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TMCNet:  CINCINNATI BELL INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 07, 2014]

CINCINNATI BELL INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2014, and the results of operations for the three and six months ended June 30, 2014 and 2013. 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, 2013.

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.

The Company is a full-service regional provider of entertainment, data and voice communications services over wireline and wireless networks, a provider of managed and professional information technology services, and a reseller of information technology ("IT") and telephony equipment. In addition, enterprise customers across the United States rely on Cincinnati Bell Technology Solutions Inc. ("CBTS"), a wholly-owned subsidiary, for efficient, scalable communication systems and end-to-end IT solutions.

On April 6, 2014, we entered into agreements valued at approximately $210 million to sell our wireless spectrum licenses and certain other assets related to our wireless business, including leases to certain wireless towers and related equipment and other assets. The agreements are subject to customary closing conditions, including regulatory approval by the Federal Communications Commission. We plan to operate and generate cash from our wireless operations until the later of April 6, 2015 and 90 days after the transfer of the licenses.

On a consolidated basis, revenue for the three and six months ended June 30, 2014 increased 3% and 1%, respectively, as the growth from our strategic products combined with increased telecom and IT equipment sales more than offset declines from wireless and legacy products. Revenue from our strategic products totaled $107.3 in the second quarter of 2014, up 23% compared to the same period a year ago. For the six months ended June 30, 2014, strategic revenue increased 24% over the prior year totaling $208.3 million.

Operating income for the three months ended June 30, 2014 was $35.6 million, down from $46.8 million in the prior year, as the revenue growth was offset by additional depreciation expense due to reducing the useful lives of certain wireless assets. For the six months ended June 30, 2014, operating income was $92.5 million, up from $66.0 million in the prior year, primarily due to transaction related compensation in the prior year.

On January 24, 2013, we completed the initial public offering ("IPO") of CyrusOne, our former Data Center Colocation segment. As of the date of the IPO, we owned approximately 1.9 million shares, or 8.6%, of CyrusOne's common stock and were limited partners in CyrusOne LP, owning approximately 42.6 million, or 66% of its partnership units. We effectively owned 69% of CyrusOne and continued to have significant influence over the entity, but we did not control its operations.

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

Therefore, effective January 24, 2013, we no longer include the accounts of CyrusOne in our consolidated financial statements, but account for our ownership in CyrusOne as an equity method investment. Due to the deconsolidation of CyrusOne, our results of operations for the period ending June 30, 2013 are not comparable to the current period.

Commencing January 17, 2014, we are permitted to exchange the partnership units of CyrusOne LP into cash or shares of common stock of CyrusOne, as determined by CyrusOne, on a one-for-one basis based upon the fair value of a share of CyrusOne common stock, subject to certain limitations which restricted the volume of shares we are permitted to sell. The registration statement filed by CyrusOne on March 24, 2014 became effective on April 4, 2014 and eliminated all prior limitations restricting the volume of shares we are allowed to sell.

On June 25, 2014, we consummated the sale of 16.0 million partnership units of CyrusOne LP to CyrusOne, Inc. at a price of $22.26 per unit. The sale generated proceeds of $355.9 million and resulted in a gain of $192.8 million.

As of June 30, 2014, we effectively own 44% of CyrusOne, which is held in the form of 1.9 million shares of common stock of CyrusOne and approximately 26.6 million partnership units in CyrusOne LP. As we continue to have significant influence over CyrusOne, we account for this investment using the equity method.

On August 4, 2014, the Company reached a tentative agreement with the Communications Workers of America ("CWA") on the terms of a new labor contract.

The tentative agreement is subject to ratification by the local CWA membership.

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

Consolidated Results of Operations Service revenue was $256.0 million during the three months ended June 30, 2014, a decrease of $0.4 million, compared to the same period in 2013. Strong demand for strategic products resulted in an additional $3.7 million of Wireline service revenue in the second quarter of 2014 compared to the same period a year ago. Information Technology ("IT") service revenue increased by $5.0 million, due to the strong demand by our enterprise customers for managed and professional services. These increases were offset by a $9.1 million decrease in Wireless service revenue as we continue to lose postpaid subscribers and begin winding down this business. For the six months ended June 30, 2014, service revenue was $514.2 million, a decrease of $12.7 million compared to the same period in 2013. Of this decrease, $15.2 million was due to the deconsolidation of CyrusOne's results of operations from our consolidated financial statements.

Excluding the impact of CyrusOne, service revenue for the six months ended June 30, 2014 increased by $2.5 million year-over-year, primarily driven by growth in wireline service revenue and managed and professional services revenues of $11.0 million and $8.1 million, respectively. These increases were partially offset by lower wireless service revenue of $16.6 million.

Product revenue totaled $63.9 million in the three months ended June 30, 2014, an increase of $8.3 million compared to the same period in 2013. For the six months ended June 30, 2014, product revenue was $128.2 million, an increase of $17.4 million compared to the same period in 2013. Increased sales of telecommunications and IT hardware of $10.0 million and $20.3 million for the three and six months ended June 30, 2014, respectively, were partially offset by lower Wireless handset and accessory sales.

Cost of services was $109.2 million in the three months ended June 30, 2014, up $5.7 million to support the growth in our strategic products. Wireless cost of services was down $1.4 million as a result of a declining subscriber base. For the six months ended June 30, 2014, cost of services was $215.5 million, an increase of $2.8 million from the comparative period in 2013 as a result of the same trends affecting the quarterly results.

Cost of products sold was $60.5 million in the three months ended June 30, 2014 compared to $54.7 million in the same period in 2013. For the six months ended June 30, 2014, cost of products sold was $120.4 million, an increase of $12.5 million compared to the same period in 2013. The cost increases in both the three and six-month periods ended June 30, 2014 primarily reflect higher costs from higher sales of telecommunications and IT hardware, partially offset by a reduction in wireless costs due to lower handset and accessory sales.

