Document and Entity Information
Document and Entity Information | ||
3 Months Ended
Mar. 31, 2010 | May. 03, 2010
| |
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | 2010-03-31 | |
Document Fiscal Year Focus | 2,010 | |
Document Fiscal Period Focus | Q1 | |
Trading Symbol | Q | |
Entity Registrant Name | QWEST COMMUNICATIONS INTERNATIONAL INC | |
Entity Central Index Key | 0001037949 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Large Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 1,736,229,071 |
CONDENSED CONSOLIDATED STATEMEN
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) | ||
In Millions, except Share data in Thousands | 3 Months Ended
Mar. 31, 2010 | 3 Months Ended
Mar. 31, 2009 |
Operating revenue | $2,966 | $3,173 |
Operating expenses: | ||
Cost of sales (exclusive of depreciation and amortization) | 941 | 1,014 |
Selling | 440 | 543 |
General, administrative and other operating | 472 | 494 |
Depreciation and amortization | 545 | 573 |
Total operating expenses | 2,398 | 2,624 |
Operating income | 568 | 549 |
Other expense (income)-net: | ||
Interest expense on long-term borrowings and capital leases-net | 279 | 260 |
Loss on early retirement of debt | 42 | |
Other-net | (9) | |
Total other expense (income)-net | 321 | 251 |
Income before income taxes | 247 | 298 |
Income tax expense | (209) | (92) |
Net income | $38 | $206 |
Earnings per common share: | ||
Basic | 0.02 | 0.12 |
Diluted | 0.02 | 0.12 |
Weighted average common shares outstanding: | ||
Basic | 1,719,148 | 1,702,069 |
Diluted | 1,739,405 | 1,706,822 |
CONDENSED CONSOLIDATED BALANCE
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) | ||
In Millions | 3 Months Ended
Mar. 31, 2010 | 12 Months Ended
Dec. 31, 2009 |
Current assets: | ||
Cash and cash equivalents | $1,196 | $2,406 |
Short-term investments | 656 | |
Accounts receivable-net of allowance of $96 and $100, respectively | 1,245 | 1,302 |
Deferred income taxes-net | 527 | 538 |
Prepaid expenses and other | 381 | 368 |
Total current assets | 4,005 | 4,614 |
Property, plant and equipment-net | 12,078 | 12,299 |
Capitalized software-net | 912 | 911 |
Deferred income taxes-net | 1,772 | 1,971 |
Other | 595 | 585 |
Total assets | 19,362 | 20,380 |
Current liabilities: | ||
Current portion of long-term borrowings | 2,046 | 2,196 |
Accounts payable | 658 | 765 |
Accrued expenses and other | 1,344 | 1,580 |
Deferred revenue and advance billings | 542 | 556 |
Total current liabilities | 4,590 | 5,097 |
Long-term borrowings-net of unamortized debt discount and other of $253 and $266, respectively | 11,500 | 12,004 |
Post-retirement and other post-employment benefits obligations-net | 2,475 | 2,479 |
Pension obligations-net | 803 | 817 |
Deferred revenue | 475 | 486 |
Other | 639 | 675 |
Total liabilities | 20,482 | 21,558 |
Commitments and contingencies (Note 12) | ||
Stockholders' deficit: | ||
Preferred stock-$1.00 par value, 200 million shares authorized; none issued or outstanding | ||
Common stock-$0.01 par value, 5 billion shares authorized; 1,746,466 and 1,738,330 shares issued, respectively | 17 | 17 |
Additional paid-in capital | 42,294 | 42,269 |
Treasury stock-10,873 and 9,084 shares, respectively (both including 44 shares, held in rabbi trust) | (29) | (22) |
Accumulated deficit | (42,915) | (42,953) |
Accumulated other comprehensive loss | (487) | (489) |
Total stockholders' deficit | (1,120) | (1,178) |
Total liabilities and stockholders' deficit | $19,362 | $20,380 |
1_CONDENSED CONSOLIDATED BALANC
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) | ||
In Millions, except Share data | Mar. 31, 2010
| Dec. 31, 2009
|
Accounts receivable, allowance | $96 | $100 |
Long-term borrowings, unamortized debt discount and other | $253 | $266 |
Preferred stock, par value | $1 | $1 |
Preferred stock, shares authorized | 200,000,000 | 200,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par value | 0.01 | 0.01 |
Common stock, shares authorized | 5,000,000,000 | 5,000,000,000 |
Common stock, shares issued | 1,746,466,000 | 1,738,330,000 |
Treasury stock, shares | 10,873,000 | 9,084,000 |
Treasury stock, shares held in rabbi trust | 44,000 | 44,000 |
2_CONDENSED CONSOLIDATED STATEM
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) | ||
In Millions | 3 Months Ended
Mar. 31, 2010 | 3 Months Ended
Mar. 31, 2009 |
Operating activities: | ||
Net income | $38 | $206 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||
Depreciation and amortization | 545 | 573 |
Deferred income taxes | 205 | 98 |
Provision for bad debt-net | 22 | 49 |
Loss on early retirement of debt | 42 | |
Other non-cash charges-net | 35 | 29 |
Changes in operating assets and liabilities: | ||
Accounts receivable | 26 | 58 |
Prepaid expenses and other current assets | 22 | (28) |
