Edgar Filing: CINCINNATI BELL INC

Document

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 June 30, 2017



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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	o

Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 July 31, 2017, there were 42,175,277 common shares outstanding.

Table of Contents



Form 10-Q Part I		Cincinnati Bell Inc.

TABLE OF CONTENTS

PART I. Financial Information



Description		Page
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations (Unaudited) Three and Six Months Ended June 30, 2017 and 2016	1

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2017 and 2016	2

	Condensed Consolidated Balance Sheets (Unaudited) June 30, 2017 and December 31, 2016	3

	Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2017 and 2016	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	32

	PART II. Other Information

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Default upon Senior Securities	37

Item 4.	Mine Safety Disclosure	37

Item 5.	Other Information	37

Item 6.	Exhibits	38

	Signatures	39

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Form 10-Q Part I		Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in millions, except per share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Revenue
Services	$	248.6		$	244.9		$	490.5		$	486.4
Products	45.4			54.3			81.7			101.7
Total revenue	294.0			299.2			572.2			588.1
Costs and expenses
Cost of services, excluding items below	126.7			124.8			252.2			248.0
Cost of products sold, excluding items below	38.7			46.0			68.0			85.5
Selling, general and administrative, excluding items below	55.4			56.2			112.1			109.4
Depreciation and amortization	47.0			44.8			92.8			88.2
Restructuring and severance related charges	3.6			—			29.2			—
Other	1.7			—			2.3			—
Total operating costs and expenses	273.1			271.8			556.6			531.1
Operating income	20.9			27.4			15.6			57.0
Interest expense	18.1			19.9			36.1			40.2
Loss on extinguishment of debt, net	—			5.2			—			2.8
Gain on sale of Investment in CyrusOne	—			(118.6		)	(117.7		)	(118.6		)
Other income, net	(0.6		)	(1.1		)	(1.0		)	(1.1		)
Income before income taxes	3.4			122.0			98.2			133.7
Income tax expense	1.3			44.4			35.7			49.1
Net income	2.1			77.6			62.5			84.6
Preferred stock dividends	2.6			2.6			5.2			5.2
Net (loss) income applicable to common shareowners	$	(0.5	)	$	75.0		$	57.3		$	79.4

Basic net (loss) earnings per common share	$	(0.01	)	$	1.79		$	1.36		$	1.89
Diluted net (loss) earnings per common share	$	(0.01	)	$	1.78		$	1.35		$	1.89

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

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in millions)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net income	$	2.1		$	77.6		$	62.5		$	84.6
Other comprehensive income (loss), net of tax:
Unrealized gains on Investment in CyrusOne, net of tax of $4.4	—			—			8.3			—
Reclassification adjustment for gain on sale of Investment in CyrusOne included in net income, net of tax of ($41.3)	—			—			(76.4		)	—
Foreign currency translation loss	—			—			—			(0.1		)
Defined benefit plans:
Amortization of prior service benefits included in net income, net of tax of ($0.4), ($1.3), ($0.8), ($2.7)	(0.7		)	(2.4		)	(1.4		)	(4.7		)
Amortization of net actuarial loss included in net income, net of tax of $2.0, $2.2, $4.0, $4.3	3.6			3.9			7.1			7.8
Total other comprehensive income (loss)	2.9			1.5			(62.4		)	3.0
Total comprehensive income	$	5.0		$	79.1		$	0.1		$	87.6

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

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Form 10-Q Part I		Cincinnati Bell Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except share amounts)

(Unaudited)



	June 30, 2017			December 31, 2016
Assets
Current assets
Cash and cash equivalents	$	58.2		$	9.7
Receivables, less allowances of $9.7 and $9.9	166.5			178.6
Inventory, materials and supplies	23.4			22.7
Prepaid expenses	19.9			15.0
Other current assets	5.3			3.9
Total current assets	273.3			229.9
Property, plant and equipment, net	1,111.7			1,085.5
Investment in CyrusOne	—			128.0
Goodwill	18.6			14.3
Deferred income taxes, net	55.1			64.5
Other noncurrent assets	23.0			18.8
Total assets	$	1,481.7		$	1,541.0
Liabilities and Shareowners’ Deficit
Current liabilities
Current portion of long-term debt	$	10.8		$	7.5
Accounts payable	121.5			105.9
Unearned revenue and customer deposits	33.4			36.3
Accrued taxes	12.2			12.9
Accrued interest	21.8			12.7
Accrued payroll and benefits	27.3			25.7
Other current liabilities	34.9			31.9
Total current liabilities	261.9			232.9
Long-term debt, less current portion	1,116.1			1,199.1
Pension and postretirement benefit obligations	190.2			197.7
Other noncurrent liabilities	37.5			33.0
Total liabilities	1,605.7			1,662.7
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 June 30, 2017 and December 31, 2016; liquidation preference $1,000 per share ($50 per depositary share)	129.4			129.4
Common shares, $.01 par value; 96,000,000 shares authorized; 42,173,872 and 42,056,237 shares issued; 42,173,872 and 42,056,237 shares outstanding at June 30, 2017 and December 31, 2016	0.4			0.4
Additional paid-in capital	2,568.5			2,570.9
Accumulated deficit	(2,669.6		)	(2,732.1		)
Accumulated other comprehensive loss	(152.7		)	(90.3		)
Total shareowners’ deficit	(124.0		)	(121.7		)
Total liabilities and shareowners’ deficit	$	1,481.7		$	1,541.0

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

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Form 10-Q Part I		Cincinnati Bell Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)



