Attached files
file | filename |
---|---|
EX-11 - EXHIBIT 11 - Lumen Technologies, Inc. | exhibit11.htm |
EX-32 - EXHIBIT 32 - Lumen Technologies, Inc. | exhibit32.htm |
EX-31.1 - EXHIBIT 31.1 - Lumen Technologies, Inc. | exhibit311.htm |
EX-31.2 - EXHIBIT 31.2 - Lumen Technologies, Inc. | exhibit312.htm |
EX-10.2 - EXHIBIT 10.2 - Lumen Technologies, Inc. | exhibit102.htm |
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended March 31, 2010
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
CenturyLink Drive, Monroe, Louisiana 71203
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone number, including area code: (318) 388-9000
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
[X] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
[ ] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
[X] Accelerated
filer
[ ] Non-accelerated
filer
[ ]
Smaller reporting company
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No
[X]
As of
April 30, 2010, there were 300,404,957 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, 2010 and 2009
|
3
|
|||
Consolidated
Statements of Comprehensive Income--
|
||||
Three
Months Ended March 31, 2010 and 2009
|
4
|
|||
Consolidated
Balance Sheets--March 31, 2010 and
|
||||
December
31, 2009
|
5
|
|||
Consolidated
Statements of Cash Flows--
|
||||
Three
Months Ended March 31, 2010 and 2009
|
6
|
|||
Consolidated
Statements of Stockholders' Equity--
|
||||
Three
Months Ended March 31, 2010 and 2009
|
7
|
|||
Notes
to Consolidated Financial Statements*
|
8-14
|
|||
Item
2.
|
Management's
Discussion and Analysis of Financial
|
|||
Condition
and Results of Operations
|
15-20
|
|||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
||
Item
4.
|
Controls
and Procedures
|
22
|
||
Part
II.
|
Other
Information:
|
|||
Item
1.
|
Legal
Proceedings
|
23
|
||
Item
1A.
|
Risk
Factors
|
23
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
||
Item
6.
|
Exhibits
|
24
|
||
Signature
|
24
|
|||
* All
references to “Notes” in this quarterly report refer to these Notes to
Consolidated Financial Statements.
2
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars,
except per share amounts,
|
||||||||
and
shares in thousands)
|
||||||||
OPERATING
REVENUES
|
$ | 1,800,426 | 636,385 | |||||
OPERATING
EXPENSES
|
||||||||
Cost
of services and products (exclusive of depreciation and
amortization)
|
619,105 | 234,631 | ||||||
Selling,
general and administrative
|
282,929 | 109,845 | ||||||
Depreciation
and amortization
|
353,162 | 127,572 | ||||||
Total
operating expenses
|
1,255,196 | 472,048 | ||||||
OPERATING
INCOME
|
545,230 | 164,337 | ||||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
expense
|
(142,225 | ) | (52,032 | ) | ||||
Other
income (expense)
|
10,500 | (1,818 | ) | |||||
Total
other income (expense)
|
(131,725 | ) | (53,850 | ) | ||||
INCOME
BEFORE INCOME TAX EXPENSE
|
413,505 | 110,487 | ||||||
Income
tax expense
|
160,548 | 43,107 | ||||||
NET
INCOME
|
252,957 | 67,380 | ||||||
Less: Net
income attributable to noncontrolling interests
|
(356 | ) | (226 | ) | ||||
NET
INCOME ATTRIBUTABLE TO CENTURYTEL, INC.
|
$ | 252,601 | 67,154 | |||||
BASIC
EARNINGS PER SHARE
|
$ | .84 | .67 | |||||
DILUTED
EARNINGS PER SHARE
|
$ | .84 | .67 | |||||
DIVIDENDS
PER COMMON SHARE
|
$ | .725 | .70 | |||||
AVERAGE
BASIC SHARES OUTSTANDING
|
299,413 | 99,126 | ||||||
AVERAGE
DILUTED SHARES OUTSTANDING
|
299,997 | 99,144 |
See
accompanying notes to consolidated financial statements.
3
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
NET
INCOME
|
$ | 252,957 | 67,380 | |||||
OTHER
COMPREHENSIVE INCOME, NET OF TAXES:
|
||||||||
Derivative
instruments:
|
||||||||
Reclassification
adjustment for losses included in net income, net of $67 and $67
tax
|
107 | 107 | ||||||
Defined
benefit pension and postretirement plans:
|
||||||||
Amortization
of net actuarial loss and prior service credit included
|
||||||||
in net income and other adjustments, net of ($13,807) and $4,224
tax
|
(9,404 | ) | 6,777 | |||||
Net
change in other comprehensive income (loss), net of tax
|
(9,297 | ) | 6,884 | |||||
COMPREHENSIVE
INCOME
|
243,660 | 74,264 | ||||||
Comprehensive
income attributable to noncontrolling interests
|
(356 | ) | (226 | ) | ||||
COMPREHENSIVE
INCOME ATTRIBUTABLE TO CENTURYTEL, INC.
|
$ | 243,304 | 74,038 |
See
accompanying notes to consolidated financial statements.
4
CenturyTel,
Inc.
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 206,490 | 161,807 | |||||
Accounts
receivable, less allowance of $41,952 and $47,450
|
670,957 | 685,589 | ||||||
Income
tax receivable
|
- | 115,684 | ||||||
Materials
and supplies, at average cost
|
37,007 | 35,755 | ||||||
Deferred
income tax asset
|
75,177 | 83,319 | ||||||
Other
|
51,356 | 41,437 | ||||||
Total
current assets
|
1,040,987 | 1,123,591 | ||||||
NET
PROPERTY, PLANT AND EQUIPMENT
|
||||||||
Property,
plant and equipment
|
15,705,912 | 15,556,763 | ||||||
Accumulated
depreciation
|
(6,735,615 | ) | (6,459,624 | ) | ||||
Net
property, plant and equipment
|
8,970,297 | 9,097,139 | ||||||
GOODWILL
AND OTHER ASSETS
|
||||||||
Goodwill
|
10,251,758 | 10,251,758 | ||||||
Other
|
2,058,502 | 2,090,241 | ||||||
Total
goodwill and other assets
|
12,310,260 | 12,341,999 | ||||||
TOTAL
ASSETS
|
$ | 22,321,544 | 22,562,729 | |||||
LIABILITIES
AND EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Current
maturities of long-term debt
|
$ | 500,071 | 500,065 | |||||
Accounts
payable
|
334,695 | 394,687 | ||||||
Accrued
expenses and other liabilities
|
||||||||
Salaries
and benefits
|
221,491 | 255,103 | ||||||
Income
taxes
|
54,399 | - | ||||||
Other
taxes
|
119,728 | 98,743 | ||||||
Interest
|
179,992 | 108,020 | ||||||
Other
|
168,358 | 168,203 | ||||||
Advance
billings and customer deposits
|
182,329 | 182,374 | ||||||
Total
current liabilities
|
1,761,063 | 1,707,195 | ||||||
LONG-TERM
DEBT
|
7,221,018 | 7,253,653 | ||||||
DEFERRED
CREDITS AND OTHER LIABILITIES
|
||||||||
Deferred
income taxes
|
2,218,967 | 2,256,579 | ||||||
Benefit
plan obligations
|
1,229,970 | 1,485,643 | ||||||
Other
deferred credits
|
389,273 | 392,860 | ||||||
Total
deferred credits and other liabilities
|
3,838,210 | 4,135,082 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
CenturyTel,
Inc.
|
||||||||
Common
stock, $1.00 par value, authorized 800,000,000 shares,
|
||||||||
issued
and outstanding 300,162,320 and 299,189,279 shares
|
300,162 | 299,189 | ||||||
Paid-in
capital
|
6,021,924 | 6,014,051 | ||||||
Accumulated
other comprehensive loss, net of tax
|
(94,603 | ) | (85,306 | ) | ||||
Retained
earnings
|
3,267,318 | 3,232,769 | ||||||
Preferred
stock - non-redeemable
|
236 | 236 | ||||||
Noncontrolling
interests
|
6,216 | 5,860 | ||||||
Total
stockholders’ equity
|
9,501,253 | 9,466,799 | ||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 22,321,544 | 22,562,729 |
See
accompanying notes to consolidated financial statements.
