Exhibit 99.1
[Logo]
1025 Eldorado Boulevard
Broomfield, Colorado 80021
www.Level3.com
NEWS RELEASE
Level 3 Contacts:
Media: Josh Howell Investors: Robin Grey
720-888-2517 720-888-2518
Chris Hardman Valerie Finberg
720-888-2292 720-888-2501
Level 3 Reports Third Quarter Results
Strong Core Communications Organic Growth of 6 Percent Quarter over Quarter
Company Announced Agreement to Acquire Broadwing
Third Quarter Financial and Business Highlights
o Consolidated Revenue of $875 million
o Net Loss of $138 million, or $0.12 per share
o Consolidated Adjusted OIBDA of $176 million
o Consolidated Free Cash Flow of negative $64 million
o Software Spectrum results reflected as discontinued operations
BROOMFIELD, Colo., October 24, 2006 -- Level 3 Communications, Inc. (Nasdaq:
LVLT) reported consolidated revenue of $875 million for the third quarter 2006,
compared to consolidated revenue of $835 million for the second quarter 2006. As
the company completed the sale of its Software Spectrum, Inc. subsidiary in the
third quarter of 2006, the results of operations of Software Spectrum are
reflected as discontinued operations for all periods provided in this release
and are not consolidated with the results of operations of Level 3's
communications and other businesses.
The net loss for the third quarter 2006 was $138 million, or $0.12 per share,
compared to a net loss of $201 million, or $0.23 per share, for the previous
quarter. Included in the net loss for the third quarter is a gain of $33 million
associated with the sale of Software Spectrum, or $0.03 per share. Included in
the net loss for the second quarter 2006 was a loss of $55 million, or $0.06 per
share, attributable to the amendment and restatement of the Level 3 Financing,
Inc.'s $730 million credit agreement.
"Excluding the benefit of acquisitions during the third quarter, we had an
approximately 6 percent growth in core communications services revenue," said
James Q. Crowe, CEO of Level 3. "This positive outcome is the result of
particularly strong contributions from transport and infrastructure and voice
services, the ongoing stabilization in the pricing environment; and the positive
impact of industry consolidation. The trend in organic growth bodes well for
future performance, and the communications business saw positive contributions
from the WilTel integration and other, more recent acquisitions."
Consolidated Adjusted OIBDA(1) defined as Adjusted Operating Income Before
Depreciation and Amortization was $176 million in the third quarter 2006,
compared to third quarter 2006 projections of $170 million to $190 million and
$170 million for the second quarter 2006.
"Our favorable performance in core services revenue was offset by declines in
SBC Contract Services revenues and higher operating expenses, which were
primarily due to the acceleration of certain integration related expenses and
increased costs attributable to the acquired companies," said Sunit S. Patel,
CFO of Level 3.
Third Quarter 2006 Financial Results
Metric Consolidated Third Quarter
($ in millions) Third Quarter Projections(1)
Revenue Results
Core Communications $544 $525 - $535
Other Communications $107 $100 -$105
SBC Contract Services $207 $205- $245
Total Communications Revenue $858 $830 - $885
Other Revenue $17
Total Consolidated Revenue $875
Consolidated Adjusted OIBDA (2)(3) $176 $170 - $190
Capital Expenditures $120
Unlevered Cash Flow (3) $121
Free Cash Flow (3) $(64)
Communications Gross Margin (3) 57%
Communications Adjusted OIBDA Margin (3) 20% ~20%
(1) Projections issued July 25, 2006.
(2) Consolidated Adjusted OIBDA excludes $18 million in non-cash compensation
expense and $1 million of non-cash impairment charges.
(3) See schedule of non-GAAP metrics for definition and reconciliation to GAAP
measures.
Communications Business
Revenue
Communications revenue for the third quarter 2006 was $858 million, versus $819
million for the previous quarter. The company recognized less than $1 million in
termination revenue during the third quarter 2006 and $3 million in termination
revenue during the second quarter 2006, primarily related to the SBC Contract
Services.