Accounts payable, accrued expenses and other current liabilities | (146) | (263) |
Deferred revenue and advance billings | (25) | (19) |
Other non-current assets and liabilities | (42) | (46) |
Cash provided by operating activities | 722 | 657 |
Investing activities: | ||
Expenditures for property, plant and equipment and capitalized software | (387) | (334) |
Proceeds from sale of investment securities | 6 | |
Purchases of investment securities | (657) | |
Other | 1 | (8) |
Cash used for investing activities | (1,043) | (336) |
Financing activities: | ||
Proceeds from long-term borrowings | 775 | |
Repayments of long-term borrowings, including current maturities | (1,495) | (239) |
Proceeds from issuances of common stock | 11 | 16 |
Dividends paid | (138) | (137) |
Early retirement of debt costs | (40) | |
Other | (2) | 15 |
Cash used for financing activities | (889) | (345) |
Cash and cash equivalents: | ||
Decrease in cash and cash equivalents | (1,210) | (24) |
Beginning balance | 2,406 | 565 |
Ending balance | $1,196 | $541 |
Basis of Presentation
Basis of Presentation | |
3 Months Ended
Mar. 31, 2010 | |
Basis of Presentation | Note1: Basis of Presentation Our condensed consolidated balance sheet as of December31, 2009, which was derived from our audited financial statements, and our unaudited interim condensed consolidated financial statements as of and for the three months ended March31, 2010 have been prepared in accordance with the instructions for Form10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. We believe that the disclosures made are adequate such that the information presented is not misleading. In the opinion of management, these statements include all normal recurring adjustments necessary to fairly present our condensed consolidated results of operations, financial position and cash flows as of March31, 2010 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form10-K for the year ended December31,2009. Our condensed consolidated results of operations and condensed consolidated statement of cash flows for the three months ended March31, 2010 are not necessarily indicative of the results or cash flows expected for the full year. Reclassifications During the first quarter of 2010, we changed the definitions we use to classify expenses as cost of sales, selling expenses or general, administrative and other operating expenses and, as a result, certain expenses in our condensed consolidated statements of operations for the prior year have been reclassified to conform to the current year presentation. Our new definitions of these expenses are as follows: Cost of sales (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: facilities expenses (which are third-party telecommunications expenses we incur for using other carriers networks to provide services to our customers); employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages and certain benefits); equipment sales expenses (such as data integration and modem expenses); rents and utilities expenses incurred by our network operations and data centers; fleet expenses; and other expenses directly related to our network operations (such as professional fees and outsourced services). Selling expenses are expenses incurred in selling products and services to our customers. These expenses include: employee-related expenses directly attributable to selling products or services (such as salaries, wages, internal commissions and certain benefits); marketing and advertising; external commissions; bad debt expense; and other selling expenses (such as professional fees and outsourced services). General, administrative and other operating expenses are corporate overhead and other operating expenses. These expenses include: employee-related expenses for administrative f |
Earnings Per Common Share
Earnings Per Common Share | |
3 Months Ended
Mar. 31, 2010 | |
Earnings Per Common Share | Note2: Earnings Per Common Share Basic earnings per common share excludes dilution and is computed by dividing net income allocated to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if certain outstanding stock options are exercised, the premium on convertible debt is converted into common stock and certain performance share awards require the issuance of common stock. The following is a reconciliation of the number of shares used in the basic and diluted earnings per common share computations for the three months ended March31, 2010 and 2009: ThreeMonthsEnded March31, 2010 2009 (Dollars inmillions exceptpershare amounts, sharesinthousands) Net income allocated to common shareholders $ 38 $ 205 Basic weighted average shares outstanding 1,719,148 1,702,069 Dilutive effect of options with strike prices equal to or less than the average price of our common stock during the period, calculated