Qwest’s acknowledgment of accounting problems could help the regional phone service provider restore investor trust, but analysts said big revisions in the bottom line for 2000 and 2001 could hurt the sale of a phone-directory business Qwest is counting on to reduce debt.
Officials of Qwest Communications International Inc., already under investigation for its accounting practices, said accounting errors made in 1999, 2000 and 2001 under policies approved by previous auditor Arthur Andersen LLP prompted an internal analysis earlier this year. Qwest hired auditor KPMG LLP in June to examine its books.
The company will restate its financial results from 2000, when it acquired Baby Bell U S West, and 2001. Chief executive Richard Notebaert said Monday the revisions could take months.
“If accounting errors were made, they will be corrected and they will be disclosed. The public will be fully informed,” Notebaert said in a conference call with investors. “If an individual violated company policy, appropriate action will be taken.”
Analysts said Qwest is moving in the right direction. “There’s no doubt that the trust factor of all American corporations is at a low and Qwest disproportionately so,” said Richard Klugman of Jefferies & Co.
“Taking an immediate priority on resolving the accounting question marks is wise because no one’s going to believe any of the numbers this company puts out until they give it the seal of approval,” Klugman said.
If earnings by the QwestDex yellow pages business were lower than previously announced, proceeds from the sale could suffer, hurting Qwest’s ability to reduce approximately $26.6 billion in debt, analysts said.
“If they can sell Dex for a reasonable price, Qwest can probably keep its independence,” said Tom Friedberg of Brean Murray and Co. “If they can’t, they won’t. It’s that simple.”
In heavy trading on the New York Stock Exchange, Qwest shares declined a penny to close Monday at $1.49.
The company announced Sunday that accounting policies were incorrectly applied to optical capacity sales in 1999, 2000 and 2001 totaling about $1.1 billion, or 18 percent of the optical capacity transactions during that time.
Qwest said the errors caused it to book approximately $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 company and KPMG also uncovered accounting problems in equipment sales, prompting earnings reductions of $124 million in the fourth quarter of 2001; and changes in production schedules of some directories in the QwestDex yellow pages business, which Qwest is trying to sell for $8 billion to $10 billion.
Chief financial officer Oren Shaffer said most of the accounting irregularities had to do with when certain transactions were recorded as revenues or expenses.
The company has already made some adjustments to its books.
Analysts said the revisions could force Qwest to renegotiate financing deals that require debt to be no more than 4 to 4.25 times earnings before interest, taxes, depreciation and amortization. In April, former CEO Joseph Nacchio said he expected earnings up to $6.6 billion for 2002, but the company withdrew 2002 earnings projections Sunday.
Qwest officials said they could not discuss debt financing deals because of the investigations and Securities and Exchange Commission rules.
Qwest said it would miss the Aug. 14 deadline set by the SEC for the nation’s biggest companies to certify the accuracy of their financial statements. Second-quarter results are expected to be reported Aug. 8 as scheduled.
Qwest has suffered a myriad of problems in recent months, including an SEC investigation into its fiber-optic capacity swaps in 2000 and 2001. Qwest has seen its stock fall to under $2 after trading as high as $27 in the past year, and its credit was downgraded to junk status.
The Justice Department is also investigating Qwest, and the General Services Administration is reviewing government contracts with the Denver-based telecommunications company.
Notebaert said the company is cooperating with the investigations.
Notebaert, who replaced Nacchio in June, has brought in a new chief financial officer and won the trust of a group of retirees critical of Nacchio’s management.
“For a year now, Qwest has been untrustworthy to the investment community, and I think this is a step in the right direction,” said Nelson Phelps, spokesman for the Association of U S West Retirees.
Three top executives left Qwest last week for undisclosed reasons, but analyst Drake Johnstone of Davenport and Co. said Notebaert should be “cleaning house.”
“You still have senior officers at Qwest that were hired by Nacchio still there that may have been involved in these decisions,” Johnstone said.
When Qwest acquired U S West in 2000, it became the local phone company for 14 states extending from Minnesota west to Washington and southwest to Arizona and New Mexico.
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