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| CTL > SEC Filings for CTL > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
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, 2008. The results of operations for the three months and nine months ended September 30, 2009 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 and nine months ended September 30, 2009 with prior periods are less meaningful. Where appropriate, the discussion below addresses trends we believe are significant, separate and apart from the impact of our acquisition of Embarq.
Subsequent to the Embarq acquisition, we are now an integrated communications company primarily engaged in providing an array of communications services in 33 states, including local and long distance voice, data, wholesale, Internet access, broadband, and satellite video services. In certain local and regional markets, we also sell communications equipment and provide fiber transport, competitive local exchange carrier, security monitoring, and other communications, professional and business information services. We operate approximately 7.2 million access lines and serve approximately 2.2 million broadband customers, based on operating data as of September 30, 2009. For additional information on our revenue sources, see Note 9. For additional information on the merger, see Note 2.
During the third quarter and first nine months of 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 Nine months
ended ended
Description Sept. 30, 2009 Sept. 30, 2009
(Dollars in thousands)
Severance and retention costs due to workforce reductions,
including contractual early retirement pension benefits for
certain participants $ 97,450 97,450
Transaction related costs associated with our acquisition of
Embarq, including investment banker and legal fees 47,154 47,154
Integration related costs associated with our acquisition of
Embarq 25,055 54,482
Accelerated recognition of share-based compensation expense due
to change of control provisions and terminations of employment 16,967 16,967
Settlement and curtailment expenses related to certain executive
retirement plans (see Note 5) 8,900 16,611
Charge incurred in connection with our $800 million bridge
facility - 8,000
$ 195,526 240,664
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All of the above items are included in operating expenses except for the $8.0 million charge incurred in connection with our $800 million bridge facility, which is reflected in Other (income) expense. None of the above items include pre-closing expenses incurred by Embarq prior to the effective time of the merger.
In addition, due to Internal Revenue Code Section 162(m) limitations, a portion of the lump sum distributions related to the termination of an executive retirement plan made in the first quarter of 2009 are currently being reflected as non-deductible for income tax purposes and thus increased our effective income tax rate. Certain merger-related costs incurred during the first nine months of 2009 are also non-deductible for income tax purposes and similarly increased our effective income tax rate. Such increase in our effective tax rate was partially offset by a reduction to our deferred tax asset valuation allowance associated with state net operating loss carryforwards. See Note 8 and "Income Tax Expense" below for additional information.
Upon the discontinuance of regulatory accounting, we recorded a one-time, non-cash extraordinary gain that aggregated approximately $218.6 million before income tax expense and noncontrolling interests ($133.2 million after-tax and noncontrolling interests). See Note 12 for additional information.
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 and 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.
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 the FCC's proposed rules regarding intercarrier compensation and the Universal Service Fund described in our prior filings with the Securities and Exchange Commission ("SEC")); our ability to effectively adjust to changes in the communications industry; our ability to successfully integrate Embarq into our operations, including realizing the anticipated benefits of the transaction and retaining and hiring key personnel; our ability to effectively manage our expansion opportunities; 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 $2.80 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 SEC; 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 our business and our acquisition of Embarq are described in greater detail in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2008, as updated and supplemented by Item 1A of Part II of this report. 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.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Net income attributable to CenturyTel, Inc. was $280.8 million and $84.7 million for the third quarter of 2009 and 2008, respectively. Net income before extraordinary item was $147.6 million and $84.7 million for the third quarter of 2009 and 2008, respectively. Diluted earnings per share for the third quarter of 2009 and 2008 was $.94 and $.83, respectively. Diluted earnings per share before extraordinary item for the third quarter of 2009 was $.49. As mentioned in the "Overview" section above, we incurred a significant amount of one-time expenses in the third quarter of 2009 related to our acquisition of Embarq. The increase in the number of average diluted shares outstanding is primarily attributable to the common stock issued in connection with our acquisition of Embarq on July 1, 2009.
Three months
ended September 30,
2009 2008
(Dollars, except per share
amounts,
and shares in thousands)
Operating income $ 378,983 180,727
Interest expense (140,422 ) (49,483 )
Other income (expense) 9,362 4,569
Income tax expense (99,876 ) (50,624 )
Income before noncontrolling interests and extraordinary item 148,047 85,189
Noncontrolling interests (412 ) (456 )
Net income before extraordinary item 147,635 84,733
Extraordinary item, net of income tax expense and noncontrolling
interests 133,213 -
Net income attributable to CenturyTel, Inc. $ 280,848 84,733
Basic earnings per share
Before extraordinary item $ .49 .83
Extraordinary item $ .44 -
Basic earnings per share $ .94 .83
Diluted earnings per share
Before extraordinary item $ .49 .83
Extraordinary item $ .44 -
Diluted earnings per share $ .94 .83
Average basic shares outstanding 298,133 100,402
Average diluted shares outstanding 298,403 100,647
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Operating income increased $198.3 million due to a $1.224 billion increase in operating revenues and a $1.026 billion 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 mentioned in Note 12, we discontinued the application of regulatory accounting effective July 1, 2009. As a result of such discontinuance, we have eliminated all intercompany transactions with regulated affiliates 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 $53 million) in the third quarter of 2009 as compared to the third quarter of 2008.