Selling, general and administrative ("SG&A") expenses were $54.5 million in the three months ended June 30, 2014, a decrease of $0.2 million compared to the same period in 2013. For the six months ended June 30, 2014, SG&A expenses totaled $109.9 million, up $2.1 million compared to the same period in 2013.

CyrusOne SG&A expenses were $2.4 million prior to the IPO. Excluding CyrusOne, SG&A expenses increased $4.5 million compared to the prior year. Corporate costs were up $8.0 million from the prior year due primarily to recognizing a $6.5 million gain in 2013 for compensation plans indexed to changes in the Company's stock price, compared to a $0.6 million expense in 2014. Partially offsetting this increase was a $4.5 million decrease in Wireless SG&A expenses due primarily to cost containment efforts as we begin to wind down operations.

Depreciation and amortization expense totaled $60.3 million and $107.2 million, respectively, in the three and six months ended June 30, 2014, up $23.1 million and $19.4 million from the same period in 2013. Excluding CyrusOne, depreciation and amortization increased $24.6 million for the six months ended June 30, 2014.

The increase in depreciation expense is primarily due to reducing the useful life of our long-lived wireless assets as a result of a continued decline in our subscriber base and the agreement to sell our wireless spectrum and certain other assets. The change in the estimated useful life of the remaining property, plant and equipment is expected to increase depreciation expense for our Wireless segment by approximately $60 million in 2014 as compared to the prior year. The remaining increase for the three and six months ended June 30, 2014 is due to additional fiber assets placed in service to support our strategic products.

Transaction-related compensation of $7.1 million and $42.6 million in the three and six months ended June 30, 2013 was associated with the IPO of CyrusOne which was completed on January 24, 2013. In 2010, the Company's Board of Directors approved a long-term incentive program for certain members of management under which payments were 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 plan. The completion of the IPO during 2013 resulted in a qualifying transaction requiring payment of compensation to the employees covered under this plan. No such transaction-related compensation occurred in the first half of 2014.

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

Restructuring charges were $6.4 million for the three and six months ended June 30, 2014. Charges incurred in the second quarter of 2014 include $2.3 million of severance costs and $2.9 million of contract termination fees, which are primarily related to the agreement to sell our spectrum licenses and certain other assets combined with the winding down of our wireless operations. The second quarter 2014 expense also includes $1.2 million for employee separations related to outsourcing certain aspects of our IT department. Charges incurred during the comparative periods of 2013 represented severance costs, expenses related to lease abandonments and fees associated with a workforce optimization initiative.

During the three months ended June 30, 2013, the Company amended the management pension plan to eliminate all future pension service credits effective July 1, 2013. As a result, the Company remeasured its projected benefit obligation for this plan and recognized a curtailment gain of $0.6 million in the quarter. No such curtailment gains or losses were recognized during the comparative period in 2014.

During the three and six months ended June 30, 2014, the Company recognized a nominal amount of gain on the sale of copper cabling in the Wireline segment that was offset slightly by a loss on the sale of corporate assets. Loss on sale or disposal of assets was $0.3 million and $2.8 million for the three and six months ended June 30, 2013, respectively. The losses for the three and six months ended June 30, 2013 were primarily attributable to $1.1 million and $4.4 million, respectively, of wireline and wireless network equipment that was removed from service and either disconnected from the existing networks, abandoned or demolished. This equipment had no resale market. These losses were partially offset by gains of $0.8 million and $1.6 million, respectively, recognized from sales of copper cabling no longer in use in the Wireline segment.

The amortization of the deferred gain for the three and six months ended June 30, 2014 totaled $6.5 million and $10.1 million, respectively, compared to $0.6 million and $1.2 million for the same periods in 2013. The change in the useful life of our long-lived wireless assets, excluding the spectrum licenses, resulted in the acceleration of the amortization of the deferred gain in the first half of 2014. In December 2009, the Company sold 196 wireless towers for $99.9 million in cash proceeds and leased back a portion of the space on these towers for a term of 20 years, which resulted in a deferred gain of $35.1 million. The change in useful life is expected to result in approximately $20 million of additional deferred gain amortization to be recognized in 2014.

Transaction costs were $0.7 million for the first half of 2014. Transaction costs in 2014 represent legal fees associated with the pending sale of our wireless assets. Transaction costs were $0.7 million and $1.1 million in the three and six months ended June 30, 2013, respectively. These costs represent exploring strategic alternatives for our Wireless business, legal and consulting costs incurred to restructure our legal entities in preparation for CyrusOne's IPO and to prepare CyrusOne to be a real estate investment trust.

Interest expense was $40.7 million and $81.0 million for the three and six months ended June 30, 2014, respectively, compared to $45.4 million and $93.3 million in the same periods of 2013. The decrease was primarily due to the Company amending its Corporate Credit Agreement to include a $540 million Tranche B Term Loan with a 4.0% interest rate at June 30, 2014. The proceeds from the facility were used to redeem all of the Company's higher coupon $500 million 8 1/4% Senior Notes on October 15, 2013. In addition, the deconsolidation of CyrusOne in January 2013 resulted in a $2.5 million decrease compared to six month period ended June 30, 2014.

Loss from CyrusOne equity method investment of $2.4 million and $1.9 million in the three and six months ended June 30, 2014, respectively, represents the Company's share of CyrusOne's net loss which, effective with the IPO date of January 24, 2013, is recorded using the equity method. In the comparative periods of 2013, our portion of CyrusOne's loss totaled $4.7 million and $6.6 million, respectively.

In the second quarter of 2014, the Company recognized a $192.8 million gain on the sale of 16.0 million partnership units in CyrusOne LP. Following the sale, we own approximately 44% of CyrusOne through our ownership of 1.9 million shares of CyrusOne's common stock and approximately 26.6 million partnership units in CyrusOne LP.

