Exhibit 99.1
[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
Level 3 Reports Fourth Quarter and Full Year 2003 Results
Reports Communications Revenue of $399 Million For the Fourth Quarter
Continues Roll-Out of New Services;
Expands Sales Force
BROOMFIELD, Colo., February 5, 2004 - Level 3 Communications, Inc. (Nasdaq:LVLT)
today announced its fourth quarter and full year 2003 results. Consolidated free
cash flow(1) was negative $15 million for the fourth quarter, and negative $139
million for the full year 2003. For the second half of 2003, the company
generated positive consolidated free cash flow of $25 million. Net cash provided
by operating activities was $29 million for the fourth quarter and $24 million
for the full year 2003.
Consolidated revenue increased to $988 million for the fourth quarter compared
to $874 million last quarter as a result of an increase in information services
revenue.
The net loss for the fourth quarter decreased to $121 million or $0.18 per share
compared to a net loss for the previous quarter of $247 million or $0.38 per
share. Included in the net loss for the fourth quarter 2003 was a $37 million
gain on extinguishment of debt, or $0.06 per share, generated by debt for equity
exchanges and a $38 million tax benefit, or an additional $0.06 per share.
The company has renamed its financial metric Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) to Adjusted Operating Income Before
Depreciation and Amortization (Adjusted OIBDA) to comply with SEC regulations.
Consolidated Adjusted OIBDA(1) was $129 million in the fourth quarter versus
$116 million for the previous quarter.
The company reports financial information based on three operating segments:
communications; information services; and other businesses, which consists
primarily of coal mining operations.
Overview "Our unlevered cash flow(1) performance was better than expected this
quarter," said James Q. Crowe, CEO of Level 3. "We generated $25 million of
positive consolidated free cash flow for the last half of 2003. On the customer
front, we renewed several large managed modem and IP customer contracts.
"Overall, demand and pricing for basic optical transport and IP services
remained challenging during the fourth quarter and we expect these market
conditions to remain unchanged through 2004. In response, we continue to develop
and launch new, value-added transport, IP and voice services at a record pace."
Fourth Quarter Financial Results Compared to Projections (1)
Metric Fourth Quarter Actuals Fourth Quarter
($ in millions) Projections (1)
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Communications Services Revenue (2) (excluding termination $373 $378-$388
and settlement revenue)
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Reciprocal Compensation $23 $28-$32
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Termination and Settlement Revenue $3 $10-$16
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Communications Revenue $399 $416-$436
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Information Services Revenue $565 $450-$550
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Other Revenue $24 $20
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Consolidated Revenue $988 $886-$1,006
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Consolidated Adjusted OIBDA (3)(4) $129 $110-$120
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Capital Expenditures (5) $44 $55
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Unlevered Cash Flow (4) $57 ($30)-($55)
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Communications Gross Margin (4) 78% 77%-79%
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(1) Projections issued October 23, 2003
(2) Communications Services Revenue is GAAP communications revenue minus
reciprocal compensation revenue
(3) Consolidated Adjusted OIBDA includes $11 million in restructuring charges
and excludes $23 million in stock-based compensation expense
(4) See schedule of non-GAAP metrics for definition and reconciliation to GAAP
measures
(5) Gross capital expenditures were $49 million for the quarter and accrual
reversals were $5 million
Consolidated Cash Flow and Liquidity
During the fourth quarter, unlevered cash flow(1) was $57 million, versus $144
million for the third quarter. Consolidated free cash flow for the fourth
quarter was negative $15 million, versus positive $40 million for the previous
quarter. For the full year 2003, unlevered cash flow increased to $237 million
from negative $49 million in 2002 and consolidated free cash flow improved to
negative $139 million in 2003 compared to negative $434 million last year.
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As of December 31, 2003, the company had cash and cash equivalents of
approximately $1.1 billion.
"I am pleased with the improvement in our cash flow year over year," said Sunit
Patel, CFO of Level 3. "We exceeded our expectations for cash flow performance
in the quarter due to greater than expected revenue in our information services
business and our continuing management of working capital and capital
expenditures."
Communications Business
Revenue
Communications revenue for the fourth quarter was $399 million, versus $413
million for the previous quarter. Total communications revenue for the fourth
quarter consisted of $376 million of communications services revenue and $23
million of reciprocal compensation revenue, compared to $388 million and $25
million in the third quarter.
Included in communications services revenue was $3 million and $10 million of
settlement and termination revenue for the fourth and third quarters,
respectively. Communications services revenue, excluding settlement and
termination revenue, decreased by $5 million quarter over quarter. This decrease
is a result of a decrease in softswitch revenue of $10 million partially offset
by growth in the company's transport and infrastructure business of $5 million.
