Exhibit 99.1
[McLeodUSA Logo Graphic]
McLeodUSA Reports Third Quarter 2004 Results
o Continued strong operational performance
o Realized benefits of ongoing quarterly cash management program
o Recorded non-cash charge of $263.1 million related to goodwill and
intangibles annual impairment review
CEDAR RAPIDS, Iowa - November 9, 2004 - McLeodUSA Incorporated (Nasdaq: MCLD),
one of the nation's largest independent, competitive telecommunications
services providers, today reported financial and operating results for the
quarter ended September 30, 2004.
Total revenues for the quarter were $168.1 million and gross margin1 was $74.0
million. SG&A expenses for the quarter were $62.5 million. Adjusted EBITDA1
for the period was $11.5 million, resulting in the tenth consecutive quarter
of positive Adjusted EBITDA. Reported net loss for the quarter was $(352.8)
million, which included a non-cash charge of $263.1 million related to the
impairment of goodwill and intangible assets, or a loss per common share of
$(1.19).
"In the third quarter, McLeodUSA's operational performance once again achieved
world-class metrics with 94% customer satisfaction, 99.7% billing accuracy and
99.999% network reliability. Successful implementation of our cash management
initiatives resulted in a 22% reduction of ongoing quarterly SG&A expenditures
compared to 2003 and a revised capital expenditure level of approximately $10
million per quarter. In addition, we have sold approximately $20 million of
fiber assets to date in 2004," said Chris A. Davis, Chairman and Chief
Executive Officer. "Sales productivity has improved since the beginning of the
year; however, these improvements were more than offset by the expected
decline in quarterly revenue resulting from the federally mandated reduction
in access rates. In the quarter, we entered into several sizeable wholesale
long distance agreements and we also made good progress in advancing
discussions with several carriers regarding our UNE-L wholesale services as a
lower cost alternative to UNE-P."
While AT&T has delayed its final decision to migrate its UNE-P lines to the
McLeodUSA network pending further clarity on the FCC's network unbundling
permanent rules, the Company continues to expect its combined wholesale
initiatives to develop into new revenue growth over the next several quarters.
For the quarter ended September 30, 2004, total revenues were $168.1 million
compared to $191.9 million in the second quarter of 2004 and $211.0 million in
the third quarter of 2003. As expected, the benefits of the Company's revenue
initiatives were offset in the third quarter by the final phase of the
federally mandated reduction in access rates, which negatively impacted
revenues and gross margin by approximately $8 million. In addition, the second
quarter of 2004 included a one-time $6 million favorable rate settlement.
Gross margin for the third quarter of 2004 was $74.0 million compared to $86.6
million in the second quarter of 2004 and $93.6 million in the third quarter
of 2003. Gross margin decreased from the second quarter of 2004 due to the
federally mandated access rate reduction as well as the favorable rate
settlement recorded in the second quarter, partially offset by favorable long
distance cost reductions. Gross margin as a percentage of revenue for the
third quarter was 44.0% compared to 45.1% in the second quarter of 2004 and
44.4% in the third quarter of 2003.
Private line and data revenue per customer was essentially flat with the
second quarter of 2004 and increased 15 % compared to the third quarter of
2003. Long distance revenue per customer remained flat with the second quarter
of 2004 and declined 16% from the third quarter of 2003 as the Company reduced
the cost of service and offered substantially more competitive pricing year
over year. Local service revenue per customer, excluding the second quarter
one-time rate settlement and the third quarter access rate reduction, was
essentially flat compared to the second quarter of 2004 and declined by
approximately 4% as compared to the third quarter of 2003 as a result of the
Company's continued migration to its lower cost, more competitively priced and
more profitable UNE-L platform versus resale and UNE-P.
The Company's excellent operational performance continued in the third quarter
of 2004. The customer satisfaction rating was 94%, billing accuracy was 99.7%
and the Company continued to consistently achieve 99.999% network reliability,
all in line with Company goals.
Customer platform mix at the end of the third quarter was 70% UNE-L, 4% resale
and 26% UNE-M/P versus 69%, 4% and 27%, respectively, at the end of the second
quarter of 2004 and 62%, 6% and 32%, respectively, at the end of the third
quarter of 2003 as the Company continued to migrate resale and UNE-P customers
to UNE-L and add new customers to the more profitable UNE-L platform. Business
customer line turnover was 2.1% in the third quarter of 2004 compared to 2.2%
in the second quarter of 2004 and 1.9% in the third quarter of 2003. Total
customer line turnover in the third quarter was 2.4% versus 2.5% and 2.3% in
the second quarter of 2004 and third quarter of 2003, respectively.
