Qwest Posts a Billion-Dollar Loss

Qwest ( Q) posted a steep second-quarter loss,reduced its financial guidance and said itwouldn't file its next quarterly report withregulators by the deadline.

The company said in a Thursday morning pressrelease that it had reached its long-stated goalof achieving positive free cash flow, as defined byoperating cash flow minus capital spending,in the period. Qwest reached this milestone in part byslashing capital spending by more than 75%from year-ago levels, to $618 million.

But investors are likely to be unnerved by news of the company's inability to file aquarterly report covering the period, possibly untilmuch later, along with scant informationabout Qwest's highly anticipated sale of its directorybusiness. Qwest, whose shares have lostmore than 90% of their value this year as Wall Streethas worried about its liquidity along withthe possible impact of various criminal and regulatoryinvestigations, closed Wednesday at $1.20.

Steep Loss

For the second quarter ended June 30, Qwest lost$1.14 billion, or 68 cents a share, narrowing from the year-ago $3.31 billion, or $1.99 ashare. The latest-quarter loss included a number of charges, including the writeoff of thecompany's remaining investment in KPN Qwest, a European network operator. On what it called anormalized basis Qwest said its loss was 13 cents a share, reversing a year-ago normalized profit of 8cents, as revenue plunged 17% to $4.32 billion.

Qwest posted adjusted earnings before interest,taxes, depreciation and amortization for the period of $1.26 billion, down from $2 billion a yearearlier. The company also trimmed its revenue and EBITDA guidance for the year, citing the continuing deterioration of the telecom business. Qwest said it remains in compliance with itsdebt covenants but that it is talking with its lenders.

As analysts point out, any reduction in Qwest'scash flow is likely to put the company in violation of its loan covenants. Qwest is required tokeep its debt, which has ballooned to $25 billion, from exceeding four times its cash flow. Butdepending on the timing and total of therestatement, Qwest may already be in violation of its2001 debt covenants.

The company said it would provide more detaileddisclosure about the second quarter in anAug. 19 form 8-K filing but wouldn't be able to fileits scheduled 10-Q until some time later, asit continues its internal accounting probe. Qwest'snew CEO Richard Notebaert -- on a mission toclean up the company's books -- said last month heplanned to restate at least $1.16 billion innetwork capacity sales recorded over the past threeyears.

Quiet

But Qwest provided little information on thelong-awaited, ever-pending sale of QwestDex, thecompany's directory business. The company had said itwould have a sale of the unit by thismonth, but the press release Thursday said only that"the company is in late stage negotiationswith bidders to sell all or part of QwestDex."

Any sign that Qwest is indeed close to getting itshands on the proceeds of a Dex sale couldgo a long way toward pacifying antsy creditors. Thecompany has said bids for the unit haveranged as high as $10 billion, though many observersare skeptical of that claim.

More to the point for stockholders, cash raised ina sale of the directory unit will alsohelp keep a looming liquidity crisis at bay a littlelonger. With $1.4 billion in cash on hand asof March and $1.1 billion in loan payments alonecoming due in the next five months,Qwest is cutting its funding margins dangerouslyclose. Though the company says it plans to befree cash flow positive for the year, it will stillneed to raise cash to stay in the good gracesof its lenders.

And without the sale of QwestDex in hand, thecompany will have adifficult time negotiating favorable terms with itscreditors, say analysts.

"Sale of a significant portion of the directorybusiness appears tobe the only event that can keep the company from atechnical default onits bank agreement," Piper Jaffray debt analyst CoryJackson wrote in anote Wednesday. "Outside of a directory sale, Qwest'sbank group holds thecards."

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