Income tax expense for the three months ended June 30, 2014 was $71.0 million compared to a benefit of $4.2 million in the same period in 2013. For the six months ended June 30, 2014, income tax expense was $80.5 million compared to $2.2 million in the first half of 2013. The increases in tax expense were due primarily to higher pre-tax income predominately caused by the gain on the sale of operating partnership units in CyrusOne offset by a valuation allowance provision of $10.7 million for Texas margin credits, which effective with CyrusOne's IPO on January 24, 2013, are uncertain of being realized before their expiration date.

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

For 2014, the Company expects its effective tax rate to be higher than statutory rates, primarily due to non-deductible expenses, including interest on securities originally issued to acquire its broadband business or securities that the Company has subsequently issued to refinance those securities. The Company expects to use federal and state net operating loss carryforwards to substantially defray payment of federal and state tax liabilities in 2014.

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

Wireline The Wireline segment provides products and services such as data transport and high-speed internet, local voice, long distance and VoIP, entertainment, 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 more than 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") and eVolve Business Solutions LLC ("eVolve") subsidiaries.

Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2014 2013 Change % Change 2014 2013 Change % Change Revenue: Data $ 84.2 $ 79.2 $ 5.0 6 % $ 167.2 $ 157.3 $ 9.9 6 % Voice - local service 51.9 58.3 (6.4 ) (11 )% 105.0 117.8 (12.8 ) (11 )% Long distance and VoIP 26.8 26.8 - 0 % 53.7 53.7 - 0 % Entertainment 18.4 13.0 5.4 42 % 35.4 25.0 10.4 42 % Other 3.4 4.3 (0.9 ) (21 )% 7.0 7.5 (0.5 ) (7 )% Total revenue 184.7 181.6 3.1 2 % 368.3 361.3 7.0 2 % Operating costs and expenses: Cost of services and products 73.1 69.8 3.3 5 % 145.0 141.0 4.0 3 % Selling, general and administrative 31.9 31.7 0.2 1 % 63.0 62.7 0.3 0 % Depreciation and amortization 28.2 27.3 0.9 3 % 56.3 54.1 2.2 4 % Restructuring charges 1.1 4.4 (3.3 ) (75 )% 1.1 5.8 (4.7 ) (81 )% Curtailment gain - (0.6 ) 0.6 n/m - (0.6 ) 0.6 n/m (Gain) loss on sale or disposal of assets (0.1 ) 0.1 (0.2 ) n/m (0.2 ) (0.7 ) 0.5 n/m Total operating costs and expenses 134.2 132.7 1.5 1 % 265.2 262.3 2.9 1 % Operating income $ 50.5 $ 48.9 $ 1.6 3 % $ 103.1 $ 99.0 $ 4.1 4 % Operating margin 27.3 % 26.9 % 0.4 pts 28.0 % 27.4 % 0.6 pts Capital expenditures $ 38.1 $ 39.3 $ (1.2 ) (3 )% $ 64.3 $ 73.1 $ (8.8 ) (12 )% Metrics information (in thousands): Fioptics units passed 307.1 238.0 69.1 29 % Internet subscribers: DSL 172.0 194.9 (22.9 ) (12 )% Fioptics 98.3 66.8 31.5 47 % Total internet subscribers 270.3 261.7 8.6 3 % Fioptics video subscribers 82.5 63.2 19.3 31 %Local access lines 505.8 550.0 (44.2 ) (8 )% Long distance lines 378.6 406.5 (27.9 ) (7 )% 32 -------------------------------------------------------------------------------- Table of Contents Form 10-Q Part I Cincinnati Bell Inc.

Wireline, continued Revenue Data revenue consists of Fioptics and DSL internet access, data transport and interconnection services. Data revenue was $84.2 million for the three months ended June 30, 2014, an increase of $5.0 million compared to the same period in 2013. Strategic data revenue was $37.5 million in the second quarter, up $8.3 million compared to the prior year. Revenue from Fioptics internet services was up $4.6 million year-over-year, due largely to an increased subscriber base totaling 98,300 as of June 30, 2014. Strategic business revenue totaled $25.9 million, including $0.6 million from Fioptics, up 12% from the prior year.

Legacy data revenue was $46.7 million for the three months ended June 30, 2014, down $3.3 million compared to the same period in 2013. This decrease is primarily due to our business customers migrating to higher bandwidth data transport products and a 12% decline in DSL customers as a result of switching to higher speed internet products.

For the six months ended June 30, 2014, data revenue was $167.2 million, an increase of $9.9 million from the comparative period in 2013. For the six months ended June 30, 2014, strategic data revenue totaled $72.6 million, up $15.9 million compared to the same period in 2013. Revenues from Fioptics internet services totaled $20.7 million, up 66% compared to the prior year. Strategic business revenue, including $1.5 million from Fioptics, totaled $50.7 million, up $5.5 million from a year ago. Legacy data revenue was $94.6 million for the six months ended June 30, 2014, down $6.0 million compared to the same period in 2013.

Voice local service revenue includes local service, digital trunking, switched access and information services and other value-added services such as caller identification, voicemail, call waiting and call return. Voice local service revenue was $51.9 million in the three months ended June 30, 2014, down $6.4 million compared to the same period in 2013. Strategic voice service revenue was $5.7 million in the second quarter, up $1.3 million compared to 2013, primarily due to the increase in Fioptics voice lines. Legacy voice service revenue was $44.5 million in the second quarter, down $7.5 million compared to the same period in 2013. The decrease is primarily due to an 8% decrease in local access lines compared to a year ago.

For the six months ended June 30, 2014, voice local service revenue was $105.0 million, down $12.8 million from the comparable prior period. Strategic voice service revenue was $10.2 million for the six months ended June 30, 2014, a $1.7 million increase from the prior year due to the increase in Fioptics voice lines. Legacy voice service revenue was $91.4 million for the six months ended June 30, 2014, a $14.2 million decrease compared to the same period a year ago due to the decrease in access lines. The segment continues to lose access lines as a result of, among other factors, customers electing to solely use wireless service in lieu of traditional local wireline service, Company-initiated disconnections of customers with credit problems, and customers electing to use service from other providers.

