Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨ 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 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		36-2669023 (I.R.S. Employer Identification No.)


30 North LaSalle Street, Chicago, Illinois 60602 (Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (312) 630-1900

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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 ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at September 30, 2009
Common Shares, $.01 par value		50,173,631 Shares
Special Common Shares, $.01 par value		49,831,064 Shares
Series A Common Shares, $.01 par value		6,484,748 Shares

Table of Contents

Telephone and Data Systems, Inc. Quarterly Report on Form 10-Q For the Period Ended September 30, 2009



Index

				Page No.
Part I.	Financial Information			3

	Item 1.	Financial Statements (Unaudited)		3
		Consolidated Statement of Operations Three and Nine Months Ended September 30, 2009 and 2008		3

		Consolidated Statement of Cash Flows Nine Months Ended September 30, 2009 and 2008		4

		Consolidated Balance Sheet September 30, 2009 and December 31, 2008		5

		Consolidated Statement of Changes in Equity Nine Months Ended September 30, 2009 and 2008		7

		Notes to Consolidated Financial Statements		9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

		Overview		28
		Nine Months Ended September 30, 2009 and 2008
			Results of Operations - Consolidated	33
			Results of Operations - Wireless	35
			Results of Operations - Wireline	40
		Three Months Ended September 30, 2009 and 2008
			Results of Operations - Consolidated	44
			Results of Operations - Wireless	46
			Results of Operations - Wireline	48
		Recent Accounting Pronouncements		52
		Financial Resources		52
		Liquidity and Capital Resources		54
		Application of Critical Accounting Policies and Estimates		58
		Certain Relationships and Related Transactions		58
		Safe Harbor Cautionary Statement		59

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		63

	Item 4.	Controls and Procedures		64

Part II.	Other Information			65

	Item 1.	Legal Proceedings		65

	Item 1A.	Risk Factors		65

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		66

	Item 5.	Other Information		67

	Item 6.	Exhibits		68

Signatures				69

Table of Contents

Part I. Financial Information Item 1. Financial Statements


Telephone and Data Systems, Inc. Consolidated Statement of Operations (Unaudited)




			Three Months Ended September 30,						Nine Months Ended September 30,
			2009			2008			2009			2008

			(Dollars and shares in thousands, except per share amounts)

Operating revenues			$	1,258,742		$	1,304,598		$	3,757,865		$	3,828,050

Operating expenses
	Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)			477,116			466,710			1,375,642			1,369,897
	Selling, general and administrative expense			507,159			490,674			1,445,920			1,423,313
	Depreciation, amortization and accretion expense			192,247			187,975			558,362			562,159
	Loss on asset disposals, net			4,557			7,100			9,469			17,190
		Total operating expenses		1,181,079			1,152,459			3,389,393			3,372,559

Operating income				77,663			152,139			368,472			455,491

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			23,334			22,566			67,034			66,945
	Interest and dividend income			3,461			8,617			8,435			35,818
	Interest expense			(30,430	)		(31,684	)		(92,780	)		(108,634	)
	Gain on investments and financial instruments			—			31,997			—			31,595
	Other, net			1,030			383			1,504			2,086
		Total investment and other income (expense)		(2,605	)		31,879			(15,807	)		27,810

Income before income taxes				75,058			184,018			352,665			483,301
	Income tax expense			27,793			61,024			121,467			163,536
Net income				47,265			122,994			231,198			319,765
Less: Net income attributable to noncontrolling interests, net of tax				(11,620	)		(21,771	)		(53,814	)		(57,298	)
Net income attributable to TDS				35,645			101,223			177,384			262,467
Preferred dividend requirement				(13	)		(13	)		(38	)		(39	)
Net income available to common			$	35,632		$	101,210		$	177,346		$	262,428

Basic weighted average shares outstanding				108,289			115,700			110,408			116,510
Basic earnings per share attributable to TDS shareholders			$	0.33		$	0.87		$	1.61		$	2.25

Diluted weighted average shares outstanding				108,565			116,193			110,633			117,065
Diluted earnings per share attributable to TDS shareholders			$	0.33		$	0.87		$	1.60		$	2.24

