In announcing its first quarter results, Qwest Communications International Inc. said the U.S. Securities and Exchange Commission has expanded its investigation into the company’s accounting restatements as well as additional transactions. The company has been under investigation by the SEC for more than a year.
As for Qwest’s first quarter financial results, Qwest reduced the principal amount of short- and long-term debt by $333 million, from $22.7 billion at December 31, 2002 to $22.3 billion at March 31, 2003. This reduction was achieved through debt maturity payments of approximately $160 million, as well as approximately $173 million of principal debt reduction through private exchange transactions. Year-to-date, the company has reduced the principal amount of short- and long-term borrowings by approximately $500 million.
Also, the company announced first quarter net income of $150 million or $0.09 per diluted share. Revenue for the first quarter was $3.63 billion, a 9.4 percent decrease from the same period last year. First quarter revenues declined year-over-year due to competitive pressures in local voice and wireless services, as well as strategic de-emphasis of certain lines of business, including customer premises equipment resale and out-of-region consumer and wholesale long-distance, according to the company.
For the first quarter, operating income increased to $179 million from a loss of $47 million a year ago.
Qwest says some of the key operational and financial highlights achieved since the announcement of fourth quarter results include:
The company's Qwest Corporation (QC) subsidiary obtained a commitment for a $1 billion senior term loan due in 2007. This loan is being arranged by Merrill Lynch & Co., Credit Suisse First Boston and Deutsche Bank. The proceeds will be used to refinance QC bonds due in 2003. With completion of this refinancing transaction, as well as the close of the second phase of the QwestDex sale, Qwest expects its business plan to be fully funded, based upon its ability to generate operating cash flow and continued access to the capital markets.
By the end of the first quarter, Qwest had signed up 530,000 access lines within its local service area for long-distance service. These long-distance sales were within the nine states approved by the Federal Communications Commission in late December 2002 -- Colorado, Idaho, Iowa, Montana, Nebraska, North Dakota, Utah, Washington and Wyoming. These nine states represent approximately 55 percent of Qwest's total local access line base.
On April 15, 2003, Qwest received unanimous approval from the FCC to re-enter the long-distance business in three additional states: New Mexico, Oregon and South Dakota. These three states represent approximately 15 percent of Qwest's total local access line base. With this action, Qwest now has FCC approval to offer long-distance service everywhere in its local service territory except for Minnesota and Arizona. An FCC decision on Qwest's Minnesota application is due by June 26. Qwest plans to file a similar application for long-distance authority in its final state, Arizona, this summer.
Qwest continued to experience positive stabilizing trends in its core business. In the first quarter, Qwest lost approximately 130,000 retail consumer access lines, 27,000 fewer lines than in the fourth quarter. This represents the third consecutive quarter of sequential improvement. The company believes this improvement was due to ongoing retention and customer service initiatives, partially offsetting the effects of competition and technology substitution. Combined consumer and business access lines declined 4.1 percent year-over-year in the first quarter.
First quarter capital expenditures were approximately $450 million, or approximately 12 percent of revenue.
Qwest also reported strong and measurable service improvements in the first quarter. Since the launch of the Spirit of Service campaign last year, Qwest has improved its customer service based upon direct customer feedback. In the American Customer Satisfaction Index (ACSI) published by the University of Michigan Business School, Qwest's score moved up 10.7 percent over last year's survey, the largest improvement of any telecom company and the second-highest improvement of all the companies surveyed. Qwest's own customer survey also reports significant improvements in service: the percentage of consumers reporting their customer care experience was excellent or very good increased five percentage points in the first quarter, and 13 percentage points since the third quarter of 2002.
Qwest continued to secure major contracts with large enterprise and government customers for voice and data services, entering into new service agreements with: the states of Minnesota and Utah, Grubb and Ellis, the Department of Energy, Crate and Barrel, and Recreational Equipment, Inc.
Qwest reached a settlement agreement with the Utah Public Utilities Division for approval of the QwestDex sale. This settlement agreement has been adopted by the Utah Public Services Commission. Regulatory reviews of the QwestDex transaction remain pending in two states. Qwest has reached a settlement agreement with the staff of the Arizona Corporation Commission. Hearings in Arizona began May 27. In addition, Qwest has reached an agreement with the Washington Attorney General and certain other groups in advance of Washington hearings that began on May 19. The second phase of the QwestDex sale is expected to close in 2003 subject to customary closing conditions with gross proceeds of $4.3 billion.
Qwest expects its 2003 rate of annual revenue decline to be in the mid-single digit range.
Cost of sales and SG&A expenses, in total, are expected to decline in 2003 from 2002 levels.
Free cash flow from continuing operations (cash provided by operating activities less capital expenditures) is expected to be approximately breakeven for this year.
Free cash flow expectations are based upon capital expenditures of approximately $2.5 billion, net interest expense of $1.7 billion, and a modest contribution from net working capital (changes in current liabilities, excluding short-term borrowings, less changes in current assets).
