UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the quarterly period ended March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

(IRS 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

Yes

No

•  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.

x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•  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).

x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•  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

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•  whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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, 2013

Common Shares, $0.01 par value

 

 

100,917,126 Shares

Series A Common Shares, $0.01 par value

 

 

7,160,055 Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

Telephone and Data Systems, Inc.

 

 

 

 

 

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2013

 

 

 

 

 

Index

 

 

 

 

 

 

 

 

 

Page No.

Part I.

Financial Information

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

 

 

 

 

 

 

Consolidated Statement of Operations

1

 

 

 

Three Months Ended March 31, 2013 and 2012

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

2

 

 

 

Three Months Ended March 31, 2013 and 2012

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

3

 

 

 

Three Months Ended March 31, 2013 and 2012

 

 

 

 

 

 

 

 

Consolidated Balance Sheet March 31, 2013 and December 31, 2012

4

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity

6

 

 

 

Three Months Ended March 31, 2013 and 2012

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

 

 

 

 

Overview

21

 

 

Divestiture Transaction

24

 

 

2013 Estimates

25

 

 

Three Months Ended March 31, 2013 and 2012

 

 

 

 

Results of Operations — Consolidated

28

 

 

 

Results of Operations — U.S. Cellular

30

 

 

 

Results of Operations — TDS Telecom

35

 

 

Recent Accounting Pronouncements

39

 

 

Financial Resources

39

 

 

Liquidity and Capital Resources

40

 

 

Application of Critical Accounting Policies and Estimates

43

 

 

Safe Harbor Cautionary Statement

44

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

49

 

 

 

 

 

 

Item 1A.

Risk Factors

49

 

 

 

 

 

 

Item 5.

Other Information

50

 

 

 

 

 

 

Item 6.

Exhibits

51

 

 

 

 

 

Signatures

 

 

 

 


 

 

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)

2013

 

2012

Operating revenues

$

 1,308,573  

 

$

 1,305,791  

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

Cost of services and products (excluding Depreciation,

  amortization and accretion expense reported below)

 

 559,892  

 

 

 509,211  

 

Selling, general and administrative

 

 486,903  

 

 

 507,599  

 

Depreciation, amortization and accretion

 

 242,077  

 

 

 197,434  

 

Loss on asset disposals, net

 

 5,616  

 

 

 2,079  

 

(Gain) loss on sale of business and other exit costs, net

 

 6,931  

 

 

 (4,174) 

 

 

Total operating expenses

 

 1,301,419  

 

 

 1,212,149  

 

 

 

 

 

 

 

 

 

Operating income

 

 7,154  

 

 

 93,642  

 

 

 

 

 

 

 

 

 

Investment and other income (expense)

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

 27,089  

 

 

 23,389  

 

Interest and dividend income

 

 1,578  

 

 

 2,183  

 

Interest expense

 

 (24,498) 

 

 

 (24,464) 

 

Other, net

 

 (154) 

 

 

 228  

 

 

Total investment and other income (expense)

 

 4,015  

 

 

 1,336  

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 11,169  

 

 

 94,978  

 

Income tax expense

 

 4,180  

 

 

 27,412  

Net income

 

 6,989  

 

 

 67,566  

Less: Net income attributable to noncontrolling interests,

  net of tax

 

 (5,570) 

 

 

 (15,312) 

Net income attributable to TDS shareholders

 

 1,419  

 

 

 52,254  

Preferred dividend requirement

 

 (12) 

 

 

 (12) 

Net income available to common shareholders

$

 1,407  

 

$

 52,242  

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 108,255  

 

 

 108,653  

Basic earnings per share attributable to TDS

  shareholders

$

 0.01  

 

 $  

 0.48  

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

 108,693  

 

 

 109,098  

Diluted earnings per share attributable to TDS

  shareholders

$

 0.01  

 

 $  

 0.48  

 

 

 

 

 

 

 

 

 

Dividends per share

$

 0.1275  

 

$

 0.1225  

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

1

 


 

 

Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

(Dollars in thousands)

2013

 

2012

Net income

$

 6,989  

 

$

 67,566  

Net change in accumulated other comprehensive income (loss)

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 15  

 

 

 -  

 

Change related to retirement plan

 

 

 

 

 

 

 

Amounts included in net periodic benefit cost for the

  period

 

 

 

 

 

 

 

 

Amortization of prior service cost

 

 (902) 

