[LOGO]
Level 3 Communications, Inc.
1025 Eldorado Boulevard
Broomfield, Colorado 80021
www.Level3.com
NEWS RELEASE
FOR IMMEDIATE RELEASE
Level 3 Contacts:
Media: Josh Howell Investors: Robin Grey
720-888-2517 720-888-2518
Karen King
720-888-2503
Level 3 Reports First Quarter 2003 Results
Genuity Integration Remains on Plan
Company On Track to Turn Free Cash Flow Positive in Second Quarter of 2004
BROOMFIELD, Colo, April 24, 2003 - Level 3 Communications, Inc. (Nasdaq:LVLT)
today announced its first quarter 2003 results. The net income for the quarter
was positive $119 million, or $0.26 basic earnings per share and $0.22 diluted
earnings per share, versus previously announced projections of a net loss of
$0.65 basic loss per share. Included in net income was $326 million of revenue
associated with customer terminations and settlements, of which $294 million
relates to a non-cash settlement with XO Communications and a $70 million gain
on the sale of the company's interest in its toll road operations. These two
items contributed a net gain of $396 million, or $0.88 basic earnings per share.
Consolidated revenue increased to $1.25 billion in the first quarter 2003, from
$945 million in the fourth quarter 2002, primarily due to settlement revenue
recognized in the quarter and the inclusion of results generated from the
acquisition of substantially all of Genuity Inc.'s assets and operations,
effective February 4, 2003. Consolidated EBITDA (Earnings Before Interest Taxes
Depreciation and Amortization) increased to $406 million from $118 million for
the
previous quarter and $51 million for the same period last year [see attached
schedule of non-GAAP (Generally Accepted Accounting Principles) metrics for
definitions]. The significant increase from fourth quarter 2002 was primarily
related to a contract settlement for transport services including dark fiber,
conduit and associated services. The settlement resulted in recognition of $294
million of revenue, for which cash had been previously received and which the
company had been recognizing over the expected contract term. Consolidated
Adjusted EBITDA (see attached schedule of non-GAAP metrics for definitions) was
$98 million in the first quarter 2003.
Financial Reporting Metrics
The company has historically provided financial metrics, some of which are based
on GAAP and others that are not prepared in accordance with GAAP (non-GAAP).
Recent legislative and regulatory changes encourage the use of GAAP financial
metrics and require companies to explain why non-GAAP financial metrics are
relevant to management and investors. To the extent that non-GAAP financial
metrics are deemed to be relevant, companies are required to reconcile those
metrics to the most directly comparable GAAP financial metrics.
As a result of these changes, the company has conducted a review of its GAAP and
non-GAAP financial metrics and has elected to eliminate certain non-GAAP cash
flow metrics, which it had provided historically. Accompanying this press
release is the company's consolidated condensed statement of operations,
consolidated condensed balance sheet and consolidated statements of cash flows.
These statements provide relevant information on the operating and cash flow
performance of the company. In addition, the company has developed two non-GAAP
financial metrics, unlevered cash flow and consolidated free cash flow (see
attached schedule of non-GAAP metrics for definitions), which are derived from
the consolidated statements of cash flows, and has eliminated its previously
provided metrics, operating cash flow and free cash flow.
The company will continue to provide the following non-GAAP metrics:
communications gross margin, EBITDA and Adjusted EBITDA. The company will not
provide historical reconciliations for non-GAAP metrics that have been
eliminated.
Communications Business Segment
First Quarter Communications Business Financial Highlights
Metric First Quarter First Quarter
($ in millions) Actuals Projections (1)
- ------------------------------------------ -------------------- ----------------
Communications GAAP Revenue $708 $395
- ------------------------------------------ -------------------- ----------------
Communications Services Revenue (2) $667 $360
- ------------------------------------------ -------------------- ----------------
Reciprocal Compensation Revenue $41 $35
- ------------------------------------------ -------------------- ----------------
Communications Cost of Revenue $89 Not Provided
- ------------------------------------------ -------------------- ----------------
Communications SG&A (3) $231 Not Provided
- ------------------------------------------ -------------------- ----------------
Communications EBITDA (4) $398 Not Provided
- ------------------------------------------ -------------------- ----------------
(1) Projections issued February 4, 2003.
(2) Communications services revenue is communications revenue minus reciprocal
compensation revenue.
(3) Selling, general & administrative (SG&A) expenses.
(4) Communications EBITDA includes an $11 million restructuring and impairment
charge and excludes $21 million of non-cash compensation.
Communications Revenue
Communications revenue for the first quarter 2003 was $708 million, versus $273
million for the previous quarter. Total communications revenue included $667
million of communications services revenue and $41 million attributable to
reciprocal compensation revenue. Included in communications services revenue was
$326 million of settlement and termination revenue. For comparison purposes,
communications services revenue, excluding the effect of settlement and
termination revenue, was $341 million during the first quarter 2003, up from
$233 million during the fourth quarter 2002, due to the Genuity transaction as
well as growth in recurring revenue.
