Earnings reports

Qwest Revises, Retraces, Replies

Qwest Communications International Inc. (NYSE: Q) on Monday announced some changes in accounting treatments and revealed the latest in the Securities and Exchange Commission (SEC)'s ongoing inquiries into its accounting practices (see Qwest Reduces Goodwill).

On the surface, it looks as though Qwest is adjusting its stance and working with the SEC on some controversial accounting practices. The market impact so far has been muted, with Qwest's stock off only slightly. At press time, Qwest shares were trading at $7.75, down $0.25 (-3.13%).

After market close last night, Qwest CEO Joseph Nacchio took to the phones with CFO Robin Szeliga to present the news to Wall Street and answer analysts' questions. Four key points emerged:

  • Goodwill gone. To conform to new rules adopted last June by the Financial Accounting Standards Board, Qwest says it must take $20 billion to $30 billion in a non-cash charge in the second quarter 2002 to reduce the value of goodwill associated with its June 2000 merger with US West. According to Qwest's 10-K annual report filed yesterday with the SEC, the original goodwill value assigned to the Qwest Company (the acquired entity in the transaction) was $30.8 billion.

    CFO Szeliga says the move will cut amortization expense by $900 million annually. Either way, analysts say, the non-cash adjustments won't sustantially affect the company's financials.

    Nacchio stressed that he didn't regret the merger. He asserted that Qwest is working to obtain FCC approval for running long-distance as well as local service in the 14-state US West region. If approved later this year, he says, "That will give us access to a $10 billion market."

  • Financials redone. Szeliga has readjusted revenues, some of which were originally deferred, and has rethought the posting of some restructuring and merger-related expenses. There will be a $48 million reduction in revenues from commercial services; additional expenses of $26 million; liabilities of $99 million; and a $9 million tax change. The upshot is that Qwest's net loss for 2001 will be $2.42 per diluted share, and its net loss for the fourth quarter will be $0.32, not $0.31.

  • SEC judgments pending. The SEC isn't pleased that Qwest put only its pro forma earnings in the press release for last quarter's financials. Technically, it should have put the Generally Accepted Accounting Principles (GAAP) financials in there as well. As a result, Qwest will probably get hit with a fine, although it's ready to battle the point.

  • Capacity swaps. The SEC also is continuing its inquiries into the nature of Qwest's capacity swaps with other carriers (see Nacchio Done at KPNQwest). The outcome is unclear. But the carrier's annual report states that in 2001, about 70 percent of cash received for optical capacity asset sales was for so-called "contemporaneous transactions," or swaps. What's more, about 67.5 percent of the revenues gleaned from optical capacity sales in 2001 were attributable to swaps. There will be no swaps recorded in 2002.

  • The announcements appear to have left much of Wall Street unfazed. "I've searched through the report and find nothing that materially affects the value of the company," says Cary Robinson of U.S. Bancorp Piper Jaffray.

    Even Qwest's astronomical goodwill writedown has drawn little more than a sniff from observers. "It does appear high," acknowledges Frank G. Louthan IV of Raymond James Capital Markets. "But it should come as no surprise when valuations in the whole sector have come down." Analysts seem particularly uninterested in the writedown since it's not likely to affect Qwest's newly reestablished debt covenants (see Qwest Gets a Reprieve).

    Few seem to care whether the ongoing SEC inquiries and accounting adjustments call into question the judgment or integrity of Qwest's executive team. "We keep our emotions out of the game," Robinson says. "We ignore the overall noise and focus on the value to investors."

    — Mary Jander, Senior Editor, Light Reading
    marionetteworks 12/4/2012 | 10:40:49 PM
    re: Qwest Revises, Retraces, Replies "Joseph Nacho sees Dip in finances"
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