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 March 31, 2012

¨ 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		36-2669023
(State or other jurisdiction of incorporation or organization)		(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 x 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 March 31, 2012
	Common Shares, $.01 par value		101,411,521 Shares
	Series A Common Shares, $.01 par value		7,131,832 Shares

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Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2012

Index

				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)		3

		Consolidated Statement of Operations Three Months Ended March 31, 2012 and 2011		3

		Consolidated Statement of Comprehensive Income Three Months Ended March 31, 2012 and 2011		4

		Consolidated Statement of Cash Flows Three Months Ended March 31, 2012 and 2011		5

		Consolidated Balance Sheet March 31, 2012 and December 31, 2011		6

		Consolidated Statement of Changes in Equity Three Months Ended March 31, 2012 and 2011		8

		Notes to Consolidated Financial Statements		10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		22

		Overview		22
		Three Months Ended March 31, 2012 and 2011
			Results of Operations — Consolidated	28
			Results of Operations — U.S. Cellular	30
			Results of Operations — TDS Telecom	35
		Recent Accounting Pronouncements		40
		Financial Resources		40
		Liquidity and Capital Resources		43
		Application of Critical Accounting Policies and Estimates		46
		Safe Harbor Cautionary Statement		47

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50

	Item 4.	Controls and Procedures		51

Part II.	Other Information

	Item 1.	Legal Proceedings		52

	Item 1A.	Risk Factors		52

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52

	Item 5.	Other Information		53

	Item 6.	Exhibits		53

Signatures

Table of Contents

Part I. Financial Information
Item 1. Financial Statements

Telephone and Data Systems, Inc.

Consolidated Statement of Operations (Unaudited)

			Three Months Ended
			March 31,
(Dollars and shares in thousands, except per share amounts)			2012			2011

Operating revenues			$	1,305,791		$	1,258,681

Operating expenses
	Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)			509,211			486,746
	Selling, general and administrative			507,599			491,106
	Depreciation, amortization and accretion			197,434			190,813
	(Gain) loss on asset disposals, net			(2,095	)		1,143
		Total operating expenses		1,212,149			1,169,808

Operating income				93,642			88,873

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			23,389			19,388
	Interest and dividend income			2,183			2,624
	Interest expense			(24,464	)		(26,509	)
	Other, net			228			80
		Total investment and other income (expense)		1,336			(4,417	)

Income before income taxes				94,978			84,456
	Income tax expense			27,412			30,159
Net income				67,566			54,297
Less: Net income attributable to noncontrolling interests, net of tax				(15,312	)		(10,793	)
Net income attributable to TDS shareholders				52,254			43,504
Preferred dividend requirement				(12	)		(12	)
Net income available to common shareholders			$	52,242		$	43,492

Basic weighted average shares outstanding (1)				108,653			108,936
Basic earnings per share attributable to TDS shareholders (1)			$	0.48		$	0.40

Diluted weighted average shares outstanding (1)				109,098			109,715
Diluted earnings per share attributable to TDS shareholders (1)			$	0.48		$	0.39

Dividends per share (2)			$	0.1225		$	0.1175

(1) On January 13, 2012, TDS shareholders approved a Share Consolidation Amendment to the Restated Certificate of Incorporation of TDS. Average basic and diluted shares outstanding used to calculate earnings per share for the comparative period presented have been retroactively restated to reflect the impact of the increased shares outstanding as a result of the Share Consolidation Amendment.

(2) Dividends per share reflects the amount paid per share outstanding at the date the dividend was declared and has not been retroactively adjusted to reflect the impact of the Share Consolidation Amendment.

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

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Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income (Unaudited)

				Three Months Ended
				March 31,
(Dollars in thousands)				2012			2011

Net income				$	67,566		$	54,297
Net change in accumulated other comprehensive income
	Change in net unrealized gain (loss) on equity investments				—			—
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(934	)		(954	)
			Amortization of unrecognized net loss		623			480
					(311	)		(474	)
			Deferred income taxes		470			523
		Net change related to retirement plan			159			49
	Net change in accumulated other comprehensive income				159			49
Comprehensive income					67,725			54,346
	Less: Comprehensive income attributable to noncontrolling interest				(15,312	)		(10,793	)
Comprehensive income attributable to TDS Shareholders				$	52,413		$	43,553

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)

