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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 March 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-7784
CenturyTel, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (318) 388-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
[X] Yes [ ] No
As of April 30, 2004, there were 138,872,890 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
Ended March 31, 2004 and 2003 3
Consolidated Statements of Comprehensive Income--
Three Months Ended March 31, 2004 and 2003 4
Consolidated Balance Sheets--March 31, 2004 and
December 31, 2003 5
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 2004 and 2003 6
Consolidated Statements of Stockholders' Equity--
Three Months Ended March 31, 2004 and 2003 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17-18
Item 4. Controls and Procedures 19
Part II. Other Information:
Item 1. Legal Proceedings 20
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months
ended March 31,
- ----------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
OPERATING REVENUES $ 593,704 578,014
- ----------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of services and products (exclusive of
depreciation and amortization) 181,549 177,860
Selling, general and administrative 101,606 88,616
Depreciation and amortization 126,992 126,765
- ----------------------------------------------------------------------------------
Total operating expenses 410,147 393,241
- ----------------------------------------------------------------------------------
OPERATING INCOME 183,557 184,773
- ----------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (52,543) (55,592)
Income from unconsolidated cellular entity 2,059 1,569
Other income and expense 2,304 (932)
- ----------------------------------------------------------------------------------
Total other income (expense) (48,180) (54,955)
- ----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 135,377 129,818
Income tax expense 52,098 45,899
- ----------------------------------------------------------------------------------
NET INCOME $ 83,279 83,919
==================================================================================
BASIC EARNINGS PER SHARE $ .58 .59
==================================================================================
DILUTED EARNINGS PER SHARE $ .58 .58
==================================================================================
DIVIDENDS PER COMMON SHARE $ .0575 .055
==================================================================================
AVERAGE BASIC SHARES OUTSTANDING 142,585 142,901
==================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 143,347 143,797
==================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months
ended March 31,
- ----------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 83,279 83,919
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Minimum pension liability adjustment,
net of ($1,739) and ($5,484) tax (3,229) (10,186)
Unrealized gain on investments,
net of $251 tax 466 -
Derivative instruments:
Net losses on derivatives hedging
the variability of cash
flows, net of ($173) tax - (322)
Less: reclassification adjustment
for losses included in net income,
net of $173 tax - 322
- ----------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 80,516 73,733
==================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2004 2003
- ----------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 273,293 203,181
Accounts receivable, less allowance
of $22,923 and $23,679 213,681 236,187
Materials and supplies, at average cost 9,488 9,229
Other 16,638 14,342
- ----------------------------------------------------------------------------------
Total current assets 513,100 462,939
- ----------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 7,227,139 7,184,155
Accumulated depreciation (3,838,323) (3,728,674)
- ----------------------------------------------------------------------------------
Net property, plant and equipment 3,388,816 3,455,481
- ----------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,426,714 3,425,001
Other 567,875 552,431
- ----------------------------------------------------------------------------------
Total investments and other assets 3,994,589 3,977,432
- ----------------------------------------------------------------------------------
TOTAL ASSETS $ 7,896,505 7,895,852
==================================================================================
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 172,258 72,453
Accounts payable 127,833 113,274
Accrued expenses and other liabilities
Salaries and benefits 81,818 83,628
Income taxes 53,815 43,082
Other taxes 44,721 35,532
Interest 56,170 64,247
Other 28,739 14,555
Advance billings and customer deposits 45,083 44,612
- ----------------------------------------------------------------------------------
Total current liabilities 610,437 471,383
- ----------------------------------------------------------------------------------
LONG-TERM DEBT 3,016,992 3,109,302
- ----------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 854,432 836,651
- ----------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value,
authorized 350,000,000 shares,
issued and outstanding 139,493,771
and 144,364,168 shares 139,494 144,364
Paid-in capital 445,000 576,515
Accumulated other comprehensive loss,
net of tax (2,763) -
Retained earnings 2,825,188 2,750,162
Unearned ESOP shares (250) (500)
Preferred stock - non-redeemable 7,975 7,975
- ----------------------------------------------------------------------------------
Total stockholders' equity 3,414,644 3,478,516
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,896,505 7,895,852
==================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months
