Q1 2012 Form 10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2012
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-8519
CINCINNATI BELL INC.
 
Ohio
 
31-1056105
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
221 East Fourth Street, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
(513) 397-9900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
  
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x

At April 30, 2012, there were 197,203,625 common shares outstanding.
 

Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

TABLE OF CONTENTS
Description
PART I. Financial Information
 
 
Page
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
Defaults upon Senior Securities – None
 
 
 
 
Item 4.
Mine Safety Disclosure – None
 
 
 
 
Item 5.
Other Information – No reportable items
 
 
 
 
Item 6.
 
 
 
 

Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Revenue
 
 
 
Services
$
318.0

 
$
311.4

Products
44.8

 
49.4

Total revenue
362.8

 
360.8

Costs and expenses
 
 
 
Cost of services, excluding items below
120.4

 
110.7

Cost of products sold, excluding items below
45.4

 
48.5

Selling, general and administrative
64.0

 
64.6

Depreciation and amortization
51.1

 
48.4

Restructuring charges
0.9

 
—

Acquisition costs
—

 
1.1

Asset impairment
—

 
1.1

Total operating costs and expenses
281.8

 
274.4

Operating income
81.0

 
86.4

Interest expense
54.4

 
54.5

Other expense, net
1.5

 
—

Income before income taxes
25.1

 
31.9

Income tax expense
12.5

 
14.0

Net income
12.6

 
17.9

Preferred stock dividends
2.6

 
2.6

Net income applicable to common shareowners
$
10.0

 
$
15.3

Basic and diluted earnings per common share
$
0.05

 
$
0.08






















The accompanying notes are an integral part of the condensed consolidated financial statements.

1
Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2012
 
2011
Net income
$
12.6

 
$
17.9

Other comprehensive income, net of tax:
 
 
 
Defined benefit pension and postretirement plans:
 
 
 
       Amortization of prior service benefits included in net income,
 
 
 
             net of tax of ($1.2) and ($1.2)
(2.1
)
 
(2.0
)
       Amortization of net actuarial loss included in net income, net of tax of $2.0 and $2.0
3.5

 
3.2

Other comprehensive income
1.4

 
1.2

Total comprehensive income
$
14.0

 
$
19.1






































The accompanying notes are an integral part of the condensed consolidated financial statements.




2
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share amounts)
(Unaudited)
 
 
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
6.9

 
$
73.7

Receivables, less allowances of $12.2 and $11.6
176.0

 
179.4

Inventory, materials and supplies
25.4

 
23.8

Deferred income taxes, net
30.3

 
30.2

Prepaid expenses
14.0

 
11.2

Other current assets
4.8

 
2.7

Total current assets
257.4

 
321.0

Property, plant and equipment, net
1,426.3

 
1,400.5

Goodwill
290.6

 
290.6

Intangible assets, net
212.5

 
216.9

Deferred income taxes, net
410.2

 
423.5

Other noncurrent assets
60.9

 
62.2

Total assets
$
2,657.9

 
$
2,714.7

Liabilities and Shareowners’ Deficit
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
12.9

 
$
13.0

Accounts payable
88.9

 
133.4

Unearned revenue and customer deposits
48.9

 
48.2

Accrued taxes
15.7

 
15.5

Accrued interest
58.5

 
45.6

Accrued payroll and benefits
39.3

 
52.6

Other current liabilities
35.8

 
48.1

Total current liabilities
300.0

 
356.4

Long-term debt, less current portion
2,518.3

 
2,520.6

Pension and postretirement benefit obligations
379.5

 
389.9

Other noncurrent liabilities
161.4

 
163.0

Total liabilities
3,359.2

 
3,429.9

Shareowners’ deficit
 
 
 
Preferred stock, 2,357,299 shares authorized, 155,250 shares (3,105,000 depositary shares) of 6 3/4% Cumulative Convertible Preferred Stock issued and outstanding at March 31, 2012 and December 31, 2011; liquidation preference $1,000 per share ($50 per depositary share)
129.4

 
129.4

Common shares, $.01 par value; 480,000,000 shares authorized; 197,667,345 and 196,322,649 shares issued; 197,175,626 and 195,721,796 shares outstanding at March 31, 2012 and December 31, 2011
2.0

 
2.0

Additional paid-in capital
2,584.2

 
2,584.6

Accumulated deficit
(3,207.4
)
 
(3,220.0
)
Accumulated other comprehensive loss
(207.5
)
 
(208.9
)
Common shares in treasury, at cost
(2.0
)
 
(2.3
)
Total shareowners’ deficit
(701.3
)
 
(715.2
)
Total liabilities and shareowners’ deficit
$
2,657.9

 
$
2,714.7


The accompanying notes are an integral part of the condensed consolidated financial statements.
 