	Six Months Ended
	June 30,
	2017			2016
Cash flows from operating activities
Net income	$	62.5		$	84.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	92.8			88.2
Loss on extinguishment of debt, net	—			2.8
Gain on sale of Investment in CyrusOne	(117.7		)	(118.6		)
Provision for loss on receivables	3.5			4.3
Noncash portion of interest expense	1.1			1.7
Deferred income taxes	35.2			48.6
Pension and other postretirement payments less than (in excess of) expense	1.5			(2.8		)
Stock-based compensation	3.9			3.5
Other, net	(3.0		)	(3.8		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in receivables	25.4			(5.5		)
Increase in inventory, materials, supplies, prepaid expenses and other current assets	(5.9		)	(5.0		)
Increase in accounts payable	9.9			14.0
Increase (decrease) in accrued and other current liabilities	9.0			(17.0		)
Decrease (increase) in other noncurrent assets	0.9			(0.6		)
Increase in other noncurrent liabilities	3.8			3.5
Net cash provided by operating activities	122.9			97.9
Cash flows from investing activities
Capital expenditures	(105.2		)	(121.6		)
Proceeds from sale of Investment in CyrusOne	140.7			142.5
Acquisitions of businesses	(9.6		)	—
Dividends received from Investment in CyrusOne	—			4.9
Other, net	0.4			(0.7		)
Net cash provided by investing activities	26.3			25.1
Cash flows from financing activities
Net (decrease) increase in corporate credit and receivables facilities with initial maturities less than 90 days	(89.5		)	15.4
Repayment of debt	(4.2		)	(124.6		)
Debt issuance costs	(0.7		)	(1.9		)
Dividends paid on preferred stock	(5.2		)	(5.2		)
Common stock repurchase	—			(4.6		)
Other, net	(1.1		)	0.1
Net cash used in financing activities	(100.7		)	(120.8		)
Net increase in cash and cash equivalents	48.5			2.2
Cash and cash equivalents at beginning of period	9.7			7.4
Cash and cash equivalents at end of period	$	58.2		$	9.6

Noncash investing and financing transactions:
Accrual of CyrusOne dividends	$	—		$	1.5
Acquisition of property by assuming debt and other noncurrent liabilities	$	6.9		$	10.1
Acquisition of property on account	$	24.8		$	34.2

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

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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 ("Cincinnati Bell", "we", "our", "us" or the "Company") provides diversified telecommunications and technology services. The Company generates a large portion of its revenue by serving customers in the Greater Cincinnati and Dayton, Ohio areas. An economic downturn or natural disaster occurring in this, or a portion of this, limited operating territory could have a disproportionate effect on our business, financial condition, results of operations and cash flows compared to similar companies of a national scope and similar companies operating in different geographic areas.

The Company has receivables with one large customer, General Electric Company, that makes up 17% and 21% of the outstanding accounts receivable balance at June 30, 2017 and December 31, 2016, respectively. This same customer represented 12% and 11% of consolidated revenue for the three and six months ended June 30, 2016, respectively.

Merger and Acquisition Activity — On July 9, 2017, the Company and Hawaiian Telcom Holdco, Inc., a Delaware corporation (“Hawaiian Telcom”), entered into an Agreement and Plan of Merger (the "Hawaiian Telcom Merger Agreement") providing for the merger of Hawaiian Telcom with a wholly-owned subsidiary of the Company in exchange for the consideration described below. Hawaiian Telcom is a fiber-centric technology leader providing voice, video, broadband, data center and cloud solutions to consumer, business and wholesale customers on the Hawaiian islands.

At the effective time of the merger, each share of Hawaiian Telcom common stock, par value of $0.01 per share, issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive, at the holder’s election and subject to proration as set forth in the Hawaiian Telcom Merger Agreement (1) 1.6305 common shares, par value $0.01 per share, of the Company (the “Company Common Shares”) (the “Share Consideration”); (2) 0.6522 Company Common Shares and $18.45 in cash, without interest (the “Mixed Consideration”); or (3) $30.75 in cash, without interest (the “Cash Consideration”). Hawaiian Telcom stockholders who elect to receive the Share Consideration or the Cash Consideration will be subject to proration to ensure that the aggregate number of Company Common Shares to be issued by the Company in the Hawaiian Telcom Merger and the aggregate amount of cash to be paid in the Hawaiian Telcom Merger will be the same as if all electing stockholders received the Mixed Consideration.

The total value of the consideration to be exchanged is approximately $360 million, exclusive of debt of Hawaiian Telcom of approximately $290 million as of March 31, 2017.

The merger is subject to standard closing conditions including the approval of Hawaiian Telcom's stockholders, the approval of the listing of additional shares of Cincinnati Bell common stock to be issued to Hawaiian Telcom’s stockholders, required federal and state regulatory approvals and other customary closing conditions. We expect the merger to close in the second half of 2018.

On July 9, 2017, we also entered into a definitive Agreement and Plan of Merger with OnX Holdings LLC ("OnX"), a privately held company that provides technology services and solutions to enterprise customers in the U.S., Canada and the U.K., in exchange for cash consideration of $201 million. The merger is subject to customary closing conditions and is expected to close in the fourth quarter of 2017.

In connection with the mergers with Hawaiian Telcom and OnX, we secured financing commitments for $1,130 million in senior secured credit facilities, as described in Note 3, that, in addition to cash on hand and other sources of liquidity, are expected to be used to repay the existing indebtedness of Hawaiian Telcom, pay the cash consideration for both mergers, repay certain indebtedness of the Company and pay the fees and expenses in connection with both mergers. The Company is also exploring the possibility of replacing a portion of the secured committed term loan with unsecured senior notes, subject to market conditions.

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.

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Form 10-Q Part I		Cincinnati Bell Inc.

On October 4, 2016, the Company filed an amendment to its Amended and Restated Articles of Incorporation to affect a one-for-five reverse split of its issued common stock (the “Reverse Split”) which had the effect of reducing the number of issued shares of common stock from 210,275,005 to 42,055,001. Any fractional shares of common stock resulting from the Reverse Split were settled in cash equal to the fraction of a share to which the holder was entitled. As a result of the Reverse Split, the Company reduced total par value from common stock by $1.7 million and increased the additional paid-in capital by the same amount.