Termination revenue is recognized when deferred revenue is accelerated as a
result of customers disconnecting services, or when customers make termination
penalty payments to Level 3 to settle contractually committed purchase amounts
that they no longer expect to meet. Settlement revenue is recognized when a
customer and Level 3 renegotiate a contract under which Level 3 is no longer
obligated to provide services for consideration previously received and
deferred. There was no cash benefit to $315 million of the $326 million in
termination and settlement revenue.
The company did not recognize managed web hosting revenue, acquired in the
Genuity transaction, during the first quarter as a result of the pending sale of
the managed web hosting business to Computer Sciences Corporation.
"Our top line growth came predominately from the Genuity transaction and our
managed modem and dedicated Internet access lines of business," said Kevin
O'Hara, president and COO of Level 3. "We are encouraged by the increase in
recurring revenue generated by our communications customers during the quarter."
Level 3 recently announced new customer agreements with companies and
institutions including eBay, Sony Online Entertainment, PanAmSat, The George
Washington University, and the University of Oregon.
Cost of Revenue
Communications cost of revenue for the first quarter 2003 was $89 million,
resulting in an 87 percent communications gross margin (see attached schedule of
non-GAAP metrics for definitions), versus 86 percent in the fourth quarter 2002
and 76 percent in the same period last year.
Included in the 87 percent communications gross margin for the first quarter
2003 was termination and settlement revenue of $326 million, which has no
corresponding cost of revenue. With the exclusion of termination and settlement
revenue, there was a quarter-over-quarter decline in gross margin, primarily as
a result of the inclusion of lower margin revenue associated with the operations
acquired in the Genuity transaction subsequent to the closing on February 4,
2003.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $231 million for first quarter 2003, versus
$163 million for the fourth quarter 2002, and versus $232 million for the same
period last year. For the same periods, communications SG&A expenses include $21
million, $23 million and $62 million, respectively, of non-cash compensation
expenses. SG&A expenses during the first quarter 2003 were higher primarily as a
result of the addition of employees and other expenses associated with the
Genuity transaction. The total number of employees in the communications
business was approximately 4,000 at the end of the first quarter 2003 versus
2,725 at the end of the fourth quarter 2002.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
Communications EBITDA (see attached schedule of non-GAAP metrics for
definitions) was $398 million for the first quarter 2003, including a
restructuring charge of $11 million, versus $105 million for the fourth quarter
2002.
Capital Expenditures
Consolidated gross capital expenditures for property, plant and equipment were
$25 million for the first quarter 2003, including $3 million for information
services and other businesses. During the quarter, the company made final
payments with respect to several construction contracts that were $6 million
below previously estimated and accrued amounts.
Network and Operational Highlights
Genuity Integration
"We have made good progress on the integration of Genuity's operations into
Level 3," said O'Hara. "While still early in the overall process, we remain on
our anticipated integration timeline. To date, we have begun to close
duplicative network capacity and facilities, combine our network operating
centers, and migrate customer traffic onto the Level 3 network. In addition, we
recently announced that we were exiting the managed web hosting business that we
acquired. After concluding that it did not adequately leverage our existing
network infrastructure, we determined that managed web hosting would not be a
profitable business for us over the long term."
As a result of the Genuity transaction, the company added approximately 1,800
route miles during the first quarter to its North American intercity network and
began offering services in five additional North American markets: Columbus,
Milwaukee, Minneapolis, Oklahoma City and Tulsa.
At the end of the first quarter 2003, Level 3 offered services in 78 markets,
consisting of 62 markets in North America and 16 markets in Europe. The company
has local fiber networks in 36 markets and operates approximately 947,000 local
fiber miles.
Information Services Business Segment
Results for the information services business include the Software Spectrum and
(i)Structure subsidiaries.
First Quarter Information Services Business Financial Highlights
- --------------------------------- ------------------------ ---------------------
Metric First Quarter Actuals First Quarter
($ in millions) Projections (1)
- --------------------------------- ------------------------ ---------------------
Revenue $526 $520
- --------------------------------- ------------------------ ---------------------
EBITDA $6 $5
- --------------------------------- ------------------------ ---------------------
(1) Projections issued February 4, 2003.
Revenue
Information services revenue was $526 million for the first quarter 2003, versus
$642 million for the previous quarter. The decline was expected due to
seasonality and continued adoption by Software Spectrum customers of Microsoft's
new software licensing program, which was introduced during the second half of
2001. This new licensing program results in customers licensing software from
Microsoft and paying a service fee to Software Spectrum. However, there is no
significant impact to profitability levels resulting from this change.
EBITDA
EBITDA (see attached schedule of non-GAAP metrics for definitions) from the
information services business was positive $6 million for the first quarter
2003, compared to positive $5 million for the previous quarter. The total number
of employees in the information services business was approximately 3,480 at the
end of the first quarter.
Other Businesses
In January 2003 and as previously announced, Level 3 sold its interest in the 91
Express Lanes, its toll road operations. The company received approximately $46
million in cash proceeds and recognized a gain of approximately $70 million and
reduced long-term debt by approximately $139 million. The company's other
business consists primarily of coal mining operations.