The decrease in softswitch revenue in the fourth quarter is due to a price
decrease on a significant number of installed ports for a managed modem customer
that took effect during the quarter and the effect of the loss of a Genuity
managed modem customer in the third quarter as previously announced.
During the quarter, the company announced new or expanded agreements with
several customers including British Telecom, Sprint and United Online.
Cost of Revenue
Communications cost of revenue for the fourth quarter was $87 million versus
cost of revenue of $91 million for the previous quarter. Communications gross
margin(1) for both periods was 78 percent. Excluding the impact of a favorable
settlement in the third quarter, communications gross margin was 77 percent.
Communications cost of revenue decreased in the fourth quarter primarily due to
continued migration of Genuity customers to the Level 3 network.
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $214 million for the fourth quarter, versus
$213 million for the previous quarter. For the same periods, communications SG&A
expenses include $19 million and $14 million of non-cash stock compensation
expenses. Communications SG&A for the third quarter included a $10 million
reduction associated with property taxes.
The total number of employees in the communications business decreased to
approximately 3,275 at the end of the fourth quarter from approximately 3,500 at
the end of the previous quarter.
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Adjusted Operating Income Before Depreciation and Amortization (OIBDA)
Adjusted OIBDA(1) for the communications business was $110 million for the
fourth quarter, versus $120 million for the previous quarter. Communications
Adjusted OIBDA margin(1) was 28 percent for the fourth quarter versus 29 percent
in the previous quarter.
Communications Adjusted OIBDA for the fourth quarter includes $7 million in
restructuring charges and excludes $19 million in non-cash stock compensation
expense. Communications Adjusted OIBDA for the third quarter included $3 million
in restructuring charges, a benefit of $10 million associated with a reduction
in property taxes, and excluded $14 million in non-cash stock compensation
expense.
Genuity Integration
"The integration of Genuity is largely complete, and I am pleased to report that
we continue to significantly exceed our operational and financial forecasts for
this acquisition," said Kevin O'Hara, COO of Level 3. "We had a goal of
completing this integration and migration of traffic within one year of the
acquisition, and we are on track to complete this during the first quarter
2004."
"We continue to evaluate M&A opportunities and, while it is difficult to predict
the outcome of these efforts, we remain disciplined in looking for acquisitions
that would create further value for our stockholders," said O'Hara.
Information Services Business
Results for the information services business include the Software Spectrum and
(i)Structure subsidiaries.
"During the fourth quarter we saw strong seasonal sales as well as an increase
in business IT spending," said Buddy Miller, vice chairman of Level 3. "We have
largely completed our previously announced restructuring efforts, which were
focused on integrating Software Spectrum and Corporate Software as well as the
closure of (i)Structure's operations in Ireland. Going forward we will continue
to focus on growing cash flow from this business segment."
Revenue and Adjusted Operating Income before Depreciation and Amortization
(OIBDA)
Information services revenue was $565 million for the fourth quarter, versus
$437 million for the previous quarter. The increase in revenue for the fourth
quarter, which is typically the strongest quarter, is primarily due to both
seasonality and good sales performance.
Adjusted OIBDA(1) for the information services business was $15 million for the
fourth quarter, including $4 million in restructuring charges and excluding $4
million in non-cash stock compensation expense, compared to negative $8 million
for the previous quarter, which included $11 million in restructuring charges
and excluded $1 million in non-cash stock compensation expense. The
restructuring charges recognized in the fourth quarter relate to headcount
reductions.
The total number of employees in the information services business decreased to
approximately 1,375 at the end of the fourth quarter from approximately 1,420 at
the end of the previous quarter.
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Other Businesses
The company's other businesses consist primarily of coal mining operations.
Revenue and Adjusted OIBDA
Revenue and Adjusted OIBDA(1) from other businesses were $24 million and $4
million for both the third and fourth quarters of 2003.
Corporate Transactions
Capital Structure Changes
As previously announced early in the fourth quarter, a subsidiary of the company
raised $500 million in gross proceeds through the issuance of 10.75% Senior
Notes and terminated, in full, the company's $1.125 billion senior secured
credit facility. Also previously announced, the company completed an agreement
to exchange approximately $352 million of face value of debt outstanding for
approximately 20 million shares of common stock and $208 million of book value
of 9% Convertible Senior Discount Notes.
Asset Sales
In December 2003, the company completed the previously announced sale of the
Midwest Fiber Optic Network (MFON) for approximately $16 million. MFON is a
regional communications system that Level 3 acquired through its transaction
with Genuity, Inc. last year.
In January 2004, the company completed the sale of its remaining investment in
Commonwealth Telephone Enterprises, Inc. for approximately $41 million.