The Condensed Consolidated Balance Sheet as of December 31, 2016 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 2016 Annual Report on Form 10-K. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results expected for the full year or any other interim period.

Business Combinations — In accounting for business combinations, we apply the accounting requirements of ASC 805, “Business Combinations,” which requires the recording of net assets of acquired businesses at fair value. In developing estimates of fair value of acquired assets and assumed liabilities, management analyzes a variety of factors including market data, estimated future cash flows of the acquired operations, industry growth rates, current replacement cost for fixed assets, and market rate assumptions for contractual obligations. Such a valuation requires management to make significant estimates and assumptions, particularly with respect to the intangible assets. In addition, contingent consideration is presented at fair value at the date of acquisition. Transaction costs are expensed as incurred.

On February 28, 2017 we acquired SunTel Services, a private company that provides network security, data connectivity, and unified communications solutions to commercial and enterprise customers across multiple sectors throughout Michigan for cash consideration of $10.0 million. Based on final fair value assessment, the acquired assets and liabilities assumed consisted primarily of property plant and equipment of $0.4 million, customer relationship intangible assets of $1.2 million, working capital of $4.1 million and goodwill of $4.3 million. These assets and liabilities are included in the IT Services and Hardware segment.

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.

Investment in CyrusOne — As of December 31, 2016, "Investment in CyrusOne" on the Condensed Consolidated Balance Sheets was recorded at fair value, which was determined based on closing market price of CyrusOne Inc. at December 31, 2016. This investment is classified as Level 1 in the fair value hierarchy. Unrealized gains and losses on our investment in CyrusOne are included in "Accumulated other comprehensive loss", net of taxes on the Condensed Consolidated Balance Sheets. When evaluating the investments for other-than-temporary impairment, the Company reviews such factors as the financial condition of the issuer, severity and duration of the fair value decline and evaluation of factors that could cause the investment to have an other-than-temporary decline in fair value.

In the first quarter of 2017, we sold our remaining 2.8 million shares of CyrusOne Inc. common stock for net proceeds totaling $140.7 million that resulted in a realized gain of $117.7 million. As of March 31, 2017, we no longer have an investment in CyrusOne Inc.

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. The Company expects its effective rate to exceed statutory rates primarily due to non-deductible expenses.

During 2016, the Company reclassed $14.5 million of Alternative Minimum Tax ("AMT") refundable tax credits from "Deferred income taxes, net" to "Receivables" as these credits were expected to be utilized during 2017. In the first two quarters of 2017, the Company reclassed an additional $7.8 million from "Deferred income taxes, net" to "Receivables." In the second quarter the Company received $14.5 million of payments related to the 2016 AMT tax credits. Acceleration of the AMT refundable tax credits was the result of the Company's decision to make an election on its 2016 federal income tax return to claim the credits in lieu of claiming bonus depreciation. New tax legislation enacted in 2015 increased the amount of AMT credits that can be claimed beginning with the 2016 tax year. The Company plans to make the same election on its 2017 federal income tax return.

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Form 10-Q Part I		Cincinnati Bell Inc.

Recently Issued Accounting Standards — In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation - Stock Compensation, which amends the scope of modification accounting for share-based payment arrangements. The ASU is effective for public business entities for annual periods beginning after December 15, 2017. The Company plans to prospectively adopt the standard effective January 1, 2018 and will apply the amended guidance to any awards modified on or after this date.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Period Pension Cost and Net Periodic Postretirement Benefit Cost, which amends the requirements in Accounting Standards Codification ("ASC") 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The ASU requires entities to disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented on a retrospective basis as of the date of adoption. In addition, only the service-cost component of net benefit cost is eligible for capitalization. The ASU is effective for public business entities for annual periods beginning after December 15, 2017. The Company is currently in the process of evaluating the impact of adoption of this ASU and plans to adopt the standard effective January 1, 2018.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the amended guidance, the Company shall now recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value. The new standard is effective for public entities for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted the amended guidance effective January 1, 2017 and will apply the guidance when performing the annual impairment test in the fourth quarter of 2017.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow - Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The FASB issued the ASU with the intent of reducing diversity in practice. The new standard is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated statement of cash flows and plans to adopt the standard effective January 1, 2018.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, which simplifies various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The new standard was adopted effective January 1, 2017.

The primary impact of adoption is the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital starting in the first quarter of fiscal year 2017. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of the date of adoption. Effective January 1, 2017, we adopted a prospective company-wide policy change due to the change in accounting principle and now record forfeitures as they are incurred on a go forward basis. As a result of the change in accounting principle the cumulative-effect adjustment to retained earnings to account for the accounting policy election was immaterial to the financial statements.

The presentation requirements for cash flows related to excess tax benefits were applied retrospectively to all periods presented and did not result in a material impact to prior period net cash provided by operations and net cash used in financing. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.

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Form 10-Q Part I		Cincinnati Bell Inc.

In February 2016, the FASB issued ASU 2016-02, Leases, which represents a wholesale change to lease accounting. The standard introduces a lessee model that brings most leases on the balance sheet as well as aligns certain underlying principles of the new lessor model with those in ASC 606. The new standard is effective for public entities for fiscal years beginning after December 15, 2018, and lessees and lessors are required to use a modified retrospective transition method for existing leases. The Company is in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements.

