CenturyTel, Inc. (Lumen Technologies) 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009. The filing reflects the consolidation of Embarq Corporation, which CenturyTel acquired on July 1, 2009. Post-acquisition, the combined entity operates in 33 states with approximately 7.2 million access lines and 2.2 million broadband customers. The company is in the process of rebranding to CenturyLink.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Operating Revenues | $1,874.3 million | $3,145.2 million |
| Operating Income | $379.0 million | $692.8 million |
| Net Income (Attributable to CenturyTel) | $280.8 million | $417.0 million |
| Diluted EPS (Total) | $0.94 | $2.50 |
| Diluted EPS (Excl. Extraordinary Item) | $0.49 | $1.70 |
| Cash and Cash Equivalents | $531.2 million (Sep 30, 2009) | N/A |
| Total Debt (Current + Long-Term) | $8.22 billion (Sep 30, 2009) | N/A |
| Operating Cash Flow (9 Months) | N/A | $961.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased significantly ($1.22 billion for the quarter; $1.19 billion for the nine months) primarily due to the inclusion of Embarq's results starting July 1, 2009. Approximately $1.3 billion of Embarq's revenue is included in the nine-month period.
- Access Line Decline: Excluding acquired lines, total access lines declined by 170,000 in the third quarter and 234,300 for the nine months, attributed to competition from wireless and broadband services.
- One-Time Expenses: The company incurred approximately $195.5 million in one-time expenses in the third quarter and $240.7 million for the nine months related to the Embarq acquisition (severance, transaction fees, integration costs, and accelerated stock compensation).
- Extraordinary Gain: A non-cash extraordinary gain of $133.2 million (after-tax) was recorded in the third quarter due to the discontinuance of regulatory accounting, which eliminated removal costs embedded in accumulated depreciation.
Guidance, Outlook, and Risks
- Future Outlook: Management expects 2010 operating results to be negatively impacted by a reduction in Universal Service Fund (USF) receipts and a wireless carrier migrating traffic, estimating a negative impact on diluted EPS of $0.12 to $0.15.
- Capital Expenditures: Budgeted capital expenditures for the fourth quarter of 2009 are expected to be between $280 million and $300 million.
- Integration Costs: The company expects to incur approximately $190 million in additional non-recurring integration expenses subsequent to September 30, 2009.
- Debt Management: In October 2009 (subsequent to the period end), the company repurchased $746.1 million of debt using proceeds from a $644.4 million debt issuance in September. A one-time pre-tax charge of approximately $61 million related to these tender offers is expected in the fourth quarter.
- Risks: Key risks include continued access line losses, regulatory changes affecting intercarrier compensation and USF, integration challenges with Embarq, and the underfunded status of the acquired Embarq pension plan.
Investor Verification Checklist
- Extraordinary Item Impact: Verify the sustainability of earnings by excluding the $133.2 million non-cash extraordinary gain from regulatory accounting changes.
- Integration Costs: Monitor the realization of the projected $190 million in future integration expenses and their impact on Q4 2009 and 2010 earnings.
- Debt Tender Offer Charge: Confirm the recording of the anticipated $61 million pre-tax charge in Q4 2009 related to the debt buyback.
- Pension Funding: Assess the cash flow impact of the underfunded Embarq pension plan, noting the $115 million contribution already made in Q3 2009.
- Regulatory Exposure: Evaluate the potential financial impact of FCC proposals to reform intercarrier compensation and the Universal Service Fund.