5
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
OPERATING
ACTIVITIES
|
||||||||
Net
income attributable to CenturyTel, Inc.
|
$ | 252,957 | 67,154 | |||||
Adjustments
to reconcile net income to net cash provided
|
||||||||
by
operating activities:
|
||||||||
Depreciation
and amortization
|
353,162 | 127,572 | ||||||
Deferred
income taxes
|
(15,369 | ) | 17,249 | |||||
Share-based
compensation
|
7,101 | 4,487 | ||||||
Income
from unconsolidated cellular entity
|
(5,236 | ) | (4,723 | ) | ||||
Distributions
from unconsolidated cellular entity
|
2,754 | 4,088 | ||||||
Changes
in current assets and current liabilities:
|
||||||||
Accounts receivable
|
14,632 | 36,098 | ||||||
Accounts payable
|
(59,992 | ) | (9,868 | ) | ||||
Accrued income and other taxes
|
194,274 | 19,103 | ||||||
Other current assets and other current liabilities, net
|
27,272 | (12,302 | ) | |||||
Retirement
benefits
|
(284,807 | ) | (23,497 | ) | ||||
Excess
tax benefits from share-based compensation
|
(2,190 | ) | (335 | ) | ||||
Decrease
in other noncurrent assets
|
(25,097 | ) | (306 | ) | ||||
Increase
(decrease) in other noncurrent liabilities
|
2,002 | (2,779 | ) | |||||
Other,
net
|
- | 8,226 | ||||||
Net cash provided by operating activities
|
461,463 | 230,167 | ||||||
INVESTING
ACTIVITIES
|
||||||||
Payments
for property, plant and equipment
|
(167,180 | ) | (45,496 | ) | ||||
Other,
net
|
(1,306 | ) | 128 | |||||
Net cash used in investing activities
|
(168,486 | ) | (45,368 | ) | ||||
FINANCING
ACTIVITIES
|
||||||||
Payments
of debt
|
(32,629 | ) | (291,976 | ) | ||||
Proceeds
from issuance of common stock
|
8,969 | 2,948 | ||||||
Repurchase
of common stock
|
(10,430 | ) | (4,026 | ) | ||||
Cash
dividends
|
(218,052 | ) | (70,373 | ) | ||||
Excess
tax benefits from share-based compensation
|
2,190 | 335 | ||||||
Other,
net
|
1,658 | (3,804 | ) | |||||
Net cash used in financing activities
|
(248,294 | ) | (366,896 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
44,683 | (182,097 | ) | |||||
Cash
and cash equivalents at beginning of period
|
161,807 | 243,327 | ||||||
Cash
and cash equivalents at end of period
|
$ | 206,490 | 61,230 | |||||
Supplemental
cash flow information:
|
||||||||
Income
taxes paid
|
$ | 2,839 | 851 | |||||
Interest
paid (net of capitalized interest of $4,526 and $327)
|
$ | 65,727 | 50,002 |
See
accompanying notes to consolidated financial statements.
6
CenturyTel,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
COMMON
STOCK
|
||||||||
Balance at beginning of period
|
$ | 299,189 | 100,277 | |||||
Issuance of common stock through dividend reinvestment,
|
||||||||
incentive and benefit plans
|
1,272 | 455 | ||||||
Shares withheld to satisfy tax withholdings
|
(299 | ) | (153 | ) | ||||
Balance at end of period
|
300,162 | 100,579 | ||||||
PAID-IN
CAPITAL
|
||||||||
Balance at beginning of period
|
6,014,051 | 39,961 | ||||||
Issuance of common stock through dividend
|
||||||||
reinvestment, incentive and benefit plans
|
7,697 | 2,493 | ||||||
Shares withheld to satisfy tax withholdings
|
(10,131 | ) | (3,873 | ) | ||||
Excess tax benefits from share-based compensation
|
2,190 | 335 | ||||||
Share-based compensation and other
|
8,117 | 4,573 | ||||||
Balance at end of period
|
6,021,924 | 43,489 | ||||||
ACCUMULATED
OTHER COMPREHENSIVE LOSS, NET OF TAX
|
||||||||
Balance at beginning of period
|
(85,306 | ) | (123,489 | ) | ||||
Net change in other comprehensive income (loss), net of
reclassification
|
||||||||
adjustment, net of tax
|
(9,297 | ) | 6,884 | |||||
Balance at end of period
|
(94,603 | ) | (116,605 | ) | ||||
RETAINED
EARNINGS
|
||||||||
Balance at beginning of period
|
3,232,769 | 3,146,255 | ||||||
Net income attributable to CenturyTel, Inc.
|
252,601 | 67,154 | ||||||
Cash dividends declared
|
||||||||
Common stock - $.725 and $.70 per share, respectively
|
(218,049 | ) | (70,370 | ) | ||||
Preferred stock
|
(3 | ) | (3 | ) | ||||
Balance at end of period
|
3,267,318 | 3,143,036 | ||||||
PREFERRED
STOCK - NON-REDEEMABLE
|
||||||||
Balance at beginning and end of period
|
236 | 236 | ||||||
NONCONTROLLING
INTERESTS
|
||||||||
Balance at beginning of period
|
5,860 | 4,568 | ||||||
Net income attributable to noncontrolling interests
|
356 | 226 | ||||||
Distributions attributable to noncontrolling interests
|
- | (320 | ) | |||||
Balance at end of period
|
6,216 | 4,474 | ||||||
TOTAL
STOCKHOLDERS' EQUITY
|
$ | 9,501,253 | 3,175,209 |
See
accompanying notes to consolidated financial statements.
7
CenturyTel,
Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
(1) Basis
of Financial Reporting
Our
consolidated financial statements include the accounts of CenturyTel, Inc. and
its majority-owned subsidiaries. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange Commission;
however, in the opinion of management, the disclosures made are adequate to make
the information presented not misleading. The consolidated financial
statements and footnotes included in this Form 10-Q should be read in
conjunction with the consolidated financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31,
2009.
The
financial information for the three months ended March 31, 2010 and 2009 has not
been audited by independent certified public accountants; however, in the
opinion of management, all adjustments necessary to present fairly the results
of operations for the three-month 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.
As
described more fully in Note 8, we have reclassified subscriber line charge
revenues to “Voice” revenues from “Network access” revenues for all periods
presented. In addition, we have included the revenues from our fiber
transport, CLEC and security monitoring operations in “Other” revenues for all
periods presented.
