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Annual Report Project David Wang 05/01/2012 Richard Lewis ACCT 2301 - S07

Annual Report Project

David Wang

05/01/2012

Richard Lewis

ACCT 2301-S07

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Introduction

Level 3 Communications is an international communications company, headquartered in Broomfield, CO. They are one of only six Tier 1 Internet providers in the world. Ranked as one of the most connected Internet Service Providers (ISPs), their expanding assets have solidified their position as one of the largest IP transit networks in North America and Europe. They are a publicly traded company on the New York Stock Exchange, symbol (LVLT). CEO James Q. Crowe, has been the Chief Executive Officer since 1997. Prior to Level 3, he was the CEO of Worldcom.

Accounting Firm KPMG LLP. audited the consolidated balance sheets of Level 3 Communications, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, cash flows, changes in stockholders' equity (deficit) and comprehensive loss for each of the years in the three-year period ended December 31, 2010. The consolidated financial statements are the responsibility of the Company's management. KPMG LLP’s responsibility is to express an opinion on the consolidated financial statements based on th eir audits. They conducted their audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). KPMG LLP’s opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Level 3 Communications, Inc. and subsidiaries, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles ( GAAP). KPMG LLP. concluded that the financial statements audited were free of any material misstatements.

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Level 3 communications fiscal year ends on December 31. At the end of the fiscal year 2011, Level 3 Communications did not pay any dividends to their stockholders. Their stock price currently is 23.20 per share, closing price as of 04/20/2012.

Industry Situation and Company Plans

After the technology companies crash of 2001, Level 3 Communications survived mainly in part due to their big brother Kiewit Construction. Global Crossing was an up and coming competitor of Level 3 Communications. They also planned to build an extensive packet-based global network. Global Crossing halted their network development after the tech crash of 2001. They downsized to the point of just maintaining survival. Level 3 Communications acquired Global Crossing in 2011. They plan to combine both networks. This will give them more complete coverage in the United States as well as adequate coverage across Europe. Level 3 Communications had a substantial market share as a network ISP provider. Global Crossing customer base was more geared towards voice traffic customers. The acquisition of Global Crossing will give an immediate increase of voice customers to the Level 3 communications customer base. Global Crossing also has switching technology specific for voice traffic on their network. The merging of both networks will help carry voice traffic over Level 3 Communications. This will also help to pursue future voice traffic customers. Strategically, this acquisition makes good sense for future growth of Level 3 Communications. The future outlook for Level 3 communications is positive. They can now move into the voice carrier market as well as ISP traffic. Telecommunications has also steadily been growing for the past decade, post 2001 tech crash.

  • 1. http://www.level3.com/investorrelations

  • 2. http://in.finance.yahoo.com/q?s=LVLT

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3.

http://www.prnewswire.com/news-releases/level-3-completes-acquisition-of-global-crossing-

131036448.html

Financial Statements

Income Statement

Income statement is mostly single step.

Gross profit for 2011 was 2627 million 2010 was 2157 million. Operating income increased from 88 million loss in 2010 to 52 million gain in 2011. Net Loss increased from 622 million in 2010 to 756 million in 2011. This increase in loss has to do with increase in cost, not a decrease in revenue. The acquisition of Global Crossing was the biggest increase in cost.

Consolidated Statements of Operations (USD $)

In Millions, except Share data, unless

Dec. 31,

Dec. 31,

otherwise specified

2011

2010

Revenue

$4,333

 

$3,591

Total Costs and Expenses Exclusive of Depreciation and Amortization shown separately below:

Cost of Revenue

1,706

 

1,434

Depreciation and Amortization

805

870

Selling, General and Administrative

1,759

1,373

Restructuring Charges

11

2

Total Costs and Expenses

4,281

3,679

Operating Income (Loss)

52

 

-88

Other Income (Expense):

Interest income

1

1

Interest expense

-716

-586

Gain (loss) on extinguishment of debt, net

-100

-59

Other, net

-23

20

Total Other Expense

-838

-624

Loss Before Income Taxes Income Tax (Expense) Benefit

-786

-712

-41

91

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Loss from Continuing Operations

-827

-621

Income (Loss) from Discontinued Operations, Net

71

-1

Net Loss

 

($756)

   

($622)

 

Loss per Share from Continuing Operations, Basic (in dollars per share)

($6.03)

[1]

($5.61)

[1]

Loss per Share from Continuing Operations, Diluted (in dollars per share)

($6.03)

[1]

($5.61)

[1]

Income (Loss) per Share from Discontinued Operations, Basic (in dollars per share)