Long distance and VoIP revenue was $26.8 million for the three months ended June 30, 2014, consistent with the same period in 2013 as the growth in strategic products offset legacy declines. Strategic revenue was $14.4 million, an increase of $1.9 million compared to the same period in 2013, due largely to the growth in VoIP and private line services. Legacy revenue was $12.0 million, a decrease of $1.1 million compared to 2013. As of June 30, 2014, long distance subscriber lines were 378,600, a 7% decrease from a year ago due to both consumer and business customers migrating to VoIP or wireless services. In addition, integration revenue decreased by $0.8 million in the second quarter as compared to the prior year.

For the six months ended June 30, 2014, long distance and VoIP revenue totaled $53.7 million, consistent with the same period in 2013. Strategic revenue was $28.2 million, an increase of $3.3 million compared to 2013. Legacy revenue was $24.3 million, a decrease of $2.2 million compared to the prior year, as we continue to lose long distance subscribers. Integration revenue decreased by $1.1 million in the second quarter as compared to the prior year.

Entertainment revenue was $18.4 million and $35.4 million for the three and six-month periods ended June 30, 2014, respectively, an increase of 42% over the comparative periods in 2013. The higher entertainment revenue was directly related to the 31% increase in Fioptics entertainment subscribers and the 7% increase in monthly average revenue per user. The Company continues to expand its Fioptics service area as there is a strong consumer demand for this service.

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

Wireline, continued Costs and Expenses Cost of services and products was $73.1 million in the three months ended June 30, 2014, an increase of $3.3 million compared to the same period in 2013, primarily due to $2.9 million additional programming costs as a result of an increase in the number of Fioptics subscribers and increased programming rates.

Contract service costs were also up $1.2 million primarily to support the growth in Fioptics. Operating expenses increased by $0.9 million due to an increase in Universal Service Fund ("USF") taxes and property taxes. These increases were partially offset by decreased payroll related costs due to lower pension and post-retirement expense.

For the six months ended June 30, 2014, cost of services and products was $145.0 million compared to $141.0 million in the same period in 2013. Programming costs were $6.8 million higher in the first half of 2014 compared to a year ago, and contract services were up $1.7 million for the same period. These increases were offset by lower payroll costs and decreased operating material expenses.

SG&A expenses in the three and six months ended June 30, 2014 were $31.9 million and $63.0 million, respectively, a year-over-year increase of $0.2 million and $0.3 million. For the quarter, bad debt expenses were lower by $1.1 million.

This decrease was offset by increased payroll costs to support the growth in Fioptics and $0.5 million related to IT outsourcing costs. The change for six months ended June 30, 2014 compared to the prior year was due to the same factors impacting the quarterly results.

Depreciation and amortization expense was $28.2 million in the three months ended June 30, 2014, an increase of $0.9 million compared to the same period in 2013. For the six months ended June 30, 2014, depreciation and amortization expense was $56.3 million, an increase of $2.2 million from the comparative period in 2013. These increases are primarily attributable to new assets placed in service in connection with the expansion of our Fioptics network.

Restructuring charges for severance related to outsourcing certain functions of our IT department totaled $1.1 million for the three and six months ended June 30, 2014. For the three months ended June 30, 2013, restructuring charges were $4.4 million, comprised of $3.0 million associated with our remaining obligations on abandoned leases and $1.4 million of severance. Restructuring charges were $5.8 million for the six months ended June 30, 2013, of which $4.4 million was associated with our remaining obligations on abandoned leases and $1.4 million was related to severance.

The curtailment gain of $0.6 million was due to a remeasurement of the Company's projected benefit obligation following an amendment to the management pension plan during the second quarter in 2013 that eliminated all future pension service credits as of July 1, 2013.

The gain on sale or disposal of assets for the three and six months ended June 30, 2014 was $0.1 million and $0.2 million, respectively, and are related to the sale of copper cabling that was no longer in use. The loss on sale or disposal of assets of $0.1 million during the second quarter in 2013 was due to $0.9 million of network equipment with no resale value that was removed from service and either disconnected from the existing network, abandoned or demolished, partially offset by a gain of $0.8 million from the sale of copper cabling that was no longer in use. The gain on sale or disposal of assets of $0.7 million for the six months ended June 30, 2013 was due to a $1.6 million gain from the sale of copper cable, partially offset by the $0.9 million loss on the disposal of network equipment referred to above.

Capital Expenditures Capital expenditures are incurred to expand our Fioptics product suite, upgrade our DSL network, and to maintain our wireline network. Capital expenditures were $38.1 million and $64.3 million for the three and six months ended June 30, 2014. In line with our planned capital expenditures, we expect to pass an additional 31,000 units with Fioptics for the remainder of the year. As of June 30, 2014, the Company is able to provide Fioptics services to 307,100 residential and business addresses, an increase of 29% compared to 2013.

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

IT Services and Hardware The IT Services and Hardware segment provides a full range of managed IT solutions, including managed infrastructure services, IT and telephony equipment sales, and professional IT staffing services. These services and products are provided in multiple geographic areas including locations in the U.S., Canada and Europe. By offering a full range of equipment and outsourced services in conjunction with the Company's wireline network, the IT Services and Hardware segment provides end-to-end IT and telecommunications infrastructure management designed to reduce cost and mitigate risk while optimizing performance for its customers.

Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2014 2013 Change % Change 2014 2013 Change % Change Revenue: Telecom and IT $ 65.9 $ 56.1 $ 9.8 17 % $ 133.8 $ 113.0 $ 20.8 18 % equipment distribution Managed and professional services 35.7 29.9 5.8 19 % 69.7 57.5 12.2 21 % Total revenue 101.6 86.0 15.6 18 % 203.5 170.5 33.0 19 % Operating costs and expenses: Cost of services and 83.6 70.7 12.9 18 % 165.3 140.1 25.2 18 % products Selling, general and administrative 12.4 11.8 0.6 5 % 24.4 22.5 1.9 8 % Depreciation and amortization 2.8 2.5 0.3 12 % 5.6 5.0 0.6 12 % Restructuring charges - 0.7 (0.7 ) n/m - 0.7 (0.7 ) n/m Total operating costs and expenses 98.8 85.7 13.1 15 % 195.3 168.3 27.0 16 % Operating income $ 2.8 $ 0.3 $ 2.5 n/m $ 8.2 $ 2.2 $ 6.0 n/m Operating margin 2.8 % 0.3 % 2.5 pts 4.0 % 1.3 % 2.7 pts Capital expenditures $ 2.5 $ 3.7 $ (1.2 ) (32 )% $ 5.0 $ 4.9 $ 0.1 2 % Revenue Revenue from telecom and IT equipment distribution represents the sale, installation, and maintenance of major, branded IT and telephony equipment.

Managed and professional services revenue consists of managed VoIP solutions and IT services that include network management, electronic data storage, disaster recovery and data security management, as well as both long and short-term IT outsourcing and consulting engagements.

Strategic managed and professional services revenue was $33.8 million for the three months ended June 30, 2014, an increase of $4.7 million compared to the same period in 2013. The revenue increase was primarily due to higher demand for our managed services from the Company's largest customer. For the six months ended June 30, 2014, strategic managed and professional services revenue was $66.7 million, an increase of $10.5 million from the comparative period in 2013, also the result of increased demand for the Company's managed services and additional staff augmentation engagements. Integration revenue totaled $67.8 million and $136.8 million for the three and six months ended June 30, 2014, an increase of $10.9 million and $22.5 million, respectively. The increase is due to increased telecom and IT equipment distribution revenue reflecting the cyclical fluctuation in capital spending by our enterprise customers which may be influenced by many factors, including the timing of customers' capital spend, the size of capital budgets and general economic conditions.

Costs and Expenses Cost of services and products was $83.6 million and $165.3 million for the three and six months ended June 30, 2014, respectively, an increase of $12.9 million and $25.2 million compared to the same period in 2013. These increases were largely driven by increased cost of goods sold related to higher equipment sales and increased payroll and contract services costs incurred to support the growth in managed and professional services.

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

IT Services and Hardware, continued SG&A expenses were $12.4 million in the three months ended June 30, 2014, an increase of $0.6 million compared to the same period in 2013. For the six months ended June 30, 2014, SG&A expenses totaled $24.4 million, a $1.9 million increase over the comparative period in 2013. These increases were largely the result of higher payroll and sales commissions related to the revenue growth from professional services and telecom and IT equipment distributions.

Depreciation expense was $2.8 million and $5.6 million in the three and six months ended June 30, 2014, respectively, compared to $2.5 million and $5.0 million during the same periods in 2013. The year-over-year increases in depreciation expense were driven by new assets placed in service.

Restructuring charges of $0.7 million in the three and six months ended June 30, 2013 were associated with employee severance. No such costs were incurred in 2014.

Capital Expenditures Capital expenditures were $2.5 million and $5.0 million during the three and six months ended June 30, 2014, respectively, compared to $3.7 million and $4.9 million during the same periods in the prior year. Fluctuations in capital expenditures, to a large extent, are due to the timing of spending on equipment to support managed service projects.

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

Wireless The Wireless segment provides digital voice and data communications services through the operation of a regional wireless network in the Company's licensed service territory, which surrounds Cincinnati and Dayton, Ohio and includes areas of northern Kentucky and southeastern Indiana. Although Wireless does not market to customers outside of its licensed service territory, it is able to provide service outside of this territory through roaming agreements with other wireless operators. The segment also sells wireless handset devices and related accessories to support its service business.

On April 6, 2014, we entered into agreements valued at approximately $210 million to sell our wireless spectrum licenses and certain other assets related to our wireless business, including leases to certain wireless towers and related equipment and other assets. The agreements are subject to customary closing conditions, including regulatory approval by the Federal Communications Commission. We plan to continue to operate and generate cash from our wireless operations until the later of April 6, 2015 and 90 days after the transfer of the licenses.

Three Months Ended June 30, Six Months Ended June 30, (dollars in millions, except for operating metrics) 2014 2013 Change % Change 2014 2013 Change % Change Revenue: Postpaid service $ 28.3 $ 35.9 $ (7.6 ) (21 )% $ 58.9 $ 73.4 $ (14.5 ) (20 )% Prepaid service 10.0 11.6 (1.6 ) (14 )% 21.1 23.4 (2.3 ) (10 )% Equipment and other 2.9 4.2 (1.3 ) (31 )% 5.9 8.2 (2.3 ) (28 )% Total revenue 41.2 51.7 (10.5 ) (20 )% 85.9 105.0 (19.1 ) (18 )% Operating costs and expenses: Cost of services and products 19.6 24.4 (4.8 ) (20 )% 39.1 48.5 (9.4 ) (19 )% Selling, general and administrative 6.7 9.0 (2.3 ) (26 )% 14.4 18.8 (4.4 ) (23 )% Depreciation and amortization 29.3 7.3 22.0 n/m 45.1 23.3 21.8 94 % Restructuring charges 5.2 - 5.2 n/m 5.2 - 5.2 n/m Loss on sale or disposal of assets - 0.2 (0.2 ) n/m - 3.5 (3.5 ) n/m Amortization of deferred gain (6.5 ) (0.6 ) (5.9 ) n/m (10.1 ) (1.2 ) (8.9 ) n/m Total operating costs and expenses 54.3 40.3 14.0 35 % 93.7 92.9 0.8 1 % Operating (loss) income $ (13.1 ) $ 11.4 $ (24.5 ) n/m $ (7.8 ) $ 12.1 $ (19.9 ) n/m Operating margin (31.8 )% 22.1 % n/m (9.1 )% 11.5 % n/m Capital expenditures $ 0.6 $ 2.0 $ (1.4 ) (70 )% $ 6.2 $ 10.2 $ (4.0 ) (39 )% Metrics information: Postpaid ARPU* $54.05 $52.05 $ 2.00 4 % $53.73 $51.66 $2.07 4 % Prepaid ARPU* $26.24 $26.16 $ 0.08 0 % $26.46 $26.36 $0.10 0 % Postpaid subscribers (in thousands) 163.4 223.1 (59.7 ) (27 )% Prepaid subscribers (in thousands) 113.3 146.9 (33.6 ) (23 )% Average postpaid churn 3.9% 2.5% 1.4 pts 3.3% 2.5% 0.8 pts * The Company has presented certain information regarding monthly average revenue per user ("ARPU") because it believes ARPU provides a useful measure of the operational performance of its Wireless segment. ARPU is calculated by dividing service revenue by the average subscriber base for the period.