Dividends per share			$	0.1075		$	0.1025		$	0.3225		$	0.3075

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

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Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows
(Unaudited)

				Nine Months Ended September 30,
				2009			2008
				(Dollars in thousands)
Cash flows from operating activities
	Net income			$	231,198		$	319,765
	Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
			Depreciation, amortization and accretion		558,362			562,159
			Bad debts expense		78,941			59,452
			Stock-based compensation expense		24,523			15,961
			Deferred income taxes, net		25,935			(298,200	)
			Gain on investments and financial instruments, net		—			(31,595	)
			Equity in earnings of unconsolidated entities		(67,034	)		(66,945	)
			Distributions from unconsolidated entities		51,668			51,224
			Loss on asset disposals, net		9,469			17,190
			Noncash interest expense		2,160			8,573
			Excess tax benefit from stock awards		(5	)		(1,832	)
			Other operating activities		(41	)		(1,955	)
		Changes in assets and liabilities from operations
			Accounts receivable		(102,137	)		(82,857	)
			Inventory		(3,595	)		(12,929	)
			Accounts payable		(29,401	)		7,140
			Customer deposits and deferred revenues		(3,609	)		9,827
			Accrued taxes		82,267			109,269
			Accrued interest		9,893			5,528
			Other assets and liabilities		(68,643	)		(37,951	)
					799,951			631,824

Cash flows from investing activities
	Additions to property, plant and equipment				(450,594	)		(485,028	)
	Cash paid for acquisitions and licenses				(15,242	)		(336,259	)
	Cash received from divestitures				50			6,838
	Proceeds from disposition of investments				—			259,017
	Cash paid to settle derivative liabilities				—			(17,404	)
	Cash paid for short-term investments				(109,055	)		—
	Other investing activities				3,285			(832	)
					(571,556	)		(573,668	)

Cash flows from financing activities
	Issuance of notes payable				—			100,000
	Repayment of notes payable				—			(100,000	)
	Repayment of variable prepaid forward contracts				—			(47,357	)
	Repayment of long-term debt				(2,507	)		(8,296	)
	TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments				1,296			1,916
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments				(119	)		(1,286	)
	Excess tax benefit from stock awards				5			1,832
	Repurchase of TDS Common and Special Common Shares				(152,918	)		(111,769	)
	Repurchase of U.S. Cellular Common Shares				(24,283	)		(23,146	)
	Dividends paid				(35,389	)		(35,783	)
	Payment of debt issuance costs				(10,074	)		—
	Distributions to noncontrolling interests				(4,962	)		(6,539	)
	Other financing activities				1,406			3,909
					(227,545	)		(226,519	)

Net increase (decrease) in cash and cash equivalents					850			(168,363	)

Cash and cash equivalents
	Beginning of period				777,309			1,174,446
	End of period			$	778,159		$	1,006,083

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

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Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

			September 30, 2009		December 31, 2008
			September 30, 2009		December 31, 2008
			(Unaudited)
			(Dollars in thousands)
Current assets
	Cash and cash equivalents		$	778,159	$	777,309
	Short-term investments			136,400		27,705
	Accounts receivable
		Due from customers, less allowances of $19,704 and $12,822, respectively		384,213		377,054
		Other, principally connecting companies, less allowances of $6,931 and $6,380, respectively		156,998		139,795
	Inventory			126,007		122,377
	Net deferred income tax asset			27,758		27,758
	Prepaid expenses			95,677		93,382
	Other current assets			72,812		63,556
				1,778,024		1,628,936
Investments
	Licenses			1,453,526		1,441,440
	Goodwill			707,840		707,079
	Customer lists, net of accumulated amortization of $106,347 and $97,891, respectively			25,577		34,032
	Investments in unconsolidated entities			219,760		205,768
	Other investments			9,996		10,623
				2,416,699		2,398,942
Property, plant and equipment
	In service and under construction			8,581,669		8,680,388
	Less: accumulated depreciation			5,108,800		5,111,464
				3,472,869		3,568,924

Other assets and deferred charges				65,583		55,614

Total assets			$	7,733,175	$	7,652,416


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

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Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Stockholders’ Equity