Revenue
Revenue from other businesses was $16 million for the first quarter 2003, versus
$30 million for the fourth quarter 2002 and $28 million for the same period last
year.
EBITDA
EBITDA from other businesses was $2 million for the first quarter 2003, compared
to $8 million last quarter and $3 million for the first quarter 2002.
Consolidated Expenses
Stock-Based Compensation Expense: The company recognized $23 million in non-cash
expenses for stock-based compensation during the first quarter 2003. The
company's Outperform Stock Option (OSO) program represents the principal
component of the company's stock-based compensation. Since the inception of this
program in 1998, this expense has been accounted for in accordance with SFAS No.
123, "Accounting For Stock-Based Compensation." Level 3 expenses the value of
OSOs and its other stock-based compensation over the respective vesting period.
Under Level 3's plan, OSOs are issued quarterly, with the value of the options
indexed to the performance of the company's common stock relative to the
performance of the Standard & Poor's 500 (S&P 500) Index.
Depreciation and Amortization: Depreciation and amortization expenses for the
quarter were $208 million, a 3 percent increase over the previous quarter due
primarily to depreciation and amortization associated with certain assets
acquired in the Genuity transaction.
Cash Flow and Liquidity
During the first quarter 2003, unlevered cash flow was negative $20 million and
consolidated free cash flow was negative $124 million (see attached schedule of
non-GAAP metrics for definitions).
Corporate Transactions
During the first quarter 2003, Level 3 completed its acquisition of
substantially all of Genuity, Inc.'s assets and operations. Level 3 paid $60
million in net cash consideration to the Genuity Bankruptcy Estate and assumed
certain long-term operating agreements. As part of the transaction, Level 3 also
paid $77 million in cash for network obligations assumed by Level 3, and
incurred other transaction-related costs of approximately $6 million.
Capital Structure Changes and Asset Sales
Capital Structure Changes
During the first quarter 2003, the company's debt was reduced by $159 million,
including $139 million through the previously announced sale of its interest in
the 91 Express Lanes, and $20 million of principal amount of the company's 9%
junior subordinated convertible notes that were converted into equity. As
previously disclosed, the company assumed long-term capital lease obligations as
part of the Genuity transaction related to vendor contracts associated with
network services. Capital lease obligations as of March 31, 2003 totaled $309
million, $121 million of which are classified as current liabilities on the
consolidated condensed balance sheet. These capital lease obligations are
expected to decline in future periods as the company utilizes the associated
network services.
Asset Sales
During the first quarter, the company sold excess real estate and other excess
operating assets, resulting in cash proceeds of approximately $16 million.
In April 2003, Level 3 announced that it would exit the managed web hosting
business it acquired in the Genuity transaction. Level 3 signed an agreement
with Computer Sciences Corporation (CSC) under which CSC will serve Genuity
hosting customers and operations. As part of the transaction, CSC will also use
Level 3's network services to serve hosting customers. Level 3 does not expect
this transaction to result in meaningful cash proceeds nor materially affect
earnings.
"We're pleased with the continuing improvement in our balance sheet through debt
reduction and asset sales," said Sureel Choksi, CFO of Level 3. "Over the past
two years, we have reduced the face amount of debt by approximately $3.0 billion
and generated cash proceeds of
approximately $500 million from asset sales. We'll continue to evaluate debt
reduction and asset sale opportunities that we believe will create value for our
stockholders."
Board and Management
Recent regulatory changes have required many companies to modify the composition
of their board of directors. Effective at the 2003 Annual Meeting to be held on
May 20, 2003, the company's Board of Directors is expected to consist of 11
directors, divided into three classes designated Class I, Class II and Class
III. At that time, Class I and II will consist of four directors and Class III
will consist of three directors.
Three of the current Class III directors, Messrs. R. Douglas Bradbury, currently
vice chairman of the board and a former employee of the company, Kevin J.
O'Hara, and Kenneth E. Stinson, chairman and CEO of Peter Kiewit Sons', Inc.
have decided not to seek reelection to the Board of Directors. In addition, two
directors that are members of Class I, Charles C. Miller III, vice chairman of
Level 3 and chairman of Information Services Group, and Colin V.K. Williams, a
former employee of the company, have informed the company that each intends not
to seek reelection to the Board after the expiration of their current term of
office at the 2004 Annual Meeting of Stockholders.
As a result of these changes and changes in 2004, the company expects that the
composition of the Board of Directors will be in compliance with applicable
rules and regulations requiring that a majority of the board members be
independent.
"I want to thank Doug, Kevin, and Ken for the tremendous service they have
provided to Level 3 as members of the board," said James Q. Crowe, chief
executive officer of the company. "I'm pleased that both Kevin and Doug will
continue to provide the benefits of their experience and counsel to the company
through employment and ongoing relationships."
As previously announced, Level 3 recently named two new Class III directors.
They are Arun Netravali, former president of Bell Labs and former chief
technology officer for Lucent Technologies, and John T. Reed, a director of the
McCarthy Group merchant-banking firm. Both Reed and Netravali will stand for
re-election at the upcoming annual meeting for new terms that will expire in
2006.