$0.52

[1]

($0.01)

[1]

Income (Loss) per Share from Discontinued Operations, Diluted (in dollars per share)

$0.52

[1]

($0.01)

[1]

Basic and Diluted Loss per Share (in dollars per share)

($5.51)

[1]

($5.62)

[1]

Shares Used to Compute Basic Loss per Share: (in shares)

137,176,000

[1]

110,680,000

[1]

Shares Used to Compute Diluted Loss per Share: (in shares)

137,176,000

[1]

110,680,000

[1]

Balance Sheet

 

Dec. 31,

Consolidated Balance Sheets (USD $)

In Millions, except Share data, unless

2011

Dec. 31,

otherwise specified

2010

Current Assets:

Cash and cash equivalents

$918

$616

 

Restricted cash and securities

10

2

Receivables, less allowances for doubtful accounts of $18 and $17, respectively

648

259

 

Other

131

83

Current Assets of Discontinued Operations

0

12

Total Current Assets

1,707

972

 

Property, Plant and Equipment, net of accumulated depreciation of $7,678 and $7,009, respectively

8,136

5,285

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Restricted Cash and Securities

51

49

Goodwill

2,541

1,427

Other Intangibles, net

358

371

Other Assets, net

395

161

Non-Current Assets of Discontinued Operations

0

90

Total Assets

13,188

8,355

Current Liabilities:

Accounts payable

747

326

Current portion of long-term debt

65

180

Accrued payroll and employee benefits

209

84

Accrued interest

216

146

Current portion of deferred revenue

264

151

Other

157

53

Current Liabilities of Discontinued Operations

0

16

Total Current Liabilities

1,658

956

Long-Term Debt, less current portion

8,385

6,268

Deferred Revenue, less current portion

885

736

Other Liabilities Non-Current Liabilities of Discontinued

1,067

440

Operations

0

112

Total Liabilities

11,995

8,512

Commitments and Contingencies

0

0

Stockholders' Equity (Deficit):

Preferred stock, $.01 par value, authorized 10,000,000 shares: no shares issued or outstanding

Common stock, $.01 par value, authorized 293,333,333 shares at December 31, 2011 and 193,333,333 shares at December 31, 2010:

207,913,428 issued and outstanding at December 31, 2011 and 111,365,226

issued and outstanding at December 31,

2010

 

2

17

Additional paid-in capital Accumulated other comprehensive loss

13,706

11,603

-80

-98

Accumulated deficit

-12,435

-11,679

Total Stockholders' Equity (Deficit)

1,193

-157

Total Liabilities and Stockholders' Equity (Deficit)

$13,188

$8,355

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Statement of Cash Flows

The main cash inflow is from operations. The main cash outflow is from investing. The biggest change was in the financial section, where a loss of 122 million in 2010 changed to a gain of 261 million in 2011.

Consolidated Statements of Cash Flows (USD $)

In Millions, unless otherwise specified Cash Flows from Operating Activities:

12 Months Ended

Dec. 31,

Dec. 31,

  • 2011 2010

Net Loss (Income) loss from discontinued operations Net loss from continuing operations

Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities of continuing operations:

Depreciation and amortization

Non-cash compensation expense attributable to stock awards

Loss (gain) on extinguishments of debt, net

Change in fair value of embedded derivative Accretion of debt discount and amortization of debt issuance costs Accrued interest on long-term debt, net

Loss on impairment of wireless spectrum licenses

Deferred income taxes

Loss (gain) on sale of property, plant, and equipment and other assets

Other, net

Changes in working capital items:

Receivables Other current assets Payables Deferred revenue Other current liabilities

($756)

($622)

-71

1

-827

-621

805

870

101

67

100

59

0

-10

56

57

82

6

20

0

33

-93

-2

4

5

-9

-12

58

-1

3

30

-33

-3

-9

1

-10

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Net Cash Provided by Operating Activities of Continuing Operations

388

339

Cash Flows from Investing Activities:

Capital expenditures

-494

-435

Decrease (increase) in restricted cash and securities, net

-54

3

Proceeds from the sale of property, plant and equipment and other assets

4

4

Investment in Global Crossing, net of cash acquired

146

0

Net Cash Used in Investing Activities in Investing Activities of Continuing Operations

-398

-428

Cash Flows from Financing Activities:

Long-term debt borrowings, net of issuance costs

1,878

808

Payments on and repurchases of long- term debt, including current portion and refinancing costs

-1,617

-930

Net Cash Provided by (Used in) Financing Activities of Continuing Operations

261

-122

Discontinued Operations:

