10-K 1 cbb12312016-10k.htm 10-K Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
 
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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Shares (par value $0.01 per share)
 
New York Stock Exchange
6 3/4% Convertible Preferred Shares
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o     No  x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
x
  
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
  
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x
The aggregate market value of the voting common shares owned by non-affiliates of the registrant was $1.0 billion, computed by reference to the closing sale price of the common stock on the New York Stock Exchange on June 30, 2016, the last trading day of the registrant’s most recently completed second fiscal quarter. The Company has no non-voting common shares.

At January 31, 2017, there were 42,128,999 common shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the Company’s 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this report to the extent described herein.

 








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

TABLE OF CONTENTS
 
 
 
 
Page
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
Item 15.
 
 
 
 
This report contains trademarks, service marks and registered marks of Cincinnati Bell Inc., as indicated.


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

Part I
Item 1. Business
Overview and Strategy
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.
Our goal is to continue the transformation of Cincinnati Bell from a legacy copper-based telecommunications company into a technology company with state of the art fiber assets servicing customers with data, video, voice and IT solutions to meet their evolving needs. To this end, leveraging our past and future investments creates a company with a healthy balance sheet, growing revenue, growing profitability and sustainable cash flows.
In an effort to achieve our objectives, we continue to focus on the following key initiatives:
continue to expand our local fiber network
grow our IT Services and Hardware segment
monetize our remaining CyrusOne investment
Continue to expand our local fiber network
We invested $230.6 million of capital in Entertainment and Communications' strategic products during 2016. Revenue from these high demand products totaled $449.5 million, up 23% over the prior year, and more than offset the decline in our legacy products. The primary focus of our strategic investments is the expansion of our Fioptics suite of products which is designed to compete directly with the cable Multiple System Operators ("MSO") serving the Company’s operating territory. In 2016 we invested $180.3 million in Fioptics as demand for the products remains strong. Year-over-year growth is outlined in the table below:
 
2016
 
2015
 
2014
Fioptics revenue (in millions):
$254.1
 
$190.8
 
$142.4
Fioptics subscribers (in thousands):
 
 
 
 
 
High-speed internet
197.6

 
153.7

 
113.7

Video
137.6

 
114.4

 
91.4

Voice
96.2

 
77.4

 
61.0

During the year we passed an additional 101,400 addresses with Fioptics and as of December 31, 2016, the product is available to approximately 533,400 customer locations, or 67% of Greater Cincinnati. Our goal is to pass an additional 35,000 addresses during 2017.
Included in capital for strategic products is $50.3 million of investment in fiber and IP-based core network technology to meet increased business and carrier demand primarily within Greater Cincinnati and in contiguous markets in the Midwest region for high-bandwidth data transport products, such as metro-ethernet and VoIP. We continue to evolve and optimize network assets to support the migration of legacy products to new technology and as of December 31, 2016, the Company has:
connected approximately 7,200 commercial addresses with fiber-based services (also referred to as a lit address) during 2016 increasing the total number of lit addresses to 15,800 (included in Fioptics addresses);
expanded the fiber network to span more than 9,600 route miles; and

4

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

provided cell site back-haul services to more than 70% of the 1,100 cell sites in-market, of which approximately 500 are lit with fiber.
As a result of our strategic investments, we generated year-over-year Entertainment and Communications revenue growth each year since 2013. Customer demand for faster data speed and broadband usage is accelerating. We believe our fiber investments are a long-term solution for our customers bandwidth needs.
Grow our IT Services and Hardware Segment
Cincinnati Bell continues to develop high-demand products for business customers through our investments in fiber and other success-based technology, such as unified communications and cloud services. Our ability to migrate customers from legacy copper-based products to higher speed fiber-based offerings while being innovative as the technology demands of our customers change is important to the growth of our IT Services and Hardware segment. During 2016, the IT Services and Hardware segment generated 10% strategic revenue growth on continued strong demand for cloud services. Our goal is to foster our current enterprise relationships while increasing our number of small to mid-size customers both within and outside the Cincinnati market. As a company with a long history of managing customer network and technology needs, we combine the management of the network, whether owned by Cincinnati Bell or leased from other carriers out of territory, with integrated voice and IT offerings. We supply the architecture and integration intelligence, labor and hardware, as well as any combination of these services. These projects can be established based on hourly billing rates, service-level driven agreements or utility-based usage models. Customers are attracted to our ability to combine our historic knowledge, unique assets and talented workforce.
Monetize our remaining CyrusOne investment
We completed the initial public offering ("IPO") of CyrusOne Inc. ("CyrusOne") during the first quarter of 2013. At the time of the IPO, we effectively owned 69% of CyrusOne held in the form of 1.9 million unregistered common shares of CyrusOne and 42.6 million economically equivalent partnership units in its underlying operating entity CyrusOne LP. The fair value of our ownership as of the IPO date was approximately $943 million. Beginning in the second quarter of 2014, we have opportunistically monetized approximately 94% of our original investment for proceeds totaling $1,189.5 million, which have primarily been used to repay debt. Our total debt as of December 31, 2012, prior to the IPO, was $2,666.0 million compared to $1,206.6 million as of December 31, 2016. Interest payments have decreased from $179.5 million in 2013 to $71.1 million in 2016.
As of December 31, 2016, we owned 2.8 million CyrusOne common shares with a fair value of $128.0 million based on quoted market prices on that date. In determining the appropriate time to further monetize our CyrusOne investment, we will give due consideration to, among other factors, CyrusOne's stock price, market performance of other real estate investment trusts ("REITS") and overall market indicators. Subsequent to December 31, 2016 we sold approximately 2 million CyrusOne common shares for cash proceeds of approximately $100 million.







5

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

Operations
As of December 31, 2016, the Company operated two segments: Entertainment and Communications and IT Services and Hardware. We generally classify our products and services into three distinct categories: Strategic, Legacy and Integration. The table below demonstrates how our products are categorized within the Entertainment and Communications and IT Services and Hardware segments:
    
Entertainment and Communications
 
 
 
Strategic
Legacy
Integration
Data
Fioptics Internet
DSL (< 10 meg)
 
 
DSL (1) (> 10 meg)
DS0 (5), DS1, DS3
 
 
Ethernet
TDM (6)
 
 
Private Line
 
 
 
MPLS (2)
 
 
 
SONET (3)
 
 
 
Dedicated Internet Access
 
 
 
Wavelength
 
 
 
Audio Conferencing
 
 
Voice
Fioptics Voice
Traditional Voice
 
 
VoIP (4)
Long Distance
 
 
 
Switched Access
 
 
 
Digital Trunking
 
Video
Fioptics Video
 
 
Services and Other
Wiring Projects
Advertising
Maintenance
 
 
Directory Assistance
Information Services
 
 
 
Wireless Handsets and Accessories
(1) Digital Subscriber Line
(2) Multi-Protocol Label Switching
(3) Synchronous Optical Network
(4) Voice over Internet Protocol
(5) Digital Signal
(6) Time Division Multiplexing

IT Services and Hardware
 
 
Strategic
Integration
Professional Services
Consulting
Installation
 
Staff Augmentation
 
Unified Communications
Voice Monitoring
Maintenance
 
Managed IP Telephony Solutions
 
Cloud Services
Virtual Data Centers
 
 
Storage
 
 
Backup
 
Management and Monitoring
Network Management/Monitoring
 
 
Security
 
Telecom & IT Hardware
 
Hardware
 
 
Software Licenses


6

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

Entertainment and Communications
The Entertainment and Communications segment provides products and services such as high-speed internet, data transport, local voice, long distance, VoIP, video 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. The segment also provides voice and data services beyond its ILEC territory, particularly in Dayton and Mason, Ohio, through the operations of Cincinnati Bell Extended Territories LLC ("CBET"), a competitive local exchange carrier ("CLEC") and subsidiary of CBT. The Entertainment and Communications segment provides long distance and VoIP services primarily through its Cincinnati Bell Any Distance Inc. ("CBAD") and eVolve Business Solutions LLC ("eVolve") subsidiaries. The key products and services provided by the Entertainment and Communications segment include the following:
Data
The Company's data products include high-speed internet access, data transport and interconnection services. Consumer demand for increased internet speeds is accelerating and more customers are opting for higher bandwidth solutions such as Fioptics. To address this demand, we are able to provide internet speeds of 30 megabits or more to approximately 67% of Greater Cincinnati, of which approximately 392,000 addresses are capable of receiving gigabit service.
As business customers migrate from legacy products and copper-based technology, our metro-ethernet product becomes the access method of choice due to its ability to support multiple applications on a single physical connection. The Company continues to build out fiber to multi-tenant units ("MTU's") in Greater Cincinnati to meet growing demand for these services. We are also expanding our metro-ethernet platform to deliver services across a wider geography to target business customers beyond our ILEC footprint. The Company’s regional network connects Greater Cincinnati, Columbus, and Dayton, Ohio, as well as Indianapolis, Indiana; Chicago, Illinois; and Louisville, Kentucky.
Voice
Voice represents local service, including Fioptics voice lines. It also includes VoIP, long distance, digital trunking, switched access and other value-added services such as caller identification, voicemail, call waiting and call return.
The Company's voice access lines continue to decrease as our customers have increasingly employed wireless technologies in lieu of wireline voice services ("wireless substitution") or migrated to competitors.
Residential and business customers purchasing traditional long distance service can choose from a variety of long distance plans, which include unlimited long distance for a flat fee, purchase of minutes at a per-minute-of-use rate, or a fixed number of minutes for a flat fee. The Company's long distance lines and related minutes of use have continued to decline as a result of wireless substitution and the migration to VoIP technology. Our VoIP products provide access to widely disbursed communication platforms and access to our cloud based services and hosted unified communications products for customers ranging from small businesses to large enterprise customers.
Video
The Company launched Fioptics in 2009 and initially focused our fiber network investment on densely populated areas, such as apartments and condominiums. Since that time, Fioptics has been deployed over a much broader base and is now available to approximately 67% of Greater Cincinnati. As of December 31, 2016, we have 137,600 video subscribers. Our Fioptics customers enjoy access to over 400 entertainment channels including digital music, local, movie and sports programming with over 140 high-definition channels, parental controls, HD DVR and video On-Demand. In addition, we offer features that deliver high customer satisfaction including Fioptics MyTV which provides a more customized packaging of channels resulting in lower prices for our customers and a Fioptics live TV streaming application.
Services and Other
Services and other revenue consists of revenue generated from wiring projects for business customers, advertising, directory assistance, maintenance and information services.



