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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 September 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
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 October 31, 2003, there were 144,205,973 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
Nine Months Ended September 30, 2003 and 2002 3
Consolidated Statements of Comprehensive Income--
Three Months and Nine Months Ended September 30,
2003 and 2002 4
Consolidated Balance Sheets--September 30, 2003 and
December 31, 2002 5
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 2003 and 2002 6
Consolidated Statements of Stockholders' Equity--
Nine Months Ended September 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 14-26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
Item 4. Controls and Procedures 28
Part II. Other Information:
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29-30
Signature 30
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 521,439 460,935 1,547,789 1,214,165
Other 82,313 63,562 226,641 171,952
- -------------------------------------------------------------------------------------------------------------------
Total operating revenues 603,752 524,497 1,774,430 1,386,117
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses (exclusive
of depreciation and amortization) 296,114 257,924 858,835 694,801
Corporate overhead costs allocable to
discontinued operations (See Note 4) - 1,343 - 11,275
Depreciation and amortization 116,857 107,514 351,660 293,745
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 412,971 366,781 1,210,495 999,821
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 190,781 157,716 563,935 386,296
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (54,360) (60,021) (165,909) (164,826)
Income from unconsolidated cellular entity 1,736 1,492 4,895 3,852
Nonrecurring gains and losses - - - 3,709
Other income and expense (1,076) (573) (1,034) (356)
- -------------------------------------------------------------------------------------------------------------------
Total other income (expense) (53,700) (59,102) (162,048) (157,621)
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 137,081 98,614 401,887 228,675
Income tax expense 46,102 34,025 139,622 79,487
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 90,979 64,589 262,265 149,188
DISCONTINUED OPERATIONS (See Note 4)
Income from discontinued operations, net of
$248,043 and $284,461 tax - 543,160 - 608,091
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 90,979 607,749 262,265 757,279
===================================================================================================================
BASIC EARNINGS PER SHARE
From continuing operations $ .63 .46 1.83 1.05
From discontinued operations $ - 3.83 - 4.30
Basic earnings per share $ .63 4.29 1.83 5.36
DILUTED EARNINGS PER SHARE
From continuing operations $ .63 .45 1.82 1.05
From discontinued operations $ - 3.80 - 4.26
Diluted earnings per share $ .63 4.26 1.82 5.31
DIVIDENDS PER COMMON SHARE $ .055 .0525 .165 .1575
===================================================================================================================
AVERAGE BASIC SHARES OUTSTANDING 143,897 141,692 143,370 141,324
===================================================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 145,171 142,770 144,481 142,710
===================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
- -----------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 90,979 607,749 262,265 757,279
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Minimum pension liability adjustment:
Minimum pension liability adjustment, net
of $226 and $(2,236) tax (420) - 4,152 -
Derivative instruments:
Net losses on derivatives hedging the
variability of cash flows, net of ($355),
($36), and ($355) tax - (658) (67) (658)
Reclassification adjustment for loss
included in net income, net of ($487) tax - - 905 -
- -----------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 90,559 607,091 267,255 756,621
=================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 157,944 3,661
Accounts receivable, less allowance of $23,526 and $33,962 246,344 272,992
Materials and supplies, at average cost 9,301 10,150
Other 9,412 9,099
- -------------------------------------------------------------------------------------------------------------------
Total current assets 423,001 295,902
- -------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,455,210 3,531,645
- -------------------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,429,479 3,427,281
Other 504,131 515,580
- -------------------------------------------------------------------------------------------------------------------
Total investments and other assets 3,933,610 3,942,861
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,811,821 7,770,408
===================================================================================================================
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 115,167 70,737
Accounts payable 119,234 64,825
Accrued expenses and other liabilities
Salaries and benefits 82,581 63,937
Income taxes 49,965 40,897
Other taxes 47,042 28,183
Interest 50,868 59,045
Other 25,475 18,596
Advance billings and customer deposits 44,685 41,884
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 535,017 388,104
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 3,119,378 3,578,132
- -------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 795,853 716,168
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000 shares,
issued and outstanding 144,176,886 and 142,955,839 shares 144,177 142,956
Paid-in capital 566,133 537,804
Accumulated other comprehensive loss, net of tax (31,713) (36,703)
Retained earnings 2,675,751 2,437,472
Unearned ESOP shares (750) (1,500)
Preferred stock - non-redeemable 7,975 7,975
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,361,573 3,088,004
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,811,821 7,770,408
===================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months
ended September 30,
- -------------------------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 262,265 757,279
Adjustments to reconcile net income to net cash provided
by operating activities from continuing operations:
Income from discontinued operations, net of tax - (608,091)
Depreciation and amortization 351,660 293,745
Income from unconsolidated cellular entity (4,895) (3,852)
Deferred income taxes 68,022 43,343
Nonrecurring gains and losses - (3,709)
Changes in current assets and current liabilities:
Accounts receivable 27,823 (22,222)