3
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited) 
 
Three Months Ended
 
March 31,
 
2012
 
2011
Cash flows from operating activities
 
 
 
Net income
$
12.6

 
$
17.9

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
51.1

 
48.4

Provision for loss on receivables
3.8

 
3.1

Asset impairment
—

 
1.1

Noncash portion of interest expense
2.0

 
2.5

Deferred income tax provision
12.4

 
13.9

Pension and other postretirement payments in excess of expense
(8.2
)
 
(11.2
)
Stock-based compensation
1.3

 
0.9

Other, net
0.9

 
(0.1
)
Changes in operating assets and liabilities
 
 
 
(Increase) decrease in receivables
(0.4
)
 
15.4

Increase in inventory, materials, supplies, prepaid expenses and other current assets
(5.5
)
 
(6.8
)
Decrease in accounts payable
(36.5
)
 
(22.2
)
(Decrease) increase in accrued and other current liabilities
(8.8
)
 
8.5

(Increase) decrease in other noncurrent assets
(0.2
)
 
0.1

Decrease in other noncurrent liabilities
(0.9
)
 
(6.5
)
Net cash provided by operating activities
23.6

 
65.0

Cash flows from investing activities
 
 
 
Capital expenditures
(84.6
)
 
(52.4
)
Other, net
—

 
0.1

Net cash used in investing activities
(84.6
)
 
(52.3
)
Cash flows from financing activities
 
 
 
Repayment of debt
(4.0
)
 
(3.0
)
Dividends paid on preferred stock
(2.6
)
 
(2.6
)
Common stock repurchase
(0.3
)
 
—

Other, net
1.1

 
(0.4
)
Net cash used in financing activities
(5.8
)
 
(6.0
)
Net (decrease) increase in cash and cash equivalents
(66.8
)
 
6.7

Cash and cash equivalents at beginning of period
73.7

 
77.3

Cash and cash equivalents at end of period
$
6.9

 
$
84.0

 
 
 
 
Noncash investing and financing transactions:
 
 
 
Acquisition of property by assuming debt and other noncurrent liabilities
$
1.4

 
$
4.5

Acquisition of property on account
$
13.3

 
$
8.1







The accompanying notes are an integral part of the condensed consolidated financial statements.

4
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 

1.
Description of Business and Accounting Policies
Description of Business — Cincinnati Bell Inc. and its consolidated subsidiaries (the “Company” or “we” ) provide diversified telecommunications and technology services through businesses in four segments: Wireline, Wireless, Data Center Colocation, and IT Services and Hardware.
Basis of Presentation — The Condensed Consolidated Financial Statements of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments necessary for a fair presentation of the results of operations, other comprehensive income, financial position, and cash flows for each period presented.
The adjustments referred to above are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to SEC rules and regulations for interim reporting.
The Condensed Consolidated Balance Sheet as of December 31, 2011 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2011 Annual Report on Form 10-K. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results expected for the full year or any other interim period.
Use of Estimates — Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. In the normal course of business, the Company is subject to various regulatory and tax proceedings, lawsuits, claims, and other matters. The Company believes adequate provision has been made for all such asserted and unasserted claims in accordance with U.S. GAAP. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.
Recently Issued Accounting Standards — In December 2011, the Financial Accounting Standards Board (“FASB”) amended the guidance in Accounting Standards Codification (“ASC”) 210 related to disclosures about offsetting assets and liabilities. The amendments would require an entity to disclose information about financial instruments and derivative instruments that are either offset subject to ASC 210-20-45 or ASC 815-10-45, or subject to enforceable master netting arrangements or similar arrangements. We will be required to adopt this guidance beginning with our interim financial statements for the three months ended March 31, 2013. The adoption of this accounting standard is not expected to have a material impact on our financial statements.
In September 2011, the FASB amended the guidance in ASC 350-20 on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The Company adopted this guidance beginning with its interim financial statements for the three months ended March 31, 2012. The adoption of this accounting standard did not have a material impact on the Company's financial statements, rather it will change the Company's approach for annual goodwill testing.
In June 2011, the FASB issued new guidance under ASC 220 regarding the presentation of comprehensive income in financial statements. An entity has the option to present the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. The Company adopted this guidance beginning with its interim financial statements for the three months ended March 31, 2012. The adoption of this new standard did not have a material impact on the Company's financial statements, but rather it prescribes the presentation of other comprehensive income in our financial statements. Separately, in December 2011, the FASB amended a portion of this guidance to defer proposed changes to the presentation of reclassification adjustments.
Income Taxes — The Company’s income tax provision for interim periods is determined through the use of an estimated annual effective tax rate applied to year-to-date ordinary income, as well as the tax effects associated with discrete items.

5
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

2.    Earnings Per Common Share
Basic earnings per common share (“EPS”) is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur upon issuance of common shares for awards under stock-based compensation plans, exercise of warrants or conversion of preferred stock, but only to the extent that they are considered dilutive.
The following table shows the computation of basic and diluted EPS:
 
 
Three Months Ended
 
March 31,
(in millions, except per share amounts)
2012
 
2011
Numerator:
 
 
 
Net income
$
12.6

 
$
17.9

Preferred stock dividends
2.6

 
2.6

Income available to common shareholders - basic and diluted
$
10.0

 
$
15.3

Denominator:
 
 
 
Weighted average common shares outstanding - basic
195.3

 
197.8

Warrants
3.1

 
—

Stock-based compensation arrangements
3.2

 
2.0

Weighted average common shares outstanding - diluted
201.6

 
199.8

Basic and diluted earnings per common share
$
0.05

 
$
0.08


For the three month period ended March 31, 2012 and 2011, awards under the Company’s stock-based compensation plans for common shares of 7.0 million and 12.6 million, respectively, were excluded from the computation of diluted EPS as the inclusion would have been anti-dilutive. For both periods, preferred stock convertible into 4.5 million common shares were excluded as the inclusion would have been anti-dilutive.