 

 

 (934) 

 

 

 

Amortization of unrecognized net loss

 

 602  

 

 

 623  

 

 

 

 

 

 

 (300) 

 

 

 (311) 

 

 

 

Change in deferred income taxes

 

 114  

 

 

 470  

 

 

Change related to retirement plan, net of tax

 

 (186) 

 

 

 159  

 

Net change in accumulated other comprehensive income (loss)

 

 (171) 

 

 

 159  

Comprehensive income

 

 6,818  

 

 

 67,725  

 

Less: Comprehensive income attributable to noncontrolling

  interest

 

 (5,570) 

 

 

 (15,312) 

Comprehensive income attributable to

  TDS Shareholders

$

 1,248  

 

$

 52,413  

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

2

 


 

 

Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows

(Unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

(Dollars in thousands)

2013

 

2012

Cash flows from operating activities

 

 

 

 

 

 

Net income

$

 6,989  

 

$

 67,566  

 

Add (deduct) adjustments to reconcile net income to net cash flows

  from operating activities

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 242,077  

 

 

 197,434  

 

 

 

Bad debts expense

 

 17,874  

 

 

 15,105  

 

 

 

Stock-based compensation expense

 

 7,585  

 

 

 10,330  

 

 

 

Deferred income taxes, net

 

 3,009  

 

 

 6,187  

 

 

 

Equity in earnings of unconsolidated entities

 

 (27,089) 

 

 

 (23,389) 

 

 

 

Distributions from unconsolidated entities

 

 8,089  

 

 

 2,938  

 

 

 

Loss on asset disposals, net

 

 5,616  

 

 

 2,079  

 

 

 

(Gain) loss on sale of business and other exit costs, net

 

 6,931  

 

 

 (4,174) 

 

 

 

Noncash interest expense

 

 497  

 

 

 862  

 

 

 

Other operating activities

 

 256  

 

 

 852  

 

Changes in assets and liabilities from operations

 

 

 

 

 

 

 

 

Accounts receivable

 

 34,038  

 

 

 38,941  

 

 

 

Inventory

 

 16,860  

 

 

 (4,842) 

 

 

 

Accounts payable

 

 (3,203) 

 

 

 (25,372) 

 

 

 

Customer deposits and deferred revenues

 

 7,904  

 

 

 10,745  

 

 

 

Accrued taxes

 

 5,309  

 

 

 82,014  

 

 

 

Accrued interest

 

 9,279  

 

 

 9,117  

 

 

 

Other assets and liabilities

 

 (95,669) 

 

 

 (104,148) 

 

 

 

 

 

 

 246,352  

 

 

 282,245  

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Cash used for additions to property, plant and equipment

 

 (176,318) 

 

 

 (242,611) 

 

Cash paid for acquisitions and licenses

 

 (14,150) 

 

 

 (11,096) 

 

Cash received from divestitures

 

 -  

 

 

 50,036  

 

Cash paid for investments

 

 -  

 

 

 (10,000) 

 

Cash received for investments

 

 -  

 

 

 20,249  

 

Other investing activities

 

 6,364  

 

 

 (436) 

 

 

 

 

 

 

 (184,104) 

 

 

 (193,858) 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Repayment of long-term debt

 

 (328) 

 

 

 (493) 

 

Issuance of long-term debt

 

 -  

 

 

 358  

 

TDS Common Shares and Special Common Shares reissued for benefit plans,

  net of tax payments

 

 140  

 

 

 (33) 

 

U.S. Cellular Common Shares reissued for benefit plans, net of tax payments

 

 123  

 

 

 357  

 

Repurchase of U.S. Cellular Common Shares

 

 (18,425) 

 

 

 -  

 

Dividends paid

 

 (13,792) 

 

 

 (13,301) 

 

Distributions to noncontrolling interests

 

 (2,396) 

 

 

 (218) 

 

Other financing activities

 

 (1,351) 

 

 

 798  

 

 

 

 

 

 

 (36,029) 

 

 

 (12,532) 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 26,219  

 

 

 75,855  

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

Beginning of period

 

 740,481  

 

 

 563,275  

 

End of period

$

 766,700  

 

$

 639,130  

 

 

 

 

 

 

 

 

 

 

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

3

 


 

 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

(Unaudited)

(Dollars in thousands)

March 31,

2013

 

December 31,

2012

Current assets

 

 

 

 

 

 