Accounts payable 53,932 6,361
Accrued income and other taxes 27,927 58,838
Other current assets and other current liabilities, net 18,865 61,745
Increase in other noncurrent assets (18,280) (23,562)
Increase in other noncurrent liabilities 7,047 31,849
Other, net 34,056 43,315
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities from continuing operations 828,422 635,039
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Payments for property, plant and equipment (256,459) (270,774)
Acquisitions, net of cash acquired (37,945) (2,245,026)
Proceeds from sale of assets - 4,144
Distributions from unconsolidated cellular entity 1,104 3,719
Other, net (5,184) 5,349
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities from continuing operations (298,484) (2,502,588)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt - 1,168,249
Payments of debt (406,231) (604,593)
Proceeds from settlement of interest rate hedge contract 22,315 -
Proceeds from issuance of common stock 28,911 14,129
Cash dividends (23,986) (22,563)
Payment of debt issuance costs - (12,899)
Payment of equity unit issuance costs - (15,867)
Other, net 3,336 2,572
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities from
continuing operations (375,655) 529,028
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations (See Note 4) - 1,629,264
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 154,283 290,743
Cash and cash equivalents at beginning of period 3,661 3,496
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 157,944 294,239
===================================================================================================================
Supplemental cash flow information:
Income taxes paid $ 68,108 26,183
===================================================================================================================
Interest paid (net of capitalized interest of $49 and $1,176) $ 174,037 153,781
===================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine months
ended September 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 1,221 810
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period 144,177 142,043
- -------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 537,804 524,668
Equity unit issuance costs and contract adjustment payments - (24,377)
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 27,690 13,319
Amortization of unearned compensation and other 639 1,983
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period 566,133 515,593
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX
Balance at beginning of period (36,703) -
Change in other comprehensive loss, net of tax 4,990 (658)
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period (31,713) (658)
- -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 2,437,472 1,666,004
Net income 262,265 757,279
Cash dividends declared
Common stock - $.165 and $.1575 per share, respectively (23,687) (22,264)
Preferred stock (299) (299)
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period 2,675,751 2,400,720
- -------------------------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (1,500) (2,500)
Release of ESOP shares 750 750
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period (750) (1,750)
- -------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 7,975
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,361,573 3,063,923
===================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months
ended September 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 nine-month periods have been
included therein. The results of operations for the first nine months of the
year are not necessarily indicative of the results of operations which might be
expected for the entire year.
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 nine months ended September 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 nine months ended September 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:
Sept. 30, Dec. 31,
2003 2002
- -------------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 6,536,888 6,347,900
Accumulated depreciation (3,427,401) (3,136,107)
- -------------------------------------------------------------------------------
3,109,487 3,211,793
- -------------------------------------------------------------------------------
Other, at cost 566,045 521,292
Accumulated depreciation (220,322) (201,440)
- -------------------------------------------------------------------------------
345,723 319,852
- -------------------------------------------------------------------------------
$ 3,455,210 3,531,645
===============================================================================
(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 nine months ended September 30,
2002 as if the Verizon acquisitions had been consummated as of January 1, 2002.
Nine months
ended September 30, 2002
------------------------
(Dollars in thousands)
(unaudited)
Operating revenues from continuing
operations $ 1,699,540
Income from continuing operations $ 172,947
Basic earnings per share from
continuing operations $ 1.22
Diluted earnings per share from
continuing operations $ 1.21
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 by the end of the fourth 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 nine months ended September 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 Nine months ended
September 30, 2002 September 30, 2002
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 38,012 246,705
- -------------------------------------------------------------------------------------------
Operating income (loss) (1) $ (15,167) 71,258
Income from unconsolidated cellular entities 3,934 25,770
Minority interest expense (1,659) (8,569)
Gain on sale of discontinued operations 803,905 803,905
Other income 190 188
- -------------------------------------------------------------------------------------------
Pre-tax income from discontinued operations 791,203 892,552
Income tax expense (248,043) (284,461)
- -------------------------------------------------------------------------------------------
Income from discontinued operations, net of tax $ 543,160 608,091
===========================================================================================
(1) Excludes corporate overhead costs of $1.3 million and $11.3 million for
the three months and nine months ended September 30, 2002, respectively,
allocated to the wireless operations. Includes a $30.5 million pre-tax
charge associated with a write-off of all amounts expended to develop the
wireless portion of the Company's billing system currently in development.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations for 2002.