3.    Debt
The Company’s debt consists of the following:
 
(dollars in millions)
March 31,
2012
 
December 31,
2011
Current portion of long-term debt:
 
 
 
Capital lease obligations and other debt
$
12.9

 
$
13.0

Current portion of long-term debt
12.9

 
13.0

Long-term debt, less current portion:
 
 
 
7% Senior Notes due 2015*
250.2

 
250.4

8 1/4% Senior Notes due 2017
500.0

 
500.0

8 3/4% Senior Subordinated Notes due 2018
625.0

 
625.0

8 3/8% Senior Notes due 2020
775.0

 
775.0

7 1/4% Senior Notes due 2023
40.0

 
40.0

Various Cincinnati Bell Telephone notes
207.5

 
207.5

Capital lease obligations and other debt
128.9

 
131.4

 
2,526.6

 
2,529.3

Net unamortized discount
(8.3
)
 
(8.7
)
         Long-term debt, less current portion
2,518.3

 
2,520.6

Total debt
$
2,531.2

 
$
2,533.6


* The face amount of these notes has been adjusted for the unamortized called amounts received on terminated interest rate swaps.

6
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

As of March 31, 2012, the Company had no outstanding borrowings on its revolving credit facility, leaving $210.0 million available for borrowings. This revolving credit facility expires in June 2014.
At March 31, 2012, the Company had $23.2 million of letters of credit outstanding under the accounts receivable securitization facility (“Receivables Facility”), leaving $80.3 million remaining on the available borrowings of $103.5 million. The Receivables Facility is subject to renewal every 364 days. In the event the Receivables Facility is not renewed, the Company believes it would be able to refinance any outstanding borrowings with borrowings under the revolving credit facility. The permitted borrowings vary depending on the level of eligible receivables and other factors. Under the Receivables Facility, certain subsidiaries, or originators, sell their respective trade receivables on a continuous basis to Cincinnati Bell Funding LLC (“CBF”). Although CBF is a wholly-owned consolidated subsidiary of the Company, CBF is legally separate from the Company and each of the Company’s other subsidiaries. Upon and after the sale or contribution of the accounts receivable to CBF, such accounts receivable are legally assets of CBF, and as such are not available to creditors of other subsidiaries or the parent company.
 

4.    Financial Instruments
The carrying values of the Company's financial instruments approximate the estimated fair values as of March 31, 2012 and December 31, 2011, except for the Company's debt and other financing arrangements.

The carrying value and fair value of the Company’s long-term debt and other financing arrangements are as follows: 
 
March 31, 2012
 
December 31, 2011
(dollars in millions)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Long-term debt, including current portion
$
2,531.2

 
$
2,472.8

 
$
2,533.6

 
$
2,460.5

Other financing arrangements
$
48.2

 
$
48.3

 
$
47.9

 
$
47.2


The fair value of debt instruments was based on closing or estimated market prices of the Company’s debt at March 31, 2012 and December 31, 2011, which is considered Level 2 of the fair value hierarchy. The fair value of other financing arrangements was calculated using a discounted cash flow model that incorporates current borrowing rates for obligations of similar duration, which is considered Level 3 of the fair value hierarchy.

5.    Restructuring Charges
Restructuring liabilities have been established for employee separation obligations, lease abandonments, and contract terminations. A summary of the activity in these liabilities is presented below:
(dollars in millions)
Employee
Separation
 
Lease
Abandonment
 
Contract Terminations
 
Total
Balance as of December 31, 2011
$
14.2

 
$
8.1

 
$
1.7

 
$
24.0

Charges
0.4

 
0.5

 
—

 
0.9

Utilizations
(1.7
)
 
(1.3
)
 
(1.3
)
 
(4.3
)
Balance as of March 31, 2012
$
12.9

 
$
7.3

 
$
0.4

 
$
20.6

For the three months ended March 31, 2012, a restructuring charge of $0.5 million was recognized for the remaining lease obligations associated with the exit of three retail stores. In addition, a restructuring charge of $0.4 million was recognized for severance associated with employee separation contracts.
As of March 31, 2012 and December 31, 2011, the restructuring liability by segment was as follows:
(dollars in millions)
Wireline
 
Wireless
 
Data Center Colocation
 
IT Services and Hardware
 
Corporate
 
Total
Balance as of December 31, 2011
$
15.1

 
$
0.7

 
$
—

 
$
2.5

 
$
5.7

 
$
24.0

Charges
—

 
0.5

 
—

 
—

 
0.4

 
0.9

Utilizations
(2.9
)
 
(0.4
)
 
—

 
(0.2
)
 
(0.8
)
 
(4.3
)
Balance as of March 31, 2012
$
12.2

 
$
0.8

 
$
—

 
$
2.3

 
$
5.3

 
$
20.6


7
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Employee separation costs consist of severance to be paid pursuant to the Company's written severance plan and certain management contracts. Severance payments are expected to be paid through 2013. Lease abandonment costs represent future minimum lease obligations, net of expected sublease income, for abandoned facilities. Lease payments on abandoned facilities will continue through 2018. Contract terminations consist of amounts due to distributors to terminate their contractual agreements and to telecommunication carriers to cancel circuits. Contract terminations are expected to be paid in 2012.
At March 31, 2012 and December 31, 2011, $10.2 million and $12.6 million, respectively, of the restructuring liabilities were included in “Other current liabilities,” and $10.4 million and $11.4 million, respectively, were included in “Other noncurrent liabilities,” in the Condensed Consolidated Balance Sheets.

