Qwest Communications Reports Third Quarter 2002 Results

  • Second Consecutive Quarter of Positive Free Cash Flow
  • Liquidity Concerns Addressed With Amended/New Credit Facilities and Pending Sale of QwestDex
  • Expects 2002 Revenue of Approximately $17.1 Billion and Adjusted EBITDA of Approxima


    Investors: Please see ?Note to Investors? below for definitions and explanations of certain matters.

    DENVER, October 30, 2002 - Qwest Communications International Inc. (NYSE: Q) today announced its financial results for the third quarter of 2002. On a reported basis, the company reported a net loss of ($214) million or ($0.13) per share, compared to a net loss of ($142) million or ($0.09) per share in the third quarter of 2001. The loss reflects after-tax non-operating items of $44 million, or $0.02 per share, due to adjustments of restructuring reserves, losses associated with the sale of certain assets and an adjustment to the company?s deferred tax provision.

    ?Qwest took significant steps to strengthen the company?s balance sheet and address liquidity concerns during the third quarter,? said Richard C. Notebaert, Qwest chairman and CEO. ?We are positioning the company to grow profitably in the future and are pleased with the momentum we have generated to date.?

    As a result of the company?s reduced capital investment and continued management of working capital, free cash flow (defined as cash flow from operations less capital expenditures) totaled $53 million for the third quarter of 2002.

    Reported revenue for the quarter decreased 13.2 percent to $3.80 billion from $4.37 billion in the same period last year. Both periods reflect the classification of the company?s QwestDex publishing business as a discontinued operation. Normalized revenue declined approximately 12.3 percent to $4.18 billion, as compared to $4.77 billion in the third quarter of 2001. Excluding $133 million in revenues from optical capacity asset sales from the third quarter of 2001 that are subject to restatement, normalized revenue declined approximately 9.8 percent. Normalized revenues declined owing to, among other things, continued competitive pressures in local and long distance voice services, industry and economic factors, and reductions in data and IP services primarily due to the company?s efforts to eliminate less profitable businesses.

    ?We are creating an efficient and disciplined company and will capitalize on opportunities as market conditions improve,? said Oren G. Shaffer Qwest vice chairman and CFO. ?We continue to de-emphasize low-margin businesses and are driving costs out of our core operations.?

    Operating expenses declined $41 million, or 1.4 percent, over last year. Sequentially, operating expenses declined $99 million, or 3.2 percent, in the quarter. The reductions reflect the company?s ongoing efforts to streamline operations while focusing on long-term annuity-based relationships with its customers.

    For the quarter, adjusted EBITDA (adjusted earnings before interest, taxes, depreciation and amortization) was $1.22 billion compared with $1.77 billion in the third quarter of 2001. Increases to regulatory and bad debt reserves reduced adjusted EBITDA by approximately $115 million.

    The company has now completed its analysis of policies and practices related to revenue recognition for optical capacity asset sales (IRUs) for the years 2001 and 2000 and concluded that the policies and practices do not support the original accounting treatment. As previously announced, the company will restate prior period financials for the IRUs and certain other incorrectly recorded transactions. The company is consulting with its current external auditors, KPMG LLP, on the scope of the restatement and what adjustments would be required. Until such time as these efforts have been concluded, the company cannot indicate the extent to which the results for 2000-2002 will be impacted.

    Until the restatement is completed and KPMG has completed the re-audit of the relevant periods, the company anticipates it will not be in a position to file its Quarterly Report on Form 10-Q. The company expects to file a Form 8-K that includes more detailed financial disclosure about the third quarter, material trends related to its results of operations and its current liquidity and capital resources, in November 2002. This additional information will not be a substitute for the disclosure required in the Form 10-Q; however, until the company can file the Form 10-Q, it will provide as much relevant material financial information as it can that is of the type included in a Form 10-Q.

    Normalized business services revenues for the quarter totaled $1.49 billion, a decline of 5.8 percent versus the same period last year. Lower local voice revenues and lower data and IP services revenue, which were primarily due to the company?s de-emphasis of low-margin businesses, were offset by growth in long-distance voice and certain IP and data services.

    Qwest continues to expand its share of enterprise business and government customers, and during the quarter signed agreements to provide services to the U.S. Department of the Treasury, General Services Administration, Alaska Airlines, the Nebraska Distance-Learning Consortium, and the State of New Mexico.

    Normalized consumer services revenues totaled $1.39 billion, representing a decrease of 9.2 percent, or $141 million, compared with the third quarter of 2001. Contributing to the decline were reduced access lines, wireless revenues and the company?s continued efforts to de-emphasize less profitable products and improve cash flow of the company?s out-of-region long-distance business.

    As of September 30, 2002, approximately 32 percent of Qwest in-region consumer customers subscribed to a package (multiple calling features sold along with local voice service at a discounted price) and more than four percent to a bundle (multiple Qwest products bundled together on one bill, including local voice service, DSL, wireless, and/or additional lines). This represents an increase of nine percent for package penetration and 83 percent for bundle penetration over the same period last year.

