UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 July 31, 2004, there were 135,024,645 shares of common stock
outstanding.
CenturyTel, Inc.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months and Six
Months Ended June 30, 2004 and 2003 3
Consolidated Statements of Comprehensive Income--Three
Months and Six Months Ended June 30, 2004 and 2003 4
Consolidated Balance Sheets--June 30, 2004 and
December 31, 2003 5
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 2004 and 2003 6
Consolidated Statements of Stockholders' Equity--
Six Months Ended June 30, 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 12-19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4. Controls and Procedures 21
Part II. Other Information:
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Six months
ended June 30, ended June 30,
- -------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES $ 603,555 586,729 1,197,259 1,164,743
- -------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of services and products (exclusive of
depreciation and amortization) 190,226 183,960 371,775 361,820
Selling, general and administrative 92,667 89,723 194,273 178,339
Depreciation and amortization 130,751 124,665 257,743 251,430
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 413,644 398,348 823,791 791,589
- -------------------------------------------------------------------------------------------------------------
OPERATING INCOME 189,911 188,381 373,468 373,154
- -------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (53,089) (55,957) (105,632) (111,549)
Income from unconsolidated cellular entity 2,126 1,590 4,185 3,159
Other income (expense) (3,811) 974 (1,507) 42
- -------------------------------------------------------------------------------------------------------------
Total other income (expense) (54,774) (53,393) (102,954) (108,348)
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 135,137 134,988 270,514 264,806
Income tax expense 51,853 47,621 103,951 93,520
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 83,284 87,367 166,563 171,286
=============================================================================================================
BASIC EARNINGS PER SHARE $ .60 .61 1.19 1.20
=============================================================================================================
DILUTED EARNINGS PER SHARE $ .60 .60 1.18 1.19
=============================================================================================================
DIVIDENDS PER COMMON SHARE $ .0575 .055 .115 .11
=============================================================================================================
AVERAGE BASIC SHARES OUTSTANDING 138,066 143,329 140,325 143,109
=============================================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 138,889 144,475 141,118 144,136
=============================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months Six months
ended June 30, ended June 30,
- ----------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 83,284 87,367 166,563 171,286
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Minimum pension liability adjustment,
net of ($523), ($7,946), $1,216 and ($2,472) tax 971 14,758 (2,258) 4,572
Unrealized gain on investments, net of $692 and
$943 tax 1,285 - 1,751 -
Derivative instruments:
Net gain (loss) on derivatives hedging the
variability of cash flows, net of ($137) and $36 tax - 255 - (67)
Less: reclassification adjustment for losses
included in net income, net of ($314) and ($487) tax - 583 - 905
- ----------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 85,540 102,963 166,056 176,696
================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2004 2003
- ------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 96,386 203,181
Accounts receivable, less allowance
of $22,823 and $23,679 219,694 236,187
Materials and supplies, at average cost 6,739 9,229
Other 14,061 14,342
- ------------------------------------------------------------------------------
Total current assets 336,880 462,939
- ------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment 7,254,584 7,184,155
Accumulated depreciation (3,906,613) (3,728,674)
- ------------------------------------------------------------------------------
Net property, plant and equipment 3,347,971 3,455,481
- ------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,426,766 3,425,001
Other 572,721 552,431
- ------------------------------------------------------------------------------
Total investments and other assets 3,999,487 3,977,432
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 7,684,338 7,895,852
==============================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 121,456 72,453
Accounts payable 137,886 113,274
Accrued expenses and other liabilities
Salaries and benefits 55,520 55,497
Income taxes 27,259 43,082
Other taxes 45,634 35,532
Interest 63,888 64,247
Other 37,228 42,686
Advance billings and customer deposits 45,026 44,612
- ------------------------------------------------------------------------------
Total current liabilities 533,897 471,383
- ------------------------------------------------------------------------------
LONG-TERM DEBT 2,883,784 3,109,302
- ------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 913,513 836,651
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
350,000,000 shares, issued and outstanding
134,993,424 and 144,364,168 shares 134,993 144,364
Paid-in capital 310,247 576,515
Accumulated other comprehensive loss,
net of tax (507) -
Retained earnings 2,900,436 2,750,162
Unearned ESOP shares - (500)
Preferred stock - non-redeemable 7,975 7,975
- ------------------------------------------------------------------------------
Total stockholders' equity 3,353,144 3,478,516
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,684,338 7,895,852
==============================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months
ended June 30,
- ------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 166,563 171,286
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 257,743 251,430
Income from unconsolidated
cellular entity (4,185) (3,159)
Deferred income taxes 57,038 43,841
Changes in current assets and
current liabilities:
