Basis of Presentation

3 Months Ended

Mar. 31, 2012

Basis of Presentation

Basis of Presentation

(1)   Basis of Presentation

        We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local and long-distance, network access, private line (including special access), public access, broadband, data, managed hosting (including cloud hosting), colocation, wireless and video services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers and security monitoring.

        The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries over which we exercise control. These subsidiaries include Savvis, since we acquired it on July 15, 2011, and Qwest, since we acquired it on April 1, 2011. For more information on these acquisitions, see Note 2—Acquisitions. All intercompany amounts and transactions with our consolidated subsidiaries have been eliminated.

        Our consolidated balance sheet as of December 31, 2011, which was derived from our audited financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission, or SEC; however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The results of operations for the first three months of the year are not indicative of the results of operations that might be expected for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

        To simplify the overall presentation of our financial statements, we report immaterial amounts attributable to noncontrolling interests in certain of our subsidiaries as follows: (i) income attributable to noncontrolling interests in other income (expense), (ii) equity attributable to noncontrolling interests in additional paid-in capital and (iii) cash flows attributable to noncontrolling interests in other financing activities.

        During the second quarter of 2011, we changed the definitions we use to classify expenses as cost of services and products and selling, general and administrative, and as a result, we reclassified previously reported amounts to conform to the current presentation. These revisions resulted in the reclassification of $31 million from selling, general and administrative to cost of services and products for the three months ended March 31, 2011. Our current definitions are as follows:

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  Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; equipment sales expenses (such as data integration and modem expenses); costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); and other expenses directly related to our network and hosting operations.

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  Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as property and other taxes) and fees; external commissions; bad debt expense; and other expenses.

        These expense classifications may not be comparable to those of other companies.

        We also have reclassified certain other prior period amounts to conform to the current period presentation, including the categorization of our revenues and our segment reporting. For more information on our segments, see Note 9—Segment Information. These changes had no impact on total revenues, total operating expenses or net income for any period.

        Effective January 1, 2012, we changed our rates of capitalized labor as we transitioned certain of Qwest's legacy systems to our historical company systems. This transition resulted in an estimated $15 million to $20 million increase in the amount of labor capitalized as an asset compared to the amount that would have been capitalized if Qwest had labor related to the same projects with its legacy systems and a corresponding estimated $15 million to $20 million decrease in operating expenses for the three months ended March 31, 2012. This change is expected to result in an estimated operating expense reduction of approximately $60 million to $80 million for the year ending December 31, 2012. The reduction in expenses described above, net of tax, increased net income approximately $9 million to $12 million, or $0.01 to $0.02 per basic and diluted common share, for the three months ended March 31, 2012 and is expected to increase net income by approximately $36 million to $48 million, or $0.06 to $0.08 per basic and diluted common share, for the year ending December 31, 2012.

        Effective January 1, 2012, we changed our estimates of the economic lives and net salvage value for certain telecommunications equipment. These changes resulted in additional depreciation expense of approximately $10 million during the first quarter of 2012 and are expected to result in additional depreciation expense of approximately $40 million for the year ending December 31, 2012. This additional depreciation, net of tax, reduced net income by approximately $6 million, or $0.01 per basic and diluted common share, for the three months ended March 31, 2012 and is expected to reduce net income by approximately $24 million, or approximately $0.04 per basic and diluted common share, for the year ending December 31, 2012.