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 co mpany 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-crossing131036448.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 otherwise specified Revenue Total Costs and Expenses Exclusive of Depreciation and Amortization shown separately below: Cost of Revenue Depreciation and Amortization Selling, General and Administrative Restructuring Charges Total Costs and Expenses Operating Income (Loss) Other Income (Expense): Interest income Interest expense Gain (loss) on extinguishment of debt, net Other, net Total Other Expense Loss Before Income Taxes Income Tax (Expense) Benefit

Dec. 31, 2011 $4,333

Dec. 31, 2010 $3,591

1,706 805 1,759 11 4,281 52 1 -716 -100 -23 -838 -786 -41

1,434 870 1,373 2 3,679 -88 1 -586 -59 20 -624 -712 91

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Loss from Continuing Operations Income (Loss) from Discontinued Operations, Net Net Loss Loss per Share from Continuing Operations, Basic (in dollars per share) Loss per Share from Continuing Operations, Diluted (in dollars per share) Income (Loss) per Share from Discontinued Operations, Basic (in dollars per share) Income (Loss) per Share from Discontinued Operations, Diluted (in dollars per share) Basic and Diluted Loss per Share (in dollars per share) Shares Used to Compute Basic Loss per Share: (in shares) Shares Used to Compute Diluted Loss per Share: (in shares)

-827 71 ($756) ($6.03)

[1]

-621 -1 ($622) ($5.61)

[1]

($6.03)

[1]

($5.61)

[1]

$0.52

[1]

($0.01)

[1]

$0.52 ($5.51) 137,176,000 137,176,000

[1]

($0.01) ($5.62) 110,680,000 110,680,000

[1]

[1]

[1]

[1]

[1]

[1]

[1]

Balance Sheet
Consolidated Balance Sheets (USD $) In Millions, except Share data, unless otherwise specified Current Assets: Cash and cash equivalents Restricted cash and securities Receivables, less allowances for doubtful accounts of $18 and $17, respectively Other Current Assets of Discontinued Operations Total Current Assets Property, Plant and Equipment, net of accumulated depreciation of $7,678 and $7,009, respectively Dec. 31, 2011 Dec. 31, 2010 $918 10 $616 2

648 131 0 1,707

259 83 12 972

8,136

5,285

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Restricted Cash and Securities Goodwill Other Intangibles, net Other Assets, net Non-Current Assets of Discontinued Operations Total Assets Current Liabilities: Accounts payable Current portion of long-term debt Accrued payroll and employee benefits Accrued interest Current portion of deferred revenue Other Current Liabilities of Discontinued Operations Total Current Liabilities Long-Term Debt, less current portion Deferred Revenue, less current portion Other Liabilities Non-Current Liabilities of Discontinued Operations Total Liabilities Commitments and Contingencies 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 Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit Total Stockholders' Equity (Deficit) Total Liabilities and Stockholders' Equity (Deficit)

51 2,541 358 395 0 13,188 747 65 209 216 264 157 0 1,658 8,385 885 1,067 0 11,995 0

49 1,427 371 161 90 8,355 326 180 84 146 151 53 16 956 6,268 736 440 112 8,512 0

2 13,706 -80 -12,435 1,193 $13,188

17 11,603 -98 -11,679 -157 $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: 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 82 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 20 33 -2 5 -12 -1 30 -3 1 6 0 -93 4 -9 58 3 -33 -9 -10 12 Months Ended Dec. 31, 2011 ($756) -71 -827 Dec. 31, 2010 ($622) 1 -621

805 101 100 0 56

870 67 59 -10 57

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Net Cash Provided by Operating Activities of Continuing Operations Cash Flows from Investing Activities: Capital expenditures Decrease (increase) in restricted cash and securities, net Proceeds from the sale of property, plant and equipment and other assets Investment in Global Crossing, net of cash acquired Net Cash Used in Investing Activities in Investing Activities of Continuing Operations Cash Flows from Financing Activities: Long-term debt borrowings, net of issuance costs Payments on and repurchases of longterm debt, including current portion and refinancing costs Net Cash Provided by (Used in) Financing Activities of Continuing Operations Discontinued Operations: Net cash provided by operating activities Net cash provided by (used in) investing activities Net Cash Provided by (Used in) Discontinued Operations Effect of Exchange Rates on Cash and Cash Equivalents Net Change in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Supplemental Disclosure of Cash Flow Information: Cash interest paid Income taxes paid, net of refunds

388 -494 -54 4 146

339 -435 3 4 0

-398

-428

1,878

808

-1,617

-930

261

-122

-4 55 51 0 302 616 918

0 -1 -1 -8 -220 836 616

576 7

523 -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

300 295 128 1,200 $1,254

0 0 0 0 $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 Companys Rights Agreement with Wells Fargo Bank, N.A., as rights agent (the Amalgamation Consideration) and (ii) each issued and outstanding share of Global Crossings 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 Stockholders 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 Sales (MRQ) vs Qtr. 1 Yr. Ago 74.67 4.55 Industry 8.40 Sector

Profitability Ratios
Company Gross Margin (TTM) Gross Margin - 5 Yr. Avg. Operating Margin (TTM) Operating Margin - 5 Yr. Avg. 60.63 58.98 -1.11 -3.89 Industry 54.85 57.90 11.22 12.11 57.09 56.53 14.79 15.77 Sector