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QWEST COMMUNICATIONS INTERNATIONAL INC. FORM 10-Q TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File No. 001-15577

Qwest Communications International Inc.
(Exact name of registrant as specified in its charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        At October 31, 2004, 1,815,907,850 shares of common stock were outstanding.

QWEST COMMUNICATIONS INTERNATIONAL INC.
FORM 10-Q
TABLE OF CONTENTS

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Glossary of Terms

        Our industry uses many terms and acronyms that may not be familiar to you. To assist you in reading this document, we have provided below definitions of some of these terms referred to in our document.

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Access Lines. Telephone lines reaching from the customer's premises to a connection with the public switched telephone network. When we refer to our access lines we mean all our consumer, wholesale and business access lines, including those used by us and our affiliates.



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Asynchronous Transfer Mode (ATM). A broadband, network transport service that provides a fast, efficient way to move large quantities of information.



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Competitive Local Exchange Carriers (CLECs). Telecommunications providers that compete with us in providing local voice services in our local service area.



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Customer Premises Equipment (CPE). Telecommunications equipment sold to a customer, usually in connection with our providing telecommunications services to that customer.



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Dedicated Internet Access (DIA). Internet access ranging from 128 kilobits per second to 2.4 gigabits per second.



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Digital Subscriber Line (DSL). A technology for providing high-speed data communications over telephone lines.



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Frame Relay. A switching technology that allows data to travel in individual packets of variable length.



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Incumbent Local Exchange Carrier (ILEC). A traditional telecommunications provider, such as Qwest Corporation, that, prior to the Telecommunications Act of 1996, had exclusive right and responsibility for providing local telecommunications services in its local service area.



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Integrated Services Digital Network (ISDN). A telecommunications standard that uses digital transmissions technology to support voice, video and data communications applications over regular telephone lines.



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Interexchange Carriers (IXCs). Telecommunications providers that provide long-distance services to end users by handling calls that are made from a phone exchange in one LATA to an exchange in another LATA or between exchanges within a LATA.



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InterLATA long-distance services. Telecommunications services that cross LATA boundaries and "800" services.



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Internet Dial Access. Provides ISPs and business customers with a comprehensive, reliable and cost-effective dial-up network infrastructure.



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Internet Protocol (IP). A protocol for transferring information across the Internet in packets of data.



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Internet Service Providers (ISPs). Businesses that provide Internet access to retail customers.



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IntraLATA long-distance services. These services include calls that terminate outside a caller's local calling area but within their LATA and wide area telecommunications service or "800" services for customers with highly concentrated demand.



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Local Access Transport Area (LATA). A geographical area in which telecommunications providers may offer services. There are 163 LATAs in the United States and 27 in our local service area.

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Local Calling Area. A geographical area, usually smaller than a LATA, within which a customer can make telephone calls without incurring long-distance charges. Multiple local calling areas make up a LATA.



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Private Lines. Direct circuits or channels specifically dedicated to the use of an end-user organization for the purpose of directly connecting two or more sites.



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Public Switched Telephone Network (PSTN). The worldwide voice telephone network that is accessible to every person with a telephone and a dial tone.



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Unbundled Network Elements (UNEs) Platform (UNE-P). Discrete elements of our network that are sold or leased to competitive telecommunications providers.



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Virtual Private Network (VPN). A private network that operates securely within a public network (such as the Internet) by means of encrypting transmissions.



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Voice over Internet Protocol (VoIP). An application that provides real-time, two-way voice capability originating in the Internet protocol over a broadband connection.



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Web Hosting. The providing of space, power and bandwidth in data centers for hosting of customers' Internet equipment.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN MILLIONS, SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(DOLLARS IN MILLIONS, SHARES IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QWEST COMMUNICATIONS INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QWEST COMMUNICATIONS INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)

        Unless the context requires otherwise, references in this report to "Qwest," the "Company," "we," "us" and "our" refer to Qwest Communications International Inc. and its consolidated subsidiaries.