Nine months ended
September 30, 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Net cash provided by operating activities $ 57,069
Net cash provided by investing activities 1,572,195
- --------------------------------------------------------------------------------
Net cash provided by discontinued operations $ 1,629,264
================================================================================
(5) Goodwill and Other Intangible Assets
The following information relates to the Company's goodwill as of
September 30, 2003 and December 31, 2002:
Sept. 30, Dec. 31,
2003 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Carrying amount of goodwill
Telephone segment $ 3,384,130 3,382,113
Other operations 45,349 45,168
- --------------------------------------------------------------------------------
Total goodwill $ 3,429,479 3,427,281
================================================================================
The Company completed the annual impairment test of goodwill as of
September 30, 2003 and has determined its goodwill is not impaired. 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 ($1.9 million) as of September
30, 2003 and $22.7 million ($729,000) as of December 31, 2002. Total
amortization expense for the first nine months of 2003 was $1.1 million 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 nine months ended September 30, 2003
and 2002 would have been as follows:
Three months Nine months
ended September 30, ended September 30,
- ---------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 90,979 607,749 262,265 757,279
Less: Total stock-based employee compensation
expense determined under fair value based
method, net of tax $ (3,030) (3,717) (9,910) (11,343)
- --------------------------------------------------------------------------------------------------------
Pro forma net income $ 87,949 604,032 252,355 745,936
========================================================================================================
Basic earnings per share
As reported $ .63 4.29 1.83 5.36
Pro forma $ .61 4.26 1.76 5.28
Diluted earnings per share
As reported $ .63 4.26 1.82 5.31
Pro forma $ .61 4.23 1.75 5.23
- --------------------------------------------------------------------------------------------------------
(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 Nine months
ended September 30, ended September 30,
- -------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Telephone $ 521,439 460,935 1,547,789 1,214,165
Other operations 82,313 63,562 226,641 171,952
- -------------------------------------------------------------------------------------------------------------------
Total operating revenues $ 603,752 524,497 1,774,430 1,386,117
===================================================================================================================
Operating income
Telephone $ 172,643 144,619 518,600 366,296
Other operations 18,138 14,440 45,335 31,275
Corporate overhead costs allocable to
discontinued operations (See Note 4) - (1,343) - (11,275)
- -------------------------------------------------------------------------------------------------------------------
Total operating income $ 190,781 157,716 563,935 386,296
===================================================================================================================
Three months Nine months
ended September 30, ended September 30,
- ------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating income $ 190,781 157,716 563,935 386,296
Interest expense (54,360) (60,021) (165,909) (164,826)
Income from unconsolidated cellular entity 1,736 1,492 4,895 3,852
Nonrecurring gains and losses - - - 3,709
Other income and expense (1,076) (573) (1,034) (356)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense $ 137,081 98,614 401,887 228,675
===================================================================================================================
Sept. 30, Dec. 31,
2003 2002
- ---------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Telephone $ 6,812,503 6,962,713
Other operations 999,318 807,695
- ---------------------------------------------------------------------------------
Total assets $ 7,811,821 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 did not have a material
impact on the Company's financial condition or results of operations.
(9) Commitments and Contingencies
On December 26, 2001, AT&T Corp. and one of its subsidiaries filed a
complaint in the U.S. District Court for the Western District of Washington
(Case No. CV0121512) seeking money damages against CenturyTel of the Northwest,
Inc. The plaintiffs claimed, among other things, that CenturyTel of the
Northwest, Inc. had breached its obligations under a 1994 stock purchase
agreement to indemnify the plaintiffs for various environmental costs and
damages relating to properties sold to the plaintiffs under such 1994 agreement.
During the third quarter of 2003, the Company reached a settlement agreement
with the plaintiffs. Such settlement did not have a material effect on the
Company's results of operations.
Certain other 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.
(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 and July 2003, the Company entered into four separate fair value
interest rate hedges associated with the full $500 million principal amount of
its Series L senior notes, due 2012, that pay interest at a fixed rate of
7.875%. The July 2003 hedges were effective August 15, 2003. These hedges are
"fixed to variable" interest rate swaps that effectively convert the Company's
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. As of September 30, 2003, the Company realized a weighted average
interest rate of 4.7% related to these hedges. Interest expense was reduced by
$4.0 million during the nine months ended September 30, 2003 as a result of
these hedges. The aggregate fair value of such hedges at September 30, 2003 was
$5.3 million and is reflected on the accompanying balance sheet as both a
liability (included in "Deferred credits and other liabilities") and as a
decrease to the Company's underlying long-term debt.
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 nine months ended September 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 nine
months ended September 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 September 30, 2003 Compared
to Three Months Ended September 30, 2002
Net income (and diluted earnings per share) was $91.0 million ($.63) and
$607.7 million ($4.26) for the third quarter of 2003 and 2002, respectively.