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Communications Revenue Quarter ended Quarter ended June Percent
($ in millions) Sept. 30, 2006 (1) 30, 2006 (2) Change
Transport and Infrastructure $284 $217 31%
IP and Data $78 $67 16%
Voice $153 $107 43%
Vyvx $29 $30 (3%)
Total Core Communications Services $544 $421 29%
Other Communications Services $107 $120 (11%)
SBC Contract Services $207 $278 (26%)
Total Communications Revenue $858 $819 5%
(1) Communications revenue for the third quarter includes approximately $37
million of revenue from Progress Telecom and ICG Communications, and
approximately $83 million of revenue from TelCove and Looking Glass.
(2) Communications revenue for the second quarter includes approximately $21
million of revenue from Progress Telecom and ICG Communications.
Core Communications Services
Core Communications Services revenue, which includes transport and
infrastructure, wholesale IP and Data, Voice and Vyvx, increased quarter over
quarter by 29 percent due to a 6 percent organic growth in core communications
services, primarily from transport and infrastructure and voice services, the
benefit of a full quarter's revenue from ICG Communications, as well as revenue
for part of the quarter from the acquisitions of TelCove and Looking Glass
Networks.
Other Communications Services
Other Communications Services revenue declined 11 percent to $107 million during
the quarter, as a result of expected declines in managed modem and managed
services.
SBC Contract Services
SBC Contract Services declined by 26 percent from the previous quarter. As
previously disclosed, SBC has announced its intention to migrate the services
provided under the agreement to its own network facilities in accordance with
terms previously negotiated by WilTel. Under the terms of this agreement, SBC
agreed to pay WilTel a minimum amount of gross margin regardless of the actual
revenue generated under the contract. Accordingly, while the company expects
future SBC Contract Services quarterly revenue will be difficult to predict and
the rate of decline to vary from quarter to quarter, the gross margin
contribution over time is fixed.
The communications deferred revenue balance was $896 million at the end of the
third quarter 2006, compared to $912 million at the end of the second quarter.
The decline in communications deferred revenue quarter over quarter is a result
of the amortization of previously recognized deferred revenue balances and a $20
million decrease associated with an integration related change in the billing
cycle for certain legacy WilTel customers, partially offset by cash receipts
associated with wavelength and dark fiber sales. Excluding the effect of the
change in the billing cycle, the communications deferred revenue balance would
have increased from the second quarter by $4 million.
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Cost of Revenue
Communications cost of revenue for the third quarter 2006 was $368 million,
versus $385 million in the previous quarter. Cost of revenue decreased during
the quarter primarily due to the benefit of synergies from the WilTel
integration and lower expenses associated with SBC Contract Services revenue
partially offset by increases from a full quarter of costs associated with ICG
Communications, and a partial quarter of costs associated with TelCove and
Looking Glass.
Communications gross margin(1) was 57 percent for the third quarter, versus 53
percent for the second quarter. The increase in communications gross margin is
primarily attributable to the higher margin revenue from TelCove, Looking Glass
and ICG Communications; organic growth in our core communications services; a
reduction in lower margin services associated with SBC Contract Services
revenue; and integration benefits from the WilTel acquisition.
"We are pleased with the improvement in our gross margin," said Crowe. "Given
positive market conditions and the benefits of integration activity and
acquisitions, we expect improvements in gross margin to continue in the fourth
quarter."
Selling, General and Administrative Expenses (SG&A)
Communications SG&A expenses were $333 million for the third quarter 2006,
versus $281 million for the previous quarter. The third and second quarter 2006
Communications SG&A expenses include $18 million and $20 million, respectively,
of non-cash compensation expense. SG&A increased in the third quarter primarily
due to costs associated with TelCove and Looking Glass, and a full quarter of
costs from ICG Communications.
"Our integration expenses increased in the quarter as we started integrating
various operating and business support systems and processes," said Patel. "For
the balance of the year, we are accelerating some of the metro integration
efforts that were previously planned for 2007."