Business Outlook
"We continued to see improvements in financial and operational metrics for the
communications business during the past three months, although sales cycles
continue to be longer than we would like," said Crowe. We continue to believe
that we reached a bottom in terms of new sales levels during the middle of 2002,
and are cautiously optimistic that we will continue to see gradual improvements.
In addition, we have demonstrated an ability to continue to improve cash flow as
a result of tight management of expenses."
"We believe we are positioned to realize significant cost synergies, after a
successful integration of the Genuity business, resulting in further
improvements in cash flow," Crowe added. "We are focused on long-term value
creation by improving consolidated free cash flow through recurring revenue
growth and new product development, as well as opportunistic acquisition
activity."
"In the information services business, we began to experience softness in sales
toward the end of the first quarter, which has continued thus far in the second
quarter," said Miller. "We believe this top-line weakness is due to enterprise
customers delaying software purchase decisions as a result of general economic
weakness and a lack of significant software vendor promotions."
Quarterly and Full Year Projections
"Our full year 2003 unlevered cash flow projections are consistent with
operating cash flow projections provided earlier in the year," said Choksi. "Our
projections for the communications business are consistent with those previously
provided, with three adjustments that have immaterial effects on cash flow. Our
updated revenue and EBITDA projections incorporate the significant non-cash
contract settlement transaction completed during the first quarter, the
anticipated sale of the managed web hosting business, and a modification
relative to the previously anticipated accounting for prepaid network services
associated with the Genuity transaction."
"Based on the sales weakness we are currently experiencing in the information
services business, as well as accelerated adoption by Software Spectrum
customers of Microsoft's new licensing program that results in reduced reported
revenue, but does not significantly impact margins, we are reducing our full
year projection for information services revenue by approximately 13 percent. We
are taking steps to further align our cost structure with anticipated revenues
to mitigate potential EBITDA effects associated with the anticipated revenue
shortfall," said Choksi.
Level 3 expects consolidated revenue to be approximately $945 million during the
second quarter 2003, including $425 million from the communications business,
$500 million from information services and $20 million from other businesses.
Approximately $390 million of communications revenue is expected to come from
communications services revenue, including $10 million in termination and
settlement revenue. Approximately $35 million in revenue is expected from
reciprocal compensation. Communications services revenue, excluding termination
and settlement revenue, is expected to grow from $341 million in the first
quarter 2003 to $380 million in the second quarter 2003. The anticipated
quarter-over-quarter increase in revenue is due to the inclusion of a full
quarter of results related to the Genuity transaction, offset partially by
anticipated churn in revenue from customers acquired through the Genuity
transaction, a reduction in revenue from XO Communications resulting from the
settlement reached during the first quarter, and a decline in voice revenue from
a major customer.
Adjustments to Previous Projections
- ---------------------------------------- -------------- --------------------- ------------------------------------ -----------------
Current Previous Sale of
Metric Second Full Year 2003 XO Web Prepaid Current
($ in millions) Quarter Projections Settle-ment Hosting Network Full Year 2003
Projections (Feb. 4, 2003) Business Services Projections
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Consolidated Revenue $945 $4,000-$4,400 $280 ($40) $3,990-$4,340
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Communications Revenue $425 $1,700-$1,800 $280 ($40) $1,940-$2,040
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Information Services Revenue $500 $2,250-$2,500 $2,000-$2,200
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Other Revenue $20 $70-$80 $70-$80
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Consolidated EBITDA $89 $350-$400 $280 $75 $705-$755
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Capital Expenditures $65 Not Provided Not Provided
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Operating Cash Flow $100-$125 Not Provided
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Unlevered Cash Flow Not Provided $100-$125
- ---------------------------------------- -------------- --------------------- ----------- ------------ ----------- -----------------
Gross margins for the communications business are expected to be in the mid 70
percent range for the second quarter 2003.
Consolidated EBITDA (see attached schedule of non-GAAP metrics for definitions)
is expected to be $89 million for the second quarter 2003. Full year 2003
Consolidated EBITDA (see attached schedule of non-GAAP metrics for definitions)
is expected to be $705 to $755 million.
Consolidated capital expenditures are expected to be approximately $65 million
for the second quarter 2003. The quarter-over-quarter increase in capital
expenditures is primarily due to significant integration expenditures related to
the Genuity transaction anticipated during the second quarter, which are
expected to result in cost reductions during the second half of 2003.
Level 3 continues to expect to incur these Genuity integration costs of
approximately $75 to $100 million during 2003. Unlevered cash flow (see attached
schedule of non-GAAP metrics for definitions) is expected to be $100 to $125
million for 2003.
The company continues to expect cash and marketable securities, including $400
million in restricted cash held as security under the company's senior secured
credit facility, of approximately $1.2 billion at year-end.
The company continues to expect to turn Consolidated Free Cash Flow positive
during the second quarter of 2004.
Summary
"I am encouraged by Level 3's ability to execute in this environment," said
Crowe. "I believe that our ability to successfully integrate the Genuity
transaction -- coupled with our consistent financial and operating performance
and our industry-leading provisioning times and quality of service -- will
enable Level 3 to continue to differentiate itself in the marketplace during
2003."