ended March 31,
- ----------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 83,279 83,919
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 126,992 126,765
Income from unconsolidated cellular entity (2,059) (1,569)
Deferred income taxes 26,673 9,502
Changes in current assets and
current liabilities:
Accounts receivable 22,506 36,266
Accounts payable 14,559 24,227
Accrued income and other taxes 19,921 53,199
Other current assets and other
current liabilities, net 709 (8,882)
Retirement benefits 10,830 5,139
Increase in other noncurrent assets (11,032) (6,751)
Decrease in other noncurrent liabilities (3,949) (588)
Other, net (4,989) (1,926)
- ----------------------------------------------------------------------------------
Net cash provided by operating activities 283,440 319,301
- ----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (61,745) (59,669)
Distribution from unconsolidated cellular entity 490 1,103
Other, net (511) (422)
- ----------------------------------------------------------------------------------
Net cash used in investing activities (61,766) (58,988)
- ----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments of debt (7,029) (242,474)
Proceeds from issuance of common stock 2,118 4,031
Repurchase of common stock (139,256) -
Cash dividends (8,253) (7,961)
Other, net 858 1,168
- ----------------------------------------------------------------------------------
Net cash used in financing activities (151,562) (245,236)
- ----------------------------------------------------------------------------------
Net increase in cash and cash equivalents 70,112 15,077
Cash and cash equivalents at beginning of period 203,181 3,661
- ----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 273,293 18,738
==================================================================================
Supplemental cash flow information:
Income taxes paid $ 22,957 147
==================================================================================
Interest paid (net of capitalized interest
of $105 and $35) $ 60,515 71,235
==================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three months
ended March 31,
- ----------------------------------------------------------------------------------
2004 2003
- ----------------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 144,364 142,956
Issuance of common stock through
dividend reinvestment,
incentive and benefit plans 72 149
Repurchase of common stock (4,942) -
- ----------------------------------------------------------------------------------
Balance at end of period 139,494 143,105
- ----------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 576,515 537,804
Issuance of common stock through
dividend reinvestment, incentive
and benefit plans 2,046 3,882
Repurchase of common stock (134,314) -
Amortization of unearned compensation
and other 753 503
- ----------------------------------------------------------------------------------
Balance at end of period 445,000 542,189
- ----------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF TAX
Balance at beginning of period - (36,703)
Change in other comprehensive loss, net of tax (2,763) (10,186)
- ----------------------------------------------------------------------------------
Balance at end of period (2,763) (46,889)
- ----------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 2,750,162 2,437,472
Net income 83,279 83,919
Cash dividends declared
Common stock - $.0575 and $.055 per
share, respectively (8,153) (7,861)
Preferred stock (100) (100)
- ----------------------------------------------------------------------------------
Balance at end of period 2,825,188 2,513,430
- ----------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (500) (1,500)
Release of ESOP shares 250 250
- ----------------------------------------------------------------------------------
Balance at end of period (250) (1,250)
- ----------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 7,975
- ----------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,414,644 3,158,560
================================================================+=================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(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 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, 2003. Certain 2003 amounts have been reclassified to be consistent with the
Company's 2004 presentation. See Note 6 for additional information.
The unaudited financial information for the three months ended March 31,
2004 and 2003 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 periods have been included therein. The results
of operations for the first three months of the year are not necessarily
indicative of the results of operations which might be expected for the entire
year.
(2) Goodwill and Other Intangible Assets
The following information relates to the Company's goodwill and other
intangible assets as of March 31, 2004 and December 31, 2003:
March 31, Dec. 31,
2004 2003
- --------------------------------------------------------------------------------
(Dollars in thousands)
Goodwill $ 3,426,714 3,425,001
Intangible asset subject to
amortization - customer base
Gross carrying amount $ 22,700 22,700
Accumulated amortization $ (2,620) (2,242)
- --------------------------------------------------------------------------------
Net carrying amount $ 20,080 20,458
================================================================================
Intangible asset not subject to
amortization - franchise costs $ 35,300 35,300
- --------------------------------------------------------------------------------
Total amortization expense related to the customer base asset for the
first quarter of 2004 was $378,000 and is expected to be $1.5 million annually
for each of the next five years.