7

Table of Contents
Form 10-K 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, telephony and IT equipment sales, and professional IT staffing services. These services and products are provided through the Company's subsidiaries in various geographic areas throughout the United States, Canada and Europe. By offering a full range of equipment and outsourced services in conjunction with the Company’s fiber and copper networks, 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.
The key products and services provided by the IT Services and Hardware segment include the following:
Professional Services
The Company's professional services offerings consist of consulting, staffing, installation and project-based engagements, including engineering and installation of voice, connectivity and IT technologies, development of application solutions and staff augmentation by highly skilled and industry-certified technical resources. Engagements can be short-term IT implementation and project-based work as well as longer term staffing and permanent placement assignments. The Company utilizes a team of experienced recruiting and hiring personnel to provide its customers with a wide range of skilled IT professionals.
Unified Communications
CBTS offers a complete portfolio of hosted solutions that include converged IP communications platforms of data, voice, video and mobility applications. We offer our customers expert management for all hardware and software components, including maintenance contracts and service level agreement ("SLA") based services. Fully hosted and managed, these voice platforms and applications can also be delivered as cloud services for a monthly utility fee.
The solutions offered include communications as a service model in a cloud environment. We provide hosted communications and solutions that deliver the efficiencies of next-generation VoIP services. Our conferencing solutions offer cloud-based audio, video, and web conferencing services accessible from any connected device. Our cloud call center application offering features speech-enabled Interactive Voice Response ("IVR"), call-back services, call analytics and surveys. The cloud call recording application features speech analytics, alerts and notification, and improved customer satisfaction and productivity. Additionally, we also manage the maintenance of a large base of local customers with traditional voice systems as well as converged VoIP systems.
Cloud Services
Virtual data center ("VDC") is a robust and scalable virtual infrastructure consisting of equipment, security, people and processes. This offering is provided in three different models: private cloud, dedicated cloud or public cloud; and provides customers with either a long-term or a short-term flexible solution that is fully managed by CBTS and monitored around the clock from our Enterprise Network Operations Center ("ENOC").
CBTS storage is a flexible, on-demand storage solution that enables businesses to eliminate capital expenditures and ongoing asset management with SLA-based services. CBTS offers Tier I, Tier II and Tier III storage to meet its customers availability, accessibility, protection, performance and capacity needs.
CBTS backup is a scalable solution that allows businesses to eliminate capital outlay and ongoing equipment management with SLA-based services and includes virtual data center, hardware, software, monitoring and support.
Management & Monitoring
CBTS provides SLA-based managed services utilizing our ENOC. The ENOC includes highly certified engineers and operation experts that proactively monitor and manage our customers’ technology environments and applications. Standalone monitoring services provide customers with scheduled and automatic checks of customers' servers, routers, switches, load balancers and firewalls. We also provide customers with advance trouble shooting, repair and changes of customers' servers, routers, switches, load balancers and other network devices from our ENOC. These services can be provided to customers with CBTS provided equipment or customer-owned equipment and do not have geographical constraints. Services can be purchased individually or bundled by combining multiple products, services, and assets into a utility or service model.


8

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

Telecom and IT Hardware
The Company maintains premium resale relationships and certifications with a variety of branded technology vendors which allows it to competitively sell, architect and install a wide array of telecommunications and IT infrastructure equipment to meet the needs of its customers.
Sales and Distribution Channels
The Company’s Entertainment and Communications segment utilizes a number of distribution channels to acquire customers. As of December 31, 2016, the Company operated eight retail stores in its operating territory to market and distribute our Fioptics suite of products. The Company works to locate retail stores in high traffic but affordable areas, with a distance between each store that considers optimal returns per store and customer convenience. The Company also offers fully-automated, end-to-end web-based sales of various other Company services and accessories. In addition, the Company utilizes a call center as well as a door-to-door sales force to target the sale of our consumer products to residents.
For both operating segments, we utilize a business-to-business sales force and a call center organization to reach business customers in our operating territory. Larger business customers are supported by sales account representatives that understand the customer's technology needs and recommend Company offered solutions. Smaller business customers are supported through a telemarketing sales force, customer representatives and store locations.
Suppliers and Product Supply Chain
The Company generally subjects purchases to competitive bids and selects its vendors based on price, service level, delivery terms, quality of product and terms and conditions.
Entertainment and Communication’s primary purchases are for network equipment, software, and fiber cable to maintain and support the growth of Fioptics. The Company maintains facilities and operations for storing cable and other equipment, product distribution and customer fulfillment.
IT Services and Hardware primarily purchases IT and telephony equipment that is either sold to a customer or used to provide service to the customer. The Company is a certified distributor of Cisco, EMC, Avaya and Oracle equipment. Most of this equipment is shipped directly to the customer from vendor locations, but the Company does maintain warehouse facilities for replacement parts and equipment testing and staging.
In addition, we have long-term commitments to outsource various services, such as certain information technology functions, cash remittance and accounts payable functions, call center operations and maintenance services.
Competition
The telecommunications industry is very competitive, and the Company competes against larger, well-capitalized national providers.
The Entertainment and Communications segment faces competition from other local exchange carriers, wireless service providers, inter-exchange carriers, as well as cable, broadband, and internet service providers. The Company has lost, and will likely continue to lose, access lines as a part of its customer base utilizes the services of competitive wireline or wireless providers in lieu of the Company’s services. Wireless providers, particularly those that provide unlimited wireless service plans with no additional fees for long distance, offer customers a substitution service for the Company’s local voice and long-distance services. The Company believes wireless substitution is the reason for the largest portion of the Company’s access line and long-distance line losses.
Our strategic products also face intense competition from cable operators, other telecom companies and niche fiber companies. Many of our competitors have lower operating costs and access to resources that provide economies of scale allowing them to more aggressively price products which they are able to provide on a much broader scale given their expanded geographic operations. Our competitors continuously upgrade their service quality and offerings which could substantially erode the competitive advantage we currently have with our fiber-based products. These competitive factors could limit the Company's ability to grow revenue and cash flows despite the strategic initiatives implemented.

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


The Fioptics suite of products also face competition from a number of different sources, including companies that deliver movies, television shows and other video programming over broadband Internet connections. Increasingly, content owners are utilizing Internet-based delivery of content directly to consumers, some without charging a fee for access to the content. Furthermore, due to consumer electronics innovations, consumers are able to watch such Internet-delivered content on television sets and mobile devices. Increased customer migration to these non-traditional entertainment products could result in increased Fioptics churn and decreased penetration.
The IT Services and Hardware segment competes against numerous other information technology consulting, web-hosting, and computer system integration companies, many of which are larger in scope and well-financed. The Company believes that participants in this market must grow rapidly and achieve significant scale to compete effectively. Other competitors may consolidate with larger companies or acquire software application vendors or technology providers, enabling them to more effectively compete. This consolidation could affect prices and other competitive factors in ways that could impede the ability of these businesses to compete successfully in the market.
Customers
The following table demonstrates how the Company’s revenue portfolio has changed over the past three years.
Percentage of revenue
 
2016
 
2015
 
2014
 
2016 vs 2015 Change
 
 
2015 vs 2014 Change
 
Strategic
 
54
%
 
46
%
 
38
%
 
8

pts
 
8

pts
Legacy
 
26
%
 
31
%
 
35
%
 
(5
)
 
 
(4
)
 
Integration
 
20
%
 
23
%
 
27
%
 
(3
)
 
 
(4
)
 
Total
 
100
%
 
100
%
 
100
%
 


 
 

 
Percentage of revenue
 
2016
 
2015
 
2014
 
2016 vs 2015 Change
 
 
2015 vs 2014 Change
 
Consumer
 
32
%
 
29
%
 
27
%
 
3

pts
 
2

pts
Business
 
59
%
 
61
%
 
62
%
 
(2
)
 
 
(1
)
 
Carrier
 
9
%
 
10
%
 
11
%
 
(1
)
 
 
(1
)
 
Total
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
The Company has sales with one customer, General Electric Company ("GE"), that contributed to 12% of the Company’s annual revenue in each of 2016 and 2015.
Employees
At December 31, 2016, the Company had approximately 3,400 employees and approximately 30% of its employees are covered under a collective bargaining agreement with the Communications Workers of America (“CWA”), which is affiliated with the AFL-CIO. The current contract with the CWA was ratified on February 27, 2015 and is in effect through May 12, 2018.