(2)
Embarq Acquisition
On
July 1, 2009, we acquired Embarq Corporation (“Embarq”) through a merger
transaction, with Embarq surviving the merger as a wholly-owned subsidiary of
CenturyTel. We accounted for such acquisition pursuant to Financial
Accounting Standards Board guidance on business combinations, which was
effective for all business combinations consummated on or after January 1, 2009,
as more fully described below.
As a
result of the acquisition, each outstanding share of Embarq common stock was
converted into the right to receive 1.37 shares of CenturyTel common stock (“CTL
common stock”), with cash paid in lieu of fractional shares. Based on the number
of CenturyTel common shares issued to consummate the merger (196.1 million), the
closing stock price of CTL common stock as of June 30, 2009 ($30.70) and the
pre-combination portion of share-based compensation awards assumed by CenturyTel
($50.2 million), the aggregate merger consideration approximated $6.1
billion. The premium paid by us in this transaction is attributable
to strategic benefits, including enhanced financial and operational scale,
market diversification, leveraged combined networks and improved competitive
positioning. None of the goodwill associated with this transaction is
deductible for income tax purposes.
The
results of operations of Embarq are included in our consolidated results of
operations beginning July 1, 2009. Approximately $1.255 billion of
operating revenues of Embarq are included in our consolidated results of
operations for the first quarter of 2010. CenturyTel was the
accounting acquirer in this transaction. We have recognized Embarq’s
assets and liabilities at their acquisition date estimated fair values pursuant
to business combination accounting rules that were effective for acquisitions
consummated on or after January 1, 2009. The assignment of a fair
value to the assets acquired and liabilities assumed of Embarq (and the related
estimated lives of depreciable tangible and identifiable intangible assets)
require a significant amount of judgment. The fair value of property,
plant and equipment and identifiable intangible assets were determined based
upon analysis performed by an independent valuation firm. The fair
value of pension and postretirement obligations was determined by independent
actuaries. The fair value of long-term debt was determined by
management 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. All other fair value
determinations, which consisted primarily of current assets, current liabilities
and deferred income taxes, were made by management. The following is
a preliminary assignment of the fair value of the assets acquired and
liabilities assumed based on currently available information.
8
Fair
value
|
||||
as of July 1, 2009
|
||||
(Dollars
in thousands)
|
||||
Current
assets
|
$ | 675,720 | ||
Net
property, plant and equipment
|
6,077,672 | |||
Identifiable
intangible assets
|
||||
Customer list
|
1,098,000 | |||
Rights of way
|
268,472 | |||
Other (trademarks, internally developed software,
licenses)
|
26,817 | |||
Other
non-current assets
|
24,131 | |||
Current
liabilities
|
(828,385 | ) | ||
Long-term
debt, including current maturities
|
(4,886,708 | ) | ||
Other
long-term liabilities
|
(2,621,358 | ) | ||
Goodwill
|
6,236,084 | |||
Total purchase price
|
$ | 6,070,445 |
The
assignment of fair values to Embarq’s assets and liabilities has not been
finalized as of March 31, 2010. Further adjustments may be necessary
prior to June 30, 2010, particularly as it relates to contingent liabilities and
other long-term liabilities (including deferred income taxes).
The
following unaudited pro forma financial information presents the combined
results of CenturyTel and Embarq as though the acquisition had been consummated
as of January 1, 2009.
Three
months
|
||||
ended
March 31,
|
||||
2009
|
||||
(Dollars
in thousands,
|
||||
except
per share amounts)
|
||||
Operating
revenues
|
$ | 1,982,000 | ||
Net
income attributable to CenturyTel, Inc.
|
$ | 257,000 | ||
Basic
earnings per share before extraordinary item
|
$ | .87 | ||
Diluted
earnings per share before extraordinary item
|
$ | .87 |
These
results include certain adjustments, primarily due to adjustments to
depreciation and amortization associated with the property, plant and equipment
and identifiable intangible assets, increased retiree benefit costs due to the
remeasurement of the benefit obligations, and the related income tax
effects. The pro forma information does not necessarily reflect the
actual results of operations had the acquisition been consummated at the
beginning of the period indicated nor is it necessarily indicative of future
operating results. The pro forma information does not give effect to
any (i) potential revenue enhancements or cost synergies or other operating
efficiencies that could result from the acquisition or (ii) transaction or
integration costs relating to the acquisition.
9
(3)
|
Goodwill
and Other Intangible Assets
|
Goodwill
and other intangible assets as of March 31, 2010 and December 31, 2009 were
composed of the following:
March
31,
|
Dec.
31,
|
|||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Goodwill
|
$ | 10,251,758 | 10,251,758 | |||||
Intangible
assets subject to amortization
|
||||||||
Customer list
|
||||||||
Gross carrying amount
|
$ | 1,279,308 | 1,279,308 | |||||
Accumulated amortization
|
(201,108 | ) | (148,491 | ) | ||||
Net
carrying amount
|
$ | 1,078,200 | 1,130,817 | |||||
Other
|
||||||||
Gross carrying amount
|
$ | 69,567 | 69,567 | |||||
Accumulated amortization
|
(23,749 | ) | (22,466 | ) | ||||
Net carrying amount
|
$ | 45,818 | 47,101 | |||||
Other intangible assets not subject to
amortization
|
$ | 268,500 | 268,500 |
Total
amortization expense related to the intangible assets subject to amortization
for the first quarter of 2010 was $53.9 million and is expected to be $206.3
million in 2010, $185.6 million in 2011, $164.5 million in 2012, $145.2 million
in 2013 and $126.0 million in 2014.
(4)
|
Postretirement
Benefits
|
We
sponsor health care plans that provide postretirement benefits to qualified
retired employees.
Net
periodic postretirement benefit cost for the three months ended March 31, 2010
(which includes the effects of our July 1, 2009 acquisition of Embarq) and 2009
included the following components:
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Service
cost
|
$ | 3,334 | 1,209 | |||||
Interest
cost
|
8,187 | 4,898 | ||||||
Expected
return on plan assets
|
(981 | ) | (347 | ) | ||||
Amortization
of unrecognized prior service cost
|
(343 | ) | (886 | ) | ||||
Net
periodic postretirement benefit cost
|
$ | 10,197 | 4,874 |
(5)
|
Defined
Benefit Retirement Plans
|
We
sponsor defined benefit pension plans for substantially all employees, including
separate plans for all legacy CenturyTel employees and all legacy Embarq
employees. Until such time as we elect to integrate Embarq’s
benefit plans with ours, we plan to continue to operate these plans
independently. Upon payment of certain lump sum distributions in
early 2009, we recognized a settlement loss (which is included in selling,
general and administrative expense) of approximately $7.7 million in the first
quarter of 2009.
Net
periodic pension expense for the three months ended March 31, 2010 (which
includes the effects of our July 1, 2009 acquisition of Embarq) and 2009
included the following components:
10
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Service
cost
|
$ | 15,932 | 3,493 | |||||
Interest
cost
|
63,277 | 6,631 | ||||||
Expected
return on plan assets
|
(70,036 | ) | (6,964 | ) | ||||
Settlement
loss
|
- | 7,711 | ||||||
Net
amortization and deferral
|
6,917 | 4,177 | ||||||
Net
periodic pension expense
|
$ | 16,090 | 15,048 |
We
contributed $300 million to the legacy Embarq pension plan in the first quarter
of 2010. Based on current actuarial estimates as of March 31, 2010,
we do not expect to be required to make a minimum contribution to the legacy
Embarq pension plan until 2012. Based on current circumstances, our
minimum required contributions to our other pension plans are
immaterial. The actual level of contribution required in future years
can change significantly depending on discount rates and actual returns on plan
assets.
