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Merger, integration and restructuring costs decreased net income $8.8 million, $36.0 million and $34.1 million for the
years ended December 31, 2007, 2006 and 2005, respectively, giving consideration to tax benefits on deductible items.
See Note 10 for additional information regarding these charges.
The following discussion and analysis details results for Windstream’s consolidated operating income and all other
consolidated results presented below operating income.
The following table reflects the primary drivers of year-over-year changes in consolidated operating income:
Consolidated operating income
Twelve months ended
December 31, 2007
Twelve months ended
December 31, 2006
(Millions)
Increase
(Decrease) %
Increase
(Decrease) %
Due to changes in wireline segment income $ 233.9 $ 271.1
Due to changes in product distribution segment income (6.1) 0.3
Due to changes in other operations segment income (5.0) 1.2
Due to changes in merger and integration costs 29.5 (7.6)
Total $ 252.3 28% $ 265.0 42%
Increases in operating income in 2007 are due in part to the acquisitions of Valor and CTC. The remaining changes in
operating income in 2007 and 2006 primarily resulted from increases in merger and integration costs and a decline in
revenues associated with continued access line losses, partially offset by the favorable effects of reduced depreciation
rates, the elimination of royalty expense paid to Alltel, and increases in high-speed Internet customers.
Other Income, Net
Set forth below is a summary of other income, net for the years ended December 31:
(Millions) 2007 2006 2005
Dividend income $ - $ - $ 11.4
Interest income on cash and short-term investments 12.3 7.8 -
Mark-to-market of interest rate swap agreement (3.1) - -
Other income (expense), net 1.9 0.9 0.2
Other income, net $ 11.1 $ 8.7 $ 11.6
Other income, net increased $2.4 million, or 28 percent, in 2007 and decreased $2.9 million, or 25 percent, in 2006.
The increase in other income, net in 2007 was primarily due to an increase in interest income earned on short-term
investments. Prior to the spin off in the third quarter of 2006, excess cash was invested with Alltel pursuant to an
intercompany cash management agreement through which interest was earned on invested funds at rates averaging
5.0 percent. This interest income was included in intercompany interest income from Alltel in the accompanying
consolidated statement of income in 2006. Due to the reduction in the Company’s cash on hand following the funding
of the acquisition of CTC on August 31, 2007, decreases in other income, net are expected in future periods. Partially
offsetting the increase in other income, net in 2007 is a decrease in the fair value of the undesignated portion of an
interest rate swap agreement, as discussed further in Note 6. Pursuant to the guidance in SFAS No. 133, “Accounting
for Derivative Financial Instruments and Hedging Activities”, as amended, changes in the market value of the
undesignated portion of this interest rate swap are included in net income. The market value calculation of this interest
rate swap is based on estimates of forward variable interest rates, and changes in estimated forward rates could result in
significant non-cash increases or decreases in other income, net in future periods.
The decrease in other income in 2006 primarily resulted from a decrease in the amount of annual dividends paid on an
investment in Rural Telephone Bank Class C stock. As of December 31, 2005, the investment in Rural Telephone Bank
Class C stock was transferred to Alltel. As a result, the Company did not receive any related dividends during 2006.
This decline in 2006 was partially offset by a $7.8 million increase in interest income earned on cash and short-term
investments, as previously discussed.
Gain on Sale of Publishing Business
On November 30, 2007 Windstream completed the split off of its directory publishing business in a tax-free transaction
with entities affiliated with WCAS. As a result of completing this transaction, Windstream recorded a gain of
$451.3 million in the fourth quarter of 2007 (See Note 3).
F-17