Income from continuing operations was $91.0 million for the third quarter of
2003 and $64.6 million for the third quarter of 2002. Diluted earnings per share
from continuing operations was $.63 during the third quarter of 2003 compared to
$.45 during the third quarter of 2002.
Discontinued operations for the third quarter of 2002 included an $803.9
million pre-tax gain ($3.86 per share) on the sale of assets, substantially all
of which relates to the Company's sale of its wireless operations and a $30.5
million pre-tax charge ($.14 per share) attributable to a write-off of the
wireless portion of the Company's billing system in development. See
Discontinued Operations for additional information.
Three months
ended September 30,
- ---------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 172,643 144,619
Other 18,138 14,440
Corporate overhead costs allocable
to discontinued operations - (1,343)
- ---------------------------------------------------------------------------------------------
190,781 157,716
Interest expense (54,360) (60,021)
Income from unconsolidated cellular entity 1,736 1,492
Other income and expense (1,076) (573)
Income tax expense (46,102) (34,025)
- ---------------------------------------------------------------------------------------------
Income from continuing operations 90,979 64,589
Discontinued operations, net of tax - 543,160
- ---------------------------------------------------------------------------------------------
Net income $ 90,979 607,749
=============================================================================================
Basic earnings per share
From continuing operations $ .63 .46
From discontinued operations $ - 3.83
Basic earnings per share $ .63 4.29
Diluted earnings per share
From continuing operations $ .63 .45
From discontinued operations $ - 3.80
Diluted earnings per share $ .63 4.26
Average basic shares outstanding 143,897 141,692
=============================================================================================
Average diluted shares outstanding 145,171 142,770
=============================================================================================
Contributions to operating revenues and operating income by the Company's
telephone and other operations for the three months ended September 30, 2003 and
2002 were as follows:
Three months
ended September 30,
- ---------------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------------
Operating revenues
Telephone operations 86.4% 87.9
Other operations 13.6% 12.1
Operating income
Telephone operations 90.5% 91.7
Other operations 9.5% 9.2
Corporate overhead costs allocable
to discontinued operations -% (.9)
- ---------------------------------------------------------------------------------------------
Telephone Operations
The Company conducts its telephone operations in rural, suburban and
small urban communities in 22 states. As of September 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 September 30, 2003 and 2002 are summarized
below.
Three months
ended September 30,
- -----------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 188,951 169,098
Network access 287,191 249,047
Other 45,297 42,790
- -----------------------------------------------------------------------------------
521,439 460,935
- -----------------------------------------------------------------------------------
Operating expenses
Plant operations 130,098 117,997
Customer operations 41,101 41,161
Corporate and other 65,931 52,774
Depreciation and amortization 111,666 104,384
- -----------------------------------------------------------------------------------
348,796 316,316
- -----------------------------------------------------------------------------------
Operating income $ 172,643 144,619
===================================================================================
Telephone operating income increased $28.0 million (19.4%) due to an
increase in operating revenues of $60.5 million (13.1%) which was partially
offset by an increase in operating expenses of $32.5 million (10.3%).
Of the $19.9 million increase in local service revenues, $16.8 million
was due to the Missouri properties acquired from Verizon on August 31, 2002
(from which the Company received revenue contribution for all three months
during the third quarter of 2003 as opposed to only one month during the third
quarter of 2002). Of the remaining $3.1 million increase, $2.2 million was due
to increased provision of custom calling features and $1.2 million was due to
increased rates in certain jurisdictions.
Network access revenues increased $38.1 million in the third quarter of
2003, of which $25.3 million was due to the Missouri properties acquired from
Verizon on August 31, 2002. The remaining $12.8 million increase is primarily
due to a (i) $7.6 million pre-tax charge recorded in the third quarter of 2002
related to the Company's refund of access charges to interexchange carriers,
(ii) a $3.4 million increase resulting from the revision of prior year revenue
settlement agreements and (iii) a $2.5 million increase in the partial recovery
of higher operating expenses through revenue sharing arrangements in which the
Company participates with other telephone companies.
Other revenues increased $2.5 million during the third quarter of 2003
primarily due to $4.1 million of revenues from the Missouri properties acquired
from Verizon on August 31, 2002. Such increase was partially offset by a $1.1
million decrease in directory revenues.
Access lines declined 8,700 (0.36%) during the three months ended
September 30, 2003 compared to 4,600 (0.26%) during the three months ended
September 30, 2002 (exclusive of acquisitions). The Company believes the decline
in the number of access lines during 2003 is primarily due to disconnecting
service for non-payment and the displacement of traditional wireline telephone
services by other competitive services, including the Company's DSL product
offering. 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 $12.1 million (10.3%), of which $15.9
million was due to the Missouri properties acquired from Verizon on August 31,
2002. Such increase was partially offset by a $1.3 million decrease in
engineering expenses and a $1.8 million decrease in repair and maintenance
expenses.