(6)
|
Stock-based
Compensation
|
We
recognize as compensation expense our cost of awarding employees with equity
instruments by allocating the fair value of the award on the grant date over the
period during which the employee is required to provide service in exchange for
the award.
We
currently maintain programs which allow the Board of Directors, through its
Compensation Committee, to grant incentives to certain employees and our outside
directors in any one or a combination of several forms, including incentive and
non-qualified stock options; stock appreciation rights; restricted stock;
restricted stock units and performance shares. As of March 31, 2010,
we had reserved approximately 31.0 million shares of common stock which may be
issued in connection with awards under our current incentive
programs. We also offer an Employee Stock Purchase Plan whereby
employees can purchase our common stock at a 15% discount based on the lower of
the beginning or ending stock price during recurring six-month periods
stipulated in such program.
Our
outstanding restricted stock awards generally vest over a three- or five-year
period (for employees) or a three-year period (for outside
directors). During the first quarter of 2010, 396,753 shares of
restricted stock were granted to certain executive-level employees, of which
198,374 were time-vested restricted stock that vests over a three-year period
and 198,379 were performance-based restricted stock. The
performance-based restricted stock will vest over time only if specific
performance measures are met for the applicable periods. One half of
the performance based restricted stock will vest in March 2012 based on our
two-year total shareholder return for 2010 and 2011 as measured against the
total shareholder return of the companies comprising the S&P 500 Index for
the same period. The other half will vest in March 2013 based on our
three-year total shareholder return for 2010, 2011 and 2012 as measured against
the total shareholder return of the S&P 500 Index for the same
period. The 198,379 shares of performance-based restricted stock
issued represent the target award. Each recipient has the opportunity
to ultimately receive between 0% and 200% of the target award depending on our
total shareholder return in relation to that of the S&P 500
Index. We valued these performance-based awards using
Monte-Carlo simulations.
As of
March 31, 2010, there were 2,459,000 shares of nonvested restricted stock
outstanding at an average grant date fair value of $31.63 per
share.
The total
compensation cost for all share-based payment arrangements for the first quarter
of 2010 and 2009 was $7.1 million and $4.5 million, respectively. As
of March 31, 2010, there was $55.0 million of total unrecognized compensation
cost related to our share-based payment arrangements, which we expect to
recognize over a weighted-average period of 2.1 years.
11
(7)
|
Income
Taxes
|
Our
effective income tax rate was 38.9% and 39.1% for the three months ended March
31, 2010 and March 31, 2009, respectively.
Included
in income tax expense for the first quarter of 2010 is a $4.0 million charge
related to the change in the tax treatment of the Medicare Part D subsidy as a
result of the comprehensive health care reform legislation signed into law by
the President in March 2010.
The lump
sum distributions made to certain executive officers in the first quarter of
2009 in connection with discontinuing the Supplemental Executive Retirement Plan
were non-deductible for income tax purposes pursuant to Internal Revenue Code
Section 162(m) limitations. Such treatment resulted in the
recognition of approximately $6.7 million of income tax expense in the first
quarter of 2009 above amounts that would have been recognized had such payments
been deductible for income tax purposes. Such increase in income tax
expense was partially offset by a $5.8 million reduction in income tax expense
caused by a reduction to our deferred tax asset valuation allowance associated
with state net operating loss carryforwards due to a law change in one of our
operating states that we believe will allow us to utilize our net operating loss
carryforwards in the future. Prior to the law change, such net
operating loss carryforwards were fully offset by a valuation allowance as it
was more likely than not that these carryforwards would not be utilized prior to
expiration.
(8)
|
Business
Segments
|
We are an
integrated communications company engaged primarily in providing an array of
communications services to our retail and wholesale customers, including local
exchange, long distance, Internet access and broadband services. We
strive to maintain our customer relationships by, among other things, bundling
our service offerings to provide our customers with a complete offering of
integrated communications services. Because of the similar economic
characteristics of our operations, we have utilized the aggregation criteria
specified in the segment accounting guidance and concluded that we operate as
one reportable segment. Our operating revenues for our products and
services include the following components:
Three
months
|
|||||||||
ended
March 31,
|
|||||||||
2010
|
2009
|
||||||||
(Dollars in thousands) | |||||||||
Voice
|
$ | 812,876 | 250,194 | ||||||
Data
|
467,440 | 139,937 | |||||||
Network
access
|
286,228 | 152,568 | |||||||
Other
|
233,882 | 93,686 | |||||||
Total
operating revenues
|
$ | 1,800,426 | 636,385 |
In the
first quarter of 2010, we have reclassified revenues generated from subscriber
line charges to “Voice” revenues from “Network access” revenues to better align
our presentation of such revenues with others in our industry. In
addition, we have included revenues generated from our fiber transport, CLEC and
security monitoring operations in “Other” revenues. Prior periods
have been restated to reflect this new presentation.
We derive
our voice revenues by providing local exchange telephone and retail long
distance services to our customers in our local exchange service
areas.
We derive
our data revenues primarily by providing high-speed Internet access services
(“DSL”) and data transmission services over special circuits and private lines
in our local exchange service areas.
We derive
our network access revenues primarily from (i) providing services to various
carriers and customers in connection with the use of our facilities to originate
and terminate their interstate and intrastate voice transmissions; (ii)
receiving universal support funds which allows us to recover a portion of our
costs under federal and state cost recovery mechanisms and (iii) receiving
reciprocal compensation from competitive local exchange carriers and wireless
service providers for terminating their calls.
12
We derive
other revenues primarily by (i) providing fiber transport, CLEC and security
monitoring services; (ii) leasing, selling, installing and maintaining customer
premise telecommunications equipment and wiring, (iii) providing payphone
services primarily within our local service territories and at various
correctional facilities around the country, (iv) participating in the
publication of local telephone directories, which allows us to share in revenues
generated by the sale of yellow page and related advertising to businesses, (v)
providing network database services and (vi) providing our video services, as
well as other new product and service offerings.
We are
required to contribute to several universal service fund programs and generally
include a surcharge amount on our customers’ bills which is designed to recover
our contribution costs. Such amounts are reflected on a gross basis
in our statement of income (included in both operating revenues and expenses)
and aggregated approximately $30 million for the three months ended March 31,
2010 and $10 million for the three months ended March 31, 2009.
|
(9)
|
Recent
Accounting Pronouncements
|
In
December 2007, the Financial Accounting Standards Board issued guidance on
business combinations, which requires an acquiring entity to recognize all of
the assets acquired and liabilities assumed in a transaction at the acquisition
date fair value with limited exceptions. Such guidance also changes
the accounting treatment for certain specific items, including acquisition
costs, acquired contingent liabilities, restructuring costs, deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date and
is effective for us for all business combinations for which the acquisition date
is on or after January 1, 2009. We have accounted for our acquisition
of Embarq using this guidance. See Note 2 for additional information
related to our acquisition of Embarq.
As of
March 31, 2010, we held life insurance contracts with cash surrender value that
are required to be measured at fair value on a recurring basis. The
following table depicts these assets held and the related tier designation
pursuant to the accounting guidance related to fair value
disclosure.
