value of the Company's
long-term debt. As of June 30, 2003, after giving effect to interest rate swaps
currently in place, approximately 92% of the Company's long-term debt
obligations were fixed rate.
The Company seeks 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, the Company uses derivative
instruments to (i) lock-in or swap its 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. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At June 30, 2003, the Company had outstanding a fair value interest
rate hedge (which was entered into in May 2003) associated with $250 million of
its $500 million aggregate principal amount of its Series L senior notes, due
2012, that pay interest at a fixed rate of 7.875%. This hedge is a "fixed to
variable" interest rate swap that effectively converts the Company's fixed rate
interest payment obligations with respect to this $250 million of principal into
obligations to pay variable rates equal to the six-month London InterBank
Offered Rate ("LIBOR") plus 3.50% with settlement and rate reset dates occurring
each six months through the expiration of the hedge in August 2012. At June 30,
2003, the Company realized a rate under this hedge of 4.74%. Interest expense
was reduced by $1.1 million in the second quarter of 2003 as a result of this
hedge. The fair market value of this hedge was $7.6 million at June 30, 2003 and
is reflected both as an asset and as an increase in the Company's underlying
long-term debt on the June 30, 2003 balance sheet. With respect to this hedge,
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 an $8.0 million decrease in the fair value of this hedge.
Effective May 8, 2003, the Company terminated a fair value interest
rate hedge associated with $500 million aggregate principal amount of its Series
H senior notes and received $22.3 million cash upon settlement, which
represented the fair value of the hedge at the termination date. Such amount
will be amortized as a reduction of interest expense through 2010, the maturity
date of the Series H notes.
At June 30, 2003, the Company also had outstanding a cash flow hedge
associated with $400 million of borrowings incurred in the fourth quarter of
2002 under its $800 million credit facilities. Such hedge expires in October
2003. This hedge was designed to swap the Company's future obligation to pay
variable rate interest based on LIBOR into obligations that lock-in a fixed rate
of 2.49%. During the second quarter of 2003, the Company retired all outstanding
indebtedness associated with its $800 million credit facilities; therefore, such
cash flow hedge was deemed ineffective as of June 30, 2003 and resulted in a
$722,000 unfavorable pre-tax charge to the Company's income for the six months
ended June 30, 2003.
For information on interest rate hedges entered into by the Company after
June 30, 2003, see footnote 10 to the Company's financial statements appearing
elsewhere in this report.
Item 4.
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
provide reasonable assurances that information required to be disclosed by the
Company in the reports it files under the Securities Exchange Act of 1934 is
timely recorded, processed, summarized and reported as required. The Company's
Chief Executive Officer, Glen F. Post, III, and the Company's Chief Financial
Officer, R. Stewart Ewing, Jr., have evaluated the Company's disclosure controls
and procedures as of June 30, 2003. Based on the evaluation, Messrs. Post and
Ewing have concluded that the Company's disclosure controls and procedures are
effective in providing reasonable assurance that they are timely alerted of all
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 the Company's 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.
PART II. OTHER INFORMATION
CenturyTel, Inc.
Item 1. Legal Proceedings
-----------------
Certain legal proceedings in which the Company is involved are discussed
in Part I, Item 3, of the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, and Part II, Item 1, of the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2003. From time to time,
the Company is involved in other litigation incidental to its business,
including administrative hearings of state public utility commissions relating
primarily to rate making and competition related issues, actions relating to
employee claims, occasional grievance hearings before labor regulatory agencies
and miscellaneous third party tort actions.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's annual meeting of shareholders on May 8, 2003, the
shareholders elected four Class III directors to serve until the 2006 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 206,487,975 9,379,007
Harvey P. Perry 205,536,644 10,330,338
Jim D. Reppond 180,001,437 35,865,545
Joseph R. Zimmel 204,114,694 11,752,288
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 R.L. Hargrove, Jr.
Johnny Hebert
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
--------
3 Charter of the Compensation Committee of the Board of
Directors, as amended through May 29, 2003.
10.1 Amendment No. 2 to the Company's Amended and Restated 1995
Incentive Compensation Plan.
10.2 Amendment No. 1 to the Company's Amended and Restated 2000
Incentive Compensation Plan.
10.3 Amendment No. 1 to the Company's 2002 Management Incentive
Compensation Plan.
10.4 Amendment No. 1 to the Company's 2002 Directors Stock
Option Plan.
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 item was reported in the Form 8-K filed May 1, 2003:
Item 9. Other Events - News release announcing first quarter
2003 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 14, 2003 /s/ Neil A. Sweasy
-----------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)