Accounts receivable 15,988 36,053
Accounts payable 24,612 38,338
Accrued income and other taxes (5,722) 27,144
Other current assets and other
current liabilities, net (2,608) 14,292
Retirement benefits 17,863 11,876
Increase in other noncurrent assets (17,909) (11,501)
Increase (decrease) in other
noncurrent liabilities (3,544) 693
Other, net (2,481) (1,220)
- ------------------------------------------------------------------------------
Net cash provided by operating
activities 503,358 579,073
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant
and equipment (156,014) (154,258)
Acquisitions, net of cash acquired (2,000) (35,584)
Distribution from unconsolidated
cellular entity 4,233 1,104
Other, net (3,301) (1,536)
- ------------------------------------------------------------------------------
Net cash used in investing
activities (157,082) (190,274)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments of debt (162,724) (397,916)
Proceeds from settlement of interest
rate hedge contract - 22,315
Proceeds from issuance of common stock 7,158 20,929
Repurchase of common stock (283,880) -
Cash dividends (16,289) (15,962)
Other, net 2,664 2,496
- ------------------------------------------------------------------------------
Net cash used in financing
activities (453,071) (368,138)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (106,795) 20,661
Cash and cash equivalents at beginning
of period 203,181 3,661
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 96,386 24,322
==============================================================================
Supplemental cash flow information:
Income taxes paid $ 71,067 42,322
==============================================================================
Interest paid (net of capitalized
interest of $235 and $37) $ 105,756 106,741
==============================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months
ended June 30,
- ------------------------------------------------------------------------------
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 492 862
Repurchase of common stock (9,863) -
- ------------------------------------------------------------------------------
Balance at end of period 134,993 143,818
- ------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 576,515 537,804
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 6,666 20,067
Repurchase of common stock (274,017) -
Amortization of unearned compensation
and other 1,083 357
- ------------------------------------------------------------------------------
Balance at end of period 310,247 558,228
- ------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX
Balance at beginning of period - (36,703)
Change in other comprehensive loss,
net of tax (507) 5,410
- ------------------------------------------------------------------------------
Balance at end of period (507) (31,293)
- ------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 2,750,162 2,437,472
Net income 166,563 171,286
Cash dividends declared
Common stock - $.115 and $.11 per
share, respectively (16,090) (15,763)
Preferred stock (199) (199)
- ------------------------------------------------------------------------------
Balance at end of period 2,900,436 2,592,796
- ------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (500) (1,500)
Release of ESOP shares 500 500
- ------------------------------------------------------------------------------
Balance at end of period - (1,000)
- ------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 7,975
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,353,144 3,270,524
==============================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six months
ended June 30, 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 and six-month periods have been
included therein. The results of operations for the first six months of the year
are not necessarily indicative of the results of operations which might be
expected for the entire year.
(2) Goodwill and Other Intangible Assets
The following information relates to the Company's goodwill and other
intangible assets as of June 30, 2004 and December 31, 2003:
June 30, Dec. 31,
2004 2003
- ------------------------------------------------------------------------------
(Dollars in thousands)
Goodwill $ 3,426,766 3,425,001
Intangible asset subject to
amortization - customer base
Gross carrying amount $ 22,700 22,700
Accumulated amortization $ (2,998) (2,242)
------------- -----------
Net carrying amount $ 19,702 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 six months of 2004 was $756,000 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 and six
months ended June 30, 2004 and 2003 included the following components:
Three months Six months
ended June 30, ended June 30,
- ---------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 1,654 1,659 3,308 3,318
Interest cost 4,572 4,893 9,144 9,786
Expected return on plan assets (616) (636) (1,232) (1,272)
Amortization of unrecognized actuarial loss 1,123 465 2,246 930
Amortization of unrecognized prior service cost (938) (657) (1,876) (1,314)
- ---------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 5,795 5,724 11,590 11,448
====================================================================================================
The Company contributed $8.0 million to its postretirement plan in the
first six months of 2004 and expects to contribute approximately $14 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 and six months ended
June 30, 2004 and 2003 included the following components:
Three months Six months
ended June 30, ended June 30,
- ---------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 3,703 4,133 8,170 5,625
Interest cost 5,856 7,601 13,195 10,346
Expected return on plan assets (7,076) (7,102) (14,152) (9,666)
Settlements - - 1,093 -
Recognized net losses 1,472 2,322 3,966 3,160
Net amortization and deferral 61 128 420 174
- ---------------------------------------------------------------------------------------------------
Net periodic pension expense $ 4,016 7,082 12,692 9,639
===================================================================================================
Currently, the Company's contributions to its retirement plans for 2004
are expected to be less than $2 million.