Balance
|
||||||||||||||||
Description
|
March
31, 2010
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Cash
surrender value of life insurance contracts
|
$ | 101,174 | 101,174 | - | - |
(10)
|
Commitments
and Contingencies
|
In Barbrasue Beattie and James
Sovis, on behalf of themselves and all others similarly situated, v. CenturyTel,
Inc., filed on October 28, 2002, in the United States District Court for
the Eastern District of Michigan (Case No. 02-10277), the plaintiffs alleged
that we unjustly and unreasonably billed customers for inside wire maintenance
services, and sought unspecified monetary damages and injunctive relief under
various legal theories on behalf of a purported class of over two million
customers in our telephone markets. On March 10, 2006, the Court
certified a class of plaintiffs and issued a ruling that the billing
descriptions we used for these services during an approximately 18-month period
between October 2000 and May 2002 were legally insufficient. In
February 2010, subject to final court approval, we settled this case in an
amount that exceeded our previously established reserves by $8 million and such
amount was reflected as an expense in the fourth quarter of
2009. Final court approval is expected in the second quarter of
2010.
Over 60
years ago, one of our indirect subsidiaries, Centel Corporation, acquired
entities that may have owned or operated seven former plant sites that produced
“manufactured gas” under a process widely used through the
mid-1900s. Centel has been a subsidiary of Embarq since being
spun-off in 2006 from Sprint Nextel, which acquired Centel in
1993. None of these plant sites are currently owned or operated by
either Sprint Nextel, Embarq or their subsidiaries. On three sites,
Embarq and the current landowners are working with the Environmental Protection
Agency (“EPA”) pursuant to administrative consent orders. Remediation
expenditures pursuant to the orders are not expected to be material. On five
sites, including the three sites where the EPA is involved, Centel has entered
into agreements with other potentially responsible parties to share remediation
costs. Further, Sprint Nextel has agreed to indemnify Embarq for most of any
eventual liability arising from all seven of these sites. Based upon
current circumstances, we do not expect this issue to have a material adverse
impact on our results of operations or financial condition.
13
In William Douglas Fulghum, et
al. v. Embarq Corporation, et al., filed on December 28, 2007 in the
United States District Court for the District of Kansas (Civil Action No.
07-CV-2602), a group of retirees filed a putative class action lawsuit
challenging the decision to make certain modifications to Embarq’s retiree
benefits programs generally effective January 1, 2008. Defendants include
Embarq, certain of its benefit plans, its Employee Benefits Committee and the
individual plan administrator of certain of its benefits plans. Additional
defendants include Sprint Nextel and certain of its benefit plans. A ruling in
Embarq’s favor was recently entered in an arbitration proceeding filed by 15
former Centel executives, similarly challenging the benefits
changes. Embarq and other defendants continue to vigorously contest
these claims and charges. Given that this litigation is still
in discovery, it is premature to estimate the impact this lawsuit could have to
our results of operation or financial condition.
In Robert M. Garst, Sr. et al.
v. CenturyTel, Inc. et al., filed March 13, 2009 in the 142nd
Judicial District Court of Texas, Midland County (Case No. CV-46861), certain of
our former ten-vote shareholders challenged the effectiveness of the vote to
eliminate our time-phase voting structure. We believe we followed all
necessary steps to properly effect the amendments described above and are
defending the case accordingly. We do not expect the resolution of
this issue to have a material adverse impact on our results of operations or
financial condition.
In April
2010, a series of lawsuits were filed by shareholders of Qwest
Communications International, Inc. in Colorado state and federal courts and in
Delaware federal court, alleging that Qwest’s officers and directors breached
their fiduciary duties by failing to maximize the value to be received by
Qwest’s stockholders in connection with CenturyTel’s recently announced
acquisition of Qwest. CenturyTel is also named as a defendant to all of
the lawsuits and is alleged to have aided and abetted these breaches of
duty. Although very early in the litigation process, we do not expect
these lawsuits to have a material adverse impact on our results of operations or
financial condition.
In
December 2009, subsidiaries of CenturyTel filed two lawsuits against
subsidiaries of Sprint Nextel to recover approximately $26 million in
terminating access charges for VoIP traffic owed under various interconnection
agreements and tariffs. One lawsuit, filed on behalf of all legacy
Embarq operating entities, is pending in federal court in Virginia, and the
other, filed on behalf of all legacy CenturyTel operating entities, is pending
in federal court in Louisiana. The lawsuits allege that Sprint Nextel
has breached contracts, violated tariffs, and violated the Federal
Communications Act by failing to pay these charges. We have not recorded a
reserve related to this issue.
From time
to time, we are involved in other proceedings incidental to our business,
including administrative hearings of state public utility commissions relating
primarily to rate making, actions relating to employee claims, occasional
grievance hearings before labor regulatory agencies and miscellaneous third
party tort actions. The outcome of these other proceedings is
not predictable. However, we do not believe that the ultimate
resolution of these other proceedings, after considering available insurance
coverage, will have a material adverse effect on our financial position, results
of operations or cash flows.
(11)
|
Subsequent
Event
|
On April
21, 2010, we entered into a definitive agreement under which we propose to
acquire Qwest Communications International, Inc. (“Qwest”) in a tax-free
stock-for-stock transaction. Under the terms of the agreement, Qwest
shareholders will receive 0.1664 CenturyTel shares for each share of Qwest
common stock they own at closing. CenturyTel shareholders are
expected to own 50.5% and Qwest shareholders are expected to own 49.5% of the
combined company at closing. On April 22, 2010, Qwest had outstanding
approximately 1.736 billion shares of common stock and as of March 31, 2010,
Qwest had outstanding $13.546 billion of long-term
debt.
Completion
of the transaction is subject to the receipt of regulatory approvals, including
the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act, as well as approvals from the
Federal Communications Commission and certain state public service
commissions. The transaction is also subject to the approval of
CenturyTel and Qwest shareholders, as well as other customary closing
conditions. Subject to these conditions, we anticipate closing this
transaction in the first half of 2011. If the merger agreement is
terminated under certain circumstances, we may be obligated to pay Qwest a
termination fee of $350 million and Qwest may be obligated to pay CenturyTel a
termination fee of $350 million.
14
Item
2.
CenturyTel,
Inc.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") included herein should be read in conjunction with MD&A and the
other information included in our annual report on Form 10-K for the year ended
December 31, 2009. The results of operations for the three months ended March
31, 2010 are not necessarily indicative of the results of operations which might
be expected for the entire year.
On
July 1, 2009, we acquired Embarq Corporation (“Embarq”) in a transaction
that substantially expanded the size and scope of our business. The
results of operations of Embarq are included in our consolidated results of
operations beginning July 1, 2009. Due to the significant size of
Embarq, direct comparisons of our results of operations for the three months
ended March 31, 2010 with the three months ended March 31, 2009 are less
meaningful than usual since most all of the significant period to period
variances are caused by the Embarq acquisition. We discuss below
certain trends that we believe are significant, even if they are not necessarily
material to the combined company.
