Business Context and Reporting Period
This Form 8-K filing by CenturyTel, Inc. (now Lumen Technologies, Inc.) reports consolidated operating results for the fourth quarter and full year ended December 31, 2003. The company, headquartered in Monroe, Louisiana, provides local, long-distance, Internet, and data services to over 3 million customers across 22 states. The report was issued on January 29, 2004.
Key Financial Metrics
Fourth Quarter 2003 (vs. Q4 2002)
- Revenues: $604.8 million (excluding nonrecurring items), a 3.2% increase. GAAP revenues were $606.3 million.
- Net Income: $89.3 million (excluding nonrecurring items), a 4.9% increase. GAAP net income was $82.4 million.
- Diluted EPS: $0.61 (excluding nonrecurring items), a 3.4% increase. GAAP diluted EPS was $0.57.
- Operating Cash Flow: $311.4 million (excluding nonrecurring items), a 0.8% increase.
- Free Cash Flow: $86.8 million (excluding nonrecurring items).
- Cash Flow Margin: 51.5% (excluding nonrecurring items).
- Balance Sheet: Cash and cash equivalents increased to $203.2 million from $3.7 million in 2002. Total long-term debt decreased to $3.11 billion from $3.58 billion.
Full Year 2003 (vs. Full Year 2002)
- Revenues (Continuing Ops): $2.379 billion (excluding nonrecurring items), a 20.2% increase.
- Net Income (Continuing Ops): $345.8 million (excluding nonrecurring items), a 39.1% increase. GAAP net income was $344.7 million.
- Diluted EPS (Continuing Ops): $2.39 (excluding nonrecurring items). GAAP diluted EPS was $2.38.
- Operating Cash Flow (Continuing Ops): $1.222 billion (excluding nonrecurring items), a 20.8% increase.
- Capital Expenditures: $377.9 million, a decrease of 8.6% from 2002.
Material Changes and Drivers
- Revenue Growth: Driven by a 23.6% increase in "Other Operations" revenues (Long Distance up 5.5%, Internet up 31.6%) and a 0.6% increase in Telephone revenues. Telephone revenue growth was offset by declines in intrastate toll usage and access lines (down 1.6% to 2.38 million lines).
- Customer Base: Long-distance customers grew 18.6% to 769,766. DSL customers grew significantly, with the company adding 7,100 customers in the quarter to reach over 83,000.
- Debt Reduction: Management highlighted record cash flows in 2003, enabling the reduction of debt by more than $467 million and an increase in cash position by nearly $200 million.
- Acquisitions: Results benefited from the acquisition of fiber assets from Digital Teleport, Inc. in June 2003 and wireline properties from Verizon in late 2002.
- Nonrecurring Items: Q4 2003 GAAP results included an $8.8 million after-tax charge for operating tax audits. Q4 2002 GAAP results included a $39.0 million after-tax charge for the redemption of senior notes. Full-year 2002 GAAP results included a $551.4 million after-tax gain from the sale of wireless operations, which is absent in 2003.
Guidance, Outlook, and Risks
2004 Guidance
- Revenue Outlook: Management anticipates a decline in 2004 telephone revenues due to lower intrastate toll usage, lower cost study adjustments, lower universal service funding, and access line declines.
- Earnings Outlook: Full-year 2004 diluted EPS is expected to be in the range of $2.05 to $2.20 (GAAP basis, excluding nonrecurring items). This projection accounts for incremental amortization, conversion costs for a new billing system, and an expected effective income tax rate of 38.5%.
- Q1 2004 Outlook: Total revenues expected between $585 million and $600 million; diluted EPS expected between $0.49 and $0.53.
Risks and Contingencies
- Competition: Risks from competitive providers and rapid technological change.
- Regulation: Ongoing changes in the regulation of the communications industry.
- Operational Execution: Risks related to integrating acquired businesses, hiring qualified staff, and upgrading billing/information systems.
- Market Conditions: Changes in demand, pricing, interest rates, and the ability to collect receivables from financially troubled communications companies.
Investor Verification Checklist
- Verify the reconciliation of non-GAAP measures (operating cash flow, free cash flow) to GAAP measures in the attached financial schedules.
- Confirm the impact of the new billing and customer care system on 2004 operating costs and amortization expenses.
- Monitor the trend in access line declines and intrastate toll usage against the 2004 revenue guidance.
- Review the details of the $467 million debt reduction and the resulting leverage ratios in the upcoming Form 10-K.
- Assess the sustainability of the 31.6% growth in Internet revenues and the 18.6% growth in long-distance customers.