The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments in January 2016. The amended guidance requires entities to carry all investments in equity securities at fair value through net income unless the entity has elected the practicability exception to fair value measurement. This standard will be effective for the fiscal year ending December 31, 2018 and will require a cumulative-effect adjustment to beginning retained earnings on this date. The Company is currently in the process of evaluating the impact of adoption of this ASU on the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard also includes expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. In August 2015, ASU 2015-14 was issued deferring the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 with an optional early application date for annual reporting periods beginning after December 15, 2016. The Company will adopt the standard and all subsequent amendments in the first quarter of the fiscal year ending December 31, 2018.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented. Our ability to adopt using the full retrospective method is dependent on the successful and timely implementation of a revenue software application that has been procured from a third-party provider and the completion of our analysis of information necessary to restate prior period financial statements.

While we are continuing to assess all potential impacts of the standard, we currently believe the standard will not have a material impact on our consolidated financial statements with the possible exception of our gross treatment of hardware revenue. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations focusing on a control model rather than a risk and reward model. We are in the process of evaluating whether the standard will have an impact on our historical practice of recording our hardware sales on a gross basis.

No other new accounting pronouncement issued or effective during the year had, or is expected to have, a material impact on the consolidated financial statements.

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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 the issuance of common shares for awards under stock-based compensation plans, the exercise of warrants or the 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
	June 30,
(in millions, except per share amounts)	2017			2016
Numerator:
Net income	$	2.1		$	77.6
Preferred stock dividends	2.6			2.6
Net (loss) income applicable to common shareowners - basic and diluted	$	(0.5	)	$	75.0
Denominator:
Weighted average common shares outstanding - basic	42.2			42.0
Stock-based compensation arrangements	—			0.1
Weighted average common shares outstanding - diluted	42.2			42.1
Basic (loss) earnings per common share	$	(0.01	)	$	1.79
Diluted (loss) earnings per common share	$	(0.01	)	$	1.78



	Six Months Ended
	June 30,
(in millions, except per share amounts)	2017		2016
Numerator:
Net income	$	62.5	$	84.6
Preferred stock dividends	5.2		5.2
Net income applicable to common shareowners - basic and diluted	$	57.3	$	79.4
Denominator:
Weighted average common shares outstanding - basic	42.1		42.0
Stock-based compensation arrangements	0.2		0.1
Weighted average common shares outstanding - diluted	42.3		42.1
Basic earnings per common share	$	1.36	$	1.89
Diluted earnings per common share	$	1.35	$	1.89

For the three months ended June 30, 2017, the Company had a net loss available to common shareholders and, as a result, all common stock equivalents were excluded from the computation of diluted EPS as their inclusion would have been anti-dilutive. For the six months ended June 30, 2017, awards under the Company's stock-based compensation plans for common shares of 0.3 million were excluded from the computation of diluted EPS as the inclusion would have been anti-dilutive. For the three and six months ended June 30, 2016, awards under the Company's stock-based compensation plans for common shares of 0.4 million and 0.5 million, respectively, were excluded from the computation of diluted EPS as the inclusion would have been anti-dilutive. For all periods presented, preferred stock convertible into 0.9 million common shares was excluded as it was anti-dilutive.

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Form 10-Q Part I		Cincinnati Bell Inc.

3. Debt

The Company’s debt consists of the following:



(dollars in millions)	June 30, 2017			December 31, 2016
Current portion of long-term debt:
Capital lease obligations and other debt	$	10.8		$	7.5
Current portion of long-term debt	10.8			7.5
Long-term debt, less current portion:
Receivables Facility	—			89.5
Corporate Credit Agreement - Tranche B Term Loan	315.8			315.8
7 1/4% Senior Notes due 2023	22.3			22.3
7% Senior Notes due 2024	625.0			625.0
Cincinnati Bell Telephone Notes	87.9			87.9
Capital lease obligations and other debt	67.9			62.0
	1,118.9			1,202.5
Net unamortized premium	8.2			8.5
Unamortized note issuance costs	(11.0		)	(11.9		)
Long-term debt, less current portion	1,116.1			1,199.1
Total debt	$	1,126.9		$	1,206.6

Corporate Credit Agreement

There were no outstanding borrowings on the Corporate Credit Agreement's revolving credit facility, leaving $150.0 million available for borrowings as of June 30, 2017. This revolving credit facility expires in January 2020.

Accounts Receivable Securitization Facility

As of June 30, 2017, the Company had no borrowings and $6.3 million of letters of credit outstanding under the accounts receivable securitization facility ("Receivables Facility"), leaving $100.1 million remaining availability on the total borrowing capacity of $106.4 million. In the second quarter of 2017, the Company executed an amendment of its Receivables Facility, which replaced, amended and added certain provisions and definitions to increase the credit availability and renew the facility, which is subject to renewal every 364 days, until May 2018. The facility's termination date is in May 2019 and was not changed by this amendment. In the event the Receivables Facility is not renewed, the Company has the ability to refinance any outstanding borrowings with borrowings under the Corporate Credit Agreement. Under the terms of the Receivables Facility, the Company could obtain up to $120.0 million depending on the quantity and quality of accounts receivable. Under this agreement, 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 the Company's other subsidiaries or the Company.

Cincinnati Bell Telephone Notes

In April 2017, the Company filed Form 15 with the SEC to de-list the Cincinnati Bell Telephone Notes ("CBT Notes") due to the number of registrants no longer exceeding 300. Therefore, the Company is no longer required to prepare supplemental guarantor information related to the CBT Notes.

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Form 10-Q Part I		Cincinnati Bell Inc.