Customer operations expenses remained stable in the third quarter of 2003
compared to the third quarter of 2002. A $4.3 million increase in customer
operations expenses due to the Missouri properties acquired from Verizon on
August 31, 2002 was offset by a $1.9 million decrease in customer service and
information technology expenses and a $1.7 million decrease in salaries and
benefits.
Corporate and other expenses increased $13.2 million (24.9%) in the third
quarter of 2003 compared to the third quarter of 2002, primarily due to $7.1
million of expenses from the Missouri properties acquired from Verizon on August
31, 2002, a $3.1 million increase in information technology expenses largely
attributable to the Company's billing project described below under "Other
Matters" and a $3.4 million increase in the provision for uncollectible
receivables. Such increases were partially offset by a $1.2 million decrease in
operating taxes.
Depreciation and amortization increased $7.3 million (7.0%), of which
$8.1 million was due to the Missouri properties acquired from Verizon on August
31, 2002.
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 September 30, 2003 and
2002 are summarized below.
Three months
ended September 30,
- ------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 45,207 39,592
Internet 20,469 14,996
Other 16,637 8,974
- ------------------------------------------------------------------------------------
82,313 63,562
- ------------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 58,984 45,992
Depreciation and amortization 5,191 3,130
- ------------------------------------------------------------------------------------
64,175 49,122
- ------------------------------------------------------------------------------------
Operating income $ 18,138 14,440
====================================================================================
The $5.6 million increase in long distance revenues was primarily
attributable to the growth in the number of customers and increased minutes of
use ($7.2 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 ($1.6 million). The number of long distance
customers as of September 30, 2003 and 2002 was 745,200 and 584,900,
respectively. Internet revenues increased $5.5 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 $7.7 million primarily due to
$6.8 million of revenues associated with the Company's LightCore operations.
Cost of sales and operating expenses increased $13.0 million primarily
due to (i) a $6.2 million increase in expenses associated with the Company's
Internet operations due to an increase in the number of customers; (ii) a $4.3
million increase in expenses associated with the Company's LightCore operations
and (iii) a $1.7 million increase in expenses associated with the Company's long
distance operations (of which $2.2 million was due to increased minutes of use).
Depreciation and amortization increased $2.1 million (65.8%) primarily
due to increased depreciation expense in the Company's CLEC and LightCore
businesses.
Interest Expense
Interest expense decreased $5.7 million (9.4%) in the third quarter of
2003 compared to the third quarter of 2002 due to decreased average debt
outstanding and interest savings achieved through hedging activities.
Income From Unconsolidated Cellular Entity
Income from unconsolidated cellular entity increased $244,000 in the
third quarter of 2003 due to increased profitability of the cellular partnership
in which the Company owns a 49% minority interest.
Income Tax Expense
The effective income tax rate from continuing operations was 33.6% and
34.5% for the three months ended September 30, 2003 and 2002, respectively. In
the third quarter of 2003, the Company recorded a federal income tax benefit of
$5.4 million due to the settlement of various issues in connection with the
completion of an income tax audit. Such benefit was partially offset by a $5.2
million increase in state income tax expense ($3.4 million net of federal
benefit) recorded in the third quarter of 2003 as a result of clarification of
an income tax statute in one of the Company's operating states (which expense
reflects the retroactive application of the tax to prior quarters).
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 September 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
September 30, 2002
- ---------------------------------------------------------------------------------
Dollars in thousands)
Operating revenues $ 38,012
Operating expenses, exclusive of corporate
overhead costs $ (53,179)
Income from unconsolidated cellular entities $ 3,934
Minority interest expense $ (1,659)
Gain on sale of discontinued operations $ 803,905
Other income and (expense) $ 190
Income tax expense $ (248,043)
Income from discontinued operations, net of tax $ 543,160
Included in operating expenses for the three months ended September 30,
2002 is a $30.5 million charge associated with the write-off of all costs
expended to develop the wireless portion of the Company's billing system in
development.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2003 Compared
to Nine Months Ended September 30, 2002
Net income (and diluted earnings per share) was $262.3 million ($1.82) and
$757.3 million ($5.31) for the nine months ended September 30, 2003 and 2002,
respectively. Income from continuing operations was $262.3 million for the first
nine months of 2003 and $149.2 million for the first nine months of 2002.
Diluted earnings per share from continuing operations was $1.82 during the nine
months ended September 30, 2003 compared to $1.05 during the nine months ended
September 30, 2002.