Cash and cash equivalents

$

 766,700  

 

$

 740,481  

 

Short-term investments

 

 125,595  

 

 

 115,700  

 

Accounts receivable

 

 

 

 

 

 

 

Due from customers and agents, less allowances of $27,413 and $28,152, respectively

 

 374,715  

 

 

 409,720  

 

 

Other, less allowances of $3,670 and $5,263, respectively

 

 131,995  

 

 

 164,608  

 

Inventory

 

 143,832  

 

 

 160,692  

 

Net deferred income tax asset

 

 44,288  

 

 

 43,411  

 

Prepaid expenses

 

 86,879  

 

 

 86,385  

 

Income taxes receivable

 

 11,301  

 

 

 9,625  

 

Other current assets

 

 30,498  

 

 

 32,815  

 

 

 

 

 

 1,715,803  

 

 

 1,763,437  

 

 

 

 

 

 

 

 

 

Assets held for sale

 

 160,073  

 

 

 163,242  

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

Licenses

 

 1,494,189  

 

 

 1,480,039  

 

Goodwill

 

 797,194  

 

 

 797,194  

 

Other intangible assets, net of accumulated amortization of $146,578 and $143,613,

  respectively

 

 55,557  

 

 

 58,522  

 

Investments in unconsolidated entities

 

 201,171  

 

 

 179,921  

 

Long-term investments

 

 40,142  

 

 

 50,305  

 

Other investments

 

 778  

 

 

 824  

 

 

 

 

 

 2,589,031  

 

 

 2,566,805  

Property, plant and equipment

 

 

 

 

 

 

In service and under construction

 

 10,917,301  

 

 

 10,808,499  

 

Less: Accumulated depreciation

 

 7,010,706  

 

 

 6,811,233  

 

 

 

 

 

 3,906,595  

 

 

 3,997,266  

 

 

 

 

 

 

 

 

 

Other assets and deferred charges

 

 130,321  

 

 

 133,150  

 

 

 

 

 

 

 

 

 

Total assets

$

 8,501,823  

 

$

 8,623,900  

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

4

 


 

 

 

Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

(Dollars and shares in thousands)

March 31,

2013

 

December 31,

2012

Current liabilities

 

 

 

 

 

 

Current portion of long-term debt

$

 1,318  

 

$

 1,233  

 

Accounts payable

 

 335,065  

 

 

 377,291  

 

Customer deposits and deferred revenues

 

 231,478  

 

 

 222,345  

 

Accrued interest

 

 15,774  

 

 

 6,565  

 

Accrued taxes

 

 55,944  

 

 

 48,237  

 

Accrued compensation

 

 75,324  

 

 

 134,932  

 

Other current liabilities

 

 102,208  

 

 

 134,005  

 

 

 

 

 

 

 817,111  

 

 

 924,608  

 

 

 

 

 

 

 

 

 

 

Liabilities held for sale

 

 18,360  

 

 

 19,594  

 

 

 

 

 

 

 

 

 

 

Deferred liabilities and credits

 

 

 

 

 

 

Net deferred income tax liability

 

 867,954  

 

 

 862,580  

 

Other deferred liabilities and credits

 

 445,614  

 

 

 438,727  

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 1,721,338  

 

 

 1,721,571  

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests with redemption features

 

 466  

 

 

 493  

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

TDS shareholders’ equity

 

 

 

 

 

 

 

Series A Common and Common Shares

 

 

 

 

 

 

 

 

Authorized 290,000 shares (25,000 Series A Common and 265,000 Common Shares)

 

 

 

 

 

 

 

 

Issued 132,672 shares (7,160 Series A Common and 125,512 Common Shares)

 

 

 

 

 

 

 

 

Outstanding 108,077 shares (7,160 Series A Common and 100,917 Common Shares) and 108,031 shares (7,160 Series A Common and 100,871 Common Shares), respectively

 

 

 

 

 

 

 

 

Par Value ($.01 per share)  ($72 Series A Common and $1,255 Common Shares)

 

 1,327  

 

 

 1,327  

 

 

Capital in excess of par value

 

 2,302,785  

 

 

 2,304,122  

 

 

Treasury shares at cost:

 

 

 

 

 

 

 

 

24,595 and 24,641 Common Shares, respectively

 

 (747,831) 

 

 

 (750,099) 

 

 

Accumulated other comprehensive loss

 

 (8,303) 