Approximately 1.1 million shares of Commonwealth Telephone's common stock were
sold in a private transaction to an institutional investor.
"During 2003 we continued our success in monetizing non-core assets and
deleveraging our balance sheet," said Patel. "We reduced our outstanding debt by
approximately $1.1 billion and received approximately $120 million in proceeds
from the sale of non-core assets. As a result of these actions, we have no
principal maturities on our unsecured debt until 2008."
Renegotiation of Dark Fiber Agreement
During the fourth quarter, the company renegotiated an existing dark fiber
contract with one of its customers, Calpoint LLC. As part of the settlement,
Level 3 received $13 million in cash, in exchange for eliminating future
operating and maintenance payments. The $13 million in settlement revenue will
be amortized in communications revenue over three years.
New Service Offerings
As discussed previously, the company is focused on deploying new services that
leverage Level 3's existing network infrastructure and address large,
established markets for communications services, particularly in the voice
market.
Softswitch
To accelerate the execution of Level 3's voice strategy, Level 3 has further
refined its organizational structure by recently establishing product management
groups structured around three customer segments: Wholesale, Business-Oriented
and Consumer-Oriented VoIP services. Level 3 sells its wholesale services
directly, and markets business and consumer VoIP services
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through third-party channels that include partners, ISPs, cable TV MSOs and
systems integrators.
In the wholesale voice business segment, the company's current product set
includes (3)Voice(R) Termination, (3)VoIP TOLL FREESM, (3)VoIP MarketplaceSM and
(3)ToneSM.
The company's (3)Voice Termination service provides wholesale termination of
voice calls over Level 3's IP-based Softswitch network. (3)Voice Termination was
recently expanded internationally and now includes an IP-to-IP interconnection
capability. In December 2003, T-Systems International GmbH announced it would
utilize Level 3's enhanced voice termination service to offer new MPLS-based
voice and data services to large enterprises around the world.
Level 3 introduced (3)VoIP Marketplace in September 2003, which enables
customers to activate local calling capability in major markets across North
America. This service allows call center operators, conferencing providers,
voice portals and other businesses to establish a local presence on the PSTN and
receive locally dialed calls.
Level 3 also recently launched its (3)VoIP TOLL FREE service, which offers
reliable, toll-free, nationwide calling infrastructure complementary to (3)VoIP
Marketplace. In January 2004, Raindance Communications announced that it would
use the new toll free voice service from Level 3 to offer the industry's first
nationwide VoIP conferencing platform delivered by a Web and audio conference
provider.
Level 3 launched (3)Tone in September 2003, and continues to build its roster of
value-added resellers and partners. (3)Tone is designed for small and medium
sized businesses and significantly lowers up-front capital expenditures,
eliminates long distance charges for calls between branch offices, and cuts
costs tied to IT administration.
Level 3 expects to begin offering a wholesale residential Voice-over-IP service
during the first half of 2004. This service will allow broadband Internet access
providers including cable operators and DSL access providers to offer IP-based
local and long distance voice services to their residential customers and
subscribers.
"All our VoIP services utilize and leverage our extensive softswitch platform.
We operate the world's largest softswitch platform and reach over 93 percent of
the US population," said Sureel Choksi, EVP and President of Softswitch
Services. "We believe our years of experience scaling this proprietary platform
allow us to offer a high-quality, carrier-grade service that enables our
customers to take advantage of the superior economics of Voice-over-IP. We
believe we have a comprehensive set of Voice-over-IP services and can enable our
business partners to offer high-quality, low-cost voice services to their
business and residential customers."
Transport and Infrastructure
The company also recently launched (3)HubSM Private Line, a private line service
that enables customers to control and own a dedicated facility on the Level 3
network. This pay-as-you-go solution offers the company's customers operating,
network, and capital expenditure savings. In November 2003, BT Americas Inc.
announced that it would use Level 3's new (3)Hub Private Line and (3)Center(r)
Colocation services to expand its MPLS backbone in the Americas.
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Earlier this week, the company launched (3)TechSM, a new service offering
technical field support service to Level 3's colocation and dark fiber customers
in North America and Europe. This service leverages the company's world-class
field service organization and enables customers to reduce network maintenance
costs and streamline network operations. This service is offered in Level 3
gateways as well as other on-net customer locations. A European PTT and CENIC
are among the initial customers of the new (3)Tech service.
IP and Data Services
The company plans to launch new services in 2004 that leverage its advanced IP
MPLS-enabled backbone. These new services provide a private, secure IP network
to support IP-VPN and voice and other advanced applications with class of
service. Level 3 will sell these services through distribution partners,
including carriers, PTTs, value-added resellers, and systems integrators.