Adjusted OIBDA
Adjusted OIBDA(1) for the communications business increased to $174 million for
the third quarter 2006, compared to $170 million for the previous quarter.
Communications Adjusted OIBDA margin(1) was 20 percent for the third quarter
2006, versus 21 percent in the previous quarter.
Communications Adjusted OIBDA in the third quarter includes $1 million in cash
restructuring charges associated with reductions in workforce resulting from the
integration of acquired businesses and excludes a $1 million non-cash asset
impairment charge, and $18 million of non-cash compensation expense. Second
quarter 2006 Communications Adjusted OIBDA includes $3 million in cash
restructuring charges associated with reductions in workforce resulting from the
integration of acquired businesses and excludes a $4 million non-cash asset
impairment charge, and $20 million of non-cash compensation expense.
Other Businesses
The company's other businesses consist primarily of coal mining operations.
Revenue and Adjusted OIBDA
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Revenue from other businesses was $17 million in the third quarter, compared to
$16 million in the second quarter of 2006. Consolidated Adjusted OIBDA(1) from
Other Businesses in the third quarter was $2 million and Other Businesses did
not contribute to Consolidated Adjusted OIBDA in the second quarter 2006.
Consolidated Cash Flow and Liquidity
During the third quarter 2006, Unlevered Cash Flow(1) was positive $121 million,
versus positive $93 million for the previous quarter. Consolidated Free Cash
Flow for the third quarter was negative $64 million, versus negative $13 million
for the previous quarter.
As of September 30, 2006, the company had cash and marketable securities of
approximately $1.2 billion. "The combination of the company's acquisitions,
financing activities during the year and continued organic core communications
growth has strengthened our financial condition," said Patel.
Corporate Transactions
Acquisitions
On October 17, 2006, Level 3 announced that it had signed a definitive agreement
to acquire Broadwing Corporation. Under the terms of the agreement, Level 3 will
pay $8.18 of cash plus 1.3411 shares of Level 3 common stock for each share of
Broadwing common stock outstanding at closing. In total, Level 3 expects to pay
approximately $744 million of cash and issue approximately 122 million shares of
common stock.
During the third quarter, Level 3 closed the acquisitions of Telcove and Looking
Glass. Also during the third quarter, Level 3 completed the sale of Software
Spectrum to Insight Enterprises, Inc. for total proceeds of $353 million in
cash, consisting of $287 million in purchase price and approximately $66 million
in a working capital adjustment. The cash received at closing remains subject to
certain post-closing adjustments.
Organizational Update
In the third quarter, Level 3 announced the formation of four customer-facing
groups to better serve the changing needs of customers in growing markets and
drive growth across the organization:
|X| The Wholesale Markets Group services the communications needs of the
largest global service providers, including carriers, cable companies,
wireless companies, and voice service providers. These customers
typically integrate Level 3 services into their own products and
services to offer to their end user customers.
|X| The Content Markets Group focuses on serving media and content
companies with large and growing bandwidth needs. Customers in this
market include video distribution companies, providers of gaming,
mega-portals, software service providers, social networking providers,
as well as more traditional media distribution companies such as
broadcasters, television networks and sports leagues.
|X| The Business Markets Group targets enterprise customers and regional
carriers who value a local, professional sales force. Specific customer
markets include small, medium, and large businesses, local and regional
carriers, state and local government entities, and higher education
institutions.
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|X| The European Markets Group serves the largest European consumers of
bandwidth, including the largest European and international carriers,
large system integrators, voice service providers, cable operators,
Internet service providers, content providers, and government and
education sectors.
"The alignment around customer markets we believe will continue to drive rapid
growth while enabling the company to better focus on the needs of our customers,
and deliver the high quality services they expect from Level 3," said Kevin
O'Hara, president and COO of Level 3. "Each group is supported by the dedicated
sales, marketing, product management, customer facing operations, and necessary
support resources required to execute and grow revenues in these key segments."