using the treasury stock method 2,412 125 Dilutive effect of performance share awards 17,845 4,628 Diluted weighted average shares outstanding 1,739,405 1,706,822 Earnings per common share: Basic $ 0.02 $ 0.12 Diluted $ 0.02 $ 0.12 We had weighted average unvested restricted stock grants outstanding of approximately 12million shares and 9million shares during the three months ended March31, 2010 and 2009, respectively. These shares were excluded from the earnings per common share calculation, and these shareholders have their own earnings per share calculation whereby they were allocated less than $1million of net income for the three months ended March31, 2010 and approximately $1million of net income for the three months ended March31, 2009, for purposes of calculating basic and diluted earnings per share. The following is a summary of the securities that could potentially dilute basic earnings per common share, but have been excluded from the computations of diluted earnings per common share for the three months ended March31, 2010 and 2009: ThreeMonthsEnded March31, 2010 2009 Outstanding options to purchase common stock excluded because the strike prices of the options exceeded the average price of common stock during the period 43,595 62,727 Outstanding options to purchase common stock because the market-based vesting conditions have not been met 2,083 2,083 Other outstanding instruments excluded because the impact would have been antidilutive 209 228 In addition, the equity premium on our 3.50% Convertible Senior Notes due 2025 (our 3.50% Convertible Senior Notes) could potentially dilute basic earnings per common share, but has been excluded from the computations of diluted earnings per common share for the three months ended March31, 2010 and 2009. The number of shares we would have to issue upon conversion of these notes is determined by a formula that ha |
Fair Value of Financial Instrum
Fair Value of Financial Instruments | |
3 Months Ended
Mar. 31, 2010 | |
Fair Value of Financial Instruments | Note3: Fair Value of Financial Instruments Our financial instruments consist of cash and cash equivalents, short-term investments (consisting of U.S. Treasury and U.S. government agency securities), auction rate securities, accounts receivable, accounts payable, interest rate hedges and long-term notes including the current portion. The carrying values of cash and cash equivalents, U.S. Treasury and U.S. government agency securities, auction rate securities, accounts receivable, accounts payable and interest rate hedges approximate their fair values. The carrying value of our long-term notes including the current portion reflects original cost net of unamortized discounts and other and was $13.359billion and $14.034billion as of March31, 2010 and December31, 2009, respectively. For additional information, see Note5Borrowings. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the Financial Accounting Standards Board (the FASB). The table below presents the fair values for auction rate securities, interest rate hedges and long-term notes including the current portion, as well as the input levels used to determine these fair values as of March31, 2010 and December31, 2009: Fair Value As Of Level March31, 2010 December31, 2009 (Dollars in millions) Assets: Auction rate securities 3 $ 93 $ 95 Fair value hedges 3 5 2 Total assets $ 98 $ 97 Liabilities: Long-term notes, including the current portion 12 $ 14,178 $ 14,245 Cash flow hedges 3 3 Total liabilities $ 14,178 $ 14,248 The three levels of the fair value hierarchy as defined by the FASB are as follows: InputLevel Description of Input Level 1 Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Level 2 Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Inputs are generally unobservable and typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. We determined the fair value of our auction rate securities using a probability-we |
Investments
Investments | |
3 Months Ended
Mar. 31, 2010 | |
Investments | Note4: Investments Our investments include short-term investments in U.S. Treasury and U.S. government agency securities and auction rate securities. As of March31, 2010, our short-term investments were $656million and as of December31, 2009 we did not have any short-term investments. We classify these investments as held-to-maturity because we have the intent and ability to hold the securities until they mature. All securities included in our short-term investments are reported at amortized cost basis, which is not materially different from fair value, and mature prior to September30, 2010. As of March31, 2010 and December31, 2009, our auction rate securities were $93million and $95million, respectively, which are classified as non-current, available-for-sale