Note 1: Basis of Presentation

        These condensed consolidated interim financial statements are unaudited and are prepared in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.

        In the third quarter of 2002, we entered into contracts for the sale of our directory publishing business. In November 2002, we closed the sale of our directory publishing business in seven of the 14 states in which we offered these services. In September 2003, we completed the sale of the directory publishing business in the remaining states. As a consequence, the results of operations of our directory publishing business are included in income from discontinued operations in our condensed consolidated statements of operations for the three and nine months ended September 30, 2003. See Note 7—Discontinued Operations.

        We made certain reclassifications to prior balances to conform to the current presentation. In the opinion of management, these statements include all the adjustments necessary to fairly present our condensed consolidated results of operations, financial position and cash flows as of September 30, 2004 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our annual report on Form 10-K/A for the year ended December 31, 2003 (the "2003 Form 10-K"). The condensed consolidated results of operations for the nine month period ended September 30, 2004 and the condensed consolidated statement of cash flows for the nine month period ended September 30, 2004 are not necessarily indicative of the results or cash flows expected for the full year.

Stock-based Compensation

        In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123" ("SFAS No. 148"), which is effective for financial statements related to periods ending after December 15, 2002. SFAS No. 148 requires the following expanded disclosure regarding stock-based compensation.

        We account for our stock-based compensation arrangements under the intrinsic-value recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic-value method, no compensation expense is recognized for options granted to employees when the strike price of those options equals or exceeds the value of the underlying security on the measurement date. Any excess of the stock price on the measurement date over the exercise price is recorded as deferred compensation and amortized over the service period during which the stock option award vests using the accelerated method described in FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans". Had compensation cost for our stock-based compensation plans been determined under the fair-value method in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based

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Compensation", our net (loss) income and basic and diluted (loss) income per share would have been changed to the pro forma amounts indicated below:

        The pro forma amounts reflected above may not be representative of the effects on our reported net income or loss in future years because the number of future shares to be issued under these plans is not known and the assumptions used to determine the fair value can vary significantly.

Earnings per share

        The weighted average number of shares used for computing basic and diluted (loss) income per share for the three months ended September 30, 2004 and 2003 was 1.815 billion and 1.747 billion, respectively, and for the nine months ended September 30, 2004 and 2003 was 1.797 billion and 1.729 billion, respectively. For these same periods, the effects of approximately 131 million and 129 million of outstanding stock options were excluded from the calculation of diluted (loss) income per share because the effect was anti-dilutive.

Recently adopted accounting pronouncements and cumulative effect of adoption

        On January 1, 2003, we adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, generally referred to as asset retirement obligations. SFAS No. 143 requires entities to record the fair value of a legal liability for an asset retirement obligation required to be settled under law or written or oral contract. If a reasonable estimate of fair value can be made, the fair value of the liability will be recognized in the period it is incurred, or if not, in the period a reasonable estimate of fair value can be made. This cost is initially capitalized and then amortized over the estimated remaining useful life of the asset. We determined that we have legal asset retirement obligations associated with the removal of a limited group of long-lived assets and recorded a cumulative effect of a change in accounting principle charge upon adoption of SFAS No. 143 of $28 million (liability of $43 million net of an asset of $15 million) as of January 1, 2003.

        Prior to the adoption of SFAS No. 143, we included in our group depreciation rates estimated net removal costs (removal costs less salvage). These costs have historically been reflected in the calculation of depreciation expense and therefore recognized in accumulated depreciation. When the assets were

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actually retired and removal costs were expended, the net removal costs were recorded as a reduction to accumulated depreciation. While SFAS No. 143 requires the recognition of a liability for asset retirement obligations that are legally binding, it precludes the recognition of a liability for asset retirement obligations that are not legally binding. Therefore, upon adoption of SFAS No. 143, we reversed the net removal costs within accumulated depreciation for those fixed assets where the removal costs exceeded the estimated salvage value and we did not have a legal removal obligation. This resulted in income from the cumulative effect of a change in accounting principle of $365 million pretax upon adoption of SFAS No. 143 on January 1, 2003. The net income impact for the nine months ended September 30, 2003 was $206 million ($365 million less the $28 million of charges disclosed above, net of income taxes of $131 million).