10

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

Website Access and Other Information
The Company was incorporated under the laws of Ohio in 1983 with its headquarters at 221 East Fourth Street, Cincinnati, Ohio 45202 (telephone number (513) 397-9900 and website address http://www.cincinnatibell.com). The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC") under the Exchange Act of 1934 (the "Exchange Act"). These reports and other information filed by the Company may be read and copied at the Public Reference Room of the SEC, 100 F Street N.E., Washington D.C., 20549. Information about the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy statements, and other information about issuers, like the Company, which file electronically with the SEC. The address of that site is http://www.sec.gov. The Company makes available its reports on Form 10-K, 10-Q, and 8-K (as well as all amendments to these reports), proxy statements and other information, free of charge, at the Investor Relations section of its website.
Executive Officers
Refer to Part III, Item 10. "Directors, Executive Officers and Corporate Governance" of this Annual Report on Form 10-K for information regarding executive officers of the registrant.
Business Segment Information
The amounts of revenue, intersegment revenue, operating income, expenditures for long-lived assets, and depreciation and amortization attributable to each of the Company’s business segments for the years ended December 31, 2016, 2015, and 2014, and assets as of December 31, 2016 and 2015 are set forth in Note 14 to the consolidated financial statements.

Item 1A. Risk Factors
In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating us. Our business, financial condition, liquidity or results of operations could be materially affected by any of these risks.

Risk Factors Related to our Business and Operations

The Company operates in highly competitive industries, and customers may not continue to purchase products or services, which would result in reduced revenue and loss of market share.
The telecommunications industry is very competitive and the Company competes against larger, well-capitalized national providers. Competitors may reduce pricing, create new bundled offerings, or develop new technologies, products or services. If the Company cannot continue to offer reliable, competitively priced, value-added services, or if the Company does not keep pace with technological advances, competitive forces could adversely affect it through a loss of market share or a decrease in revenue and profit margins. The Company has lost, and will likely continue to lose, access lines as a part of its customer base utilizes the services of competitors.
The Entertainment and Communications segment faces competition from other local exchange carriers, wireless service providers, inter-exchange carriers, and cable, broadband and internet service providers. Wireless providers, particularly those that provide unlimited wireless voice and data plans with no additional fees for long distance, offer customers a substitution for the Company’s services. The Company believes wireless substitution accounts for the largest portion of its access line losses. Also, cable competitors that have existing service relationships with CBT’s customers also offer substitution services, such as VoIP and long distance voice services in the Company's operating areas. Partially as a result of wireless substitution and increased competition, CBT’s legacy voice lines decreased by 15% and long distance subscribers decreased by 7% in 2016 compared to 2015.
Our strategic products also face intense competition from cable operators, other telecom companies and niche fiber companies. Many of our competitors have lower operating costs and access to resources that provide economies of scale allowing them to more aggressively price products, which they are able to provide on a much broader scale given their expanded geographic operations. Our competitors are expected to continuously upgrade their service quality and offerings, which could substantially erode the competitive advantage we currently have with our fiber-based products. These competitive factors could limit the Company's ability to grow revenue and cash flows despite the strategic initiatives implemented.

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

The Fioptics suite of products also faces competition from a number of different sources, including companies that deliver movies, television shows and other video programming over broadband Internet connections. Increasingly, content owners are utilizing Internet-based delivery of content directly to consumers, some without charging a fee for access to the content. Furthermore, due to consumer electronics innovations, consumers are able to watch such Internet-delivered content on television sets and mobile devices. Increased customer migration to these non-traditional entertainment products could result in increased Fioptics churn and decreased penetration. If the Company is unable to effectively implement strategies to attract and retain Fioptics video and high-speed internet subscribers, retain access lines and long distance subscribers, or replace such customers with other sources of revenue, the Company's Entertainment and Communications business will be adversely affected.
The IT Services and Hardware segment competes against numerous other information technology consulting, web-hosting, and computer system integration companies, many of which are large in scope and well-financed. This market is rapidly evolving and highly competitive. Other competitors may consolidate with larger companies or acquire software application vendors or technology providers, which may provide competitive advantages. The Company believes that many of the participants in this market must grow rapidly and achieve significant scale to compete effectively. This consolidation could affect prices and other competitive factors in ways that could impede our ability to compete successfully in the market.
The competitive forces described above could have a material adverse impact on the Company’s business, financial condition, results of operations and cash flows.
The Company may be unable to grow our revenues and cash flows despite the initiatives we have implemented.
We must produce adequate revenues and cash flows that, when combined with cash on hand and funds available under our revolving credit facilities, will be sufficient to service our debt, fund our capital expenditures, pay our taxes, fund our pension and other employee benefit obligations and pay preferred dividends pursuant to our dividend policy. We have identified some potential areas of opportunity and implemented several growth initiatives, including increasing marketing promotions and related expenditures and launching new products and services with a focus on areas that are growing such as Fioptics, other fiber-based service offerings and IT solutions. We cannot be assured that these opportunities will be successful or that these initiatives will improve our financial position or our results of operations.

Failure to anticipate the need for and introduce new products and services or to compete with new technologies may compromise the Company’s success in the telecommunications industry.
The Company’s success depends, in part, on being able to anticipate the needs of current and future business, carrier and residential customers. The Company seeks to meet these needs through new product introductions, service quality and technological improvements. New products and services are important to the Company’s success because its industry is technologically driven, such that new technologies can offer alternatives to the Company’s existing services. The development of new technologies and products could accelerate the Company’s loss of access lines or limit the growth from its strategic products, which would have a material adverse effect on the Company’s revenue, results of operations, financial condition and cash flows.

The Company’s access lines, which generate a significant portion of its cash flows and profits, are decreasing in number. If the Company continues to experience access line losses similar to the past several years, its revenues, earnings and cash flows from operations may be adversely impacted.
The Company generates a substantial portion of its revenues by delivering voice and data services over access lines. The Company's local telecommunications subsidiary, CBT, has experienced substantial access line losses over the past several years due to a number of factors, including wireless and broadband substitution and increased competition. The Company expects access line losses to continue into the foreseeable future. Failure to retain access lines without replacing such losses with an alternative source of revenue would adversely impact the Company's revenues, earnings and cash flow from operations.
Some of our strategic products generate lower profit margins than our traditional services, and some can be expected to experience slowing growth as increasing numbers of our existing or potential customers subscribe to these newer products. Moreover, we cannot provide assurance that the revenues generated from our new offerings will offset revenue losses from the reduced sales of our legacy products or that our new strategic offerings will be as successful as anticipated.

12

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

The Company's failure to meet performance standards under its agreements could result in customers terminating their relationships with the Company or customers being entitled to receive financial compensation, which would lead to reduced revenues and/or increased costs.
The Company's agreements with its customers contain various requirements regarding performance and levels of service. If the Company fails to provide the levels of service or performance required by its agreements, customers may be able to receive service credits to their accounts and other financial compensation, and also may be able to terminate their relationship with the Company. In order to provide these levels of services, the Company is required to protect against human error, natural disasters, equipment failure, power failure, sabotage and vandalism, and have disaster recovery plans available for disruption of services. The failure to address these or other events may result in a disruption of services. In addition, any inability to meet service level commitments or other performance standards could reduce the confidence of customers and could consequently impair the Company's ability to attract and retain customers, which could adversely affect the Company's ability to generate revenues and operating results.
The Company generates a substantial portion of its revenue by serving a limited geographic area.
The Company generates a substantial portion of its revenue by serving customers in Greater Cincinnati and Dayton, Ohio. An economic downturn or natural disaster occurring in this limited operating territory would have a disproportionate effect on the Company's 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.
A large customer accounts for a significant portion of the Company’s revenues and accounts receivable. The loss or significant reduction in business from this customer would cause operating revenues to decline and could negatively impact profitability and cash flows.
As of December 31, 2016 and 2015, the Company had receivables from GE that account for 21% and 22% of the outstanding accounts receivable balance, respectively. GE contributed 12% to consolidated revenue for each of the years ended 2016 and 2015, respectively, and 14% for the year end 2014. As a result of this concentration, the Company's results of operations and financial condition could be materially affected if the Company lost this customer or if services purchased were significantly reduced. If GE were to default on its accounts receivable obligations, the Company would be exposed to potentially significant losses in excess of the provisions established. This would also negatively impact the available borrowing capacity under the accounts receivable securitization facility ("Receivables Facility").
Maintaining the Company's telecommunications networks requires significant capital expenditures, and its inability or failure to maintain its telecommunications networks could have a material impact on its market share and ability to generate revenue.
Over the past several years, the Company has improved its wireline network through increased capital expenditures for fiber optic cable in areas of its operating network. The Company intends to continue its capital expenditures for fiber optic cable through 2017.
In order to provide appropriate levels of service to the Company's customers, the network infrastructure must be protected against damage from human error, natural disasters, unexpected equipment failure, power loss or telecommunications failures, terrorism, sabotage or other intentional acts of vandalism. The Company's networks may not address all of the problems that may be encountered in the event of a disaster or other unanticipated problems, which may result in disruption of service to customers.
The Company may also incur significant additional capital expenditures as a result of unanticipated developments, regulatory changes and other events that impact the business.
Increases in broadband usage may cause network capacity limitations, resulting in service disruptions or reduced capacity for customers.
Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional Internet activity such as web browsing and email. As utilization rates and availability of these services continue to grow, our high-speed Internet customers may use much more bandwidth than in the past. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions or reduced capacity for customers.
We may not be able to recover the costs of the necessary network investments. This could result in an adverse impact to our results of operations and financial condition.