investments and are included in other non-current assets at their estimated fair value on our condensed consolidated balance sheets. These securities have stated maturities between 2033 and 2036. We recorded approximately $2million of unrealized losses, net of deferred income taxes on these auction rate securities for both the three months ended March31, 2010 and March31, 2009. The cumulative net unrealized losses, net of deferred income taxes, related to these securities were $17million and $15million as of March31, 2010 and December31, 2009, respectively. These unrealized losses were recorded in accumulated other comprehensive loss on our condensed consolidated balance sheets. The cost basis of these securities was $120million as of March31, 2010 and December31, 2009. We consider the decline in fair value to be a temporary impairment because we believe it is more likely than not that we will ultimately recover the entire $120million cost basis, in part because the securities are rated investment grade, the securities are collateralized and the issuers continue to make required interest payments. At some point in the future, we may determine that the decline in fair value is other than temporary if, among other factors: the issuers cease making required interest payments; we believe it is more likely than not that we will be required to sell these securities before their values recover; or we change our intent to hold the securities due to events such as a change in the terms of the securities. |
Borrowings
Borrowings | |
3 Months Ended
Mar. 31, 2010 | |
Borrowings | Note5: Borrowings As of March31, 2010 and December31, 2009, our long-term borrowings, net of unamortized discounts and other, consisted of the following: March31, 2010 December31, 2009 (Dollarsinmillions) Current portion of long-term borrowings: Long-term notes $ 2,009 $ 2,168 Long-term capital lease and other obligations 37 28 Total current portion of long-term borrowings 2,046 2,196 Long-term borrowingsnet: Long-term notesnet 11,350 11,866 Long-term capital lease and other obligationsnet 150 138 Total long-term borrowingsnet 11,500 12,004 Total borrowingsnet $ 13,546 $ 14,200 We were in compliance with all provisions and covenants of our borrowings as of March31, 2010. The holders of our 3.50% Convertible Senior Notes have the option to require us to repurchase their notes for cash every five years on November15, beginning in 2010, and receive cash from us equal to the par value of the notes. We believe the likelihood of holders requiring us to repurchase their notes on November15, 2010 increases the more the conversion price exceeds the trading price of our common stock. The conversion value of the notes as of March31, 2010 was calculated by using the current conversion rate of 203.2268per $1,000 in principal amount of the notes or a conversion price of $4.92, adjusted for certain events, including the payment of dividends, as described in the indenture governing the notes. Even if we are not required to repurchase these notes in November2010, we anticipate we will call the notes at that time. Tender Offer In March 2010, we completed a cash tender offer for the purchase of up to $1.204billion aggregate principal amount of notes issued by our wholly owned subsidiary, Qwest Capital Funding, Inc (QCF), consisting of $403million of its 7.90% Notes due 2010 and $801million of its 7.25% Notes due 2011. With respect to QCFs 7.90% Notes due 2010, we received and accepted tenders of approximately $338million aggregate principal amount of these notes, or 84%, for $347million, resulting in a loss of $10million. With respect to QCFs 7.25% Notes due 2011, we received and accepted tenders of approximately $622million aggregate principal amount of these notes, or 78%, for $650million, resulting in a loss of $30million. The combined loss on this tender offer, net of deferred taxes, reduced net income by approximately $25million, or approximately $0.01 per basic and diluted common share, for the three months ended March31, 2010. Repayment In February 2010, we redeemed $525million aggregate principal amount of QCIIs Senior Notes due 2011, resulting in a loss of $2million. This loss, net of deferred taxes, reduced net income by approximately $1million, or less than $0.01 per basic and diluted common share, for the three months ended March31, 2010. New Issuance In January 2010, QCII issued $800million of 7.125% Senior Notes due 2018. We are using net proceeds of $775million for general corporate purposes, including repayment of indebt |
Derivative Financial Instrument
Derivative Financial Instruments | |
3 Months Ended
Mar. 31, 2010 | |