Conference Call Today
Level 3 will hold a conference call to discuss the company's first-quarter
results, at 11:00 a.m. eastern standard time today. To join the call, please
dial 612-326-1003. A live broadcast of the call can also be heard on Level 3's
web site at www.level3.com. An audio replay of the call will be accessible
through the web site or by dialing 320-365-3844 Access Code 677263.
About Level 3 Communications
Level 3 (Nasdaq:LVLT) is an international communications and information
services company. The company operates one of the largest Internet backbones in
the world, is one of the largest providers of wholesale dial-up service to ISPs
in North America and is the primary provider of Internet connectivity for
millions of broadband subscribers, through its cable and DSL partners. The
company offers a wide range of communications services over its 20,000-mile
broadband fiber optic network including Internet Protocol (IP) services,
broadband transport, colocation services, Genuity managed services, and patented
Softswitch-based managed modem and voice services. Its Web address is
www.Level3.com.
The company offers information services through its subsidiaries, (i)Structure
and Software Spectrum. For additional information, visit their respective web
sites at www.softwarespectrum.com, and www.i-structure.com.
Forward Looking Statement
Some of the statements made by Level 3 in this press release are forward-looking
in nature. Actual results may differ materially from those projected in
forward-looking statements. Level 3 believes that its primary risk factors
include, but are not limited to: changes in the overall economy relating to,
among other things, the September 11 attacks and subsequent events, the
challenges of integration, substantial capital requirements; development of
effective internal processes and systems; the ability to attract and retain high
quality employees; technology; the number and size of competitors in its
markets; law and regulatory policy; and the mix of products and services offered
in the company's target markets. Additional information concerning these and
other important factors can be found within Level 3's filings with the
Securities and Exchange Commission. Statements in this release should be
evaluated in light of these important factors.
Schedule to Reconcile non-GAAP Financial Metrics
Pursuant to Regulation G, the company is hereby providing a reconciliation of
non-GAAP financial metrics to the most directly comparable GAAP measure.
The following reconciliations of non-GAAP financial measures to GAAP measures
include forward-looking statements with respect to the information identified as
guidance. Level 3 has made a number of assumptions, which may or may not prove
to be correct, in preparing the guidance. We caution you that these
forward-looking statements are only predictions, which are subject to risks and
uncertainties including technological uncertainty, financial variations, changes
in the regulatory environment, industry growth and trend predictions. Please see
the company's Form 10-K/A-1 Annual Report for a description of risks and
uncertainties.
The ranges provided for the GAAP measures that are part of the reconciliation of
non-GAAP forward-looking measures are in no way meant to indicate that the
company expects or is implicitly providing guidance on those GAAP measures. In
order to reconcile the non-GAAP guidance ranges to GAAP measures, the company
has to use ranges for the GAAP measures that arithmetically add up to the
non-GAAP guidance measures. While the company feels reasonably comfortable about
the non-GAAP guidance measures, it fully expects that the ranges used for the
GAAP measures will vary from actual results.
Communications Gross Margin ($) is defined as communications revenue less
communications cost of revenue from the consolidated condensed statements of
operations.
Cost of Revenue for the communications business includes leased capacity,
right-of-way costs, access charges and other third party circuit costs directly
attributable to the network, as well as costs of assets sold pursuant to
sales-type leases.
Communications Gross Margin (%) is defined as communications gross margin ($)
divided by communications revenue. Management believes that communications gross
margin is a relevant metric to provide to investors, as it is a metric that
management uses to measure the margin available to the company after it pays
third party network services costs.
COMMUNICATIONS GROSS MARGIN ($ in millions) Q103 Q402 Q102
- ------------------------------------------- ------------- ---------- ----------
Communications Revenue $708 $273 $278
- ------------------------------------------- ------------- ---------- ----------
Communications Cost of Revenue $89 $39 $66
- ------------------------------------------- ------------- ---------- ----------
Communications Gross Margin ($) $619 $234 $212
- ------------------------------------------- ------------- ---------- ----------
Communications Gross Margin (%) 87% 86% 76%
- ------------------------------------------- ------------- ---------- ----------
EBITDA is defined as income/(loss) from operations from the consolidated
condensed statements of operations, less depreciation and amortization expense
and non-cash compensation expense included within selling, general and
administration expense on the consolidated condensed statements of operations,
and after reduction of operating expenses by the non-cash portion of
restructuring and impairment charges. EBITDA is not a measurement under
accounting principles generally accepted in the United States and may not be
similar to EBITDA measures of other companies. Management believes that EBITDA
is a relevant metric to
provide to investors, as it is an indicator of operating performance, especially
in a capital-intensive industry such as telecommunications, since it excludes
items that are not directly attributable to ongoing business operations.