 

 

 (8,132) 

 

 

Retained earnings

 

 2,449,720  

 

 

 2,464,318  

 

 

 

Total TDS shareholders' equity

 

 3,997,698  

 

 

 4,011,536  

 

 

 

 

 

 

 

 

 

 

 

Preferred shares

 

 825  

 

 

 825  

 

Noncontrolling interests

 

 632,457  

 

 

 643,966  

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

 4,630,980  

 

 

 4,656,327  

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

 8,501,823  

 

$

 8,623,900  

 

 

 

 

 

 

 

 

 

 

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

5

 


 

 

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS Shareholders

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Series A Common and Common Shares

 

Capital in

Excess of

Par Value

 

Treasury Common Shares

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Retained

Earnings

 

Total TDS

Shareholders'

Equity

 

 

Preferred Shares

 

Non

controlling Interests

 

Total

Equity

December 31, 2012

$

 1,327  

 

$

 2,304,122  

 

$

 (750,099) 

 

$

 (8,132) 

 

$

 2,464,318  

 

$

 4,011,536  

 

$

 825  

 

$

 643,966  

 

$

 4,656,327  

Add (Deduct)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to TDS

  shareholders

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 1,419  

 

 

 1,419  

 

 

 -  

 

 

 -  

 

 

 1,419  

Net income attributable

  to noncontrolling interests

  classified as equity

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 5,597  

 

 

 5,597  

Change in foreign currency

  translation adjustment

 

 -  

 

 

 -  

 

 

 -  

 

 

 15  

 

 

 -  

 

 

 15  

 

 

 -  

 

 

 -  

 

 

 15  

Change related to retirement

  plan

 

 -  

 

 

 -  

 

 

 -  

 

 

 (186) 

 

 

 -  

 

 

 (186) 

 

 

 -  

 

 

 -  

 

 

 (186) 

Common and Series A

  Common Shares dividends

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 (13,780) 

 

 

 (13,780) 

 

 

 -  

 

 

 -  

 

 

 (13,780) 

Preferred dividend requirement

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 (12) 

 

 

 (12) 

 

 

 -  

 

 

 -  

 

 

 (12) 

Dividend reinvestment plan

 

 -  

 

 

 -  

 

 

 3  

 

 

 -  

 

 

 (2) 

 

 

 1  

 

 

 -  

 

 

 -  

 

 

 1  

Incentive and compensation

  plans

 

 -  

 

 

 534  

 

 

 2,265  

 

 

 -  

 

 

 (2,223) 

 

 

 576  

 

 

 -  

 

 

 -  

 

 

 576  

Adjust investment in

  subsidiaries for repurchases,

  issuances, other compensation

  plans and noncontrolling interest

  purchases

 

 -  

 

 

 (3,734) 

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 (3,734) 

 

 

 -  

 

 

 (14,710) 

 

 

 (18,444) 

Stock-based compensation

  awards

 

 -  

 

 

 2,395  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 2,395  

 

 

 -  

 

 

 -  

 

 

 2,395  

Tax windfall (shortfall) from

  stock awards

 

 -  

 

 

 (532) 

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 (532) 

 

 

 -  

 

 

 -  

 

 

 (532) 

Distributions to

  noncontrolling interests

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 (2,396) 

 

 

 (2,396) 

March 31, 2013

$

 1,327  

 

$

 2,302,785  

 

$

 (747,831) 

 

$

 (8,303) 

 

$

 2,449,720  

 

$

 3,997,698  

 

$

 825  

 

$

 632,457  

 

$

 4,630,980  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

6

 


 

 

 

Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TDS Shareholders

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Series A Common and Common Shares

 

Capital in

Excess of

Par Value

 

Treasury Common Shares

 

Accumulated

Other

Comprehensive

 Income (Loss)

 

Retained

Earnings

 

Total TDS

Shareholders'

Equity

 

 

Preferred Shares

 

Non

controlling

Interests

 

Total

Equity

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

 

 -  

 

 

 4,845  

 

 

 -  

 

 

 -  

 

 

 -  

 

 

 4,845  

 

 

 -  

 

 

 -  

 

 

 4,845  

Tax windfall (shortfall) from

  stock awards

 

 -  

 

 

 (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  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

7

 


 

 

 

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 (“ASC”).  The consolidated financial statements include the accounts of TDS and its majority-owned subsidiaries, including TDS’ 85%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP.  All material intercompany accounts and transactions have been eliminated.