(3) Postretirement Benefits
The Company sponsors health care plans that provide postretirement
benefits to all qualified retired employees.
Net periodic postretirement benefit cost for the three months ended March
31, 2004 and 2003 included the following components:
Three months
ended March 31,
- ------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 1,654 1,659
Interest cost 4,572 4,893
Expected return on plan assets (616) (636)
Amortization of unrecognized actuarial loss 1,123 465
Amortization of unrecognized prior service cost (938) (657)
- ------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 5,795 5,724
==============================================================================
The Company contributed $5.0 million to its postretirement plan in the
first quarter of 2004 and expects to contribute approximately $13 million for
the full year.
(4) Retirement Plans
CenturyTel and certain subsidiaries sponsor defined benefit pension plans
for substantially all employees. CenturyTel also sponsors an Outside Directors'
Retirement Plan (a frozen plan that accrues no additional benefits) and a
Supplemental Executive Retirement Plan to provide directors and officers,
respectively, with supplemental retirement, death and disability benefits.
Net periodic pension expense for the three months ended March 31, 2004 and
2003 included the following components:
Three months
ended March 31,
- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 4,467 1,492
Interest cost 7,339 2,745
Expected return on plan assets (7,076) (2,564)
Settlements 1,093 -
Recognized net losses 2,494 838
Net amortization and deferral 359 46
- --------------------------------------------------------------------------------
Net periodic pension expense $ 8,676 2,557
================================================================================
Currently, the Company does not expect to make any contributions to its
pension plans for 2004.
(5) 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 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 determined
consistent with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for the three months ended March 31, 2004 and 2003 would have
been as follows:
Three months
ended March 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 83,279 83,919
Less: Total stock-based employee
compensation expense determined
under fair value based method,
net of tax $ (4,290) (3,534)
- -------------------------------------------------------------------------------
Pro forma net income $ 78,989 80,385
===============================================================================
Basic earnings per share
As reported $ .58 .59
Pro forma $ .55 .56
Diluted earnings per share
As reported $ .58 .58
Pro forma $ .55 .56
- -------------------------------------------------------------------------------
(6) Business Segments
The Company is an integrated communications company engaged primarily in
providing an array of communications services to its customers, including local
exchange, long distance, Internet access and data services. The Company strives
to maintain its customer relationships by, among other things, bundling its
service offerings to provide its customers with a complete offering of
integrated communications services. As a result of the Company's increased focus
on integrated bundle offerings and the varied discount structures associated
with such offerings, the Company has determined that its results of operations
would be more appropriately reported as a single reportable segment under the
provisions of Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Therefore, the results
of operations for 2004 reflect the presentation of a single reportable segment.
The Company's operating revenues for its products and services include the
following components:
Three months
ended March 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 178,058 177,013
Network access 240,957 246,330
Long distance 44,589 42,560
Data 65,628 58,136
Fiber transport and CLEC 17,432 5,895
Other 47,040 48,080
- -------------------------------------------------------------------------------
Total operating revenues $ 593,704 578,014
===============================================================================
Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas.
Network access revenues primarily relate to (i) services provided by the
Company to long distance carriers, wireless carriers and other carriers and
customers in connection with the use of the Company's facilities to originate
and terminate their interstate and intrastate voice and data transmissions and
(ii) the receipt of universal support funds which allows the Company to recover
a portion of its costs under federal and state cost recovery mechanisms.
Long distance revenues relate to the provision of retail long distance
services to its customers.
Data revenues include revenues primarily related to the provision of
Internet access services (both dial-up and digital subscriber line ("DSL")
services) and the provision of special circuits for other carriers.
Fiber transport and CLEC revenues include revenues from the Company's fiber
transport, competitive local exchange carrier and security monitoring
businesses.
Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for long
distance carriers and (iii) participating in the publication of local
directories.