(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 and six months ended June 30, 2004 and 2003
would have been as follows:
Three months Six months
ended June 30, ended June 30,
- ---------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 83,284 87,367 166,563 171,286
Less: Total stock-based employee compensation
expense determined under fair value based
method, net of tax $ (1,337) (3,346) (5,627) (6,880)
- ---------------------------------------------------------------------------------------------------
Pro forma net income $ 81,947 84,021 160,936 164,406
===================================================================================================
Basic earnings per share
As reported $ .60 .61 1.19 1.20
Pro forma $ .59 .59 1.15 1.15
Diluted earnings per share
As reported $ .60 .60 1.18 1.19
Pro forma $ .59 .58 1.14 1.14
- ---------------------------------------------------------------------------------------------------
(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. Effective in the first quarter of 2004, as a
result of the Company's increased focus on integrated bundle offerings and the
varied discount structures associated with such offerings, the Company
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 Six months
ended June 30, ended June 30,
- ---------------------------------------------------------------------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 180,142 178,360 358,200 355,373
Network access 245,515 248,220 486,472 494,550
Long distance 45,727 43,201 90,316 85,761
Data 68,169 60,672 133,797 118,808
Fiber transport and CLEC 18,321 9,036 35,753 14,931
Other 45,681 47,240 92,721 95,320
- ---------------------------------------------------------------------------------------------------
Total operating revenues $ 603,555 586,729 1,197,259 1,164,743
===================================================================================================
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 data transmission services over special circuits
and private lines.
Fiber transport and CLEC revenues include revenues from the Company's
fiber transport, competitive local exchange carrier ("CLEC") and security
monitoring businesses.
Other revenues include revenues related to (i) leasing, selling,
installing and maintaining 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 of its regulated operations to
depreciation expense.
(7) Commitments and Contingencies
AT&T filed a petition with the Federal Communications Commission ("FCC")
in December 2003 challenging certain provisions of the Telecommunications Act of
1996 that allow local exchange carriers ("LECs") to file access tariffs on a
streamlined basis and, if certain criteria are met, deems 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 pending resolution of the "deemed lawful" tariff
issue. As of June 30, 2004, the amount of the Company's earnings in excess of
the authorized rate of return for the combined 2001 and 2002 monitoring period
(for which the ability to request refunds lapses on September 30, 2005)
aggregated approximately $40 million. 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 its situation concerning the "deemed lawful" tariff
issue. 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
and six months ended June 30, 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 and 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 June 30, 2004 Compared
to Three months Ended June 30, 2003
Net income was $83.3 million and $87.4 million for the second quarter of
2004 and 2003, respectively. Diluted earnings per share was $.60 for both the
second quarter of 2004 and 2003.
Three months
ended June 30,
- ------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares
in thousands)
Operating income $ 189,911 188,381
Interest expense (53,089) (55,957)
Income from unconsolidated cellular entity 2,126 1,590
Other income (expense) (3,811) 974
Income tax expense (51,853) (47,621)
- ------------------------------------------------------------------------------
Net income $ 83,284 87,367
==============================================================================
Basic earnings per share $ .60 .61
==============================================================================
Diluted earnings per share $ .60 .60
==============================================================================
Average basic shares outstanding 138,066 143,329
==============================================================================
Average diluted shares outstanding 138,889 144,475
==============================================================================
Operating income increased $1.5 million (0.8%) due to a $16.8 million
(2.9%) increase in operating revenues which was partially offset by a $15.3
million (3.8%) increase in operating expenses.