Discontinued operations for the nine months ended September 30, 2002
included an $803.9 million pre-tax gain ($3.86 per share) on the sale of assets,
substantially all of which relates to the Company's sale of its wireless
operations and a $30.5 million pre-tax charge ($.14 per share) attributable to a
write-off of the wireless portion of the Company's billing system in
development. See Discontinued Operations for additional information.
Nine months
ended September 30,
- --------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 518,600 366,296
Other 45,335 31,275
Corporate overhead costs allocable to
discontinued operations - (11,275)
- --------------------------------------------------------------------------------------------
563,935 386,296
Interest expense (165,909) (164,826)
Income from unconsolidated cellular entity 4,895 3,852
Nonrecurring gains and losses - 3,709
Other income and expense (1,034) (356)
Income tax expense (139,622) (79,487)
- --------------------------------------------------------------------------------------------
Income from continuing operations 262,265 149,188
Discontinued operations, net of tax - 608,091
- --------------------------------------------------------------------------------------------
Net income $ 262,265 757,279
============================================================================================
Basic earnings per share
From continuing operations $ 1.83 1.05
From discontinued operations $ - 4.30
Basic earnings per share $ 1.83 5.36
Diluted earnings per share
From continuing operations $ 1.82 1.05
From discontinued operations $ - 4.26
Diluted earnings per share $ 1.82 5.31
Average basic shares outstanding 143,370 141,324
============================================================================================
Average diluted shares outstanding 144,481 142,710
============================================================================================
Contributions to operating revenues and operating income by the Company's
telephone and other operations for the nine months ended September 30, 2003 and
2002 were as follows:
Nine months
ended September 30,
- --------------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.2% 87.6
Other operations 12.8% 12.4
Operating income
Telephone operations 92.0% 94.8
Other operations 8.0% 8.1
Corporate overhead costs allocable to
discontinued operations -% (2.9)
- --------------------------------------------------------------------------------------------
Telephone Operations
The Company conducts its telephone operations in rural, suburban and
small urban communities in 22 states. As of September 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 nine months ended September 30, 2003 and 2002 are summarized
below.
Nine months
ended September 30,
- ------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 565,599 418,332
Network access 845,999 686,325
Other 136,191 109,508
- ------------------------------------------------------------------------------------------
1,547,789 1,214,165
- ------------------------------------------------------------------------------------------
Operating expenses
Plant operations 378,587 305,230
Customer operations 124,068 103,484
Corporate and other 189,284 155,269
Depreciation and amortization 337,250 283,886
- ------------------------------------------------------------------------------------------
1,029,189 847,869
- ------------------------------------------------------------------------------------------
Operating income $ 518,600 366,296
==========================================================================================
Telephone operating income increased $152.3 million (41.6%) due to an
increase in operating revenues of $333.6 million (27.5%) which was partially
offset by an increase in operating expenses of $181.3 million (21.4%).
Of the $147.3 million increase in local service revenues, $132.2 million
was due to the properties acquired from Verizon in the third quarter of 2002. Of
the remaining $15.1 million increase, $6.5 million was due to increased
provision of custom calling features and $4.7 million was due to increased rates
in certain jurisdictions.
Network access revenues increased $159.7 million in the first nine months
of 2003, of which $147.9 million was due to the properties acquired from Verizon
in the third quarter of 2002. The remaining $11.8 million increase is primarily
due to a (i) $7.6 million pre-tax charge recorded in the third quarter of 2002
related to the Company's refund of access charges to interexchange carriers;
(ii) $6.1 million increase resulting from the revision of prior year revenue
settlement agreements; (iii) $4.5 million increase in the partial recovery of
higher operating expenses through revenue sharing arrangements in which the
Company participates with other telephone companies; and (iv) $3.8 million
increase in revenues from the federal Universal Service Fund. Such increases
were partially offset by a $8.4 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 $26.7 million during the first nine months of
2003 substantially all of which is due to the properties acquired from Verizon
in the third quarter of 2002.
Access lines declined 19,900 (0.8%) during the nine months ended
September 30, 2003 compared to a decline of 7,100 (0.39%) during the nine months
ended September 30, 2002 (exclusive of acquisitions). 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,
including the Company's DSL product offering. 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 $73.4 million (24.0%), of which $75.0
million was due to the properties acquired from Verizon in the third quarter of
2002; $3.6 million was due to increased access expenses; and $2.7 million was
due to increased salaries and benefits. Such increases were partially offset by
a $5.0 million decrease in information technology expenses and a $3.0 million
decrease in repair and maintenance expenses.
During the nine months ended September 30, 2003 customer operations
expenses increased $20.6 million (19.9%), of which $23.8 million was due to the
properties acquired from Verizon in the third quarter of 2002. Such increase was
partially offset by a $2.2 million decrease in salaries and benefits.