 

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 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 (“Form 10-K”) for the year ended December 31, 2012.

 

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, are U.S. Cellular, TDS Telecom’s incumbent local exchange carriers, (“ILEC”), its competitive local exchange carrier (“CLEC”), its Hosted and Managed Services (“HMS”) operations, and the Non-Reportable Segment which includes TDS’ majority-owned printing and distribution company, Suttle-Straus, Inc. (“Suttle-Straus”) and TDS’ wholly-owned wireless telephone subsidiary, Airadigm Communications, Inc. (“Airadigm”). All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation.

 

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of March 31, 2013 and December 31, 2012, and the results of operations, cash flows, changes in comprehensive income and equity for the three months ended March 31, 2013 and 2012. These results are not necessarily indicative of the results to be expected for the full year.

 

Recent Accounting Pronouncements

 

As of March 31, 2013, there are no recent accounting pronouncements that are expected to have a material impact on TDS’ financial position or results of operations.

 

Agent Liabilities

 

U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular.  At March 31, 2013 and December 31, 2012, U.S. Cellular had accrued $63.9 million and $88.2 million, respectively, for amounts due to agents, including rebates and commissions.  These amounts are included in Other current liabilities in the Consolidated Balance Sheet.

 

Amounts Collected from Customers and Remitted to Governmental Authorities

 

If a tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority, then amounts collected from customers and remitted to governmental authorities are recorded on a net basis within a tax liability account in the Consolidated Balance Sheet.  If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Operating revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $36.1 million for the three months ended March 31, 2013 and $39.6 million for the three months ended March 31, 2012.

 

2.   Fair Value Measurements

 

As of March 31, 2013 and December 31, 2012, TDS did not have any financial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. However, TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.

 

8

 


 

 

 

 

 

Level within the Fair Value Hierarchy

 

March 31, 2013

 

December 31, 2012

 

 

 

 

Book Value

 

Fair Value

 

Book Value

 

Fair Value

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

1

 

$

 766,700  

 

$

 766,700  

 

$

 740,481  

 

$

 740,481  

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-backed securities

1

 

 

 125,595  

 

 

 125,595  

 

 

 115,700  

 

 

 115,700  

Long-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-backed securities

1

 

 

 40,142  

 

 

 40,175  

 

 

 50,305  

 

 

 50,339  

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

1

 

 

 1,178,250  

 

 

 1,230,244  

 

 

 1,178,250  

 

 

 1,238,204  

 

Institutional and other

2

 

 

 538,369  

 

 

 591,696  

 

 

 538,657  

 

 

 589,435  

 

Short-term investments and Long-term investments are both designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet.  Long-term investment maturities are 20 months at March 31, 2013.  Government-backed securities include U.S. treasuries and corporate notes guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program.  Long-term debt excludes capital lease obligations and current portion of Long-term debt.

 

The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. The fair values of Long-term investments were estimated using quoted market prices for the individual issuances. The fair value of “Retail” Long-term debt, excluding capital lease obligations and the current portion of such Long-term debt, was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular's 6.95% Senior Notes.  TDS’ institutional debt includes U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS estimated the fair value of its institutional and other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.0% to 6.05% at March 31, 2013. 

 

As of March 31, 2013 and December 31, 2012, TDS did not have nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in the Consolidated Balance Sheet.

 

3.   Income Taxes

 

TDS’ overall effective tax rate on Income before income taxes for the three months ended March 31, 2013 and March 31, 2012 was 37.4% and 28.9%, respectively.  The effective tax rate for the three months ended March 31, 2013 was higher than the rate for the three months ended March 31, 2012 primarily as a result of tax benefits related to the expiration of the statute of limitations for certain tax years and the adjustment of deferred tax balances related to certain partnership investments in 2012.

 

TDS incurred a federal net operating loss in 2011 largely attributable to 100% bonus depreciation applicable to qualified capital expenditures.  TDS carried back this federal net operating loss to prior tax years, and received a $71.4 million federal income tax refund in 2012 for carrybacks to 2009 and 2010 tax years.  Of this amount, $59.9 million of the refund was received in the three months ended March 31, 2012.

 

4.   Earnings Per Share

 

Basic earnings per share attributable to TDS shareholders is computed by dividing Net income available to common shareholders of TDS by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to TDS shareholders is computed by dividing Net income available to common shareholders of TDS by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.