As previously disclosed, the Company anticipates its net income for 2004
will be lower than 2003 as a result of (i) lower intrastate toll usage, (ii)
lower Universal Service Fund revenues, (iii) declines in access lines, (iv)
incremental amortization and operating expenses related to the development of
its new billing and customer care system, and (v) an increase in its effective
income tax rate. See below for additional information.
Operating Revenues
Three months
ended June 30,
- ------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 180,142 178,360
Network access 245,515 248,220
Long distance 45,727 43,201
Data 68,169 60,672
Fiber transport and CLEC 18,321 9,036
Other 45,681 47,240
- ------------------------------------------------------------------------------
$ 603,555 586,729
==============================================================================
The $1.8 million (1.0%) increase in local service revenues is primarily
due a $3.1 million increase due to the provision of custom calling features to
more customers, which was partially offset by a $2.1 million decrease due to a
decline in the number of access lines.
Access lines declined 15,900 (0.70%) during the second quarter of 2004
compared to a decline of 3,800 (0.16%) in the second quarter of 2003. The
Company believes the decline in the number of access lines during 2004 and 2003
is primarily due to 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
approximately 2% in 2004.
Network access revenues decreased $2.7 million (1.1%) in the second
quarter of 2004 primarily due to a $3.8 million decrease in 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 is uncertain. In addition, network access revenues declined $2.1
million due to a decrease 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. Such decreases were partially
offset by a $3.1 million increase in revenues attributable to the recognition
of prior year interstate access revenues.
Certain of the Company's interstate network access revenues are based on
tariffed access charges filed directly with the FCC; the remainder of such
revenues is derived from revenue sharing arrangements with other LECs
administered by the National Exchange Carrier Association. In the second quarter
of 2004, the Company revised certain estimates for recognizing interstate
network access revenues. Previously, the Company initially recognized interstate
revenues at a rate of return lower than the authorized rate of return prescribed
by the FCC to allow for potential decreases in demand or other factor changes
which could decrease the achieved rate of return over the respective monitoring
periods. As the monitoring periods progressed, the Company recorded additional
revenues ratably up to the authorized rate of return. In the second quarter of
2004, the Company began generally recognizing such interstate network access
revenues at the authorized rate of return, unless the actual achieved rate of
return was lower than authorized. As a result, in the second quarter of 2004 the
Company recognized approximately $8.5 million of incremental nonrecurring
revenues. In addition, in the second quarter of 2004 the Company recognized a
$4.6 million nonrecurring reduction in network access revenues due to an
adjustment of prior years universal service revenues.
The $2.5 million (5.8%) increase in long distance revenues was due to
growth in the Company's retail long distance operations. A $4.9 million revenue
increase due to an increase in the number of long distance lines served and
increased minutes of use was partially offset by a $2.4 million decrease caused
by lower average rates charged by the Company. The number of long distance lines
operated by the Company as of June 30, 2004 and 2003 was 1,013,400 and 882,800,
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 (12.4%) due primarily to a $4.5
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
$2.7 million increase in special access revenues due to an increase in the
number of special circuits.
Fiber transport and CLEC revenues increased $9.3 million (102.8%),
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 $1.6 million (3.3%) during the second quarter of
2004 primarily due to a $1.3 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.
Operating Expenses
Three months
ended June 30,
- ------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------
(Dollars in thousands)
Cost of services and products (exclusive of
depreciation and amortization) $ 190,226 183,960
Selling, general and administrative 92,667 89,723
Depreciation and amortization 130,751 124,665
- ------------------------------------------------------------------------------
$ 413,644 398,348
==============================================================================
Cost of services and products increased $6.3 million (3.4%) 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 $3.3
million increase in plant operations expenses; and (iii) a $2.2 million increase
in expenses associated with Company's Internet operations due to an increase in
the number of customers. Such increases were partially offset by a $3.4 million
decrease in access expenses and a $2.3 million decrease in the cost of providing
retail long distance service primarily due to a decrease in the average cost per
minute of use.
