Windstream 2006 Annual Report Download - page 109

Selling, general, administrative and other expenses increased $25.6 million, or 8 percent, in 2006 and $12.2 million, or
4 percent, in 2005. The acquisition of Valor accounted for a $21.8 million increase in selling, general, administrative
and other expenses in 2006. Selling, general, administrative and other expenses in 2006 were affected by the decline in
allocations received from Alltel related to services that Alltel provided for the Company for periods prior to the
spin-off under a shared services arrangement, partially offset by a gradual increase in direct expenses associated with
Windstream’s new corporate cost structure. The 2005 increase was due primarily to increased selling and marketing
costs incurred by Windstream’s publishing subsidiary.
Depreciation and amortization expense declined $24.6 million, or 5 percent, and $34.3 million, or 7 percent, in 2006
and 2005, respectively. The acquisition of Valor accounted for a $56.4 million increase in depreciation and
amortization expense in 2006. The decline primarily resulted from a reduction in depreciation rates for certain of the
Company’s wireline operations, reflecting the results of studies of depreciable lives completed during 2006 and 2005.
Royalty expense to Alltel declined $139.2 million, or 52 percent, and $1.4 million or 1 percent, in 2006 and 2005,
respectively. Windstream’s ILEC subsidiaries incurred a royalty expense from Alltel for the use of the Alltel brand
name in marketing and distributing telecommunications products and services pursuant to a licensing agreement with
an Alltel affiliate. Following the spin-off and merger with Valor, Windstream no longer incurs this charge as it
discontinued use of the Alltel brand name following a brief transitional rebranding period.
Restructuring and Other Charges
A summary of the restructuring and other charges recorded in 2006 was as follows:
(Millions) Wireline
Product
Distribution
Other
Operations Total
Fees associated with spin-off from Alltel $ 7.9 $ - $ - $ 7.9
Signage and other rebranding costs related to the spin-off 13.8 - - 13.8
Severance and employee benefit costs 10.5 0.1 - 10.6
Costs associated with split-off of directory publishing - - 11.2 11.2
Computer system separation and conversion costs 5.9 - - 5.9
Total restructuring and other charges $ 38.1 $ 0.1 $ 11.2 $ 49.4
During 2006, the Company incurred $27.6 million of costs in connection with its spin-off from Alltel and merger with
Valor. These costs consisted of $7.9 million of consulting and legal fees, $13.8 million of signage and other costs to
rebrand the Company’s offices and vehicles, and $5.9 million of computer system separation and conversion costs. Of
these charges, $26.6 million was paid in cash during the year, and $0.8 million related to a non-cash adjustment of
compensation expense relating to the accelerated vesting of employees’ Alltel restricted stock pursuant to the spin-off.
The remaining liability of $0.2 million will be funded through operating cash flows and paid during 2007.
In the fourth quarter of 2006, the Company announced a realignment of its operational functions to better serve
customers and operate more efficiently. These changes will result in the elimination of approximately 180 net
employee positions during the first half of 2007. In connection with these activities, the Company recorded a
restructuring charge of $10.6 million consisting of severance and employee benefits related to this planned workforce
reduction. Payments pursuant to the plan will be made during the first half of 2007 as positions are eliminated and will
be funded through operating cash flows. As a result of the consolidation of certain functions and the standardization of
processes, the Company expects to realize annual savings of approximately $15.0 million - $20.0 million beginning in
2008.
On December 12, 2006 Windstream announced that it would split off its directory publishing business in what
Windstream expects to be a tax-free transaction with entities affiliated with Welsh, Carson, Andersen and Stowe, a
private equity investment firm (see Note 17 to the accompanying consolidated financial statements for additional
information regarding this pending transaction). In conjunction with this transaction, the Company incurred $11.2
million of incremental costs, primarily consisting of investment banker, audit and legal fees in the fourth quarter of
2006, of which $1.8 million had been paid by the end of the year. The remaining fees will be paid pursuant to the
closing of the transaction in 2007 and will be funded through operating cash flows.
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