Derivative Financial Instruments | Note6: Derivative Financial Instruments We sometimes use derivative financial instruments, specifically interest rate swap contracts, to manage interest rate risks. We execute these instruments with financial institutions we deem creditworthy and monitor our exposure to these counterparties. An interest rate hedge is generally designated as either a cash flow hedge or a fair value hedge. In a cash flow hedge, a borrower of variable interest debt agrees with another party to make fixed payments equivalent to paying fixed rate interest on debt in exchange for receiving payments from the other party equivalent to receiving variable rate interest on debt, the effect of which is to eliminate some portion of the variability in the borrowers overall cash flows. In a fair value hedge, a borrower of fixed rate debt agrees with another party to make variable payments equivalent to paying variable rate interest on the debt in exchange for receiving fixed payments from the other party equivalent to receiving fixed rate interest on debt, the effect of which is to eliminate some portion of the variability in the fair value of the borrowers overall debt portfolio due to changes in interest rates. We recognize all derivatives on our condensed consolidated balance sheets at fair value. We generally designate the derivative as either a cash flow hedge or a fair value hedge on the date on which we enter into the derivative instrument. Cash flows from derivative instruments that are fair value hedges or cash flow hedges are classified in cash flows from operations. For a derivative that is designated as and meets all of the required criteria for a cash flow hedge, we record in accumulated other comprehensive loss on our condensed consolidated balance sheets, any changes in the fair value of the derivative. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In addition, if there are any changes in the fair value of the derivative arising from ineffectiveness of the cash flow hedging relationship, we record those amounts immediately in other expense (income)net in our condensed consolidated statements of operations. For a derivative that is designated as and meets all of the required criteria for a fair value hedge, we record in other expense (income)net in our condensed consolidated statements of operations the changes in fair value of the derivative and the underlying hedged item. However, if the terms of this type of derivative match the terms of the underlying hedged item such that we qualify to assume no ineffectiveness, then the fair value of the derivative is measured and the change in the fair value for the period is assumed to equal the change in the fair value of the underlying hedged item for the period, with no impact in other expense (income)net. We assess quarterly whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item or whether our initial assumption of no ineffectiveness is still valid. If we determine that a derivative is not highly effective as a hedge, a derivative has ceased to be a highly effective hedge or our assumption of n |
Severance and Restructuring
Severance and Restructuring | |
3 Months Ended
Mar. 31, 2010 | |
Severance and Restructuring | Note7: Severance and Restructuring Severance For the three months ended March31, 2010 and 2009, we recorded severance expenses of $3million and $23million, respectively. A portion of our severance expenses is included in each of cost of sales, selling expenses and general, administrative and other operating expenses in our condensed consolidated statements of operations. We have not included any severance expenses in our segment expenses. As of March31, 2010 and December31, 2009, our severance liability was $50million and $77million, respectively, and is included in accrued expenses and other in our condensed consolidated balance sheets. Restructuring During 2004 and previous years, as part of our ongoing efforts to evaluate our operating costs, we established restructuring programs, which included workforce reductions, consolidation of excess facilities, and restructuring of certain business functions. As of March31, 2010, the remaining restructuring reserve for these programs related to leases for real estate that we ceased using in prior periods and consisted of our estimates of amounts to be paid for these leases in excess of our estimates of any sublease revenue we may collect. We expect this reserve will be used over the remaining lease terms, which range from 0.3to 15.8years, with a weighted average of 12.5years. The remaining reserve balances are included on our condensed consolidated balance sheets in accrued expenses and other current liabilities for the current portion and other long-term liabilities for the long-term portion. The provisions, reversals, and adjustments are included in general, administrative and other expenses in our condensed consolidated statements of operations. We have not included any restructuring expenses in our segment expenses. The following table presents the details of our real estate restructuring reserves for the three months ended March31, 2010: RealEstate Restructuring (Dollarsinmillions) Balance at December31, 2009 $ 206 Provisions Utilization (11 ) Reversals and adjustments (7 ) Balance at March31, 2010 $ 188 |
