Qwest Says It Used Improper Accounting
Qwest Communications International Inc., under a federal accounting investigation, said Sunday it will restate results because the telephone company incorrectly booked $1.16 billion in sales and some expenses.
Qwest withdrew its 2002 forecasts, which called for as much as $18.4 billion in sales, because of competition and diminishing demand, Chief Executive Richard Notebaert said. Qwest, which improperly booked sales from 1999-2001, didn’t say which periods it expects to restate or by how much.
The Securities and Exchange Commission in March began probing transactions in which Qwest, the biggest local-phone provider in 14 western U.S. states, sold space on its fiber-optic network to other carriers, then agreed to buy a similar amount from them. Investors questioned whether the company used the swaps to improperly inflate sales.
“The right thing to do is share the information we have with the shareholders and the public,” said Notebaert, who was named by the board to replace Joseph Nacchio last month. “We’d like to have resolution to the [SEC probe] so we can serve our 18 million customers.”
In April, Denver-based Qwest forecast 2002 sales of $18 billion to $18.4 billion, below its previous estimate. Qwest didn’t say when the restatement would be complete.
Qwest also said it improperly accounted for some expenses from the purchase of service from other carriers in 2000 and 2001. WorldCom Inc., the second-largest U.S. long-distance phone company, filed the biggest U.S. bankruptcy a week ago after hiding $3.85 billion in expenses, some from using rivals’ networks.
Some analysts have questioned whether Qwest will be forced to file for bankruptcy. Notebaert dismissed the possibility.
“This company will survive and the services and products we provide that are so critical will go on,” he told Bloomberg News.
A restatement by Qwest, which also faces a criminal probe by the Justice Department, could jeopardize some of its funding agreements, which require it to maintain a certain ratio of debt-to-EBTIDA, or earnings before interest, taxes, depreciation and amortization, the company said.
Qwest had $26.5 billion in debt as of March 31 and has about $6.5 billion in debt maturing in May 2003 through 2004, according to debt-rating agency Standard & Poor’s.
“We’re still very solvent here,” Qwest’s new Chief Financial Officer Oren Shaffer told Reuters. “We were in compliance [with funding agreements] in the first quarter and we don’t know what the second quarter is going to look like,” he said.
The SEC is investigating Qwest’s fiber-optic capacity swaps with Global Crossing Ltd., Enron Corp. and others in 2000 and 2001.
At issue is whether the fiber-optic capacity swaps were done for legitimate business reasons, were priced at fair market values and were properly accounted for.
The expected restatement comes at a time when the federal government is pledging a crackdown on corporate misdeeds after a series of scandals at major companies eroded investor confidence in Wall Street.
Qwest hired auditor KPMG in June to examine its books, after dismissing Arthur Andersen.
The Justice Department is investigating Qwest, and the General Services Administration is reviewing government contracts with the Denver-based telecommunications company.
“It is our intent to fully cooperate with every government agency and be totally transparent and responsive,” Notebaert told the Associated Press.
The company reported Sunday that accounting policies were incorrectly applied to optical capacity sales in 1999, 2000 and 2001 totaling about $1.1 billion, or 18% of the optical capacity transactions during that time.
Qwest said the errors caused it to book about $874 million as revenue for 2000 and 2001. The company also said it understated its expenses in 2001 by $113 million, but overstated them by $15 million in 2000.
The expected restatement of the company’s financial reports also will include adjustments for three transactions relating to equipment sales that totaled $283 million in 2000 and 2001. The company has determined that revenue and profit in those transactions were incorrectly recognized upfront and should be deferred.
Additionally, Qwest improperly recorded cost entries for services it purchased from third-party telecommunications providers in 2000 and 2001. In 2000, Qwest overstated costs by $15 million and in 2001 Qwest understated costs by $113 million.
In the last year, Qwest has faced a downgrade of its credit rating to junk status and a sinking stock price.
In trading Friday on the New York Stock Exchange, shares of Qwest were down 11 cents, or 6.8%, to close at $1.50, but gained 10 cents in extended trading.
