10-Q 1 submission.txt 2ND QTR 10-Q 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)