Level 3 posts positive second-quarter free cash flow, expects to sustain cash generation

By Jennifer Lanning Drey

Portland, Ore., July 24 - Level 3 Communications, Inc.'s tight management of capital expenditures contributed to second-quarter free cash flow of $4 million, which compares with negative cash flow of $141 million in the same period of 2007, Sunit Patel, Level 3's chief financial officer, said Thursday during the company's quarterly earnings call.

"We believe we are sustainably free cash flow positive going forward," Patel said.

The company ended the second quarter with $660 million of cash and marketable securities, which included $123 million of net proceeds from the company's sale of its Vyvx advertising distribution business.

"Our liquidity will continue to improve over the remainder of the year," Patel said.

Level 3 has more than sufficient cash to cover its $362 million of September 2009 debt maturities and expects to refinance its 2010 maturities well ahead of their maturity date, Patel said.

"Our equity-holder-friendly bias on any refinancing transactions remains, consistent with the refinancings we did last year," he said.

Adjusted EBITDA up 30%

Level 3 reported second-quarter adjusted EBITDA of $251 million, which was up 30% from the prior-year quarter. The second-quarter performance reflects the accelerated execution of planned cost-reduction initiatives, with selling, general and administrative expense dropping to $393 million in the second quarter from $427 million in the 2007 period, Patel said.

"We think this quarter was good, and we think we can have increasingly better quarters over the course of the year," Jim Crowe, chief executive officer of Level 3, said during Thursday's call.

During the remainder of the year, Level 3 expects gross margin performance to be driven primarily by core network services revenue growth.

"In many ways, the market is exactly the market we have built our company for," Crowe said. "I'm happy to say our provisioning is no longer an impediment to meeting the kind of demand inherent in that market."

Once the company reaches its target debt-to-EBITDA ratio of between 3 times and 5 times, Level 3 will allocate cash generation toward expanding its network, Crowe said.

Based in Broomfield, Colo., Level 3 is a provider of international communications including internet protocol services, broadband transport and infrastructure services, collocation services and voice and voice-over-IP services.

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