Windstream 2007 Annual Report Download - page 99

Increases in depreciation and amortization expense in 2007 are primarily due to the acquisitions of Valor and CTC,
including the amortization of acquired intangible assets (See Note 4). Partially offsetting these increases were
decreases in depreciation expense reflecting the results of studies completed during the second and fourth quarters of
2007 and during 2006 that lowered the Company’s depreciation rates. Depreciable lives were revised to reflect the
estimated remaining useful lives of wireline plant based on the Company’s expected future network utilization and
capital expenditure levels required to provide service to its customers (See Note 2).
Royalty Expense
Royalty expense decreased $129.6 million, or 100 percent, and $139.2 million, or 52 percent, in 2007 and 2006,
respectively. Prior to the separation, Windstream’s regulated 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 from Alltel and merger with Valor, Windstream no
longer incurs this charge as it discontinued the use of the Alltel brand name following a brief transitional rebranding
period.
Restructuring Charges
During 2007 the Company incurred $4.5 million in restructuring costs from a workforce reduction plan and the
announced realignment of its business operations and customer service functions intended to improve overall support
to its customers. In the fourth quarter of 2006, the Company announced a realignment of its operational functions to
better serve customers and operate more efficiently. In connection with these activities, the Company recorded a
restructuring charge of $10.5 million. During 2005, the Company incurred $4.5 million in restructuring costs related to
a workforce reduction in its wireline operations.
Restructuring charges, consisting primarily of severance and employee benefit costs, are triggered by the Company’s
continued evaluation of its operating structure and identification of opportunities for increased operational efficiency
and effectiveness. These costs should not necessarily be viewed as non-recurring, and are included in the determination
of segment income. They are reviewed regularly by the Company’s decision makers and are included as a component
of compensation targets.
Wireline Segment Income
The following table reflects the primary drivers of year-over-year changes in wireline segment income:
Wireline segment income
Twelve months ended
December 31, 2007
Twelve months ended
December 31, 2006
(Millions)
Increase
(Decrease) %
Increase
(Decrease) %
Due to Valor acquisition $ 105.6 $ 75.4
Due to CTC acquisition 15.7 -
Due to termination of the licensing agreement with Alltel 129.6 139.2
Other (17.0) 56.5
Total wireline segment income $ 233.9 25% $ 271.1 42%
Increases in operating income are due primarily to the acquisitions of Valor and CTC, which accounted for 52 percent
and 28 percent of the change in wireline segment income in 2007 and 2006, respectively. Increases were also due to the
elimination of royalty expenses that were paid to Alltel prior to the spin off. The remaining changes in segment income
in 2007 and 2006 primarily resulted from the decline in revenues associated with the continued access line losses,
partially offset by increases in high-speed Internet customers and the favorable effects of reduced depreciation rates, as
discussed above.
Merger and integration costs related to the wireline operations, which are triggered by strategic transactions and are
unpredictable by nature, are not included in the determination of segment income. Set forth below is a summary of
wireline merger and integration costs for the years ended December 31:
(Millions) 2007 2006 2005
Transaction costs associated with the acquisition of CTC $ 0.7 $ - $ -
Transaction costs associated with spin off from Alltel - 7.9 31.2
Signage and other rebranding costs 1.4 13.8 -
Computer system and conversion costs 2.5 5.9 -
Total merger and integration costs $ 4.6 $ 27.6 $ 31.2
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