13

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

We may be liable for the material that content providers distribute over our networks.
The law relating to the liability of private network operators for information carried on, stored or disseminated through their networks is still unsettled. As such, we could be exposed to legal claims relating to content disseminated on our networks. Claims could challenge the accuracy of materials on our network or could involve matters such as defamation, invasion of privacy or copyright infringement. If we need to take costly measures to reduce our exposure to these risks or are required to defend ourselves against such claims, our financial results would be negatively affected.
Cyber attacks or other breaches of network or other information technology security could have an adverse effect on our business.
Cyber attacks or other breaches of network or information technology security may cause equipment failures or disruptions to our operations. Our inability to operate our wireline networks as a result of such events, even for a limited period of time, may result in significant expenses and/or loss of market share to other communications providers. In addition, the potential liabilities associated with these events could exceed the insurance coverage we maintain. Cyber attacks, which include the use of malware, computer viruses and other means for disruption or unauthorized access, have increased in frequency, scope and potential harm in recent years. While, to date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the aggregate, have been material to our operations or financial condition, the preventative actions we take to reduce the risk of cyber incidents and protect our information technology and networks may be insufficient to repel a major cyber attack in the future. The costs associated with a major cyber attack could include expensive incentives offered to existing customers and business partners to retain their business, increased expenditures on cyber security measures, lost revenues from business interruption, litigation and damage to our reputation. If we fail to prevent the theft of valuable information such as financial data, sensitive information about the Company and intellectual property, or if we fail to protect the privacy of customer and employee confidential data against breaches of network or information technology security, it could result in damage to our reputation, which could adversely impact customer and investor confidence. Any of these occurrences could result in a material adverse effect on our results of operations and financial condition.
Natural disasters, terrorist acts or acts of war could cause damage to our infrastructure and result in significant disruptions to our operations.
Our business operations are subject to interruption by natural disasters, power outages, terrorist attacks, other hostile acts and events beyond our control. Such events could cause significant damage to our infrastructure, resulting in degradation or disruption of service to our customers. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. Our system redundancy may be ineffective or inadequate and our disaster recovery planning may not be sufficient for all eventualities. These events could also damage the infrastructure of suppliers that provide us with the equipment and services we need to operate our business and provide products to our customers. A natural disaster or other event causing significant physical damage would cause us to experience substantial losses resulting in significant recovery time and expenditures to resume operations. In addition, these occurrences could result in lost revenues from business interruption as well as damage to our reputation.
The regulation of the Company’s businesses by federal and state authorities may, among other things, place the Company at a competitive disadvantage, restrict its ability to price its products and services, and threaten its operating licenses.
Several of the Company’s subsidiaries are subject to regulatory oversight of varying degrees at both the state and federal levels, which may differ from the regulatory scrutiny faced by the Company’s competitors. A significant portion of CBT’s revenue is derived from pricing plans that are subject to regulatory review and approval. These regulated pricing plans limit the rates CBT charges for some services while the competition has typically been able to set rates for services with limited or no restriction. In the future, regulatory initiatives that would put CBT at a competitive disadvantage or mandate lower rates for its services would result in lower profitability and cash flows for the Company. In addition, different regulatory interpretations of existing regulations or guidelines may affect the Company’s revenues and expenses in future periods.
At the federal level, CBT is subject to the Telecommunications Act of 1996 (the "1996 Act"), including the rules subsequently adopted by the Federal Communications Commission ("FCC") to implement the 1996 Act, which has impacted CBT’s in-territory local exchange operations in the form of greater competition. At the state level, CBT conducts local exchange operations in portions of Ohio, Kentucky, and Indiana, and, consequently, is subject to regulation by the Public Utilities Commissions in those states. Various regulatory decisions or initiatives at the federal or state level may from time to time have a negative impact on CBT’s ability to compete in its markets.

14

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

There are currently many regulatory actions under way and being contemplated by federal and state authorities regarding issues that could result in significant changes to the business conditions in the telecommunications industry. In addition, in connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet. There is currently only limited regulation applicable to these services. As the significance of the Internet continues to grow, federal, state and local governments may pass laws and adopt rules and regulations or apply existing laws and regulations to the Internet (including Internet access services). Related matters are currently under consideration in both federal and state legislative and regulatory bodies. We cannot provide any assurances that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative, or judicial initiatives relating to the telecommunications industry, will not have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
From time to time, different regulatory agencies conduct audits to ensure that the Company is in compliance with the respective regulations. The Company could be subject to fines and penalties if found to be out of compliance with these regulations, and these fines and penalties could be material to the Company’s financial condition.
The Company depends on a number of third-party providers, and the loss of, or problems with, one or more of these providers may impede the Company's growth or cause it to lose customers.
The Company depends on third-party providers to supply products and services. For example, many of the Company's information technology and call center functions are performed by third-party providers, and network equipment is purchased from and maintained by vendors. The loss of or problems with one or more of these third-party providers may result in an adverse effect on our ability to provide products and services to our customers and on our results of operations and financial condition.
A failure of back-office information technology systems could adversely affect the Company’s results of operations and financial condition.
The efficient operation of the Company’s business depends on back-office information technology systems. The Company relies on back-office information technology systems to effectively manage customer billing, business data, communications, supply chain, order entry and fulfillment and other business processes. A failure of the Company’s information technology systems to perform as anticipated could disrupt the Company’s business and result in a failure to collect accounts receivable, transaction errors, processing inefficiencies, and the loss of sales and customers, causing the Company’s reputation and results of operations to suffer. In addition, information technology systems may be vulnerable to damage or interruption from circumstances beyond the Company’s control, including fire, natural disasters, systems failures, security breaches and viruses. Any such damage or interruption could have a material adverse effect on the Company’s business.
If the Company fails to extend or renegotiate its collective bargaining agreements with its labor union when they expire or if its unionized employees were to engage in a strike or other work stoppage, the Company’s business and operating results could be materially harmed.
The Company is a party to collective bargaining agreements with its labor union, which represents approximately 30% of its employees. No assurance can be given that the Company will be able to successfully extend or renegotiate its collective bargaining agreements in the future. If the Company fails to extend or renegotiate its collective bargaining agreements, if disputes with its union arise, or if its unionized workers engage in a strike or a work stoppage, the Company could experience a significant disruption of operations or incur higher ongoing labor costs, either of which could have a material adverse effect on the business.
The loss of any of the senior management team or attrition among key sales associates could adversely affect the Company’s business, financial condition, results of operations and cash flows.
The Company’s success will continue to depend, to a significant extent, on its senior management team and key sales associates. Senior management has specific knowledge relating to the Company and the industry that would be difficult to replace. The loss of key sales associates could hinder the Company’s ability to continue to benefit from long-standing relationships with customers. The Company cannot provide any assurance that it will be able to retain the current senior management team or key sales associates. The loss of any of these individuals could adversely affect the Company’s business, financial condition, results of operations and cash flows.

15

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

Risks Related to our Indebtedness
The Company’s debt could limit its ability to fund operations, raise additional capital, and fulfill its obligations, which, in turn, would have a material adverse effect on its businesses and prospects generally.
As of December 31, 2016, the Company and its subsidiaries had outstanding indebtedness of $1,206.6 million, on which it incurred $75.7 million of interest expense in 2016, and had total shareowners’ deficit of $121.7 million. At December 31, 2016, the Company and its subsidiaries had $24.2 million of borrowing availability under its Receivables Facility and had the ability to borrow up to an additional $150.0 million under the Corporate Credit Agreement's revolving credit facility, subject to compliance with certain conditions. In addition, the Company's ability to incur additional debt from time to time is subject to the restrictions contained in its credit facilities and other debt instruments.
The Company’s debt has important consequences, including the following:
 
the Company is required to use a substantial portion of its cash flow from operations to pay principal and interest on its debt, thereby reducing the availability of cash flow to fund working capital, capital expenditures, strategic acquisitions, investments and alliances, and other general corporate requirements;
 
there is a variable interest rate on a portion of its debt which could increase if the market interest rates increase;
 
the Company’s debt increases its vulnerability to adverse changes in the credit markets, which adverse changes could increase the Company's borrowing costs and limit the availability of financing;
 
the Company’s debt service obligations limit its flexibility to plan for, or react to, changes in its business and the industries in which it operates;
 
the Company’s level of debt and shareowners’ deficit may restrict it from raising additional financing on satisfactory terms to fund working capital, capital expenditures, strategic acquisitions, investments and alliances, and other general corporate requirements; and
 
the Company’s debt instruments require the Company to comply with specified financial ratios and other restrictive covenants. Failure to comply with these covenants, if not cured or waived, could limit availability to the cash required to fund the Company's operations and general obligations and could result in the Company’s dissolution, bankruptcy, liquidation or reorganization.
The Company’s creditors and preferred stockholders have claims that are superior to claims of the holders of the Company's common stock. Accordingly, in the event of the Company’s dissolution, bankruptcy, liquidation, or reorganization, payment is first made on the claims of creditors of the Company and its subsidiaries, then preferred stockholders, and finally, if amounts are available, to holders of the Company's common stock.
The Corporate Credit Agreement and other indebtedness impose significant restrictions on the Company.
The Company’s debt instruments impose, and the terms of any future debt may impose, operating and other restrictions on the Company. These restrictions affect, and in many respects limit or prohibit, among other things, the Company’s ability to:
 
incur additional indebtedness;
 
create liens;
 
make investments;
 
enter into transactions with affiliates;
 
sell assets;
 
guarantee indebtedness;
 
declare or pay dividends or other distributions to shareholders;
 
repurchase equity interests;
 
redeem debt that is junior in right of payment to such indebtedness;
 
enter into agreements that restrict dividends or other payments from subsidiaries;
 
issue or sell capital stock of certain of its subsidiaries; and
 
consolidate, merge, or transfer all or substantially all of its assets and the assets of its subsidiaries on a consolidated basis.