Integration Update
"We have completed the majority of the physical integration of WilTel's network,
and we are seeing the benefit of the network and operating expense savings we
expected from this acquisition in our results this quarter," said O'Hara. "Our
primary focus going forward will be to continue the integration efforts of our
metro acquisitions and begin the integration work on Broadwing subject to the
requirements and restrictions of applicable law.
"The integrations of the metro acquisitions are underway, and we are beginning
to see the benefits of our increased local footprints across the communications
business. We are on track to complete the majority of the integration of these
companies by the end of 2007."
Capital Markets Activity
During the third quarter, the company redeemed all of its outstanding 9 1/8%
Senior Notes due 2008 and 10 1/2% Senior Discount Notes due 2008. Aggregate
principal, call premium and accrued interest totaled $470 million. As a result,
long-term debt due in 2008 was reduced by approximately $460 million.
2006 Business Outlook
Communications Revenue
"The continued strength in our core communications business and our
strengthening gross margin are indicators of strong momentum," said Crowe. "We
are confident in our ability to continue to deliver industry leading growth in
our core communications revenues."
Fourth
Metric Quarter Projections (1) 2006
($ in millions) Full Year Projections (1)
Core Communications Services revenue $595 - $605 $1,950- $1,960
Other Communications Services revenue $90 - $95 $440 - $445
SBC Contract Services $100 - $130 $875 - $905
Total Communications Revenue $785 - $830 $3,265 - $3,310
Consolidated Adjusted OIBDA $180 - $200 $670 - $690
Communications Adjusted OIBDA Margin ~23% ~21%
Consolidated Capital Expenditures N/A $390 - $410
Net Cash Interest Expense N/A $495
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"We are increasing the midpoint for our 2006 core communications services and
total communications revenue as a result of stronger than anticipated organic
growth," said Patel. "Excluding benefits from the pending acquisition of
Broadwing, we reiterate our expectation that Consolidated Adjusted OIBDA in 2007
will be $830 million to $890 million."
Summary
"We are pleased with the continued demand we are seeing from our customers, we
believe our performance this quarter continues to demonstrate that our business
and industry dynamics are strong," said Crowe. "We believe we are well
positioned for the future. In addition, we believe our pending acquisition of
Broadwing creates significant value for our stockholders and expands our
opportunities for growth."
Conference Call and Web site Information
Level 3 will hold a conference call to discuss the company's third quarter
results at 10 a.m. EDT today. To join the call, please dial 612-332-0342. 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 843661. An archived webcast of the third
quarter conference call together with the press release, financial statements
and non-GAAP reconciliations may also be accessed at www.level3.com.
About Level 3 Communications
Level 3 Communications, Inc (Nasdaq: LVLT), an international communications
company, operates one of the largest Internet backbones in the world. Through
its customers, Level 3 is the primary provider of Internet connectivity for
millions of broadband subscribers. The company provides a comprehensive suite of
services over its broadband fiber optic network including Internet Protocol (IP)
services, broadband transport and infrastructure services, colocation services,
voice services and voice over IP services. These services provide building
blocks that enable Level 3's customers to meet their growing demands for
advanced communications solutions. The company's Web address is www.Level3.com.
"Level 3 Communications," "Level 3" and the Level 3 Communications logo are
registered service marks of Level 3 Communications, Inc. in the United States
and/or other countries. Any other product and company names herein may be
trademarks of their respective owners. Level 3 services are provided by wholly
owned subsidiaries of Level 3 Communications, Inc.
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: increasing the volume of traffic on Level 3's
network; developing new products and services that meet customer demands and
generate acceptable margins; successfully completing commercial testing of new
technology and information systems to support new products and services,
including voice transmission services; stabilizing or reducing the rate of price
compression on certain of our communications services; integrating strategic
acquisitions; attracting and retaining qualified management and other personnel;
and the ability to meet all of the terms and conditions of our debt obligations.
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.
-30-
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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 reconciliations of these non-GAAP financial metrics to GAAP include
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 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. 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. Cost of revenue also includes satellite transponder lease
costs, package delivery costs and blank tape media costs attributable to the
video business.