Employee Benefits
Employee Benefits | |
3 Months Ended
Mar. 31, 2010 | |
Employee Benefits | Note8: Employee Benefits The components of net periodic benefits expense for our pension, non-qualified pension and post-retirement benefit plans for the three months ended March31, 2010 and 2009 are detailed below: Three Months Ended March31, Pension Plan Non-Qualified PensionPlan Post-Retirement Benefit Plans 2010 2009 2010 2009 2010 2009 (Dollars inmillions) Net periodic benefits expense: Service cost $ 15 $ 26 $ $ $ 2 $ 2 Interest cost 112 126 1 1 46 54 Expected return on plan assets (140 ) (144 ) (15 ) (17 ) Recognized prior service cost (6 ) (25 ) (25 ) Recognized net actuarial loss 32 15 10 9 Total net periodic benefits expense $ 13 $ 23 $ 1 $ 1 $ 18 $ 23 The net periodic benefits expense for our pension, non-qualified pension and post-retirement benefit plans is recorded in general, administrative and other operating expenses in our condensed consolidated statements of operations. The measurement date used to determine pension, non-qualified pension and post-retirement benefits is December31. |
Tax Matters
Tax Matters | |
3 Months Ended
Mar. 31, 2010 | |
Tax Matters | Note9: Tax Matters During the three months ended March31, 2010, our income tax expense increased by $113million as a result of the March 2010 enactments of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Among other things, these laws disallow, beginning in 2013, federal income tax deductions for retiree prescription drug benefits to the extent we receive reimbursements for those benefits under the Medicare Part D program. Although this tax increase does not take effect until 2013, under accounting principles generally accepted in the U.S. we recognize the full accounting impact in the period in which the laws are enacted. During the three months ended March31, 2009, we reduced our income tax expense by $16million due to the recognition of previously unrecognized tax benefits and settlements of uncertain tax positions that are discrete to those periods. The benefits recorded for previously unrecognized tax positions were the result of increases in the amount of benefit that we believe is more likely than not to be sustained on various individual tax positions. We had unrecognized tax benefits as of March31, 2010 of $206million. This amount was a decrease of $76million from the balance at December31, 2009, as a result of the elimination of unrecognized tax benefits arising from settlements with taxing authorities. Approximately $57million of the $206million unrecognized tax benefits we had at March31, 2010 could affect our effective tax rate as these positions would permanently decrease the cumulative amount that we would ever have to pay the taxing authorities. |
Comprehensive Income
Comprehensive Income | |
3 Months Ended
Mar. 31, 2010 | |
Comprehensive Income | Note10: Comprehensive Income Comprehensive income includes the amortization of actuarial gains and losses and prior service costs for our pension and post-retirement benefit plans, changes in the fair value and related amortization of certain financial derivative instruments (which qualify for hedge accounting) and unrealized gains and losses on certain investments. The components of comprehensive income for the three months ended March31, 2010 and 2009 are detailed below: ThreeMonthsEnded March31, 2010 2009 (Dollarsinmillions) Net income $ 38 $ 206 Other comprehensive gain (loss)net of deferred taxes: Pensionnet 16 9 Post-retirement benefit plansnet (11 ) (12 ) Unrealized (loss) gain on derivative instrumentsnet (1 ) 2 Unrealized loss on auction rate securities and othernet (2 ) (4 ) Total other comprehensive gain (loss)net of deferred taxes 2 (5 ) Comprehensive income $ 40 $ 201 |
Segment Information
Segment Information | |
3 Months Ended
Mar. 31, 2010 | |