        We adopted the provisions of FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46R") in the first quarter of 2004. FIN 46R requires an evaluation of three additional criteria to determine if consolidation is required. These criteria are: 1) whether the entity is a variable interest entity; 2) whether the company holds a variable interest in the entity; and 3) whether the company is the primary beneficiary of the entity. If all three of these criteria are met, consolidation is required.

        Upon adoption of FIN 46R, we identified two relationships that may be subject to consolidation by us under the provisions of FIN 46R. Both relationships are with groups of entities that provide Internet port access and services to their customers. The first relationship is with special purpose entities created and wholly owned by KMC Telecom Holdings, Inc. (the "KMC Entities"). Our previously disclosed service contracts and consent agreements with the KMC Entities may be variable interests under FIN 46R. We do not currently have sufficient information about the special purpose entities to complete our analysis under FIN 46R. We have continuously requested this information, but have not received sufficient information to complete our analysis. Until further information about their financial statements and capitalization is available to us, we are unable to come to any conclusion under FIN 46R. Our maximum exposure to loss related to the KMC Entities is the total remaining amount due under our service contracts, which was approximately $230 million as of September 30, 2004. Payments made under our service contracts, which are included in cost of sales, were $220 million and $230 million, respectively, for the nine months ended September 30, 2004 and 2003 and $73 million and $73 million for the three months ended September 30, 2004 and 2003, respectively. See Note 12—Commitment and Contingencies for a discussion of additional potential loss exposure related to KMC.

        We previously recorded a liability and charge associated with our relationship with the second entity. We do not currently have sufficient information about this entity to complete our analysis under FIN 46R. We have requested the information; however the management of this entity has stated that financial information is not readily available and has thus far not provided any of the requested information. Until further information about the entity's financial statements and capitalization is available to us, we are unable to come to any conclusion under FIN 46R. As a result of previously recording a liability and charge associated with this relationship, we believe that our exposure to loss, excluding interest accretion, has been reflected in our financial statements.

        In December 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the "Act") became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In May 2004, the FASB issued final guidance on how employers that provide post-retirement health care benefits should account for the Act. In the third quarter of 2004, we adopted the provisions of FASB Staff Position No. 106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003".

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        Accounting for the government subsidy provided under the Act reduced our accumulated post-retirement benefit obligation by $235 million. The Act reduced the prescription drug expense component of our year-to-date 2004 post-retirement benefit expenses by $25 million ($25 million after-tax). Due to the immaterial impact of the adoption of FSP 106-2 on our year-to-date statement of operations we recorded the $16 million impact from prior quarters in the third quarter and did not restate our first and second quarter 2004 results. We expect that accounting for the Act will result in an annual decrease of $33 million from what our post-retirement health care benefit costs otherwise would be. See Note 8—Pension Plan Benefits.

Note 2: Assets Held for Sale

Wireless assets

        As reported in 2003, we entered into a services agreement with a subsidiary of Sprint Corporation ("Sprint") that allows us to resell Sprint wireless services, and we began offering these Sprint services under our brand name in March of 2004. In the second quarter of 2004, we committed to a plan to dispose of our PCS licenses and related wireless network assets in our local service area. As of that date, we classified those assets as held for sale and we ceased further depreciation of the wireless network assets in our local service area. These assets have a net book value of $163 million as of September 30, 2004, and are included in our wireless services segment. Had we not committed to a plan for disposal of these assets, we would have recorded additional depreciation expense of $3 million and $5 million for the three and nine month periods ended September 30, 2004.

        On July 1, 2004, we entered into an agreement with Verizon Wireless under which Verizon Wireless agreed to acquire all our PCS licenses and related wireless network assets in our local service area. Under the terms of the agreement, Verizon Wireless is to pay us $418 million to purchase our PCS licenses, cell sites and wireless network infrastructure, site leases, and associated network equipment. The transaction is expected to be completed by year-end or early 2005. We expect to record a gain upon the closing of the sale, although the sale remains contingent on federal regulatory approval and other conditions.