Level 3 also plans to introduce new low-speed enhancements to its (3)FlexSM data
service, an offering announced in September 2003, that enables media and
entertainment companies, ISPs, cable operators, enterprises and others to use
Ethernet technology to more simply and cost effectively meet their data
networking needs. The lower speed capabilities are expected to make the service
more desirable to the enterprise market, which Level 3 will continue to serve
through other service providers, systems integrators and value-added resellers.
New Services Summary
"As a result of the new services we have announced over the past two quarters,
we have increased our addressable market from approximately $34 billion to $66
billion," said Crowe. "We will continue to launch new services to increase our
addressable market for communications services that leverage our network and
represent opportunities for the company to enter large existing markets where we
have a competitive advantage. We believe the mid- to long-term growth
opportunities for the company are significant in areas such as Voice-over-IP,
new local transport services, converged data and voice networks and IP-VPNs."
"As a result of our new service initiatives, we are increasing the size of our
global communications business sales force by approximately 100 salespeople in
order to provide increased attention to growing vertical segments such as voice
service providers, the government and system integrators," added Crowe. "In
particular, given our recent success and sales to the government sector, we have
created a group based in Washington, D.C., to focus directly on opportunities
with the government sector. We are also focused on growing our indirect
distribution to the business and consumer markets through partners and
value-added resellers."
Business Outlook
"We expect to see pressure on our top-line in the first half of 2004, primarily
from our managed modem business," said Crowe. "Our goal is to grow revenue
during the latter part of 2004 when we expect to see a positive impact from the
sales of our new services."
"In particular, our largest managed modem customer, AOL, has recently notified
the company of their intent to reduce overall purchases of dial-up capacity and
to proportionately reduce purchases from the company. While the company has not
yet received formal notification of this reduction and thus is unable to
estimate the financial impact with accuracy, we believe the impact of this
reduction and other factors could result in a year-over-year reduction of $100
million to $150 million in our managed modem related revenue, of which the
substantial
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majority would result from potential AOL actions. While the company expects
continuing reductions in managed modem related revenue, future decreases are
expected to be more gradual and in line with overall market declines."
"Assuming these potential declines in managed modem related revenue occur as
described above, we would expect communications revenue, including reciprocal
compensation but excluding termination revenue, to decline by a
high-single-digit percentage in 2004 versus 2003," said Crowe. "However, our
goal is to report positive growth in fourth quarter 2004 revenue versus fourth
quarter 2003 as a result of the expected contribution from new services, as well
as growth in existing businesses, excluding managed modem."
"We expect an increase in operating and capital expenditures from current levels
to fund significant growth in our sales force, new service initiatives and new
customer segments such as the federal government," said Crowe. "Importantly, we
believe that while 2004 will be a transition year from a revenue perspective,
our margins in the communications business for the full year 2004 should remain
consistent with our current margins."
"We have previously stated that we expect the company's positive overall trend
experienced in consolidated free cash flow to continue," said Crowe. "However,
if the potential reduction in managed modem related revenue occurs as described
above, we expect that consolidated free cash flow will decline by between
approximately $40 million and $60 million year over year."
First Quarter 2004
Metric First Quarter
($ in millions) Projections
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Communications Revenue $380-$400
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Consolidated Adjusted OIBDA $110-$120
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Capital Expenditures $65
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"We expect communications revenue to be flat to declining in the first quarter
primarily as a result of a reduction in communications services revenue," said
Patel. "This reduction is expected as a result of price reductions that occurred
for certain of our IP and managed modem customers during the fourth quarter
2003."
Consolidated Adjusted OIBDA is expected to decrease to $110 million - $120
million in the first quarter as a result of the quarter over quarter reduction
in consolidated revenue from the seasonality of the information services
business as well as a slight decline in communications revenue.
Capital expenditures are expected to increase to approximately $65 million in
the first quarter as the company begins investing in new service initiatives and
network build out related to recently awarded government contracts.
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Summary
We are very focused on introducing a series of new services that leverage the
investment we have made in our advanced network and where we provide our
customers with savings relative to services available today," said Crowe. "Our
goal in 2004 is to offset lost revenues from our managed modem business
primarily from growth in sales of new services and to generate real growth in
the second half, which should give the company a solid foundation for
substantial positive growth in 2005."
Conference Call Information
Level 3 will hold a conference call to discuss the company's fourth quarter
results at 11 a.m. Eastern Time today. To join the call, please dial
612-326-1011. 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 on the
company's web site or by dialing 320-365-3844; access code 715055.
(1) Non-GAAP 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 company provides projections that include non-GAAP metrics that the company
deems relevant to management and investors. These non-GAAP metrics are
Consolidated Adjusted OIBDA, communications gross margin, Communications
Adjusted OIBDA margin, unlevered cash flow and consolidated free cash flow. The
following reconciliation of these non-GAAP financial metrics to GAAP includes
forward-looking statements with respect to the information identified as a
projection. Level 3 has made a number of assumptions in preparing our
projections, including assumptions as to the components of financial metrics.