Commitment Letter

On July 9, 2017, in connection with the execution of the merger agreement with Hawaiian Telcom and the execution of the merger agreement with OnX, the Company also entered into a commitment letter (the “Commitment Letter”) with Morgan Stanley Senior Funding, Inc. (the “Committed Party”). Pursuant to the Commitment Letter, the Committed Party has committed to provide the Company with $1,100 million senior secured credit facilities (the “Credit Facilities”), consisting of (i) a $150 million revolving credit facility with a maturity of five years and (ii) term loan facilities in an aggregate amount equal to $950 million with a maturity of seven years, to be made available to the Company to finance the transactions contemplated by the OnX Merger Agreement and the Hawaiian Telcom Merger Agreement upon the closings thereof, subject to certain terms and conditions set forth in the Commitment Letter. Proceeds from the Credit Facilities will be used to repay Hawaiian Telcom’s existing indebtedness, refinance the Company’s existing revolving credit facility and term loan facility, pay the cash portion of the consideration for the Hawaiian Telcom Merger, pay the cash consideration for OnX Merger on a cash-free, debt-free basis, pay fees and expenses incurred in connection with the OnX Merger and the Hawaiian Telcom Merger and finance ongoing working capital and other general corporate needs. On July 27, 2017, the Commitment Letter was amended to include additional Lenders and to increase the total commitment to $1,130 million consisting of a $180 million revolving credit facility and $950 million term loan. The Company is also exploring the possibility of replacing a portion of the secured committed term loan with unsecured senior notes, subject to market conditions.

The Credit Facilities are subject to the negotiation of mutually acceptable credit or loan agreements and other mutually acceptable definitive documentation, which will include certain representations and warranties, affirmative and negative covenants, financial covenants, events of default and collateral and guarantee agreements that are customarily required for similar financings. Additionally, the Committed Party’s obligation to provide the financing is subject to the satisfaction of specified conditions and the accuracy of specified representations.

The documentation governing the Credit Facilities has not been finalized and accordingly the actual terms may differ from the description of such terms in the foregoing summary of the Commitment Letter.

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Form 10-Q Part I		Cincinnati Bell Inc.

4. Restructuring and Severance

Liabilities have been established for employee separations and lease abandonment. A summary of activity in the restructuring and severance liability is shown below:



(dollars in millions)	Employee Separation			Lease Abandonment		Total
Balance as of December 31, 2016	$	11.0		$	0.2	$	11.2
Charges	25.6			—		25.6
Utilizations	(12.7		)	—		(12.7		)
Balance as of March 31, 2017	23.9			0.2		24.1
Charges	3.6			—		3.6
Utilizations	(4.4		)	—		(4.4		)
Balance as of June 30, 2017	$	23.1		$	0.2	$	23.3

In the second quarter of 2017, the Company initiated reorganizations within both segments of the business in order to more appropriately align the Company for future growth. As a result, head count reductions were made resulting in a $3.6 million severance charge. In the first quarter of 2017, the Company finalized a voluntary severance program for certain bargained employees related to an initiative to reduce field and network costs within our legacy copper network. As a result, a severance charge of $25.6 million was recorded to the Entertainment and Communications segment. The Company made severance payments during the six months ended June 30, 2017 for employee separations associated with the previously discussed initiatives.

Lease abandonment costs represent future minimum lease obligations, net of expected sublease income, for abandoned facilities. Lease payments on abandoned facilities will continue through 2019.

A summary of restructuring activity by business segment is presented below:



(dollars in millions)	Entertainment and Communications			IT Services and Hardware			Corporate			Total
Balance as of December 31, 2016	$	7.5		$	3.0		$	0.7		$	11.2
Charges	25.6			—			—			25.6
Utilizations	(9.8		)	(2.3		)	(0.6		)	(12.7		)
Balance as of March 31, 2017	23.3			0.7			0.1			24.1
Charges	1.3			2.3			—			3.6
Utilizations	(3.6		)	(0.8		)	—			(4.4		)
Balance as of June 30, 2017	$	21.0		$	2.2		$	0.1		$	23.3

At June 30, 2017 and December 31, 2016, $12.7 million and $7.4 million, respectively, of the restructuring and severance liabilities were included in “Other current liabilities.” At June 30, 2017 and December 31, 2016, $10.6 million and $3.8 million was included in "Other noncurrent liabilities," respectively.

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Form 10-Q Part I		Cincinnati Bell Inc.

5. Financial Instruments and Fair Value Measurements

The carrying values of the Company's financial instruments approximate the estimated fair values as of June 30, 2017 and December 31, 2016, except for the Company's long-term debt. The carrying and fair values of these financial instruments are as follows:



	June 30, 2017				December 31, 2016
(dollars in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current portion*	$	1,059.3	$	1,083.6	$	1,149.2	$	1,177.9
*Excludes capital leases and note issuance costs.

The fair value of our long-term debt was based on closing or estimated market prices of the Company’s debt at June 30, 2017 and December 31, 2016, which is considered Level 2 of the fair value hierarchy.

6. Pension and Postretirement Plans

The Company sponsors three noncontributory defined benefit plans and a postretirement health and life insurance plan. For the three and six months ended June 30, 2017, approximately 14% and 13% of the costs, respectively, were capitalized as a component of property, plant and equipment related to construction of our copper and fiber networks. For the three and six months ended June 30, 2016, approximately 10% of the costs were capitalized as a component of property, plant and equipment related to construction of our copper and fiber networks.

For the three and six months ended June 30, 2017 and 2016, pension and postretirement benefit costs were as follows:



	Three Months Ended June 30,
	2017			2016			2017			2016
(dollars in millions)	Pension Benefits						Postretirement and Other Benefits
Service cost	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	4.9			4.8			0.8			0.9
Expected return on plan assets	(6.5		)	(6.8		)	—			—
Amortization of:
Prior service benefit	—			—			(1.1		)	(3.7		)
Actuarial loss	4.4			4.8			1.2			1.3
Total amortization	4.4			4.8			0.1			(2.4		)
Pension / postretirement costs (benefits)	$	2.8		$	2.8		$	0.9		$	(1.5	)



	Six Months Ended June 30,
	2017			2016			2017			2016
(dollars in millions)	Pension Benefits						Postretirement and Other Benefits
Service cost	$	—		$	—		$	0.1		$	0.1
Interest cost on projected benefit obligation	9.7			9.6			1.6			1.7
Expected return on plan assets	(13.0		)	(13.6		)	—			—
Amortization of:
Prior service benefit	—			—			(2.2		)	(7.4		)
Actuarial loss	8.8			9.6			2.3			2.5
Total amortization	8.8			9.6			0.1			(4.9		)
Pension / postretirement costs (benefits)	$	5.5		$	5.6		$	1.8		$	(3.1	)

Amortizations of prior service benefit and actuarial loss represent reclassifications from accumulated other comprehensive income.