We are an
integrated communications company primarily engaged in providing an array of
communications services to customers in 33 states, including local and long
distance voice, wholesale network access, high-speed Internet access, other data
services, and video services. In certain local and regional markets,
we also provide fiber transport, competitive local exchange carrier, security
monitoring, and other communications, professional and business information
services. We operate approximately 6.9 million access lines and
serve approximately 2.3 million broadband customers, based on operating data as
of March 31, 2010. For additional information on our revenue sources,
see Note 8. For additional information on our acquisition
of Embarq, see Note 2.
During
the three months ended March 31, 2010 and 2009, we incurred a significant amount
of one-time expenses, the vast majority of which are directly attributable to
our acquisition of Embarq. Such expenses are summarized in the table
below.
Three
months
|
Three
months
|
|||||||
Description
|
ended
March 31, 2010
|
ended
March 31, 2009
|
||||||
(Dollars
in thousands)
|
||||||||
Severance
costs due to workforce reductions
|
$ | 14,982 | - | |||||
Integration
related costs associated with our acquisition of Embarq
|
21,507 | 6,929 | ||||||
Income
tax charge due to a change in the treatment of Medicare subsidy
receipts
|
3,965 | - | ||||||
Settlement
loss related to supplemental executive retirement plan
|
- | 7,711 | ||||||
Charge
incurred upon termination of our $800 million bridge
facility
|
- | 8,000 | ||||||
Total
|
$ | 40,454 | 22,640 | |||||
During
the last several years (exclusive of acquisitions and certain non-recurring
favorable adjustments), we have experienced revenue declines in our voice and
network access revenues primarily due to declines in access lines, intrastate
access rates, minutes of use, and federal support fund payments. To
mitigate these declines, we plan to, among other things, (i) promote long-term
relationships with our customers through bundling of integrated services, (ii)
provide new services, such as video and wireless broadband, and other additional
services that may become available in the future due to advances in technology,
wireless spectrum sales by the Federal Communications Commission (“FCC”) or
improvements in our infrastructure, (iii) provide our broadband and premium
services to a higher percentage of our customers, (iv) pursue acquisitions of
additional communications properties if available at attractive prices, (v)
increase usage of our networks and (vi) market our products and services to new
customers.
15
In
addition to historical information, this management’s discussion and analysis
includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond our control. Actual events and
results may differ materially from those anticipated, estimated or projected if
one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results
include but are not limited to: the timing, success and overall
effects of competition from a wide variety of competitive providers; the risks
inherent in rapid technological change; the effects of ongoing changes in the
regulation of the communications industry (including those arising out of the
FCC’s proposed rules regarding intercarrier compensation and the Universal
Service Fund and the FCC’s National Broadband Plan released in the first quarter
of 2010); our ability to effectively adjust to changes in the communications
industry; changes in our allocation of the Embarq purchase price after the
date hereof; our ability to successfully integrate Embarq into our operations,
including the possibility that the anticipated benefits from the Embarq merger
cannot by fully realized in a timely manner or at all, or that integrating
Embarq’s operations into ours will be more difficult, disruptive or costly than
anticipated; our ability to successfully complete our pending acquisition of
Qwest, including timely receiving all shareholder and regulatory approvals and
realizing the anticipated benefits of the transaction; our ability to
effectively manage our expansion opportunities, including retaining and hiring
key personnel; possible changes in the demand for, or pricing of, our products
and services; our ability to successfully introduce new product or service
offerings on a timely and cost-effective basis; our continued access to credit
markets on favorable terms; our ability to collect our receivables from
financially troubled communications companies; our ability to pay a $2.90 per
common share dividend annually, which may be affected by changes in our cash
requirements, capital spending plans, cash flows or financial position;
unanticipated increases in our capital expenditures; our ability to successfully
negotiate collective bargaining agreements on reasonable terms without work
stoppages; the effects of adverse weather; other risks referenced from time to
time in this report or other of our filings with the Securities and Exchange
Commission; and the effects of more general factors such as changes in interest
rates, in tax rates, in accounting policies or practices, in operating, medical,
pension or administrative costs, in general market, labor or economic
conditions, or in legislation, regulation or public policy. These and other
uncertainties related to our business and our July 2009 acquisition of Embarq
are described in greater detail in Item 1A to our Form 10-K for the year ended
December 31, 2009, as updated and supplemented by our subsequent SEC reports.
You should be aware that new factors may emerge from time to time and it is not
possible for us to identify all such factors nor can we predict the impact of
each such factor on the business or the extent to which any one or more factors
may cause actual results to differ from those reflected in any forward-looking
statements. You are further cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to update any of our
forward-looking statements for any reason.
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2010 Compared
to
Three Months Ended March 31, 2009
Net
income attributable to CenturyTel, Inc. was $252.6 million and $67.2 million for
the first quarter of 2010 and 2009, respectively. Diluted earnings
per share for the first quarter of 2010 and 2009 was $.84 and $.67,
respectively. The increase in the number of shares outstanding
is primarily attributable to the common stock issued in connection with our
acquisition of Embarq on July 1, 2009.
16
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars,
except per share amounts,
and
shares in thousands)
|
||||||||
Operating
income
|
$ | 545,230 | 164,337 | |||||
Interest
expense
|
(142,225 | ) | (52,032 | ) | ||||
Other
income (expense)
|
10,500 | (1,818 | ) | |||||
Income
tax expense
|
(160,548 | ) | (43,107 | ) | ||||
Net
income
|
252,957 | 67,380 | ||||||
Less:
Net income attributable to noncontrolling interests
|
(356 | ) | (226 | ) | ||||
Net
income attributable to CenturyTel, Inc.
|
$ | 252,601 | 67,154 | |||||
Basic
earnings per share
|
$ | .84 | .67 | |||||
Diluted
earnings per share
|
$ | .84 | .67 | |||||
Average
basic shares outstanding
|
299,413 | 99,126 | ||||||
Average
diluted shares outstanding
|
299,997 | 99,144 |
Operating
income increased $380.9 million due to a $1.164 billion increase in operating
revenues and a $783.1 million increase in operating expenses. Such
increases in operating revenues, operating expenses and operating income were
substantially due to our July 1, 2009 acquisition of Embarq.
As a
result of the discontinuance of the application of regulatory accounting
effective July 1, 2009 (as more fully described in our 2009 Annual Report on
Form 10-K), we have eliminated all intercompany transactions with regulated
affiliates since the third quarter of 2009 that previously were not eliminated
under the application of regulatory accounting. This has caused our
revenues and operating expenses to be lower by equivalent amounts (approximately
$52 million) for the three months ended March 31, 2010 as compared to the three
months ended March 31, 2009.
Operating
Revenues
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Voice
|
$ | 812,876 | 250,194 | |||||
Data
|
467,440 | 139,937 | ||||||
Network
access
|
286,228 | 152,568 | ||||||
Other
|
233,882 | 93,686 | ||||||
Total
operating revenues
|
$ | 1,800,426 | 636,385 |
The
$562.7 million increase in voice revenues is primarily due to $584.2 million of
revenues attributable to the Embarq properties acquired July 1,
2009. The remaining $21.5 million decrease is primarily due (i) a
$9.4 million decrease due to a 6.5% decline in the average number of access
lines in our legacy CenturyTel markets; (ii) a $4.1 million decrease in custom
calling feature revenues primarily due to the continued migration of customers
to bundled service offerings at a lower effective rate; and (iii) a $3.9 million
reduction due to the elimination of all intercompany transactions due to the
above-described discontinuance of regulatory accounting.
