Question

Additional problem: Access the SEC/Edgar Web site for the Qwest International Communications, Inc. Form 10-K Annual Report for the Year 2005. Notice the reported $757 million loss in 2005. Answer the following: o Does this necessarily mean the company's operating activities consumed cash in 2005? Explain. o Looking at the company's 2005 Annual Statement of Cash Flows, did operating activities consume cash or generate cash? How much? o What was Qwest's single largest operating source of cash in 2005? Explain how this could be a source of cash.

Answer 1

The profit/loss reported takes into consideration the impact of the operating activities as well as other non operating business activities of the Company, such as income from other investments, non operating expenses which are not directly attributable to core business activities, etc. Hence, we cannot assume that the operating acivities were the entire cause for the loss reported.  

From the Annual Report we can see (all amounts in Millions):

Operating Revenue = $13,903

Operating Expenses = $13,048 Difference (cash generated) = $855 This shows that operating activities generated Cash, although the cash generation was extremely low at $855 mil, about 6% of the Revenues. This implies that the operating activities did not consume cash in 2005.   The loss was a result of other expenses (non operating) of $1,615.   Qwest's single largest operating source of cash in 2005 was the Wireline business. It contributed $13,335 mil to the revenues with expenses of $6,600 leading to an income (cash generation) of $6,735. Within the wireline services, there were two segments, i.e. Voice services and Data & Internet services. These contributed $9,239 and $4,096 respectively to the revenue.

In the Form 10-K, the Company also states that the wireline services segment provides over 95% of the overall operating revenue. Only the balance comes from the wireless and other services businesses.

The wireline business provides all of the consolidated cash flows from operations for 2005. Cash flows in operations of the wireless segment was not substantial. The Other services business saw expenses of $2,785 mil against a revenue of $41 mil. The cash inflows from the wireline business was sufficient to cover this.