16

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

In addition, the Company’s Corporate Credit Agreement and debt instruments include restrictive covenants that may materially limit the Company’s ability to prepay debt and redeem preferred stock. The agreements governing the Corporate Credit Agreement also require the Company to achieve and maintain compliance with specified financial ratios.
The restrictions contained in the terms of the Corporate Credit Agreement and its other debt instruments could:
 
limit the Company’s ability to plan for or react to market conditions or meet capital needs or otherwise restrict the Company’s activities or business plans; and
 
adversely affect the Company’s ability to finance its operations, strategic acquisitions, investments or alliances, other capital needs, or to engage in other business activities that would be in its interest.
A breach of any of the debt's restrictive covenants or the Company’s inability to comply with the required financial ratios would result in a default under some or all of the debt agreements. During the occurrence and continuance of a default, lenders may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. Additionally, under the Corporate Credit Agreement, the lenders may elect not to provide loans until such default is cured or waived. The Company’s debt instruments also contain cross-acceleration provisions, which generally cause each instrument to be subject to early repayment of outstanding principal and related interest upon a qualifying acceleration of any other debt instrument. Failure to comply with these covenants, if not cured or waived, would limit the cash available to the Company required to fund operations and its general obligations and could result in the Company’s dissolution, bankruptcy, liquidation or reorganization.
The Company depends on its Corporate Credit Agreement and Receivables Facility to provide for its short-term financing requirements in excess of amounts generated by operations, and the availability of those funds may be reduced or limited.
The Company depends on the revolving credit facilities under its Corporate Credit Agreement and its Receivables Facility to provide for short-term financing requirements in excess of amounts generated by operations. The Corporate Credit Agreement revolving credit facility has a maturity date of January 2020. The Receivables Facility has a termination date of May 2019, and is subject to renewal every 364 days, with the next renewal occurring in May 2017.
The Company's ability to borrow under its Corporate Credit Agreement is subject to the Company's compliance with covenants, including covenants requiring compliance with specified financial ratios. Failure to satisfy these covenants would constrain or prohibit its ability to borrow under these facilities.
As of December 31, 2016, the Company had no outstanding borrowings under the Corporate Credit Agreement's revolving credit facility, leaving $150.0 million in additional borrowing availability under this facility. The $150.0 million available under the Corporate Credit Agreement's revolving credit facility is funded by various financial institutions. If one or more of these banks is not able to fulfill its funding obligations, the Company’s financial condition could be adversely affected.
As of December 31, 2016, the Company had $89.5 million of borrowings and $6.3 million of letters of credit that were outstanding under its Receivables Facility. At that date, the Company had a borrowing capacity under this Receivables Facility of $120.0 million and a maximum borrowing limit of $120.0 million. The available borrowing capacity is calculated monthly based on the amount and quality of outstanding accounts receivable and thus may be lower than the maximum borrowing limit. If the quality of the Company’s accounts receivables deteriorates, this will negatively impact the available capacity under this facility. As of December 31, 2016, the Company had $24.2 million of borrowing capacity remaining under its Receivables Facility.
The servicing of the Company’s indebtedness is dependent on its ability to generate cash, which could be impacted by many factors beyond its control.
The Company’s ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory, and other factors, many of which are beyond its control. The Company cannot provide assurance that its business will generate sufficient cash flow from operations, that additional sources of debt financing will be available, or that future borrowings will be available under its Corporate Credit Agreement or Receivables Facility, in each case, in amounts sufficient to enable the Company to service its indebtedness or to fund other liquidity needs. If the Company cannot service its indebtedness, it will have to take actions such as reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, or selling assets, including its investment in CyrusOne, restructuring or refinancing indebtedness, or seeking additional equity capital, which may adversely affect its shareholders, debt holders and customers. The Company may not be able to negotiate remedies on commercially reasonable terms, or at all. In addition, the terms of existing or future debt instruments may restrict the Company from adopting any of these alternatives. The Company’s inability to generate the necessary cash flows could result in its dissolution, bankruptcy, liquidation or reorganization.


17

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

The Company depends on the receipt of dividends or other intercompany transfers from its subsidiaries and investments.
Virtually all of the Company's operations are conducted through its subsidiaries and most of the Company's debt is held at the parent company. Certain of the Company's material subsidiaries are subject to regulatory authority which may potentially limit the ability of such subsidiaries to distribute funds or assets. If any of the Company's subsidiaries were to be prohibited from paying dividends or making distributions, the Company may not be able to make the scheduled interest and principal repayments on its debt. This failure would have a material adverse effect on the Company's liquidity and the trading price of the Company's common stock, preferred stock, and debt instruments, which could result in its dissolution, bankruptcy, liquidation or reorganization.

Other Risk Factors
The Company has a significant investment in CyrusOne.
As of December 31, 2016, we held 2.8 million shares of CyrusOne common stock valued at $128.0 million. The value of our investment is subject to CyrusOne executing on their strategic plan and other factors beyond CyrusOne's control, such as volatility in equity markets and fluctuations in the valuation of companies perceived by investors to be comparable to CyrusOne, all of which could cause significant changes in the market price of CyrusOne's common stock. The fair value of our investment in CyrusOne may decline which may adversely affect the realization of our investment. As a result, we may be unable to monetize any or all of our investment in CyrusOne, which would therefore limit our ability to repay debt, repurchase equity interests, pursue strategic acquisitions or alliances, reduce the cash available to fund operations and our general obligations, and could result in the Company's dissolution, bankruptcy, liquidation or reorganization.
The trading price of the Company's common stock may be volatile, and the value of an investment in the Company's common stock may decline.
The market price of the Company's common stock has been volatile and could be subject to wide fluctuations in response to, among other things, the risk factors described in this report and other factors beyond the Company's control, such as volatility in equity markets and fluctuations in the valuation of companies perceived by investors to be comparable to the Company.
Equity markets have experienced price and volume fluctuations that have affected the Company's stock price and the market prices of equity securities of many other companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, may negatively affect the market price of the Company's stock.
Companies that have experienced volatility in the market price of common shares have periodically been subject to securities class action litigation. The Company may be the target of this type of litigation in the future. Securities litigation could result in substantial costs and/or damages and divert management's attention from other business concerns.
The uncertain economic environment, including uncertainty in the U.S. and world securities markets, could impact the Company's business and financial condition.
The uncertain economic environment could have an adverse effect on the Company's business and financial liquidity. The Company's primary source of cash is customer collections. If economic conditions were to worsen, some customers may cancel services or have difficulty paying their accounts receivable. These conditions would result in lower revenues and increases in the allowance for doubtful accounts, which would negatively affect the results of operations. Furthermore, the sales cycle would be further lengthened if business customers slow spending or delay decision-making on the Company's products and services, which would adversely affect revenues. If competitors lower prices as a result of economic conditions, the Company would also experience pricing pressure. If the economies of the U.S. and the world deteriorate, this could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
The Company’s future cash flows could be adversely affected if it is unable to fully realize its deferred tax assets.
As of December 31, 2016, the Company had net deferred income taxes of $64.5 million, which are primarily composed of deferred tax assets associated with U.S. federal net operating loss carryforwards of $76.8 million and state, local and foreign net operating loss carryforwards of $48.2 million. The Company has recorded valuation allowances against deferred tax assets related to certain state, local and foreign net operating losses and other deferred tax assets due to the uncertainty of the Company’s ability to utilize the assets within the statutory expiration period. The use of the Company’s deferred tax assets enables it to satisfy current and future tax liabilities without the use of the Company’s cash resources. If the Company is unable for any reason to generate sufficient taxable income to fully realize its deferred tax assets, or if the use of its net operating loss carryforwards is limited by Internal Revenue Code Section 382 or similar state statute, the Company’s net income, shareowners’ deficit and future cash flows would be adversely affected.

18

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

Adverse changes in the value of assets or obligations associated with the Company’s employee benefit plans could negatively impact shareowners’ deficit and liquidity.
The Company sponsors three noncontributory defined benefit pension plans: one for eligible management employees, one for non-management employees, and one supplemental, nonqualified, unfunded plan for certain former executives. The Company also provides healthcare and group life insurance benefits for eligible retirees. The Company’s Consolidated Balance Sheets indirectly reflect the value of all plan assets and benefit obligations under these plans. The accounting for employee benefit plans is complex, as is the process of calculating the benefit obligations under the plans. Adverse changes in interest rates or market conditions, among other assumptions and factors, could cause a significant increase in the Company’s benefit obligations or a significant decrease of the asset values, without necessarily impacting the Company’s net income. In addition, the Company’s benefit obligations could increase significantly if it needs to unfavorably revise the assumptions used to calculate the obligations. These adverse changes could have a further significant negative impact on the Company’s shareowners’ deficit. In addition, with respect to the Company’s pension plans, the Company expects to make approximately $27 million of estimated aggregate cash contributions to its qualified pension plans for the years 2017 to 2020. Additionally, the Company’s postretirement costs are adversely affected by increases in medical and prescription drug costs. Further, if there are adverse changes to plan assets or if medical and prescription drug costs increase significantly, the Company could be required to contribute additional material amounts of cash to the plans or could accelerate the timing of required payments.
Third parties may claim that the Company is infringing upon their intellectual property, and the Company could suffer significant litigation or licensing expenses or be prevented from selling products.
The Company may be unaware of intellectual property rights of others that may cover some of its technology, products or services. Any litigation growing out of third-party patents or other intellectual property claims could be costly and time-consuming and would divert the Company’s management and key personnel from its business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Resolution of claims of intellectual property infringement might also require the Company to enter into costly license agreements. Likewise, the Company may not be able to obtain license agreements on acceptable terms. The Company also may be subject to significant damages or injunctions against the development and sale of certain of its products or services. Further, the Company often relies on licenses of third-party intellectual property for its businesses. The Company cannot ensure these licenses will be available in the future on favorable terms or at all.
Third parties may infringe upon the Company’s intellectual property, and the Company may expend significant resources enforcing its rights or suffer competitive injury.
The Company’s success depends in significant part on the competitive advantage it gains from its proprietary technology and other valuable intellectual property assets. The Company relies on a combination of patents, copyrights, trademarks and trade secrets protections, confidentiality provisions and licensing arrangements to establish and protect its intellectual property rights. If the Company fails to successfully enforce its intellectual property rights, its competitive position could suffer, which could harm its operating results.
The Company may also be required to spend significant resources to monitor and police its intellectual property rights. The Company may not be able to detect third-party infringements and its competitive position may be harmed before the Company does so. In addition, competitors may design around the Company’s technology or develop competing technologies. Furthermore, some intellectual property rights are licensed to other companies, allowing them to compete with the Company using that intellectual property.
We could be subject to a significant amount of litigation, which could require us to pay significant damages or settlements.
Our business faces a substantial amount of litigation, including, from time to time, patent infringement lawsuits, antitrust class actions, securities class actions, wage and hour class actions, personal injury claims and lawsuits relating to our advertising, sales, billing and collection processes. We may incur significant expenses in defending these lawsuits. In addition, we may be required to pay significant awards and settlements.