These assumptions, including dollar amounts of the various components that
comprise a financial metric, may or may not prove to be correct. 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 Annual Report on Form 10-K/A-1 for a
description of these risks and uncertainties.
In order to provide projections with respect to non-GAAP measures, we are
required to indicate a range for GAAP measures that are components of the
reconciliation of the non-GAAP metric. The provision of these ranges is in no
way meant to indicate that the company is explicitly or implicitly providing
projections on those GAAP components of the reconciliation. In order to
reconcile the non-GAAP financial metric to GAAP, the company has to use ranges
for the GAAP components that arithmetically add up to the non-GAAP financial
metric. While the company feels reasonably comfortable about the projections for
its non-GAAP financial metrics, it fully expects that the ranges used for the
GAAP components will vary from actual results. We will consider our projections
of non-GAAP financial metrics to be accurate if the specific non-GAAP metric is
met or exceeded, even if the GAAP components of the reconciliation are different
from those provided in an earlier reconciliation.
Communications Gross Margin ($) is defined as communications revenue less
communications cost of revenue from the consolidated condensed statements of
operations.
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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 ($) divided by communications revenue. Management believes that
communications gross margin is a relevant metric to provide to investors, as it
is a metric that management uses to measure the margin available to the company
after it pays third party network services costs; in essence, a measure of the
efficiency of the company's network.
COMMUNICATIONS GROSS MARGIN ($ in millions)
Q303 Q403 Full Year 2003
Communications revenue $413 $399 $1,947
Communications cost of revenue $91 $87 $370
Communications Gross Margin ($) $322 $312 $1,577
Communications Gross Margin (%) 78% 78% 81%
Consolidated Adjusted OIBDA is defined as operating income from the consolidated
condensed statements of operations, plus depreciation and amortization plus
non-cash impairment charges plus non-cash stock compensation expense.
Communications Adjusted OIBDA Margin is defined as Communications Adjusted OIBDA
divided by communications revenue.
Management believes that Adjusted OIBDA and Communications Adjusted OIBDA
margins are relevant and useful metrics to provide to investors, as they are an
important part of the company's internal reporting and are indicators of
profitability and operating performance, especially in a capital-intensive
industry such as telecommunications. Management also uses Adjusted OIBDA and
Communications Adjusted OIBDA margins to compare the company's performance to
that of its competitors. Adjusted OIBDA excludes non-cash impairment charges and
non-cash stock compensation expense due to the company's adoption of the expense
recognition provisions of SFAS No. 123. Additionally, Adjusted OIBDA excludes
interest expense and income tax expense and other gains/losses not included in
operating income. Excluding these items eliminates the expenses associated with
the company's capitalization and tax structures. Adjusted OIBDA excludes
depreciation and amortization expense in order to eliminate the impact of
capital investments which management believes should be evaluated through
consolidated free cash flow.
There are limitations to using non-GAAP financial measures, including the
difficulty associated with comparing companies that use similar performance
measures whose calculations may differ from the company's calculations.
Additionally, this financial measure does not include certain significant items
such as depreciation and amortization, interest expense and non-cash impairment
charges. Adjusted OIBDA and Communications Adjusted OIBDA margin should not be
considered a substitute for other measures of financial performance reported in
accordance with GAAP.
