Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2001, for CenturyTel, Inc. (Note: The input metadata references "Lumen Technologies," but the filing text identifies the registrant as CenturyTel, Inc., a regional integrated communications company operating in 21 states). The company provides local exchange, wireless, long distance, Internet access, and data services. The results include operations from properties acquired from Verizon Communications Inc. in late 2000.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 |
|---|---|---|
| Total Operating Revenues | $539.4 million | $1,574.3 million |
| Operating Income | $143.8 million | $413.2 million |
| Net Income | $92.3 million | $293.3 million |
| Diluted Earnings Per Share | $0.65 | $2.06 |
| Net Cash Provided by Operating Activities | N/A | $606.9 million |
| Net Cash Used in Investing Activities | N/A | ($231.6 million) |
| Net Cash Used in Financing Activities | N/A | ($372.9 million) |
| Total Assets | $6,389.3 million | (As of Sep 30, 2001) |
| Total Liabilities | $4,100.9 million | (As of Sep 30, 2001) |
| Stockholders' Equity | $2,288.4 million | (As of Sep 30, 2001) |
Segment Performance (Nine Months 2001):
- Telephone: Revenues of $1,116.9 million; Operating Income of $307.7 million.
- Wireless: Revenues of $329.5 million; Operating Income of $88.8 million.
- Other Operations: Revenues of $127.9 million; Operating Income of $16.7 million.
Material Changes vs. Prior Period
Revenue and Profit Growth: Net income for the nine months ended September 30, 2001, increased to $293.3 million from $174.4 million in the prior year period. This increase was significantly driven by nonrecurring gains. Excluding nonrecurring items, net income was $165.3 million in 2001 compared to $171.7 million in 2000.
Nonrecurring Items: The company recorded net pre-tax nonrecurring gains of approximately $200.3 million for the nine months ended September 30, 2001. Key components included:
- A $185.1 million pre-tax gain from the sale of 30 PCS licenses to Leap Wireless International, Inc.
- A $54.6 million pre-tax gain from the sale of remaining shares of Illuminet Holdings, Inc.
- Offsetting charges of $25.5 million for write-downs of non-operating investments and assets.
Operating Expenses: Total operating expenses increased to $1,161.1 million for the nine months of 2001 from $935.4 million in 2000. This increase is largely attributable to the integration of Verizon properties acquired in late 2000, which added significant depreciation and amortization costs ($67.3 million increase in telephone segment depreciation alone).
Wireless Trends: Wireless operating income decreased slightly ($3.1 million) year-over-year due to declining average revenue per customer ($46 in 2001 vs. $49 in 2000) driven by price reductions and increased competition, despite growth in the customer base.
Guidance, Outlook, Risks, and Contingencies
Pending Acquisitions: In October 2001, the company signed agreements to purchase approximately 675,000 telephone access lines and related assets in Alabama and Missouri from Verizon affiliates for approximately $2.159 billion. Closing is expected in the second half of 2002, subject to regulatory approvals.
Strategic Review: In August 2001, management announced it is exploring the potential separation of its wireless business from its other operations.
Regulatory Risks:
- Wisconsin Refunds: The Wisconsin Public Service Commission ordered a $14.7 million refund related to access charges on former Ameritech properties. The company is challenging this in state court; an unsuccessful appeal would result in a one-time charge of approximately $0.03 per share.
- Universal Service Support: New FCC rules effective July 2001 are estimated to increase universal service support receipts by approximately $12 million annually.
Accounting Risks (SFAS 71): The company currently applies SFAS 71 (regulatory accounting). If this standard becomes inapplicable due to regulatory or competitive changes, the company would be required to write off regulatory assets and liabilities. Management estimates this could result in a material, noncash, after-tax extraordinary charge between $400 million and $450 million.
Capital Expenditures: Revised budgeted capital expenditures for 2001 are $560 million ($400M telephone, $70M wireless, $90M other). Anticipated 2002 expenditures range from $500 million to $525 million, excluding pending acquisitions.
Investor Verification Checklist
- Nonrecurring Gains: Verify the sustainability of earnings by excluding the ~$200 million in one-time gains from PCS license and Illuminet sales.
- Wireless Separation: Monitor progress on the potential spin-off or separation of the wireless segment announced in August 2001.
- Verizon Acquisition Financing: Assess the company's ability to finance the pending $2.159 billion acquisition of Verizon assets in Alabama and Missouri.
- Regulatory Accounting Status: Evaluate the risk of losing SFAS 71 status, which could trigger a massive noncash charge ($400M-$450M) against earnings.
- Wisconsin Litigation: Track the outcome of the appeal regarding the $14.7 million access charge refund order.
- Wireless Margins: Monitor the trend of declining average revenue per customer (ARPU) in the wireless segment due to competitive pricing pressures.