6.    Pension and Postretirement Plans
The Company sponsors three noncontributory defined benefit plans and a postretirement health and life insurance plan. A portion of these costs is capitalized as a component of internal labor costs incurred for network construction in the Wireline segment, historically averaging approximately 8%.
Effective January 1, 2012 and pursuant to a new labor agreement ratified in 2011, pension credits have been curtailed for certain bargained employees.
Pension and postretirement benefit costs are as follows:
 
Three Months Ended March 31,
 
2012
 
2011
 
2012
 
2011
(dollars in millions)
Pension Benefits
 
Postretirement and
Other Benefits
Service cost
$
0.6

 
$
1.3

 
$
0.1

 
$
0.1

Interest cost on projected benefit obligation
6.1

 
6.2

 
1.6

 
1.8

Expected return on plan assets
(6.9
)
 
(7.3
)
 
—

 
—

Amortization of:
 
 
 
 
 
 
 
Prior service cost (benefit)
—

 
0.1

 
(3.3
)
 
(3.3
)
Actuarial loss
3.9

 
3.6

 
1.6

 
1.6

Benefit costs
$
3.7

 
$
3.9

 
$
—

 
$
0.2


Contributions in 2012 to the Company’s pension and postretirement plans are expected to be approximately $32.1 million and $21.6 million, respectively. For the three months ended March 31, 2012, contributions to the pension and postretirement plans were $6.1 million each.

7.    Stock-Based and Other Compensation Plans
The Company grants stock options, stock appreciation rights (“SARs”), performance-based awards, and time-based restricted shares, some of which are cash-payment awards, with the final award payment indexed to the percentage change in the Company’s stock price from the date of grant.
The Company recognized stock-based compensation expense of $3.5 million and $1.4 million for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was $10.3 million of unrecognized compensation expense related to these awards. The remaining compensation expense for the stock options, SARs and restricted awards is expected to be recognized over a weighted-average period of approximately two years, while the remaining expense for performance-based awards will be recognized within approximately one year.
The Company also has deferred compensation plans for its Board of Directors and certain executives. Under these plans, participants can elect to invest their deferrals in the Company’s common stock. At March 31, 2012 and 2011, there were 0.7 million common shares deferred. As these awards can be settled in cash, the Company records compensation costs each period based on the change in the Company’s stock price. The Company recognized compensation expenses of $0.7 million for the three months ended March 31, 2012 and a gain of $0.1 million for the corresponding prior period.

In 2010, the Company's Board of Directors approved a new long-term incentive program for certain members of management of both corporate and the data center business. Payment is contingent upon the completion of a qualifying transaction and attainment of an increase in the equity value of the data center business, as defined in the plans. As of April 30, 2012 the Compensation Committee has approved grants that could result in a maximum payout up to $90 million based on the maximum

8
Table of Contents

equity value created of $1.0 billion. The range of reasonably possible payouts is estimated as $30.0 million to $40.0 million. Additional awards may be granted pursuant to these plans in future periods. For the quarter ended March 31, 2012, no compensation expense was recorded for the awards in accordance with ASC 718, "Compensation - Stock Compensation."

8.    Share Repurchases
In 2010, the Board of Directors approved a plan for the repurchase of the Company's outstanding common stock in an amount up to $150.0 million. Prior to 2011, the Company repurchased and retired shares with a total cost of $10.0 million. In late 2011, the Company purchased 3.4 million shares at a cost of $10.8 million and retired 3.3 million shares. During the three months ended March 31, 2012, the Company cash settled $0.3 million of these repurchases and retired the remaining 0.1 million shares. As of March 31, 2012, the Company has authority to repurchase $129.2 million of its common stock.

9.    Business Segment Information
The Company operates in four segments: Wireline, Wireless, Data Center Colocation, and IT Services and Hardware. The Company’s segments are strategic business units that offer distinct products and services and are aligned with its internal management structure and reporting.
The Wireline segment provides local voice, data, long distance, entertainment, VoIP, and other services over its owned and other wireline networks. The Wireless segment provides advanced digital voice and data communications services and sales of related handset equipment to customers in the Greater Cincinnati and Dayton, Ohio operating areas. The Data Center Colocation segment provides data center colocation services primarily to large businesses. The Company owns or maintains 20 data centers in Texas, Ohio, Kentucky, Indiana, Illinois, England and Singapore. The IT Services and Hardware segment provides a range of fully managed and outsourced information technology (“IT”) and telecommunications services along with the sale, installation, and maintenance of major branded IT and telephony equipment.

Certain corporate administrative expenses have been allocated to the segments based upon the nature of the expense and the relative size of the segment. Intercompany transactions between segments have been eliminated.


9
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Selected financial data for the Company’s business segment information is as follows:
 
Three Months Ended
 
March 31,
(dollars in millions)
2012
 
2011
Revenue
 
 
 
Wireline
$
182.4

 
$
183.9

Wireless
63.7

 
71.4

Data Center Colocation
52.6

 
43.4

IT Services and Hardware
73.2

 
70.3

Intersegment
(9.1
)
 
(8.2
)
Total revenue
$
362.8

 
$
360.8

Intersegment revenue
 
 
 
Wireline
$
5.0

 
$
5.8

Wireless
0.6

 
0.6

Data Center Colocation
1.6

 
0.6

IT Services and Hardware
1.9

 
1.2

Total intersegment revenue
$
9.1

 
$
8.2

Operating income
 
 
 
Wireline
$
57.2

 
$
59.6

Wireless
15.1

 
16.3

Data Center Colocation
13.2

 
12.0

IT Services and Hardware
2.6

 
3.2

Corporate
(7.1
)
 