Communications Gross Margin (%) is defined as communications gross margin ($)
divided by communications revenue. Management believes that communications gross
margin is a relevant metric to provide to investors, as it is a metric that
management uses to measure the margin available to the company after it pays
third party network services costs; in essence, a measure of the efficiency of
the company's network.
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COMMUNICATIONS GROSS MARGIN ($ in millions)
Q206 Q306
Communications Revenue $819 $858
Communications Cost of Revenue $385 $368
Communications Gross Margin ($) $434 $490
Communications Gross Margin (%) 53% 57%
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 Consolidated 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 Consolidated Adjusted
OIBDA and Communications Adjusted OIBDA Margins to compare the company's
performance to that of its competitors. Consolidated 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. 123R.
Additionally, Consolidated 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. Consolidated 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. Consolidated Adjusted OIBDA and Communications Adjusted OIBDA Margin
should not be considered a substitute for other measures of financial
performance reported in accordance with GAAP.
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Consolidated Adjusted OIBDA
Three Months Ended September 30, 2006 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($167) $25 $4 ($138)
(Income) Loss from Discontinued Operations $-- ($25) $-- ($25)
Income Tax (Benefit)/Expense $1 $-- ($3) ($2)
Plus Other (Income)/Expense $140 $-- $-- $140
Operating Income/(Loss) ($26) $-- $1 ($25)
Plus Non-Cash Impairment Charge $1 $-- $-- $1
Plus Depreciation and Amortization Expense $181 $-- $1 $182
Plus Non-Cash Stock Compensation Expense $18 $-- $-- $18
Consolidated Adjusted OIBDA $174 $-- $2 $176
Consolidated Adjusted OIBDA
Three Months Ended June 30, 2006 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($224) $23 $-- ($201)
(Income) Loss from Discontinued Operations $-- ($23) $-- ($23)
Income Tax (Benefit)/Expense $-- $-- $1 $1
Plus Other (Income)/Expense $207 $-- ($2) $205
Operating Income/(Loss) ($17) $-- ($1) ($18)
Plus Non-Cash Impairment Charge $4 $-- $-- $4
Plus Depreciation and Amortization Expense $163 $-- $1 $164
Plus Non-Cash Stock Compensation Expense $20 $-- $-- $20
Consolidated Adjusted OIBDA $170 $-- $-- $170
Consolidated Adjusted OIBDA
Three Months Ended September 30, 2005 Communications Information Con-
($ in millions) Services Other solidated
Net Earnings/(Loss) ($211) $3 $4 ($204)
(Income) Loss from Discontinued Operations $-- ($3) $-- ($3)
Income Tax (Benefit)/Expense $1 $-- $-- $1
Plus Other (Income)/Expense $123 $-- ($6) $117
Operating Income/(Loss) ($87) $-- ($2) ($89)
Plus Non-Cash Impairment Charge $2 $-- $-- $2
Plus Depreciation and Amortization Expense $156 $-- $2 $158
Plus Non-Cash Stock Compensation Expense $13 $-- $-- $13
Consolidated Adjusted OIBDA $84 $-- $-- $84
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Communications Adjusted OIBDA Margin
($ in millions) Q206 Q306
Communications Revenue $819 $858
Communications Adjusted OIBDA $170 $174
Communications Adjusted OIBDA Margin 21% 20%
Projected Consolidated Adjusted OIBDA Consolidated
Three Months Ended December 31, 2006 Range
($ in millions)
Low High
Net Earnings/(Loss) ($185) ($155)
Plus Other (Income)/Expense $135 $130
(Income)/Loss from Discontinued Operations - -
Operating Income/(Loss) ($50) ($25)
Plus Depreciation and Amortization Expense $205 $195
Plus Non-Cash Stock Compensation Expense $25 $30
Consolidated Adjusted OIBDA $180 $200
Projected Consolidated Adjusted OIBDA Consolidated
Twelve Months Ended December 31, 2006 Range
($ in millions)
Low High
Net Earnings/(Loss) ($690) ($650)