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Form 10-Q Part I		Cincinnati Bell Inc.

Based on current assumptions, contributions to qualified and non-qualified pension plans in 2017 are expected to be approximately $2 million each. Management expects to make cash payments of approximately $9 million related to its postretirement health plans in 2017.

For the six months ended June 30, 2017, contributions to the pension plans were $1.8 million and contributions to the postretirement plan were $4.0 million.

7. Shareowners' Deficit

Accumulated Other Comprehensive Loss

For the six months ended June 30, 2017, the changes in accumulated other comprehensive loss by component were as follows:



(dollars in millions)	Unrecognized Net Periodic Pension and Postretirement Benefit Cost				Unrealized gain on Investment in CyrusOne				Foreign Currency Translation Loss			Total
Balance as of December 31, 2016	$	(157.6	)		$	68.1			$	(0.8	)	$	(90.3	)
Unrealized gain on Investment in CyrusOne, net	—				8.3			(a)	—			8.3
Reclassifications, net	5.7			(b)	(76.4		)	(c)	—			(70.7		)
Balance as of June 30, 2017	$	(151.9	)		$	—			$	(0.8	)	$	(152.7	)


(a)	The unrealized gain on Investment in CyrusOne, net of tax, represents changes in the fair value of CyrusOne shares of common stock owned by the company during the period, before any subsequent sales of those shares.


(b)	These reclassifications are included in the components of net periodic pension and postretirement benefit costs (see Note 6 for additional details). The components of net periodic pension and postretirement benefit cost are reported within "Cost of services," "Cost of products sold," and "Selling, general and administrative" expenses on the Condensed Consolidated Statements of Operations.


(c)	These reclassifications are reported within "Gain on sale of Investment in CyrusOne" on the Condensed Consolidated Statements of Operations.

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Form 10-Q Part I		Cincinnati Bell Inc.

8. Business Segment Information

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 Entertainment and Communications segment provides products and services such as data transport, high-speed internet, video, local voice, long distance, voice over internet protocol ("VoIP") and other services. The IT Services and Hardware segment provides a range of fully managed and outsourced IT and telecommunications services along with the sale, installation and maintenance of major branded Telecom and IT hardware.

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.

Selected financial data for the Company’s business segment information is as follows:



	Three Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in millions)	2017			2016			2017			2016
Revenue
Entertainment and Communications	$	201.4		$	192.5		$	396.7		$	382.8
IT Services and Hardware	96.0			109.8			182.2			212.3
Intersegment	(3.4		)	(3.1		)	(6.7		)	(7.0		)
Total revenue	$	294.0		$	299.2		$	572.2		$	588.1
Intersegment revenue
Entertainment and Communications	$	0.5		$	0.2		$	0.9		$	0.6
IT Services and Hardware	2.9			2.9			5.8			6.4
Total intersegment revenue	$	3.4		$	3.1		$	6.7		$	7.0
Operating income
Entertainment and Communications	$	26.4		$	27.2		$	24.8		$	54.9
IT Services and Hardware	0.6			6.9			3.1			14.1
Corporate	(6.1		)	(6.7		)	(12.3		)	(12.0		)
Total operating income	$	20.9		$	27.4		$	15.6		$	57.0
Expenditures for long-lived assets
Entertainment and Communications	$	48.0		$	55.3		$	97.5		$	115.6
IT Services and Hardware	2.5			3.8			17.3			5.8
Corporate	—			0.1			—			0.2
Total expenditures for long-lived assets	$	50.5		$	59.2		$	114.8		$	121.6
Depreciation and amortization
Entertainment and Communications	$	43.2		$	41.6		$	85.2		$	81.8
IT Services and Hardware	3.7			3.2			7.5			6.4
Corporate	0.1			—			0.1			—
Total depreciation and amortization	$	47.0		$	44.8		$	92.8		$	88.2

	June 30, 2017			December 31, 2016
Assets
Entertainment and Communications	$	1,111.8		$	1,093.5
IT Services and Hardware	94.7			60.0
Corporate and eliminations	275.2			387.5
Total assets	$	1,481.7		$	1,541.0

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Form 10-Q Part I		Cincinnati Bell Inc.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements regarding future events and results that are subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “predicts,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “endeavors,” “strives,” “may,” or variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of future financial performance, anticipated growth and trends in businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned these forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially and adversely from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and, in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A, and those discussed in other documents the Company filed with the Securities and Exchange Commission (“SEC”). Actual results may differ materially and adversely from those expressed in any forward-looking statements. The Company undertakes no obligation to revise or update any forward-looking statements for any reason.

Introduction

This Management’s Discussion and Analysis section provides an overview of Cincinnati Bell Inc.'s financial condition as of June 30, 2017, and the results of operations for the three and six months ended June 30, 2017 and 2016. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and accompanying notes, as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Results for interim periods may not be indicative of results for the full year or any other interim period.

Executive Summary

Segment results described in the Executive Summary and Consolidated Results of Operations sections are net of intercompany eliminations.

Cincinnati Bell Inc. and its consolidated subsidiaries ("Cincinnati Bell", "we", "our", "us" or the "Company") provides integrated communications and IT solutions that keep residential and business customers connected with each other and with the world. Through its Entertainment and Communications segment, the Company provides high speed data, video, and voice solutions to consumers and businesses over an expanding fiber network and a legacy copper network. In addition, business customers across the United States rely on Cincinnati Bell Technology Solutions Inc. ("CBTS"), a wholly-owned subsidiary, reported as the IT Services and Hardware segment, for the sale and service of efficient, end-to-end communications and IT systems and solutions.