    Normalized wholesale services revenues totaled $905 million for the quarter. Excluding $133 million in optical capacity asset revenues subject to restatement from the same period last year, normalized revenues declined approximately 20 percent. The decline is mainly attributable to reduced volumes, mandated rate reductions for switched access services, and general economic and industry conditions. The company is increasing pricing on certain products to improve profitability.

    Directory services revenue decreased approximately one-half of one percent, or $2 million, primarily due to the extension of the life of five directories in 2001 from 12 months to 13 months. The incremental revenue from the directory life extensions in 2001 was $13 million. Net of the directory life extensions, directory services revenue increased by $12 million, or 3.3 percent, primarily due to higher advertising rates in 2002. These results continue to reflect the point of publication method of accounting, which Qwest has used since 1999. As previously announced, Qwest?s restated financial statements will reflect directory services results based on the deferral and amortization method of accounting. All books published in the third quarter of 2002 had 12-month service lives. As a result of the pending sale of the QwestDex business, directory services results are reported as a discontinued operation.

    The company reaffirmed its financial guidance for 2002 and indicated it expects results to be at the low end of the range provided in the update given on August 8, 2002, before the company entered into agreements to sell its QwestDex business. The low end of that guidance, which included results from the QwestDex business, was for revenue of approximately $17.1 billion and adjusted EBITDA of approximately $5.4 billion. The company expects a normalized loss of ($0.47) to ($0.49) per share and capital investment of between $3.0 - $3.1 billion. Finally, the company believes it will generate free cash flow for the year, between $100 and $200 million.

    As previously announced, the company ceased amortization of its goodwill beginning on January 1, 2002, in conjunction with the adoption of Statement of Financial Accounting Standards (?SFAS?) No. 142, which will reduce annual amortization expense by approximately $900 million. Further, Qwest expects to record a transitional goodwill impairment charge of approximately $24 billion for its adoption of SFAS No. 142, effective January 1, 2002. Additionally, as required by SFAS No. 142, the company will continue to monitor factors such as the business conditions in the telecommunications industry and the company?s market capitalization during 2002. Those factors, among others, will require the company to perform another goodwill impairment test in 2002.

    In addition, the company has determined that certain network and intangible assets are impaired and approximately $10.8 billion in additional charges are required. This network impairment includes fair market adjustments for the company?s domestic and international network as well as its wireless and hosting platforms. The company expects to record an approximate $8.1 billion impairment charge for these assets and an approximate $2.7 billion reduction in the carrying value of intangible assets related to customer lists and product technology associated with the company?s interexchange carrier business. Write-downs for these assets will be reflected in the company?s Form 10-Q for the second quarter of 2002, the period in which the impairment occurred. The company expects the impact of these write-downs to decrease annual depreciation expense by an additional approximately $1.4 billion.

    Several initiatives were completed in the quarter to strengthen the company?s balance sheet and improve its liquidity position. On August 20, 2002, the company announced it had reached a definitive agreement to sell its QwestDex publishing business to a new entity formed by the private equity firms of The Carlyle Group and Welsh, Carson, Anderson & Stowe for $7.05 billion. On September 4, 2002, the company announced it had successfully amended its syndicated credit facility, extending the term and relaxing certain financial covenants. In addition, the company?s QwestDex subsidiary obtained a $750 million term loan due in 2004.

    In June and July, Qwest filed two applications with the Federal Communications Commission (FCC) to re-enter the long-distance markets in Colorado, Idaho, Iowa, Montana, Nebraska, North Dakota, Utah, Washington and Wyoming. On September 10, 2002, Qwest withdrew those applications because of concerns relating to historical accounting issues. On September 30, 2002, Qwest refiled an application with the FCC for all nine states. The new application addresses the accounting concerns by creating a new long-distance subsidiary ? Qwest Long Distance Corporation (QLDC) ? that does not have the historical financial accounting issues that caused the withdrawal of the prior application. Additionally, the application incorporates the full record of Qwest?s previous long-distance applications that the FCC examined in detail over the course of the summer, and that utility commissions in the nine states and the United States Department of Justice (DOJ) had recommended that the FCC approve. On October 22, 2002, the DOJ conditionally recommended that the FCC approve Qwest?s application to re-enter the long-distance business in the nine states. The FCC must act on Qwest?s application within 90 days of its filing. Utility commissions in Oregon and New Mexico also have completed proceedings and indicated their support for Qwest being authorized to provide long distance services in their states.

    Although the company has announced it will be restating its financial statements for 2001 and 2000, until that restatement is completed it will continue to provide a comparison to reported and normalized results for the 2001 period. The comparisons should not be viewed as a confirmation of the previously reported numbers, nor should it be viewed as indicative of the actual trends since the reported numbers for the prior period will be restated. This restatement will also impact the results for the first nine months of 2002.

    ?Reported? results in the applicable period were prepared in accordance with what the company believed, at the relevant time, were generally accepted accounting principles in the United States (GAAP); however, the company has determined that the results in 2001 were not in accordance with GAAP and is restating those financial statements. In addition, the company has not yet determined the impact of the restatement on the current period. Adjusted or normalized results are not prepared in accordance with GAAP.