Segment Information | Note11: Segment Information Our operating revenue is generated from our business markets, mass markets and wholesale markets segments. Our Chief Operating Decision Maker (CODM) regularly reviews information for each of our segments to evaluate performance and to allocate resources. The accounting principles used to determine segment results are the same as those used in our condensed consolidated financial statements; however, in 2010 certain previously unallocated expenses were included in the information our CODM uses to evaluate the performance of each segment and certain revenue and expenses were realigned based on changes in how we manage our business. The majority of our cost of sales and selling expenses are incurred directly by or allocated to our segments based on an activity based costing methodology. As a result of these changes, we have reclassified and reallocated certain prior year segment revenue and expense amounts presented in our Quarterly Report on Form10-Q for the three months ended March31, 2009 to conform to the current period presentation. For each segment, segment income equals its revenue minus its expenses and other expenses allocated to it based on its operations. Segment information for the three months ended March31, 2010 and 2009 is summarized in the following table: ThreeMonths Ended March31, 2010 2009 (Dollars inmillions) Total segment revenue $ 2,867 $ 3,095 Total segment expenses 1,381 1,555 Total segment income $ 1,486 $ 1,540 Total segment margin percentage 52 % 50 % Business markets: Revenue $ 999 $ 1,001 Expenses 599 619 Income $ 400 $ 382 Margin percentage 40 % 38 % Mass markets: Revenue $ 1,183 $ 1,325 Expenses 556 637 Income $ 627 $ 688 Margin percentage 53 % 52 % Wholesale markets: Revenue $ 685 $ 769 Expenses 226 299 Income $ 459 $ 470 Margin percentage 67 % 61 % The following table reconciles segment income to net income for the three months ended March31, 2010 and 2009: Three Months Ended March31, 2010 2009 (Dollarsinmillions) Total segment income $ 1,486 $ 1,540 Other revenue (primarily USF surcharges) 99 78 Unassigned expenses (primarily general and administrative) (472 ) (496 ) Depreciation and amortization (545 ) (573 ) Total other expensenet (321 ) (251 ) Income tax expense (209 ) (92 ) Net income $ 38 $ 206 Revenue from our products and services for the three months ended March31, 2010 and 2009 is summarized in the following table: ThreeMonthsEnded March31, 2010 2009 (Dollars inmillions) Operating revenue by category: Strategic |
Commitments and Contingencies
Commitments and Contingencies | |
3 Months Ended
Mar. 31, 2010 | |
Commitments and Contingencies | Note12: Commitments and Contingencies In this section, when we refer to a class action as putative it is because a class has been alleged, but not certified in that matter. Until and unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent. To the extent appropriate, we have accrued liabilities for the matters described below. The terms and conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate us to indemnify our former directors, officers or employees with respect to certain of the matters described below, and we have been advancing legal fees and costs to certain former directors, officers or employees in connection with certain matters described below. KPNQwest Litigation/Investigation On January27, 2009, the trustees in the Dutch bankruptcy proceeding for KPNQwest, N.V. (of which we were a major shareholder) filed a lawsuit in the federal district court for the District of Colorado alleging violations of the Racketeer Influenced and Corrupt Organizations Act and breach of duty and mismanagement under Dutch law. We are a defendant in this lawsuit along with Joseph P. Nacchio, our former chief executive officer, Robert S. Woodruff, our former chief financial officer, and John McMaster, the former president and chief executive officer of KPNQwest. Plaintiffs allege, among other things, that defendants actions were a cause of the bankruptcy of KPNQwest, and they seek damages for the bankruptcy deficit of KPNQwest of approximately $2.4billion. Plaintiffs also seek treble and punitive damages as well as an award of plaintiffs attorneys fees and costs. A lawsuit asserting the same claims that was previously filed in the federal district court for the District of New Jersey was dismissed without prejudice, and that dismissal was affirmed on appeal. On March31,2010, the federal district court for the District of Colorado dismissed the lawsuit without prejudice, concluding that the dispute should not be adjudicated in the United States. On September13, 2006, Cargill Financial Markets, Plc and Citibank, N.A. filed a lawsuit in the District Court of Amsterdam, located in the Netherlands, against us, KPN Telecom B.V., Koninklijke KPN N.V. (KPN), Mr.Nacchio, Mr.McMaster, and other former employees or supervisory board members of us, KPNQwest or KPN. The lawsuit alleges that defendants misrepresented KPNQwests financial and business condition in connection with the origination of a credit facility and wrongfully allowed KPNQwest to borrow funds under that facility. Plaintiffs allege damages of approximately 219million (or approximately $296million based on the exchange rate on March31, 2010). On October31, 2002, Richard and Marcia Grand, co-trustees of the R.M. Grand Revocable Living Trust, dated January25, 1991, filed a lawsuit in Arizona Superior Court. As amended and following the appeal of a partial summary judgment against plaintiffs which was affirmed in part and reversed in part, plaintiffs allege, among other things, that defendants violated state securities |