Page 10
Consolidated Adjusted OIBDA
Three Months Ended December 31, 2003 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($166) $4 $41 ($121)
Income from Discontinued Operations ($4) -- -- ($4)
Cumulative Effect of Change in Accounting -- -- -- --
Income Tax (Benefit)/Expense -- $1 ($39) ($38)
Plus Other (Income)/Expense $87 -- -- $87
Operating Income/(Loss) ($83) $5 $2 ($76)
Plus Depreciation and Amortization Expense $174 $6 $2 $182
Plus Non-Cash Compensation $19 $4 -- $23
Plus Non-Cash Impairment Charges -- -- -- --
Consolidated Adjusted OIBDA $110 $15 $4 $129
Consolidated Adjusted OIBDA
Three Months Ended September 30, 2003 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($246) ($16) $15 ($247)
Income from Discontinued Operations ($3) -- -- ($3)
Cumulative Effect of Change in Accounting -- -- -- --
Income Tax (Benefit)/Expense -- -- ($12) ($12)
Plus Other (Income)/Expense $154 -- ($1) $153
Operating Income/(Loss) ($95) ($16) $2 ($109)
Plus Depreciation and Amortization Expense $201 $7 $2 $210
Plus Non-Cash Compensation $14 $1 -- $15
Plus Non-Cash Impairment Charges -- -- -- --
Consolidated Adjusted OIBDA $120 ($8) $4 $116
Consolidated Adjusted OIBDA
Three Months Ended June 30, 2003 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($455) ($17) $10 ($462)
Income from Discontinued Operations ($3) $9 -- $6
Cumulative Effect of Change in Accounting -- -- -- --
Income Tax (Benefit)/Expense -- -- -- --
Plus Other (Income)/Expense $325 ($2) ($9) $314
Operating Income/(Loss) ($133) ($10) $1 ($142)
Plus Depreciation and Amortization Expense $218 $9 $1 $228
Plus Non-Cash Compensation $24 $1 -- $25
Plus Non-Cash Impairment Charges -- -- -- --
Consolidated Adjusted OIBDA $109 -- $2 $111
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Consolidated Adjusted OIBDA
Three Months Ended March 31, 2003 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) $47 ($4) $76 $119
Income from Discontinued Operations ($2) ($2) -- ($4)
Cumulative Effect of Change in Accounting -- -- ($5) ($5)
Income Tax (Benefit)/Expense -- -- -- --
Plus Other (Income)/Expense $131 -- ($70) $61
Operating Income/(Loss) $176 ($6) $1 $171
Plus Depreciation and Amortization Expense $199 $7 $1 $207
Plus Non-Cash Compensation $21 $2 -- $23
Plus Non-Cash Impairment Charges -- -- -- --
Consolidated Adjusted OIBDA $396 $3 $2 $401
Consolidated Adjusted OIBDA
Twelve Months Ended December 31, 2003 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($820) ($33) $142 ($711)
(Income)/Loss from Discontinued Operations ($12) $7 -- ($5)
Cumulative Effect of Change in Accounting -- -- ($5) ($5)
Income Tax (Benefit)/Loss -- $1 ($51) ($50)
Plus Other (Income)/Expense $697 ($2) ($80) $615
Operating Income/(Loss) ($135) ($27) $6 ($156)
Plus Depreciation and Amortization Expense $792 $29 $6 $827
Plus Non-Cash Compensation $78 $8 -- $86
Plus Non-Cash Restructuring Charges -- -- -- --
Consolidated Adjusted OIBDA $735 $10 $12 $757
Consolidated Adjusted OIBDA
Twelve Months Ended December 31, 2002 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($1,098) $12 $228 ($858)
Income from Discontinued Operations -- ($2) -- ($2)
Cumulative Effect of Change in Accounting -- -- -- --
Income Tax (Benefit) ($118) ($2) ($1) ($121)
Plus Other (Income)/Expense $372 $1 ($205) $168
Operating Income/(Loss) ($844) $9 $22 ($813)
Plus Depreciation and Amortization Expense $768 $25 $8 $801
Plus Non-Cash Compensation $175 $6 -- $181
Plus Non-Cash Impairment Charges $182 -- -- $182
Consolidated Adjusted OIBDA $281 $40 $30 $351
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Communications Adjusted OIBDA Margin Full Year 2003
($ in millions) Q303 Q403
Communications revenue $413 $399 $1,947
Communications Adjusted OIBDA $120 $110 $735
Communications Adjusted OIBDA Margin 29% 28% 38%
Consolidated
Projected Consolidated Adjusted OIBDA Range
Three Months Ended March 31, 2004
($ in millions)
Low High
Net Earnings/(Loss) ($200) ($210)
Income from Discontinued Operations -- --
Cumulative Effect of Change in Accounting -- --
Income Tax (Benefit)/Expense -- --
Plus Other (Income)/Expense $110 $110
Operating Income/(Loss) ($90) ($100)
Plus Depreciation and Amortization Expense $180 $200
Plus Non-Cash Compensation $20 $20
Plus Non-Cash Impairment Charges -- --
Consolidated Adjusted OIBDA $110 $120
Unlevered Cash Flow is defined as net cash provided by (used in) operating
activities less capital expenditures offset by release of capital expenditure
accruals, and adding back cash interest paid, less interest income all as
disclosed in the consolidated condensed statements of cash flows or the
consolidated condensed statements of operations. 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,
measured over time, provides management and investors with a sense of the growth
pattern of the business.
There are material limitations to using unlevered cash flow to measure the
company against some of its competitors as it excludes certain material items
such as cash spent on merger and acquisition activity and interest expense.
Level 3 does not currently pay income taxes due to net operating losses, and
therefore, generates higher cash flow than a comparable business that does pay
income taxes. Additionally, this financial measure is subject to variability
quarter over quarter as a result of the timing of payments related to accounts
receivable and accounts payable. Unlevered cash flow should not be used as a
substitute for net change in cash and cash equivalents on the consolidated
statements of cash flows.