Results of operations for 2003 have been conformed to the Company's 2004
presentation of a single reportable segment. In connection with this change, the
Company has, among other things, (i) eliminated certain 2003 revenues arising
out of previously-reported intersegment transactions (which reduced operating
expenses by a like amount and therefore had no impact on operating income), (ii)
reclassified certain 2003 revenues to conform to the new revenue components and
(iii) reclassified depreciation expense related to certain service subsidiaries
of the Company from operating expenses to depreciation expense. Previously with
multiple segment presentation, the Company allocated such costs to its regulated
telephone operations as an operating expense.
(7) Commitments and Contingencies
AT&T filed a petition with the FCC in December 2003 seeking forbearance
from enforcing certain provisions of the Telecommunications Act of 1996 that
allow LECs to file access tariffs on a streamlined basis and, if certain
criteria are met, deem those tariffs lawful. Certain of the Company's telephone
subsidiaries file interstate tariffs directly with the FCC using this
streamlined filing approach. As a result of recent court rulings, tariffs that
have been "deemed lawful" in effect nullify an interexchange carrier's ability
to seek refunds should the earnings from the tariffs ultimately result in
earnings above the authorized rate of return prescribed by the FCC. The Company
has not recognized any revenues in excess of the authorized rate of return
applicable to those carriers who historically have requested refunds pending
resolution of the "deemed lawful" tariff issue. As of March 31, 2004, the amount
of earnings in excess of the authorized rate of return for the combined 2001 and
2002 monitoring period aggregated approximately $40 million. The ability to
request refunds for this monitoring period lapses on September 30, 2005. The
combined 2003 and 2004 monitoring period continues until the end of 2004 and
the ability to request refunds for this monitoring period lapses on September
30, 2007. The Company will continue to monitor the status of the AT&T petition
with the FCC. Although it is possible the Company could benefit favorably upon
resolution of this issue, there is no assurance that a favorable outcome will
occur.
The Company is involved in certain legal proceedings discussed in Part I,
Item 3, of the Company's Annual Report on Form 10-K for the year ended December
31, 2003. From time to time, the Company is involved in other proceedings
incidental to its business, including administrative hearings of state public
utility commissions relating primarily to rate making and competition, actions
relating to employee claims, grievance hearings before labor regulatory
agencies, and miscellaneous third party tort actions.
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, 2003. The results of operations for the three months
ended March 31, 2004 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 an integrated
communications company engaged primarily in providing local exchange, long
distance, Internet access and data services to customers in 22 states. The
Company derives its revenues from providing (i) local exchange telephone
services, (ii) network access services, (iii) long distance services, (iv) data
services, which includes both dial-up and DSL Internet services, as well as
special access circuits and local private line services, (v) fiber transport,
competitive local exchange and security monitoring services and (vi) other
related services. For additional information on the Company's revenue sources,
see footnote 6 to the Company's financial statements included in Item 1 of Part
I of this quarterly report.
In addition to historical information, this management's discussion and
analysis includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond the control of the Company. Actual events
and results may differ materially from those anticipated, estimated or projected
if one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results include
but are not limited to: the timing, success and overall effects of competition
from a wide variety of competitive providers; the risks inherent in rapid
technological change; the effects of ongoing changes in the regulation of the
communications industry; 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; 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; other risks referenced from time
to time in this report or other of the Company's filings with the Securities and
Exchange Commission; and the effects of more general factors such as changes in
interest rates, in tax rates, in accounting policies or practices, in operating,
medical or administrative costs, in general market, labor or economic
conditions, or in legislation, regulation or public policy. These and other
uncertainties related to the business are described in greater detail in Item 1
to the Company's Form 10-K for the year ended December 31, 2003. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to update any of its forward-looking statements for any reason.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 Compared
to Three Months Ended March 31, 2003
Net income was $83.3 million and $83.9 million for the first quarter of
2004 and 2003, respectively. Diluted earnings per share for both the first
quarter of 2004 and the first quarter of 2003 was $.58.