Operating Revenues
Three months
ended September 30,
2009 2008
(Dollars in thousands)
Voice $ 829,697 218,253
Network access 352,759 205,385
Data 470,465 132,631
Fiber transport and CLEC 43,685 38,006
Other 177,719 55,798
$ 1,874,325 650,073
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The $611.4 million increase in voice revenues is primarily due to $630.8 million of revenues attributable to the Embarq properties acquired July 1, 2009. The remaining $19.3 million decrease is primarily due to (i) an $8.1 million decrease due to a 6.9% decline in the average number of access lines in our incumbent markets; (ii) a $3.8 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 $3.8 million reduction due to the elimination of all intercompany transactions due to the discontinuance of regulatory accounting.
Total access lines declined 170,000 in the third quarter of 2009, adjusted to exclude the number of access lines we acquired from Embarq on July 1, 2009. We believe the decline in the number of access lines during the third quarter of 2009 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 140,000 and 180,000 lines for the fourth quarter of 2009.
Network access revenues increased $147.4 million in the third quarter of 2009 due to $171.2 million of revenues attributable to Embarq. Excluding Embarq, network access revenues decreased $23.8 million (11.6%) in the third quarter of 2009 primarily due to (i) a $13.7 million reduction due to the elimination of all intercompany transactions due to the discontinuance of regulatory accounting; (ii) a $7.1 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); and (iii) a $3.4 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. Such decreases were partially offset by a $6.4 million increase in prior year revenue settlements recorded in the third quarter of 2009. We believe that intrastate access rates and minutes will continue to decline in 2009, although we cannot precisely estimate the magnitude of such decrease. Complaints filed by interexchange carriers in several of our operating states could, if successful, place further downward pressure on our intrastate access rates. In addition, we expect intrastate minutes to decline at a faster rate in our recently acquired Embarq markets as compared to our incumbent markets.
Data revenues increased $337.8 million in the third quarter of 2009 due to $355.5 million of revenues attributable to Embarq. Excluding Embarq, data revenues decreased $17.7 million (13.3%) substantially due to a $24.8 million reduction due to the elimination of all intercompany transactions due to the discontinuance of regulatory accounting. The remaining $7.1 million increase is primarily attributable to an increase in DSL-related revenues principally due to growth in the number of DSL customers.
Fiber transport and CLEC revenues increased $5.7 million primarily due to $4.1 million of revenues attributable to Embarq and a $1.7 million increase in our incumbent CLEC revenues.
Other revenues increased $121.9 million in the third quarter of 2009 due to $137.3 million of revenues attributable to Embarq. Excluding Embarq, other revenues decreased $15.4 million (27.6%) primarily due to a $9.0 million reduction due to the elimination of all intercompany transactions as a result of the discontinuance of regulatory accounting and a $4.0 million decrease in certain non-regulated product sales and service offerings.
Operating Expenses
Three months
ended September 30,
2009 2008
(Dollars in thousands)
Cost of services and products (exclusive of depreciation and
amortization) $ 684,865 242,243
Selling, general and administrative 448,275 98,751
Depreciation and amortization 362,202 128,352
$ 1,495,342 469,346
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Cost of services and products increased $442.6 million primarily due to $487.2 million of expenses attributable to the Embarq properties acquired on July 1, 2009. The remaining $44.6 million decrease is primarily due to a $43.7 million reduction in expenses due to the elimination of all intercompany transactions due to the discontinuance of regulatory accounting.
Selling, general and administrative expenses increased $349.5 million primarily
due to $288.9 million of expenses incurred by Embarq (which includes
approximately $104.2 million of costs associated with employee termination
benefits, primarily due to severance and retention benefits, contractual pension
benefits and acceleration of share-based compensation expense associated with
employee terminations). The remaining $60.6 million increase is primarily due to
(i) $47.2 million of transaction related merger costs, including investment
banker and legal fees associated with our acquisition of Embarq; (ii) $25.1
million of integration costs incurred associated with our acquisition of Embarq,
primarily related to system conversion efforts, and (iii) $8.9 million of a
settlement expense associated with the triggering of change of control
provisions upon our acquisition of Embarq under our frozen supplemental
executive retirement plan. Such increases in expenses were partially offset by a
$9.5 million reduction in expenses due to the elimination of all intercompany
transactions due to the discontinuance of regulatory accounting and a $6.0
million decrease due to the favorable resolution of certain transaction tax
audit issues.
Depreciation and amortization increased $233.9 million primarily due to $250.1 million of depreciation and amortization attributable to Embarq (including $56.6 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 decrease in depreciation expense due to a reduction in certain depreciation rates effective July 1, 2009 upon the discontinuance of regulatory accounting (see Note 12).
