LUMN

CenturyTel, Inc. (Lumen Technologies) 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009. The registrant is CenturyTel, Inc., a large accelerated filer. The filing serves as the final quarterly report prior to the company's merger with Embarq Corporation, which was consummated on July 1, 2009. The combined entity operates in 33 states with approximately 7.3 million access lines and 2.1 million broadband customers. The financial statements presented do not include the results of Embarq.

Key Financial Metrics (Six Months Ended June 30, 2009)

Margins: Operating margin for the six months ended June 30, 2009, was approximately 24.7%, down from 27.9% in the prior year period. The effective income tax rate was 38.7% for the six months ended June 30, 2009, compared to 36.8% in 2008.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 2.7% year-over-year. Voice revenues fell 5.2% due to a 6.7% decline in access lines and migration to bundled services. Network access revenues dropped 8.0% due to lower intrastate minutes and reduced Universal Service Fund support.
• Expense Increases: Selling, general, and administrative (SG&A) expenses increased 16.2% primarily due to $29.4 million in acquisition-related costs for the Embarq merger. Cost of services decreased 1.5% due to CLEC divestitures and lower maintenance costs, partially offset by higher DSL expenses.
• Profitability: Net income attributable to CenturyTel declined 24.7% to $136.2 million. This was driven by lower operating income and a higher effective tax rate caused by non-deductible merger costs and executive retirement plan distributions.
• Liquidity: Cash and cash equivalents decreased significantly from $243.3 million at year-end 2008 to $59.1 million at June 30, 2009. This reduction was due to the repayment of $394.7 million in debt (primarily revolving credit facility) and the payment of $141.1 million in cash dividends.

Guidance, Outlook, and Risks

• Merger Integration: The company expects to incur approximately $50 million in closing costs and $370 million in aggregate non-recurring post-closing integration costs (severance, branding, system conversion). These costs will be recognized in the third quarter and beyond.
• Regulatory Accounting Change: Upon discontinuing SFAS 71 (regulated accounting) on July 1, 2009, the company expects to record a non-cash extraordinary gain of approximately $134.5 million (after-tax) and reduce annual depreciation expense by $80-90 million due to revised asset lives.
• Capital Expenditures: Budgeted capital expenditures for the second half of 2009 are expected to be between $525 million and $575 million, including costs related to Embarq properties.
• Dividends and Buybacks: The company maintains an annual dividend of $2.80 per share. The share repurchase program was suspended pending the Embarq merger completion but is expected to resume subject to credit rating maintenance.
• Risks: Key risks include the inability to realize merger synergies, continued access line losses, regulatory changes regarding intercarrier compensation and the Universal Service Fund, and potential underfunding of pension plans.

Investor Verification Checklist

• Merger Closing Date: Verify the final purchase price allocation for the Embarq acquisition, which is expected to be completed by the end of 2009.
• Integration Costs: Monitor the actual recognition of the estimated $370 million in integration costs and their impact on Q3 and Q4 earnings.
• Regulatory Gain: Confirm the timing and exact amount of the non-cash extraordinary gain resulting from the discontinuance of SFAS 71 in Q3 2009.
• Access Line Trends: Track the rate of access line loss, which management estimates will be between 330,000 and 380,000 lines for the remainder of 2009.
• Debt Structure: Review the post-merger debt structure, specifically the combined revolving credit facilities ($728 million CenturyTel + $800 million Embarq) and any new leverage covenants.