Corporate and other expenses increased $34.0 million (21.9%) primarily
due to a $44.0 million increase associated with the properties acquired from
Verizon in the third quarter of 2002 and a $5.8 million increase in information
technology expenses largely attributable to the Company's billing project
described below under "Other Matters". Such increases were partially offset by a
$14.3 million decrease in the provision for uncollectible receivables. The first
nine months of 2002 were 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 nine 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 $53.4 million (18.8%), of which
$51.9 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 nine months ended September 30, 2003 and 2002
are summarized below.
Nine months
ended September 30,
- ---------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 130,968 105,871
Internet 58,345 42,263
Other 37,328 23,818
- ---------------------------------------------------------------------------------------
226,641 171,952
- ---------------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 166,896 130,818
Depreciation and amortization 14,410 9,859
- ---------------------------------------------------------------------------------------
181,306 140,677
- ---------------------------------------------------------------------------------------
Operating income $ 45,335 31,275
=======================================================================================
The $25.1 million increase in long distance revenues was primarily
attributable to the growth in the number of customers and increased minutes of
use ($28.7 million), primarily due to penetration of the markets acquired from
Verizon in 2002. Such increases were partially offset by a decrease in the
average rate charged by the Company ($3.6 million). The number of long distance
customers as of September 30, 2003 and 2002 was 745,200 and 584,900,
respectively. Internet revenues increased $16.1 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 $13.5 million primarily due to
(i) $9.3 million of revenues associated with the Company's LightCore operations
and (ii) a $3.1 million increase in revenues in the Company's CLEC business
primarily due to an increased number of customers, including those acquired in
connection with the purchase of certain CLEC operations on February 28, 2002.
Cost of sales and operating expenses increased $36.1 million primarily
due to (i) a $14.0 million increase in expenses associated with the Company's
long distance operations (of which $10.3 million was due to increased minutes of
use and $1.9 million was due to an increase in marketing expenses); (ii) a $12.6
million increase in expenses associated with the Company's Internet operations
due to an increase in the number of customers and (iii) a $5.8 million increase
in expenses associated with the Company's LightCore operations.
Depreciation and amortization increased $4.6 million (46.2%) primarily
due to increased depreciation expense in the Company's CLEC, Internet and fiber
transport businesses (including LightCore).
Income From Unconsolidated Cellular Entity
Income from unconsolidated cellular entity increased $1.0 million in the
first nine 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 34.7% and
34.8% for the nine months ended September 30, 2003 and 2002, respectively. For
additional information, see - "Income Tax Expense" in the discussion above of
the Company's third quarter results.
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 nine months ended September 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.
Nine months
ended September 30, 2002
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705
Operating expenses, exclusive of corporate overhead costs $ (175,447)
Income from unconsolidated cellular entities $ 25,770
Minority interest expense $ (8,569)
Gain on sale of discontinued operations $ 803,905
Other income $ 188
Income tax expense $ (284,461)
Income from discontinued operations, net of tax $ 608,091
Included in operating expenses for the nine months ended September 30,
2002 is a $30.5 million charge associated with the write-off of all costs
expended to develop the wireless portion of the Company's billing system in
development.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
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 did not 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
$828.4 million during the first nine months of 2003 compared to $635.0 million
during the first nine 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
$298.5 million and $2.503 billion for the nine months ended September 30, 2003
and 2002, respectively. Payments for property, plant and equipment were $14.3
million less in the first nine months of 2003 than in the comparable period
during 2002. Capital expenditures for the nine months ended September 30, 2003
were $216.5 million for telephone operations and $40.0 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 third
quarter of 2002, the Company acquired the assets of Verizon's Alabama and
Missouri local exchange telephone operations for $2.201 billion cash. 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
$375.7 million during the first nine months of 2003. Net cash provided by
financing activities was $529.0 million during the first nine months of 2002. In
May 2002, the Company issued $500 million of Equity Units. In the third quarter
of 2002, the Company issued $500 million of 7.875% senior notes, due 2012, and
$165 million of 4.75% convertible debentures. Proceeds from the Equity Units,
senior notes, convertible debentures, along with proceeds received from the sale
of the Company's wireless operations and utilization of its credit facilities,
were used to finance the $2.201 billion cash purchase of local exchange
telephone assets in Alabama and Missouri from Verizon in the third quarter of
2002 and the redemption of $400 million principal amount in remarketable debt
securities (plus an associated $71.1 million premium payment) in October 2002.
Budgeted capital expenditures for 2003 total $400 million. 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 September 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 $ 3,234,545 115,167 431,276 (1) 874,477 (2) 1,813,625
- ----------------------------------------------------------------------------------------------------------
(1) Includes $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 August 2006.
(2) 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.