For the third quarter of 2004, SG&A was $62.5 million versus $68.5 million in
the second quarter of 2004 and $80.0 million in the third quarter of 2003. The
significant reductions in SG&A expenses reflects the Company's ongoing process
improvement programs, as well as specific actions taken in 2004 to reduce
non-essential expenses and conserve cash. Adjusted EBITDA in the third quarter
of 2004 was $11.5 million compared to $18.1 million in the second quarter of
2004 and $13.6 million in the third quarter of 2003.
In the third quarter, the Company completed its annual goodwill impairment
testing. Based on the most recent projection of future operations, including
the expected timing of retail and wholesale revenue growth, the independent
third-party valuations resulted in full impairment of goodwill and a partial
impairment of the McLeodUSA trade name. As a result, a non-cash impairment
charge of $263.1 million was recorded in the third quarter. Net loss for the
third quarter of 2004, including the impairment charge, was $(352.8) million
compared to $(82.2) million in both the second quarter of 2004 and the third
quarter of 2003.
Total revenues for the nine months ended September 30, 2004 were $553.5
million versus $659.5 million in the comparable 2003 period primarily driven
by the federally mandated access rate reductions of $25.6 million, lower long
distance rates and volume of $35.9 million, and the decline in cost and volume
of local services of $29.5 million. Gross margin for the nine-month period
ending September 30, 2004 was $246.6 million versus $276.6 million in 2003
driven by lower revenues partially offset by increased profitability
associated with the migration of the business to UNE-L and the favorable
impact of the Company's cost reduction initiatives. Gross margin as a percent
of revenue for the nine-month period was 44.6% versus 41.9% in 2003. Total
SG&A expenses for the nine-month period were $206.7 million and $235.2 million
in the 2004 and 2003 periods, respectively, as the Company successfully
executed its productivity improvement plans. Adjusted EBITDA was $39.9 million
for the nine-month 2004 period versus $41.4 million in 2003, despite the $106
million decline in revenue.
The Company has completed a number of actions focused on cash conservation and
improved liquidity while continuing to support its revenue growth plan. Total
quarterly run-rate SG&A expense was reduced by $17.5 million from the third
quarter of 2003. Capital expenditures for the third quarter 2004 were reduced
to $8.5 million, down from the second quarter 2004 expenditure of $14
million. Based on actions taken to date, the Company will most likely underrun
its revised plan to spend approximately $50-55 million in 2004 as well as, its
initial 2004 plan of $65 million. Capital expenditures for the remainder of
the year are dedicated to new product introduction, cost savings programs and
strategic growth initiatives. The Company received approximately $2.1 million
of cash from fiber sales in the third quarter. These combined actions resulted
in a cash usage of approximately $20.1 million in the third quarter. After the
end of the quarter the Company closed additional fiber transactions valued at
approximately $14 million. In 2004, the Company has closed approximately $20
million of fiber transactions.
The Company ended the quarter with $26.1 million of cash on hand. The Company
met all current financial covenants and continued to have full access to the
$110 million Exit Facility. As announced previously, the Company made
its third quarter withdrawal of $15.0 million from the Exit Facility
and during October 2004 made its planned $20 million withdrawal resulting in a
total of $108 million used against the Exit Facility. Going forward the Company
expects to continue to realize the benefits of the cash management actions
implemented in previous quarters and the execution of its plan to sell
additional fiber.
Based on the expected timing of the realization of certain retail and
wholesale revenue initiatives, it is more likely than not that the Company
will not meet the minimum revenue covenant in its Credit Agreement and Exit
Facility as of December 31, 2004. The Company has initiated discussions with
its lender group regarding obtaining a waiver for this covenant. Minimum
revenue is no longer a restrictive covenant after December 31, 2004.