Three Months Ended March 31, 2002 Comm- Information Con-
($ in millions) unications Services Coal Other solidated
- ----------------------------------------------- ---------------- ---------------- --------------- ---------------- ----------------
Income (Loss) from Operations ($224) $-- $3 ($2) ($223)
- ----------------------------------------------- ---------------- ---------------- --------------- ---------------- ----------------
Depreciation and Amortization Expense $204 $4 $1 $1 $210
- ----------------------------------------------- ---------------- ---------------- --------------- ---------------- ----------------
Non-cash Compensation Expense $62 $2 -- -- $64
- ----------------------------------------------- ---------------- ---------------- --------------- ---------------- ----------------
Non-cash Restructuring and Impairment -- -- -- -- --
- ----------------------------------------------- ---------------- ---------------- --------------- ---------------- ----------------
EBITDA $42 $6 $4 ($1) $51
- ----------------------------------------------- ---------------- ---------------- --------------- ---------------- ----------------
- ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
EBITDA
Three Months Ended December 31, 2002 Comm- Information Con-
($ in millions) unications Services Coal Other solidated
- ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Income (Loss) from Operations ($249) ($4) $4 $1 ($248)
- ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Depreciation and Amortization Expense $190 $8 $1 $2 $201
- ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Non-cash Compensation Expense $26 $1 -- -- $27
- ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Non-cash Restructuring and Impairment $138 -- -- -- $138
- ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
EBITDA $105 $5 $5 $3 $118
- ---------------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
EBITDA
Three Months Ended March 31, 2003 Comm- Information Con-
($ in millions) unications Services Coal Other solidated
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Income (Loss) from Operations $178 ($4) $1 $-- $175
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Depreciation and Amortization Expense $199 $8 $1 -- $208
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Non-cash Compensation Expense $21 $2 -- -- $23
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Non-cash Restructuring and Impairment -- -- -- -- --
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
EBITDA $398 $6 $2 $-- $406
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Projected EBITDA
Three Months Ended June 30, 2003 Comm- Information Con-
($ in millions) unications Services Coal Other solidated
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Income (Loss) from Operations ($150) ($3) $2 $-- ($151)
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Depreciation and Amortization Expense $207 $8 -- -- $215
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Non-cash Compensation Expense $23 $2 -- -- $25
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Non-cash Restructuring and Impairment -- -- -- -- --
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
EBITDA $80 $7 $2 $-- $89
- ---------------------------------------------- ---------------- ---------------- ---------------- ----------------- ----------------
Consolidated
Range
Projected EBITDA
Twelve Months Ended December 31, 2003
($ in millions)
- --------------------------------------------- ---------------------------------
Low High
- --------------------------------------------- ---------------- ----------------
Income (Loss) from Operations ($245) ($200)
- --------------------------------------------- ---------------- ----------------
Depreciation and Amortization Expense $850 $855
- --------------------------------------------- ---------------- ----------------
Non-cash Compensation Expense $100 $100
- --------------------------------------------- ---------------- ----------------
Non-cash Restructuring and Impairment -- --
- --------------------------------------------- ---------------- ----------------
EBITDA $705 $755
- --------------------------------------------- ---------------- ----------------
Adjusted EBITDA is defined as consolidated EBITDA plus non-cash cost of revenue
plus/minus the change in communications cash deferred revenue plus/minus the
change in deferred revenue not collected. Management believes that Adjusted
EBITDA is a relevant metric to provide to investors, as it is a metric that is
used to calculate the company's total leverage covenant contained in its senior
secured credit facility.
Adjusted EBITDA ($ in millions) Q103
- --------------------------------------------------------------- ---------------
Consolidated EBITDA $406
- --------------------------------------------------------------- ---------------
Non-cash cost of revenue --
- --------------------------------------------------------------- ---------------
Change in communications cash deferred revenue ($306)
- --------------------------------------------------------------- ---------------
Change in deferred revenue not collected ($2)
- --------------------------------------------------------------- ---------------
Adjusted EBITDA $98
- --------------------------------------------------------------- ---------------
Change in Communications Cash Deferred Revenue is the change in the total of the
current and noncurrent deferred revenue balances on the consolidated condensed
balance sheet between quarters.
CHANGE IN COMMUNICATIONS DEFERRED REVENUE Dec. 31, 2002 Mar. 31, 2003
($ in millions)
- ------------------------------------------------------------------------------------ ----------------- ----------------
Deferred Revenue - Current $199 $117
- ------------------------------------------------------------------------------------ ----------------- ----------------
- ------------------------------------------------------------------------------------ ----------------- ----------------
Deferred Revenue - Noncurrent $1,264 $925
- ------------------------------------------------------------------------------------ ----------------- ----------------
Deferred Revenue per Balance Sheet $1,463 $1,042
- ------------------------------------------------------------------------------------ ----------------- ----------------
- ------------------------------------------------------------------------------------ ----------------- ----------------
Communications $1,406 $1,030
- ------------------------------------------------------------------------------------ ----------------- ----------------
Information Servcies $57 $12
- ------------------------------------------------------------------------------------ ----------------- ----------------
Deferred Revenue per Balance Sheet $1,463 $1,042
- ------------------------------------------------------------------------------------ ----------------- ----------------
- ------------------------------------------------------------------------------------ ----------------- ----------------
Quarter over Quarter Change in Communications Deferred Revenue ($376)
- ------------------------------------------------------------------------------------ ----------------- ----------------
Non-Cash Adjustments to Deferred Revenue (1) $70
- ------------------------------------------------------------------------------------ ----------------- ----------------
Decrease in Communications Deferred Revenue ($306)
- ------------------------------------------------------------------------------------ ----------------- ----------------
(1) Non-Cash Adjustments to Deferred Revenue - This adjustment reverses the net
non-cash change in deferred revenue as a result of the Genuity acquisition.