				Three Months Ended
				March 31,
(Dollars in thousands)				2012			2011

Cash flows from operating activities
	Net income			$	67,566		$	54,297
	Add (deduct) adjustments to reconcile net income to net cash flows
		from operating activities
			Depreciation, amortization and accretion		197,434			190,813
			Bad debts expense		15,105			14,285
			Stock-based compensation expense		10,330			9,459
			Deferred income taxes, net		6,187			47,841
			Equity in earnings of unconsolidated entities		(23,389	)		(19,388	)
			Distributions from unconsolidated entities		2,938			8,439
			(Gain) loss on asset disposals, net		(2,095	)		1,143
			Noncash interest expense		862			875
			Other operating activities		852			1,159
	Changes in assets and liabilities from operations
			Accounts receivable		38,941			8,438
			Inventory		(4,842	)		2,978
			Accounts payable		(25,372	)		56,189
			Customer deposits and deferred revenues		10,745			10,342
			Accrued taxes		82,014			18,832
			Accrued interest		9,117			15,072
			Other assets and liabilities		(104,148	)		(87,732	)
					282,245			333,042

Cash flows from investing activities
	Cash used for additions to property, plant and equipment				(242,611	)		(157,897	)
	Cash paid for acquisitions and licenses				(11,096	)		—
	Cash received from divestitures				50,036			—
	Cash paid for investments				(10,000	)		—
	Cash received for investments				20,249			122,785
	Transfer of cash to Restricted cash				—			(282,500	)
	Other investing activities				(436	)		(1,503	)
					(193,858	)		(319,115	)

Cash flows from financing activities
	Repayment of long-term debt				(493	)		(402	)
	Issuance of long-term debt				358			300,000
	TDS Common Shares and Special Common Shares reissued
		for benefit plans, net of tax payments			(33	)		587
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments				357			1,305
	Repurchase of TDS Common and Special Common Shares				—			(11,603	)
	Repurchase of U.S. Cellular Common Shares				—			(17,357	)
	Dividends paid				(13,301	)		(12,197	)
	Payment of debt issuance costs				—			(9,848	)
	Distributions to noncontrolling interests				(218	)		(686	)
	Other financing activities				798			968
					(12,532	)		250,767

Net increase in cash and cash equivalents					75,855			264,694

Cash and cash equivalents
	Beginning of period				563,275			341,683
	End of period			$	639,130		$	606,377

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 (Unaudited)

			March 31,		December 31,
(Dollars in thousands)			2012		2011


Current assets
	Cash and cash equivalents		$	639,130	$	563,275
	Short-term investments			229,975		246,273
	Accounts receivable
		Due from customers and agents, less allowances of $23,891 and $25,738, respectively		348,371		393,978
		Other, less allowances of $5,464 and $5,333, respectively		147,038		148,599
	Inventory			134,929		130,044
	Net deferred income tax asset			40,898		40,898
	Prepaid expenses			84,201		80,628
	Income taxes receivable			9,314		85,636
	Other current assets			18,117		16,349
				1,651,973		1,705,680

Assets held for sale				—		49,647

Investments
	Licenses			1,505,110		1,494,014
	Goodwill			796,819		797,077
	Other intangible assets, net of accumulated amortization of $133,984 and $131,101, respectively			47,851		50,734
	Investments in unconsolidated entities			191,644		173,710
	Long-term investments			50,333		45,138
	Other investments			1,096		3,072
				2,592,853		2,563,745
Property, plant and equipment
	In service and under construction			10,341,851		10,197,596
	Less: Accumulated depreciation			6,518,118		6,413,061
				3,823,733		3,784,535

Other assets and deferred charges				104,109		97,398

Total assets			$	8,172,668	$	8,201,005

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 Equity (Unaudited)

				March 31,			December 31,
(Dollars and shares in thousands)				2012			2011


Current liabilities
	Current portion of long-term debt			$	1,420		$	1,509
	Accounts payable				327,376			364,746
	Customer deposits and deferred revenues				218,316			207,633
	Accrued interest				16,518			7,456
	Accrued taxes				46,671			41,069
	Accrued compensation				54,990			107,719
	Other current liabilities				94,536			144,001
					759,827			874,133

Liabilities held for sale					—			1,051

Deferred liabilities and credits
	Net deferred income tax liability				821,115			808,713
	Other deferred liabilities and credits				391,397			383,567