As of September 30, 2003, the Company had $533.0 million of undrawn
committed bank lines of credit and the Company's 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 September 30, 2003, the Company
had no commercial paper outstanding under such program. At September 30, 2003,
the Company held almost $158 million of cash and cash equivalents.
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.
If and when the Company's regulated operations no longer qualify for the
application of SFAS 71, the Company does not currently expect to record an
impairment charge related to the carrying value of the property, plant and
equipment of its regulated telephone operations. Additionally, upon
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 accounted for in accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). The capitalized costs of the system aggregated
$158.1 million (before accumulated amortization) at September 30, 2003. The
Company began amortizing its billing system costs in early 2003 (over a 20-year
period) based on the total number of customers that the Company has migrated to
the new system.
The system remains in the development stage and has required
substantially more time and money to develop than originally anticipated. The
Company currently expects to complete all phases of the new system no later than
mid-2005 at an aggregate capitalized cost in accordance with SOP 98-1 of
approximately $200-215 million which will be amortized over 20 years. In
addition, the Company expects to incur additional costs related to completion of
the project, including (i) approximately $15 million of customer service related
and data conversion costs (the majority of which are expected to be incurred in
2004) that will be expensed as incurred and (ii) $10 million of capitalized
hardware costs (which will be amortized over a three-year period). The estimates
above do not include any amounts for maintenance or on-going support of either
the old or new system, and are based on assumptions regarding various future
events, several of which are beyond the Company's control. There is no assurance
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 development
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. Through the first nine months of 2003, such
costs have increased approximately $17.2 million over the first nine months of
2002 and are expected to trend similarly for the remainder of the year. 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. In addition, the Company recently announced changes,
effective January 1, 2004, that would decrease its subsidization of benefits
provided under its postretirement medical plan. The amount of the Company's cost
savings will be dependent upon the employees' age and years of service at
retirement. 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 September 30, 2003, the fair value of the Company's long-term debt was
estimated to be $3.5 billion based on the overall weighted average rate of the
Company's long-term debt of 6.3% 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 63 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 $148.4 million decrease in the fair value of the Company's
long-term debt. As of September 30, 2003, after giving effect to interest rate
swaps currently in place, approximately 85% 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 September 30, 2003, the Company had outstanding four fair value
interest rate hedges associated with the full $500 million aggregate principal
amount of its 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 the Company's 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. At September 30, 2003, the Company
realized a rate under these hedges of 4.7%. Interest expense was reduced by $4.0
million during the nine months ended September 30, 2003 as a result of these
hedges. The aggregate fair market value of these hedges was $5.3 million at
September 30, 2003 and is reflected both as a liability and as a decrease in the
Company's underlying long-term debt on the September 30, 2003 balance sheet.
With respect to 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 $17.1 million decrease in the fair value of
these hedges.
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 September 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 expired in October
2003. 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 during the second quarter of 2003 and
resulted in a $722,000 unfavorable pre-tax charge to the Company's income for
the nine months ended September 30, 2003.
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 September 30, 2003. Based on the evaluation, Messrs. Post
and Ewing concluded that the Company's 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 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
-----------------
On December 26, 2001, AT&T Corp. and one of its subsidiaries filed a
complaint in the U.S. District Court for the Western District of Washington
(Case No. CV0121512) seeking money damages against CenturyTel of the Northwest,
Inc. The plaintiffs claimed, among other things, that CenturyTel of the
Northwest, Inc. had breached its obligations under a 1994 stock purchase
agreement to indemnify the plaintiffs for various environmental costs and
damages relating to properties sold to the plaintiffs under such 1994 agreement.
During the third quarter of 2003, the Company reached a settlement agreement
with the plaintiffs. Such settlement did not have a material effect on the
Company's results of operations.
Certain other 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 6: Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
--------
3.1 Registrant's Bylaws, as amended through August 26, 2003
(incorporated by reference to Exhibit 3.1 of Registrant's
Current Report on Form 8-K dated August 26, 2003 and filed on
September 2, 2003).
10.1 Form of Change of Control Agreement dated August 26, 2003 by
and between Registrant and Stacey W. Goff (incorporated by
reference to Exhibit 10.1(c) of Registrant's Quarterly Report
on Form 10-Q for the period ended March 31, 2000).
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 July 31, 2003:
Item 12. Results of Operations and Financial Condition - News
release announcing second quarter 2003 operating
results.
The following items were reported in the Form 8-K filed September
2, 2003:
Items 5 & 7. Other Events and Regulation FD Disclosure and Exhibits -
News release announcing the promotion of two of the
Registrant's Officers and Registrant's Bylaws, as
amended through August 26, 2003.
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: November 14, 2003 /s/ Neil A. Sweasy
-----------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)