Level 3 entered into certain transactions with Genuity prior to the
acquisition of Genuity by Level 3, whereby it received cash for services to
be provided in the future. As a result of the acquisition, Level 3 can no
longer amortize this deferred revenue into earnings and accordingly,
reduced the purchase price applied to the net assets acquired in the
Genuity transaction by the amount of the unamortized deferred revenue
balance. Level 3 also assumed deferred revenue obligations in the Genuity
acquisition.
Change in Deferred Revenue Not Collected is the change in the current and
noncurrent deferred revenue balances on the consolidated condensed balance sheet
between quarters, which has not been collected and is included in the accounts
receivable balance on the consolidated condensed balance sheet.
CHANGE IN DEFERRED REVENUE NOT COLLECTED Dec. 31, Mar. 31,
($ in millions) 2002 2003
- ------------------------------------------------------------- -------- ---------
Communications Accounts Receivable related to Deferred
Revenue (1) $47 $49
- ------------------------------------------------------------- -------- ---------
Quarter over Quarter Change ($2)
- ------------------------------------------------------------- -------- ---------
- ------------------------------------------------------------- -------- ---------
Deferred Revenue Attributable to Equity Investments (2) $4 $4
- ------------------------------------------------------------- -------- ---------
Year over Year Change --
- ------------------------------------------------------------- -------- ---------
- ------------------------------------------------------------- -------- ---------
Increase in Deferred Revenue not Collected ($2)
- ------------------------------------------------------------- -------- ---------
(1) Communications Accounts Receivable related to Deferred Revenue - A
component of accounts receivable representing amounts billed to a customer
for which the corresponding service/products have been delivered, but will
be recognized as revenue over future periods as the service/product is used
by the customer.
(2) Deferred Revenue Attributable to Equity Investees - The company previously
made investments in certain public and private companies in connection with
those entities agreeing to purchase various services from the company. The
company originally recorded these transactions as investments and deferred
revenue on the balance sheet. The company did not feel it was appropriate
to include these transactions in Adjusted EBITDA until services had been
provided to the investee. This adjustment to deferred revenue not collected
represents the deferred revenue obligations remaining under these
transactions.
Unlevered Cash Flow is defined as net cash (used in) provided by operating
activities less capital expenditures offset by release of capital expenditure
accruals, and adding back cash interest paid, less interest income. Management
believes that unlevered cash flow is a relevant metric to provide to investors,
as it is an indicator of the operational strength and performance of the company
and, over time, provides management and investors with a sense of the growth
pattern of the business.
Consolidated Free Cash Flow is defined as net cash (used in) provided by
operating activities less capital expenditures offset by release of capital
expenditure accruals. Management believes that consolidated free cash flow is a
relevant metric to provide to investors, as it is an indicator of the company's
ability to generate cash to service its debt.
UNLEVERED CASH FLOW AND
CONSOLIDATED FREE CASH FLOW Unlevered Consolidated
Three Months Ended March 31, 2003 Cash Free Cash
($ in millions) Flow Flow
- -------------------------------------------- ----------------- -----------------
Net Cash Used in Operating Activities ($105) ($105)
- -------------------------------------------- ----------------- -----------------
Gross Capital Expenditures ($25) ($25)
- -------------------------------------------- ----------------- -----------------
Release of Capital Expenditure Accruals $6 $6
- -------------------------------------------- ----------------- -----------------
Cash Interest Paid $109 N/A
- -------------------------------------------- ----------------- -----------------
Interest Income ($5) N/A
- -------------------------------------------- ----------------- -----------------
Total ($20) ($124)
- -------------------------------------------- ----------------- -----------------
Consolidated
Range
Projected Unlevered Cash Flow
Twelve Months Ended December 31, 2003
($ in millions)
- ----------------------------------------------- --------------------------------
Low High
- ----------------------------------------------- --------------- ----------------
Net Cash Used in Operating Activities ($115) ($50)
- ----------------------------------------------- --------------- ----------------
Gross Capital Expenditures ($200) ($240)
- ----------------------------------------------- --------------- ----------------
Release of Capital Expenditure Accruals $5 $5
- ----------------------------------------------- --------------- ----------------
Cash Interest Paid $430 $435
- ----------------------------------------------- --------------- ----------------
Interest Income ($20) ($25)
- ----------------------------------------------- --------------- ----------------
Unlevered Cash Flow $100 $125
- ----------------------------------------------- --------------- ----------------
LEVEL 3 COMMUNICATIONS, INC.