Consolidated Free Cash Flow is defined as net cash provided by (used in)
operating activities less capital expenditures offset by release of capital
expenditure accruals as disclosed in the consolidated condensed statements of
cash flows. 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.
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There are material limitations to using free cash flow to measure the company
against some of its competitors as Level 3 does not currently pay income taxes
due to net operating losses, and therefore, generates higher cash flow than a
comparable business that does pay income taxes. Additionally, this financial
measure is subject to variability quarter over quarter as a result of the timing
of payments related to accounts receivable and accounts payable. This financial
measure should not be used as a substitute for net change in cash and cash
equivalents on the consolidated statements of cash flows.
UNLEVERED CASH FLOW AND CONSOLIDATED FREE CASH FLOW
Three Months Ended December 31, 2003 Consolidated Free
($ in millions) Unlevered Cash Flow Cash Flow
Net Cash Provided by Continuing Operations $29 $29
Gross Capital Expenditures ($49) ($49)
Release of Capital Expenditure Accruals $5 $5
Cash Interest Paid $75 N/A
Interest Income ($3) N/A
Total $57 ($15)
UNLEVERED CASH FLOW AND CONSOLIDATED FREE CASH FLOW
Three Months Ended September 30, 2003 Consolidated Free
($ in millions) Unlevered Cash Flow Cash Flow
Net Cash Provided by Continuing Operations $90 $90
Gross Capital Expenditures ($52) ($52)
Release of Capital Expenditure Accruals $2 $2
Cash Interest Paid $109 N/A
Interest Income ($5) N/A
Total $144 $40
CONSOLIDATED FREE CASH FLOW Consolidated Free
Six Months Ended December 31, 2003 Cash Flow
($ in millions)
Net Cash Provided by Continuing Operations $119
Gross Capital Expenditures ($101)
Release of Capital Expenditure Accruals $7
Total $25
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UNLEVERED CASH FLOW AND CONSOLIDATED FREE CASH FLOW
Twelve Months Ended December 31, 2003 Consolidated
($ in millions) Unlevered Cash Flow Free Cash Flow
Net Cash Provided by Continuing Operations $24 $24
Gross Capital Expenditures ($191) ($191)
Release of Capital Expenditure Accruals $28 $28
Cash Interest Paid $394 N/A
Interest Income ($18) N/A
Total $237 ($139)
UNLEVERED CASH FLOW AND CONSOLIDATED FREE CASH FLOW
Twelve Months Ended December 31, 2002 Consolidated
($ in millions) Unlevered Cash Flow Free Cash Flow
Net Cash Used in Continuing Operations ($431) ($431)
Gross Capital Expenditures ($218) ($218)
Release of Capital Expenditure Accruals $215 $215
Cash Interest Paid $414 N/A
Interest Income ($29) N/A
Total ($49) ($434)
Consolidated
Projected CONSOLIDATED FREE CASH FLOW Range
Twelve Months Ended December 31, 2004
($ in millions)
Low High
Net Cash Provided by Continuing Operations $70 $100
Gross Capital Expenditures ($250) ($300)
Total ($180) ($200)
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 22,500 mile
broadband fiber optic network including Internet Protocol (IP) services,
broadband transport and infrastructure services, colocation services, and
patented Softswitch managed modem and voice services. Its Web address is
www.Level3.com.
Page 15
The company offers information services through its subsidiaries, Software
Spectrum and (i)Structure. For additional information, visit their respective
web sites at www.softwarespectrum.com and www.i-structure.com.
The Level 3 logo, (3)Voice Termination and (3)Center Colocation are registered
service marks and (3)VoIP TOLL FREE, (3)VoIP Marketplace, (3)Tone, (3)Hub
Private Line, (3)Tech and (3)Flex are service marks of Level 3 Communications,
Inc. in the United States and/or other countries.
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.
