Cincinnati Bell 2006 Annual Report Download - page 133

Income tax expense was $54.3 million for 2005. Although the Company had pre-tax losses for the year,
income tax expense results from legislation that the state of Ohio passed on June 30, 2005 instituting a gross
receipts tax and phasing out Ohio’s corporate franchise and income tax over a 5 year period. As a result of this
legislation, the Company no longer expects to realize state income tax benefits associated with $47.5 million of
deferred tax assets previously recorded. Therefore, the Company reduced deferred tax assets and increased
income tax expense by $47.5 million in 2005. Additionally, the Company has non-deductible expenses including
interest on securities originally issued to acquire its broadband business (the “Broadband Securities”) or
securities that the Company has subsequently issued to refinance the Broadband Securities. As a result of these
items, the Company recorded income tax expense of $54.3 million even though it had a loss before income taxes
of $10.2 million. The Company used federal and state net operating loss carryforwards to substantially defray
payment of federal and state tax liabilities. As a result, the Company had cash income tax payments of $2.1
million during the year.
Discussion of Operating Segment Results
Local
The Local segment provides local voice telephone service, including enhanced custom calling features, and
data services, which include dedicated network access, Gigabit Ethernet and Asynchronous Transfer Mode based
data transport, and DSL and dial-up Internet access, to customers in southwestern Ohio, northern Kentucky, and
southeastern Indiana. Cincinnati Bell Telephone LLC (“CBT”), which operates as the Incumbent Local Exchange
Carrier (“ILEC”) in its operating territory of an approximate 25-mile radius of Cincinnati, Ohio, is the primary
provider of these services. CBT’s network has full digital switching capability and can provide data transmission
services to over 90% of its in-territory access lines via DSL.
Outside of its ILEC territory, the Local segment provides these services through Cincinnati Bell Extended
Territories LLC (“CBET”), which operates as a competitive local exchange carrier (“CLEC”) both in the
communities north of CBT’s operating territory and in the greater Dayton market. CBET provides voice and data
services for residential and business customers on its own network and by purchasing unbundled network
elements from the ILEC. CBET provides service through UNE-L to its customer base in the Dayton, Ohio
market. The Local segment links its Cincinnati and Dayton geographies through its SONET, which provides
route diversity via two separate paths.
(dollars in millions) 2006 2005
$ Change
2006 vs.
2005
% Change
2006 vs.
2005 2004
$ Change
2005 vs.
2004
% Change
2005 vs.
2004
Revenue:
Voice .......................... $473.0 $500.4 $(27.4) (5)% $519.8 $(19.4) (4)%
Data ........................... 238.2 219.2 19.0 9% 203.9 15.3 8%
Other .......................... 36.1 36.0 0.1 0% 38.0 (2.0) (5)%
Total revenue ...................... 747.3 755.6 (8.3) (1)% 761.7 (6.1) (1)%
Operating costs and expenses:
Cost of services and products ....... 237.9 236.1 1.8 1% 220.2 15.9 7%
Selling, general and administrative . . . 136.8 133.7 3.1 2% 134.8 (1.1) (1)%
Depreciation .................... 103.8 108.2 (4.4) (4)% 117.2 (9.0) (8)%
Restructuring .................... 2.8 1.5 1.3 87% 10.4 (8.9) (86)%
Total operating costs and expenses . . . 481.3 479.5 1.8 0% 482.6 (3.1) (1)%
Operating income .................. $266.0 $276.1 $(10.1) (4)% $279.1 $ (3.0) (1)%
Operating margin ................... 35.6% 36.5% (1) pts 36.6% 0 pts
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