Plus Other (Income)/Expense $595 $590
(Income)/Loss from Discontinued Operations ($45) ($55)
Operating Income/(Loss) ($140) ($115)
Plus Depreciation and Amortization Expense $735 $725
Plus Non-Cash Stock Compensation Expense $75 $80
Consolidated Adjusted OIBDA $670 $690
Projected Consolidated Adjusted OIBDA Consolidated
Twelve Months Ended December 31, 2007 Range
($ in millions)
Low High
Net Earnings/(Loss) ($610) ($500)
Plus Other (Income)/Expense 545 $515
Operating Income/(Loss) ($65) $15
Plus Depreciation and Amortization Expense $820 $780
Plus Non-Cash Stock Compensation Expense $75 $95
Consolidated Adjusted OIBDA $830 $890
Unlevered Cash Flow is defined as net cash provided by (used in) operating
activities less net capital expenditures, and adding back cash interest paid,
less interest income all as disclosed in the consolidated statements of cash
flows or the consolidated condensed statements of operations. Management
believes that Unlevered Cash Flow is a relevant metric to provide to
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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 a significant amount of 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 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. Consolidated Free Cash Flow excludes cash used for
acquisitions or principal repayments.
There are material limitations to using Consolidated Free Cash Flow to measure
the company against some of its competitors as Level 3 does not currently pay a
significant amount of 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 September 30, 2006 Consolidated Free
($ in millions) Unlevered Cash Flow Cash Flow
Net Cash Provided by Operating Activities $56 $56
Capital Expenditures, net ($120) ($120)
Cash Interest Paid $204 N/A
Interest Income ($19) N/A
Total $121 ($64)
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UNLEVERED CASH FLOW AND CONSOLIDATED FREE CASH FLOW
Three Months Ended June 30, 2006 Consolidated Free
($ in millions) Unlevered Cash Flow Cash Flow
Net Cash Provided by Operating Activities $60 $60
Capital Expenditures, net ($73) ($73)
Cash Interest Paid $122 N/A
Interest Income ($16) N/A
Total $93 ($13)
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[Logo]
LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(unaudited)
Three Months Ended
September 30, June 30, September 30,
(dollars in millions, except per share data) 2006 2006 2005
Revenue:
Communications $ 858 $ 819 $ 364
Other 17 16 20
-- -- --
Total Revenue 875 835 384
Costs and Expenses:
Cost of Revenue 382 399 127
Depreciation and Amortization 182 164 158
Selling, General and Administrative, including non-cash
compensation of $18, $20, and $13, respectively 334 283 183
Restructuring Charges, including non-cash impairment
charges of $1, $4 and $2, respectively 2 7 5
-- -- --
Total Costs and Expenses 900 853 473
--- --- ---
Operating Income (Loss) (25) (18) (89)
Other Income (Loss), net:
Interest Income 19 16 11
Interest Expense (161) (170) (138)
Other Income (Expense) 2 (51) 10
- --- --
Other Income (Loss) (140) (205) (117)
---- ---- ----
Loss from Continuing Operations Before Income Taxes (165) (223) (206)
Income Tax Benefit (Expense) 2 (1) (1)
- -- --
Loss from Continuing Operations (163) (224) (207)
Income (Loss) from Discontinued Operations (8) 23 3
Gain on Sale of Discontinued Operations 33 - -
-- -- --
25 23 3
---- ---- ----
Net Loss $ (138) $ (201) $ (204)
====== ====== ======
Basic and Diluted Loss per Share:
Loss from Continuing Operations $ (0.14) $ (0.25) $ (0.29)
Income from Discontinued Operations 0.02 0.02 -
---- ---- --
Net Loss $ (0.12) $ (0.23) $ (0.29)
======= ======= =======
Weighted Average Shares Outstanding (in thousands):
Basic and Diluted 1,128,153 881,155 699,332
========= ======= =======
(c) 2006 by Level 3 Communications, Inc. All rights reserved.