    ?Free cash flow? results reflect cash flow from operations less capital expenditures. For the purpose of this release free cash flow includes cash flow from the QwestDex operations.

    ?Normalized? results reflect adjustments to eliminate the impacts of non-recurring and non-operating items, which for the relevant periods may include restructuring, merger-related and other charges, gains (losses) on the sale of rural exchanges, gains (losses) on the sale of assets and investments, a depreciation adjustment for access lines returned to service, the write-down of investments, KPNQwest restructuring charges, changes in the market value of financial instruments, gains (losses) on discontinued operations, asset impairments, and gains (losses) on the early retirement of debt. In addition, the company normalized in the second quarter for the increased bad debt reserves associated with the WorldCom, Inc. bankruptcy consistent with other telecommunications providers. For additional details on these adjustments, readers should refer to Attachments C and D.

    ?Adjusted EBITDA? excludes all items adjusted as a normalizing item. Adjusted EBITDA does not represent cash flow for the periods presented and should not be considered as an alternative to cash flows as a source of liquidity. Qwest's definition of adjusted EBITDA is not necessarily comparable with adjusted EBITDA or similar non-GAAP concepts used by other companies or with similar concepts used in Qwest's debt instruments. Adjusted EBITDA is provided as a complement to the financial results reported in accordance with GAAP and is presented to provide investors additional information concerning the company's operations. The company expects to disclose any differences in the adjusted EBITDA for the three months and four quarters ended September 30, 2002, and the consolidated EBITDA calculation under the credit facility when it is available in its Form 8-K in November 2002.

    Certain reclassifications have been made to prior periods to conform to the current presentation.

    As previously announced, Qwest will host a conference call for investors and the media today at 9:00 a.m. EST with Richard C. Notebaert, Qwest chairman and CEO and Oren Shaffer, Qwest vice chairman and CFO. The call may be heard on the Web at www.qwest.com/about/investor/meetings.

    Qwest Communications International Inc. (NYSE: Q) is a leading provider of voice, video and data services to more than 25 million customers. The company?s 53,000-plus employees are committed to the ?Spirit of Service? and providing world-class services that exceed customers? expectations for quality, value and reliability. For more information, please visit the Qwest Web site at www.qwest.com.

    This release may contain projections and other forward-looking statements that involve risks and uncertainties. These statements may differ materially from actual future events or results. Readers are referred to the documents filed by us with the Securities and Exchange Commission, specifically the most recent reports which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements, including but not limited to: the duration and extent of the current economic downturn in our 14-state local service area, including its effect on our customers and suppliers; the effects of our anticipated restatement of historical financial statements including delays in or restrictions on our ability to access the capital markets or other adverse effects to our business and financial position; our substantial indebtedness, and our inability to complete any efforts to de-lever our balance sheet through asset sales or other transactions; any adverse outcome of the SEC's current investigation into our accounting policies, practices and procedures; any adverse outcome of the current investigation by the U.S. Attorney's office in Denver into certain matters relating to us; adverse results of increased review and scrutiny by Congress, regulatory authorities, media and others (including any internal analyses) of financial reporting issues and practices or otherwise; the failure of our chief executive and chief financial officers to provide certain certifications relating to certain public filings; rapid and significant changes in technology and markets; any adverse developments in commercial disputes or legal proceedings, including any adverse outcome of current or future legal proceedings related to matters that are the subject of governmental investigations, and, to the extent not covered by insurance, if any, our inability to satisfy any resulting obligations from funds available to us, if any; our future ability to provide interLATA services within our 14-state local service area; potential fluctuations in quarterly results; volatility of our stock price; intense competition in the markets in which we compete; changes in demand for our products and services; dependence on new product development and acceleration of the deployment of advanced new services, such as broadband data, wireless and video services, which could require substantial expenditure of financial and other resources in excess of contemplated levels; higher than anticipated employee levels, capital expenditures and operating expenses; adverse changes in the regulatory or legislative environment affecting our business; and changes in the outcome of future events from the assumed outcome included in our significant accounting policies.

    The information contained in this release is a statement of Qwest's present intention, belief or expectation and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and Qwest's assumptions. Qwest may change its intention, belief or expectation, at any time and without notice, based upon any changes in such factors, in Qwest's assumptions or otherwise. The cautionary statements contained or referred to in this release should be considered in connection with any subsequent written or oral forward-looking statements that Qwest or persons acting on its behalf may issue. This release may include analysts' estimates and other information prepared by third parties for which Qwest assumes no responsibility.

    Qwest undertakes no obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

    By including any information in this release, Qwest does not necessarily acknowledge that disclosure of such information is required by applicable law or that the information is material.

    The Qwest logo is a registered trademark of, and CyberCenter is a service mark of, Qwest Communications International Inc. in the U.S. and certain other countries.

Contact Information
Investor Contact
Stephanie Comfort
Media Contact
Tyler Gronbach
(303) 992-2155
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