Selling, general and administrative expenses increased $2.9 million
(3.3%) primarily due to (i) a $3.1 million increase in marketing expenses; (ii)
a $1.2 million increase in expenses associated with the Company's LightCore
operations; and (iii) a $1.2 million increase in expenses attributable to the
Company's Sarbanes-Oxley compliance effort. Such increases were partially offset
by a $3.3 million decrease in bad debt expense.
Depreciation and amortization increased $6.1 million (4.9%) primarily due
to a $3.1 million adjustment related to depreciation of fixed assets related to
the Company's new billing system; a $1.6 million increase due to higher levels
of plant in service (partially offset by reductions due to fully depreciated
assets); and a $1.1 million increase in depreciation due to the assets acquired
in connection with the Company's LightCore operations.
Interest Expense
Interest expense decreased $2.9 million (5.1%) in the second quarter of
2004 compared to the second quarter of 2003 primarily due to a decrease in
average debt outstanding.
Other Income (Expense)
Other income (expense) was $3.8 million of expense for the second
quarter of 2004, compared to $974,000 of income for the second quarter of 2003.
The second quarter of 2004 included a $3.6 million prepayment expense paid in
connection with the redemption of $100 million aggregate principal amount of the
Company's Series B senior notes in May 2004.
Income Tax Expense
The effective income tax rate from continuing operations was 38.4% and
35.3% for the three months ended June 30, 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.
RESULTS OF OPERATIONS
Six months Ended June 30, 2004 Compared
to Six months Ended June 30, 2003
Net income was $166.6 million and $171.3 million for the first six months
of 2004 and 2003, respectively. Diluted earnings per share for the six months
ended June 30, 2004 was $1.18 compared to $1.19 during the first six months of
2003.
Six months
ended June 30,
- ------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income $ 373,468 373,154
Interest expense (105,632) (111,549)
Income from unconsolidated cellular entity 4,185 3,159
Other income (expense) (1,507) 42
Income tax expense (103,951) (93,520)
- ------------------------------------------------------------------------------
Net income $ 166,563 171,286
==============================================================================
Basic earnings per share $ 1.19 1.20
==============================================================================
Diluted earnings per share $ 1.18 1.19
==============================================================================
Average basic shares outstanding 140,325 143,109
==============================================================================
Average diluted shares outstanding 141,118 144,136
==============================================================================
Operating income increased $314,000 (0.1%) as a $32.5 million (2.8%)
increase in operating revenues was substantially offset by a $32.2 million
(4.1%) increase in operating expenses.
As previously disclosed, the Company anticipates its net income for 2004
will be lower than 2003 as a result of (i) lower intrastate toll usage, (ii)
lower Universal Service Fund revenues, (iii) declines in access lines, (iv)
incremental amortization and operating expenses related to the development of
its new billing and customer care system, and (v) an increase in its effective
income tax rate. See below for additional information.
Operating Revenues
Six months
ended June 30,
- -------------------------------------------------------------------------------
2004 2003
- -------------------------------------------------------------------------------
(Dollars in thousands)
Local service $ 358,200 355,373
Network access 486,472 494,550
Long distance 90,316 85,761
Data 133,797 118,808
Fiber transport and CLEC 35,753 14,931
Other 92,721 95,320
- ------------------------------------------------------------------------------
$ 1,197,259 1,164,743
==============================================================================
The $2.8 million (0.8%) increase in local service revenues is primarily
due a $6.3 million increase due to the provision of custom calling features to
more customers which was partially offset by a $3.3 million decrease due to a
decline in the number of access lines.
Access lines declined 25,600 (1.1%) during the first six months of 2004
compared to a decline of 11,200 (0.5%) in the first six months of 2003. The
Company believes the decline in the number of access lines during 2004 and 2003
is primarily due to 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
approximately 2% in 2004.
Network access revenues decreased $8.1 million (1.6%) in the first six
months of 2004 primarily due to a $7.1 million decrease in 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 is uncertain. The decline in network access revenues was also
impacted by a $5.3 million decrease 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. Such
decreases were partially offset by a $4.6 million increase in revenues
attributable to the recognition of prior year interstate access revenues
(see Three Months June 30, 2004 compared to Three Months June 30, 2003 -
Operating Revenues for additional information).