Other recent highlights include:
o On November 5, 2004, the Company announced an agreement with Level 3
Communications, Inc. to terminate a 20-year dark fiber lease agreement
signed in 1999. McLeodUSA will transfer fibers back to Level 3 in
exchange for a cash payment and other consideration. In addition, the
companies have entered into an agreement under which McLeodUSA will
provide network services to Level 3 at discounted rates.
o On October 6, 2004, the Company introduced the addition of Preferred
Advantage(R) Conference Calling to its comprehensive suite of
telecommunications solutions for business customers. This enhanced service
provides strategic tools to allow businesses to conduct virtual meetings,
share files and presentations with online web collaboration, as well as
deliver online training through a user-friendly virtual collaboration
platform.
o On September 27, 2004, the Company announced that it was selected as the
primary telecommunications services provider for D.O.C. Optics, the ninth
largest retail optical chain in the country. The multi-year agreement
includes local, long distance and data telecommunications services for
all D.O.C. Optics locations in the McLeodUSA 25-state footprint.
o On September 15, 2004, the Company announced that it was selected by
American Business Communication to provide local voice services in
addition to long distance services to Regis Hair Salons. McLeodUSA has
installed local and long distance services in 1,901 locations, long
distance only in 3,440 locations and enhanced 800 services in nearly
6,000 locations across the McLeodUSA 25-state footprint.
Conference Call
- ---------------
McLeodUSA will host a conference call on Tuesday, November 9, 2004, at 10 a.m.
Eastern Time to discuss third quarter results and the information contained in
this release. The call may be accessed at 888-271-9098 (U.S.) or 706-634-6027
(International). A replay will be available approximately 2 hours after
completion of the call at 800-642-1687 (U.S.) or 706-645-9291 (International),
Conference ID No. 1727279. The audio replay will be available through midnight
ET on Tuesday, November 16, 2004. The call will also be Webcast live and
available via replay at:
http://www.mcleodusa.com/InvestorRelations/StreamingMedia.do
About McLeodUSA
- ---------------
McLeodUSA provides integrated communications services, including local
services, in 25 Midwest, Southwest, Northwest and Rocky Mountain states. The
Company is a facilities-based telecommunications provider with, as of
September 30, 2004, 38 ATM switches, 39 voice switches, 696 collocations, 435
DSLAMs and 2,474 employees. As of April 16, 2002, Forstmann Little & Co.
became a 58% shareholder in the Company. Visit the Company's Web site at
www.mcleodusa.com
(1)Non-GAAP Financial Measures
- ------------------------------
To provide further clarification, the Company has begun using the term
Adjusted EBITDA as a replacement for EBITDA. Adjusted EBITDA is a non-GAAP
financial measure used by management to evaluate the effectiveness of the
Company's operating performance and to enhance the comparability between
periods. EBITDA is an acronym for earnings before interest, taxes,
depreciation and amortization. Adjusted EBITDA, as defined by McLeodUSA,
further removes the effects of other income and expense, restructuring
adjustments and impairment charges. Management removes the effects of other
income and expense, restructuring adjustments and impairment charges from
Adjusted EBITDA because it does not believe that such items are representative
of the core operating results of the Company's ongoing competitive
telecommunications activities. For a facilities-based telecommunications
services provider like McLeodUSA with high initial capital investments
required in order to gain entry to the industry, management believes that
omitting depreciation and amortization from Adjusted EBITDA provides a
relevant and useful measure of the Company's core operating performance and
enhances comparability between periods. Management believes that non-GAAP
measures such as Adjusted EBITDA are commonly reported and used by analysts,
investors and other interested parties in the telecommunications industry.
Adjusted EBITDA is reconciled to net loss, the most comparable GAAP measure,
within the table presented below. McLeodUSA's use of Adjusted EBITDA may not
be comparable to similarly titled measures used by other companies in the
telecommunications industry. The use of Adjusted EBITDA is not intended to
replace measures of financial performance reported in accordance with
accounting principles generally accepted in the United States.
Three months ended
--------------------------------------------------------------
(In millions) Sept. 30, 2004 June 30, 2004 Sept. 30, 2003
------------------- ------------------- -------------------
Reconciliation of Adjusted EBITDA:
Net loss............................................. $ (352.8) $ (82.2) $ (82.2)
Interest expense..................................... 11.9 11.6 8.9
Other nonoperating expense........................... 0.5 0.5 0.3
Restructuring adjustment............................. - (0.2) -
Impairment charge.................................... 263.1 - -
Depreciation and amortization........................ 88.8 88.4 86.6
------------------- ------------------- -------------------
Adjusted EBITDA.................................. $ 11.5 $ 18.1 $ 13.6
=================== =================== ===================
Nine months ended
-----------------------------------------------
(In millions) Sept. 30, 2004 Sept. 30, 2003
---------------------- ----------------------
Reconciliation of Adjusted EBITDA:
Net loss.................................................... $ (526.4) $ (239.1)
Interest expense............................................ 34.6 25.9
Other nonoperating expense.................................. 1.5 0.7
Restructuring adjustment.................................... (0.2) -
Impairment charge........................................... 263.1 -
Depreciation and amortization............................... 267.3 253.9
---------------------- ----------------------
Adjusted EBITDA......................................... $ 39.9 $ 41.4
====================== ======================
Gross margin is another financial measure that management uses to evaluate operating performance. Gross
margin, which is calculated as revenues less cost of service, excludes depreciation and amortization expenses.