19

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

The Company could incur significant costs resulting from complying with, or potential violations of, environmental, health and human safety laws.
The Company’s operations are subject to laws and regulations relating to the protection of the environment, health, and human safety, including those governing the management and disposal of, and exposure to, hazardous materials and the cleanup of contamination, and the emission of radio frequencies. While the Company believes its operations are in substantial compliance with environmental, health, and human safety laws and regulations, as an owner or operator of property, and in connection with the current and historical use of hazardous materials and other operations at its sites, the Company could incur significant costs resulting from complying with or violations of such laws, the imposition of cleanup obligations and third-party suits. For instance, a number of the Company’s sites formerly contained underground storage tanks for the storage of used oil and fuel for back-up generators and vehicles.

20

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

Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2016, we owned or maintained properties in Ohio, Kentucky and Indiana. Principal office locations are in Cincinnati, Ohio.
Our properties include copper and fiber plants and associated equipment in our local operating market. Each of the Company’s subsidiaries maintains some investment in furniture and office equipment, computer equipment and associated operating system software, application system software, leasehold improvements and other assets.
With regard to its local Entertainment and Communications operations, the Company owns substantially all of the central office switching stations and the land upon which they are situated. Some business and administrative offices are located in leased facilities, all of which are recorded as operating leases. The Company’s out-of-territory network assets include a fiber network plant, internet protocol and circuit switches and integrated access terminal equipment. In addition, as of year-end, we lease eight Company-run retail locations.
For additional information about the Company’s properties, see Note 4 to the consolidated financial statements.

Item 3. Legal Proceedings
We are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations in the normal course of business. We believe that the liabilities accrued for legal contingencies in our consolidated financial statements, as prescribed by generally accepted accounting principles ("GAAP"), are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations, and other matters, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our consolidated financial statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2016, cannot be reasonably determined.
Based on information currently available, consultation with counsel, available insurance coverage and established reserves, management believes the eventual outcome of all outstanding claims will not, individually or in the aggregate, have a material effect on the Company's financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures
Not applicable.

21

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
The Company’s common shares (symbol: CBB) are listed on the New York Stock Exchange. 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") effective 11:59 p.m. October 4, 2016. The following table shows the high and low closing sale prices during each quarter for the last two fiscal years after consideration of the Reverse Split:
 
 
First
 
Second
 
Third
 
Fourth
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
2016
High
$
19.45

 
$
23.05

 
$
25.10

 
$
22.75

 
Low
$
14.50

 
$
18.00

 
$
19.55

 
$
17.90

2015
High
$
18.40

 
$
20.45

 
$
19.85

 
$
19.85

 
Low
$
14.65

 
$
16.70

 
$
15.40

 
$
15.70

(b) Holders
As of January 31, 2017, the Company had 4,644 holders of record of the 42,128,999 common shares outstanding and 155,250 shares outstanding of the 6 3/4% Cumulative Convertible Preferred Stock.
(c) Dividends
In 2016 and 2015, the Company paid $10.4 million of dividends on its 6 3/4% Cumulative Convertible Preferred Stock. In 2016 and 2015, the Company did not pay any dividends on its common stock and does not intend to pay any common stock dividends in 2017.
(d) Stock Performance
The following graph matches Cincinnati Bell Inc.'s cumulative five-year total shareholder return on common stock with the cumulative total returns of the S&P 500 index and the S&P Integrated Telecommunication Services index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 2011 to December 31, 2016.

22

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

a2016cumulativetotalreturngr.jpg
 
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Cincinnati Bell Inc.
$100
$181
$117
$105
$119
$148
S&P 500
$100
$116
$154
$175
$177
$198
S&P Integrated Telecommunication Services
$100
$115
$128
$130
$134
$167

Copyright © 2017 Standard & Poor's, a division of S&P Global. All rights reserved.

(e) Issuer Purchases of Equity Securities
The following table provides information regarding the Company’s purchases of its common stock during the quarter ended December 31, 2016:
Period
 
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs *
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs (in millions)*
10/1/2016 - 12/31/2016
 

 
$

 

 
$
124.4

*
In February 2010, the Board of Directors approved an additional plan for the repurchase of the Company’s outstanding common stock in an amount up to $150.0 million. This repurchase plan does not have a stated maturity.

23

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Item 6. Selected Financial Data
As further discussed in Note 16 to our consolidated financial statements, we ceased operations of our wireless business as of March 2015. As a result, wireless financial results are now presented as discontinued operations. Therefore, we have recast the financial information, except as noted, for all periods presented.

All shares of common stock and per share information presented in the following table have been adjusted to reflect the Reverse Split on a retroactive basis for all periods presented.

Accounting Standard Update ("ASU") 2015-03 Simplifying the Presentation of Debt Issuance Costs was adopted effective January 1, 2016. As a result, certain note issuance costs were reclassed from "Other noncurrent assets" to "Long-term debt, less current portion." All periods presented in the following table have been recast to present the impact of ASU 2015-03, respectively.


24

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

The selected financial data should be read in conjunction with the consolidated financial statements and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in this document.
(dollars in millions, except per share amounts)
 
2016
 
2015
 
2014
 
2013 (a)
 
2012 (a)
Operating Data
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
1,185.8

 
$
1,167.8

 
$
1,161.5

 
$
1,073.4

 
$
1,251.5

Cost of services and products, selling, general and administrative, depreciation and amortization expense
 
1,079.8

 
1,031.3

 
979.5

 
877.6

 
1,018.0

Other operating costs and losses (b)
 
13.0

 
8.5

 
5.1

 
56.0

 
20.3

Operating income
 
93.0

 
128.0

 
176.9

 
139.8

 
213.2

Interest expense
 
75.7

 
103.1

 
145.9

 
176.0

 
211.2

Loss on extinguishment of debt, net
 
19.0

 
20.9

 
19.6

 
29.6

 
13.6

Loss from CyrusOne investment (c)
 

 
5.1

 
7.0

 
10.7

 

Gain on sale of CyrusOne investment
 
(157.0
)
 
(449.2
)
 
(192.8
)
 

 

Income (loss) from continuing operations
 
101.8

 
290.8

 
117.7

 
(64.9
)
 
(18.8
)
Income (loss) from discontinued operations, net of tax
 
0.3

 
62.9

 
(42.1
)
 
10.2

 
30.0

Net income (loss)
 
102.1

 
353.7

 
75.6

 
(54.7
)
 
11.2

Basic earnings (loss) per common share from continuing operations
 
$
2.17

 
$
6.69

 
$
2.57

 
$
(1.83
)
 
$
(0.74
)
Basic earnings (loss) per common share from discontinued operations

 
$
0.01

 
$
1.50

 
$
(1.01
)
 
$
0.25

 
$
0.76

Basic earnings (loss) per common share

 
$
2.18

 
$
8.19

 
$
1.56

 
$
(1.58
)
 
$
0.02

Diluted earnings (loss) per common share from continuing operations
 
$
2.17

 
$
6.68

 
$
2.56

 
$
(1.83
)
 
$
(0.74
)
Diluted earnings (loss) per common share from discontinued operations

 
$
0.01

 
$
1.49

 
$
(1.00
)
 
$
0.25

 
$
0.76

Diluted earnings (loss) per common share
 
$
2.18

 
$
8.17

 
$
1.56

 
$
(1.58
)
 
$
0.02

Dividends declared per common share
 
$

 
$

 
$

 
$

 
$

Weighted-average common shares outstanding
 
 
 
 
 
 
 
 
 
 
     Basic
 
42.0

 
41.9

 
41.7

 
41.2

 
39.4

     Diluted
 
42.1

 
42.0

 
41.9

 
41.2

 
39.4

 
 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net
 
$
1,085.5

 
$
975.5

 
$
815.4

 
$
756.8

 
$
1,415.4

Total assets (d)
 
1,541.0

 
1,446.4

 
1,807.0

 
2,088.2

 
2,850.4

Total long-term obligations (e)
 
1,429.8

 
1,485.4

 
2,044.7

 
2,509.5

 
3,191.8

 
 
 
 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
 
 
 
Cash flow provided by operating activities
 
$
173.2

 
$
110.9

 
$
175.2

 
$
78.8

 
$
212.7

Cash flow (used in) provided by investing activities
 
(95.5
)
 
383.2

 
392.6

 
(185.4
)
 
(371.8
)
Cash flow (used in) provided by financing activities
 
(75.4
)
 
(544.6
)
 
(514.5
)
 
87.6

 
109.0

Capital expenditures (f)
 
(286.4
)
 
(283.6
)
 
(182.3
)
 
(196.9
)
 
(367.2
)

25

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

(a)
Results for 2012 include the revenues and expenses of CyrusOne, our former data center business. During 2013, CyrusOne results are included for the period January 1, 2013 through January 23, 2013. Effective January 24, 2013, the date of the CyrusOne IPO, we no longer include CyrusOne's operating results in our consolidated financial statements. See Notes 1 and 15 to the consolidated financial statements.
 