Three months
ended March 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income $ 183,557 184,773
Interest expense (52,543) (55,592)
Income from unconsolidated cellular entity 2,059 1,569
Other income and expense 2,304 (932)
Income tax expense (52,098) (45,899)
- -------------------------------------------------------------------------------
Net income $ 83,279 83,919
===============================================================================
Basic earnings per share $ .58 .59
===============================================================================
Diluted earnings per share $ .58 .58
===============================================================================
Average basic shares outstanding 142,585 142,901
===============================================================================
Average diluted shares outstanding 143,347 143,797
===============================================================================
Operating income decreased $1.2 million (.7%) as a $15.7 million (2.7%)
increase in operating revenues was more than offset by a $16.9 million (4.3%)
increase in operating expenses.
As previously disclosed, the Company anticipates its diluted earnings per
share for 2004 will be lower than 2003 as a result of (i) lower intrastate toll
usage, (ii) lower cost study adjustments, (iii) lower Universal Service Fund
revenues, (iv) declines in access lines, (v) incremental amortization and
operating expenses related to the development of its new billing and customer
care system, and (vi) an increase in its effective income tax rate. See below
for additional information.
Operating Revenues
Three months
ended March 31,
- --------------------------------------------------------------------------------
2004 2003
- --------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 178,058 177,013
Network access 240,957 246,330
Long distance 44,589 42,560
Data 65,628 58,136
Fiber transport and CLEC 17,432 5,895
Other 47,040 48,080
- --------------------------------------------------------------------------------
$ 593,704 578,014
================================================================================
The $1.0 million (0.6%) increase in local service revenues is primarily due
a $3.2 million increase due to the provision of custom calling features to more
customers, which was partially offset by a $704,000 reduction in rates in a
certain jurisdiction and a $730,000 decrease due to a decline in the number of
access lines.
Access lines declined 9,700 (0.4%) during the first quarter of 2004
compared to a decline of 7,400 (0.3%) in the first quarter of 2003. The Company
believes the decline in the number of access lines during 2004 and 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 access lines to decline between 1 and 2% for 2004.
Network access revenues decreased $5.4 million (2.2%) in the first quarter
of 2004 primarily due to a $4.1 million decrease as a result of lower intrastate
revenues due to a reduction in intrastate minutes (partially due to the
displacement of minutes by wireless and electronic mail services). The Company
believes that intrastate minutes will continue to decline in 2004, although the
magnitude of such decrease cannot be precisely estimated. The decline in network
access revenues was also impacted by a $2.9 million decrease in revenues from
the federal Universal Service Fund due to an increase in the nationwide average
cost per loop factor used by the Federal Communications Commission to allocate
funds among all recipients. Such decreases were partially offset by a $1.1
million increase in the partial recovery of increased operating costs through
revenue sharing arrangements with other telephone companies.
The $2.0 million (4.8%) increase in long distance revenues was due to
growth in the Company's nonregulated long distance operations. A $5.3 million
revenue increase due to an increase in the number of long distance lines and
increased minutes of use was partially offset by a $3.3 million decrease caused
by lower average rates charged by the Company. The number of long distance lines
operated by the Company as of March 31, 2004 and 2003 was 971,900 and 848,800,
respectively. Effective in the first quarter of 2004, the Company changed its
methodology of reporting long distance units from a customer-based count to a
line-based count. Prior periods have been restated to conform to the 2004
presentation.
Data revenues increased $7.5 million (12.9%) due primarily to a $5.1
million increase in Internet revenues due to growth in the number of customers,
principally due to the expansion of the Company's DSL product offering, and a
$2.2 million increase in special access revenues due to an increase in the
number of special circuits provided to other carriers.
Fiber transport and CLEC revenues increased $11.5 million (195.7%),
substantially all of which is attributable to the Company's acquisitions of
fiber transport assets (which are operated under the name LightCore) in June and
December 2003.
Other revenues decreased $1.0 million (2.2%) during the first quarter of
2004 primarily due to a $3.0 million decrease in directory revenues due to the
expiration of the Company's rights to share in the revenues of yellow-page books
published in certain markets acquired from Verizon Communications, Inc. in 2002.