 

The amounts used in computing earnings per share and the effects of potentially dilutive securities on the weighted average number of Common and Series A Common Shares were as follows:

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2013

 

2012

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

 

 

 

 

 

Basic earnings per share attributable to TDS shareholders:

 

 

 

 

 

 

Net income available to common shareholders of TDS used in basic earnings per share

$

 1,407  

 

$

 52,242  

Adjustments to compute diluted earnings:

 

 

 

 

 

 

Noncontrolling interest adjustment

 

 (28) 

 

 

 (345) 

 

Preferred dividend adjustment

 

 -  

 

 

 12  

 

Net income attributable to common shareholders of TDS used in diluted earnings per share

$

 1,379  

 

$

 51,909  

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares used in basic earnings per share:

 

 

 

 

 

 

 

Common Shares

 

 101,095  

 

 

 101,534  

 

 

Series A Common Shares

 

 7,160  

 

 

 7,119  

 

 

 

Total

 

 108,255  

 

 

 108,653  

 

 

 

 

 

 

 

 

 

 

Effects of dilutive securities:

 

 

 

 

 

 

Stock options

 

 112  

 

 

 202  

 

Restricted stock units

 

 326  

 

 

 180  

 

Preferred shares

 

 -  

 

 

 63  

Weighted average number of shares used in diluted earnings per share

 

 108,693  

 

 

 109,098  

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to TDS shareholders

$

 0.01  

 

$

 0.48  

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to TDS shareholders

$

 0.01  

 

$

 0.48  

9

 


 

 

 

Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings per share attributable to TDS shareholders because their effects were antidilutive. The number of such Common Shares excluded, if any, is shown in the table below.

 

 

 

Three Months Ended

 

 

March 31,

 

 

2013

 

2012

(Shares in thousands)

 

 

 

Stock options

 6,672  

 

 4,301  

 

 

 

 

 

Preferred shares

 61  

 

 -  

 

 

 

 

 

 

5.   Acquisitions, Divestitures and Exchanges

 

TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment.  As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications companies, cable, HMS or other possible businesses.  In addition, TDS may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success. 

 

Divestiture Transaction

  

On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Nextel Corporation (“Sprint”). The Purchase and Sale Agreement provides that U.S. Cellular will transfer customers and certain PCS licensed spectrum to Sprint in U.S. Cellular's Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (“Divestiture Markets”) in consideration for $480 million in cash at closing, subject to pro-rations of certain assets and liabilities. The Purchase and Sale Agreement also contemplates certain other agreements, together with the Purchase and Sale Agreement collectively referred to as the “Divestiture Transaction.”  The transaction was approved by the FCC in March 2013 and the closing is expected to occur in the second quarter of 2013.

  

U.S. Cellular will retain other assets and liabilities related to the Divestiture Markets, including network assets, retail stores and related equipment, and other buildings and facilities. The transaction does not affect spectrum licenses held by U.S. Cellular or variable interest entities (“VIEs”) that are not currently used in the operations of the Divestiture Markets. The Purchase and Sale Agreement also contemplates certain other agreements, including customer and network transition services agreements, which will require that U.S. Cellular provide customer, billing and network services to Sprint for a period of up to 24 months after the closing date. Sprint will reimburse U.S. Cellular for providing such services at an amount equal to U.S. Cellular's cost, including applicable overhead allocations. In addition, these agreements will require Sprint to reimburse U.S. Cellular up to $200 million

10

 


 

 

(the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees.

 

Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. The table below describes the amounts TDS has recognized, and expects to recognize, in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period, as a result of the transaction.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Expected Period of Realization/ Incurrence

 

Projected Range

 

Cumulative Amount Incurred as of March 31, 2013

 

Actual Amount Incurred Three Months Ended March 31, 2013

(Gain) loss on sale of business and other exit costs, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from Sprint

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase price

 

2013

 

$

 (480,000) 

 

$

 (480,000) 

 

$

 -  

 

$

 -  

 

 

Sprint Cost Reimbursement

 

2013-2014

 

 

 (150,000) 

 

 

 (200,000) 

 

 

 -  

 

 

 -  

 

Net assets transferred

 

2013

 

 

 150,000  

 

 

 170,000  

 

 

 -  

 

 

 -  

 

Non-cash charges for the write-off and

  write-down of property under construction

  and related assets

 

2012-2013