 
(b)
Other operating costs and losses consist of restructuring and severance related charges (reversals), transaction-related compensation, curtailment loss (gain), loss (gain) on disposal of assets - net, impairment of assets and transaction costs.
 
 
(c)
Losses represent our equity method share of CyrusOne's losses from the date of the IPO through December 31, 2015. Effective January 1, 2016, our ownership in CyrusOne is no longer accounted for using the equity method.
 
 
(d)
Total assets include current and noncurrent assets from discontinued operations.
 
 
(e)
Total long-term obligations comprise long-term debt less current portion, pension and postretirement benefit obligations, other noncurrent liabilities and noncurrent liabilities from discontinued operations.
See Notes 6, 7, 9, 13 and 16 to the consolidated financial statements for discussions related to 2016 and 2015.
 
 
(f)
Capital expenditures include capital expenditures from discontinued operations.

26

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K 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. See "Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement" for further information on forward-looking statements.

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

Consolidated revenue totaling $1,185.8 million for the year ended December 31, 2016 increased $18.0 million compared to the prior year as strategic revenue growth more than offset declines from legacy and integration products. Revenue from our strategic products totaled $637.5 million in 2016, up 19% compared to 2015.
Operating income in 2016 was $93.0 million, down from the prior year due in large part to increased depreciation expense associated with the impact of accelerating the construction of our fiber network and reducing the estimated useful life of certain set-top boxes and the related software as we upgrade customers to new technology. We also reduced the estimated useful life of our copper assets in the fourth quarter of 2015. Income from continuing operations totaled $101.8 million for the year ended December 31, 2016, primarily due to the $157.0 million gain on the sale of a portion of our CyrusOne investment.
The Company sold a combined 4.1 million CyrusOne common shares for cash totaling $189.7 million during 2016. The cash generated from these transactions was primarily used to manage our debt and fund the expansion of our fiber network. In the third quarter of 2016 the Company issued $425.0 million of 7% senior notes due 2024. The proceeds of the debt were primarily used to repay the remaining $397.1 million of 8 3/8% senior unsecured notes due 2020. In the fourth quarter of 2016, the Company issued an additional $200.0 million of 7% senior notes due 2024 at 105.000% and the proceeds were used to repay $208.0 million of the Corporate Credit Agreement - Tranche B Term Loan.









27

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Consolidated Results of Operations
Revenue
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Service revenue
 
 
 
 


 


 
 
 


 


 
Entertainment and Communications
$
763.0

 
$
735.0

 
$
28.0

 
4
%
 
$
728.8

 
$
6.2

 
1
%
 
IT Services and Hardware
215.7

 
198.0

 
17.7

 
9
%
 
161.4

 
36.6

 
23
%
 
Total service revenue
$
978.7

 
$
933.0

 
$
45.7

 
5
%
 
$
890.2

 
$
42.8

 
5
%
 
Entertainment and Communications revenue increased as the growth in Fioptics and other strategic services offset the combined impact of legacy declines and no longer providing backhaul services to our discontinued wireless operations effective March 31, 2015. Fioptics revenue totaled $254.1 million, $190.8 million and $142.4 million for the years ended December 31, 2016, 2015 and 2014, respectively, up 33% in 2016 and up 34% in 2015 from the comparable prior year. IT Services and Hardware increased during 2015 primarily due to growth from our strategic services. During 2016, the growth was primarily associated with cloud services as professional services and management and monitoring revenue were only up 1% and 3%, respectively, compared to 2015.
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Product revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Entertainment and Communications
$
4.5

 
$
7.4

 
$
(2.9
)
 
(39
)%
 
$
10.7

 
$
(3.3
)
 
(31
)%
 
IT Services and Hardware
202.6

 
227.4

 
(24.8
)
 
(11
)%
 
260.6

 
(33.2
)
 
(13
)%
 
Total product revenue
$
207.1

 
$
234.8

 
$
(27.7
)
 
(12
)%
 
$
271.3

 
$
(36.5
)
 
(13
)%
 
Product revenue is primarily driven by the volume of Telecom and IT hardware sales reflecting the cyclical fluctuation in capital spending by our enterprise customers in our IT Services and Hardware segment. In 2014, we entered into agreements to sell Verizon wireless handsets and accessories at our retail locations generating revenue of $3.1 million and $5.7 million in 2015 and 2014, respectively. In 2016, the Entertainment and Communications segment is no longer selling Verizon wireless handsets at our retail locations.
Operating costs
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Cost of services
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Entertainment and Communications
$
344.7

 
$
319.9

 
$
24.8

 
8
%
 
$
290.2

 
$
29.7

 
10
%
 
IT Services and Hardware
161.7

 
152.6

 
9.1

 
6
%
 
126.0

 
26.6

 
21
%
 
Total cost of services
$
506.4

 
$
472.5

 
$
33.9

 
7
%
 
$
416.2

 
$
56.3

 
14
%
 
Cost of services increased in both periods due to growth in our strategic products. Entertainment and Communications costs also increased due to programming costs associated with our growing Fioptics video subscriber base and higher programming rates.

28

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Cost of products
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Entertainment and Communications
$
2.5

 
$
6.3

 
$
(3.8
)
 
(60
)%
 
$
8.3

 
$
(2.0
)
 
(24
)%
 
IT Services and Hardware
170.0

 
191.8

 
(21.8
)
 
(11
)%
 
223.2

 
(31.4
)
 
(14
)%
 
Total cost of products
$
172.5

 
$
198.1

 
$
(25.6
)
 
(13
)%
 
$
231.5

 
$
(33.4
)
 
(14
)%
 
Cost of products are primarily impacted by changes in Telecom and IT hardware sales. Entertainment and Communications cost of products decreased primarily due to lower sales of Verizon handsets at our retail locations.
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Selling, general, and administrative
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Entertainment and Communications
$
141.5

 
$
146.2

 
$
(4.7
)
 
(3
)%
 
$
133.0

 
$
13.2

 
10
 %
 
IT Services and Hardware
57.5

 
53.5

 
4.0

 
7
 %
 
51.0

 
2.5

 
5
 %
 
Corporate
19.7

 
19.4

 
0.3

 
2
 %
 
20.2

 
(0.8
)
 
(4
)%
 
Total selling, general and administrative
$
218.7

 
$
219.1

 
$
(0.4
)
 
0%

 
$
204.2

 
$
14.9

 
7
 %
 
Entertainment and Communications SG&A costs were down primarily in 2016 due to a one-time pension charge of $3.8 million incurred in the second quarter of 2015 related to our excess benefit plan. In addition to the one-time pension charge, Entertainment and Communications SG&A costs were up in 2015 compared to 2014 primarily due to retail store costs and an increase in our sales force to support our fiber acceleration strategy. IT Services and Hardware SG&A costs were up primarily related to increased payroll and headcount-related costs to support the growth for our strategic products. Corporate SG&A costs decreased during 2015 as increased stock-based compensation expense was more than offset by lower contract services.
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Depreciation and amortization expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Entertainment and Communications
$
168.6

 
$
129.2

 
$
39.4

 
30
%
 
$
115.7

 
$
13.5

 
12
 %
 
IT Services and Hardware
13.5

 
12.3

 
1.2

 
10
%
 
11.7

 
0.6

 
5
 %
 
Corporate
0.1

 
0.1

 

 
0
%
 
0.2

 
(0.1
)
 
(50
)%
 
Total depreciation and amortization expense
$
182.2

 
$
141.6

 
$
40.6

 
29
%
 
$
127.6

 
$
14.0

 
11
 %
 
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, reducing the estimated useful life of certain set-top boxes and the related software as we upgrade customers to new technology. We also reduced the estimated useful life of our copper assets in the fourth quarter of 2015.
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Restructuring and severance related charges (reversals)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Entertainment and Communications
$
7.7

 
$
1.6

 
$
6.1

 
n/m

 
$
(0.5
)
 
$
2.1

 
n/m
 
IT Services and Hardware
3.3

 
2.8

 
0.5

 
18
 %
 

 
2.8

 
n/m
 
Corporate
0.9

 
1.6

 
(0.7
)
 
(44
)%
 
0.1

 
1.5

 
n/m
 
Total restructuring and severance related charges (reversals)
$
11.9

 
$
6.0

 
$
5.9

 
98
 %
 
$
(0.4
)
 
$
6.4

 
n/m
 

29

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.