Such decrease was partially offset by a $882,000 increase in revenues related to
selling, leasing, installing, maintaining and repairing customer premise
telecommunications equipment.
Operating Expenses
Three months
ended March 31,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands)
Cost of services and products (exclusive
of depreciation and amortization) $ 181,549 177,860
Selling, general and administrative 101,606 88,616
Depreciation and amortization 126,992 126,765
- -------------------------------------------------------------------------------
$ 410,147 393,241
===============================================================================
Cost of services and products increased $3.7 million (2.1%) primarily due
to (i) a $5.0 million increase in expenses associated with operating the
Company's fiber transport assets acquired in June and December 2003; (ii) a $3.2
million increase in salaries and benefits; (iii) a $2.7 million increase in
customer service and retention related expenses; and (iv) a $2.2 million
increase in expenses associated with the Company's Internet operations due to an
increase in the number of customers. Such increases were substantially offset by
a $5.3 million decrease in access expenses (which included a one-time credit of
$3.1 million recorded in the first quarter of 2004) and a $4.5 million decrease
associated with the Company's nonregulated long distance operations primarily
due to a decrease in the average cost per minute of use and a decrease in
circuit costs.
Selling, general and administrative expenses increased $13.0 million
(14.7%) primarily due to (i) a nonrecurring $5.0 million reduction in the
provision for uncollectible receivables recorded in the first quarter of 2003
due to the partial recovery of amounts previously written off related to the
bankruptcy of MCI (formerly WorldCom); (ii) a $5.0 million increase in salaries
and benefits; (iii) a $2.1 million increase in expenses associated with the
Company's LightCore operations; and (iv) a $1.6 million increase in marketing
expenses. Such increases were partially offset by a $1.9 million decrease in the
provision for uncollectible receivables.
Interest Expense
Interest expense decreased $3.0 million (5.5%) in the first quarter of 2004
compared to the first quarter of 2003. A $5.5 million reduction due to decreased
average debt outstanding was partially offset by a $2.7 million increase due to
higher average interest rates.
Other Income and Expense
Other income and expense contributed $2.3 million of income for the first
quarter of 2004, compared to $932,000 of expense for the first quarter of 2003.
Such increase was primarily due to a $1.1 million increase in interest income
due to higher cash balances and a $1.0 million reduction in minority interest
expense associated with the Company's purchase of additional equity in certain
majority-owned subsidiaries.
Income Tax Expense
The effective income tax rate from continuing operations was 38.5% and
35.4% for the three months ended March 31, 2004 and 2003, respectively. The
increase in the effective income tax rate in 2004 is due to an increase in the
Company's effective state income tax rate.
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 was $283.4 million during the
first three months of 2004 compared to $319.3 million during the first three
months of 2003. 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
operations of the Company, see Results of Operations.
Net cash used in investing activities was $61.8 million and $59.0 million
for the three months ended March 31, 2004 and 2003, respectively. Payments for
property, plant and equipment were $2.1 million more in the first quarter of
2004 than in the comparable period during 2003. Budgeted capital expenditures
for 2004 total $400 million.
Net cash used in financing activities was $151.6 million during the first
three months of 2004 compared to $245.2 million during the first three months of
2003. Net payments of debt were $235.4 million less during the first quarter of
2004 compared to the first quarter of 2003. The Company repurchased 4.9 million
shares of common stock for $139.3 million in the first quarter of 2004 in
accordance with its $400 million stock repurchase program approved in February
2004. See Part II, Item 2, of this quarterly report for additional information.
In late 2003, the Company repaid all of its credit facility indebtedness,
and had only $7.0 million of debt payments due in the first quarter of 2004. At
March 31, 2004, the Company had $172.3 million of debt obligations due within
the next twelve months. The Company prepaid its $100 million, 8.25%, Series B
senior notes, due 2024, in early May 2004. The Company will reflect $4.6 million
of expense (which includes a $3.6 prepayment premium and a $1.0 million write
off of related deferred debt costs) in its second quarter 2004 results of
operations associated with this prepayment.
The following table contains certain information concerning the Company's
material contractual obligations as of March 31, 2004.