(4.7
)
Total operating income
$
81.0

 
$
86.4

Expenditures for long-lived assets
 
 
 
Wireline
$
23.3

 
$
25.5

Wireless
6.3

 
4.8

Data Center Colocation
52.8

 
21.6

IT Services and Hardware
2.2

 
0.5

Total expenditures for long-lived assets
$
84.6

 
$
52.4

Depreciation and amortization
 
 
 
Wireline
$
25.9

 
$
25.4

Wireless
7.9

 
8.7

Data Center Colocation
15.6

 
12.0

IT Services and Hardware
1.6

 
2.2

Corporate and eliminations
0.1

 
0.1

Total depreciation and amortization
$
51.1

 
$
48.4

 
 
 
 
  
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Wireline
$
728.5

 
$
713.6

Wireless
290.6

 
295.2

Data Center Colocation
991.8

 
964.0

IT Services and Hardware
37.8

 
36.6

Corporate and eliminations
609.2

 
705.3

Total assets
$
2,657.9

 
$
2,714.7


10
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

10.    Supplemental Guarantor Information
Cincinnati Bell Telephone Notes
Cincinnati Bell Telephone Company LLC (“CBT”), a wholly-owned subsidiary of Cincinnati Bell Inc. (the “Parent Company”), had $207.5 million in notes outstanding at March 31, 2012, that are guaranteed by the Parent Company and no other subsidiaries of the Parent Company. The guarantee is full and unconditional. The Parent Company’s subsidiaries generate substantially all of its income and cash flow and generally distribute or advance the funds necessary to meet the Parent Company’s debt service obligations. As of December 31, 2011, management completed a restructuring of certain of its legal entities. Cincinnati Bell Complete Protection Inc. was merged into Cincinnati Bell Inc. (the Parent and guarantor).

The following information sets forth the Condensed Consolidating Statements of Operations and Comprehensive Income for the three months ended March 31, 2012 and 2011, Condensed Consolidating Balance Sheets as of March 31, 2012 and December 31, 2011, and Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2012 and 2011, of (1) the Parent Company, as the guarantor, (2) CBT, as the issuer, and (3) the non-guarantor subsidiaries on a combined basis. The condensed consolidating financial statements shown below have been retroactively restated to reflect the merger of Cincinnati Bell Complete Protection Inc. into Cincinnati Bell Inc. (the Parent and guarantor) for all periods.  

11
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Condensed Consolidating Statements of Operations and Comprehensive Income
  
Three Months Ended March 31, 2012
(dollars in millions)
Parent
(Guarantor)
 
CBT
(Issuer)
 
Other
Non-guarantors
 
Eliminations
 
Total
Revenue
$
—

 
$
159.9

 
$
218.5

 
$
(15.6
)
 
$
362.8

Operating costs and expenses
7.1

 
104.4

 
185.9

 
(15.6
)
 
281.8

Operating income (loss)
(7.1
)
 
55.5

 
32.6

 
—

 
81.0

Interest expense (income), net
40.6

 
(0.1
)
 
13.9

 
—

 
54.4

Other expense (income), net
(0.4
)
 
1.1

 
0.8

 
—

 
1.5

Income (loss) before equity in earnings of subsidiaries and income taxes
(47.3
)
 
54.5

 
17.9

 
—

 
25.1

Income tax expense (benefit)
(14.1
)
 
19.8

 
6.8

 
—

 
12.5

Equity in earnings of subsidiaries, net of tax
45.8

 
—

 
—

 
(45.8
)
 
—

Net income
12.6

 
34.7

 
11.1

 
(45.8
)
 
12.6

Other comprehensive income
1.4

 
—

 
—

 
—

 
1.4

Total comprehensive income
$
14.0

 
$
34.7

 
$
11.1

 
$
(45.8
)
 
$
14.0

 
 
 
 
 
 
 
 
 
 
Net income
12.6

 
34.7

 
11.1

 
(45.8
)
 
12.6

Preferred stock dividends
2.6

 
—

 
—

 
—

 
2.6

Net income applicable to common shareowners
$
10.0

 
$
34.7

 
$
11.1

 
$
(45.8
)
 
$
10.0

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2011
 
Parent
(Guarantor)
 
CBT
(Issuer)
 
Other
Non-guarantors
 
Eliminations
 
Total
Revenue
$
1.5

 
$
163.8

 
$
209.5

 
$
(14.0
)
 
$
360.8

Operating costs and expenses
7.1

 
104.7

 
176.6

 
(14.0
)
 
274.4

Operating income (loss)
(5.6
)
 
59.1

 
32.9

 
—

 
86.4

Interest expense, net
37.0

 
1.7

 
15.8

 
—

 
54.5

Other expense (income), net
(0.4
)
 
2.1

 
(1.7
)
 
—

 
—

Income (loss) before equity in earnings of subsidiaries and income taxes
(42.2
)
 
55.3

 
18.8

 
—

 
31.9

Income tax expense (benefit)
(13.2
)
 
20.9

 
6.3

 
—

 
14.0

Equity in earnings of subsidiaries, net of tax
46.9

 
—

 
—

 
(46.9
)
 
—

Net income
17.9

 
34.4

 
12.5

 
(46.9
)
 
17.9

Other comprehensive income
1.2

 
—

 
—

 
—

 
1.2

Total comprehensive income
$
19.1

 
$
34.4

 
$
12.5

 
$
(46.9
)
 
$
19.1

 
 
 
 
 
 
 
 
 
 
Net income
17.9

 
34.4

 
12.5

 
(46.9
)
 