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[Logo]
LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(unaudited)
September 30, June 30, December 31,
(dollars in millions) 2006 2006 2005
Assets
Current Assets:
Cash and cash equivalents $ 731 $ 1,658 $ 452
Marketable securities 509 507 176
Restricted securities 45 35 34
Accounts receivable, less allowances of $17, $19 and $17 351 376 392
Current assets of discontinued operations - 557 524
Other 105 119 92
--- --- --
Total Current Assets 1,741 3,252 1,670
Property, Plant and Equipment, net 6,418 5,529 5,632
Marketable Securities - - 234
Restricted Securities 91 90 75
Goodwill and Other Intangibles, net 976 490 291
Noncurrent Assets of Discontinued Operations - 265 264
Other Assets, net 117 125 111
--- --- ---
$ 9,343 $ 9,751 $ 8,277
======= ======= =======
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 406 $ 375 $ 367
Current portion of long-term debt 5 462 -
Accrued payroll and employee benefits 93 65 79
Accrued interest 94 153 102
Deferred revenue 143 177 199
Current liabilities of discontinued operations - 560 539
Other 157 127 137
--- --- ---
Total Current Liabilities 898 1,919 1,423
Long-Term Debt, less current portion 6,577 6,558 6,023
Deferred Revenue 754 736 737
Other Liabilities 552 571 570
Stockholders' Equity (Deficit) 562 (33) (476)
--- --- ----
$ 9,343 $ 9,751 $ 8,277
======= ======= =======
(c) 2006 by Level 3 Communications, Inc. All rights reserved.
15
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LEVEL 3 COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
September 30, June 30, September 30,
(dollars in millions) 2006 2006 2005
Cash Flows from Operating Activities:
Net loss $ (138) $ (201) $ (204)
Income from discontinued operations (25) (23) (3)
--- --- --
Loss from continuing operations (163) (224) (207)
Adjustments to reconcile loss from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 182 164 158
Non-cash impairment expenses 1 4 2
Gain on sale of property, plant and equipment, and other assets (1) (3) (7)
Loss on extinguishment of long-term debt, net 1 55 -
Non-cash compensation expense attributable to stock awards 18 20 13
Deferred revenue (20) (14) 2
Amortization of debt issuance costs 8 3 4
Accreted interest on discount debt 8 11 5
Accrued interest on long-term debt (59) 34 23
Changes in working capital items net of amounts acquired:
Receivables 64 14 39
Other current assets 13 (7) 13
Payables (8) 1 (14)
Other current liabilities 22 (1) 14
Other (10) 3 (3)
--- - --
Net Cash Provided by Operating Activities 56 60 42
Cash Flows from Investing Activities:
Capital expenditures (120) (73) (94)
Purchase of marketable securities - (98) -
Proceeds from sale and maturity of marketable securities - 5 29
Proceeds from sale of property, plant and equipment 3 - 7
Increase in restricted cash and securities, net (9) - (9)
Acquisitions, net of cash acquired (664) (12) -
---- --- --
Net Cash Used in Investing Activities (790) (178) (67)
Cash Flows from Financing Activities:
Long-term debt borrowings, net of issuance costs - 628 67
Payments on long-term debt, including current portion and refinancing costs (463) (53) -
Equity offering - 543 -
-- --- --
Net Cash Provided by (Used in) Financing Activities (463) 1,118 67
Net Cash Provided by Discontinued Operations 268 74 2
Effect of Exchange Rates on Cash 2 4 (2)
- - --
Net Change in Cash and Cash Equivalents (927) 1,078 42
Cash and Cash Equivalents at Beginning of Period 1,658 580 448
----- --- ---
Cash and Cash Equivalents at End of Period $ 731 $ 1,658 $ 490
===== ======= =====
Supplemental Disclosure of Cash Flow Information:
Cash interest paid $ 204 $ 122 $ 106
Total Cash, Current Marketable Securities and Noncurrent Marketable Securities $ 1,240 $ 2,165 $ 1,301
(c) 2006 by Level 3 Communications, Inc. All rights reserved.
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