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

Wireless, continued Revenue Postpaid service revenue was $28.3 million and $58.9 million in the three and six months ended June 30, 2014, respectively, down $7.6 million and $14.5 million compared to the same periods in 2013. The decrease was primarily due to continued declines in postpaid subscribers as a result of intense competitive pressure from larger national carriers and the announcement to sell our wireless spectrum licenses and certain other assets. The declines in postpaid subscribers were partially offset by a 4% increase in postpaid ARPU. Data ARPU totaled $21.56 and $21.19 for the three and six month periods ended June 30, 2014, respectively, both up 12% compared to a year ago as smartphone subscribers accounted for 50% of our subscriber base compared to 43% as of June 30, 2013.

Prepaid service revenue was $10.0 million and $21.1 million in the three and six months ended June 30, 2014, respectively, a decrease of $1.6 million and $2.3 million from the comparative periods in 2013. The decrease in prepaid revenue is primarily due to a 23% decrease in prepaid subscribers, which was driven by our announcement to sell our wireless spectrum and certain other assets and the notification to our lifeline subscribers that, effective July 1, 2014, we will discontinue our lifeline product. Prepaid ARPU for the three and six months ended June 30, 2014 was consistent with the same periods in the prior year.

Equipment and other revenue for the three and six months ended June 30, 2014 was $2.9 million and $5.9 million, respectively, a decrease of $1.3 million and $2.3 million compared to the same periods in 2013, due primarily to continued postpaid subscriber losses which resulted in fewer activations and upgrades.

Costs and Expenses Cost of services and products consists largely of network operation costs, interconnection expenses with other telecommunications providers, roaming expense (which is incurred for subscribers to use their handsets in the territories of other wireless service providers), and cost of handsets and accessories sold. The total cost of services and products was $19.6 million in the three months ended June 30, 2014, a decrease of $4.8 million compared to the same period in 2013. The decrease was largely due to $2.7 million of lower handset subsidies in the three months ended June 30, 2014 compared to 2013. In addition, network-related costs were down $1.3 million from the prior year due to a decrease in roaming charges and lower network access expenses resulting from a reduced subscriber base and lower minutes of use.

For the six months ended June 30, 2014, cost of services and products totaled $39.1 million, a decrease of $9.4 million compared to the same period in 2013.

The year-over-year decrease is primarily due to $3.6 million of lower handset subsidies and $2.7 million lower network-related costs, both of which resulted from reduced subscribers. The remaining decrease is largely due to a combined reduction in cost of goods sold, contract services and payroll expenses due to cost containment efforts. In addition, handset repair and warranty costs were down compared to the prior period as handset sales have also decreased.

SG&A expenses were $6.7 million in the three months ended June 30, 2014, a decrease of $2.3 million compared to the prior year. For the six months ended June 30, 2014, SG&A expenses totaled $14.4 million, down $4.4 million compared to the same period in 2013. The decrease in SG&A costs are a direct result of cost containment efforts as we begin to wind down our wireless operations.

Depreciation and amortization was $29.3 million and $45.1 million in the three and six months ended June 30, 2014, respectively, an increase of $22.0 million and $21.8 million compared to the same period in 2013. The increase in depreciation expense is the result of reducing the useful life of our long-lived assets due to the continued decline in our subscriber base and as a result of the agreement to sell our wireless spectrum and certain other assets. The change in the estimated useful life of the remaining property, plant and equipment is expected to increase depreciation expense by approximately $60 million for 2014.

Restructuring charges totaled $5.2 million for the three and six months ended June 30, 2014 and relate to $2.9 million in early termination fees and $2.3 million for employee severance charges associated with the shut down of the wireless business. No such costs were incurred in 2013.

Loss on sale or disposal of assets was $0.2 million and $3.5 million in the three and six-month periods ended June 30, 2013, respectively. This equipment had no resale market and has either been disconnected from the existing wireless network, abandoned or demolished. No such losses were incurred during the same periods in 2014.

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

Wireless, continued The amortization of the deferred gain for the three and six months ended June 30, 2014 totaled $6.5 million and $10.1 million, respectively, compared to $0.6 million and $1.2 million for the same periods in 2013. The changes in the useful life of our long-lived wireless assets, excluding the spectrum licenses, resulted in the acceleration of the amortization of the deferred gain in the first half of 2014. In December 2009, the Company sold 196 wireless towers for $99.9 million in cash proceeds, and leased back a portion of the space on these towers for a term of 20 years, which resulted in a deferred gain of $35.1 million. The change in useful life is expected to result in approximately $20 million of additional deferred gain amortization to be recognized in 2014.

Capital Expenditures Capital expenditures of $0.6 million and $6.2 million during the three and six months ended June 30, 2014, respectively, were primarily related to network software upgrades implemented to address the growing demand for data from our current customer base. Capital expenditures decreased in 2014 compared to 2013 due to decisions made regarding the announcement to sell our wireless spectrum licenses and certain other assets.