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended
March 31,
(dollars in millions) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Revenue:
Communications $ 708 $ 278
Information Services 526 80
Other 16 28
Total Revenue 1,250 386
----- -----
Costs and Expenses:
Cost of Revenue 581 146
Depreciation and Amortization 208 210
Selling, General and Administrative, including non-cash
compensation of $23 and $64, respectively 275 253
Restructuring Charges 11 -
----- -----
Total Costs and Expenses 1,075 609
----- -----
Income (Loss) from Operations 175 (223)
Other Income (Loss), net
Interest Income 5 9
Interest Expense (140) (129)
Other Income 74 134
----- -----
Other Income (Loss) (61) 14
----- -----
Income (Loss) Before Income Taxes 114 (209)
Income Tax Benefit - 119
----- -----
Income (Loss) Before Change in Accounting Principles 114 (90)
Cumulative Effect of Change in Accounting Principles 5 -
----- -----
Net Income (Loss) $ 119 $ (90)
===== =====
Basic Earnings (Loss) per Share:
Income (Loss) Before Change in Accounting Principles $ 0.25 $ (0.23)
Cumulative Effect of Change in Accounting Principles 0.01 -
----- -----
Net Income (Loss) $ 0.26 $ (0.23)
====== ======
Diluted Earnings (Loss) per Share:
Income (Loss) Before Change in Accounting Principles $ 0.21 $ (0.23)
Cumulative Effect of Change in Accounting Principles 0.01 -
----- -----
Net Income (Loss) $ 0.22 $ (0.23)
====== ======
Weighted Average Shares Outstanding (in thousands)
Basic 450,824 391,279
======= =======
Diluted 649,700 391,279
======= =======
LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(unaudited)
March 31, December 31,
(dollars in millions) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 944 $ 1,142
Restricted cash 79 99
Accounts receivable, less allowances of $31 and $29, respectively 420 539
Other 117 154
------ ------
Total Current Assets 1,560 1,934
Property, Plant and Equipment, net 6,043 6,010
Restricted Cash 469 467
Intangibles and Goodwill 505 380
Other Assets, net 186 172
------ ------
$ 8,763 $ 8,963
======= =======
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable $ 492 $ 691
Current portion of long-term debt 3 4
Current portion of Genuity capitalized leases 121 -
Accrued payroll and employee benefits 126 156
Accrued interest 88 92
Deferred revenue 117 199
Other 236 211
------ ------
Total Current Liabilities 1,183 1,353
Long-Term Debt, less current portion 5,979 6,102
Genuity Capitalized Leases, less current portion 188 -
Deferred Revenue 925 1,264
Accrued Reclamation Costs 86 92
Other Liabilities 460 392
Stockholders' Deficit (58) (240)
------ ------
$ 8,763 $ 8,963
======= =======
LEVEL 3 COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(dollars in millions)
(unaudited)
Three Months Ended March 31,
2003 2002
----------------------------
Cash Flows from Operating Activities:
Net Income (Loss) $ 119 $ (90)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Cumulative effect of change in accounting principles (5) -
Equity earnings, net (1) (4)
Depreciation and amortization 208 210
Gain on debt extinguishments, net - (130)
Dark fiber and submarine cable non-cash cost of revenue - 2
(Gain) loss on sale of property, plant and equipment, toll-road operations and other assets (69) 2
Accretion of asset retirement obligations 2 -
Non-cash compensation expense attributable to stock awards 23 64
Deferred revenue (348) 23
Accrued interest on marketable securities - 5
Amortization of debt issuance costs 5 3
Accreted interest on discount debt 26 27
Accrued interest on long-term debt - (21)
Changes in working capital items net of amounts acquired:
Receivables 119 35
Other current assets 50 (15)
Payables (199) (165)
Other liabilities (27) (4)
Other (8) (7)
----- -----
Net Cash Used in Operating Activities (105) (65)
Cash flows from Investing Activities:
Proceeds from sales and maturities of marketable securities - 200
Decrease in restricted cash and securities, net 7 18
Capital expenditures (25) (53)
Release of capital expenditure accruals 6 -
Genuity acquisition (143) -
Investments and acquisitions (1) (14)
McLeod business acquisition - (50)
CorpSoft acquisition, net of cash acquired of $34 - (89)
Proceeds from sale of toll-road operations 46 -
Proceeds from sale of property, plant and equipment 16 6
----- -----
Net Cash Provided by (Used in) Investing Activities (94) 18
Cash Flows from Financing Activities:
Long-term debt borrowings, net of issuance costs - 2
Purchases of and payments on long-term debt, including current portion (1) (90)
----- -----
Net Cash Used in Financing Activities (1) (88)
Net Cash Used in Discontinued Operations - (47)
Effect of Exchange Rates on Cash 2 (5)
----- -----
Net Change in Cash and Cash Equivalents (198) (187)
Cash and Cash Equivalents at Beginning of Year 1,142 1,297
----- -----
Cash and Cash Equivalents at End of Period $ 944 $ 1,110
====== =======
Supplemental Disclosure of Cash Flow Information:
Cash interest paid $ 109 $ 116
Noncash Investing and Financing Activities:
Common stock issued in exchange for long term debt $ 20 $ 32