Consolidated revenue totaling $294.0 million and $572.2 million for the three and six months ended June 30, 2017, respectively, decreased compared to the prior year primarily due to the $8.7 million and $19.6 million decline in Telecom and IT hardware sales as well as declining service revenue as our customers continued to in-source IT professionals. For the three and six months ended June 30, 2017, revenue from our strategic products totaled $171.5 million and $336.1 million, respectively, up 9% from both prior year comparable periods. These increases were offset by declining legacy sales and the above mentioned changes in the IT Services and Hardware segment.

Operating income was $20.9 million and $15.6 million for the three and six months ended June 30, 2017, respectively, down from the prior year due in large part to restructuring and severance related charges incurred to reduce field and network costs associated with our legacy copper network, reorganizations within both segments of the business in order to adjust to the increased in-sourcing of IT professionals by our customers, as well as appropriately aligning the Company for future growth. Net income totaled $2.1 million and $62.5 million for the three and six months ended June 30, 2017, respectively, including the $117.7 million gain recognized on the sale of 2.8 million CyrusOne Inc. common shares in the first quarter of 2017.

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Form 10-Q Part I		Cincinnati Bell Inc.

Consolidated Results of Operations

Revenue



	Three months ended June 30,									Six months ended June 30,
(dollars in millions)	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change
Service revenue
Entertainment and Communications	$	200.0	$	191.2	$	8.8		5	%	$	394.2	$	380.2	$	14.0		4	%
IT Services and Hardware	48.6		53.7		(5.1		)	(9	)%	96.3		106.2		(9.9		)	(9	)%
Total service revenue	$	248.6	$	244.9	$	3.7		2	%	$	490.5	$	486.4	$	4.1		1	%

Entertainment and Communications revenue increased as the growth in Fioptics and other strategic services offset legacy declines. Fioptics revenue totaled $77.0 million for the three months ended June 30, 2017 and $150.6 million for the six months then ended, up 24% and 25% from prior year comparable periods, respectively. IT Services and Hardware revenue declined primarily due to decreases in billable headcount as a result of increased in-sourcing of IT professionals by our customers.



	Three months ended June 30,									Six months ended June 30,
(dollars in millions)	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change
Product revenue
Entertainment and Communications	$	0.9	$	1.1	$	(0.2	)	(18	)%	$	1.6	$	2.0	$	(0.4	)	(20	)%
IT Services and Hardware	44.5		53.2		(8.7		)	(16	)%	80.1		99.7		(19.6		)	(20	)%
Total product revenue	$	45.4	$	54.3	$	(8.9	)	(16	)%	$	81.7	$	101.7	$	(20.0	)	(20	)%

Product revenue is primarily driven by the volume of Telecom and IT hardware sales reflecting capital spending fluctuations by our enterprise customers in our IT Services and Hardware segment.

Operating Costs



	Three months ended June 30,									Six months ended June 30,
(dollars in millions)	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change
Cost of services
Entertainment and Communications	$	92.4	$	85.1	$	7.3		9	%	$	182.4	$	168.9	$	13.5		8	%
IT Services and Hardware	34.3		39.7		(5.4		)	(14	)%	69.8		79.1		(9.3		)	(12	)%
Total cost of services	$	126.7	$	124.8	$	1.9		2	%	$	252.2	$	248.0	$	4.2		2	%

Entertainment and Communications costs increased primarily due to programming costs associated with our growing Fioptics video subscriber base and higher programming rates. IT Services and Hardware costs declined due to fewer billable resources driven by the professional services revenue reductions.



	Three months ended June 30,									Six months ended June 30,
(dollars in millions)	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change
Cost of products
Entertainment and Communications	$	0.5	$	0.4	$	0.1		25	%	$	1.0	$	0.9	$	0.1		11	%
IT Services and Hardware	38.2		45.6		(7.4		)	(16	)%	67.0		84.6		(17.6		)	(21	)%
Total cost of products	$	38.7	$	46.0	$	(7.3	)	(16	)%	$	68.0	$	85.5	$	(17.5	)	(20	)%

Cost of products are primarily impacted by changes in Telecom and IT hardware sales.

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Form 10-Q Part I		Cincinnati Bell Inc.



	Three months ended June 30,									Six months ended June 30,
(dollars in millions)	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change
Selling, general, and administrative
Entertainment and Communications	$	34.7	$	35.5	$	(0.8	)	(2	)%	$	70.7	$	70.0	$	0.7		1	%
IT Services and Hardware	16.8		14.0		2.8			20	%	31.9		27.4		4.5			16	%
Corporate	3.9		6.7		(2.8		)	(42	)%	9.5		12.0		(2.5		)	(21	)%
Total selling, general and administrative	$	55.4	$	56.2	$	(0.8	)	(1	)%	$	112.1	$	109.4	$	2.7		2	%

IT Services and Hardware SG&A costs were up due to additional headcount at branch office locations to support the expansion of our national footprint. Corporate SG&A decreased from a year ago largely driven by lower consulting expenses, as well as by additional stock-based compensation expense recorded in 2016 as a result of changes in our stock price.



	Three months ended June 30,								Six months ended June 30,
(dollars in millions)	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
Depreciation and amortization expense
Entertainment and Communications	$	43.2	$	41.6	$	1.6	4	%	$	85.2	$	81.8	$	3.4	4	%
IT Services and Hardware	3.7		3.2		0.5		16	%	7.5		6.4		1.1		17	%
Corporate	0.1		—		0.1		n/m		0.1		—		0.1		n/m
Total depreciation and amortization expense	$	47.0	$	44.8	$	2.2	5	%	$	92.8	$	88.2	$	4.6	5	%

The increase in depreciation and amortization expense is primarily due to an increase in Entertainment and Communications depreciation as a result of expanding our fiber-based network.