The $4.6 million (5.3%) increase in long distance revenues was due to
growth in the Company's retail long distance operations. A $10.0 million revenue
increase due to an increase in the number of long distance lines served and
increased minutes of use was partially offset by a $5.4 million decrease caused
by lower average rates charged by the Company. The number of long distance lines
operated by the Company as of June 30, 2004 and 2003 was 1,013,400 and 882,800,
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 $15.0 million (12.6%) due primarily to a $9.6
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
$4.6 million increase in special access revenues due to an increase in the
number of special circuits.
Fiber transport and CLEC revenues increased $20.8 million (139.5%),
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 $2.6 million (2.7%) during the first six months
of 2004 primarily due to a $4.3 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.
Operating Expenses
Six months
ended June 30,
- ------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------
(Dollars in thousands)
Cost of services and products (exclusive of
depreciation and amortization) $ 371,775 361,820
Selling, general and administrative 194,273 178,339
Depreciation and amortization 257,743 251,430
- ------------------------------------------------------------------------------
$ 823,791 791,589
==============================================================================
Cost of services and products increased $10.0 million (2.8%) primarily
due to (i) a $9.6 million increase in expenses associated with operating the
Company's fiber transport assets acquired in June and December 2003; (ii) a $5.4
million increase in plant operations expenses; (iii) a $4.5 million increase in
expenses associated with the Company's Internet operations due to an increase in
the number of customers; (iv) a $3.4 million increase in customer service and
retention related expenses; and (v) a $1.2 million increase in salaries and
benefits. Such increases were substantially offset by an $8.8 million decrease
in access expenses (which included a one-time credit of $3.1 million recorded in
the first six months of 2004) and a $6.8 million decrease in the cost of
providing retail long distance service 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 $15.9 million
(8.9%) primarily due to (i) a nonrecurring $5.0 million reduction in bad debt
expense 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 $5.7 million increase in salaries and benefits; (iii) a $3.5
million increase in expenses associated with the Company's LightCore operations;
and (iv) a $4.8 million increase in marketing expenses. Such increases were
partially offset by a $6.7 million decrease in bad debt expense during the first
six months of 2004 (exclusive of the MCI recovery mentioned above).
Depreciation and amortization increased $6.3 million (2.5%) due to a $3.1
million adjustment related to depreciation of fixed assets related to the
Company's new billing system, a $2.3 million increase due to higher levels of
plant in service and a $2.1 million increase in depreciation due to the assets
acquired in connection with the Company's LightCore operations.
Interest Expense
Interest expense decreased $5.9 million (5.3%) in the first six months of
2004 compared to the first six months of 2003 due primarily to a decrease in
average debt outstanding.
Other Income (Expense)
Other income (expense) was $1.5 million of expense for the first six
months of 2004, compared to $42,000 of income for the first six months of 2003.
The first six months of 2004 included a $3.6 million prepayment expense paid in
connection with the redemption of $100 million aggregate principal amount of the
Company's Series B senior notes in May 2004. Such expense was partially offset
by a $1.2 million increase in interest income due to higher cash balances.
Income Tax Expense
The effective income tax rate from continuing operations was 38.4% and
35.3% for the six months ended June 30, 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 $503.4 million during the
first six months of 2004 compared to $579.1 million during the first six 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 $157.1 million and $190.3
million for the six months ended June 30, 2004 and 2003, respectively. Payments
for property, plant and equipment were $156.0 million in the first six months of
2004 compared to $154.3 million during the first six months of 2003. Budgeted
capital expenditures for 2004 total $400 million. In June 2003, the Company
acquired the assets of a fiber transport business for $39.4 million cash (of
which $35.6 million was paid at acquisition and the remainder was previously
paid as a deposit in 2002).
Net cash used in financing activities was $453.1 million during the first
six months of 2004 compared to $368.1 million during the first six months of
2003. The Company repurchased 9.9 million shares of common stock for $283.9
million in the first six months 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. Payments of debt were $235.2
million less during the first six months of 2004 compared to the first six
months of 2003. In May 2004, the Company prepaid its $100 million, 8.25%, Series
B senior notes, due 2024. The Company incurred a $4.6 million pre-tax expense
(a $3.6 million prepayment premium and a $1.0 million write-off
of related deferred debt costs) in the second quarter of 2004 associated with
this prepayment.