Total
access lines declined 126,000 (1.8%) in the first quarter of 2010 as compared to
year end 2009. We believe the decline in the number of access lines
during the first quarter of 2010 is primarily due to the displacement of
traditional wireline telephone services by other competitive services and recent
economic conditions. Based on our current retention initiatives, we
estimate that our access line loss will be between 7.5% and 8.5% in
2010.
17
Data
revenues increased $327.5 million in the first quarter of 2010 due to $350.6
million of revenues attributable to Embarq. Excluding Embarq, data
revenues decreased $23.1 million substantially due to a $27.3 million reduction
due to the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting. The remaining $4.2 million
increase is primarily attributable to an increase in DSL-related revenues
principally due to growth in the number of DSL customers.
Network
access revenues increased $133.7 million in the first quarter of 2010 due to
$162.7 million of revenues attributable to Embarq. Excluding Embarq,
network access revenues decreased $29.0 million in the first quarter of 2010
primarily due to (i) a $10.9 million reduction due to the elimination of all
intercompany transactions due to the discontinuance of regulatory accounting;
(ii) a $9.4 million reduction in revenues from the federal Universal Service
Fund primarily due to an increase in the nationwide average cost per loop factor
used by the FCC to allocate funds among all recipients; and (iii) a $4.1 million
decrease as a result of lower intrastate revenues due to a reduction in
intrastate access rates and minutes (principally due to the loss of access lines
and the displacement of minutes by wireless, electronic mail and other optional
calling services). We believe that intrastate access rates and
minutes will continue to decline in 2010, although we cannot precisely estimate
the magnitude of such decrease. Proceedings filed by interexchange
carriers in several of our operating states or state initiated legislation
could, if successful, place further downward pressure on our intrastate access
rates.
Operating
Expenses
Three
months
|
||||||||
ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Cost
of services and products (exclusive of depreciation and
amortization)
|
$ | 619,105 | 234,631 | |||||
Selling,
general and administrative
|
282,929 | 109,845 | ||||||
Depreciation
and amortization
|
353,162 | 127,572 | ||||||
$ | 1,255,196 | 472,048 |
Cost of
services and products increased $384.5 million primarily due to $418.0 million
of expenses attributable to the Embarq properties acquired on July 1, 2009
(which includes approximately $5.4 million of costs associated with employee
severance benefits). The remaining $33.5 million decrease is
primarily due to a $40.8 million reduction in expenses due to the elimination of
all intercompany transactions due to the discontinuance of regulatory
accounting, which was partially offset by a $6.9 million increase in salaries,
wages and benefits.
Selling,
general and administrative expenses increased $173.1 million primarily due to
$199.7 million of expenses incurred by Embarq (which includes approximately $6.5
million of costs associated with employee severance benefits), which was
partially offset by a $9.3 million reduction in salaries and benefits (primarily
due to a $7.7 million settlement charge related to a supplemental executive
pension plan in first quarter 2009) and a $7.3 million reduction in
expenses due to the elimination of all intercompany transactions due to the
discontinuance of regulatory accounting.
Depreciation
and amortization increased $225.6 million primarily due to $239.0 million of
depreciation and amortization attributable to Embarq (including $49.2 million of
amortization expense related to the customer list and other intangible assets
associated with the Embarq acquisition). The remaining decrease was
primarily due to a $10.8 million decrease in depreciation expense due to a
reduction in certain depreciation rates effective July 1, 2009 upon the
discontinuance of regulatory accounting and a $6.9 million decrease due to
certain assets becoming fully depreciated.
Interest
Expense
Interest
expense increased $90.2 million in the first quarter of 2010 compared to the
first quarter of 2009 primarily due to $89.0 million of interest expense
attributable to Embarq’s indebtedness assumed in connection with our acquisition
of Embarq.
18
Other
Income (Expense)
Other
income (expense) includes the effects of certain items not directly related to
our core operations, including gains and losses from nonoperating asset
dispositions and impairments, our share of income from our 49% interest in a
cellular partnership, interest income and allowance for funds used during
construction. Other income (expense) was $10.5 million for the first
quarter of 2010 compared to $(1.8) million for the first quarter of
2009. Included in the first quarter of 2009 is an $8.0 million
one-time charge associated with terminating our $800 million bridge credit
facility entered into in connection with our acquisition of Embarq.
Income
Tax Expense
Our
effective income tax rate was 38.9% and 39.1% for the three months ended March
31, 2010 and March 31, 2009, respectively.
Included
in income tax expense for the first quarter of 2010 is a $4.0 million charge
related to the change in the tax treatment of the Medicare Part D subsidy as a
result of the comprehensive health care reform legislation signed into law by
the President in March 2010.
The lump
sum distributions made to certain executive officers in the first quarter of
2009 in connection with discontinuing the Supplemental Executive Retirement Plan
were non-deductible for income tax purposes pursuant to executive compensation
limitations prescribed by the Internal Revenue Code. Such treatment
resulted in the recognition of approximately $6.7 million of income tax expense
in the first quarter of 2009 above amounts that would have been recognized had
such payments been deductible for income tax purposes. Such increase
in income tax expense was partially offset by a $5.8 million reduction in income
tax expense caused by a reduction to our deferred tax asset valuation allowance
associated with state net operating loss carryforwards due to a law change in
one of our operating states that we believe will allow us to utilize our net
operating loss carryforwards in the future. Prior to the law change,
such net operating loss carryforwards were fully offset by a valuation allowance
as it was more likely than not that these carryforwards would not be utilized
prior to expiration.
LIQUIDITY
AND CAPITAL RESOURCES
Excluding
cash used for acquisitions, we rely on cash provided by operations to fund our
operating and capital expenditures as well as our dividend
payments. Our operations have historically provided a stable source
of cash flow which has helped us continue our long-term program of capital
improvements.
Net cash
provided by operating activities was $461.5 million during the first three
months of 2010 and $230.2 million during the first three months of
2009. During the first quarter of 2010, we contributed $300 million
to the legacy Embarq pension plan. Such funding was made with
approximately $126 million of borrowings under our revolving credit facility,
with the balance being provided by cash on hand. The lump sum
distributions associated with the discontinuance of our Supplemental Executive
Retirement Plan were paid in early 2009 and aggregated approximately $37
million. Our accompanying consolidated statements of cash flows
identify major differences between net income and net cash provided by operating
activities for each of these periods. For additional information
relating to our operations, see Results of Operations.
Net cash
used in investing activities was $168.5 million and $45.4 million for the three
months ended March 31, 2010 and 2009, respectively. Payments for
property, plant and equipment were $167.2 million in the first quarter of 2010
and $45.5 million in the first quarter of 2009. Included in our first
quarter 2009 capital expenditures was approximately $6.4 million related to the
integration of Embarq. Our budgeted capital expenditures for 2010 are
expected to be between $825-875 million.
Net cash
used in financing activities was $248.3 million during the first three months of
2010 compared to $366.9 million during the first three months of
2009. We made $292.0 million of debt payments (substantially all of
which related to our revolving credit facility) in the first quarter of 2009
primarily from cash on hand. We paid dividends of $218.1 million in
the first three months of 2010 compared to $70.4 million in the first three
months of 2009. Such increase is primarily attributable to the
increase in shares outstanding as a result of the common stock issued in
connection with our Embarq acquisition on July 1, 2009.