In 2016, restructuring and severance related charges were associated with increased in-sourcing of IT professionals in our operating territory and initiatives to reduce costs associated with our legacy copper network group, including a voluntary severance program for certain management employees. In 2015, restructuring charges represented severance associated with employee separations, consulting fees related to a workforce optimization initiative and lease abandonments.
Other operating costs
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Other operating costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Curtailment loss
$

 
$
0.3

 
$
(0.3
)
 
n/m

 
$

 
$
0.3

 
n/m

 
Loss (gain) on sale of disposal of assets, net

1.1

 
0.8

 
0.3

 
38
 %
 
(0.3
)
 
1.1

 
n/m

 
Impairment of assets

 

 

 
n/m

 
4.6

 
(4.6
)
 
n/m

 
Transaction costs

 
1.4

 
(1.4
)
 
n/m

 
1.2

 
0.2

 
17
 %
 
Total other operating costs
$
1.1

 
$
2.5

 
$
(1.4
)
 
(56
)%
 
$
5.5

 
$
(3.0
)
 
(55
)%
 
Impairment charges totaling $4.6 million in 2014 were recorded for the abandonment of an internal use software project related to the Entertainment and Communications segment.
Transaction costs incurred in 2015 primarily represent fees for exploring opportunities to increase the scale of our IT Services and Hardware Segment. Transaction costs incurred in 2014 represent legal fees associated with the sale of our wireless assets and fees associated with new equity method investments.
Non-operating expenses (income)
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Non-operating costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
$
75.7

 
$
103.1

 
$
(27.4
)
 
(27
)%
 
$
145.9

 
$
(42.8
)
 
(29
)%
 
Loss on extinguishment of debt, net
19.0

 
20.9

 
(1.9
)
 
(9
)%
 
19.6

 
1.3

 
7
 %
 
Gain on Sale of CyrusOne investment
(157.0
)
 
(449.2
)
 
292.2

 
(65
)%
 
(192.8
)
 
(256.4
)
 
n/m

 
Other (income) expense, net

(7.6
)
 
2.6

 
(10.2
)
 
n/m

 
5.1

 
(2.5
)
 
(49
)%
 
Income tax expense
61.1

 
159.8

 
(98.7
)
 
(62
)%
 
81.4

 
78.4

 
96
 %
 
Income (loss) from discontinued operations, net of tax

0.3

 
62.9

 
(62.6
)
 
n/m

 
(42.1
)
 
105.0

 
n/m

 
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 2015 and 2014. During 2016, 2015 and 2014, we reduced our total debt by $31.0 million, $449.7 million and $451.0 million, respectively. Certain debt repayments in each period resulted in a loss on extinguishment of debt.
In 2016, the Company recognized a gain of $157.0 million on the sale of 4.1 million CyrusOne common shares. In 2015, the Company recognized a gain of $412.9 million on the sale of 20.3 million CyrusOne LP partnership units and a gain of $36.3 million on the sale of 1.4 million CyrusOne common shares. In 2014, the Company recognized a $192.8 million gain on the sale of 16.0 million CyrusOne LP partnership units. Effective December 31, 2015, we exchanged our remaining 6.3 million operating partnership units in CyrusOne LP for an equal number of newly issued shares of common stock of CyrusOne Inc. As a result, at December 31, 2015, we owned approximately 9.5% of CyrusOne's common shares and no longer had significant influence over the entity. Effective January 1, 2016, our investment in CyrusOne was no longer accounted for using the equity-method.
Dividends declared by CyrusOne in 2016 totaled $6.4 million and were included in Other (income) expense, net. For 2015 and 2014, Other (income) expense, net includes the Company's share of CyrusOne's net loss recorded under the equity method of accounting totaling $5.1 million and $7.0 million, respectively.

30

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Income tax expense fluctuates accordingly based on changes in Income from continuing operations before income taxes. The Company uses federal and state net operating loss carryforwards to defray payment of federal and state tax liabilities. As a result, the Company had cash income tax payments, net of refunds, totaling $1.7 million in 2016.
In periods without tax law changes, the Company expects its effective tax rate to exceed statutory rates due to non-deductible expenses. Non-deductible expenses were higher in prior years due to non-deductible interest expense on securities originally issued to acquire its broadband business (the "Broadband Securities"). The Broadband Securities were repaid in full during 2015.
Effective March 31, 2015, we discontinued operating our wireless business as there were no subscribers remaining on the network. As a result, we no longer required the use of the spectrum being leased. Therefore, the $112.6 million gain on sale of wireless spectrum licenses, which had previously been deferred, was recognized during the three months ended March 31, 2015. On April 1, 2015, we transferred certain other wireless assets to the purchaser, including leases to certain wireless towers and related equipment and other assets, which resulted in a gain of $15.9 million in the second quarter of 2015. These gains were partially offset by operating losses as we continued to incur costs during the wind down of the wireless business.
 

31

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Discussion of Operating Segment Results
The Company manages its business based upon product and service offerings. For the years ended December 31, 2016, 2015, and 2014, we operated two business segments: Entertainment and Communications and IT Services and Hardware. The closing of our wireless operations, effective March 31, 2015, represented a strategic shift in our business. Therefore, certain wireless assets, liabilities and results of operations are reported as discontinued operations in our financial statements. For further details of Discontinued Operations, see Note 1 and Note 16 of Notes to Consolidated Financial Statements.
Certain corporate administrative expenses have been allocated to our business segments based upon the nature of the expense and the relative size of the segment. Intercompany transactions between segments have been eliminated.

32

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Entertainment and Communications
The Entertainment and Communications segment provides products and services such as high-speed internet, video, local voice, long distance, VoIP, data transport and other services. CBT, a subsidiary of the Company, is the 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 CBET, a CLEC and subsidiary of CBT. The Company provides long distance and VoIP services primarily through its CBAD and eVolve subsidiaries.

33

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Entertainment and Communications, continued
 
 
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
(dollars in millions)
2016
 
2015
 
2016 vs. 2015
 
2016 vs. 2015
 
2014
 
2015 vs. 2014
 
2015 vs. 2014
 
Revenue:


 


 


 


 


 


 


 
Data
$
344.8

 
$
322.8

 
$
22.0

 
7
 %
 
$
309.6

 
$
13.2

 
4
 %
 
Voice
275.0

 
291.9

 
(16.9
)
 
(6
)%
 
313.5

 
(21.6
)
 
(7
)%
 
Video
125.7

 
96.6

 
29.1

 
30
 %
 
75.5

 
21.1

 
28
 %
 
Services and Other
23.3

 
32.4

 
(9.1
)
 
(28
)%
 
42.1

 
(9.7
)
 
(23
)%
 
Total revenue
768.8

 
743.7

 
25.1

 
3
 %
 
740.7

 
3.0

 
0
 %
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of services and products
359.5

 
331.5

 
28.0

 
8
 %
 
306.2

 
25.3

 
8
 %
 
Selling, general and administrative
141.6

 
150.9

 
(9.3
)
 
(6
)%
 
136.2

 
14.7

 
11
 %
 
Depreciation and amortization
168.6

 
129.2

 
39.4

 
30
 %
 
115.7

 
13.5

 
12
 %
 
Restructuring and severance charges (reversals)
7.7

 
1.6

 
6.1

 
n/m

 
(0.5
)
 
2.1

 
n/m

 
Other
0.8

 
0.6

 
0.2

 
33
 %
 
4.2

 
(3.6
)
 
(86
)%
 
Total operating costs and expenses
678.2

 
613.8

 
64.4

 
10
 %
 
561.8

 
52.0

 
9
 %
 
Operating income
$
90.6

 
$
129.9

 
$
(39.3
)
 
(30
)%
 
$
178.9

 
$
(49.0
)
 
(27
)%
 
Operating margin
11.8
%
 
17.5
%
 
 
 
(5.7)

 
24.2
%
 
 
 
(6.7)

 
Capital expenditures
$
272.5

 
$
269.5

 
$
3.0

 
1
 %
 
$
163.7

 
$
105.8

 
65
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Metrics (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fioptics units passed
533.4

 
432.0

 
101.4

 
23
 %
 
335.0

 
97.0

 
29
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Internet subscribers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DSL
105.6

 
133.7

 
(28.1
)
 
(21
)%
 
156.2

 
(22.5
)
 
(14
)%
 
Fioptics
197.6

 
153.7

 
43.9

 
29
 %
 
113.7

 
40.0

 
35
 %
 
Total internet subscribers
303.2

 
287.4

 
15.8

 
5
 %
 
269.9

 
17.5

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fioptics video subscribers
137.6

 
114.4

 
23.2

 
20
 %
 
91.4

 
23.0

 
25
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential voice lines:
 
 
 
 

 

 
 
 


 


 
Legacy
117.5

 
146.4

 
(28.9
)
 
(20
)%

181.6


(35.2
)

(19
)%

Fioptics
83.8

 
71.4

 
12.4

 
17
 %
 
56.7

 
14.7

 
26
 %
 
Total residential voice lines
201.3


217.8


(16.5
)

(8
)%

238.3


(20.5
)

(9
)%
 
Business voice lines:
 
 
 
 

 

 
 
 


 


 
Legacy
190.7

 
215.4

 
(24.7
)
 
(11
)%
 
238.0

 
(22.6
)
 
(9
)%
 
VoIP*
131.7

 
89.5

 
42.2

 
47
 %
 
70.0

 
19.5

 
28
 %
 
Total business voice lines
322.4

 
304.9

 
17.5

 
6
 %
 
308.0

 
(3.1
)
 
(1
)%
 
Total voice lines
523.7


522.7


1.0


0%

 
546.3

 
(23.6
)
 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long distance lines:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
187.6

 
199.4

 
(11.8
)
 
(6
)%
 
212.5

 
(13.1
)
 
(6
)%
 
Business
129.7

 
140.3

 
(10.6
)
 
(8
)%
 
150.3

 
(10.0
)
 
(7
)%
 
Total long distance lines:
317.3

 
339.7

 
(22.4
)
 
(7
)%
 
362.8

 
(23.1
)
 
(6
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* VoIP lines include Fioptics voice lines

34

Table of Contents
Form 10-K Part II
 
Cincinnati Bell Inc.

Revenue
The following table illustrates our revenue by market: Consumer, Business and Carrier. Our products within each market have been classified as either Strategic, Legacy or Integration.

 
 
 
 
Year ended December 31,
(dollars in millions)
2016
 
2015
 
2014
Revenue:
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
Strategic
 
 
 
 
 
 
 
 
Data
$
103.0

 
$
72.7

 
$
48.4

 
 
 
Voice
21.7

 
19.7

 
17.7

 
 
 
Video
123.6

 
94.8

 
73.9

 
 
 
Services and other
3.4

 
3.7

 
4.0

 
 
 
 
251.7

 
190.9

 
144.0