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

Data Center Colocation The Data Center Colocation segment provided enterprise customers with outsourced data center operations, including necessary redundancy, security, power, cooling, and interconnection. Upon completion of the IPO of CyrusOne on January 24, 2013, we no longer control the operations of CyrusOne and account for our investment in CyrusOne using the equity method. For the three months ended March 31, 2013, revenues and expenses represent revenues earned and operating expenses incurred during the period January 1, 2013 to January 23, 2013 when CyrusOne's results were included in our consolidated financial statements.

Three Months Ended June 30, Six Months Ended June 30, (dollars in millions) 2014 2013 Change % Change 2014 2013 Change % Change Revenue $ - $ - $ - n/m $ - $ 15.6 $ (15.6 ) n/m Operating costs and expenses: Cost of services - - - n/m - 4.8 (4.8 ) n/m Selling, general and administrative - - - n/m - 2.4 (2.4 ) n/m Depreciation and amortization - - - n/m - 5.2 (5.2 ) n/m Total operating costs and expenses - - - n/m - 12.4 (12.4 ) n/m Operating income $ - $ - $ - n/m $ - $ 3.2 $ (3.2 ) n/m Operating margin n/m n/m n/m n/m 20.5 % n/m Capital expenditures $ - $ - $ - n/m $ - $ 7.7 $ (7.7 ) n/m 40 -------------------------------------------------------------------------------- Table of Contents Form 10-Q Part I Cincinnati Bell Inc.

Financial Condition, Liquidity, and Capital Resources As of June 30, 2014, the Company had $2,226.3 million of outstanding indebtedness and an accumulated deficit of $3,142.3 million. A significant amount of the Company's indebtedness and accumulated deficit resulted from the purchase and operation of a national broadband business, which was sold in 2003.

The Company's primary source of cash is generated by operations. The Company generated $93.8 million and $29.4 million of cash flows from operations during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the Company had $150.0 million of short-term liquidity on undrawn capacity on the Corporate Credit Agreement. Short-term liquidity does not include $347.2 million of cash to be used to repay $325.0 million of the 8 3/4% Senior Subordinated Notes due 2018. On July 9, 2014, the Company notified its trustee of its intent to redeem $325.0 million of its outstanding 8 3/4% Senior Subordinated Notes due 2018 on August 8, 2014 at a redemption price of 104.375%.

The Company expects to remit cash of approximately $350 million, including accrued interest of approximately $11 million.

As of June 30, 2014, the Company had $114.8 million of borrowings and $5.2 million of letters of credit outstanding under the Receivables Facility, leaving no remaining availability on the total borrowing capacity of $120.0 million. The Receivables Facility is subject to renewal annually. While we expect to continue to renew this facility, we would be required to use cash, our Corporate Credit Agreement or other sources to repay any outstanding balance on the Receivables Facility if it were not renewed.

The Company's primary uses of cash are for capital expenditures and debt service and, to a lesser extent, to fund pension and retiree medical obligations and preferred stock dividends. The Company believes that its cash on hand, cash generated from operations, and available funding under its credit facilities will be adequate to meet its cash requirements in 2014. In addition, management expects that the Company will continue to have access to the capital markets to refinance debt and other obligations should such a need arise in the near future.

As of January 17, 2014, we are permitted to exchange the partnership units of CyrusOne LP into cash or shares of common stock of CyrusOne, as determined by CyrusOne, on a one-for-one basis based upon the fair value of a share of CyrusOne common stock, subject to certain limitations which restricted the volume of shares we were permitted to sell. On April 4, 2014, the registration statement filed by CyrusOne on March 24, 2014 became effective and eliminated all prior limitations restricting the volume of shares we are allowed to sell.

On June 25, 2014, we sold 16.0 million partnership units in CyrusOne's operating partnership, CyrusOne LP, for $22.26 per partnership unit. The sale resulted in proceeds of $355.9 million and resulted in a gain of $192.8 million. As of June 30, 2014, the fair value of our remaining ownership interests in CyrusOne was $709.4 million.

We intend to sell down our remaining ownership interest in CyrusOne and use the proceeds primarily to repay long-term debt to achieve leverage ratios more comparable to other telecommunication companies and for other general corporate purposes. Our amended Corporate Credit Agreement obligates us to use 85% of the proceeds from any sales of CyrusOne towards debt repayments.

Cash Flows Cash provided by operating activities during the six months ended June 30, 2014 totaled $93.8 million, an increase of $64.4 million compared to the same period in 2013. The increase is primarily due to 2013 transaction related compensation totaling $42.6 million, interest payments being lower by $9.5 million in 2014 and improved working capital.

Cash flows provided by investing activities during the six months ended June 30, 2014 amounted to $293.1 million, compared to cash used by investing activities totaling $99.1 million in the same period in 2013. The increase was primarily driven by the $355.9 million of proceeds received on the sale of CyrusOne partnership units. The deconsolidation of CyrusOne in 2013 increased cash used in investing activities by $19.5 million for the period January 1, 2013 through January 23, 2013. Excluding CyrusOne, capital expenditures were down $12.7 million from the prior year largely due to timing of payments. Dividends received from CyrusOne in the first half of 2014 increased by $9.4 million as only one dividend payment was received in same period of 2013.

Cash flows used by financing activities during the six months ended June 30, 2014 were $44.3 million, compared to $51.6 million provided by financing activities during the same period in 2013. In the first half of 2014, we repaid $31.4 million of the outstanding balances on the Corporate Credit Agreement and Receivables Facility as opposed to borrowing $56.8 million in the same period a year ago. Debt repayments totaled $8.3 million in 2014, an increase of $3.5 million over the prior year. In addition, cash proceeds received from the exercise of stock options and warrants totaled $1.2 million in the first half of 2014, a decrease of $5.4 million compared to the same period in 2013.