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 $ 3,189,250 172,258 424,139 (1) 808,807 (2) 1,784,046 (3)
- ----------------------------------------------------------------------------------------------
(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 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.
(3) Includes $100 million of Series B senior notes that were prepaid in early
May 2004, as mentioned above.
As of March 31, 2004, the Company had $533 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 has a commercial
paper program that authorizes it to have outstanding up to $1.5 billion in
commercial paper at any one time. At March 31, 2004, the Company had no
commercial paper outstanding under such program. At March 31, 2004, the Company
held over $273 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 expect to record an impairment
charge related to the carrying value of the property, plant and equipment of its
regulated telephone operations. Additionally, upon the discontinuance of SFAS
71, the Company would be required to revise the lives of its property, plant and
equipment to reflect the estimated useful lives of the assets. The Company does
not expect such revisions in asset lives, or the elimination of other regulatory
assets and liabilities, to have a material unfavorable impact on the Company's
results of operations. The Company is in the process of determining the
existence of a regulatory liability associated with Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations",
including whether or not such regulatory liability can be quantified with
reasonable accuracy.
Development of Billing System
The Company is in the process of developing an integrated billing and
customer care system which will provide the Company with, in addition to
standard billing functionality currently being provided by its legacy system,
custom built hardware and software technology for more effective customer care,
billing and provisioning systems. The costs to develop such 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 $174.7 million (before
accumulated amortization) at March 31, 2004. 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 (exclusive of previously-disclosed write-offs).
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
During the past several years, the Company's employee benefit expenses,
including defined benefit pension expenses and pre- and post-retirement medical
expenses, have increased due to rising medical costs, the decline of equity
markets in recent years and record low interest rates. 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 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
several factors, including the age and years of service of the Company's
retirees. Pension and medical costs are anticipated to increase between $4-6
million in 2004 compared to 2003 levels.
Change in Regulations
In February 2004, the Federal Communications Commission adopted an order,
which is effective on a prospective basis, that permits rate-of-return carriers
to convert acquired access lines governed by price-cap regulation back to
rate-of-return regulation.
Item 3.
CenturyTel, Inc.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT 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 on long-term debt obligations is determined based on
a discounted cash flow analysis, using the rates and maturities of these
obligations compared to terms and rates currently available in the long-term
financing markets. The results of the sensitivity analysis used to estimate
market risk are presented below, although the actual results may differ from
these estimates.
At March 31, 2004, 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 6.4% and an overall weighted maturity of 10 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 64 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 $145.6 million decrease in fair value of the Company's long-term
debt at March 31, 2004. As of March 31, 2004, after giving effect to interest
rate swaps currently in place, approximately 84% 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 March 31, 2004, 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 March 31, 2004, the Company
realized a rate under these hedges of 4.9%. Interest expense was reduced by $3.8
million during the first quarter of 2004 as a result of these hedges. The
aggregate fair market value of these hedges was $3.1 million at March 31, 2004
and is reflected both as an asset and as an increase in the Company's underlying
long-term debt on the March 31, 2004 balance sheet. With respect to each of
these hedges, market risk is estimated as the potential change in the fair value
of the hedge resulting from a hypothetical 10% increase in the forward rates
used to determine the fair value. A hypothetical 10% increase in the forward
rates would result in a $15.6 million decrease in the fair value of these hedges
at March 31, 2004, and would also increase the Company's interest expense.
Certain shortcomings are inherent in the method of analysis presented in
the computation of fair value of financial instruments. Actual values may differ
from those presented if market conditions vary from assumptions used in the fair
value calculations. The analysis above incorporates only those risk exposures
that existed as of March 31, 2004.