17.9

Preferred stock dividends
2.6

 
—

 
—

 
—

 
2.6

Net income applicable to common shareowners
$
15.3

 
$
34.4

 
$
12.5

 
$
(46.9
)
 
$
15.3




12
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Condensed Consolidating Balance Sheets
 
 
 
 
 
 
 
 
 
  
As of March 31, 2012
(dollars in millions)
Parent
(Guarantor)
 
CBT
(Issuer)
 
Other
Non-guarantors
 
Eliminations
 
Total
Cash and cash equivalents
$
1.8

 
$
1.2

 
$
3.9

 
$
—

 
$
6.9

Receivables, net
1.2

 
—

 
174.8

 
—

 
176.0

Other current assets
5.7

 
35.5

 
33.7

 
(0.4
)
 
74.5

Total current assets
8.7

 
36.7

 
212.4

 
(0.4
)
 
257.4

Property, plant and equipment, net
0.1

 
627.6

 
798.6

 
—

 
1,426.3

Goodwill and intangibles, net
—

 
2.4

 
500.7

 
—

 
503.1

Investments in and advances to subsidiaries
1,833.9

 
274.3

 
—

 
(2,108.2
)
 
—

Other noncurrent assets
389.7

 
7.4

 
234.5

 
(160.5
)
 
471.1

Total assets
$
2,232.4

 
$
948.4

 
$
1,746.2

 
$
(2,269.1
)
 
$
2,657.9

 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
—

 
$
3.0

 
$
9.9

 
$
—

 
$
12.9

Accounts payable
0.4

 
41.6

 
46.9

 
—

 
88.9

Other current liabilities
98.0

 
50.1

 
49.6

 
0.5

 
198.2

Total current liabilities
98.4

 
94.7

 
106.4

 
0.5

 
300.0

Long-term debt, less current portion
2,182.2

 
215.6

 
120.5

 
—

 
2,518.3

Other noncurrent liabilities
394.8

 
131.6

 
175.9

 
(161.4
)
 
540.9

Intercompany payables
258.3

 
—

 
662.5

 
(920.8
)
 
—

Total liabilities
2,933.7

 
441.9

 
1,065.3

 
(1,081.7
)
 
3,359.2

Shareowners’ equity (deficit)
(701.3
)
 
506.5

 
680.9

 
(1,187.4
)
 
(701.3
)
Total liabilities and shareowners’ equity (deficit)
$
2,232.4

 
$
948.4

 
$
1,746.2

 
$
(2,269.1
)
 
$
2,657.9

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
 
Parent
(Guarantor)
 
CBT
(Issuer)
 
Other
Non-guarantors
 
Eliminations
 
Total
Cash and cash equivalents
$
69.6

 
$
1.4

 
$
2.7

 
$
—

 
$
73.7

Receivables, net
2.0

 
—

 
177.4

 
—

 
179.4

Other current assets
5.8

 
31.8

 
31.7

 
(1.4
)
 
67.9

Total current assets
77.4

 
33.2

 
211.8

 
(1.4
)
 
321.0

Property, plant and equipment, net
0.1

 
642.5

 
757.9

 
—

 
1,400.5

Goodwill and intangibles, net
—

 
2.4

 
505.1

 
—

 
507.5

Investments in and advances to subsidiaries
1,731.4

 
237.3

 
—

 
(1,968.7
)
 
—

Other noncurrent assets
387.9

 
7.6

 
234.0

 
(143.8
)
 
485.7

Total assets
$
2,196.8

 
$
923.0

 
$
1,708.8

 
$
(2,113.9
)
 
$
2,714.7

 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
—

 
$
3.1

 
$
9.9

 
$
—

 
$
13.0

Accounts payable
1.0

 
53.7

 
78.7

 
—

 
133.4

Other current liabilities
93.2

 
55.3

 
61.5

 
—

 
210.0

Total current liabilities
94.2

 
112.1

 
150.1

 
—

 
356.4

Long-term debt, less current portion
2,182.0

 
216.3

 
122.3

 
—

 
2,520.6

Other noncurrent liabilities
404.3

 
122.8

 
171.0

 
(145.2
)
 
552.9

Intercompany payables
231.5

 
—

 
595.8

 
(827.3
)
 
—

Total liabilities
2,912.0

 
451.2

 
1,039.2

 
(972.5
)
 
3,429.9

Shareowners’ equity (deficit)
(715.2
)
 
471.8

 
669.6

 
(1,141.4
)
 
(715.2
)
Total liabilities and shareowners’ equity (deficit)
$
2,196.8

 
$
923.0

 
$
1,708.8

 
$
(2,113.9
)
 
$
2,714.7






13
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Condensed Consolidating Statements of Cash Flows
  
Three Months Ended March 31, 2012
(dollars in millions)
Parent
(Guarantor)
 
CBT
(Issuer)
 
Other
Non-guarantors
 
Eliminations
 
Total
Cash flows provided by (used in) operating activities
$
(36.5
)
 
$
47.4

 
$
12.7

 
$
—

 
$
23.6

Capital expenditures
—

 
(22.3
)
 
(62.3
)
 
—

 
(84.6
)
Cash flows used in investing activities
—

 
(22.3
)
 
(62.3
)
 
—

 
(84.6
)
Funding between Parent and subsidiaries, net
(29.6
)
 
(24.5
)
 
54.1

 
—

 
—

Repayment of debt
—

 
(0.8
)
 
(3.2
)
 