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

Debt Covenants Corporate Credit Agreement The Corporate Credit Agreement financial covenants require that we maintain certain leverage and interest coverage ratios and limit our cumulative spending on capital expenditures. The facility also contains certain covenants which, among other things, limit the Company's ability to incur additional debt or liens, pay dividends, repurchase Company common stock, sell, transfer, lease, or dispose of assets, and make investments or merge with another company. If the Company was to violate any of its covenants and was unable to obtain a waiver, it would be considered a default. If the Company was in default under its Corporate Credit Agreement, no additional borrowings under the Corporate Credit Agreement would be available until the default was waived or cured. The Company is in compliance with all of its Corporate Credit Agreement covenants.

The Company's most restrictive covenants are generally included in its Corporate Credit Agreement. In order to continue to have access to the amounts available to it under the revolving facility, the Company must remain in compliance with all of the covenants. The following table presents the calculations of the most restrictive debt covenant, the Consolidated Total Leverage Ratio, as of and for the twelve months ended June 30, 2014: (dollars in millions) Consolidated Total Leverage Ratio 5.18 Maximum ratio permitted for compliance 6.50 Consolidated Funded Indebtedness additional availability $ 551.5 Consolidated EBITDA clearance over compliance threshold $ 84.8 Definitions and components of these calculations are detailed in our Corporate Credit Agreement and can be found in the Company's Form 8-K filed on November 20, 2012.

The Company's ability to make restricted payments, which include share repurchases and common stock dividends, is limited to a total of $15 million given that its Consolidated Total Leverage Ratio, as defined in the Corporate Credit Agreement, exceeds 3.50 to 1.00 as of June 30, 2014. The Company may make restricted payments of $45 million annually when the Consolidated Total Leverage Ratio is less than or equal to 3.50 to 1.00. There are no limits on restricted payments when the Consolidated Total Leverage Ratio is less than or equal to 3.00 to 1.00. These restricted payment limitations do not impact the Company's ability to make regularly scheduled dividend payments on its 6 3/4% Cumulative Convertible Preferred Stock. Furthermore, the Company may make restricted payments in the form of share repurchases or dividends up to 15% of CyrusOne proceeds, subject to a $35 million annual cap with carryovers.

Public Bond Indentures The Company's 8 3/4% Senior Subordinated Notes due 2018 and the 8 3/8% Senior Notes due 2020 contain covenants that, among other things, limit the Company's ability to incur additional debt or liens, pay dividends or make other restricted payments, sell, transfer, lease, or dispose of assets and make investments or merge with another company. The Company is in compliance with all of its public debt indentures.

One of the financial covenants permits the issuance of additional indebtedness up to a 4:00 to 1:00 Consolidated Adjusted Senior Debt to EBITDA Ratio (as defined by the individual indentures). Once the Company exceeds this ratio, the Company is not in default under the terms of the indentures; however, additional indebtedness may only be incurred in specified permitted baskets, including a basket which allows $900 million of total Corporate Credit Agreement debt (Revolver and Term Loans). We also have baskets for capital lease incurrences, borrowings against the Receivables Facility, refinancings of existing debt, and other debt incurrences. In addition, the Company's ability to make restricted payments, which include share repurchases, repayment of subordinated notes and common stock dividends, would be limited to specific allowances. As of June 30, 2014, the Company was below the 4:00 to 1:00 Consolidated Adjusted Senior Debt to EBITDA ratio, and the Company has access to the restricted payments basket which exceeded $800 million as of June 30, 2014.

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

Share Repurchase Plan 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. In prior years, the Company repurchased and retired a total of 7.4 million shares at a total cost of $20.8 million. The Company did not repurchase any additional shares during the six months ended June 30, 2014. As of June 30, 2014, the Company has the authority to repurchase its common stock with a value of up to $129.2 million under the plan approved by its Board of Directors, subject to satisfaction of the requirements under its bond indentures.

Regulatory Matters Refer to the Company's Annual Report on Form 10-K for the year ended 2013 for a complete description of regulatory matters.

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

Contingencies 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 accounting principles generally accepted in the United States.

Such matters are subject to many uncertainties and outcomes that are not predictable with assurance.

Future Operating Trends Refer to the Company's Annual Report on Form 10-K for the year ended 2013 for a complete description of all the Company's future operating trends.

Wireless On April 6, 2014, we entered into agreements to sell our wireless spectrum licenses and certain other assets related to our wireless business, including leases to certain wireless towers and related equipment and other assets. We plan to continue to operate and generate cash from our wireless operations until the later of April 6, 2015 and 90 days after the transfer of the licenses.

Effective July 1, 2014, we discontinued our lifeline program.

Critical Accounting Policies The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

Application of these principles requires management to make estimates or judgments that affect the amounts reported in the accompanying condensed consolidated financial statements and information available as of the date of the financial statements. As this information changes, the financial statements could reflect different estimates or judgments. The Company's most critical accounting policies and estimates are described in its Annual Report on Form 10-K for the year ended December 31, 2013. Updates to our critical accounting policies are described below: Reviewing the Carrying Values of Long-Lived Assets - In conjunction with our long-lived asset impairment analysis conducted in the fourth quarter of 2013, we reassessed the useful lives of all our Wireless property, plant and equipment.

The remaining useful life for all Wireless property, plant, and equipment assets was reduced to 30 months as of December 31, 2013. In the second quarter of 2014, following the agreement to sell our wireless spectrum licenses and certain other assets, we reduced the useful life of the assets not included in the sale to be fully depreciated as of March 31, 2015. As a result of these changes in estimate, depreciation expense increased by approximately $30 million for the six months ended June 30, 2014.

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

Recently Issued Accounting Standards Refer to Note 1 of the Condensed Consolidated Financial Statements for further information on recently issued accounting standards. The adoption of new accounting standards did not have a material impact on the Company's financial results for the three and six months ended June 30, 2014.

Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for a description of the Company's market risks.

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