Cost of service includes expenses directly associated with providing telecommunications services to its
customers. Costs classified as cost of service include, among other items, the cost of connecting customers to
the McLeodUSA network via leased facilities, the costs paid to third party providers for interconnect access
and transport services, the costs of leasing components of network facilities and the cost of fiber related to
sales and leases of network facilities. Gross margin is reconciled to net loss, the most comparable GAAP
measure, within the table presented below.
Three months ended
--------------------------------------------------------------
(In millions) Sept. 30, 2004 June 30, 2004 Sept. 30, 2003
------------------- ------------------- -------------------
Reconciliation of Gross Margin:
Net loss............................................. $ (352.8) $ (82.2) $ (82.2)
Interest expense..................................... 11.9 11.6 8.9
Other nonoperating expense........................... 0.5 0.5 0.3
Restructuring adjustment............................. - (0.2) -
Impairment charge 263.1 - -
Depreciation and amortization........................ 88.8 88.4 86.6
Selling, general and administrative.................. 62.5 68.5 80.0
------------------- ------------------- -------------------
Gross Margin..................................... $ 74.0 $ 86.6 $ 93.6
=================== =================== ===================
Nine months ended
-----------------------------------------------
(In millions) Sept. 30, 2004 Sept. 30, 2003
---------------------- ----------------------
Reconciliation of Gross Margin:
Net loss.................................................... $ (526.4) $ (239.1)
Interest expense............................................ 34.6 25.9
Other nonoperating expense.................................. 1.5 0.7
Restructuring adjustment.................................... (0.2) -
Impairment charge........................................... 263.1 -
Depreciation and amortization............................... 267.3 253.9
Selling, general and administrative......................... 206.7 235.2
---------------------- ----------------------
Gross Margin............................................ $ 246.6 $ 276.6
====================== ======================
Some of the statements in this press release include statements about our future expectations. Statements that
are not historical facts are "forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act. Such statements may include projections
of financial and operational results and goals, including revenue, EBITDA, Adjusted EBITDA, profitability,
savings and cash. In some cases, you can identify these so-called "forward-looking statements" by our use of
words such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"project," "intend" or "potential" or the negative of those words and other comparable words. These
forward-looking statements are subject to known as well as unknown risks and uncertainties that may cause
actual results to differ materially from our expectations. Our expectations are based on various factors and
assumptions and reflect only our predictions. Factors that could cause actual results to differ materially
from the forward-looking statement include technological, regulatory, public policy or other developments in
our industry, availability and adequacy of capital resources, current and future economic conditions, the
existence of strategic alliances, our ability to generate cash, our ability to implement process and network
improvements, our ability to attract and retain customers, our ability to migrate traffic to appropriate
platforms and changes in the competitive climate in which we operate. These and other risks are described in
more detail in our most recent Annual Report on Form 10-K filed with the SEC. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a result of future events, new
information or otherwise.