—

 
(4.0
)
Common stock repurchase
(0.3
)
 
—

 
—

 
—

 
(0.3
)
Other financing activities
(1.4
)
 
—

 
(0.1
)
 
—

 
(1.5
)
Cash flows provided by (used in) financing activities
(31.3
)
 
(25.3
)
 
50.8

 
—

 
(5.8
)
Increase (decrease) in cash and cash equivalents
(67.8
)
 
(0.2
)
 
1.2

 
—

 
(66.8
)
Beginning cash and cash equivalents
69.6

 
1.4

 
2.7

 
—

 
73.7

Ending cash and cash equivalents
$
1.8

 
$
1.2

 
$
3.9

 
$
—

 
$
6.9

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2011
 
Parent
(Guarantor)
 
CBT
(Issuer)
 
Other
Non-guarantors
 
Eliminations
 
Total
Cash flows provided by (used in) operating activities
$
(34.2
)
 
$
56.4

 
$
42.8

 
$
—

 
$
65.0

Capital expenditures
—

 
(23.7
)
 
(28.7
)
 
—

 
(52.4
)
Other investing activities
—

 
0.1

 
—

 
—

 
0.1

Cash flows used in investing activities
—

 
(23.6
)
 
(28.7
)
 
—

 
(52.3
)
Funding between Parent and subsidiaries, net
45.7

 
(32.8
)
 
(12.9
)
 
—

 
—

Repayment of debt
—

 
(0.5
)
 
(2.5
)
 
—

 
(3.0
)
Other financing activities
(3.0
)
 
—

 
—

 
—

 
(3.0
)
Cash flows provided by (used in) financing activities
42.7

 
(33.3
)
 
(15.4
)
 
—

 
(6.0
)
Increase (decrease) in cash and cash equivalents
8.5

 
(0.5
)
 
(1.3
)
 
—

 
6.7

Beginning cash and cash equivalents
69.8

 
1.8

 
5.7

 
—

 
77.3

Ending cash and cash equivalents
$
78.3

 
$
1.3

 
$
4.4

 
$
—

 
$
84.0


14
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Supplemental Guarantor Information - 8 3/8% Senior Notes due 2020, 8  3/4% Senior Subordinated Notes due 2018, 8 1/4% Senior Notes due 2017, and 7% Senior Notes due 2015
The Parent Company’s 8 3/8% Senior Notes due 2020, 8 3/4% Senior Subordinated Notes due 2018, 8 1/4% Senior Notes due 2017, and 7% Senior Notes due 2015 are guaranteed by the following subsidiaries: Cincinnati Bell Entertainment Inc., Cincinnati Bell Any Distance Inc., Cincinnati Bell Telecommunications Services LLC, Cincinnati Bell Wireless LLC, CBTS Software LLC, Cincinnati Bell Shared Services LLC, Cincinnati Bell Technology Solutions Inc., Cincinnati Bell Any Distance of Virginia LLC, eVolve Business Solutions LLC, GramTel Inc., Cyrus One Foreign Holdings LLC, and CyrusOne Inc. As of December 31, 2011, management completed a restructuring of certain of its legal entities. Cincinnati Bell Complete Protection Inc. was merged into Cincinnati Bell Inc. (the Parent and issuer) for all periods.
The Parent Company owns directly or indirectly 100% of each guarantor and each guarantee is full and unconditional, and joint and several. In certain customary circumstances, a subsidiary may be released from its guarantee obligation. These circumstances are defined as follows:
•
upon the sale of all of the capital stock of a subsidiary,
 
 
•
if the Company designates the subsidiary as an unrestricted subsidiary under the terms of the indentures, or
 
 
•
if the subsidiary is released as a guarantor from the Company's credit facility.

The Parent Company's subsidiaries generate substantially all of its income and cash flow and generally distribute or advance the funds necessary to meet the Parent Company's debt service obligations. The following information sets forth the Condensed Consolidating Statements of Operations and Comprehensive Income for the three months ended March 31, 2012 and 2011, Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and the Condensed Consolidating Balance Sheets as of March 31, 2012 and December 31, 2011, of (1) the Parent Company, as the issuer, (2) the guarantor subsidiaries on a combined basis, and (3) the non-guarantor subsidiaries on a combined basis. The condensed consolidating financial statements shown below have been retroactively restated to reflect the merger of Cincinnati Bell Complete Protection Inc. into Cincinnati Bell Inc. (the Parent and issuer) for all periods.


15
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Condensed Consolidating Statements of Operations and Comprehensive Income
 
Three Months Ended March 31, 2012
(dollars in millions)
Parent
(Issuer)
 
Guarantors
 
Non-guarantors
 
Eliminations
 
Total
Revenue
$
—

 
$
228.0

 
$
150.4

 
$
(15.6
)
 
$
362.8

Operating costs and expenses
7.1

 
194.5

 
95.8

 
(15.6
)
 
281.8

Operating income (loss)
(7.1
)
 
33.5

 
54.6

 
—

 
81.0

Interest expense, net
40.6

 
10.7

 
3.1

 
—

 
54.4

Other expense (income), net
(0.4
)
 
5.3

 
(3.4
)
 
—

 
1.5

Income (loss) before equity in earnings of subsidiaries and income taxes
(47.3
)
 
17.5

 
54.9

 
—

 
25.1

Income tax expense (benefit)
(14.1
)
 
5.9

 
20.7

 
—

 
12.5

Equity in earnings of subsidiaries, net of tax
45.8

 
—

 
—

 
(45.8
)
 