Page 16
LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
(dollars in millions) 2003 2002 2003 2002
Revenue:
Communications $ 399 $ 273 $ 1,947 $ 1,101
Information Services 565 623 1,999 1,896
Other 24 30 80 114
-- -- -- ---
Total Revenue 988 926 4,026 3,111
Costs and Expenses:
Cost of Revenue 620 630 2,264 2,008
Depreciation and Amortization 182 201 827 801
Selling, General and Administrative, including non-cash
compensation of $23, $27, $86 and $181, respectively 251 213 1,046 934
Restructuring Charges, including non-cash impairment
charges of $-, $138, $- and $182, respectively 11 131 45 181
-- --- -- ---
Total Costs and Expenses 1,064 1,175 4,182 3,924
----- ----- ----- -----
Operating Income (Loss) (76) (249) (156) (813)
Other Income (Loss), net
Interest Income 3 6 18 29
Interest Expense (128) (146) (567) (560)
Other, net 38 73 (66) 363
-- -- --- ---
Other Income (Loss) (87) (67) (615) (168)
--- --- ---- ----
Loss Before Income Taxes (163) (316) (771) (981)
Income Tax Benefit 38 2 50 121
-- - -- ---
Loss Before Change in Accounting Principle and Discontinued Operations
Discontinued Operations (125) (314) (721) (860)
Cumulative Effect of Change in Accounting Principle - - 5 -
Income from Discontinued Operations 4 1 5 2
- - - -
Net Loss $ (121) $ (313) $ (711) $ (858)
====== ====== ====== ======
Basic Earning (Loss) per Share:
Loss before Change in Accounting Principle and Discontinued Operations
Discontinued Operations $ (0.19) $ (0.73) $ (1.28) $ (2.11)
Cumulative Effect of Change in Accounting Principle - - 0.01 -
Income from Discontinued Operations 0.01 - 0.01 -
---- ----
Net Loss $ (0.18) $ (0.73) $ (1.26) $ (2.11)
======= ======= ======= =======
Weighted Average Shares Outstanding (in thousands)
Basic and Diluted 671,992 427,929 565,931 407,317
======= ======= ======= =======
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LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(unaudited)
December 31, September 30,
(dollars in millions) 2003 2003
Assets
Current Assets
Cash and cash equivalents $ 1,129 $ 1,317
Restricted cash 74 495
Accounts receivable, less allowances of $28 and $30, respectively 561 355
Other 140 119
--- ---
Total Current Assets 1,904 2,286
Property, Plant and Equipment, net 5,727 5,785
Restricted Cash 61 58
Intangibles and Goodwill, net 459 495
Other Assets, net ** 142 150
--- ---
$ 8,293 $ 8,774
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 651 $ 497
Current portion of long-term debt 125 750
Accrued payroll and employee benefits 135 148
Accrued interest 100 78
Deferred revenue 189 132
Other 231 205
--- ---
Total Current Liabilities 1,431 1,810
Long-Term Debt, less current portion 5,250 5,340
Deferred Revenue 954 919
Other Liabilities 477 529
Stockholders' Equity ** 181 176
--- ---
$ 8,293 $ 8,774
======= =======
** The September 30, 2003 balance sheet has been restated to reflect the
change in the accounting for the investment in Commonwealth Telephone from
the equity method to the cost method as an investment security available
for sale, resulting in an increase to the asset and equity.
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LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(dollars in millions) Three Months Ended Twelve Months Ended
December 31, 2003 December 31, 2003
Cash Flows from Operating Activities:
Net Loss $ (121) $ (711)
Gain from discontinued operations (4) (5)
Cumulative effect of change in accounting principle - (5)
- --
Loss from continuing operations (125) (721)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities:
Equity earnings, net - (3)
Depreciation and amortization 182 827
Induced conversion expense - 200
Gain on debt extinguishments, net (37) (41)
Gain on sale of property, plant and equipment,
toll-road operations and other assets (4) (74)
Non-cash expense attributable to stock awards 23 86
Deferred revenue 86 (263)
Deferred income taxes (52) (64)
Amortization of debt issuance costs 4 42
Accreted interest on long term discount debt 25 106
Accrued interest on long-term debt 24 25
Changes in working capital items:
Receivables (198) (26)
Other current assets (25) 37
Payables 141 (55)
Other current liabilities (7) (41)
Other (8) (11)
-- ---
Net Cash Provided by Operating Activities 29 24
Cash Flows from Investing Activities:
Decrease in restricted cash and securities, net 18 9
Capital expenditures (49) (191)
Release of capital expenditure accruals 5 28
Genuity acquisition 35 (109)
Investments and acquisitions - (2)
Proceeds from sale of toll-road operations - 46
Proceeds from sale of property, plant and equipment 7 58
- --
Net Cash Provided by/(Used in) Investing Activities 16 (161)
Cash Flows from Financing Activities:
Stock options exercised - 3
Long-term debt borrowings, net of issuance costs 487 848
Purchases of and payments on long-term debt,
including current portion (net of restricted cash) (743) (772)
---- ----
Net Cash Provided by/(Used in) Financing Activities (256) 79
Net Cash Provided by Discontinued Operations 20 37
Effect of Exchange Rates on Cash 3 8
- -
Net Change in Cash and Cash Equivalents (188) (13)
Cash and Cash Equivalents at Beginning of Period 1,317 1,142
----- -----
Cash and Cash Equivalents at End of Period $ 1,129 $ 1,129
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash interest paid $ 75 $ 394
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