				September 30, 2009			December 31, 2008
				(Unaudited)
				(Dollars in thousands)
Current liabilities
	Current portion of long-term debt			$	15,126		$	15,337
	Accounts payable				297,249			319,575
	Customer deposits and deferred revenues				170,493			174,101
	Accrued interest				24,129			14,236
	Accrued taxes				66,661			25,192
	Accrued compensation				84,125			90,512
	Other current liabilities				116,041			134,334
					773,824			773,287

Deferred liabilities and credits
	Net deferred income tax liability				499,002			471,623
	Other deferred liabilities and credits				384,032			368,045
					883,034			839,668

Long-term debt					1,620,979			1,621,422

Commitments and contingencies

Noncontrolling interests with mandatory redemption features					708			589

Equity
	TDS stockholders’ equity
		Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued 57,082,000 shares			571			571
		Special Common Shares, par value $.01 per share; authorized 165,000,000 shares; issued 63,442,000 shares			634			634
		Series A Common Shares, par value $.01 per share; authorized 25,000,000 shares; issued and outstanding 6,485,000 and 6,461,000 shares, respectively			65			65
		Capital in excess of par value			2,084,481			2,066,597
		Treasury shares at cost:
			Common Shares, 6,908,000 and 5,435,000 shares, respectively		(206,244	)		(163,017	)
			Special Common Shares, 13,611,000 and 9,352,000 shares, respectively		(462,788	)		(350,091	)
		Accumulated other comprehensive loss			(12,951	)		(16,812	)
		Retained earnings			2,370,595			2,229,540
			Total TDS stockholders' equity		3,774,363			3,767,487

	Preferred shares				845			852
	Noncontrolling interests				679,422			649,111

		Total equity			4,454,630			4,417,450

Total liabilities and equity				$	7,733,175		$	7,652,416

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

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Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited)


		TDS Shareholders
(Dollars in thousands)		Common Shares		Special Common Shares		Series A Common Shares		Capital in Excess of Par Value			Treasury Common Shares			Treasury Special Common Shares			Accumulated Other Comprehensive Loss			Retained Earnings			Total Shareholders’ Equity			Preferred Shares			Non controlling Interests			Total Equity
December 31, 2008		$	571	$	634	$	65	$	2,066,597		$	(163,017	)	$	(350,091	)	$	(16,812	)	$	2,229,540		$	3,767,487		$	852		$	649,111		$	4,417,450
Net income excluding portion attributable to noncontrolling interests with mandatory redemption features			—		—		—		—			—			—			—			177,384			177,384			—			53,695			231,079
Net unrealized losses on equity investments			—		—		—		—			—			—			(302	)		—			(302	)		—			—			(302	)
Changes in plan assets and projected benefit obligation related to retirement plans			—		—		—		—			—			—			4,163			—			4,163			—			—			4,163
Dividends:
	Common, Special Common and Series A Common Shares		—		—		—		—			—			—			—			(35,351	)		(35,351	)		—			—			(35,351	)
	Preferred shares		—		—		—		—			—			—			—			(38	)		(38	)		—			—			(38	)
Repurchase of shares			—		—		—		—			(43,826	)		(116,167	)		—			—			(159,993	)		(7	)		—			(160,000	)
Dividend reinvestment plan			—		—		—		(13	)		280			451			—			444			1,162			—			—			1,162
Incentive and compensation plans			—		—		—		(45	)		319			3,019			—			(1,384	)		1,909			—			—			1,909
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans			—		—		—		6,564			—			—			—			—			6,564			—			(18,422	)		(11,858	)
Stock-based compensation awards			—		—		—		11,523			—			—			—			—			11,523			—			—			11,523
Tax windfall (shortfall) from stock awards			—		—		—		(145	)		—			—			—			—			(145	)		—			—			(145	)
Distributions to noncontrolling interests			—		—		—		—			—			—			—			—			—			—			(4,962	)		(4,962	)
September 30, 2009		$	571	$	634	$	65	$	2,084,481		$	(206,244	)	$	(462,788	)	$	(12,951	)	$	2,370,595		$	3,774,363		$	845		$	679,422		$	4,454,630

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

Table of Contents

Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited)