—

Net income
12.6

 
11.6

 
34.2

 
(45.8
)
 
12.6

Other comprehensive income
1.4

 
—

 
—

 
—

 
1.4

Total comprehensive income
$
14.0

 
$
11.6

 
$
34.2

 
$
(45.8
)
 
$
14.0

 
 
 
 
 
 
 
 
 
 
Net income
12.6

 
11.6

 
34.2

 
(45.8
)
 
12.6

Preferred stock dividends
2.6

 
—

 
—

 
—

 
2.6

Net income applicable to common shareowners
$
10.0

 
$
11.6

 
$
34.2

 
$
(45.8
)
 
$
10.0

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2011
 
Parent
(Issuer)
 
Guarantors
 
Non-guarantors
 
Eliminations
 
Total
Revenue
$
1.5

 
$
224.4

 
$
148.9

 
$
(14.0
)
 
$
360.8

Operating costs and expenses
7.1

 
188.6

 
92.7

 
(14.0
)
 
274.4

Operating income (loss)
(5.6
)
 
35.8

 
56.2

 
—

 
86.4

Interest expense, net
37.0

 
13.6

 
3.9

 
—

 
54.5

Other expense (income), net
(0.4
)
 
2.5

 
(2.1
)
 
—

 
—

Income (loss) before equity in earnings of subsidiaries and income taxes
(42.2
)
 
19.7

 
54.4

 
—

 
31.9

Income tax expense (benefit)
(13.2
)
 
6.9

 
20.3

 
—

 
14.0

Equity in earnings of subsidiaries, net of tax
46.9

 
—

 
—

 
(46.9
)
 
—

Net income
17.9

 
12.8

 
34.1

 
(46.9
)
 
17.9

Other comprehensive income
1.2

 
—

 
—

 
—

 
1.2

Total comprehensive income
$
19.1

 
$
12.8

 
$
34.1

 
$
(46.9
)
 
$
19.1

 
 
 
 
 
 
 
 
 
 
Net income
17.9

 
12.8

 
34.1

 
(46.9
)
 
17.9

Preferred stock dividends
2.6

 
—

 
—

 
—

 
2.6

Net income applicable to common shareowners
$
15.3

 
$
12.8

 
$
34.1

 
$
(46.9
)
 
$
15.3


16
Table of Contents
Form 10-Q Part I
 
Cincinnati Bell Inc.

Condensed Consolidating Balance Sheets
 
 
 
 
 
 
 
 
 
 
As of March 31, 2012
(dollars in millions)
Parent
(Issuer)
 
Guarantors
 
Non-guarantors
 
Eliminations
 
Total
Cash and cash equivalents
$
1.8

 
$
1.1

 
$
4.0

 
$
—

 
$
6.9

Receivables, net
1.2

 
2.0

 
172.8

 
—

 
176.0

Other current assets
5.7

 
29.0

 
40.2

 
(0.4
)
 
74.5

Total current assets
8.7

 
32.1

 
217.0

 
(0.4
)
 
257.4

Property, plant and equipment, net
0.1

 
772.6

 
653.6

 
—

 
1,426.3

Goodwill and intangibles, net
—

 
500.7

 
2.4

 
—

 
503.1

Investments in and advances to subsidiaries
1,833.9

 
4.6

 
266.5

 
(2,105.0
)
 
—

Other noncurrent assets
389.7

 
235.7

 
6.2

 
(160.5
)
 
471.1

Total assets
$
2,232.4

 
$
1,545.7

 
$
1,145.7

 
$
(2,265.9
)
 
$
2,657.9

 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
—

 
$
9.4

 
$
3.5

 
$
—

 
$
12.9

Accounts payable
0.4

 
54.1

 
34.4

 
—

 
88.9

Other current liabilities
98.0

 
51.6

 
48.1

 
0.5

 
198.2

Total current liabilities
98.4

 
115.1

 
86.0

 
0.5

 
300.0

Long-term debt, less current portion
2,182.2

 
112.1

 
224.0

 
—

 
2,518.3

Other noncurrent liabilities
394.8

 
159.7

 
147.8

 
(161.4
)
 
540.9

Intercompany payables
258.3

 
553.3

 
120.7

 
(932.3
)
 
—

Total liabilities
2,933.7

 
940.2

 
578.5

 
(1,093.2
)
 
3,359.2

Shareowners’ equity (deficit)
(701.3
)
 
605.5

 
567.2

 
(1,172.7
)
 
(701.3
)
Total liabilities and shareowners’ equity (deficit)
$
2,232.4

 
$
1,545.7

 
$
1,145.7

 
$
(2,265.9
)
 
$
2,657.9

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
 
Parent
(Issuer)
 
Guarantors
 
Non-guarantors
 
Eliminations
 
Total
Cash and cash equivalents
$
69.6

 
$
1.1

 
$
3.0

 
$
—

 
$
73.7

Receivables, net
2.0

 
1.9

 
175.5

 
—

 
179.4

Other current assets
5.8

 
27.6

 
35.9

 
(1.4
)
 
67.9

Total current assets
77.4

 
30.6

 
214.4

 
(1.4
)
 
321.0

Property, plant and equipment, net
0.1

 
731.4

 
669.0

 
—

 
1,400.5

Goodwill and intangibles, net
—

 
505.1

 
2.4

 
—

 
507.5

Investments in and advances to subsidiaries
1,731.4

 
1.2

 
202.5

 
(1,935.1