Net cash provided by operating activities

-4

0

Net cash provided by (used in) investing activities

55

-1

Net Cash Provided by (Used in) Discontinued Operations

51

-1

Effect of Exchange Rates on Cash and Cash Equivalents

0

-8

Net Change in Cash and Cash Equivalents

302

-220

Cash and Cash Equivalents at Beginning of Year

616

836

Cash and Cash Equivalents at End of Year

918

616

Supplemental Disclosure of Cash Flow Information:

Cash interest paid

576

523

Income taxes paid, net of refunds

7

-1

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Non-cash Investing and Financing Activities:

Long-term debt issued in exchange transaction Long-term debt retired in exchange transaction Conversion of notes into common stock

Long-term debt issued and proceeds placed in escrow

Settlement of Global Crossing debt with escrowed securities

300

0

295

0

128

0

1,200

0

$1,254

$0

Accounting Policies

Footnote 1. This was the only footnote throughout the financial statement.

Adjusted to give effect to the 1 for 15 reverse stock split that became effective on October 19, 2011. See Note 1 - Organization and Summary of Significant Accounting Policies.

On October 4, 2011, a subsidiary of Level 3 completed its amalgamation with Global Crossing, and became a

wholly owned indirect subsidiary of the Company through a tax free, stock for stock transaction. As a result of the Amalgamation, (i) each issued and outstanding common share of Global Crossing was exchanged for 16 shares of Level 3 common stock (unadjusted for the 1 for 15 reverse stock split completed on October 19, 2011), including the associated

rights under the Company’s Rights Agreement with Wells Fargo Bank, N.A., as rights agent (the “Amalgamation Consideration”) and (ii) each issued and outstanding share of Global Crossing’s 2% cumulative senior convertible preferred

stock was exchanged for the Amalgamation Consideration, plus an amount equal to the aggregate accrued and unpaid dividends thereon. In addition, (i) the outstanding vested options to purchase Global Crossing common shares were modified into vested options to purchase Level 3's common stock and (ii) the issued and outstanding restricted stock units covering Global Crossing common shares, to the extent applicable in accordance with their terms, vested and settled for 16 shares of

the Company's common stock.

Ratio Analysis

TESTS OF LIQUIDITY

Current Ratio

= 1707/1658 = 1.03

Quick Ratio = 918+648/1658 = .9445

ASSET MANAGEMENT

Inventory Turnover = 1,706/?

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Accounts Receivable Turnover = 4,333/453.5 = 9.555

TESTS OF SOLVENCY AND EQUITY POSITION

Debt Ratio = 11995/13188 = .910 Times-Interest-Earned Ratio = 52/(716) = -0.073

TESTS OF PROFITABILITY

Return on Net Sales = (756)/4333 = -0.174 Return on Total Assets = (-756 +-716)/10771.5 = -0.137 Return on Common Stockholder’s Equity = (-756-0)/518 = -1.460 Earnings per Share of Common Stock = (-756-0)/ 207,913,428 =-3.636

MARKET ANALYSIS

Price/Earnings Ratio = 23.20/-3.636 = -6.381 Dividend Yield Ratio = 0/23.20 = 0

Conclusion

I would not currently invest in Level 3 Communications. However, they have strategically joined with Global Crossing to increase their market share. Based on their current price/earnings ratio, and dividend yied ratio, they are well below industry averages. Industry average PE ratio is 12.70. Average industry dividend ratio is 4.12

With the addition of the customer base from Global Crossing, Sales has increased by 20.8 % in the last 12 months. In the past 4 weeks Level 3 industry rank has grown to number 22. Level 3 does have a positive operating income of 52 million in 2011 up from a loss of 88 million in 2010.

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Until Level 3 exhibits a steady dividend yield, it would be too risky to invest in them. Level 3 once was the darlings of Wall Street. They have survived, sustained, and grown since the telecommunications crash of 2001. With the joining of Global Crossing, Level 3 may one day again become the darlings of Wall Street. They have positioned themselves to have much more growth in the next few years. Until then, it is too risky to invest in Level 3 Communications.

Growth Rates

 

Company

Industry

Sector

Sales (MRQ) vs Qtr. 1 Yr. Ago

74.67

4.55

8.40

Profitability Ratios

 

Company

Industry

Sector

Gross Margin (TTM)

60.63

54.85

57.09

Gross Margin - 5 Yr. Avg.

58.98

57.90

56.53

Operating Margin (TTM)

-1.11

11.22

14.79

Operating Margin - 5 Yr. Avg.

-3.89

12.11

15.77