Long-term debt					1,529,988			1,529,857

Commitments and contingencies					—			—

Noncontrolling interests with redemption features					1,064			1,005

Equity
	TDS shareholders’ equity
		Series A Common and Common Shares (1)
			Authorized 290,000 shares (25,000 Series A Common and 265,000 Common Shares) (1)
			Issued 132,634 shares (7,132 Series A Common and 125,502 Common Shares) and 132,621 shares (7,119 Series A Common and 125,502 Common Shares), respectively (1)
			Outstanding 108,544 shares (7,132 Series A Common and 101,412 Common Shares) and 108,456 shares (7,119 Series A Common and 101,337 Common Shares), respectively (1)
			Par Value ($.01 per share) ($71 Series A Common and $1,255 Common Shares) (1)		1,326			1,326
		Capital in excess of par value (1)			2,278,384			2,268,711
		Treasury shares at cost:
			24,090 and 24,165 Common Shares, respectively (1)		(746,988	)		(750,921	)
		Accumulated other comprehensive loss			(8,695	)		(8,854	)
		Retained earnings (1)			2,487,936			2,451,899
			Total TDS shareholders' equity		4,011,963			3,962,161

	Preferred shares				830			830
	Noncontrolling interests				656,484			639,688

		Total equity			4,669,277			4,602,679

Total liabilities and equity				$	8,172,668		$	8,201,005

(1) The December 31, 2011 amounts reflect the impact of the Share Consolidation Amendment to the Restated Certificate of Incorporation of TDS, as approved by the TDS shareholders on January 13, 2012.

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)		Series A Common and Common Shares (1)		Capital in Excess of Par Value (1)			Treasury Common Shares(1)			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (1)			Total TDS Shareholders' Equity (1)			Preferred Shares		Non controlling Interests			Total Equity (1)
December 31, 2011		$	1,326	$	2,268,711		$	(750,921	)	$	(8,854	)	$	2,451,899		$	3,962,161		$	830	$	639,688		$	4,602,679
Add (Deduct)
Net income attributable to TDS shareholders			—		—			—			—			52,254			52,254			—		—			52,254
Net income attributable to noncontrolling interests classified as equity			—		—			—			—			—			—			—		15,252			15,252
Change related to retirement plan			—		—			—			159			—			159			—		—			159
Common and Series A Common Shares dividends			—		—			—			—			(13,289	)		(13,289	)		—		—			(13,289	)
Preferred dividend requirement			—		—			—			—			(12	)		(12	)		—		—			(12	)
Dividend reinvestment plan			—		296			2,703			—			(1,585	)		1,414			—		—			1,414
Incentive and compensation plans			—		444			1,230			—			(1,331	)		343			—		—			343
Adjust investment in subsidiaries for repurchases, issuances, and
	other compensation plans		—		4,157			—			—			—			4,157			—		1,678			5,835
Stock-based compensation awards (2)			—		4,845			—			—			—			4,845			—		—			4,845
Tax windfall (shortfall) from stock awards (3)			—		(69	)		—			—			—			(69	)		—		—			(69	)
Distributions to noncontrolling interests			—		—			—			—			—			—			—		(218	)		(218	)
Other			—		—			—			—			—			—			—		84			84
March 31, 2012		$	1,326	$	2,278,384		$	(746,988	)	$	(8,695	)	$	2,487,936		$	4,011,963		$	830	$	656,484		$	4,669,277

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

	TDS Shareholders
(Dollars in thousands)	Series A Common, Special Common and Common Shares		Capital in Excess of Par Value		Treasury Special Common and Common Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total TDS Shareholders' Equity			Preferred Shares		Non controlling Interests		Total Equity
December 31, 2010	$	1,270	$	2,107,929	$	(738,695	)	$	(3,208	)	$	2,450,599		$	3,817,895		$	830	$	647,013	$	4,465,738
Add (Deduct)
Net income attributable to TDS shareholders		—		—		—			—			43,504			43,504			—		—		43,504
Net income attributable to noncontrolling interests classified as equity		—		—		—			—			—			—			—		10,754		10,754
Change related to retirement plan		—		—		—			49			—			49			—		—		49
Common, Special Common and Series A Common Shares dividends		—		—		—			—			(12,185	)		(12,185	)		—		—		(12,185	)
Preferred dividend requirement		—		—		—			—			(12	)		(12	)		—		—		(12	)
Repurchase of shares		—		—		(11,603	)		—			—			(11,603	)		—		—		(11,603	)
Dividend reinvestment plan		—		32