19
We have
available two revolving credit facilities, (i) a five-year, $728 million
unsecured revolving credit facility of CenturyTel which expires in December 2011
and (ii) an $800 million unsecured revolving credit facility of Embarq which
expires in May 2011. Up to $250 million of the credit facilities can
be used for letters of credit, which reduces the amount available for other
extensions of credit. As of April 30, 2010, approximately $56 million
of letters of credit were outstanding. Available borrowings under
these credit facilities are also effectively reduced by any outstanding
borrowings under our commercial paper program. Our commercial paper
program borrowings are effectively limited to the total amount available under
the two credit facilities. As of April 30, 2010, we had approximately
$105 million outstanding under our credit facilities (all of which relates to
CenturyTel’s facility) and no amounts outstanding under our commercial paper
program. Prior to the lapse of Embarq’s credit facility in 2011,
CenturyTel plans, based on current market conditions, to replace the existing
two facilities with a single larger CenturyTel revolving credit
facility.
Following
our announcement of our pending acquisition of Qwest, (i) Standard & Poor’s
indicated that our current long-term debt rating of BBB- had been placed under
watch for a possible downgrade and (ii) Moody’s Investors Service affirmed our
current long-term debt rating of Baa3, but downgraded its outlook from stable to
negative. It is expected that any downgrades would be made only
following the completion of the Qwest acquisition.
OTHER
MATTERS
On March
16, 2010, the FCC released its National Broadband Plan, which is the FCC’s
framework to develop a comprehensive plan over the next decade for broadband
deployment, intercarrier compensation reform and regulatory reform initiatives
such as reformation of the USF high cost support fund. Given the
early stages of the Plan, we cannot predict the ultimate outcome nor can we be
assured that such Plan will not have a material adverse effect on us or our
industry in the future.
20
Item
3.
CenturyTel,
Inc.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES
ABOUT MARKET RISK
We are
exposed to market risk from changes in interest rates on our long-term debt
obligations. We have estimated our market risk using sensitivity
analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. Fair value on long-term debt obligations is
determined based on a discounted cash flow analysis, using the rates and
maturities of these obligations compared to terms and rates currently available
in the long-term financing markets. The results of the sensitivity
analysis used to estimate market risk are presented below, although the actual
results may differ from these estimates.
At March
31, 2010, the fair value of our long-term debt was estimated to be $8.3 billion
based on the overall weighted average rate of our debt of 7.1% 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 our long-term debt resulting from a
hypothetical increase of 71 basis points in interest rates (ten percent of our
overall weighted average borrowing rate). Such an increase in
interest rates would result in approximately a $346.5 million decrease in fair
value of our long-term debt at March 31, 2010. As of March 31, 2010,
approximately 97% of our long-term and short-term debt obligations were fixed
rate.
We seek
to maintain a favorable mix of fixed and variable rate debt in an effort to
limit interest costs and cash flow volatility resulting from changes in
rates. From time to time over the past several years, we have used
derivative instruments to (i) lock-in or swap our exposure to changing or
variable interest rates for fixed interest rates or (ii) to swap obligations to
pay fixed interest rates for variable interest rates. We have
established policies and procedures for risk assessment and the approval,
reporting and monitoring of derivative instrument activities. We do
not hold or issue derivative financial instruments for trading or speculative
purposes. Management periodically reviews our exposure to interest
rate fluctuations and implements strategies to manage the exposure.
We are
also exposed to market risk from changes in the fair value of our pension plan
assets. If our actual return on plan assets is significantly lower
than our expected return assumption, our net periodic pension expense will
increase in the future and we will be required to contribute additional funds to
our pension plan.
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, 2010.
21
Item
4.
CenturyTel,
Inc.
CONTROLS
AND PROCEDURES
We
maintain disclosure controls and procedures designed to provide reasonable
assurances that information required to be disclosed by us in the reports we
file under the Securities Exchange Act of 1934 is timely recorded, processed,
summarized and reported as required. Our Chief Executive Officer,
Glen F. Post, III, and our Chief Financial Officer, R. Stewart Ewing, Jr., have
evaluated our disclosure controls and procedures as of March 31,
2010. Based on that evaluation, Messrs. Post and Ewing concluded that
our disclosure controls and procedures have been effective in providing
reasonable assurance that they have been timely alerted of material information
required to be filed in this report. Since the date of Messrs. Post’s
and Ewing’s most recent evaluation, we did not make any change to our internal
control over financial reporting that materially affected, or that we believe is
reasonably likely to materially affect, our internal control over financial
reporting. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events and contingencies, and
there can be no assurance that any design will succeed in achieving its stated
goals. Because of inherent limitations in any control system,
misstatements due to error or fraud could occur and not be
detected.
22
PART II.
OTHER INFORMATION
CenturyTel,
Inc.
Item
1. Legal
Proceedings.
See Note
10 to the financial statements included in Part I, Item 1, of this
report.
Item
1A. Risk
Factors.
We
may not be able to successfully or timely complete our pending acquisition of
Qwest, or realize the anticipated benefits of the transaction.
We are
unable to complete our pending acquisition of Qwest until after we receive
approvals from the FCC and various state governmental entities and after the
waiting period has expired under the Hart-Scott-Rodino Antitrust Improvements
Act. In deciding whether to grant some of these approvals, the relevant
governmental entity will make a determination of whether, among other things,
the merger is in the public interest. Regulatory entities may impose certain
requirements or obligations as conditions for their approval or in connection
with their review. We can provide no assurance that we will obtain
the necessary approvals or that any required conditions will not have a material
adverse effect on CenturyTel following the merger. In addition, we can provide
no assurance that these conditions will not result in the abandonment of the
merger. Depending on the reasons for not completing the merger, we
could be required to pay Qwest a termination fee of $350 million. For
this and other reasons, our failure to complete the merger could adversely
affect our business, operating results or financial condition, and could
negatively impact the trading price of our securities. If the merger
is completed, we can provide no assurance that the anticipated benefits of the
merger will be fully realized in the time frame anticipated or at all, or that
the costs or difficulties related to the integration of Qwest’s operations into
ours will not be greater than expected.
Implementation
of the FCC’s National Broadband Plan could materially adversely affect our
business.
The FCC’s
10-year National Broadband Plan released on March 16, 2010 seeks comprehensive
changes in federal communications regulations and programs that could, among
other things, result in lower universal service funding and access revenues for
several of our local exchange companies. At this stage, we can
neither predict the ultimate outcome of this plan nor provide any assurances
that the implementation of this plan will not have a material adverse effect on
our business, operating results or financial condition.
For a
listing of other factors that could materially and adversely affect our
business, financial condition, results of operation, liquidity or prospects,
please see Item 1A to our Annual Report on Form 10-K for the year ended December
31, 2009.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
During
the first quarter of 2010, we withheld 299,390 shares of stock at an average
price of $34.84 per share to pay taxes due upon vesting of restricted stock for
certain of our employees.
23
Item
6. Exhibits
|
A.
|
Exhibits
|
|
10.2
|
Form
of Restricted Stock Agreement, pursuant to the Amended and Restated 2005
Management Incentive Compensation Plan and dated as of March 8, 2010,
entered into between Registrant and nine of its top
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.
|
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, 2010
|
/s/ Neil A. Sweasy
|
|
Neil
A. Sweasy
|
||
Vice
President and Controller
|
||
(Principal
Accounting Officer)
|
24