	Three months ended June 30,							Six months ended June 30,
(dollars in millions)	2017		2016		$ Change		% Change	2017		2016		$ Change		% Change
Other operating costs
Restructuring and severance related charges	$	3.6	$	—	$	3.6	n/m	$	29.2	$	—	$	29.2	n/m
Other	1.7		—		1.7		n/m	2.3		—		2.3		n/m
Total other	$	5.3	$	—	$	5.3	n/m	$	31.5	$	—	$	31.5	n/m

Restructuring and severance related charges incurred by both segments in the second quarter of 2017 relate to company initiated reorganizations of the business in order to more appropriately align the Company for future growth. Restructuring and severance related charges incurred by the Entertainment and Communications segment during the first quarter of 2017 were related to a voluntary severance program for certain bargained employees to reduce field and network costs associated with our legacy copper network. Other costs are due to transaction costs resulting from the acquisition of SunTel Services in the first quarter of 2017, as well as the pending merger agreements with Hawaiian Telcom and OnX committed to in July 2017. The combinations with OnX and Hawaiian Telcom are expected to close in the fourth quarter of 2017 and second half of 2018, respectively.

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Form 10-Q Part I		Cincinnati Bell Inc.



	Three months ended June 30,											Six months ended June 30,
(dollars in millions)	2017			2016			$ Change			% Change		2017			2016			$ Change			% Change
Non-operating costs
Interest expense	$	18.1		$	19.9		$	(1.8	)	(9	)%	$	36.1		$	40.2		$	(4.1	)	(10	)%
Loss on extinguishment of debt, net	—			5.2			(5.2		)	n/m		—			2.8			(2.8		)	n/m
Gain on sale of CyrusOne investment	—			(118.6		)	118.6			n/m		(117.7		)	(118.6		)	0.9			(1	)%
Other income, net	(0.6		)	(1.1		)	0.5			(45	)%	(1.0		)	(1.1		)	0.1			(9	)%
Income tax expense	1.3			44.4			(43.1		)	n/m		35.7			49.1			(13.4		)	(27	)%

Interest expense continued to decrease due to the Company primarily using proceeds from the sale of a portion of its CyrusOne investment to repay debt in 2016.

The Company recognized a realized gain of $117.7 million on the sale of 2.8 million CyrusOne common shares in the first quarter of 2017. In the second quarter of 2016, the Company recognized a realized gain of $118.6 million on the sale of 3.1 million shares of CyrusOne Inc. common stock.

Income tax expense decreased year over year primarily due to lower income before tax. The Company expects to use federal and state net operating loss carryforwards to substantially defray payment of federal and state tax liabilities in 2017.

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Form 10-Q Part I		Cincinnati Bell Inc.

Entertainment and Communications

The Entertainment and Communications segment provides products and services such as data transport, high-speed internet, video, local voice, long distance, VoIP and other services. Cincinnati Bell Telephone Company LLC ("CBT"), a subsidiary of the Company, is the incumbent local exchange carrier ("ILEC") for a geography that covers a radius of approximately 25 miles around Cincinnati, Ohio, and includes parts of northern Kentucky and southeastern Indiana. CBT has operated in this territory for over 140 years. Voice and data services beyond its ILEC territory, particularly in Dayton and Mason, Ohio, are provided through the operations of Cincinnati Bell Extended Territories LLC ("CBET"), a competitive local exchange carrier ("CLEC") and subsidiary of CBT. The Company provides long distance and VoIP services primarily through its Cincinnati Bell Any Distance Inc. ("CBAD").

Table of Contents



Form 10-Q Part I		Cincinnati Bell Inc.

Entertainment and Communications, continued



	Three Months Ended June 30,												Six Months Ended June 30,
(dollars in millions)	2017			2016			Change			% Change			2017			2016			Change			% Change
Revenue:
Data	$	87.7		$	86.8		$	0.9		1	%		$	175.3		$	172.0		$	3.3		2	%
Voice	67.1			69.1			(2.0		)	(3	)%		134.8			139.3			(4.5		)	(3	)%
Video	37.2			30.9			6.3			20	%		73.2			59.9			13.3			22	%
Services and Other	9.4			5.7			3.7			65	%		13.4			11.6			1.8			16	%
Total revenue	201.4			192.5			8.9			5	%		396.7			382.8			13.9			4	%
Operating costs and expenses:
Cost of services and products	95.8			88.3			7.5			8	%		189.1			176.1			13.0			7	%
Selling, general and administrative	34.7			35.4			(0.7		)	(2	)%		70.7			70.0			0.7			1	%
Depreciation and amortization	43.2			41.6			1.6			4	%		85.2			81.8			3.4			4	%
Restructuring and severance charges	1.3			—			1.3			n/m			26.9			—			26.9			n/m
Total operating costs and expenses	175.0			165.3			9.7			6	%		371.9			327.9			44.0			13	%
Operating income	$	26.4		$	27.2		$	(0.8	)	(3	)%		$	24.8		$	54.9		$	(30.1	)	(55	)%
Operating margin	13.1		%	14.1		%				(1.0	)	pts	6.3		%	14.3		%				(8.0	)	pts
Capital expenditures	$	48.0		$	55.3		$	(7.3	)	(13	)%		$	97.5		$	115.6		$	(18.1	)	(16	)%

Metrics information (in thousands):
Fioptics units passed	556.7			478.7			78.0			16	%

Internet subscribers:
DSL	93.0			121.7			(28.7		)	(24	)%
Fioptics	214.1			175.0			39.1			22	%
Total internet subscribers	307.1			296.7			10.4			4	%

Fioptics video subscribers	142.8			126.8			16.0			13	%