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 March 31, 2004. 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
AT&T filed a petition with the FCC in December 2003 seeking forbearance
from enforcing certain provisions of the Telecommunications Act of 1996 that
allow LECs to file access tariffs on a streamlined basis and, if certain
criteria are met, deem those tariffs lawful. Certain of the Company's telephone
subsidiaries file interstate tariffs directly with the FCC using this
streamlined filing approach. As a result of recent court rulings, tariffs that
have been "deemed lawful" in effect nullify an interexchange carrier's ability
to seek refunds should the earnings from the tariffs ultimately result in
earnings above the authorized rate of return prescribed by the FCC. The Company
has not recognized any revenues in excess of the authorized rate of return
applicable to those carriers who historically have requested refunds pending
resolution of the "deemed lawful" tariff issue. As of March 31, 2004, the amount
of earnings in excess of the authorized rate of return for the combined 2001 and
2002 monitoring period aggregated approximately $40 million. The ability to
request refunds for this monitoring period lapses on September 30, 2005. The
combined 2003 and 2004 monitoring period continues until the end of 2004 and
the ability to request refunds for this monitoring period lapses on September
30, 2007. The Company will continue to monitor the status of the AT&T petition
with the FCC. Although it is possible the Company could benefit favorably upon
resolution of this issue, there is no assurance that a favorable outcome will
occur.
For additional information on the Company's legal proceedings, see footnote
8 to the Company's financial statements included in Item 1 of Part I of this
quarterly report.
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
On February 3, 2004, the Company announced that its board of directors
approved a repurchase program that will allow the Company to repurchase up to an
aggregate of $400 million of either its common stock or equity units prior to
December 31, 2005. The following table reflects the Company's repurchases of its
common stock during the first quarter of 2004, all of which were effected in
open-market transactions in accordance with the above-described program.
Total Approximate
Number of Dollar Value
Shares of Shares (or
Purchased as Units) that
Part of Publicly May Yet Be
Total Number Announced Purchased
of Shares Average Price Plans or Under the Plans
Period Purchased Per Share Programs or Programs
- ----------------------------------------------------------------------------------------------------
January 1 - January 31, 2004 - $ - - $ 400,000,000
February 1 - February 29, 2004 2,140,900 $ 28.16 2,140,900 $ 339,716,187
March 1 - March 31, 2004 2,801,100 $ 28.15 2,801,100 $ 260,867,253
----------- ---------
Total 4,942,000 $ 28.15 4,942,000 $ 260,867,253
=========== =========
In late March 2004, the Company repurchased an additional 644,000 shares of
common stock at an average price of $27.38 that were not settled until early
April and are therefore not reflected in the table above or the Company's
financial statements included elsewhere herein.
The Company did not repurchase any of its equity units during the first
quarter of 2004.
As part of its repurchase program, the Company recently entered into a
purchase plan with a broker in accordance with Rule 10b5-1 issued under the
Securities Exchange Act of 1934. This plan authorizes the broker to effect
repurchases under the repurchase program on the Company's behalf during the
Company's self-imposed trading "blackout periods" prior to its quarterly
earnings announcements, provided that the terms and conditions in the plan are
met. Unless terminated earlier, the 10b5-1 plan will lapse December 31, 2004,
subject to extension by the parties.
Item 5. Other Information
The Company's proxy statement dated March 24, 2004 inadvertently included
incorrect data on the amount of long-term incentive plan payouts for 2003 in the
Summary Compensation Table appearing on page 16. The actual amount of these 2003
payouts was $200,406 to Glen F. Post, III and $60,323 to each of R. Stewart
Ewing, Jr., Harvey P. Perry and David D. Cole.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1(a) Amendments to Registrant's Employee Stock Ownership Plan
and Trust, dated as of January 14, 2004.
10.1(b) Amendments to Registrant's Dollars & Sense Plan and Trust,
dated as of January 14, 2004.
10.2(f)(v) Form of Restricted Stock Agreement pursuant to the
Registrant's amended and restated 2002 management
incentive compensation plan and dated as of February 25,
2004, entered into by Registrant and its executive
officers.
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 January 29,
2004:
Item 12. Results of Operations and Financial Condition -
News release announcing fourth quarter 2003 operating
results.
The following item was reported in the Form 8-K filed February 4,
2004:
Item 5. Press release announcing the Company's Stock Repurchase
Program.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CenturyTel, Inc.
Date: May 7, 2004 /s/ Neil A. Sweasy
-------------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)