Dividends
Dividends | |
3 Months Ended
Mar. 31, 2010 | |
Dividends | Note13: Dividends Our Board of Directors declared the following dividends payable in 2010: Date Declared Record Date Dividend PerShare TotalAmount PaymentDate (inmillions) December16, 2009 February19,2010 $ 0.08 $ 138 March12,2010 April14, 2010 May 21, 2010 $ 0.08 $ 140 June 11, 2010 |
Subsequent Event
Subsequent Event | |
3 Months Ended
Mar. 31, 2010 | |
Subsequent Event | Note14: Subsequent Event CenturyLink Merger Agreement On April21, 2010, we entered into a merger agreement whereby CenturyTel, Inc. (CenturyLink) will acquire us in a tax-free, stock-for-stock transaction. Under the terms of the agreement, our stockholders will receive 0.1664 shares of CenturyLink common stock for each share of our common stock they own at closing. Based on our and CenturyLinks share prices as of the date of the merger agreement, at closing CenturyLink shareholders are expected to own approximately 50.5% and our stockholders are expected to own approximately 49.5% of the combined company. Completion of this transaction is subject to approval by the stockholders of both companies, various federal and state regulatory approvals as well as other customary closing conditions. We anticipate closing this transaction in the first half of 2011. If the merger agreement is terminated under certain circumstances, we may be obligated to pay CenturyLink a termination fee of $350million. |
Financial Statements of Guarant
Financial Statements of Guarantors | |
3 Months Ended
Mar. 31, 2010 | |
Financial Statements of Guarantors | Note15: Financial Statements of Guarantors QCII and two of its subsidiaries, QCF and QSC, guarantee the payment of certain of each others registered debt securities. As of March31, 2010, QCIIs total outstanding debt included $2.7billion aggregate principal amount of senior notes that were issued in February 2004,June 2005,September 2009 and January 2010 and that are guaranteed by QCF and QSC (the QCII Guaranteed Notes). These notes are guaranteed through their respective maturity dates, the latest of which is in April 2018. In addition, each series of QCFs outstanding notes totaling approximately $1.226billion in aggregate principal amount is guaranteed on a senior unsecured basis by QCII (the QCF Guaranteed Notes). These notes are guaranteed through their respective maturity dates, the latest of which is in February 2031. The guarantees described above are full and unconditional and joint and several. All of the QCF Guaranteed Notes and $1.3 billion of the QCII Guaranteed Notes are registered debt securities. A significant amount of QCIIs and QSCs income and cash flow are generated by their subsidiaries. As a result, the funds necessary to meet their debt service or guarantee obligations are provided in large part by distributions or advances from their subsidiaries. The following information sets forth our condensed consolidating statements of operations for the three months ended March31, 2010 and 2009, our condensed consolidating balance sheets as of March31, 2010 and December31, 2009, and our condensed consolidating statements of cash flows for the three months ended March31, 2010 and 2009. The information for QCII is presented on a stand-alone basis, information for QSC and QCF is presented on a combined basis and information for all of our other subsidiaries is presented on a combined basis. Each entitys investments in its subsidiaries, if any, are presented under the equity method. The condensed consolidating statements of operations and balance sheets include the effects of consolidating adjustments to our subsidiaries tax provisions and the related income tax assets and liabilities in the QSC and QCII results. Both QSC and QCF are 100% owned by QCII, and QCF is a finance subsidiary of QCII. Other than as already described in this note, the accounting principles used to determine the amounts reported in this note are the same as those used in our condensed consolidated financial statements. We periodically restructure the internal capital structure of our subsidiaries based on the needs of our business. QWEST COMMUNICATIONS INTERNATIONALINC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2010 (UNAUDITED) QCII(1) QSC(2) QCF(3) Subsidiary Non- Guarantors Eliminations QCII Consolidated (Dollars inmillions) Operating revenue: Operating revenue $ $ $ 2,966 $ $ 2,966 Operating revenueaffiliates 3 7 (10 ) Total operating revenue 3 2,973 (10 ) 2,966 |