Excess network supplies held for sale

        We periodically review our network supplies against our usage requirements to identify potential excess supplies for disposal. The excess supplies identified are then moved to held for sale and carried at the lower of cost or estimated sales price. The carrying value of the excess supplies is also reviewed each period and updated for current market conditions. As noted in Note 3—Impairment Charges, we recorded an impairment charge totaling $50 million in the nine month period ended September 30, 2004. The carrying value of the remaining network supplies held for sale at September 30, 2004 totals $2 million and is included in assets held for sale on the balance sheet.

Note 3: Impairment Charges

2004 Impairment Charges

        In conjunction with our effort to sell certain assets, we determined that the carrying amounts were in excess of our expected sales price, which indicated that our investments in these assets may have been impaired at that date. In the third quarter of 2004, pursuant to SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), we recorded an impairment of $26 million to reduce the carrying value of network supplies held for sale to their estimated fair value based on recent selling prices for comparable assets. In addition, we recorded an impairment charge of $8 million for hosting assets sold in conjunction with sub-leasing a network facility. In the second quarter of 2004, we estimated the fair value of our payphone business and network supplies held for

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sale using actual contract prices and recent selling prices for comparable assets and determined that these assets were impaired by $19 million and $24 million, respectively.

        In accordance with SFAS No. 144, the estimated fair value of the impaired assets becomes the new basis for accounting purposes. As such, approximately $124 million in accumulated depreciation was eliminated against the cost of these impaired assets in connection with the accounting for these impairments. The impact of the impairments is expected to reduce our annual depreciation expense by approximately $4 million in 2004 and approximately $8 million in subsequent years.

2003 Impairment Charge

        In August 2003, we entered into a services agreement with a subsidiary of Sprint Corporation ("Sprint") that allowed us to resell Sprint's wireless services. Due to the anticipated decrease in usage of our own wireless network following the transition of our customers onto Sprint's network, we determined, in the third quarter of 2003, that certain asset groups were not expected be recovered through future projected cash flows and recorded an impairment charge of $230 million.

        In accordance with SFAS No. 144, the fair value of the impaired assets became the new basis for accounting purposes. As such, approximately $25 million in accumulated depreciation was eliminated in connection with the accounting for the impairment. This impairment reduced our annual depreciation and amortization expense by approximately $40 million, effective October 1, 2003.

Note 4: Income Tax Provision

        In the second quarter of 2004, we recorded income tax expense of $136 million related to a change in the expected timing of deductions related to our tax strategy, referred to as the Contested Liability Acceleration Strategy ("CLAS"), which we implemented in 2000. In early June 2004, we completed a reassessment of our strategy and determined it was necessary to adjust our accounting. In July of 2004, we were formally notified by the Internal Revenue Service ("IRS") that it is contesting the CLAS tax strategy. The change in expected timing of deductions caused an increase in our net operating loss carry-forwards ("NOLs") generated over the period from 2001 to 2004. Because we are not currently forecasting future taxable income sufficient to realize the benefits of this increase in our NOLs, we recorded an increase in our valuation allowance on deferred tax assets as required by SFAS No. 109. Additionally, in September of 2004 the IRS issued a Notice of Proposed Adjustment of penalty on this transaction. We intend to vigorously defend our position on this and other tax matters.

        In the fourth quarter of 2004, the IRS billed us for additional taxes due for past years. This billing relates to the preparation of a carryback claim from the year 2000, and resulted in additional Alternative Minimum Tax ("AMT") due. The payment of this AMT liability results in AMT Credit carryforwards that we expect to realize as a reduction in our potential tax liabilities. We have reclassified $223 million as a current liability for this matter. Also, we paid $186 million of the liability in November 2004. The remaining portion of the liability for this matter relates to potential penalties and related interest of $37 million.

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Note 5: Borrowings