Contact:
McLeodUSA Incorporated, Cedar Rapids, IA
Investor Contact: Bryce E. Nemitz
Press Contact: Bruce A. Tiemann
Phone: (319) 790-7800
Mcleodusa_ir@mcleodusa.com
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Three months ended
----------------------------------------------
September 30, 2004 September 30, 2003
---------------------- -----------------------
Revenue $ 168.1 $ 211.0
Operating expenses:
Cost of service (exclusive of depreciation and amortization
shown separately below) 94.1 117.4
Selling, general and administrative 62.5 80.0
Depreciation and amortization 88.8 86.6
Impairment charge 263.1 -
------------------ --------------------
Total operating expenses 508.5 284.0
------------------- --------------------
Operating loss (340.4) (73.0)
------------------- --------------------
Nonoperating expense:
Interest expense, net of amounts capitalized (11.9) (8.9)
Other expense (0.5) (0.3)
------------------ --------------------
Total nonoperating expense (12.4) (9.2)
------------------ --------------------
Net loss $ (352.8) $ (82.2)
------------------ --------------------
Preferred stock dividend (0.8) (1.2)
------------------ --------------------
Net loss applicable to common shares $ (353.6) (83.4)
================== ====================
Basic and diluted loss per common share $ (1.19) $ (0.30)
================== ====================
Weighted average common shares outstanding 296.7 278.9
=================== ====================
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(UNAUDITED)
Nine months ended
----------------------------------------------
September 30, 2004 September 30, 2003
---------------------- -----------------------
Revenue $ 553.5 $ 659.5
Operating expenses:
Cost of service (exclusive of depreciation and amortization
shown separately below) 306.9 382.9
Selling, general and administrative 206.7 235.2
Depreciation and amortization 267.3 253.9
Impairment charge 263.1 -
Restructuring adjustment (0.2) -
---------------- --------------
Total operating expenses 1,043.8 872.0
---------------- --------------
Operating loss (490.3) (212.5)
---------------- --------------
Nonoperating expense:
Interest expense, net of amounts capitalized (34.6) (25.9)
Other expense (1.5) (0.7)
---------------- ---------------
Total nonoperating expense (36.1) (26.6)
---------------- ---------------
Net loss $ (526.4) $ (239.1)
---------------- ---------------
Preferred stock dividend (2.4) (3.6)
---------------- ---------------
Net loss applicable to common shares $ (528.8) $ (242.7)
================ ===============
Basic and diluted loss per common share $ (1.80) $ (0.87)
================ ===============
Weighted average common shares outstanding 293.3 277.9
================ ===============
McLeodUSA Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
September 30, 2004 December 31, 2003
----------------------- -----------------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 26.1 $ 56.5
Trade receivables, net 60.3 65.6
Prepaid expense and other 25.2 22.4
Assets held for sale 2.0 2.0
-------------- -------------
Total Current Assets 113.6 146.5
-------------- -------------
Non-current Assets
Property and equipment, net 818.1 1,007.7
Goodwill and other intangibles, net 156.0 446.9
Other non-current assets 24.1 29.5
-------------- -------------
Total Non-current Assets 998.2 1,484.1
-------------- -------------
Total Assets $ 1,111.8 $ 1,630.6
============== =============
LIABILITIES AND EQUITY
Current Liabilities
Current maturities of long-term debt $ 40.4 $ 27.1
Accounts payable 35.1 30.5
Deferred revenue, current portion 6.7 6.9
Other current liabilities 100.2 121.5
Liabilities related to discontinued operations 0.3 1.1
-------------- -------------
Total Current Liabilities 182.7 187.1
-------------- -------------
Long-term Liabilities
Long-term debt, excluding current maturities 724.7 717.3
Deferred revenue less current portion 17.2 15.1
Other long-term liabilities 60.8 58.3
-------------- -------------
Total Long-term Liabilities 802.7 790.7
-------------- -------------
Redeemable Convertible Preferred Stock 80.4 131.1
Stockholders' Equity 46.0 521.7
-------------- -------------
Total Liabilities and Equity $ 1,111.8 $ 1,630.6
============== =============
McLeodUSA Incorporated and Subsidiaries
Selected Telecommunications Statistical Data
------------------ ------------------- -------------------
9/30/03 6/30/04 9/30/04
------------------ ------------------- -------------------
Active central offices 1,719 1,692 1,705
Collocations 604 696 696
Switches owned
CO / LD 44 39 39
ATM / Frame Relay 38 38 38
DSLAMs installed 435 435 435
Total Competitive:
Customers 407,124 369,282 356,938
Access Units / Customer 2.7 2.8 2.8
Revenue per Customer / Month
Local $ 109.24 $ 111.97* $ 102.04**
Long distance 35.28 30.11 29.80
Private line & data 27.61 32.11 31.70
----------- ------------ ------------
Total $ 172.13 $ 174.19 $ 163.54
=========== ============ ============
Platform Distribution
Resale 6% 4% 4%
UNE-M/P 32% 27% 26%
UNE-L 62% 69% 70%
----------- ------------ ------------
Total 100% 100% 100%
=========== ============ ============
* Excluding second quarter rate settlement local revenue per customer was $105.67
** Excluding impact of federally mandated access rate reduction local revenue per customer was $104.77