Interest Expense
Interest expense increased $90.9 million in the third quarter of 2009 compared to the third quarter of 2008 primarily due to $96.3 million of interest expense attributable to Embarq's indebtedness assumed in connection with our acquisition of Embarq.
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 $9.4 million for the third quarter of 2009 compared to $4.6 million for the third quarter of 2008. Our share of income from our 49% interest in a cellular partnership increased $5.9 million in the third quarter of 2009 compared to the third quarter of 2008.
Income Tax Expense
Our effective income tax rate was 39.5% and 37.4% for the three months ended September 30, 2009 and September 30, 2008, respectively. Such increase in the effective tax rate was primarily caused by certain of our Embarq merger-related integration costs which are considered non-deductible for income tax purposes.
Extraordinary Item
Upon the discontinuance of regulatory accounting, we recorded a one-time extraordinary gain of approximately $133.2 million after-tax. See Note 12 for additional information related to this extraordinary gain.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net income attributable to CenturyTel, Inc. was $417.0 million and $265.7 million for the first nine months of 2009 and 2008, respectively. Net income before extraordinary item was $283.8 million and $265.7 million for the nine months ended September 30, 2009 and 2008, respectively. Diluted earnings per share for the first nine months of 2009 and 2008 was $2.50 and $2.53, respectively. Diluted earnings per share before extraordinary item for the first nine months of 2009 was $1.70. As mentioned in the "Overview" section above, we incurred a significant amount of one-time expenses in the first nine months of 2009 related to our acquisition of Embarq. The increase in the number of average diluted shares outstanding is primarily attributable to the common stock issued in connection with our acquisition of Embarq on July 1, 2009.
Nine months ended September 30, 2009 2008 (Dollars, except per share amounts, and shares in thousands)
Operating income $ 692,763 544,910
Interest expense (237,391 ) (148,771 )
Other income (expense) 15,179 26,436
Income tax expense (185,796 ) (155,916 )
Income before noncontrolling interests and extraordinary item 284,755 266,659
Noncontrolling interests (936 ) (999 )
Net income before extraordinary item 283,819 265,660
Extraordinary item, net of income tax expense and noncontrolling
interests 133,213 -
Net income attributable to CenturyTel, Inc. $ 417,032 265,660
Basic earnings per share
Before extraordinary item $ 1.70 2.54
Extraordinary item $ .80 -
Basic earnings per share $ 2.50 2.54
Diluted earnings per share
Before extraordinary item $ 1.70 2.53
Extraordinary item $ .80 -
Diluted earnings per share $ 2.50 2.53
Average basic shares outstanding 165,558 103,396
Average diluted shares outstanding 165,666 103,774
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Operating income increased $147.9 million due to a $1.188 billion increase in operating revenues and a $1.041 billion 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 mentioned in Note 12, we discontinued the application of regulatory accounting effective July 1, 2009. As a result of such discontinuance, we are eliminating all intercompany transactions with regulated affiliates that previously were not eliminated under the application of regulatory accounting beginning in the third quarter of 2009. This has caused our revenues and operating expenses to be lower by equivalent amounts (approximately $53 million) in the first nine months of 2009 as compared to the first nine months of 2008.
Operating Revenues
Nine months
ended September 30,
2009 2008
(Dollars in thousands)
Voice $ 1,247,218 658,634
Network access 735,969 621,987
Data 753,325 390,463
Fiber transport and CLEC 126,947 120,805
Other 281,720 164,904
$ 3,145,179 1,956,793
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The $588.6 million increase in voice revenues is primarily due to $630.8 of revenues attributable to the Embarq properties acquired July 1, 2009. The remaining $42.2 million decrease in voice revenues is primarily due to (i) a $23.4 million decrease due to a 6.6% decline in the average number of access lines in our incumbent markets; (ii) a $10.3 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 $3.8 million reduction due to the elimination of all intercompany transactions due to the discontinuance of regulatory accounting.
Total access lines declined 234,300 in the first nine months of 2009, adjusted to exclude the number of access lines we acquired from Embarq on July 1, 2009. We believe the decline in the number of access lines during 2009 and 2008 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 140,000 and 180,000 for the fourth quarter of 2009.
Network access revenues increased $114.0 million in the first nine months of 2009 due to $171.2 million of revenues attributable to Embarq. Excluding Embarq, network access revenues decreased $57.2 million in the first nine months of 2009 primarily due to (i) a $24.5 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); (ii) a $13.7 million reduction due to the elimination of all intercompany transactions due to the discontinuance of regulatory accounting; (iii) a $10.6 million decrease in interstate revenues primarily due to reductions in our partial recovery of lower operating costs through revenue sharing arrangements and return on rate base; and (iv) a $10.0 million reduction in revenues from the federal Universal Service Fund primarily due to an increase in the nationwide average cost per . . .
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