		TDS Shareholders
(Dollars in thousands)		Common Shares		Special Common Shares		Series A Common Shares		Capital in Excess of Par Value		Treasury Common Shares			Treasury Special Common Shares			Accumulated Other Comprehensive Income/(Loss)			Retained Earnings			Total Shareholders’ Equity			Preferred Shares			Non controlling Interests			Total Equity
December 31, 2007		$	571	$	633	$	64	$	2,048,110	$	(120,549	)	$	(204,918	)	$	511,776		$	1,690,651		$	3,926,338		$	860		$	654,972		$	4,582,170
Net income excluding portion attributable to noncontrolling interests with mandatory redemption features			—		—		—		—		—			—			—			262,467			262,467			—			58,893			321,360
Net change in marketable equity securities and equity method investments			—		—		—		—		—			—			(17,509	)		—			(17,509	)		—			(1,945	)		(19,454	)
Cumulative-effect adjustment related to fair value accounting (Note 15)			—		—		—		—		—			—			(502,677	)		502,677			—			—			—			—
Changes in plan assets and projected benefit obligation related to retirement plans			—		—		—		—		—			—			72			—			72			—			—			72
Dividends:
	Common, Special Common and Series A Common Shares		—		—		—		—		—			—			—			(35,732	)		(35,732	)		—			—			(35,732	)
	Preferred shares		—		—		—		—		—			—			—			(39	)		(39	)		—			—			(39	)
Repurchase of shares			—		—		—		—		—			(114,988	)		—			—			(114,988	)		(6	)		—			(114,994	)
Dividend reinvestment plan			—		1		1		1,418		—			—			—			—			1,420			—			—			1,420
Incentive and compensation plans			—		—		—		62		2,154			6,430			—			(6,220	)		2,426			—			—			2,426
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans			—		—		—		6,941		—			—			—			—			6,941			—			(8,543	)		(1,602	)
Stock-based compensation awards			—		—		—		4,668		—			—			—			—			4,668			—			—			4,668
Tax windfall (shortfall) from stock awards			—		—		—		1,019		—			—			—			—			1,019			—			—			1,019
Distributions to noncontrolling interests			—		—		—		—		—			—			—			—			—			—			(6,539	)		(6,539	)
Other			—		—		—		—		—			—			—			—			—			—			183			183
September 30, 2008		$	571	$	634	$	65	$	2,062,218	$	(118,395	)	$	(313,476	)	$	(8,338	)	$	2,413,804		$	4,037,083		$	854		$	697,021		$	4,734,958

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

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Telephone and Data Systems, Inc.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accounting policies of Telephone and Data Systems, Inc. (“TDS™”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. The consolidated financial statements include the accounts of TDS and its majority-owned subsidiaries, including TDS’ 82%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular®”), TDS’ 100%-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom®”) and TDS’ 80%-owned printing and distribution company, Suttle-Straus, Inc. In addition, the consolidated financial statements include all entities in which TDS has a variable interest that requires TDS to recognize a majority of the entity’s expected gains or losses. All material intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2009 presentation.

The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K for the year ended December 31, 2008.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items unless otherwise disclosed) necessary to present fairly the financial position as of September 30, 2009 and December 31, 2008, the results of operations for the three and nine months ended September 30, 2009 and 2008, and cash flows and changes in equity for the nine months ended September 30, 2009 and 2008. The results of operations for the three and nine months, and cash flows and changes in equity for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

2. Summary of Significant Accounting Policies

Postretirement Benefits

TDS sponsors two contributory defined benefit postretirement plans that cover most employees of TDS Corporate, TDS Telecom and the subsidiaries of TDS Telecom. One plan provides medical benefits and the other plan provides life insurance benefits.

Net periodic benefit costs for the defined benefit postretirement plans include the following components:

		Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008

		(Dollars in thousands)
Service cost		$	535		$	498		$	1,605		$	1,496
Interest on accumulated benefit obligation			889			863			2,668			2,589
Expected return on plan assets			(664	)		(948	)		(1,992	)		(2,844	)
Amortization of:
	Prior service cost		(201	)		(207	)		(601	)		(622	)
	Net loss		452			242			1,355			726
Net postretirement cost		$	1,011		$	448		$	3,035		$	1,