The following table contains certain information concerning the Company's
material contractual obligations as of June 30, 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 $ 3,005,240 121,456 924,153 (1) 305,424 1,654,207
- -----------------------------------------------------------------------------------------
(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 and $500 million aggregate
principal amount of the Company's senior notes, Series J, due 2007, which
the Company is committed to remarket in 2005.
As of June 30, 2004, the Company had $533 million of undrawn committed
bank lines of credit and the Company's telephone subsidiaries had available for
use $123 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; however, borrowings are limited to the amount available under its
credit facility.. At June 30, 2004, the Company had no commercial paper
outstanding under such program. At June 30, 2004, the Company held over $96
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.
When and if 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
the billing functionality currently being provided by its legacy system,
custom built hardware and software technology for more effective customer care,
billing and provisioning. 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 $187.3 million (before
accumulated amortization) at June 30, 2004. The Company began amortizing its
billing system costs in early 2003 (over a 20-year period) based on the total
number of customers migrated to the new system.
The system has required substantially more time and money to develop than
originally anticipated. The Company currently expects to complete conversion to
the new system in 2004 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 in 2004
related to completion of the project, including (i) approximately $15 million of
customer service related and data conversion costs 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 $2-4
million in 2004 compared to 2003 levels.
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 June 30, 2004, the fair value of the Company's long-term debt was
estimated to be $3.3 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 $137.7 million decrease in fair value of the Company's long-term
debt at June 30, 2004. As of June 30, 2004, after giving effect to interest rate
swaps currently in place, approximately 83% of the Company's long-term debt
obligations were fixed rate.
The Company seeks to maintain a favorable mix of fixed and variable rate
debt in an effort to limit interest costs and cash flow volatility resulting
from changes in rates. From time to time, the Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At June 30, 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 June 30, 2004, the Company
realized an average rate under these hedges of 5.5%. Interest expense was
reduced by $6.3 million during the first six months of 2004 as a result of these
hedges. The aggregate fair market value of these hedges was $25.0 million at
June 30, 2004 and is reflected both as a liability and as a decrease in the
Company's underlying long-term debt on the June 30, 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 an $18.0 million decrease in the
fair value of these hedges at June 30, 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 June 30, 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 June 30, 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. 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
-----------------
For information on the Company's legal proceedings, see footnote 7 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 authorizes 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 second 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 Paid Per Share Programs or Programs
- ----------------------------------------------------------------------------------------------
April 1 - April 30, 2004 644,000 $ 27.38 644,000 $ 243,233,143
May 1 - May 31, 2004 280,100 $ 29.68 280,100 $ 234,920,525
June 1 - June 30, 2004 3,996,600 $ 29.66 3,996,600 $ 116,366,731
----------- ---------
Total 4,920,700 $ 29.37 4,920,700 $ 116,366,731
=========== =========
The Company did not repurchase any of its equity units during the second
quarter of 2004.
As part of its repurchase program, in March 2004 the Company 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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's annual meeting of shareholders on May 6, 2004, the
shareholders elected four Class I directors to serve until the 2007 annual
meeting of shareholders and until their successors are duly elected and
qualified.
The following number of votes were cast for or were withheld from the
following nominees:
Class I Nominees For Withheld
---------------------- ----------- -----------
William R. Boles, Jr. 176,935,791 21,061,739
W. Bruce Hanks 182,192,051 15,805,479
C.G. Melville, Jr. 187,942,221 10,055,309
Glen F.Post, III 185,329,694 12,667,836
The Class II and Class III directors whose terms continued after the
meeting are:
Class II Class III
----------------- ---------------
Virginia Boulet Fred R. Nichols
Calvin Czeschin Harvey P. Perry
James B. Gardner Jim D. Reppond
R.L. Hargrove, Jr. Joseph R. Zimmel
Johnny Hebert
The following represents the votes cast by the shareholders to ratify the
appointment of KPMG LLP as independent auditor for 2004:
For 186,303,159
Against 9,978,566
Abstain 1,715,805
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
--------
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 April 29, 2004:
Item 12. Results of Operations and Financial Condition - News
release announcing first quarter 2004 operating results.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CenturyTel, Inc.
Date: August 9, 2004 /s/ Neil A. Sweasy
-----------------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)